Ayr Wellness Inc

Q1 2021 Earnings Conference Call

5/26/2021

spk01: Welcome to the AIR Wellness first quarter 2021 earnings call. Joining us today are AIR's CEO, Jonathan Sandelman, the company's CFO, Brad Asher, and the company's co-chief operating officer, Jennifer Drake. The company will discuss forward-looking matters on this call, including targets for revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended March 31st, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and other disclosures concerning non-GAAP measures contained in AIR's management discussion and analysis for the quarter ended March 31st, 2021. I will now turn the call over to AIR's CEO, Jonathan Sandelman.
spk03: Thank you, and good afternoon, everyone. The first quarter was truly a transformative quarter for our business. Our strategic name change at the beginning of this year serves to better reflect our mission to deliver the highest quality cannabis, the best customer experience, and to be a force for good in our communities. We're happy to report our strong Q1 results today and even more excited for the progress anticipated for the remainder of 2021. Our revenue in the first quarter grew 74% year over year and our adjusted EBITDA more than doubled. This growth was mostly organic as our acquisitions closed too late in Q1 to contribute much to this quarter. But that will change as we move through the rest of the year. In total, we closed three major acquisitions in Q1, beginning in February with our acquisition of Liberty Health Science, adding the fourth largest retail footprint in Florida to our portfolio. We also closed on our Arizona acquisition at the end of March, adding three new dispensaries and a large cultivation expansion in one of the latest adult-use markets to emerge in the West. In March, we also closed our acquisition in Ohio, and we were able to harvest our first flower in Pennsylvania called Rebel, which hit the shelves in our stores earlier this month. We also opened our sixth store in Nevada, the closest dispensary to the Las Vegas airport, just in time for the return of tourism to the state. The results of our successful execution are beginning to show in our numbers, and substantial progress can be seen in our April monthly revenue. We told you all about the amazing record for 420 we had, but the entire month was incredibly strong, with total revenues nearly doubling since January. You will see this continue to build through the year as we close our New Jersey acquisition As Florida continues to improve and our next cultivation projects come online, we have always been committed to building strong foundations for the future of our business. In 2021, as we expand in our seven states, that investment will increasingly focus on building our brands. We are putting significant resources into elevating and evolving the air wellness ramp. As part of this, we've partnered with a premier branding company to build the foundations for a national branding strategy to be cultivators of wellness and creators of wonder. To bring this to life, we are developing iconic branding, including reimagining the dispensary design and consumer experience. This retail concept will be introduced first in our Air Wellness Pennsylvania stores and showcased in the new Greater Boston adult use stores, and then rolled out across Florida and the rest of our footprint when the time is right. Our national and regional marketing efforts are growing to support this consumer-focused strategy and will be aligned around our core belief that everything starts with the plant. And with AIR uniquely positioned as the premier cultivator of high-quality cannabis at scale. You can expect to see us focus our national portfolio on a narrower select group of core power brands sold at air retail and wholesale across our footprint. For example, June 1st, we'll introduce the Origin extracts to the Florida market. Origin has done phenomenally well in Massachusetts since its debut late last year and sold over 2.2 million in retail in March according to BDS, more than doubling its fourth quarter revenue, and has over 20 percent of the concentrate markets, according to BDS. Wicked sour gummies, which have become a huge success with the consumers en masse in Nevada, will follow in Florida and Arizona. To further support our branding investments, we are developing a best-of-breed marketing technology stack and integrating the consumer-facing digital ecosystem across the entire air wellness customer journey. You will see these brand investments drive additional revenue in the second half of 2021 and into 2022 and beyond. Jen will walk you through the details of the remaining milestones in 2021 in 2022 to reach the target we have set for 2022. We still have work to do, but so far we've accomplished what we said we would on time and on budget. Our team works tirelessly to make that happen. I am very proud of the hard work everyone here at AIR puts in every day to reach the goals we have set for ourselves and our shareholders. With that, I'll pass the call to our CFO, Brad Asher, to walk through the financial results.
spk07: Brad Asher Good afternoon, everyone. As John mentioned, we are proud of the substantial growth in Q1. As a reminder, Q1 included only 34 days of contribution from the Liberty acquisition and eight days of contribution from the Arizona acquisition. Now we'll be walking through actual results of the business without any pro forma adjustments. Q1 also presented our first quarter reported under U.S. GAAP. We signaled to this change on our previous call, and I want to reiterate a few of the key differences you will see in our Q1 results and going forward. It's important to note these differences are all in line with industry norms and not unique to AIR in any way. Warrants and biological assets are two of the areas that show the greatest differences between IFRS and GAAP in our industry. Under GAAP, our warrants were treated as equity as opposed to liabilities. And we no longer have the biological asset fair value requirement. Therefore, all fair value is removed from inventory. However, one exception is the fair value requirement for acquisitions whereby the inventory is marked to fair value on the purchase date, which is consistent with previous IFRS treatment. In Q1, this applies to the inventory from our Florida, Arizona, and Ohio acquisitions. As this inventory is subsequently sold, the fair value cost basis has a downward impact on gross margins. Throughout our financial statements, we've identified this as incremental costs to acquire cannabis inventory in a business combination. And you will see these amounts itemized within the inventory footnote, cost of goods sold presentation, and adjusted EBITDA reconciliation. In addition, under U.S. GAAP, the majority of our leases are now considered operating leases and treated as rent expense through cost of goods sold or G&A. Whereas under previous IFRS reporting, All capitalized leases were considered financing leases, and expense is part of depreciation and interest. While this change in classification doesn't impact cash flow in any way, it does have an impact on reported adjusted EBITDA, with $1.6 million of lease expense in Q1. Lease expense will continue to build from this number as our footprint expands consistently throughout the year, particularly as we open more stores in Florida. Based on our current expectations of the annual impact of this GAAP-related lease expense reclassification on adjusted EBITDA, we are adjusting our 2022 adjusted EBITDA target to 300 million from 325 million under IFRS. I'll now provide a brief summary of the key financial metrics and results for the first quarter. In Q1, sales increased to 58.4 million representing an increase of 74% over prior year and 22% over prior quarter. To exit the quarter in March, there was an exponential jump of 72% in monthly sales relative to January sales, driven by our first full month of sales from the Liberty acquisition and eight days of sales from the Arizona acquisition. Our adjusted EBITDA for the quarter was 18.4 million, representing a 136% increase over prior year on an apples-to-apples gap basis and in line with prior quarter. With the prior IFRS treatment of leases, the first quarter represents a 3 percent increase in adjusted EBITDA from $19.4 million to $20 million on an apples-to-apples IFRS basis. Adjusted gross margins of 54 percent represents an 8 percent increase and 6 percent decrease from prior year and prior quarter, respectively. The sequential decrease was anticipated as we continue to ramp retail operations in new supply-constrained markets, ahead of our substantial cultivation facilities coming online and the higher margins that come with vertical integration. Our SG&A expense of $16.6 million represents 28 percent of sales, which was consistent with prior year as a percentage of sales, while representing a sequential increase from Q4 of approximately 22 percent on a percentage of sales basis. This increase was largely due to our continued investment in branding, talent, and infrastructure, the strong foundations of our business, as well as startup costs associated with preparing locations for their intended use. For example, we hired 110 people just in Florida in the one month we owned the business. In total in Q1, we adjusted for $1.6 million of startup costs and adjusted EBITDA as we believe these expenses are not indicative of ongoing operations and quantifying this amount only enhances comparability to prior and future periods. Lastly, we ended the quarter with $195.7 million of cash on hand compared to $127.2 million to end the year, demonstrating a strong capital position to propel our growth initiatives. The increase in cash from year-end was primarily driven by an equity raise in January, with total gross proceeds of $118 million USD. This was partially offset by $31 million paid for a combination of CapEx and acquisitions, as well as $21.9 million paid in federal taxes subsequent to year-end. With that, I'll hand it over to our co-COO, Jennifer Drake.
spk05: Thanks, Brad. As John mentioned in his opening remarks, AIR's business will look dramatically different throughout the remainder of 2021 than it did in the first quarter. After closing our acquisitions in Florida, Arizona, and Ohio, we're well on our way to meeting many of the critical milestones that we laid out a few months ago on our year-end call when we set our 2022 targets. I want to spend our time today on this call putting more detail around that ramp up in revenue and EBITDA, because judging from the 50% discount we trade at relative to our peers, clearly there's some uncertainty as to our ability to hit our $725 million revenue target and $300 million GAAP adjusted EBITDA target, which, as Brad mentioned, translates to $325 million of adjusted EBITDA on an IFRS basis. The first major contributors to the ramp have already been accomplished. We've closed our acquisitions in Florida and Arizona. And we've begun to ramp up in Pennsylvania in our two new air wellness stores and in cultivation. These three states combined with the addition of a sixth dispensary in Nevada, have already contributed to the near doubling of our run rate revenue in April versus January. As John mentioned, this month, in the month of May, we began selling our own flour in Pennsylvania. This is very important because it will drive revenue increases in our stores and revenue increases from Pennsylvania wholesale, and it will move EBITDA margins up in the state. Adding further to this base in 2021 will be the closing of our New Jersey acquisition in July, the opening of four additional dispensaries in Pennsylvania, at least seven more dispensaries in Florida, and additional manufacturing in Nevada coming online in June that, just like in Pennsylvania, will drive both wholesale revenue and margin at retail. Additionally, in July, we'll begin selling flower from our second phase of cultivation expansion in Pennsylvania, adding significant capacity for revenue growth in that very supply-constrained and quality supply-constrained market. Our rebel flower launch from our first harvest in Pennsylvania received top reviews with an initial launch of five strains and THC levels reaching nearly 30 percent. Beyond these drivers, Further incremental drivers of growth in 2022 will be adult use retail and wholesale sales in New Jersey as our cultivation facility comes online. Significant incremental growth in Massachusetts as we open and ramp three adult use dispensaries in greater Boston and turn on 75,000 square feet of new canopy for cultivation. Launching our cultivation in Ohio and scaling product manufacturing there. and really driving our wholesale business and retail gross margin expansion in Arizona as our new 80,000 square foot cultivation facility ramps up production. Finally, our Florida turnaround will add more revenue in EBITDA throughout 2022, with continued improvements in cultivation and production driving a much better experience in our expanded retail footprint. Our guidance only assumes that we reach the Florida average, which is revenue of $4 million per year per store, and reaching that average by the end of 22. But when have we ever been content stopping at average? Florida is such an important state for us. It's such an important lever to the growth of revenue and EBITDA for our business. And we are so focused on getting it right that we are moving our corporate headquarters to Florida later this year. So we are definitely all in on Florida. These are all projects and milestones where we have strong visibility on the resources needed to complete them, both human and financial. Importantly, we have cash ready on hand with nearly $200 million in the bank. We also have the expertise needed to make these milestones happen with strong business foundations, scalable systems, operational controls in place, and senior leadership and human capital over 1,500 people strong, 10 of whom are a specifically dedicated SWAT team focused on the integration, project management, and best practices and execution of the milestones that drive our 2022 projections. As we continue to scale operations in our seven states, you will see a significant presence in states that matter. In 2022, six of our seven states will contribute over $100 million of revenue to our $725 million revenue target. Before I pass it back to John, I want to address one more topic, which is the issue of uplisting, as many of you have asked about this over the last few months. As Brad discussed, this quarter we are completing the transition to reporting in U.S. GAAP, as we've elected to become a U.S. filer. This means that there are no additional regulatory reporting or audit hurdles for us to jump once the U.S. exchanges are ready to take plant-touching listings. So we are good to go on those fronts. we've done absolutely everything we can to be ready at the drop of the hat to up-list. So when the U.S. exchanges are ready to take plan-touching listings, we are ready to list. With that, I'll hand it back to John.
spk03: Thanks, Jen. As discussed, we're excited to see our strategy playing out as planned and are encouraged by the strong results we were producing in April as a result of our quality execution and recent acquisitions coming online. We are focused on closing our New Jersey acquisition later this summer, and we expect to see continued progress from our existing states as we look to bring more cultivation capacity and dispensaries online in Pennsylvania and Florida. We also continue to see excellent opportunities out there for additional expansion through M&A. both to deepen our presence in our existing states where possible and to add new states to our footprint. We remain committed to finding the right assets and the right people at the right price. Having six of our seven states generate over $100 million in revenue in 2022 is what we mean when we say we want to be in states that are meaningful and can move the needle. We continue to look for those opportunities, plus new opportunities to leverage sales through that strong, diverse footprint. We look forward to reporting our full Q2 results later this summer, demonstrating the next step function in the growth that we've talked so much about today, and to announcing even more expected milestones and opportunities as they arise. We look forward to welcoming all of you to our new Florida headquarters sometime later this year. With that, I now hand it over to the operator to open up for questions.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Matt McGinley with Needham. Please go ahead.
spk09: Thank you. When we strip out the noise in the gross margin rate related to acquired inventory and startup costs, which I assume is predominantly in new states, was there any real change in the gross margin rate in Nevada and Massachusetts? And second to that, implicit in that 30% EBITDA rate you got in the second quarter, does that adjusted gross margin rate stay about the same as you had it in the first quarter?
spk07: Yeah. Hey, Matt. This is Brett. So the incremental cost to acquire inventory that only relates to the acquisitions 28 million of that is on our balance sheet, and 5.8 was flowing through the P&L. Almost all of it relates to Florida. So none of that relates to Massachusetts or Nevada. In terms of those margins, I think they've been very consistent from prior quarter. And I just want to reiterate that the incremental costs are not at all related to Massachusetts or Nevada.
spk09: Great. And Brad, implicit in that 30% even die rate for the second quarter, does that Does that gross margin rate stay about the same?
spk07: Yeah, I think you're going to see that margin in second quarter stay the same. In the second half of the year, I think you're going to start to see some improvement, especially with SG&As. We get some operating leverage. Even the margins overall will trend up. Okay.
spk09: Thank you very much.
spk01: The next question comes from Russell Stanley with Beacon Securities. Please go ahead.
spk08: Good afternoon. Thanks for taking my question. Just around Florida, obviously a huge priority, and a number of the initiatives that you have underway take some time to produce results, although you've already seen major increase in yields. Just wondering, from a standpoint of your actual to-do list, how much progress have you made? Are you 50% of the way there, 75% of the way there in terms of actually taking action on these items so far?
spk03: I'll take that, Russ. Thanks for the question. In Florida, we've seen major progress. I've recently talked in various interviews that when we look at the business simply back to August, the crop failure rate was 25%, and now that rate is in line with our other cultivation sites. If you think about it, you have the cost to produce 100%, and you only end up with 75% of the product. So it's a major expense that's essentially been eradicated. Next, the grams per square foot. That has increased already by 60%. We talked about Florida. One of the issues that Liberty had, it only had flour two days a week in its stores. Now we have flour four to five days a week, but we're still narrow on our genetics. We only have two genetics in our stores today. By June and July, we should have 15, and we should have flour seven days a week. So major progress in improving the efficiency and the yields in cultivation, which then drive the inventory in the stores, which in turn drives the revenue.
spk08: Great. That's helpful. If I could sneak one more question in just around Massachusetts and your expansion plan underway at Milford. Given your penetration level already very high, I guess my question is around dispensaries. How many more dispensaries do you need to see that market add in order to absorb the additional capacity that you have planned?
spk03: So if we think about it, when our adult use stores are operating, we won't have any product to be able to put into the wholesale market. So we need that capacity to just maintain what we have. And as the market continues to grow, today we're in 95 out of 127 stores. That's projected to grow. by the end of the year to at least 135 stores. Most of the growth, as we've talked about in the past, is coming from non-vertical players who need to buy products. So we see our wholesale business growing. You saw a quarter or two ago when we had material returned to us that had been locked up in the inspection process. When it was finally released and we had product to sell, we took our recent average of $4.5 million approximately a month in wholesale to almost $6.5 million. So there's demand. We've always felt there's probably twice the demand that we're able to supply, and that's in current markets. And with the further growth in non-vertical retail stores, we see that we'll be able to supply the market without affecting the average selling price.
spk08: That's great, Colin. Thanks very much.
spk01: The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
spk11: Good evening, all. Thanks for taking the questions. Congrats on the quarter and the recent acquisition closing. I just wanted to revert back to the 2022 guidance in relation to where things are looking for next quarter on the EBITDA margin profile. So still expecting around 30% plus margins going into Q2 here. And even on a GAAP basis, 2022 looks to be about 41%. My math is correct. So I'm just curious if you can give us a roadmap of what is the large contributors to that you know, appreciation of margin between, you know, your retail versus wholesale strategy as well as new markets like New Jersey and Arizona with respect to how they're going to play into that margin expansion?
spk03: Well, if you think about it, in some of our major markets today, we're not vertically integrated to the extent that our retail stores need products. And a lot of that vertical integration happens. The cultivations get completed towards the end of the year and the beginning of next year. And we all know that a vertically integrated operator has higher margins than one that has to buy a third-party product. And it's just simple math. Cultivation comes in, we supply our own stores, margins go up. If we just replace the third-party product and sales were even flat, our margins would go up.
spk11: Okay, that's fair. And then the other question I had was on just looking ahead to next quarter. If we can just give a little more color on the dynamics you're expecting with a full period from Arizona. I don't expect you to quantify within the $90 million how much does that save, but clearly less than a week of performance in Q1 versus the full quarter in Q2. And then also just the market dynamics as it looks like in many states. Obviously, I'm in Toronto here, so we're not fortunate. But it looks like many states in the U.S. are starting to open now on the back of COVID restrictions being relieved. So your anticipation of consumer behavior into Q2 and maybe Q3 on the back of states opening up versus acquisitions coming online for a full period in the next quarter?
spk03: So we don't have any states. different than Toronto that are closed right now. So, I'm not sure of the question.
spk11: Yeah, it's all of you. So, I guess I'm just trying to get an idea of how much of next quarter is going to be more organic growth within the assets themselves versus just new revenues coming online because the deal is closed.
spk03: Well, the deals are closed. The deals that are closed are already contributing. We've, you know, Brad went through that. and they will continue to contribute. And as the CapEx program finishes and more cultivation comes online, it will contribute even more. And that's what we're showing. We're showing a bridge, right? We're showing you the first quarter. We're talking about April. We're talking about the second quarter. And what we've always talked about is the first half of the year is an investment period. that pays off in the second half, fourth quarter of next year and into 2022. Okay, thanks.
spk11: I'll get back in line.
spk01: The next question comes from Scott Fortune with Roth Capital Partners. Please go ahead.
spk10: Good afternoon. Good afternoon. Thanks for taking the question. Real quick, in Nevada, you've added a six-door there. I just want to get a sense for tracking. Similar, as we see the Nevada market really open up the tourism and high-producing 20 million-plus stores annually that you have in that state. How is the added efficiencies and capacity coming along, or is that another market you'll look to add potential production expansion? We're adding manufacturing capability. Okay.
spk03: We're adding manufacturing capabilities, as we've said, in Las Vegas. The good news is when we look at our quarter and the growth that Nevada had in a difficult tourist market, and while we're not dependent on tourists, it does help when the tourists come back and the hotels and casinos start to rehire their people. We are focused on the local markets. We've always been focused on the local markets. But unemployment rate in that state has been extremely high. And so we think we're right at the inflection point of seeing potentially very strong growth here.
spk10: Okay, no, I appreciate that. And then really any updates on Boston and dispensary timings, what's going on in Massachusetts, and just maybe a little bit more color on the national branding strategy that you're rolling out, kind of narrowing down some brands. Is this existing brands that you have, like Origin, like you mentioned, and putting in place in the new states, kind of step us through a little bit more color on that strategy?
spk03: So we have approximately 500 SKUs in the company. The original branded portfolio that we created, plus through acquisitions, we pick up other branded portfolios. And what I've asked my team and the branding company to do and our operators is to take a more focused approach on a single portfolio that we will have In every state that we're in, we will have that both in our retail and in our wholesale business. So those brands will be in our stores and in our competitor stores. And by doing that, if we consistently brand and market the same concentrated portfolio, we will, in effect, create the first true national brand. And you've seen how well we've done in brands. In Nevada, where we have 12% of the overall market, it shows we have a strong brand. The highly edible brand in Nevada is a strong brand. The Sierra brand, according to BDS, is the number two brand in Massachusetts. So we have this extensive portfolio. We narrow it. We concentrate it. We market it. We brand it. We sell it through our retail. We sell it to the wholesale market. And as our footprint continues to expand, these names in this portfolio will be nationally branded products.
spk10: Thanks. And then real quick, any updates on the Boston kind of what's moving in Massachusetts timing from that standpoint?
spk03: I have no new information to share. I think what we've said in the past is what we know to be true.
spk10: Okay, thanks. I'll jump back in the queue.
spk01: The next question comes from Vivian Acer with Cohen. Please go ahead.
spk04: Hi, thanks. Good afternoon. I wanted to follow up on your comment that you're moving your HQ to Florida to really solidify your commitment to that market. I was wondering whether you could comment on any potential cost savings due to the relocation. Presumably, you're taking advantage of perhaps more attractive relative real estate costs. Thanks.
spk03: So, Vivian, real estate is much cheaper. what we're going to pay per square foot is about a third of what we have been paying in New York City. But I really think that the strategy is more than just the efficiencies or the cost savings on the commercial real estate. It's always been my belief that the Liberty asset by itself will be worth more in the future than the current value of our stock today. And we will expand as rapidly as we can. We don't want to get down in front of the cultivation because that's been the mistake they've made in the past. But because of the rapid improvement in our cultivation, issues in fact that i i spoke about recently it will give us the ability to expand and while we have you know a goal out there of 42 my personal goal is to be more aggressive than that so i think the collective management at air understanding the importance of florida has made this decision that if we focus intensely on this state, the upside is just tremendous.
spk04: Great. I appreciate the caller. Thanks so much.
spk01: The next question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.
spk13: Hi. Good afternoon and congrats on the first quarter results. First question here, just trying to understand the magnitude of the first harvest completed in Pennsylvania during the second quarter. Would that be earmarked entirely for your own dispensaries, or would you expect to also recognize some of your first wholesale revenues in that market in the second quarter?
spk03: Brad, correct me if I'm wrong, but by having the size harvest, we'll realize we will both be in the retail and wholesale market and as you must know the the wholesale market is still very constrained and it's a very good wholesale market so you'll start to see wholesale revenues there brad do you have any details on that that you want to share or yeah no i mean that's exactly right and as a reminder you know we have two stores open at this time so we are going to feed our stores with flour but we're absolutely going to have from that harvest
spk07: enough to start producing a wholesale business in that state.
spk13: Great, that's helpful. I wanted to ask a question on one of the comments in the press release about step function growth in Q2 and Q3. I think the wording was especially in Q4. I just wanted to clarify that last point where you call out the Q4 growth. Are you maybe suggesting there that Q4, we might see an acceleration of revenue sequentially in Q4 relative to the growth rates we see in Q2 or Q3. I just want to make sure we're not misinterpreted in that statement.
spk05: I think it's a matter of in Q4 we're going to see a number of cultivation facilities come online, and so that's really when the run rate will start to reach that peak that feeds into the $300 million of GAAP adjusted EBITDA guidance for 2022.
spk13: Okay, understood. And then maybe just a final question here on Ohio. They announced a number of new dispensary open licenses to be issued in that state. Just wondering whether, you know, this announcement would adjust your strategic priorities at all, whether you'd – I want to move maybe a little bit quicker on bringing wholesale capacity to that market, you know, with additional dispensers coming online.
spk03: I think, you know, our strategy in Ohio is to move as fast as we can. And we are aware of those store opening, but it is still a constrained market without those stores. There we're a cultivator and a manufacturer at this point. We'd hope to be a retailer in the future. So I don't think that changes anything because our plan originally was to build as fast as we could, so we're just going to stay on that plan.
spk13: That's great. Thanks for taking my questions.
spk01: The next question comes from Jason Zandberg with PI Financial. Please go ahead.
spk02: Hi, thanks for taking my question.
spk01: It seems that Jason Zandberg has dropped off. Jason, if you would like to ask your question again, please rejoin the queue by pressing star and one. The next question comes from Greg Gibas with Northland Securities. Please go ahead.
spk06: Hi, good afternoon. Thanks for taking the questions. I guess, first, how should we think about organic revenue growth in the quarter? And then, second, as we layer in the new acquisitions this year, you know, the partial quarters in Q1 for Arizona and Florida and then Ohio and New Jersey to come in July to your existing business, how, I guess, would you expect gross margins to trend as a result of those?
spk03: Brad, do you want to take it? I think we've answered this question before, but, Brad, do you want to respond to that?
spk07: Yeah, so we do have growth from our existing states quarter over quarter. I'd say it's in the 5 to 10 percent range. The balance of that is coming from these assets coming online. And that's really what you're going to see in terms of Q2 with that, you know, 55 percent quarter over quarter growth in sales. It's really those assets coming online. In terms of margin, you know, it's back to our original point about vertical integration, right? in these states pre-vertical integration where we're just in the retail business and, you know, margins are lower than basically we're also acquiring customers with lower margins. And once we have vertical integration, I think you're going to see a substantial lift, you know, roughly 20% in margins.
spk06: Great. Thank you.
spk05: And Greg, vertical integration in a market like Pennsylvania or New Jersey should be the same, and ironically also in Florida, it allows you to get both better margins and more revenue because the more, when you're in a constrained market like Pennsylvania or like New Jersey will be, people want to go where they know when they go to a store they'll be able to buy what they want. for different reasons, the same dynamics in Florida. So you're having these supply-constrained market dynamics play out where when we have our cultivation and production that can feed our own stores, it drives both the top line and the EBITDA line.
spk06: Sure. That makes sense. Thanks, Jen.
spk01: The next question comes from Jason Zandberg with PI Financial. Please go ahead.
spk02: Thanks, I'll try this again. I just wanted to ask, I think it was asked by Matt earlier, I'm not sure if there was any clarification on the answer though, just in terms of now with a reopening economy, have you seen any differences in consumer behavior in terms of, you know, basket size, in terms of, you know, number of customers on a daily basis coming through the stores? just any color you could provide on differences in consumer behavior would be helpful. Go ahead, John. Sorry.
spk03: Yeah, I wouldn't say that necessarily with the economy opening, we're seeing the kind of experience that retailers, conventional retailers are seeing, right? People rushing in and start shopping in malls again. But what we are seeing, and we talked about Nevada, with the unemployment rate falling, disposable incomes going up, we expect that that will impact revenue. So it's not, I don't think we're seeing the opening of the economy trade because business has been strong all through COVID. Once our stores opened up, And so I don't see that as a driving factor at this point. But obviously, if employment rates continue to go down and people are feeling more secure, they tend to spend more money. So I would agree with that.
spk02: Okay. No, that's great. And if I could just clarify in terms of employment, peak production or cultivation yields in Florida, when do you expect to be at that peak? Is that a Q2, Q3, or Q4 sort of target?
spk03: I can't tell you exactly when the peak will happen, but we're seeing, as I mentioned earlier, a 60% increase in efficiency in yields. And I think we still have a lot of work that we can do to get those yields more in line with where we average in our other states. I think by Q4, they'll be much higher than where they are today. But I think it's a very smooth function. I think that each harvest will get better and better. And as we add more genetics, then I also think the yields will go up and the efficiency will go up. If you're dependent on only two strains, it's less likely that you'll accelerate that as opposed to when you're adding, you know, 13 additional strains. So I think it's going to be a very smooth function to a more efficient number that's more in line of what our numbers are in our other cultivation sites. And they'll go harvest by harvest, improvement by improvement.
spk02: Okay, I appreciate the color.
spk01: The next question comes from Howard Penny with Hedgeye. Please go ahead.
spk12: Thank you so much for the question. The retail sales increase of 24% in Nevada, would that be close to a same-store sales number, or do you have that, or would you be willing to talk about that? Thank you. Brad?
spk07: Yeah, can you repeat the question specifically around retail sales?
spk12: I was just trying to look at a metric of same-store sales, and you said retail sales are up 24% in Nevada year-over-year. I was wondering if that's equal to, like, a same-store sales number.
spk07: Yeah, I'd say, you know, 80% of that is. We have an additional store online now, but it's still ramping, so it really is organic growth in those stores. Awesome.
spk10: Thank you.
spk01: We currently have no more questioners in the phone lines and this concludes the question and answer session and also today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Disclaimer

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