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spk03: Good morning and welcome to the Green Thumb Industry second quarter 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jennifer Dooley, Chief Strategy Officer for Green Thumb Industries. Please go ahead.
spk11: Thanks, Andrea. Good afternoon and welcome to Green Thumb's second quarter 2021 earnings call. I'm here today with Founder and Chief Executive Officer Ben Kobler and Chief Financial Officer Anthony Georgiatis. 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 company's reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including our quarterly report on Form 10-Q, which we expect will be filed tomorrow. This report, along with today's earnings press release, can be found under the Investor section of our website. Greensum 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, Greensum will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release, and FDC and CDAR filing. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now here's Ben.
spk07: Thanks, Jen. Good afternoon, everyone, and thank you for joining our second quarter 2021 earnings call. Strong momentum in our business continues. Our revenue for the quarter was $222 million, up 14% sequentially, and up 85% year-over-year. To give you a sense of the growth, this quarter's revenue exceeded our entire annual revenue in 2019, just 18 months ago. We boasted our fourth consecutive quarter of positive GAAP net income. We continued that positive free cash flow from operations, and adjusted EBITDA grew 11% sequentially to $79 million more than double the level from a year ago. During the quarter, we raised $217 million in a non-brokered private placement of senior debt, and we feel very comfortable with the balance sheet. We ended the quarter with cash and cash equivalents of $360 million, which gives us significant financial flexibility to invest for the future and strong returns for our shareholders. We continue to attract new U.S. institutional investors who are aligned with our long-term vision to create cannabis experiences that connect people and improve communities. To enact our vision, just last month, we launched a new brand called Good Green and announced the Leap Bake Off, both initiatives dedicated to creating more opportunity for underserved communities in the areas of education, employment, and expungement. In addition to high quality products and authentic brands, our team's passion for these projects is real, and I am proud it is part of Green Thumb's DNA. Regardless of the current barriers limiting access to capital markets, U.S. institutions are demonstrating an appetite for greater access to cannabis investments, and we are excited about the momentum. The first half of the year felt very solid, and we continued to focus on execution. We are looking beyond the current year to optimize the tremendous potential when adult use sales begin in New York, New Jersey, Connecticut, and our recently entered market of Virginia. In each of the new adult use markets coming online over the next few years, we anticipate a surge in demand that will mirror what we've experienced first in Nevada, then in Massachusetts, and most recently in Illinois. History does not repeat, it rhymes. Our home state of Illinois continues to book record sales every month, and our team is preparing for the next few chapters. Demand remains strong across the country. It has been a busy few months for us as we expand and enter new markets. In addition to Virginia via Dharma, we closed on the acquisition of Liberty Compassion, a Massachusetts-based cannabis operator, adding greater capacity for us to serve a growing East Coast consumer base. We also expanded into Rhode Island with the acquisition of a vertically integrated summit. This broadens our footprint to 14 states and 62 retail locations. and puts us in solid position in the highly desirable northeastern market, where we now have operations in the contiguous states of Connecticut, New Jersey, New York, Massachusetts, Rhode Island, and Pennsylvania. We love the map. We accomplish this by remaining committed to our disciplined strategy to enter markets that meet our supply-demand requirements. These are highly coveted states that offer tremendous potential as we scale distribution of our cannabis products and retail experiences. The flower and the service keep getting better and better. On a personal note, I am excited that our acquisition partners chose Green Thumb. They didn't have to. They did so because of our reputation as a trustworthy and proven operator and a shared alignment of vision, principles, people, and community. I am committed to making sure we deliver on that. I am also very proud of what our team accomplished in the 90 days since our last conference call. As you can imagine, negotiating critical M&A deals and then integrating people, culture, and systems requires considerable time and effort. The team gets this done while completing other growth critical initiatives like the first expansion harvest ahead of the schedule in Oglesby, Illinois. Moving forward with our site in Warwick, New York, which is transforming a former prison to a cannabis campus and building out capacity in states like New Jersey, Ohio, and Pennsylvania. We are also optimizing brand distribution, including canned beverages, which continue to perform very well. Cookies on the Strip had a rousing opening as it becomes a top tourist destination in Vegas. We've got our own brand portfolio. We seek to create some of the highest-valued, most-well brands and cannabis experiences that bring well-being to people and communities. We have brands distributed in 12 states, and we continue to scale our capabilities. There is still tremendous potential to build depth and breadth of brand distribution. We are also enjoying success with limited seasonal offerings like canned pineapple jalapeno and the incredible s'mores bar. At the core, we believe that find your rhythm is a means to more well-being for America. We know Americans want edibles but are a bit nervous. That is why Incredibles, the credible edible, can build trust and help lay the path. And we know that Good Green can help anyone be good, feel good, and do good. Together and over time, we can actually make things better. As I mentioned before, we are pretty close to parity between our retail and CPG businesses on a gross basis. And over time, CPG growth will continue to accelerate as distribution meets the demand ahead. That is our focus every day. We have many levers for growth that will expand access to well-being through cannabis. Strong execution for our customers and disciplined capital allocation for our shareholders remain our top priorities. as we continue to deliver sustainable growth and returns. Today really is day one for the great American cannabis growth story. And there's so much opportunity for so many people in communities to win along the way. I've been saying that for a long time, so let me try to quantify it a bit for you. Legal US cannabis sales are currently on a run rate of $24 billion. That's because the second quarter 2021 sales were $6 billion. That's a new record. $24 billion is very big, but it's just a start. We think it more than triples in the next decade. As an example, California grew 9% quarter over quarter on a base of about $1 billion as the legal regulated market grows. Colorado grew 25% in its seventh year of legal adult youth sales. States like New York, Virginia, Ohio, New Jersey are not even in the $24 billion number. That's 50 million Americans. Greensum has a nice position in each of those states. Because of this top-down and bottom-up analysis focused on the data and the consumer, we think our $80 billion industry size is too low. But even if you think it's around $80 billion, that means there's about $60 billion more of legal sales to come. We have confidence in those legal sales in the United States, regardless of the federal policy. And we believe that will lead to at least $100 billion of new market cap. That's $100 billion of new wealth creation. That's an unbelievable setup and honestly, very American. But the real questions are, how do we handle it? Who participates? And will we be pleased in 10 years looking back? I'm focused on that for Green Thumb and for the industry. and I am excited about the days ahead. We understand the privilege, and we understand the responsibility of this position. With that, I'll turn the call over to Anthony for his financial review. Anthony? Thanks, Ben, and good afternoon, everyone. Appreciate you joining us today. Before I begin, I'd like to give a special thanks to our team and shareholders for all their hard work, dedication, and trust. We delivered yet another record quarter. none of which would be possible without our extensive and growing Green Thumb family. For those that have been with us since the early days, we've shown that if you plant dice, you're going to harvest wind. For those that just arrived, the ride on the Green Thumb rocket ship is just getting started, so buckle that seatbelt. Today is day one for all of us. In the second quarter, the company generated $222 million of top-line net revenue, and $79 million of adjusted operating EBITDA. Total net revenue increased 14% over Q1, with gross CPG revenue growing 13% and gross retail revenue growing 15%. As a reminder, the difference between gross and net is intercompany. Similar to last quarter, there are three primary drivers to our top-line trajectory growth. Robust consumer demand, high quality differentiated product and execution. Number one, the tidal wave of demand for cannabis is real. Across the board, in every market we operate in, consumer demand for legal cannabis is going up and to the right. Number two, our differentiated product offering continues to resonate in our respective markets. We believe in quality over quantity and leading with the consumer. No everyday niche for our crew. Here at Green Thumb, we want the fire and more of it. Last, operational execution. We've said it since our first call as a public company in 2018. Enter, open, scale. In the face of tremendous growth and a myriad of complex regulatory environments, the team makes it look easy. The net result of everything above is another highly profitable quarter where the company generated gross margins in the mid-50s. While this figure is likely to climb over Q1, when we unpack the numbers, it makes sense given ramp-up costs related to our CPG expansions. I would assume that the business will continue to incur these sorts of expenses while still maintaining our intrinsic goal of keeping gross margins at or above 50%. On the STNA side, excluding DNA and stock-based copy, normalized operating costs approximated $47 million, a $5 million increase over the $42 million incurred in Q1. As we head into the second half of the year, we plan to continue to accelerate our investments in our team and our infrastructure. We need a bigger boat and more team helping us operate the boat. In Q2, Total other income approximated $2.4 million, primarily driven by non-cash gain-through losses associated with our investment portfolio and the refinancing of our senior debt facility. As a result, the company generated over $79 million in adjusted operating unit GA, close to 36% of revenue, and over $20 million in net income, our fourth consecutive quarter positive earnings per share. Moving on to the balance sheet, landed the quarter with approximately $360 million of cash. This is $80-plus million greater than last quarter that was supplemented by the $217 million non-brokered debt raise we completed in April. With this cash, we intend to double and triple down our bets in a number of key markets. Our patients and consumers have spoken. They want more Rhythm, Dog Walkers, and Incredibles, and our capital spend should help address this. In closing, we wanted to welcome the Liberty, Dharma, and Summit teams into the Green Thumb family. We're excited about the additional reach these businesses and teams provide as we continue our expedition into Prohibition 2.0. We hope everyone enjoys the balance of their summer and look forward to speaking with you again in a few months. Back to you, Dan. Thank you, Anthony. Before we go... I want to share a little more about the programs I mentioned earlier and our efforts to expand access to opportunity and well-being in underserved communities, especially those harmed by the war on drugs. In this country today, there's a 90% racial wealth gap between white and black Americans due to systemic inequality. There is not a person of green thumb who is in trouble by this shocking disparity. So in July, we joined forces with 90 to 0. This group is developing a roadmap to advance racial equity by growing black talent and increasing capital to black businesses. With the support of leading CEOs from companies like Starbucks, Goldman Sachs, and the United Way, and with the help of two-time NBA MVP Steph Curry, we are honored to be the first company to represent cannabis in driving this change. with 90 to 0. We also announced the upcoming launch of our new brand called Good Green. To advance our mission of expanding access to well-being through cannabis, sales of Good Green products will fund grants to nonprofits that support the brand's three pillars, education, employment, and expungement. We encourage you or a 501c3 you know, or people you know who know a 501c3 that fits our mission to apply at our website, good.green. To give the program a head start before actual product sales, we are proactively committing at least $1.3 million over the next 18 months. And the application process is now open. The application process is a means to figure out who and where to give the money in order to generate the largest impact. This builds on our existing social impact program, Growing for Good, which is committed to advancing diversity and inclusion, restorative justice, and social equity within the cannabis industry. Our entire team's dedication to these important social issues is inspiring. I am also excited Green Thumbs landing in the number two spot of Crane's fast 50 list of rapidly growing companies in Chicago. We feel the growth and we are ready for more. In terms of COVID, we can only hope that the Delta variant will not lead to a repeat of 2020. Based on the data, we encourage Americans to get vaccinated to protect yourself, the elderly, and our kids. While it's still too early to determine the ultimate impact of COVID this time around, we have learned how to live with the pandemic and we fully appreciate the essential role cannabis and our industry plays in providing well-being and comfort to tens of millions of Americans. Rest assured that your company is stronger than ever and committed to becoming better every day. And finally, I want to say thank you to Jennifer Dooley. Many of you remember her from the Roadshow. Five years, tantalizing brands, one IPO, 13 conference calls, lots of laughs, lots of learning, and lots of good fun. So on behalf of the shareholders, we appreciate your contribution and wish you well in your next chapter of life. Thank you, Jen. With that, I'll turn the call over to the operator for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble the roster. And our first question will come from Matt McGinley of Needham. Please go ahead. Matt, your line is open. Are you muted on your end?
spk10: I apologize for that. My question is on retail. I'm impressed with the sequential growth in the retail business. I think most of the new unit additions in the back half will be the acquired medical dispensaries, and I think new medical units in Pennsylvania and Florida. Would you expect this to impact the average retail productivity, or is there still enough momentum with the rising productivity on your overall store base where you could sustain your average unit volume in the back half?
spk07: Yeah, thanks for the question, Matt. I think one quarter is too short to judge. The last quarter, I think the number is 2%. People said, hey, is it too low? And now it's higher. I think over time, we're seeing very strong consumer demand. We're seeing the markets, as Anthony said, in every single market go up and to the right. And so we're analyzing those. We're understanding opening the box and really the evolving consumer and what that looks like. We like the retail business, and you can see, though, a majority or a significant majority of our capital is going into the production business, branded consumer products and production.
spk10: Okay, great. My second question is on the G&A in the back half. You made that comment. Anthony made that comment that you'll be investing in G&A in the back half. Can you quantify what type of increase we should expect? from that $47 million core number that you had in the second quarter? And then additionally, I would think that most of the recently acquired assets would likely be lower margin. They just operate at a lower scale than what you do at GTI Consolidated. Would that have an impact on the margins in the back half, or is it just kind of small enough where the rest of the system is just operating at such a scale it just sort of gets mixed up and wouldn't really have a margin impact?
spk07: Yeah, Matt, you said a lot there. I'm trying to understand the root of your question. Do you mind just kind of repeating it?
spk10: Yeah, absolutely. So you made the comment of the core GNN in this quarter was $47 million. but you also said that you would be investing in the back half. Can you help to help us understand how much of an increase we should expect to see on G&A investment into the back half? And then the second part of that was you've recently acquired these assets across these several different states. Presumably those are all lower margin businesses than what you have with core GTI today. Would that have an impact on margin in the back half, or are they just small enough it wouldn't really have an impact on overall GTI consolidated just because you're operating at such a scale for the rest of the business, it would just get washed away and not have an impact?
spk07: Sure. Okay. Now, I totally follow it out. GNA, I just got jumbled. So, look, I think we've said it before. You know, as the business continues to grow and what we're seeing, we're building the team in advance of the title wave that's coming. And so our foot is on the gas in terms of the infrastructure that we're building here. At the same time, we're ramping up CapEx in the back half of the year, which would be at or above where we spent to date. And so, you know, we anticipate that G&I number to continue to increase. Now, do I think that's going to result in some margin dilution kind of over time? Candidly, no, because I think the top line will outrun it. The second part of your question, the retail margin dilution of the acquisitions, you answered it correctly. It's not a factor. We're looking out at what these assets mean and the touch points with the consumer, what it means about our brands and those markets, state tax revenues, state jobs. We like those assets. We're not thinking about margin dilution of acquired retail boxes.
spk10: Okay, perfect. Thanks for the answers, and congrats on a great quarter.
spk07: Thanks.
spk03: The next question comes from Vivian Ather of Callen. Please go ahead.
spk02: Hi, thanks very much. I wanted to dive in on your consumer packaged goods business. Clearly, a nice quarter on that and appreciate the desire to continue to invest behind that as you build a portfolio of brands. One of the traditional metrics, Ben, that we talk about in CPG is ACV, right, is the measure of distribution. But I think, you know, for you guys, it's not just about getting one SKU in a competitor door and calling that a win. So how do we think about kind of distribution opportunities kind of over the medium term in terms of kind of what percentage of your portfolio, you know, is well represented in third party doors and how much runway you have there? Thanks.
spk07: Yeah, good question, and something we're looking at and obviously tracking which states, which brands, at which distribution, and what's going on with the consumer. There's elements of the regulatory structure of which products are allowed. Edibles not allowed in PA, no pre-rolls in Pennsylvania, and things like that. But we focus on full brand distribution. We want to meet the consumer where they are, and so we're looking at 100% distribution in many of the states we are in. That's Illinois, Pennsylvania, Maryland. As we scale product in Massachusetts, a lot of the catalyst behind the acquisition was more rhythm, more Incredibles, more dog walkers. Consumers want it, so we got to get it to them, and we got to get it to them at the right retailers, which means everywhere. I think the consumer and I think the industry is evolving fast, and so we want to play where they're going to be a little bit. So sometimes we have the unfortunate decision where we can't do mass distribution to everybody, or we're doing strategic things where certain products are going to certain places because of limited supply.
spk02: Yeah, understood. And my follow-up kind of along the same lines, I was wondering if you could comment on Cannes at all. I was recently at a competitor dispensary in downtown Boston. I saw products on display. There wasn't any available for sale. You've noted in your press release the aspiration to continue expansion beyond Illinois. So perhaps if you could give us a more real-time update, is that product available? Were those samples in Massachusetts? And how many states could we expect Cannes to be in by your end? Thanks.
spk07: Great. Yeah, we're going to scale on the East Coast. If you think about some of the markets that we're really targeting, again, it's not about this quarter or the end of the year or the first half of next year. We're thinking a few years out of who that consumer is and where they are. States like New Jersey and New York don't even have rules for how the REC program is going to go. We see Connecticut moving forward pretty quickly. Massachusetts is an unbelievable opportunity, and your experience is the experience I hear about often, which is I want more can and I can't get it. That's a high-class good problem to have, and we're scaling operations of the business. I think the business will have a few more states by year-end or over the next six, eight, ten months, and we plan to go pretty big in a few of the states to be ready. We think, again, the consumer experience in cannabis is evolving, and cannabis can be really a part of that. Two milligram social experience reduces the fear of entry into the product, and we open ourselves up to a brand-new consumer base. It's big. If any of you are in Chicago, give us a call. Come on back.
spk08: Thanks.
spk03: The next question comes from Pablo Zuanek of Cancer Fitzgerald. Please go ahead.
spk01: Thank you. Anthony, I think in your prepared remarks you said something about doubling capacity in Pennsylvania, New Jersey, Ohio. You also mentioned that in Illinois just completed an expansion there. Can you give more quarter in terms of, you know, the timing when that kicks in? And did I hear you right about doubling capacity in those four states? And, again, if you can put some metrics around it, some people talk about square feet of canopy and also timing. I'm just asking that in the context that, yes, your gross wholesale accelerated, right, plus 13 percent this quarter compared to six in the first quarter. But in the second half last year, each quarter, you were up about 30%, right? So those capacity ramp-ups can really drive significant growth. So more color there would help. Thank you, Anthony.
spk07: Sure. Great question, Pablo. So, you know, we're not doubling and tripling capacity, obviously, in every market. We're doing that on a market-by-market basis. But the big capital projects that we have going on right now that we anticipate will be completed – by the end of the first half of 22 are in the places that you just indicated, Ohio, New Jersey, and Pennsylvania. Ohio, we don't currently have cultivation online, so that'll be brand new. So we are capping out the canopy space that the state allows us. New Jersey, we're certainly doubling capacity, and then PA, approximately that amount as well. So in terms of timing, look, we all know that these projects take a long time, and even when they're finished, then the plants need to get to a point where they can be harvested, packaged, and sold. And so the guidance that we've been giving, at least internally and externally, is that those projects should be completed by the end of the first half of next year.
spk01: Got it. Thank you. That's helpful. And, Ben, can I ask you this one in terms of brands? You know, when I hear from companies in Illinois, you know, one of your competitors licensing cookies and local farms for pre-rolls, right? You know, how do you think about that? Companies that are relying either on celebrities for brands or licensing brands from other vendors to operate in their states. I suppose you are happy with your brand portfolio. You don't need to rely on that. And related to that question, in the case of a cookies agreement in Nevada, that's just to rebrand one store, or can you sell the cookies brand itself across all your essence stores in Nevada? Thank you. Sure, Pablo. Thanks. Great questions.
spk07: So the last question first, in Nevada, we have a deal on one store. There's retail and there's wholesale product, right? Cookies is a lifestyle brand that connects in many respects from product to retail to experience to merchandise, et cetera, et cetera. So our deal is for one retail experience. We are distributing the product. There's other products in the state, and we think that there's edge in growing high-quality indoor premium product, which is really what our team specializes in. You heard Anthony mention his prepared remarks. We think there's edge there. So that's the Nevada story, and that can help drive retail business, you know, around the state, but also particularly in the Strip, Spooky Zone Strip. And we're excited to welcome you out there. I don't know when you're coming. In terms of Illinois and brands, you know, we just think consumer first. So if consumers love those brands, they should be here and they should win. But if there's quality issues, there's production issues, there's distribution, the brand promise, it's very hard to take a brand nationally. We've seen bits and starts and we've seen things go very, very well. So, you know, we're excited because the consumer gets more choice, to be candid.
spk09: Okay, thank you.
spk03: The next question comes from Eric is of Craig Helen Capital Group. Please go ahead.
spk08: All right, great.
spk07: Thanks taking my questions, guys. And congrats on yet another strong quarter here. One thing that you guys keep hitting on is, you know, faster than expected growth in US cannabis really across the board here. My question is if you're seeing that on the beverage side with CAM. It's good to hear you guys building out more distribution assets for beverages, but this has been sort of 1% of the market or maybe even lower historically. Is this something that you see sort of increasing in share here? Is this something that you expect to move the needle in the near term, or should we – continue to think of this more as sort of a longer-term bet, customer acquisition tool. Any comment on the growth you're seeing on the beverage side specifically would be great. Thanks. Sure. Yeah, great question. Thanks, Eric. You know, the short answer at the beginning is no. We don't see outside growth there. We see major growth in U.S. cannabis and core products. This is flour, pre-rolls, edibles, vape, concentrates. You know, that's 95% of the basket, I think. And that's where we're really investing. The minute time versus impact time in the short and medium term is mismatched in the beverage versus portfolio. Does that make sense? But we like understanding, you know, what's going to happen out there. So you answered the question correctly with it's a longer-term play. You know, customer acquisition, I don't even know. It's understanding the customer, understanding the product. And, you know, being able to be a leader, understanding first mover, and sort of making the mistakes along the way so that we can win, you know, as the game enters, you know, a larger state. Yeah, that makes sense. All right. And then, Ben, you also mentioned in your prepared remarks seeing increased appetite from U.S. institutions, right? I'm not sure if that's just referring to, you know, some of the purchases that you've done over the past few months here. But, you know, with these stocks seemingly trading more on, you know, sort of capital dynamics than fundamentals, could you elaborate on that comment any more, just provide any more detail on that increased appetite? Any caller would, I'm sure, be helpful to anyone on the call here. Thanks. Sure. you know, let's set the stage a little bit. Here we are three years after going public and being part of really the first class, the first group of MSOs to go public and bring U.S. cannabis into public markets for the investors, sophisticated or not, to try to get access to this. There's been a lot of work, and, you know, we met many of the people on the call and around in our roadshow then as people were interested. They heard of it. I've seen another product. They're intrigued. You know, there's been issues in Canada and people having to understand what's going on in the U.S., that appetite is growing. So the comment there is there is no $24 billion brand-new consumer product industry that's going to $80 billion. There just isn't one. You don't see same-store sales like you do in the cannabis industry. You don't see the returns on invested capital. And the business fundamentally is quite exciting. People are interested in growth. This is American capitalism and capitalism Things trade on those sorts of metrics. If you zoom down to where we are as a green thumb, you see $500 million plus or minus of new capital coming into the space. We do it without a bank. We do it with growth equals net on behalf of shareholders because the return on that invested capital is so dramatic into this kind of growth. And the fruits of today are what we planted from basically the debt of 2019. And now with the balance sheet flushed with cash and, you know, the foot on the gas, capital investment ramping, we are excited about where this is going. That's basically where we sit. That's great. Thank you.
spk03: The next question comes from Camilo Lyon of BTIG. Please go ahead.
spk08: Thank you. Good afternoon. I was hoping to get a little more color on, Anthony, on your comments around gross margin and, in particular, the rampant costs in your CPG expansion and how to think about when we start to see the return of those increased investments through either greater growth, which would probably have some sort of offsetting margin benefit. So if you could help us bridge those two, that'd be wonderful.
spk07: Sure. So look, that's a near impossible question to answer, just given the number of variables, right? So obviously, as we bring on additional capacity, there's a ramp-up period. And during that ramp-up period, you've got your onboarding expense before you're bringing on revenue. material nature. And, you know, these facilities, after a couple of harvests, they really start to produce kind of the yields that you initially underwrote when you invested the capital. Now, what's interesting with our business, if we were just doing one or two of these, you know, the payback on that would flow through the P&L rather rapidly. But effectively, what you're going to start to see is we'll finish one and then we'll start another. And so, you know, and given kind of the exposure that we have in a number of states where we have capital projects that have either started today or that will start over the next 12 months, it's a very difficult question to answer because effectively we're going to continue to keep our foot on the gas, as we've said before, and so I would expect that we're going to continue to run expensive that gross margin line, while at the same time generating kind of additional scale from the capacity expansion that, you know, that were recently completed. You know, I think the net kind of answered your question is it's really hard for me to kind of tell you where that number is going. I can tell you again, and I've said this a number of times, and I apologize if I just sound redundant, but our goal is to keep our gross margin line at or above 50%. If we can do that, we can drive massive operating leverage and scale into the business down to our EVTA line, and that's going to produce great returns for shareholders.
spk08: So just to be clear, outside of the cultivation expansion projects, are there any other costs that flow through in Q2 that affected the gross margin?
spk07: Nothing in material and nature.
spk08: Okay, perfect. That's what I was really trying to get at. And then just shifting gears to Virginia, I'd be curious to hear what your thoughts have been on how that market is developing now that you're in it officially. You're starting to ramp up. How do you see the consumer behavior, if any, if it's any at all different from other markets and assuming it's not? And any sort of views on the planned rollout through the back half of this year, the expansion rollout through the back half of this year?
spk07: Sure. You know, it rhymes a lot with the other markets we've seen. This is a medical program where there's access. The product offering is limited. Flour is not available yet. And we're seeing big demand. There's five stores open in the state, plus or minus. We opened the most recent one, which was the first remote store, standalone store, not connected with one of the cultivation sites. This is in its infancy. There's 8.5 million people, plus or minus, in Virginia. And the story on the demand is pretty simple. The story on the supply is the capex. We're really bullish on what the demand will look like both with flour and with adult use. And the math is just as basic as you could do. You do a lot of the great work and a lot of the stuff. I mean, it's that simple for us. But we've got to build the infrastructure. It's not easy. Got massive eight-figure, approaching nine-figure CapEx projects combined in the state from all the operators. I believe it's the largest CapEx project industry in the state. There's supply chain, global supply chain issues. We're able to wrestle through those in order to put the infrastructure here. But there's a progressive thought to put this infrastructure in place. This is going to create hundreds of millions of dollars of state tax revenue. You're going to employ thousands of people. And this is going to be a net positive. for the community, and for the economy. So we're positive on it. We're excited to be there. We love the new team. We love the product coming out of it, and really the consumer. I mean, RISE Salem opened last week, 10 days ago or so. You know, rousing reception. People are very excited, and we can bring the RISE consumer experience to people in Virginia. You know, we're really excited about that. We're going to learn and get better along the way. So look for it to go up and to the right.
spk08: John, good luck on the balance of the offense.
spk03: The next question comes from Michael Lavery of Piper Sandler. Please go ahead.
spk05: Thank you. Good afternoon. Just following up on Virginia. Hey there. Quick question on your trajectory. um it looks like you're in health service area three um is that geographic limitation intact still and and if so will that change when recreational use comes on board
spk07: I'm not going to comment on the rules that aren't written. But we have the geographic situation based on the current rules in medical. There is delivery. There are stores. Consumers are moving around. Product is moving around. There's limited supply, limited product set. Look for it to evolve over time. But I'm not intimate enough on the details to give you any guidance on that. Again, I think the state will see up and to the right. And I think everybody understands, first, it's about patient. And then it's about the adult use market, safe, regulated, 21 and over. generating productive jobs and massive state tax revenue.
spk05: Okay, great. And then just following up on a comment you made earlier when you were given some of the industry color and pointing to the momentum at the $24 billion now, one of the first states you called out as part of that was California. What does it take to get that more interesting for you to be directly involved there?
spk07: It's a good question. It's really the same script here. We're studying it. There's a lot of consumers there. You see the market in California go 9%, like I said, quarter over quarter, which was $950 million to $1 billion, $40 million, quarter over quarter. That's tremendous growth. So what's happening? What is going on in the supply chain? What does our return on invested capital look like there, standalone? And then however you want to think about it, we've called it, you know, Optionality maximization or weighted probability or other things against everything else happening in the business. What's our cost to capital? What's our access to capital? And what's the best move for shareholders based on where we think this is going to be? Being in our position kind of in the way about where we are. So, you know, it's very much on the table. We're constantly evaluating it. But we really like what's happening east of the Mississippi. We like the setup, and we like participating in California, being close to the consumer, understanding the participants there. Certainly, you see us do two significant things with brands out of California, and we think we're very close to the consumer there, and it hasn't cost shareholders any money. So we like that setup. and we continue to really invest in it and be a part of what's happening there. I think time in Canada has really accelerated, so I think you're seeing several turnovers in the market. I think you're seeing accelerated consolidation or whatever capital market cycle you want to call it. Eventually, there will be profitable entities that capital will go to the strength. So I think that's where we're ready, watching, and kind of waiting for that to go down.
spk05: Okay, great. Thanks so much.
spk03: The next question comes from Aaron Gray of Alliance Global Partners. Please go ahead.
spk06: Good evening. Thanks for the questions and congrats on the quarter. Absolutely. So first question for me, I want to dive back to CPG. So it looks like the percentage of your products flowing through your stores, at least looking at percentage of retail, has come down the past two quarters. So I understand part of that looks to be because of supply, but as that supply kind of comes up for you guys, I just want to kind of think about how you look to allocate product. either between your own stores or either if it's near-term higher margin or the argument to kind of maybe bring about more brand awareness and distributing to other stores. So that's how best to think about that when you're in this kind of supply-contrained state with your CPG brands. Thanks.
spk07: Hey, Aaron. Anthony here. You know, there's not a really silver bullet to answer the question. I think the way we approach it is on a market-by-market basis. And so, you know, certain markets really require us to, you know, supply more of our own product to our own stores. Other markets, there's, you know, a healthy amount of available supply out there, and that provides a better offering for the consumer than we go with that. Really what we try to do is just optimize the situation in each market, and sometimes, you know, what we're looking to optimize is different, right? If we were just looking to kind of optimize the top line, we may do one thing in a market. If we were looking to optimize profitability, we'd do another. So for us, it's really kind of looking at each market on a market-by-market basis and then, you know, really each week that goes by and, you know, and the allocation decisions that have to get made when products are coming out of wholesale, that's something that we spend a lot of time looking at and looking to optimize because it's important for the business.
spk06: Okay, great. Thanks for that, Collin. And then second question for me is on M&A. You know, you guys have gotten a little more active, you know, this year. Just entered a new state of Rhode Island. You know, seems to be on the precipice of, you know, adult youth legalization. Um, so just would love to get some color. You talked about, you know, really like an east of, you know, the Mississippi. So kind of, you know, going forward, how do you think about other, you know, new markets, especially, you know, looking at Delaware, that's another small one. You have Maine, which recently legalized. So just maybe where you guys are thinking today in terms of the M&A landscape, where you guys are seeing, uh, you know, valuations in the marketplace and how you think about it. Thanks.
spk07: Thanks, Aaron. Not, not, uh, not super keen to show too many cards, you know, same deal. Everything's on the table if it makes sense. We get a lot of phone calls. We're very active in the industry. We want to put capital to work for shareholders if it makes sense. But we're not looking to reach too much. We love our portfolio. I mean, Ohio, Pennsylvania, New York, New Jersey, Connecticut, Virginia, all have monstrous opportunity. And we're pretty head-down focused on executing there. At the same time, we're paying very close attention to everything else going on. So the number of states isn't even that many that have an opinion on what's going on. The bar is high in order to go there. It's the same thing I've said, but each one of these deals sets up as meeting that kind of criteria. You know, it's not even that complicated of math for us if things make sense or don't. We're happy to say no. We do a lot, as always, but really everything's on the table if it makes sense, and we're here for the long term.
spk06: Okay, great. Thanks. Thank you.
spk03: The next question comes from Scott Fortune of Roth Capital Partners. Please go ahead.
spk09: Good afternoon. Thanks for the questions. Just real quick in light of the modest sequential growth in kind of May, June, and reporting 14% central growth here in the second quarter, what's the exit rate coming out of the quarter relative to the 14%? Any color on the momentum there? from July and third quarter so far would be helpful. And then are you seeing consumer shifts purchasing more, you know, with COVID or reopening kind of traffic in the stores and helping out average ticket size? How should we look at kind of the consumption side of it from the consumers, from the basket size, I think?
spk07: Yeah, we're not seeing the kind of stuff we saw in March, April, May with – COVID changing consumer behavior. We continue to see increased demand in consumers finding cannabis. We continue to see, and Anthony said it, Every state is up and to the right. You know, to go week by week in what's happened this weekend versus that weekend is not our style. I think quarter to quarter, $6 billion, you go through every single state and look at what happened in every single state, even monthly if you want, and nothing in that screams to us that there's any issues, which is sort of, I think, at the core. We think this thing is going to go up and to the right. That's both the same state sales, same state sales, meaning states that are already open at least a year, what they're going to compound, And then the states that open, like a store, are new stores coming online, new states coming online. And literally the horses in the stable that haven't even gotten out to the track yet are big, strong, and going to run really fast. Their names are like New York and Virginia. And then we like our position there. We're putting capital to make those horses really work, work for shareholders, work for the market, work for the state. And that's just as simple as we look at it. So no cause of any worry, which I think – we hear about. But if you're worried, come on out to any of the stores, ours or otherwise, in any of these states, and I think you can feel it in a few days.
spk09: I appreciate that. And a really big picture, you know, glad to see your initiative towards social equity with 90 to 0, Good, Green, and Lead programs. And you've been outspoken about moving forward in Illinois to add social licenses. We're starting to see that unlock and also in New York as more states come on board. But big picture, what do you see as key to accelerate and implement these equity programs? Is safe banking at the federal level critical and really helpful to gain or jumpstart the cause, unlike Senator Booker's belief from that standpoint? How do you look at that from a federal level and kind of accelerating the social equity part of this?
spk07: Yeah, thanks, Scott. Good question. First, no, we don't think it's a federal move to accelerate this. I wish I knew the answer to the core of your question, which is how do you get state governments to move along the line of logic and common sense? It's difficult. We're learning along the way. We're trying to be proactive, honest, here to talk, here to meet, here to move the ball. We have a very unique perspective because we're active in so many states. We understand the mistakes. We can learn from them, and we can try to put them in place in the new state. And so how is New Jersey, Connecticut, and New York, for example, which all three governors signed legalization, going to implement social equity? Are they going to learn from what happened in Illinois, which was slow, but now here we are. We've had two rounds of lotteries, 110 new licenses, great group of many different people. We're going to do a bake-off. Other operators are very in it in order to make sure there's new successful people in the industry. But I don't know how to get state governments to move faster and function on the decision tree that we do, but I'm open to suggestions along the way.
spk09: I appreciate the call. Thanks.
spk03: The next question comes from Andrew Parthenow of Stiefel GMP. Please go ahead.
spk04: Hi. Thanks for taking my questions, and congrats on the great quarter. You know, maybe talking about consumer behaviors and trends that you're seeing, Obviously, you know, during COVID, there wasn't a lot of tourism happening, but now with COVID restrictions easing, could you give a little color on what you're seeing with regards to the tourism front? You know, we've got some pretty good data out of Illinois on out-of-state sales, but hard to put a finger on some other states. You know, any color on that could be useful. Yeah.
spk07: Sure. I think the best example of the tourist bid comes from Nevada. You're seeing records out of there. You're seeing big operators there be successful in growing to it. So just looking at the data here, and obviously this is all public, but you're seeing numbers around 80, 87. Even March 21 was $97 million in Nevada. Obviously the weather was cooler. It's 108 degrees outside there in these few months. But yeah, More tourists, there's going to be more cannabis buying. We think that's pretty basic. Going underneath to see what's happening in this state is pretty difficult. You're seeing the out-of-state bid in Illinois, like you mentioned, which is great. It's nice the state provides that kind of transparency. How much is tourists versus people over the border? Not really clear, but not something we super focus on. Again, we see a huge amount of consumer demand for the product. We want to offer it safely, compliantly, and in a way that creates better experiences for consumers.
spk04: Thanks for that, Color. And maybe following up on a previous question around M&A, appreciate, you know, you want to keep your cards close to your chest on strategy. But maybe, you know, looking at valuations, you know, we've seen public market shares retreating to pre-Senate runoff levels. Wondering if you're seeing something similar on the private side or any kind of color you can provide on that?
spk07: Yeah, good question. You know, the public market marks the market every day. There's a bid-ask, the markets are thin or not, and it moves around. It doesn't happen in the private market. So the short-term swings of public stock prices and sellers' sentiment on what their value is do not correlate one-to-one and, you know, into the reactions. When there's been big droughts in the market and things are different, people understand there's no capital available and they may change a little bit. But it's much more about sentiment. I think it's a little less on the market of the current public markets. And to your comment just on the pricing, it's not something we focus on much. We just think it's good for the buyers, essentially. We're building a business and a boat for what's to come out for a while. So that's exciting for me and for us for this kind of opportunity.
spk04: Definitely would agree on that. Thanks for taking my questions, and congrats again. Sure. Thanks, Andrew.
spk03: The next question comes from Graham Kreidler of 8 Capital. Please go ahead.
spk08: Hi, good afternoon, and thanks for taking my question here. I appreciate the comments at the top of the column on Q&A with respect to the capital spending and setting the stage for the large projects expected to come online in the first half of 2022. I was wondering, given the balance sheet strength of the company right now, I was curious what the thoughts are with respect to capital allocation in the state of Florida. That's a market that I think you've been very, very strategic in how you wanted to allocate capital there. And with the resources that you have, is there an opportunity to potentially advance some spending there, get a bit more aggressive, or maybe look at that as a growth platform, you know, sort of in a two-years-out situation? Just I would be curious on thoughts on that. Thank you very much.
spk07: Sure, Graham. Anthony here. Yeah, I mean, look, we've got a lot of cash on the balance sheet. And I would say that we've got a lot of opportunities to deploy that capital within the business. We talked about the projects that we have that are currently underway in Ohio, New Jersey, and Pennsylvania. We also have very large other projects that are contemplated that have not yet started. So think of a place like New York, Virginia. We're going to continue to deploy capital in these other markets. Those projects just have not yet started. Specifically, as it relates to Florida, given the cash on our balance sheet, given the cost of capital, we are going to start to deploy capital. We have a great site, Cala, right off Highway 75, and that'll be a project that should get started here within the next three months or so. you know, obviously there's a lot going on. There's a lot of capital being deployed there by other operators as well. So my guess is, you know, we'll deploy the capital, see how the business performs, and then revisit.
spk08: Okay, understood for that. Thank you very much.
spk03: The next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
spk08: Hello and good evening, everyone. Congrats on another solid quarter.
spk07: Andrew, thank you. Just the first question here.
spk05: I just wanted to see if you guys had any insights or perspectives on the New York and Virginia medical programs and when we might see timing for smoke-full dried flower products approved within those medical markets. Yeah.
spk07: The core answer is it's murky. Obviously, it's been signed into law. The former governor in New York was not a huge fan. We now have a new governor. Fresh perspective. That's nice. So my guess is it would be quicker now than it would have been before, but I don't really know. It seems to be part of the law. It's so more ridiculous than medical patients who would benefit from this, and now it's a law to not have access. It's available in the market. We know a lot of operators and team are working on this. In terms of Virginia, I think the timing is, I don't want to say the wrong thing, so we'll have to circle back, but I think it's known, and that'll be coming soon. We anticipate, similarly you've seen in every other market, the flower comes on, there's increased demand. This is the core product of the category, and obviously the core part of our focus, which is high-end indoor premium flower. We think find your rhythm works well. I'm excited to bring that rhythm brand to New Yorkers, to Virginians, and everybody across America. That's great. Thanks for that, Cutler.
spk05: My next question here, I just want to go back to your comments about significantly expanding your production capacity in several of your core markets. I guess it just raises a question about how you feel about your current supply situation today. Do you feel supply constrained at all in any of your core states? And is this activity, or is this investment activity kind of proactive move in anticipation of faster growth ahead?
spk07: Good question. The answer is both. We have more product, we have more sales, and the markets are growing. Our product's good, people want it. It doesn't mean every single day, every single one, but there's a lot we can learn as we go and we develop and innovate. But at the core, more rhythm, more incredible, more dog walkers, more Bebo is a path to win. We'll be coming out with good dream, and we'll need more supply. We anticipate monster sales there as the consumers want the value proposition of that product and to feel good and do good about how they buy. So again, both. We have more sales today in the current markets, but look at the month-over-month growth in some of our core markets. I mean, I think Illinois was... 10.7% last month. That's a serious growth curve. And now there's going to be a doubling of the points of sale for consumers to go get the product. So inventory in the system is going to go up and sales are going to go up. It's like not a mystery. So we need more product to serve both of those. And as it goes, and as people say, you know, won't your market share in retail go down, but that's fine. I mean, this is going to go up. There's more consumers. There's more wealth to be created. There's more participants. And we just view that all as a net positive.
spk05: That's great, Collin. I appreciate your insights. Sure. Thanks.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.
spk07: Sure. Thanks, everybody, for joining us. We'll be back in about 90 days with an update. Have a safe end of summer. Bye.
spk03: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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