Earnings Transcript for GTII.CN - Q3 Fiscal Year 2023

Operator: Good afternoon, and welcome to Green Thumb's Third Quarter 2023 Earnings Conference Call. 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 section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I will now turn the call over to Shannon Weaver, Vice President of Communications. Please go ahead.

Shannon Weaver : Thank you, Betsy. Good afternoon, and welcome to Green Thumb's third quarter 2023 earnings call. I'm here today with founder and CEO, Ben Kovler; President, Anthony Georgiadis; and Chief Financial Officer, Matt Faulkner. 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 materially from these statements. These risks and uncertainties are detailed in the earnings press release issued today, along with the reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the 2022 annual report filed on Form 10-K. This report, along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and SEDAR filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone, and now here's Ben.

Ben Kovler: Thank you, Shannon. Good afternoon, everyone, and thank you for joining our third quarter 2023 conference call. I'll lead off with some quick observations on the industry and an overview of our results. Anthony, will discuss our operations, and Matt will dive into the financials. After that, we'll open the call to questions. I'm pleased to report that our team delivered a great third quarter. We booked record revenue of $275 million, a 9% increase quarter-over-quarter with a nice lift from adult-use sales in Maryland. Our GAAP net income was $11 million or $0.05 per basic and diluted share, and adjusted EBITDA was $83 million or 30% of revenue. Nine-month cash flow from operations was $154 million, and we ended the quarter with a strong balance sheet, including $137 million in cash, net of our share buyback and tax payments. Just today, Gallup released a new poll showing a record 70% of U.S. adults believe marijuana should be legal. And with Ohio legalizing yesterday, more than 50% of the U.S. population lives in the state with adult-use cannabis. Yet, it remains a Schedule 1 narcotic in the eyes of Uncle Sam. From a federal perspective, it is impossible to predict whether we will get regulatory change from safer banking, rescheduling of cannabis, a potential Garland memo, or something else, and if so, what the timing might be. We believe that eventually change will happen and Green Thumb is well-positioned for that change. Regardless of what happens, we'll continue to build our business by focusing on our long-term strategy, creating brands and products that resonate with the consumer, remaining disciplined with our capital allocation and driving growth that generates cash flow. Regarding the cannabis industry and the economy, nothing has structurally changed since the last quarter. The industry set a new high watermark with sales $7.4 billion in the quarter, which is a run rate of nearly $30 billion and a 2.8% increase over last quarter. We feel good about our 9% growth versus industry of 2.8%, and especially given our historical CapEx spend, we like the setup going forward. RYTHM is in a solid financial position, mainly due to our intense focus on capital allocation, and being fiscally responsible with the dollars. Anthony, will go into more detail on our CapEx plans. But as I've said, we believe we are in the final stages of this CapEx cycle. I'll use our recent success in Maryland as an example. Positioning our company to benefit from adult-use sales was two years in the making. We needed to invest in expanding our cultivation and manufacturing capacity to meet the anticipated demand. We've planned ahead to strategically locate our RISE stores where there's optimal access for medical patients and consumers, Hagerstown in the northwest corner of the state, Jaffa near Baltimore, and Silver Spring in Bethesda, suburban communities in Washington, DC. We learned from the adult-use slip in New Jersey last year as we prepared for a successful launch in Maryland, and we will build on our learning’s from Maryland as we gear up for upcoming adult-use sales in Ohio, which voted to legalize yesterday, and Minnesota coming soon, and potentially other states like Pennsylvania, Virginia, and Florida. All of this long-term planning was focused on driving one outcome, organic growth that generates cash flow. And because we've been successful at executing this model, we have sufficient cash flow to continue investing in the business and pay our heavy tax burden without taking on additional debt or diluting our shareholders with an equity raise. Taking all this into consideration, our Board of Directors authorized a share repurchase of up to $50 million, and we spent $25 million of it in September. Going forward, we have the flexibility to use our cash reserves to repurchase more shares, or on debt refinancing, strategic M&A, or investments in the business as opportunities present themselves. Turning to our CPG business. We are steadfast in our mission to build brands that will be part of the American experience for decades to come. And we're doing that by connecting people to cannabis in innovative ways. In early September, we held the first ever music and legal cannabis consumption concert in Illinois with the miracle in Mundelein. The event was truly a miracle. The vibes were high. Everyone was happy, relaxed, and connected with the music, and each other. I want to thank everyone involved from our team members at our RISE Mundelein Dispensory to the entire village of Mundelein who helped ensure the event was equal parts, fun, and safe. It's no surprise that cannabis and music have been associated together for a long time. To elevate the positive connection between cannabis and music, we launched the RYTHM Artist Series, a line of celebrity musician strains that were developed with each artist and inspired by their lifestyle, brand, and preferences. This series is about honoring the authentic relationship that artists have with cannabis while bringing fans closer to their favorite artists by actually smoking the same strains as they do. While we're excited about this innovative way to enhance the RYTHM experience, the artists are even more excited. Mitchell Tenpenny, State Champs, Marcus King, and Tinashe are contributing their artistic senses and cannabis preferences to craft unique strains that will resonate with their fan bases. I also want to welcome two new Board members to the Board of Directors, Richard Reisin and Hannah Ross. Richard, has joined the audit committee and Hannah has joined both the audit and compensation committee of the Board. I look forward to the contributions both Richard and Hannah will bring to the table, as we continue to strengthen our Board. Finally, the world at war is creating a great deal of fear, uncertainty, and anxiety. We are surrounded by heartbreaking coverage of the Israel Hamas war, the continued conflict in Ukraine and other tragedies across the globe. Our hearts are with the innocent people who are suffering as a result and we hope and pray for peaceful resolutions. In these dark and overwhelming times, I've never been more confident in our mission and the power of cannabis to ease pain, calm anxiety, and promote positivity and well-being. Now, I'll turn the call over to Anthony, to add his sauce on the quarter. Anthony?

Anthony Georgiadis: Thanks, Ben. Good afternoon, everyone. Thanks for joining us. As you just heard, the Company posted a robust third quarter. To summarize, $275 million in revenue, $83 million in adjusted EBITDA, $25 million in stock repurchase, and our favorite $61 million in operating cash flow. We couldn't be more proud of the team for their hard work and execution, especially in Maryland where substantial preparation and planning allowed us to have a seamless transition into adult-use. Throughout the quarter, we also saw our wholesale brand performance continue to strengthen in a number of Green Thumb markets. These share gains by RYTHM, Dogwalkers, and incredibles, as reported by BDS, highlight our team's continued focus on improving flower quality, and increasing stocking levels on our top performing goods. Just this week in Illinois, our team was recognized with 10 awards at the High Times Cannabis Cup, including four flower awards for our RYTHM Jack Herer, RYTHM Slapz, RYTHM Black Afghan, my personal favorite, RYTHM Animal Face. On the edibles front, a recent collaboration with Magnolia Bakery highlights the broad reach of our Incredibles brand along with reinforcing its reputation as the Credible Edible. It's exciting for our team to receive these recognitions given our dedicated focus on the consumer. In Q3, we invested $54 million across our CPG and retail fleet bringing our year-to-date capital spend to a $184 million. We anticipate spending approximately $50 million in the fourth quarter bringing total 2023 CapEx spend to approximately $230 million. During the quarter in addition to various CPG facility investments we opened two new stores, one on Craig Road in Nevada and the other in Fruitland Park, Florida. Subsequent to quarter end, we've opened two additional stores in Florida and anticipate that we'll open approximately four more prior to year-end as our Florida expansion continues. In a bit of recent news, we wanted to give a shout out to the Buckeye State, which handily passed an adult-use bill yesterday. Big thanks to everyone involved to helped support the effort. We're hopeful the legislators now follow the will of the people and allow the personal freedoms people voted for yesterday. As a reminder, we are well-positioned to say with our retail footprint in our state-of-the-art Toledo based cultivation and processing facility. As we get closer to 2024, while we are allocating meaningful resources toward cannabis legislative change, we intend to continue to operate our business assuming no tax relief nor incremental capital market accessibility. As such, we anticipate this year's themes of cash flow generation and balance sheet stability to continue into the New Year. Last, in advance of this weekend, we wanted to acknowledge the veteran community and thank them for all their sacrifice. We look forward to the day that we can legally share a Dogwalker as easy as a can of Budweiser. We hope everyone has a safe holiday season with their loved ones and look forward to speaking with you in late February. With that, I'll turn the call over to Matt, to review our financial results.

Matt Faulkner: Thanks, Anthony and good afternoon, everyone. We generated over $275 million in revenue in the third quarter of 2023, a 5% increase compared to the prior year and a 9% sequential increase. While the effective price compression continues to pressure the top line, revenue during the quarter benefited from the legalization adult-use sales in Maryland. Continued unit growth as well as revenue generated from eight new stores opened during the year also contributed to the increase in revenue. Overall, retail revenue increased 3% versus the third quarter of 2022. Third quarter comparable sales were up slightly compared to the third quarter last year on a base of 77 stores. Consumer packaged goods gross revenue increased 18% versus the prior year quarter. Looking forward, we expect to see fourth quarter sequential revenue to be down low-single-digits, much like we saw in the fourth quarter last year. Gross profit for the third quarter was $133.8 million or 48.6% of revenue compared to $131.2 million or 50.2% of revenue for the third quarter of last year. The decline in gross margin was primarily driven by price compression. Turning to OpEx. Selling, general and administrative expense for the third quarter was $84.8 million or 30.8% of revenue of compared to $82.5 million or 31.6% of revenue last year. SG&A excluding depreciation, amortization, one-time transaction costs and stock-based comp, which we refer to as normalized operating costs approximated $59 million compared to $57 million in Q2 and $53 million in the third quarter of 2022. The sequential increase in total expenses primarily reflected cost associated with opening new stores and supporting adult-use launch. We continue to carefully manage our costs in this inflationary environment. The Company generated net income of $10.5 million or $0.05 per basic and diluted share during the quarter. This compares to net income of $9.8 million or $0.04 per basic and diluted share reported last year. Adjusted EBITDA, which excludes non-cash stock-based compensation and other non-operating costs was $83 million or 30% of revenue for the quarter as compared to $84.5 million or 32% of revenue for the third quarter last year. We ended the third quarter at the strong balance sheet, including cash of $137 million and working capital of $170 million while staying current with more than $28 million in tax payments during the quarter and $80 million year-to-date, along with the repurchase of 25 million in shares during the quarter. Cash flow from operations came in at $154 million for the nine months this year compared to $88 million last year, with $61 million generated during the current quarter. In summary, we are pleased with our third quarter performance and execution within this current market environment. We will continue to focus on execution in our stated goals. Thank you for your support and confidence and we look forward to updating you next quarter. With that, I will open the call for your questions. Operator?

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Matt McGinley with Needham. Please go ahead.

Matt McGinley: Thank you. So, on the gross margin side, you noted that price compression was the primary driver of that decline in rate. But as I think your CapEx spend over the last few years, it's been mostly into production facilities. And I think in probably in some of your older facilities, you probably aren't fully utilizing that capacity as wholesale opportunities shrank, and then some of the newer facilities, you probably aren't fully utilizing them because the markets haven't opened up yet. I know that DNA and your COGS probably increased a little over time, but I guess my question is, has your cost per unit gotten worse over time from that capacity that's underutilized, and if not, why would that not be the case?

Anthony Georgiadis: Yes, Matt. This is Anthony. That's a, it’s a really good question. But the reality is, we have a bit of what you just described happening within the portfolio, right. So, when you think about some of the states where we have greater capacity than needed, I'll take Ohio for one, that's a place where we have effectively planting less right now than we than we planted call it, a year ago. Obviously that would change with adult-use, but certainly that facility is not operating at optimum efficiency. And then in addition to that, we have a number of facilities that we just turned on, call it Minnesota, Virginia, the new Hackettstown facility in New Jersey, the new facility in New York, where those are just getting ramped up. So generally speaking, yes, we're running a little bit more cost of the P&L from a facility standpoint, due to having some new facilities that we brought online as well as having some older legacy ones that are not operating at full capacity.

Operator: The next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

Eric Des Lauriers: Great. Thanks for taking my questions and congrats again on another strong quarter here. So, looks like Florida retail expansion significantly picking up here. I guess, just a few questions there. Are these Circle K stores, if you could comment on sort of the status of that partnership as it relates to regulators? And then, just any comments on production expansion or CapEx, for Florida going forward? Thank you.

Anthony Georgiadis: Sure, Eric. Anthony Georgiadis, again as well. So, the stores that we've opened this year have been standalone RISE stores. Those are the same stores that we've been operating since we became operational in the state a few years back. We're still working with the, with Department of Health on operationalizing the stores that are adjacent to Circle Ks. I hope you have an update there soon, but nothing tangible just yet. And look, on the facility side, the CapEx spend is really front-end loaded. So, for those that have operated in Florida for a while, and know that the, really the best way to approach is go to wholesale capacity in advance of the retail, so you can actually feed the stores and scale them up over time. So, that's essentially what we've been doing. We finished the spend called late last year, end of this year. We've been ramping up facility and now, we're over to our retail site expansion and had a lot of good things to show up to ‘24.

Eric Des Lauriers: Thank you.

Operator: The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey: Thanks for the question, and congrats on the quarter. So, can you speak to some of the learnings that you've had in terms of setting up for conversion the adult-use markets that you mentioned, with strong conversion that you guys just had in Maryland? You guys were a market leader in the legacy Maryland market. You're also one of the market leaders in Minnesota in Ohio, which should be converting as well as the potential converting market of Pennsylvania. So, do you feel like this is a distinct advantage needing kind of capitalizing on the conversion or are there other factors that you believe contribute to it? Any color you can provide without giving away, maybe some secret sauce would be appreciated in terms of a potential conversion with Maryland?

Anthony Georgiadis: Thanks. Sure. Yes, Aaron. Anthony here. Look, the reality is, number one, you got to learn from your mistakes. I would say that, we learned a lot in New Jersey. We learned a number of things of what not to do. And the reality is there's not a silver bullet. There's no real secret sauce. It's really just making sure you've got a great team because it's a lot of heavy lift. That's number one. Two, product quality is key. One of the things that we did early on when we knew Maryland was going adult-use, we focused on improving the RYTHM flower quality. So, that once we hit the adult-use market, we could really hit the ground running. Generally flower is the tip of the spear. So, but it's really just making sure that that we're fully staffed up, our sites are ready to handle the additional volume and really just continuing to learn from our mistakes and evolve this business.

Aaron Grey: Great. Thanks for the color.

Ben Kovler: Thanks, Aaron.

Operator: The next question comes from Scott Fortune with ROTH MKM. Please go ahead.

Scott Fortune: Yes, good afternoon. And thanks for the questions. Just want to focus a little bit on the wholesale side as you see, some new stores, these social equity stores coming on board in Illinois, New Jersey. How are you -- how's that growth coming from that on the wholesale side? And are you seeing kind of that starting to cannibalize a little bit on the retail sales as we see more of these stores come onboard in these states. What kind of your strategy, wholesale versus retail on these states that are picking up on the retail side?

Anthony Georgiadis: Yes. Scott, Anthony. I'll take that question as well. If your question is specific to New Jersey, yes, what we've seen is there's additional stores have opened up in the state. There's been erosion on our retail business and increased demand on the wholesale side. That's currently what's happening in New Jersey right now. The reality is that, you can't paint all these markets with the same brush. So, well, that may be going on in New Jersey. It could be a different kind of supply demand situation in other markets. But, what we've seen in New Jersey is that, stores have opened up, at a nice pace over the last, two quarters. And, we feel pretty good about the fact that we've got additional wholesale capacity coming with Hackettstown. I mean, candidly, we wish we had the capacity sooner, but, it's setting up to work out pretty well now as all these stores really opening up. And so as we kind of look ahead, we think there's probably greater growth in the wholesale side than the retail side for, at least for Green Thumb.

Scott Fortune: Thank you. Appreciate.

Operator: The next question comes from Gerald Pascarelli with Wedbush. Please go ahead.

Gerald Pascarelli: Great. Thank you very much for taking the question. Macro related question on the resumption of student loan repayment, they resumed last month. Just curious on how you're thinking about a potential impact from that. Speaking of the industry, just in terms of unit sales or potential down trading. Any color you could provide, on that on your thoughts on the student loan repayments would be great? Thank you very much.

Ben Kovler: Sure. Hey, Gerald. It's Ben. To be candid, we haven't spent a lot of calories of time on that. We’re focused pretty bottom up on what's happening in the box and appealing to consumers. There's more money coming into consumers’ pockets through relief of, prior debt or whether it was tax repayments. We saw that hit pretty fast and that was a big thing coming out of COVID or other sorts of bonuses to the consumer. We're watching what's happening on the ground every day, bottom up to make decisions on pricing and sort of value orientation and different sorts of deals to drive the best unit economics we can. But haven't -- aren't super focused on the student loan. We're seeing a lot more unit growth, obviously even doing the pricing, but it's a by state, by sort of product discussion for us versus a macro one market business for now.

Gerald Pascarelli: Got it. Thanks, Ben.

Ben Kovler: Sure.

Operator: The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.

Matt Bottomley: Good evening. Congrats on the great print here. And a question for me just on the onset here is just on Meryl Lynch specifically, you called it out in your prepared remarks and in the press release. You had a peer this morning, report earnings and gave some granularity on the sort of state by state metrics. I'm just wondering, I think they quoted having about a 7% market share in Maryland and it looks like from what I've seen in the branded sales data, which I know is on a sample base, you guys are probably 2x that. So are you comfortable on providing any sort of commentary on where your standing is in Maryland. I know it's about a $1 billion market, right out of the gate, on the July 1 implementation. I'm just wondering, you know, could you have a 15%-ish market share there or if you're not willing to get into the numbers, just any sort of directional commentary on how that market's been going so far.

Ben Kovler: Yeah. Thanks, Matt. Hey. It's Ben. I can take this one, give Anthony some relief and good news is I know the number's a little, not as well as Anthony. So we're very bullish on Maryland. Great start, lot of transparency from the state. And we see a lot of growth ahead. We're really focused on the quality of our products, like Anthony mentioned, RYTHM flower, Dogwalkers, Incredibles. Things are doing very well there. And we continue to be able to increase output and drive some efficiencies there. We're not going to comment on, state by state individual data, but we remain optimistic on what's going on in Maryland. The team there continues to really kill it. They're grinding it out. And it's showing up. And we can take that playbook and we know what consumers want and we can continue to deliver on that across the country. Because that's where we've been focused. It's really the same script over and over for us in order to drive those gains. So just yesterday, Ohio turns on, we see that September 7, 2024. It's marked on my calendar and we're ready for it, and we're going to go at it again. So thanks. Appreciate the question, Matt.

Matt Bottomley: Okay. And then just on Ohio specifically, had some calls today sort of going around and obviously, a lot of bullish sentiment on the positive vote from last night, but it seems like, there's some cautious optimism with respect to maybe what the governor might say or just sort of state politicians with respect to potentially challenging it. So is Ohio a bit of a bit of a is there some nuance to exactly what we're waiting to see before we actually expect maybe nine months out of an implementation? Are we waiting to get official commentary from the governor or from the legislators on that? Just given the fact that something that, although polling was very positive, in advance of it actually going through yesterday, it seems like the local politicians there have not been shy speaking against it.

Ben Kovler: Yeah. I mean, it's hard to comment. This is Ben again. Thanks. It's hard to comment on politicians who'd say whatever they want the will of the people is pretty clear. 57% Ohio saw 70% across the country and all the polling in Ohio makes it very clear. This is what the people want. And there's a lot of political posturing. We're focused on hiring people, creating a great economy in there, taking away unsafe product that's on the street or frankly, a lot of people driving over to Michigan to bring their product back to Ohio. Those should be Ohio jobs and Ohio tax dollars. So we're ready to play our part in this, and we're focused on the win, but there's a lot of details to be worked out. It's not a constitutional amendment. We put a lot of facts out there both on our social media and otherwise, to give the lay of the land of what's happening. And we're comfortable with what's going on. We're excited about Toledo and we're excited about the job creation in Ohio as a result of this program. Great question.

Matt Bottomley: Okay. Got it. Thanks, Ben.

Ben Kovler: Thanks, Matt.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Ben Kovler, Chairman and CEO, for any closing remarks.

Ben Kovler: Thanks, Betsy. Thanks everybody for joining us. Have a happy and safe holiday season. Talk to you soon.

Operator: The conference is now included. Thank you for attending today's presentation. You may now disconnect.