Q3 2022 Terrascend Corp Earnings Call
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Good afternoon.
Yeah.
My name is David and I'll be your conference operator today.
At this time I'd like to welcome everyone to tariffs since third quarter 2022 earnings call joining us for today's call is Jason while executive Chairman.
Ziad got him President and Chief operating Officer, and Keith Staffer Chief Financial Officer. Today's presentation includes forward looking statements about the business outlook in the states in which the company operates each forward looking statement discussed in today's call is subject to risks and uncertainties that could cause could that could cause actual.
Results to differ materially from those projected in such statements additional information regarding these factors appears under the heading of risk factors in our annual report of Form 10-K for the fiscal year ended December 31, 2021, and subsequent filings that were or will be filed with the securities and exchange Commission and available.
At Www Dot SEC dot Gov, and our website at www Dot Terra ascend dot com.
We're looking statements in this presentation speak only as of the original date of this presentation and we undertake no obligation to update or revise any of these statements I would now like to introduce Mr. Jason Wilde. Please go ahead Mr. Weil.
Yeah.
Thank you. Thank you very much David good afternoon, everybody and thank you for joining us today.
The third quarter represented a period of genuine progress and significant improvement for terrorist attack.
In spite of a challenging macroeconomic environment, we delivered sequential top line revenue.
<unk> significantly reducing operating expenses.
These actions resulted in an almost doubling of adjusted EBITDA.
Adjusted EBITDA margin expansion of 800 basis points sequentially.
Positive cash flow from operations totaled $1 5 million in the quarter, a significant improvement versus negative cash flow from operations of $16 million in Q2.
Excluding the $9 million of taxes paid in Q2, we delivered a $7 million improvement quarter over quarter.
While momentum appears to be building for federal regulatory reform, we remain focused on building a business that generates positive operating cash flow with or without the benefit of uplifting tax relief or a lower cost of capital.
Q3 was a solid step forward in executing against this strategy as we generated.
Positive cash flow from operations.
In New Jersey, we continued to perform well at both retail and wholesale.
Harrison has quickly established itself as a top three player in what is one of the most attractive market in the country.
In Maryland, we operationalized, our new cultivation and manufacturing facility in Hagerstown and are now in an enviable position for the start of adult use just as we are in the period, leading up to adult use in new Jersey.
In Pennsylvania, and Michigan, we made significant progress on reducing costs and streamlining operations amidst the very competitive environment.
Subsequent to the third quarter, we closed the debt financing with Polaris at attractive terms, considering current market conditions Cigna.
Significantly strengthening our balance sheet and enabling us to continue to execute on our growth plans.
We're also finalizing the refinancing of our loan facility in Michigan with more news to come on that shortly.
On the M&A front tariffs then it's fortunate to have a wide open map.
The pain in the industry and capital markets continue to experience has resulted in opportunities to acquire businesses at a fraction of previous multiples.
We are focused on expanding our retail footprint in our existing markets like Maryland, Michigan, and Pennsylvania through bolt on acquisitions that are both opex efficient and accretive.
In terms of new markets, we have a robust pipeline of single state and multistate asset that are not available to others due to licensing costs.
In closing I would like to pull back to a 40000 foot view of the industry and outline the factors that I believe will drive <unk> continued leadership in this space.
Alright things that we can control and things that we cannot control.
To execute against the things that we can control our team is ultra focused on building deep relationship with deep relationships with consumers by delivering high quality consistent products and best in class brands that our customers expect and deserve.
Investors shareholders and market conditions demand and require profitable bottom line results and the companies that cannot get there will not survive.
On that front, we have made the operational decisions to ensure that <unk> continues to generate positive cash flow from operations.
Regarding the things that we cannot control I am more positive than I have been at any point over the last few years, whether it's safe banking, which many expected path from the current lame duck session of Congress.
Lifting our EBIT legislation that addresses the odor is $2 88 tax code.
I would not be surprised if this legislation accelerates on both sides of the aisle following last months order by the precedent to fast track. The review of the federal scheduling of candidates and we are encouraged by the results of the midterm elections.
This initiative will remain on track.
We are starting to see green shoots for the industry, including canopy Growth's recently announced plans to consolidate its U S investment grade.
State level decoupling of 280 <unk> taxes in many market in the most recent adult use ballot wins and Missouri, Maryland.
All of this leads me to believe that the dam is finally about the break and I know that Paris that is ready to capitalize on the opportunity.
In closing I have always been inspired by the famous quote from John F. Kennedy.
Quote we choose to go to the Moon in this decade, not just the CEB, but because of the park.
Challenge is one that we are willing to accept one we are unwilling to postpone and one which we intend to win close quote.
While the Harrison has no plans to go to the Moon anytime soon that quote continues to motivate us <unk>.
A challenge a challenge of operating in this industry is one that we are willing to accept in fact relish.
And it is one which we certainly intend to win.
With that I will now turn the call over to <unk> to provide an update on our key markets.
Yeah.
Thank you Jason for laying out the macro overview and higher level aspect of our business.
Before going into more detail on our operation.
I would like to introduce <unk>, who recently joined us as president of our northeast region.
<unk> brings nearly six years of candidates industry experience.
Starting his cofounder SVP of operations and retail with vital care.
Prior to joining the kind of industry <unk>.
Ian how key finance and operational leadership role in both private and publicly traded companies.
<unk> very industry, including new our brand.
<unk> technologies and the Walt Disney content.
We are excited that <unk> has joined our team.
I had a chance to work with him earlier in my candidates career.
I know firsthand that he brings a deep understanding of candidates.
The entire vertical chain.
Along with the right leadership skills.
Korean has been with us for two months and we have already felt the impact.
Now I would like to take us through more detail on our operations state by state.
New Jersey remains a key growth driver.
According to data reported by <unk>.
<unk> sales are currently run rating at $900 million.
Only six months into the adult use program life.
Within this market where demand continues to outpace supply.
We are strategically allocating our production between our retail and wholesale channels.
New Jersey is also proving out our brand strategy.
As we leverage our own brand.
And licensed brand, which has resulted in the acquisition of new customers and high retention rates.
As a result, we have quickly established ourselves as a top three operator in the state.
Our time pre branded flower.
It represents.
Represent three of the top 10, selling skus in the state.
With frosted melon gelato holding the number one position.
We also own more than 50% market share of the concentrate category with seven of the top selling skus.
Our guess brand is performing very well and continues to gain traction in the state.
Our retail sales in the state.
So it's strong growth quarter over quarter.
Given by continued strong performance in Maplewood and Phillipsburg.
The addition of Lodi early in the third quarter.
In Maryland, we have completely exited our legacy facility in Frederick.
We are now fully operational with cultivation and manufacturing at our new Hagerstown facility and we expect our first harvest in January .
Given adult use was approved by Maryland voters last week, we are preparing to go to market with a full suite of brands.
Product and format for wholesale distribution.
Bridging the same strategy that has proven so successful in new Jersey.
Finally, our vertical integration plant in Maryland remains on track.
We are actively evaluating M&A opportunities targeting the dispensary limits.
Pennsylvania remains a key strategic focus area for us.
While the current medical program has matured.
Adult use is on the horizon and what's likely helped by last week's election.
When that time.
We will be prepared to leverage our vertical scale.
Ryan and capabilities.
At the retail level, we increased the vertical mix our own time engaged brand.
Our stores and introduce the cookies brand through recently announced expansion of our partnership.
We now have a partnership with cookies across Michigan, New Jersey and Pennsylvania.
The wholesale channel in Pennsylvania has become increasingly challenged by the recent trend of British guarantee but we are encouraged by the early traction of our newly launched cookies engaged brands.
We have also taken decisive action to manage expenses and streamline operations.
Resulting in a reduction in our cost per pound.
In recent months, we have seen an increasing number of opportunities to acquire additional retail licenses.
Fraction of previous multiples.
In Michigan, we took steps to reduce our cost structure and improve profitability.
We have reduced our workforce and scaled back organic store expansion plans.
As a result.
While much of our motivation and acquire engage was to extend the brand beyond state borders we are on a path to becoming EBITDA and cash flow positive in Michigan within months not quarters.
During the quarter.
We closed on the acquisition of Pinnacle, which include six dispensary.
Six dispensary licenses with five currently operational in the southern part of the state near the borders.
In India.
This acquisition increased our retail footprint in Michigan to 17 locations.
With 19 expected by the end of the year as we opened two new stores.
The physical stores are performing well and has enabled us.
To add positive cash flow by adding only four wall opex.
This allows us to leverage our existing cost structure and state level operating team.
We continue to build our branded wholesale business, which we expect will begin to contribute to the bottom line more meaningfully over time.
On the M&A front.
<unk> remains a fragmented market.
And this dynamic presents additional opportunities to gain further scale and expand operating leverage similar to our pinnacle acquisition.
We continue to evaluate multiple opportunities in this regard.
In Canada in California, we have taken additional steps to optimize operations and reduce costs.
In Canada, we significantly reduced costs.
Which we expect will result in a significant improvement in cash flow over the coming months.
In California, we shut down our Valhalla production facility in the quarter choosing.
Choosing instead to outsource our manufacturing due to favorable economics.
This combined.
Combined with the reduction in the workforce and other measures.
Which will lead to a positive EBITDA in California.
While this industry remains in its early innings.
A promising and exciting growth story and we are building the company for the long term a company that we believe will be at the center of this growth.
I believe in our strategy.
Our branch.
Our state and most importantly, our team.
We have a clear line of sight and expect.
To have every state in our portfolio contributing with positive EBITDA and sustained positive cash flow from operation as a company.
With that I would like to now turn the call over to Keith to provide a financial update.
Okay.
Thanks.
Good afternoon, everyone.
The results that I'll be going over today have already been filed on SEDAR and Edgar I'd also like to remind everyone that effective with our previous 2021 10-K filing in March of 2022, we became a U S filer with the SEC and report our results in accordance with U S. GAAP all of the results that I will wrap.
<unk> today are stated in U S dollars.
Net sales for the third quarter totaled $67 million, an increase of three 4% sequentially and 36% year over year.
The sequential growth was driven by strong results in New Jersey, and a partial quarter benefit from the pinnacle acquisition, partially offset by a decline in wholesale in Pennsylvania, and challenging retail trends in both Pennsylvania and Michigan.
Year over year growth was driven by New Jersey, and the acquisition of gauge in Michigan offset by the aforementioned headwinds and a continued challenging operating environment in Canada.
Regarding sales by channel retail sales grew 11% sequentially to $53 4 million.
Driven by New Jersey, and the addition of the Pinnacle acquisition part.
Actually offset by pressure in Pennsylvania, and Michigan.
Retail sales grew 114% year over year.
Driven by New Jersey, and the acquisition of gauge in Michigan, partially offset by declines in Pennsylvania and California.
Wholesale sales declined 19% sequentially and 44% year over year to $13 6 million in the quarter.
Driven by a decline in Pennsylvania, due to increasing Berta chaldee in the state.
The decline in wholesale sales in Pennsylvania was partially offset by growth in New Jersey.
Gross margin for the quarter was 36, 3%.
Impacted by a 6 million U S dollar write off of inventory in Canada.
Adjusted gross margin for the quarter, excluding the inventory write off in Canada was 46, 1% compared to adjusted gross margin of 47, 1% in the previous quarter.
A client of 100 basis points sequentially.
Driven mainly by temporary operational drag.
From Maryland, and Canada.
We are now fully out of our legacy facility in Maryland, and we have significantly reduced costs in Canada, such that neither of these areas are expected to be a material drag on margin beginning in 2023.
Excluding Maryland in Canada in Q3.
Adjusted gross margin would have been 49.0%.
This demonstrates the progress that we're making towards our stated goal of 50% gross margin in the coming months.
G&A for the quarter was reduced by $2 7 million or almost 10% to $26 7 million.
Or 39, 8% of revenue.
Compared to $29 5 million in the second quarter and 45, 5% of revenue.
Note that the $26 7 million in the third quarter included $3 million of one time items, mainly mainly related to severance and legal settlements.
Excluding these one time items underlying opex in the third quarter was $23 7 million or 35% of revenue.
A driving factor of these cost reductions was a 12% reduction in our workforce. These actions will generate further savings into Q4, as we realize a full quarter of the benefit and without the one time costs.
Adjusted EBITDA for the quarter was $11 3 million versus $5 8 million in the previous quarter, representing an almost doubling of adjusted EBITDA sequentially.
Adjusted EBITDA margin improved 800 basis points to 16, 9% in Q3 from eight 9% in Q2.
Driven by the operating expense reduction actions that we've outlined.
For the fourth quarter, we expect modest sequential revenue and adjusted EBITDA growth.
This modest revenue growth will mainly be driven by growth in new Jersey early traction with the introduction of the gauge and cookies brands NPA wholesale.
Full quarter of the Pinnacle acquisition in Michigan and continued progress with branded wholesale sales in Michigan.
Offset by the themes pressures, we continue to experience with retail sales in both Pennsylvania and Michigan.
Net loss for the quarter was $311 million.
Compared to net income of $14 2 million in the previous quarter.
In the quarter, we booked a $331 million noncash impairment to goodwill and certain intangibles of our Michigan business.
Operationally, we could not be more pleased with the actions we've taken to reduce the cost structure and enhanced gross margin profile of our Michigan business.
We are also pleased with the traction of the gauge brand recently launched in our other markets.
We have a clearly defined path and expect to become EBITDA and cash flow positive in Michigan in the coming months not quarters.
We also continue to focus on strengthening our balance sheet.
Following the quarter end, we closed a $45 $5 million debt financing with <unk>, adding to our Q3 ending cash position of $34 3 million.
This additional cash provides us with the flexibility to continue to execute on our growth plans.
We are also finalizing the refinancing of our loan facility in Michigan with news to come on that shortly.
Yeah.
Cash flow from operations totaled a positive one.
$5 million in the quarter.
Significant improvement versus negative cash flow from operations of $16 million in the second quarter.
Excluding $9 million of taxes paid in the second quarter.
We delivered a $7 million improvement in cash flow from operations quarter over quarter.
Capital expenditures were $3 6 million in the quarter, primarily relating to the recently completed expansion at our acreage count facility.
Our capex spending plans for the rest of the year, mainly related to final payments for our completed Hagerstown projects as well as relatively minimal outlays to complete three store openings and Michigan.
Over the past few years, we have completed 90% of our Capex plans on our current footprint.
With additional expansion for New Jersey, the only remaining major outlay.
We also closed on the acquisition of Pinnacle during the quarter, which included a $10 million cash component.
In summary, we're pleased with our progress in Q3 and look forward to updating on our continued progress on future calls.
This concludes our prepared remarks, I'd now like to turn it over to the operator for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star key followed by the number one on your Touchtone phone.
Here are three total prompt acknowledging your request questions will be taken in the order. They are received should you wish to withdraw your request. Please press the star key followed by the number two if using a speaker phone. Please lift your handset before pressing any keys, one moment, while we assemble the queue and we will.
We'll take our first question from Andrew Bond with Jefferies. Your line is now open.
Hey evening, Andrew or bottom line for Owen Bennett, Thanks for taking our questions.
Maybe first on M&A, Hey evening.
Maybe first on your commentary around increasingly attractive M&A opportunities you mentioned, a couple of potential states and opportunities for acquisitions, specifically, Michigan, Pennsylvania, and Maryland, just wondering how you would prioritize these three states.
And are you considering any opportunities that provide entry into additional states or would you prefer acquisitions that deepen our footprint in your existing footprint.
<unk>.
Sure sure. Thanks for the question Andrew.
Yes, we are I would say that we are equally weighted our desire to.
Add more retail and.
Michigan, Pennsylvania and Maryland.
We have multiple conversations going on in each of those three states and we think that.
<unk> done strategic move in all three of those markets.
As it relates to adding additional states or.
Other possibly other multistate operator.
<unk>.
Our pipeline of deals that we're looking at on that front as well so we sort of.
The way, we split up our view on M&A.
The first part is going deeper where we are.
And the second part is adding at.
At least another state or two over the next say 12 to 18 months.
Great. Thanks for that detail, Jason second from our side on the target for each of your three new Jersey stores to get to a $40 million annual run rate within the first 12 months of Rec sales can you talk about how each of the three stores are tracking towards that if anyone one of those three does stand out in particular and maybe any incremental color on what.
Needs to happen within your assumptions for those stores to reach that run rate. Thank you.
Yeah. Thanks, Andrew <unk> here, we are very excited and still Super bullish about New Jersey is all fronts, particularly in retail.
Both our maplewood and Phillipsburg stores continued to perform extremely well.
We are actually kind of surprised we said they'll get to $40 million just five few months and they are already around 90% of the way Theyre Lodi.
Grand opening continues to ramp up nicely.
And when we look to all three stores are.
Equally as important and we are excited about OPM.
Great. Thanks, I'll pass it on.
Okay.
Thank you next we'll go to <unk>.
Kendrick Tingey with ATB capital Your line is now open.
Thank you and good evening.
Jason I can understand your commentary with respect to Michigan and the fact that you expect EBIT margin positive in the next couple of months versus quarters can you just speak to that as we think through 2023.
What EBIT margin positive looks like and what that looks like compared to your expectations at the time of the <unk> acquisition, just trying to handicap, how we can expect the Michigan business to track through through 2023 on the research you've done with that.
Yes, hi, Ken or Keith I can take that the Atkins add into it so I would say.
One of the Michigan is really one of the areas, where we where we may have made the most progress in taking the most action in Q3 and really have been looking forward to given this update because a lot of the cost that we talked about coming out of the business really were concentrated in getting that business right sized and <unk>.
<unk> and getting it to on solid footing.
So that's why we don't want to box ourselves in and say exactly but we do feel confident enough to say this weeks, but not months.
Alright monthly not quarters months not quarters and.
And really where we see ourselves getting to.
Neutral to slightly positive in EBITDA.
In Michigan and then as we look into next year. It's really now we're on a solid footing on this healthy foundation and we've added.
Two stores like Pinnacle and look at US further kind of up that curve on the positive scale is really bolting on.
And further.
Consolidating in that state as Theres a lot of really there is a lot of targets out there and theres a lot of kind of fight for survival and we feel like now with the actions. We've taken we are poised to capitalize on that to get anything back I think you described it well Keith Ken if I go down.
Each line of the P&L, starting with the cost of production.
At an all time lowest.
Cost per pound from a production perspective at our cultivation facilities, while maintaining our quality and yields are actually improving on them.
So that has helped us.
Get to our targets, we continue to hold a premium price.
In Michigan, one we've seen a lot of pressure.
On the pricing at retail.
Our blended average still.
Continued to hold pretty strong.
We are carefully look at our pricing strategy in order to maintain that balance of revenue and margin.
Launching our branded product and wholesale.
Adjusting the price strategy and the traction that we are starting to see we're pretty positive about that and.
And then Opex finally, we have made some tough decisions the team.
Didn't be prouder of what they have accomplished and we are in a situation where we.
We really feel pretty efficient, adding any incremental revenue we can.
It will be efficient revenue run by the team.
Okay, great. Thanks, so much for the color and if I could just quickly came Marilyn just in the context of the approval and the palms can you speak to with respect to Hagerstown.
When fully ramped understanding it's early days, we went fully ramped how we should think about what sort of throughput that facility can support.
That's helpful.
What kind of dollars dollar growth that supports and will you be while positioning or how well positioned will you be full expected adult speeding up late and early in 2020 for 2025, the curious thing.
So you'll start to adult use seems to be a pretty wide gap. Thanks.
Sure Ken Rick I'll take the first part of that and yes, you can.
I'll take the second part.
We have a significant investment in the Hagerstown and I think we've said before $25 million of projects completed the facility is massive.
The infrastructure is in place overall, and we turned on the initial set of rooms that gives us double the capacity that we had at Fredrik. Just in this first initial phase and to turn on additional sets of roofs, it's a fairly minimal outlay.
That's going to get us.
Multiples of where we currently sit and we did it kind of thoughtfully that way.
To make sure we have clear line of sight too.
Due to the timing of adult use which Jason can give some thoughts on but.
That's how we thought through it that's how we plan the project and from now until adult use we feel like we have plenty of capacity to the ramp back up or our wholesale business in Maryland and.
Hopefully add ons of stores as we go as well as we mentioned in our in our remarks.
Sure So I mean.
Yes.
I'll start this off with to.
To a certain extent my guess is as good as yours Kendrick, but.
What I would say.
Yes, we obviously theres obviously, the overwhelming majority of the voters voted for a legalization. So there is a clear mandate.
But for the state to rollout the program I would say sooner rather than later.
You could have looked at we can look at it like.
<unk> got a pretty like new.
In New Jersey was or like Arizona was a few years ago, where Arizona.
Kicked in very quickly in terms of the truck.
Thank you.
Well over a year.
We are from our conversations.
With people in the know in the state they feel like it's more likely to be not quite like Arizona, but figure.
At least.
Sometime within the second half hopefully of next year.
We still need to see there.
Regulations come out the legislators need to SaaS.
Staff.
MMC and we just need to see the speed at which all of that rolls out.
But what I would say that is exactly why we are phasing in.
Our cultivation capacity there.
<unk> like <unk>.
As mentioned, our starting capacity is going to be double what we had.
Our Frederick Frederick facility.
Much higher quality.
This facility is just in a state of the art.
And as we get more of.
Our view on when we think that the program is going to kick. In then we will then we'll start bringing.
Theres other rooms as well.
Thanks, very much I'll get back in queue.
Thank you and next we'll go to Andrew <unk> with Stifel. GMP. Your line is now open.
Yes.
Good evening and congrats on the good operational progress here.
Maybe starting off with the <unk>.
Cookies exclusive partnership in Pennsylvania.
Understanding now this is this is in multiple jurisdiction as you mentioned.
I'm trying to understand here how.
How do you think this is going to.
In fact, your wholesale opportunities.
Given you have access to the recognized brand.
Could you talk about perhaps how wholesale is doing in other markets.
Do you think that this could open up new opportunities when you introduced this in Pennsylvania and.
Could you just remind us again, maybe I missed it on timing when this could come into play in Pennsylvania.
Hi, Andrew.
Thank you.
Where we are.
And early journey launching gauge and cookies in Pennsylvania.
Time will tell but early signs.
Convincing us that.
We're getting some exciting traction.
And a lot of.
Retailers have decided to go more vertical in Pennsylvania, I still believe that at the end of the day the patient is going to be the judge.
<unk>.
Menu would look like.
Savings or improving margin and painted on the revenue line or losing.
<unk> will end up reversing that trend.
We do believe that both cookies engage will give us new opportunity in Pennsylvania. The early signs are showing this.
Thanks for that and maybe switching gears.
Hum.
You guys mentioned, we're going to see shortly.
The outcomes of the refinancing on the.
Gauge that.
Could you talk a little bit about.
What are you seeing out there.
Should we kind of be expecting given that you just recently did a $45 million financing.
Are you thinking about any other sources of growth capital.
And more specifically.
Could we see canopy somehow getting involved.
And any way interestingly.
They announced that.
Strategic.
Restructuring if you want to call it.
But they didn't do much with with the tariffs and.
Asset that they have an investment.
You could talk to that.
Sure well thanks.
Sure sure Thanks, Patrick well.
Well I'll start late start on Michigan.
And then I'll touch upon the canopy.
Here's what I have decided about Michigan.
Zero concerns about a refinancing of the Michigan debt that comes due at the end of this month.
Easiest thing to do would have been just accept wanted to multiple term sheets that we have been presented with to refinance the full $55 million.
But our view was that the rates were not low enough to justify locking the company and for multiple years. When we don't need all of that money and we think we may be on the cusp of a materially lower cost of capital in the coming months.
So as it relates to Michigan, I would say bear with us for a few days and we will have an update for you.
But just to reiterate.
<unk> worried about the refinancing we have made our decision and we look forward to sharing the details in the coming days.
As it relates to canopy.
And the news out of canopy, a few weeks ago I would say that I was thrilled when I when David Klein called me a day or so before they made the announcement.
And.
Just for about three or four days I actually was with even barely sleeping.
So excited about it we have an excellent relationship with canopy, we've had a long relationship or at least in terms of this industry, we've got a pretty long relationship.
With canopy and we are always looking at ways to work more closely together.
Thanks for that I'll get back in the queue.
Thanks, Patrick.
Okay and next we'll go to Eric Dolores with Craig Hallum Capital. Your line is now open.
Alright, Thank you for taking my questions.
First I was wondering if you could just comment on any trends that youre seeing in the mix of premium versus value sales.
Some of your peers, we've heard a bit of an increase in the mix of value, but you guys are obviously kind of doubling down on premium products and so I'm, just wondering especially with your cookie.
Cookies partnership here just.
Any commentary on any of the trends youre seeing there between premium and value.
Yeah, Eric adhere.
We're measuring very carefully the loyalty of our patients and customers.
The quarter I discussed.
Three upper buckets that we measure the loyalty from a.
Customers and patients that visit us more than five times every 90 days, we continue to have a very solid 75% our foot traffic picking with us with our premium products.
Having said that we are aware and we acknowledge the pressure and inflation on our customers and patients and we are moving.
And the direction.
Pending faster and bigger segments.
The customers in Q4.
We will be adding our lead gen.
Brands.
In New Jersey, and Pennsylvania.
Combination.
<unk> brand and a premium brand, we believe firmly that will capture.
And allow us to acquire new customers and retain hours just to give you an example.
In New Jersey.
In Michigan, I shared the premium price and.
And how carefully we're watching that too.
The lower the price or.
Increased athletic and then secondly on the barge.
In New Jersey.
The newest data show that three out of the top 10 skus in the states our own premium brands, we own 50% of market share of the concentrate New Jersey.
So the brand strategy that we have building the equity of our brands.
Implementing it with the license product.
And traffic drivers and expanding it into a value brand like <unk> will be the best combination that you have that.
Alright, I appreciate that color.
And then just on Michigan I appreciate the.
The commentary on.
Expectations for positive cash flow in months not quarters. It certainly certainly great to hear.
Could you comment or just maybe talk a bit more about how much of those improvements you expect to see from simple additional retail scale versus some improvements to standard operating procedures. For example, here ultimately wondering how much of these cost savings you see a transfer.
We're able to other states and maybe just more broadly comment on some of the strategic.
Lessons that you've learned entering a very.
Price pressure state in Michigan.
Yes.
Yes, Hi, Eric Keith I can start.
Add in I think that a lot of the actions that we've taken that Ed outlined in detail there around.
First of all in like the operating expenses that carries through we.
We did a lot of work on and this is probably what translates to other states. We did and has already translated other states who did a lot of work on the four wall labor model at retail.
And really went.
Hard on that and in Michigan to get us to this visibility, where we talked about where we're going here.
And so that that's translated.
Across states.
And then.
The gross margin progression will continue so that the opex.
Actions that we've taken will carry forward.
At the level, they're at the lower level they are at the.
The gross margin.
<unk> is still to come because we continue to cycle out.
Almost cycled out inventory it's been procured.
From third parties, and we're cycling in and through more of the.
That were producing out of our extraction labs. So we will continue to see margins ramp there.
And then.
I think we had outlined a lot of the other cost per pound initiatives, which were there.
Have have driven savings in Michigan and are already translating outside of Michigan across other states like we mentioned in Pennsylvania in particular.
But also in New Jersey.
Yes, I think you've covered it just to give an example around how were measuring that cost per pound in the labor model two of the biggest.
Buckets that will contribute.
Contribute to what we're trying to accomplish both on the EBITDA and the cash flow.
The cost of production as measured by the yield measured by the cost per pound and that is something that we can take to all states.
Starting in San Francisco, where it should be the highest cost of production we have proved.
That we can accomplish the goal.
That gives us confidence from a labor model perspective.
We across all our retail fleet, we are measuring that labor model into percentage of.
Revenue and transaction permit.
We have a pretty strict goal.
Our retail leaders are working towards.
Towards that common goal I think this is the one that we can scale across all states again I want to reemphasize.
Our goal and we see a clear.
Line of sight to get each state on its own to be EBITDA positive and cash flow positive from operations and we are confident as we have ever been.
And what we're seeing on the weekly basis that we are very close.
That's great to hear I appreciate the color. Thank you.
Okay next we'll go to Noel Atkinson with Clarus Securities. Your line is now open.
Hi, Good evening, guys and nice to see sequential improvement in Q3.
Just regarding the cost savings you guys achieved Q3 so.
It seems like it was quite substantial especially after the one times items can you give us a sense of then how much.
How much incremental in Q4, you will see versus what you were able to report in Q3 from those prior initiatives and then do you have any further new cost savings either at the cultivation side or the Opex side that are set to launch in Q4.
I know it's Keith.
Yes.
<unk>.
There is still more to come here to.
To your point, so a lot of the actions were taken within the quarter.
I would say just to frame it up.
Without giving an exact number.
Because theres still a lot of moving parts, but we would expect.
Another sizable portion to come let's say somewhere from another quarter to a half of the savings that we realized in Q3 that will come through additionally in.
In Q4.
Just as kind of a low side high side.
And there is a pipeline of additional activity is not so much on the Opex side, we tried to sequence and do all of that all at one time to get it get it done and get it behind us and get everybody engaged across the company and the effort going forward.
But as we've been outlining a lot there's a lot more to come on that on the cost of goods front, where we're super razor focused and thats like the next chapter for US as we know there's more there.
To go after and so we have a pipeline of <unk>.
Projects and opportunities to continue to drive.
First to that 50% gross margin that we've outlined before and that were showing progress towards on an underlying basis and then we believe we can eventually.
Possibly get beyond that with that with the pipeline of projects that we have.
Okay, great. Thanks.
Just a couple quick ones.
The Pennsylvania facility so.
What is your production capacity utilization right now versus what your total capacity would be thinking that I don't use is coming down the pike in the next couple of years probably.
Okay.
No also.
We looked at.
The demand we look at the wholesale business and how it was impacted by the virtualization and we have.
Shutdown five of our flower room.
Order to avoid building any unhealthy inventory during that transition.
We have converted.
Any inventory that was stuck in the pipeline too we watched it and returned it to concentrate that has no expiration date.
Jason always said, we refused to get <unk> 20 on the dollar if we can get.
The future knowing that Pennsylvania will turn recreational we will know that we will use that inventory.
We have reduced debt production and.
In Pennsylvania with the same ratio that our wholesale.
Has gone down at the same time, we have adjusted.
The labor on the cultivation side in order to not to lead the scale impact our cost of pumps. So we thoughtfully did the same reduction in labor increased automation in order to keep the cost per pound.
As low as we would.
Like it to be from an overall capacity of that facility. We are done with our capex investments as you know.
We've done this.
Fault into.
<unk>.
The full capacity, we will be able to supply the state both wholesale and retail business with no further capex.
That's the only one thing I want to add even with the reduction in our production. We are still accomplishing what we described in Michigan is reducing.
Cultivation production cost per pound.
Okay.
And then one last quick one so the.
State level decoupling to ETE taxes. So Jason can you just talk a little bit or for Keith talk about like what you see as potential impact on that on your business.
If you don't see some positive movement to Capitol Hill, where under the buy and administration in the next little while.
Yes, I think that the Pennsylvania, I don't think that the past quite yet the decoupling of <unk>.
I think it's similar to new Jersey, where it seems like it's working its way towards being approved.
But we are on both on both of those we believe that starting January one.
<unk>, New Jersey, and Pennsylvania will be decoupled from two eight.
And where are you going to hoping that there is an outside chance that new Jersey gross retro to January 1st of this year.
And then and then just add to that and then Maryland is already decoupled as of June 30, or July one of this year, and then Michigan and California are already decoupled, so our entire state footprint.
We'll just be subject to $2 80.
The federal level shortly.
Okay.
Okay. Thanks very much.
Okay.
Next we'll go to Andrew simple with echelon capital markets. Your line is open.
Thanks for taking my questions and good evening.
It is first of all I just wanted to ask if there were any states or operational factors that may have held back the adjusted gross margin in the quarter I Wouldnt presume to have seen the gross margins a little bit higher sequentially with the revenue mix shifting more to high margin states such as New Jersey.
As well as with increasing verdict holiday in Pennsylvania for example, maybe.
And maybe speak to the margin drivers for Q3.
Sure Andrew Hi.
So.
It's really and Thats, where we tried to give some color and ill get more so it's really just shutdown and transfer from Frederick Hagerstown, there was still quite a drag.
From a gross margin dollar standpoint negative.
And in fact, we'll see them dragged on the flip side as we start up that facility without a lot of output in Q4.
So thats why when I mentioned in my prepared remarks, we see that kind of being behind us effective 2023.
So I didn't say Q4.
In Canada.
Also we are still in operating drag.
Quarter.
And so.
Taken some actions there as well so those two once we.
Kind of cycle out of that that's where we get to this 49% and 49 point.
Zero percent.
Excluding those two factors and Thats kind of where we see ourselves headed from what we call an underlying standpoint.
And then Theres more work to go on all the things, we're talking about the cost per pound and everything to get us over that 50% Mark So hopefully that answers your question.
Yes, that's very helpful. Thank you Keith.
My follow up would be on the wholesale side of the business.
Are you expecting any.
Up into Q4 with some of the earlier investments you've made in Pennsylvania and ongoing growth in New Jersey.
Will we see any.
Contribution from Maryland in Q4 is that early 2023.
Okay, I'll start with that and Dan can fill in so.
We are I'll say with Pennsylvania.
Lee optimistic we've learned and.
And taken our lumps in Pennsylvania, but with the cookies engage brand.
Seeing some positive traction there.
<unk> been carrying cookies for a month or so maybe a little bit more in our retail and then we just recently released.
On the menu in our wholesale and our teams have really been getting calls from all the major players in Pennsylvania, even though they've all gone vertical they still want to carry cookies and so we have a cell selling program there in Pennsylvania and again, we all know kind of what's happened to the wholesale market in Pennsylvania.
So that's why I will say, we're cautious cautiously optimistic there on new Jersey.
New Jersey is going fantastic.
Fantastic.
Capacity, we've been selling to all adult use dispensaries in the state I believe every single one of them almost on a weekly basis.
And so we've just been strategically allocating and balancing and making sure we don't sell out too much into one one channel or another in New Jersey.
And then.
And then in Maryland, and I think it was the last part of your question first harvest is in January . So we don't expect much out of that facility in Q4, there'll be some sales coming from the processing lab is up and running so there'll be some sales coming from manufactured products, but don't count on that.
Being too material in Q4, we're really just ramping that up to delek.
<unk> portfolio of products beginning.
With lower beginning in Q1.
Yeah.
Yes.
The only thing I want to add.
We can't control the external environment, we can we can guess, what's coming but what we can control is what we're focused on is our brand is the quality and the launch of new products to extend our offerings.
That's the only thing I'll add.
Yeah.
Yes.
Great. Thank you both I will get back into queue. Thank you.
Thank you.
And next we'll go to Vivien <unk> with Cowen <unk> Company. Your line is now open.
Hi, Good evening. This is victor on for Vivien Naser and thank you for taking the question.
So just one from me I just wanted to double back to Michigan, specifically the branded wholesale business can you offer any commentary on how your expectations for gross margins for this business and how maybe these expectations have changed since last quarter.
Hi, Victor Keith.
Yes so.
The gross margin in wholesale is going to be lower than retail.
But we're really trying to balance things out there as we get that program up and running and make sure that we.
Have the pricing set appropriately between the channels between retail and wholesale and the strategy of premium with the cookies and the gauge brands in both channels.
So, but directionally speaking the branded wholesale will be.
A bit lower than retail not notably in certain nowhere, certainly nowhere near where the bulk wholesale margins were in the past 10 or 15% range.
But we should be.
I mean, it's more like the the plus or minus 30% range versus retail, which we believe can be.
Higher and higher and 40% to 50% range.
Okay.
Great. Thank you for the color I'll jump back into the queue.
Okay. Okay.
Next we'll go to Sean <unk> with Canaccord Genuity. Your line is open.
And thank you for taking my questions just one for me here.
On the New Jersey business. So I just wanted to gauge the productivity of that cookies corner.
In New Jersey, So maybe if you could quantify that in any way what percentage of revenues is that accounting for it from the stores.
Any sort of demand or signals or statistics, you could provide on maybe the basket sizes are.
The increase in traffic would be appreciated thanks.
Yes. Thank you.
Cookies.
Excellent adjacent brands.
Every time, we launch a corner we've seen.
A solid contribution and new Jersey before I talk about brand by brand.
We see.
We see a solid market share of around 20% for us.
20% in flour, we are 50% in concentrate.
<unk> is performing very similar to how it.
How it did in Michigan, we still have it's too early to tell the contribution as we in Q4, we are launching 10 different flavors flavors for cookies and more products to come but we haven't seen any surprises or any.
The thing that we haven't seen in Michigan thing bulk blends gauge and cookies are holding a premium.
I think in New Jersey.
Resulting in what I described earlier.
Stickiness and the percentage of customers that we are seeing more than that.
Five times every 90 days, we are measuring the basket size, obviously continues to be.
These strong with three stores.
Not seeing a major dip in basket size, but the team is starting to measure the value of the lifetime value of the customers and the value of the customer per year, and we're very encouraged to see that continues to perform very strongly.
Almost two quarters end.
But we'll continue to see how cookies will perform as we add more skus here in Q4.
Okay.
Thank you that's it for me.
Thank you this.
This concludes today's question and answer session I'll turn the call back over to Jason Weil for any additional or closing remarks.
Thank you all for joining US today, we look forward to speaking with you next quarter.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation you may now disconnect.
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