Q4 2022 Green Thumb Industries Inc Earnings Call
Speaker 1: So F incl C grow.
Speaker 1: Thank you for your patience.
Speaker 2: Good afternoon, and welcome to the Green Thumb fourth quarter and full year 2022 earnings conference call.
Speaker 2: At this time, all participants are in a listen-only mode. A question and answer session will follow the conclusion of formal remarks. During the question and answer session, we would ask for a limit of one question per person. As a reminder, a live audio webcast of the call is available on the Investor Relations.
Speaker 3: Good afternoon and welcome to Green Thumb's fourth quarter and full year 2022 earnings call. I'm here today with founder and CEO Ben Kobler, President Anthony Georgiades, and Chief Financial Officer Matt Bautner. Today's discussion and responses to questions may include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ.
Speaker 3: can be found under the investors section of our website.
Speaker 3: GreenSum assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the day of this call. Throughout the discussion, GreenSum will refer to non-GAAP financial measures including EBITDA, adjusted operating EBITDA, and adjusted net income. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our...
Speaker 4: for today's call now that Anthony has assumed the role of president and Matt is our new CFO . I'll lead off with an overview of our results and some observations on the current state of the industry.
Speaker 4: Anthony will discuss our operations, Matt will dive into the financials, and then I'll close with some final comments. All right, so let's get started. We feel good about our fourth quarter and full year 2022 results, posting $259 million of revenue with $81 million of adjusted operating EBITDA and $1.02 billion in sales with $311 million of adjusted operating EBITDA, respectively. Like other companies across industries, we face new challenges in 2022.
Speaker 4: The highest inflationary environment in 40 years and consumers in the pocketbook High interest rates that further squeeze access to capital, especially in cannabis and the concern about a recession They continue to loom over the economy Even so, Green Thumb reached a new milestone in 2022 as we crossed $1 billion in revenue This is a 14% increase in revenue year over year
Speaker 4: and it represents nearly 5x category growth, which was 3%. But 2022 was not just an income statement differentiator for Green Thumb. We are also proud of our year-ending cash position of $178 million and full year cash flow from operations of nearly $160 million, both of which are net of paying the government almost $120 million in cash. Additionally, in 2022, we extended the maturity of our senior debt, $250 million, at 7% to April 2025. On a GAAP basis, we reported a net loss of $51 million in the fourth quarter and net income of $12 million for the year.
Speaker 4: both of which included $89 million in impairment charge related to our Nevada business that Matt will cover in more detail. Without this impairment charge, our net income would have been $12 million for the fourth quarter and $75 million for the year. I also want to point out that concerns around price compression in our industry are very real.
Speaker 4: The days of fat margins and easy money and cannabis are waning. As people digest punitive tax rates and high cost of capital, the dollars run out and margins slip. We are in the midst of a washout that will leave the industry with fewer operators, not more. This is ironic as politicians and operators are talking about including more folks, not less. The price and pressure has squeezed margins to a spot that given 280E, there is not the cash flow for the marginal player.
Speaker 4: But if we zoom out, we see year-over-year unit growth of 28%.
Speaker 4: which is the best indicator for us of dead consumer demand given the changes in pricing. This massive unit growth on a life-for-life basis continues to show us that cannabis is an essential purchase for American consumers.
Speaker 4: By now you probably know that cash is king at Green Thumb. It's every decision we make and every dollar we spend. There are no meaningful federal relief on 280E and banking restrictions.
Speaker 4: Having a strong balance sheet is absolutely critical to executing our growth strategy and creating sustainable value for our stakeholders.
Speaker 4: Over the past three years, we have paid $340 million in state and federal income tax. To give you a glimpse at some of the irony in current tax policy, during that same time, Illinois collected over $1 billion in cannabis tax dollars.
Speaker 4: Yet our business and new social equity startups in Illinois cannot deduct dispensary employee wages or dispensary rent on their Illinois tax return a solid double dip by the state
Speaker 4: The US cannabis industry reached $26 billion in 2022. That is tremendous growth from virtually zero a decade ago. This kind of growth attracts a lot of prospectors and get-rich-quick hopefuls. For a variety of reasons, these folks will get caught and eaten by the bear.
Speaker 4: We've been doing what we said we would do since going public in 2018, so by now most of you know us, focused, disciplined, hardworking, and true believers in the rights of well-being through cannabis and the long-term viability and vibrancy of our industry. For those just getting to know us, we look forward to demonstrating these traits to you.
Speaker 4: is the dimming promise for fresh participation in this industry, especially for black and brown entrepreneurs. Green Thumb has strongly advocated for the opportunity to build wealth among those most impacted by the war on drugs.
Speaker 4: With the best intentions, many states instituted social equity license programs.
Speaker 4: the best intentions, many states instituted social equity license programs. This generated a lot of excitement and hope in those communities.
Speaker 4: But there have been some unintended consequences that have led to widespread disappointment.
Speaker 4: When you're in an industry with severely restricted access to capital and you have to contend with a 280E tax penalty and a single operator, it becomes very difficult to create real value once awarded a license to operate a retail or cultivation facility. The very people that social equity licenses were supposed to help are left pretty helpless. We believe everyone would benefit from a solution to these problems from the federal government. Consumers would have more buying options.
Speaker 4: A new cohort of entrepreneurs would emerge, communities with thrive from new business formations, and existing operators could expand product distribution. Until then, Greenstone will continue to fight the good fight by advocating loudly and supporting organizations and programs geared toward preparing those entrepreneurs for the hurdles ahead. It is by no means hopeless by thinking too long for state social equity programs to achieve meaningful results.
Speaker 4: With almost 9 out of 10 Americans favoring some form of cannabis legalization, you would think federal representatives would pay closer attention to their constituents and pass safe banking.
Speaker 4: But right now, the best way to create change is to drive more people to vote, especially the younger generations. That's why Rise Dispensaries is a premier sponsor of Edcount's cannabis voter project, and we look forward to registering new voters and increasing voter participation across the country at dispensaries as well as concerts and festivals.
Speaker 4: Right now the best way to create change is to drive more people to vote especially the younger generations That's why rise dispensaries is a premier sponsor of egg counts cannabis voter project And we look forward to registering new voters and increasing voter participation across the country at dispensaries as well as concerts and festivals
Speaker 4: We will look out and continue to see an industry that can triple in size over the next decade. And while we have entered the middle innings, this is a marathon and not all runners will finish. We are confident in the ingredients we have in place since 2014. We have the right team, the right assets, and the right stage.
Speaker 4: We respect the plans, believe in the product, and the well-being and creatives. Now I'll turn the call over to Anthony, our newly appointed president, to talk about our operational progress in 2022 and what to expect in 23. Good afternoon, everyone. Thanks for joining. Just then mentioned, despite experiencing a number of headwinds outside our control.
Speaker 5: 2022 was a solid year for Green CapEx we invested back into the business throughout the year. In our favor, we generated $159 million in operating cash flow while remaining 100% current on our taxes with our largest financial partner, Uncle Sam. Other accomplishments include the launching of adult use sales in Rhode Island,
Speaker 5: in many of our markets.
Speaker 5: We lived through a hyperinflationary environment combined with a global supply chain crunch that drove up both capital investment costs as well as operating costs.
Gross market isn't the only lever that we have within the business to kind of watch margins. So we're obviously closely watching the SG&A line, we are working hard to get more operationally efficient on the CPG side of the business and at the end of the day. We're also we continue to look at the brewery County that were seeing.
Within our March to see if there is more that we can now we can do on that front.
At the end of the day, though for US it's all about cash flow so while while gross margin as a component of that we've got other tools in the toolbox that were kind of utilizing to minimize the impact.
Thank you.
The next question comes from Papa Giovanni with Cantor Fitzgerald. Please go ahead.
This is Matthew Baker on for Pablo.
For our first question we were wondering what explains the steep drop in price in retail prices in Illinois. Since early December from our view it seems quite certain and we want to note that stabilizing or worsening and then secondly, I was wondering if you could remind us of where you may have new capacity coming through our store ramp up in 2023. Thank you.
Okay.
Alright, Matt This is Anthony I'll take that one so.
Yeah.
We're seeing some price impact in Illinois, but not to the extent that youre kind of alluding to.
One of the things that could be happening is obviously with Missouri going adult use that may be impacting a lot of the border stores there.
Sure.
But generally speaking while we're seeing some compression.
I think this is as extreme as we've seen in other markets.
Can you can you repeat your second question.
Yeah.
Yeah, just wondering if you could remind us of where you have new capacity coming through or store ramp up in 2023.
Oh sure. Okay. So let's start on the retail side, which you know, which I mentioned in my prepared remarks.
We've got a goal of opening approximately a mid teen number of additional stores. This year and it's really across the following markets, Virginia, Pennsylvania, Minnesota, and Nevada and Florida.
And then on the CPG side, we got capital projects that have bled into this year.
From last year, but we've got a new facility in Virginia that will be operationalized.
Minnesota, Our New York facility should turn on near the tail end of this year.
We have additional new Jersey capacity coming online and then we also have a small expansion taking place in Connecticut.
The next question comes from Eric The lawyers with Craig Hallum Capital Group. Please go ahead.
Great. Thank you for taking my questions and congrats on the strong cost controls here in the quarter.
My question is on these cost controls so.
Normalized operating expenses that you guys called out decreased pretty materially both in absolute terms and as a percentage of sales.
Quite impressive considering the growth of your growth of your asset base and of course, the inflationary environment as well.
Do you feel that we've reached kind of a new base level of Opex like should we think of any of these normalized.
Expense levels.
Possibly coming down further.
In 'twenty three I know you've mentioned some efforts around increasing efficiency around CPG just wondering how you feel on that.
Sort of Q4 base level of normalized operating expenses. Thank you.
Sure. Thanks for the question Eric This is Matt I can take that.
As a reference we saw normalized operating costs in the 21% 22% range for the past two years and we expect that trend to continue.
But at the same time, we also plan to keep a close eye on our spend to balance short term profitability targets with long term strategic objectives.
So given given the fixed cost.
Faith that you operate with number of retail locations. There's only so much of a floor. You can you can hit but we feel pretty good about where we are at and how we can maintain that level.
Thank you.
Yeah.
The next question comes from.
With Wolfe Research. Please go ahead.
Good afternoon, and thank you for taking the question it looks like sales trends and <unk> came in a bit ahead of expectations. So can you talk about what you're seeing quarter to date from a sales perspective, and then I guess, just taking a step back and thinking about the industry as a whole what is the catalyst here for pricing to stabilize and when do you think we could see some capacity eggs.
The market here as they become increasingly capital constrained out there.
Thanks Spencer this is Matt I can I can start off there while we don't provide guidance. We know that seasonality is a factor and we expect Q1 revenue to dip to the mid <unk> from <unk>.
Q4 revenues by the mid single digits.
And <unk>.
Ben do you want to take the.
Sure.
Hey, Spencer its been on capacity coming off of a pricing stabilizing I mean, you're starting to see it it depends on which market. That's obviously a bottom up decision and it starts with when the capital come into the markets.
And we're able to really hone in on where we're at how places like Massachusetts have experienced what they've experienced in what states. We're looking at where we're putting capital and see what other capital is out there.
The days of money tumbling in which creates a lot more supply, which is what really creates the price deflation in some of these markets is oversupply.
And we look out in markets, where we're spending and where we have a lot of confidence given there's lack of a lot of new capital coming in people are really digesting the tax penalties and interest rates are four 500 book spreads are up.
So the cost of capital is higher which gives us some confidence too early to call a bottom, but I would say we're studying the data were not more worried than we were so I think that's stabilizing.
Got it thank you.
Yeah.
The next question comes from Andrew <unk> with Stifel. Please go ahead.
Good evening, Thanks for taking my questions and congrats on the great cash generation this quarter.
I have a two part question and then a little bit of a follow on from the last question just thinking about working capital management and namely your inventory I'm. Just wondering if you can talk to your inventory levels and how do you feel about your turnover.
Do you see this as being a big source of cash in 2023.
And for the second part.
More about the the.
Environment that you operate and do you see any risk.
That other companies might be monetizing their inventories.
And that could be a new source of price compression and if so.
Which markets do you think are most at risk.
Cognizance, you just mentioned that Youre not really more worried than you were before about about pricing.
I'll take the first part of that Andrew.
When we look at our inventory level, we feel pretty good about our inventory level, while inventory is up from last year, we still feel we're in a good a good position and between the mix of our CPG inventory retail inventory.
Monetizing that is not.
A significant concern of ours, we continue to turn the inventory.
Consistent pace and we expect to see that in the future.
And Andrew I'll take the second question just as it relates to.
What's happening kind of in the world around us relative to kind of inventory levels and could that kind of further push pricing down.
We look in 2022, we felt pretty good we felt it.
Pennsylvania, Nevada and Massachusetts.
And in all three of those cases I think he was a situation where you just had supplies integrated band it built up over a period of time.
For this year.
It seems like it's stabilized.
Massachusetts is a little bit unclear.
I also think that there is some of the activity that we're seeing in Florida. I think is a driver of what you. Just described I think a lot of the price compression we are seeing down there.
There was a little bit of overbuilding and now there is kind of a recovery cycle.
When we look across our portfolio.
Other places where it could pop up we have some positive catalyst coming right. So you look at places like Maryland, and that's probably is a market where you have elevated inventory levels, but with adult use coming that should hopefully absorb some of that some of that inventory.
We certainly seen that happen in Connecticut, as well as some of the other markets that have launched.
Over the last several years, so we're watching it close could that drive some further price compression I think so but fortunately for us it's limited to a few markets and not any kind of widespread is it.
If we were totally operational within a number of the west coast markets.
Thanks for that I'll get back in the queue.
The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening and thank you for the question.
I'm curious could you provide some color about your relative pricing and brand mix amend the continued pricing pressure.
Some detail on how you look at managing price gaps going forward and whether that might differ between your premium and value brands.
With the share capture you're getting right now from an shine I mean, the trade down with constrained wallet or potentially looking to make some adjustments. Thank you.
Yeah, Thanks, Darrin, Hey, it's Ben I'll take it and we like where we're at we can improve it.
The short answer and what I would say is we like rhythms positioning a premium we think we have room to up.
Upgrade and continue with whether it's a reserve or various limited time offerings that youll see coming there on the high end of the flower. We think we have some of the best flower in the game and we know we can continue to do better and we have a lot of things happening to drive that over say the next six to 18 months on the highest value partner. We're studying this all the time and then the biggest category like flower you mentioned, we love and Shine if opportunity and good.
Great.
And then we continue to parlay into the next category. The next category, whether it's pre rolls vape concentrates edibles and it's a very similar kind of analysis understanding where the consumer is.
Believable proprietary data to see exactly what's happening on a daily basis with the consumer and we use that to drive decisions on what the package and how to sell at what price.
So we're comfortable with where we are we think we got more upside to go.
Okay, great. Thanks for the color.
Sure.
The next question comes from Michael Lavery with Piper Sandler. Please go ahead.
Thank you good evening.
Clearly, it's clear that the supply and demand that's been driving the pricing moves.
Some of the oversupply you can see at least maybe light at the end of the tunnel, but.
Ideally.
Okay.
Little more consistently driven by brand equity.
One way is that from happening you've got some of the brands that stand out a little bit relative to others.
Maybe you've got a little better line of sight on what it takes for cause that's really carry more weight.
Sure. Thanks, Michael it's been I mean keep in mind. This industry is in its nascent stage right, where we're under a decade the idea of national marketing and National brands is really brand, new youre seeing rhythm flower or incredibles with sort of the best national distribution around maybe a handful of other names in the entire sector.
So.
We're able to see on a micro basis state by state able to take pricing power, which is really what our brand is through that trust and through that that platform to build that and we think it just continues to grow so I can't tell you three years, it's going to work, but we see over time, the ability where you know the national marketing the standards of the brand develops a relationship with the consumer that drives the price.
And then people are not just buying any old pre roll because they don't know what stuff is in it which is what we've seen out west and in other places.
Trust and door water. They know it's not trim, they know what theyre going to get and we continue to invest in that kind of basic promise with the consumer and I think if you look over time and be able to see that happen with some of the best brands. The key is for US is watching what others failed.
I think it didn't work so well in.
Trying to improve from there.
I think more brand equity to be developed and more scale of dollars spent on the brands that will show up in that.
We will revisit over the next medium term.
Okay. That's great. Thank you.
Thank you.
The next question comes from Scott Fortune with Roth and Pan. Please go ahead.
Good afternoon, thanks for the questions.
Real quick looking at consumer demand you mentioned, the 28% year volume lift can you.
Unpack that a little bit, especially from your side and what you've seen is the pricing.
Impressive, helping penetrate the illicit consumers shift to the legal side.
Just provide more of a a little bit of color.
That value demand pattern and consumer groups or did the graphics I really continue to drive that growth to offset the pricing compression were seeing.
The country.
Hey, Scott do you mind, just maybe synthesize that question a little bit you were a little muffled. So I just want to make sure we heard it right.
Yes, I just wanted to unpack that that volume with Bbs as they call them out by 28% on the year.
Think that's coming from a shift from the listed right because the legal side, new consumer just kind of unpack that the consumer side.
Yes sure.
Oh, that's a good that's a very good question.
Look I think the reality is it depends by market.
Sure I think that there is as prices continued to compress in a number of these markets.
When you put your.
When you think and act like a consumer why would you why would you buy untested unregulated product. If you can go to the stores for the same price, it's something that at the very least it's tested by third party lab within a much more controlled environment. So I definitely think theres conversion from the.
From the legacy or unregulated market into the state licensed markets.
The other factor here is.
There's a whole host of other kind of macroeconomic factors that are showing up here.
And again it really is it's really driven by at least for our stores, where they are within the country and then what are the macroeconomic kind of impacts that are happening in the markets, where we're most prevalent calling you know, Pennsylvania, Illinois.
And some of the mid Atlantic States. So I think generally though the biggest driver is probably that kind of conversion to the illegal marketplace. At the same time I think there's also just more widespread acceptance I mean, my guess is everybody on this phone is heard the term candidates from their family members a lot more in the last three months than they ever did call. It in the previous 12 to 18 months.
Yes.
I think there are new consumers new <unk>.
<unk> continued to enter our stores on a regular basis and that's obviously also driving some of the growth.
Thanks for the color appreciate it.
The next question comes from John Mccarthy with <unk>. Please go ahead.
Hey, guys one question that.
Comprised that hadn't come up previously.
Was Virginia expansion Theres been some pretty pessimistic news out of the state over the last week.
Are there any kind of changes to the planned spending environment. There for you guys.
And then similarly.
Is there any kind of optimism that has come about in the last month or so out of other expansion states, mainly Pennsylvania and Minnesota.
Sure. John This is Anthony I'll take that one again.
Look Virginia, we're all obviously aware of the news does not look like adult use sales are going to go live in 2024, However, what I'll tell you that the.
The medical program continues to evolve state can continue to do a really nice job of opening up that program patients simplifying the process.
<unk> registration as well as access in general.
We do have an expansion there obviously if you don't use was coming we feel a lot better about it but at the end of the day.
This is a phased expansion. So we built it such that it's perfectly ready to increase the capacity for the existing medical market and then we've got two more stores, we plan to open there between now and the end of the year.
The other markets, Minnesota and Pennsylvania.
Minnesota is probably were further along in Pennsylvania.
See how that evolves through the end of legislative session and then in Pennsylvania.
One we're watching closely I know that a lot of us really are and are involved with that but right now, it's probably a little bit murky to kind of opine on what direction, that's going to go and win.
Great. Thanks, Joe the only thing I would.
John the only thing I would chime in is very hard for us to make capital investments decisions based on the political landscape for the political headlines. So when you take a year to build the supply chain is tricky so nothing about happening in Virginia really adjust our bullishness on the demand from the people from Virginia.
We think they're going to buy adult use which months, which ear is unclear same thing with new Yorker, Minnesota or Ta and we spent accordingly, because we understand that that demand from the consumers and across the country that demand is coming true. The past is not straight the headlines are contrary to where that's going often but we're bullish on Virginia, we're bullish.
Sean Minnesota, our bullish on Ta and we think that 24 to 36 months all three of those markets will be significantly bigger than they are today.
The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good evening, everyone. Just wanted to ask a question on on Nevada, specifically.
Given some of the headwinds in that market is there any other color you have on the dynamics of what's happening there or is it simply just price compression like everywhere else are there changes in sort of tourism habits and people that going out of Las Vegas, how many times, they're their purchasing or their frequency frequency of visit or potential basket size and then I was just a broader question are there other.
Other markets you think that when you look at your portfolio it might make sense to.
Streamline them a little more theres been some press releases from some of your peers that have done that particularly on the west coast and I'm. Just curious as were in 2023 now if you think paring back asset exposure or capex in some of your noncore markets might make sense in the current environment.
Great Matt I'll take the first one I mean.
Out of market.
It had a tough year. He was off 20% went from effectively a $1 billion in 'twenty, one that you know.
822.
So for US we've seen a few things happened in that market price was it was one of the first places we saw severe kind of price erosion that happened relatively quickly it's right off the heels of Covid.
And it came fast and furious.
There is kind of a few other things happening in that market, which are unique.
The tribes play a unique kind of role in that market that I think he's having a bigger impact than anyone really kind of understand at this point and at the same time I wouldn't be surprised that there was a lot of product that continues to cross state lines from California into the state that is eroding kind of the.
The state license market.
In terms of the second question I don't know if anyone.
Oh, Yeah sure Matt I can hit it in terms of exiting markets. It's funny. The question that's really the answer to one of the prior questions about folks asking if.
What's it going to take I think as you've seen people exit you know like us people in the industry are out of money literally the cash is very tight on our balance sheet, but its elsewhere. So as you've seen people exit markets. There was a relief amongst those operators that are very tight because AD supply lease as people shut down at least the pricing stability in sort of a better market for those that can survive.
So we're in the midst of it we don't see Green Dot, leaving anyway, we really like where we're at in building. This portfolio in a calculated really precise surgical manner, and we understand where we are the distribution channels that consumers arent, we like sort of the upside embedded in this portfolio is driven all the decisions up until now although we're constantly evaluating it.
We're not afraid to be wrong. So I like the question. Thank you. Okay. Thanks, guys.
This concludes our question answer session I would like to turn the conference back over to Ben.
Closing remarks.
Thank you and thanks, everybody for joining us and look forward to updating you later this spring. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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