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spk11: Good afternoon, and welcome to Green Thumb's fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the conclusion of formal remarks. During the question and answer session, we would ask for a limit for one question and one follow-up question per person. As a reminder, a live audio webcast of all the call is available on the investor relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I'll now turn the call over to Grace Bronte, Corporate Communications. Please go ahead.
spk01: Thanks, Anthony. Good morning and welcome to Green Thumb's fourth quarter 2021 earnings call. I'm here today with founder and CEO Ben Kobler and Chief Financial Officer Anthony Georgiotis. Today's discussion and responses to questions may include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. These risks and uncertainties are detailed in the earnings press release issued today, along with the reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the annual report filed on Form 10-K, which we expect to file later today. This report, along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and CEDAR filings. Please note, all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now here's Ben.
spk14: Thank you, Grace. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2021 earnings call. 2021 was a great year for Green Thumb. Our team's strong execution delivered results we are proud of. For the full year, revenue grew 61% to $894 million and gap net income more than quadrupled to $75 million. Increased scale and operating leverage drove adjusted EBITDA growth of 71% to $308 million. Interestingly, we committed over $200 million in CapEx to invest ahead of the demand curve in the U.S. and by faith that we can underwrite. We delivered our sixth consecutive quarter of positive gap in income and eighth consecutive quarter of positive cash flow from operations. But beyond the numbers, we're grateful to our team, our customers, and our communities who supported us along the way, and we are all even more excited about the future. It can be difficult to avoid the noise in cannabis. Plenty of wormholes and dead ends of noisy chatter. I believe we have done an okay job filtering out that noise, focusing on where the puck is going, and studying the tremendous potential of the great American growth story. The growth trajectory may not be linear, but over the long term, we are quite confident it will be up and to the right. The timing of the rollout of adult youths in various states is quite difficult to predict, but when it happens, we are confident that the demand is real. While no company is immune to competitive pricing, we at Braindump have focused on premium cannabis and developing brands that are in high demand and less prone to pricing pressure, while at the same time investing in scale production of certain items that will drive down the marginal cost per unit. As we've been saying for quite a while, our long-term adjusted EBITDA margin goal of more than 30% remains intact. It is worth noting that some states sales trends vary quite a bit month to month. And that is not surprising in this emerging industry, given what's going on. So while Illinois saw sales volumes decrease in January, December was a record month. And for the full year 2021, total sales grew 67% to $1.8 billion year over year. That's Illinois alone. Overall demand remains healthy, but the Illinois market is being artificially capped by the lack of progress in Springfield to issue social equity licenses and diversify the ownership base in the state away from what is really a white-dominated group of men. All is not lost for Illinois in social equity. One, we think the constructive conversations with the votes in power to resolve the issue would help. Two, Illinois will be a blueprint for how not to achieve any equity or how not to let anybody black or brown into the industry. This is actually quite a good thing, in our opinion, because we believe we need to create a culture where it's okay to make mistakes, but it's not okay to learn from them. And so we're seeing other states with equity provisions in their cannabis laws study Illinois as a cautionary tale so we can all learn and we can all get better together. There's a lot of discussion about cannabis reforms and new laws at the federal level. While the market may be waiting with bated breath, we at Green Thumb are not. We think we are in an optimal position to take advantage of the changes that seem inevitable. But I would repeat what I've said before, we operate our business without the need for federal change. As you can see, despite a wonky 280E structure, the business was able to generate over $132 million of cash flow from operations and over $75 million of GAAP net income. That's about 33 cents a share. Until then, we'll be executing a plan that puts Green Summit in position to win based on what we know now, not what may or may not happen sometime in the future. And the core thing we know now is the American consumer is choosing cannabis for well-being. So there are many hurdles in these emerging industries, especially those with decentralized regulatory structures. So our plan remains very simple, not easy. You want to execute the business plan to focus on the consumer and the product. Everything we've accomplished in 2021 was specifically designed to build long-term value for all of our stakeholders. And so now I'll point out some of the major achievements in 2021 that reflect our enter open scale strategy. This has really been our North star since inception. So starting with enter, we entered three new states in 2021, Virginia, Rhode Island, and Minnesota. We entered Virginia through our acquisition of Dharma in July when we acquired a production facility and one retail store. Since then, we've opened three additional retail locations and we continue to bolster our position both on retail and production ahead of adult use sales in 2024 or maybe sooner. Rhode Island. While the smallest state by area, It is actually the second most densely populated after New Jersey. We acquired one of three available state licenses in August, which came as a medical dispensary and a cultivation facility. And most recently in December, we're super excited as we entered Minnesota through our acquisition of Leafline Industries, which is one of only two licensed cultivators in the Minnesota cannabis market. And as you know, Minnesota and Colorado have approximately the same population of 5.7 million people. With this transaction, we added five open medical dispensaries and a large cultivation production facility. Due to some of the details on the licensing and the medical program, Minnesota is really an underserved state, and we believe we can expand our capabilities to provide patients with greater access to well-being through cannabis. In fact, this week, maybe today, the first legal sales of flour are beginning, and our Minnesota stores are proud to offer several strains of flour to patients for the first time ever. Having done this a few times, I would encourage patience for the patients as the market begins to accelerate. We believe tomorrow it will only get better. With Minnesota, we expanded our footprint to 15 states, and we love our 15-state market, especially considering that our cannabis operations now serve over 50% of the U.S. adult population. Furthermore, several of our states, it's really important to note, Virginia, New York, New have all half the W's and it's on the near term, medium term horizon. Here at Green Thumb, we really like where our chips are on the board. The open part of our strategy. In 2021, we made a lot of progress opening new stores. We added 22 stores to the family. We opened 10 and acquired 12 in various deals. I'll walk through a few. We ended the year with a store count of 73, and as of today, sit at 76. As always, when it comes to new store roll-ups, we undergo a rigorous due diligence process, which includes determining the best use of capital to achieve the highest returns. We opened new stores in Nevada with Rise Reno, a third store in New Jersey in Bloomfield that we encourage you all to come to soon, and an additional store in Pennsylvania with Rise Warminster. In Massachusetts, a combination of acquisition and new store openings, we opened five new stores for a total of six, three adult use and three medical. And we're excited about the most recent store, Rise Chelsea, just outside of Boston, which gives us a unique six-store footprint in the Commonwealth. We have four locations in Virginia, two Rise stores in Salem and Abingdon, and in February we opened two more, Rise Christiansburg and Rise Lynchburg. And in Illinois, we expanded our Rise Mondelein store to enhance our guest experience with an on-site consumption lounge and private smoke-easy. We also encourage all of you, if you're in Chicago, it's close to O'Hare, be in touch, make a reservation. We'd love to welcome you out there. Major hats off to our retail team for an extraordinarily productive year. And if we look at the third part of the business plan, scale. To position our company for sustainable, profitable growth, we must understand and operate with scale. Beyond scaling retail locations, it also requires investments in building the infrastructure to support growth. We have been building, expanding, and improving several production and cultivation facilities in places like Illinois, Ohio, Massachusetts, New York, New Jersey, Minnesota, Rhode Island, and Virginia. That's where the CapEx is going that you see that we've spent. Our end game is not only to stay ahead of the demand curve, especially in those states that passed all these legislation, but it is also to produce the highest quality and safest cannabis experiences for our consumers. And all of these dots must be connected in order to achieve our ultimate goal, building brands at scale to satisfy the American consumer's growing demand for well-being through high-quality, safe, and reliable cannabis products. We're very proud of our family of products, and the early consumer relationships being formed with those brands. Rhythm, Incredibles, Dog Walkers, Bebo, Dr. Solomon, and now Goodgreen have the brand attache needed to build what we would like to see. The scale we have built, combined with the information that we have developed, should set us up to make high probability, well-informed decisions. And while this may sound ambitious, it is not. Each day, I'm reminded of the power of that special consumer connection with the brand that truly makes all of this possible. And as you all know, listening to this call and calling this space, cannabis is a complex business. But rest assured, you can count on us to thoughtfully execute our strategy that has been working since we started this incredible journey. We have accomplished a lot in a short period of time, but I truly believe this is just the beginning. There's a lot of opportunity ahead. We will take it in chunkable bites that we can digest and that we can execute against. We like having optionality that comes with positive free cash flow after tax and a strong balance sheet. We like growth, but not for growth's sake. We're building green thumb to prosper over the long term so that all of our many stakeholders may also prosper. With that, I'm going to call over to Anthony for his financial review.
spk15: Thanks, Ben, and good morning, everyone. Thank you for listening. As you just heard, the company closed out a strong 2021, generating $894 million of top-line net revenue and $308 million of adjusted operating EBITDA. It's humbling to think how far we've come since going public in 2018, a year in which we generated $62 million of net revenue and $22 million of adjusted operating EBITDA. In just three years, our team has been able to drive current monthly financial performance that now exceeds the results for all of 2018. Other highlights in 2021 include the following. Year-over-year revenue growth of over 60%. Gross margins of approximately 55%. Adjusted EBITDA margins in excess of 34%. Fixed closed M&A transactions and entry into the Virginia, Rhode Island, and Minnesota markets. Net team growth of approximately 1,500 team members. And $128 million in cash taxes paid to our largest financial partner, the U.S. government. For those of you that read Buffett's annual letter this weekend, this comes out to approximately $350,000 in cash taxes per day. Said differently, the team had a hell of a year in our 2021 gross cap-back spend of $229 million to set this up for 2022 and beyond. Turning to the fourth quarter, the company posted $244 million of top-line net revenue and $76 million of adjusted operating liabilities. total net revenue increased 4% over Q3, with gross CPG revenue growing 3% and gross retail revenue growing 8%. Prior to accounting for intercompany revenue, this left our gross CPG to retail revenue breakdown at 42% and 58% respectively, about flat with last quarter. Consistent with previous periods, and despite some headwinds experienced during the quarter, we attribute our top-line growth to solid execution high-quality, differentiated product, and continued strong demand within our respective markets. On the profitability front, the company generated gross margins of approximately 53%, a 260 basis point decline over Q3. The dividend gross margins was primarily attributable to moderate pricing pressure experienced on both the CPG and retail side of our business. At no point did we as the management team assume that our historical gross margin performance was repeatable into perpetuity. However, we remain confident that our scale, diversified market base, and focus on premium products will help support our efforts in keeping this critical metric at or above 50%. On the SG&A side, excluding depreciation, amortization, one-time transaction costs, and stock-based costs, normalized operating costs approximately $57 million, a $5 million increase over the $52 million incurred in Q3. The lion's share of this quarter-over-quarter revenue, quarter-over-quarter increase is both payroll and marketing-related, principally reflecting our team expansion to close at 4,000 members. In 2022, we will continue to closely monitor our overall SG&A spend relative to our top-line growth and margin performance, where the goal is maintaining gross margins and adjusted operating unit TA margins at or above 50% and 30% respectively. Other expenses in the quarter are approximately $4 million, which primarily reflects non-cash gains associated with our investment portfolio, as well as interest expense from our senior debt facility. Net of these expenses, the company generated $22.8 million in net income for $0.10 per share, our sixth consecutive quarter of positive earnings per share of the business. In addition, we generated an adjusted operating EBITDA of $76 million, or 31% of revenue. Moving on to our balance sheet and cash flows, we ended the year with approximately $230 million of cash. During the quarter, Greenfield made healthy tax payments to Uncle Sam, and we invested over $75 million in gross capex, when including the spend associated with our sale-lease tax. On our last call, I communicated our plan to increase our bets in a number of key markets that we believe will help drive the next phase of growth for Greenfield. Our balance sheet and positive cash flow from operations provides us substantial financial flexibility, and we remain bullish on our uses of capital and the cash-on-cash returns we can generate in this next phase of Prohibition 2.0. As we look ahead to 2022, I anticipate repeating the following same themes that you've heard previously. The star of the team is the team. Taste the soup. Parade alio. Lead with the consumer in mind every step of the way and embrace our role and responsibility within the industry to continue to chip away at the wall of prohibition that has cost our country and its constituents countless lives, dollars, and opportunities. We hope that you and your family stay safe during these uncertain times and hope you all are as excited as we are for what's to come. Back to you, Ben.
spk14: Thanks, Anthony. Taste the soup, eh? I like that. Yes, 2021 was indeed a productive and busy year. We accomplished a lot, delivering strong results and set ourselves up well for the future. Financially, we're in comfortable shape with positive cash flow and over $200 million in cash on the balance sheet. I'm proud that we earned the reputation for thoughtfully allocating capital, for focusing on strong execution, and most importantly, for doing what we say we are going to do. I'm also proud of our team's commitment to our core principles. They adhere to a standard of excellence that elevates a company's leadership position in an emerging industry. In a brand new frontier, it is very important for us to stay grounded and to stay humble. Giving back has been an important part of our mission since the beginning. And with every new store opening, we donate first aid profits to local organizations who are making a positive impact on their communities. We also believe it is our responsibility to help fix some of the problems created by the war on drugs. Today, there are approximately 40,000 Americans still incarcerated for marijuana offenses. Given the wide legalization of cannabis, the irony is beyond cruel. We strongly believe in the planet's potential to improve well-being, which is important work when considering that every year, More than 95,000 Americans die from alcohol abuse, and another 100,000 Americans die from opioid overdose. Those numbers are staggering to us. Social equity is also a very important concept for us, especially in the cannabis business. Our LEAP program in Illinois was very successful in helping individuals apply for social equity licenses. We recently launched a sister program, Leap Connecticut, in partnership with the NAACP, Greater New Haven, and Vicente Cederberg, to promote social equity applicants with essential knowledge about how to apply for a cannabis license in Connecticut and tips for operating a successful cannabis business. I think this is incredibly valuable, as we think the next chapter for cannabis in the U.S. can be about new wealth creation. Good Green, our line of cannabis products dedicated to creating opportunities for marginalized communities impacted by the war on drugs, continues to support nonprofit organizations. In 2021, Green Thumb provided grants to three nonprofit organizations to develop a Good Green grant program. Each organization fit one of Good Green's core principles, which are education, employment, and expungement. and are doing amazing work to create opportunity and change in black and brown communities. We encourage you to check them out on the website and get involved. We are currently in our second round of grant making to qualified applicants. This work we do in our communities is part of our DNA and really inspires passion throughout our organization. I believe our commitment to the communities we serve positions us to attract top talent aligned with our core principles. With that in mind, we're very pleased to welcome Dori McWhorter as she recently joined the board of directors. Dori is currently the president and CEO of YMCA of Metropolitan Chicago and a lifelong advocate of bringing community leaders together to promote social equity and lasting change. Welcome, Dori. I'm excited you're here, and I'm truly excited you're on the board. Stepping a little bit back, I would be remiss not to mention that our hearts and hopes go out to the brave people in Ukraine. Graticating injustice has always been core to our mission and our values, and it's both painful and alarming to witness Russia's aggression towards its neighbor, the sovereign state. Nothing can be more unjust than what we're watching happen, and along with the whole world, we are watching and praying for a peaceful resolution. Finally, back to the U.S. and cannabis. As I said many times before, we are still in the early innings of this great American cannabis growth story. The U.S. legal cannabis market is is already a $24 billion industry, and we actually believe the market can more than triple over the next decade. We think it's still day one for cannabis, it's definitely day one for green thumb, and the best is yet to come. So stay tuned. With that, Anthony and I welcome any and all of your questions.
spk11: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Start in Two. We ask for a limit of one question and one follow-up question per person. At this time, we will pause momentarily to assemble our roster. Our first question comes from Vivian Acer with Cohen & Co. You may now go ahead.
spk09: Hi, good morning.
spk14: Hi, Vivian.
spk09: So my question is for Anthony. Thank you very much for the context around your aspirations to hold gross margins at or above 50%, as well as the adjusted EBITDA margin at or above 30%. But just looking back to the sequential degradation that you saw in gross margin in particular in the fourth quarter, I was wondering if you could just unpack that a little bit. Is it product mix, geographic mix, a combination? If you could just you know, maybe offer a gross margin bridge of some kind, that would be really helpful. Thank you.
spk15: Sure, Vivian, and excellent question. So, you know, let's do that a little bit. You know, obviously, throughout kind of throughout the year from each quarter, we saw, you know, a little bit of kind of growth within the gross margin line. And, you know, in the fourth quarter, what I explained in my prepared remarks is that we started to see some some price settling that, you know, really rolled through both the retail and the CPG portion of the business. And that, you know, really the pricing was probably the biggest driver in terms of the quarter reported decline that we saw. You know, historically, gross margins on the retail side of the business remain relatively consistent. We did see some market kind of aberration in the fourth quarter. And then obviously on the wholesale side of the business, given the verticality that we have within most of the markets that we operate in, we saw a similar kind of impact there. So, you know, there were some other things that kind of rolled through that line. You know, but that's typical on a quarterly basis. There's going to be a little bit of noise. But, you know, just zooming out, you know, really the biggest driver was just some of the price settling that we saw in a few of the markets.
spk09: Thank you.
spk11: Our next question is from Camilo Lyon with BTIG. You may now go ahead.
spk06: Thank you and congrats on just a remarkable amount of consistency that you're putting out quarter to quarter. You know, following up on the last question on gross margin, Anthony, you talked about some states showing that price compression. Can you tell us what states that is most impactful on the gross margin? And how do you think about the levers that you have at your disposal to kind of alleviate those pricing pressures? Is it, you know, from a greater focus on some of your other, you know, key products and more of your premium and flour getting into the market? Is it some other mechanisms around marketing and positioning relative to the other brands. How do you view your optionality around kind of recapturing some of that pricing pressure that you felt in Q4?
spk15: Yeah, sure, Camille. So let me just unpack that quickly. So basically two questions there. First one is, okay, which markets did you really experience kind of the price settling that rolled through the gross margin line? And then second, you know, what kind of tools does the business have to effectively counteract those? So going to the first question, You know, look, there's constant kind of price movement, you know, within all the markets that we operate in. These are nascent markets. You've got, you know, given the different kind of regulatory structures and the supply-demand kind of economics that are at play within each of these markets, you know, we do see kind of, you know, month-to-month and quarter-to-quarter swings. In the fourth quarter... And the state data really shows this. Pennsylvania and Nevada overall were two of the markets where you saw some flattening on the total size of the market. And that effectively, that lack of growth kind of resulted in some price compression that took place at the competitive level. And then in terms of what we're doing within the business to counteract those, I mean, look, we've talked about this a few times. One, obviously, it's scale within the business. We're leaning in there. We have a diversified kind of market base. It's one of the things we love about our business is just that, you know, we're not beholden on one or two markets. At this point, we're operational in 15 markets. There are different kind of stages within their kind of growth cycle. And then last, we've said before, but it's brands. You know, it's building, you know, effectively some pricing opportunities uh, the ability to kind of price our products, giving kind of the premium kind of folks that we have and having some, some real price control, uh, instead of effectively letting market dictate price a hundred percent of the time. So, you know, look again, these markets are, are nascent. We're watching this closely. You know, we live this day to day and it's something that we're going to be navigating, uh, over the next, uh, next few quarters.
spk06: That's great. Thanks for the color on that. Um, and if I could ask you to follow up on, on the brand, uh, on the brand topic. Ben, now that you've had the brand portfolio really start to gain prominence in all of your states to varying degrees, how do you view the buy versus build decision going forward with respect to your brand portfolio?
spk14: Yeah, thanks, Ben. You know, we're trying to study and learn as much as we can all the time. Being close to the product and the consumer is helpful for us. You know, the The hurdle is pretty high to buy, but if things make sense, you know, we're willing to do it. It's about looking at the portfolio composition broadly. It's about the pricing. And then it's really about capabilities. You know, one of the things is we're not going to do everything forever. The business does a lot of different things, and I think specialization and focus is okay for us. So we're constantly examining it. The best place for us to be in the acquisition space in brands, just speaking candidly, is something that we don't do ourselves. Inventing and creating is harder. So that's where it is. But we love the brands. We love the consumer's relationship with the product around the country, and we think there's some special things going on out there in our house of brands, a family of products, and others. But we know the consumer is developing a relationship with this product in a long-lasting, sticky way.
spk16: got it thanks a lot and good luck sure thanks for the questions our next question comes from matt mckinley with need him you may now go ahead thank you the industry data would suggest that you did better than most in fourth quarter with your your wholesale revenue but it looks like the net revenue is actually still down three million sequentially How should we think about that decline in the fourth quarter relative to the growth in the CPG segment? I think most of us would assume you would have into the first quarter through the duration of 2022. I think, Anthony, relative to the comment you made on gross margin, was that decline in wholesale revenue driven by pricing, or was there also something that happened in a specific market on the wholesale revenue? I'm assuming that's probably along the same lines of what you already gave in your remarks on gross margins.
spk15: Yeah, like I said, there was some movement in the fourth quarter just across the business, particularly now with the number of markets that we're operating in. I guess just kind of stepping back, though, again, as we kind of look at it, the markets where we're seeing kind of some of this activity It's something we're watching closely. Obviously, we're kind of leaning into the verticality of the business that we have. So one of the reasons why you saw the decline that you did was just the company ended up effectively shipping more product to its own retail store base, thereby creating more intercompany revenue for the quarter, which dropped that kind of net wholesale number that you referenced. Part of that was just supply driven. You know, again, within these markets, you know, our retail stores were big buyers of product. And sometimes if we cannot kind of fulfill the demand that we have at the retail level from third parties, we have no choice but to effectively divert product from our own facilities, own wholesale facilities for our own retail stores. In some ways, you know, really just the availability of product at each of the market levels is a big driver of that intercompany number. You know, in terms of where it's going, really hard to predict, like I said, because the supply and demand kind of dynamics within each respective market play a role in driving that kind of figure on a quarter-to-quarter basis.
spk16: Thank you. My second question is on inflation. Can you help us frame where you're seeing this occur right now or where we're likely to see inflationary pressure that would impact your T&L and balance sheet? And what do you think the best tools are that you have at your disposal to attempt to offset those headwinds to cash flow margins?
spk15: Yeah, look, I think, you know, this is something that I think all the operators in the space are navigating. You know, on the balancing side, it's really just on the capital projects that we have ongoing. You know, from that perspective, obviously, you're seeing an increase in both the labor costs of construction as well as, you know, raw material. A lot of the commodities, obviously, have seen a run-up, and the supply chain shortages have just, you know, put additional pressure on that. Within the business, you know, look, we've got a lot of raw material coming in from overseas, primarily Asia, obviously seeing growth there. The shipping rates are, you know, just, you know, not a huge kind of number within the business, but in terms of the rate of growth that we've seen in terms of the cost to ship containers across the ocean have drastically kind of increased. And then obviously kind of on the, you know, on the payroll front, You know, we've seen an increase there just, you know, in terms of staffing at the retail and wholesale kind of levels. So, look, it's showing up. It's showing up on the balance sheet. It's going to show up on the P&L. You know, we're not going to make excuses. It's candidly just something that we're going to have to kind of deal with and navigate through. And as we look ahead, it's something we're just going to closely watch throughout 2022 and, you know, just kind of make adjustments on the fly accordingly.
spk14: Thank you.
spk11: Our next question comes from Pablo Zuanek with Cantor Fitzgerald. You may now go ahead.
spk00: Good morning. Sorry, I joined the call late, so I'm sorry if this was asked already, but I'm very impressed with your recent deals in Rhode Island and Minnesota. I know they look like small states, but, you know, there's only two licenses in Rhode Island, sorry, two in Minnesota and three in Rhode Island. So the question is, do you have visibility in places like Virginia, Rhode Island, Minnesota, where you invested almost $500 million combined? that there will not be any new medical licenses issued for the next two or three years. And remind us in those three states if you have any caps on stores and cultivation. Thank you.
spk14: Great. Hey, Pablo. Ben, thanks for the question. Yeah, look, we love those states, too. We're doing the same thing you are. We're not against new licenses coming into the various states. Net net is two licenses enough to serve six million people? No. It's not going to work great. It's about first mover. It's about scale. And, you know, there's a lot of nuances in each state. I think you asked how many stores are in each state. I can try to do it, but we can follow up on any details. With Minnesota, we have five open going to eight per the law now with those other three in various stages. Virginia, we have four. Like we mentioned, fifth coming soon in a sixth. The sixth is on-prem at the production. And Rhode Island is one store, one production. We'll invest a little bit to scale that up. REC coming, not enough product from our own supply to supply ourselves. Small state, but the same math applies whether there's zeros or not. So it's really the same game, especially with what's going on. Big picture, our new license is in. We don't lose a lot of sleep on new licenses coming in. We like our product. We love first mover. We like having the lowest cost dollars out there to go do what we're going to do. And at the end of the day, we think consumers have a relationship with our brands that are going to want those. It's just so early in some of these markets. You can't even buy flour online. what's going on in some of the markets is just early. And we know what that demand curve is going to look like. So that's what we're underwriting. And even if you double the licenses in each of the states, it doesn't make us really flinch either on price paid, on dollars being allocated on demand curve or anything like that. Because, you know, we think find your rhythm and enjoy the journey with dog walkers and what Bebo can bring to people is pretty differentiated.
spk00: And so we're excited about that. Thanks. That's a good call. Just a quick follow-up. Can you give an update in the case of New Jersey? I think you applied for two stores. When did you apply for the third store to go rec? If you have any visibility on that. And same thing with New York. You have four medical stores. Supposedly you can add four more, but do we know when you can start adding those four stores? Thanks.
spk14: Thanks, Paulo. Great question. Short, structured answers. No visibility and no answer on New York. So we have two. We're confident. New Jersey's learning as we go. We hope to partner with the state and help through this. It's going to turn on. I do not know when, and I have no offering of commentary about when because it's a tricky process here as everybody learns it together. In New York, you know, Hemphill passes. We are active doing what we said we were going to do. We fought the prison in Warwick again. Locking people up for marijuana, now we can employ people in marijuana. It's a major change into what's happening in society in the U.S., so we really want to put that on display. And regardless of what else is going on in the state, there's 20 billion people, there's 5 billion in demand. We're not penciling out $2 billion in sales out of the gate in any way, shape, or form for us. We're putting in dollars where we can create amazing returns on those invested dollars at ridiculously low multiples of EBITDA out of 24 months. And that's great for stakeholders, shareholders, and actually it's great for consumers in the country. So we're pumped about that. Timing or details of stores, nothing. I think we're kind of sitting behind, you know, many of the others that are going to come in. But the RLOs do have a first spot here, and we're going to get going. But I don't have a lot of clarity on the additional stores. Got it. Thank you. Sure.
spk11: Please limit yourself to one question so more questioners may ask their questions. Our next question comes from Eric at the Laurier with Craig Halem. You may now go ahead.
spk12: Great. Thanks for taking my question and perhaps on another strong quarter here. A bit of a follow-up on the last question for me. So obviously, you know, the timing of New Jersey and New York adult use sales beginning is out of your hands. But can you talk about when you expect your production operations to be sort of fully up and running, and then if we should expect a large wholesale presence out the gate, or if you guys will have more of a focus on vertical or intercompany sales? Thanks.
spk14: For New Jersey?
spk12: For both New Jersey and New York, if you can. Thanks.
spk14: You said timing on the regular wholesale retail? We're going to optimize the business like we always do. You know, capacity step up in New Jersey. We're in Patterson. I think we doubled the number of flower rooms. Obviously, there's a storm. There's a lot of different things, but that is online and coming together. So we will have more product. We'll optimize with the operators in the state in order to best serve the consumers and keep the patients satisfied with the product, as that's the priority. So I can't tell you where it's going to go. I don't really know, but we're good at optimizing that. We like the two retail locations that will be approved for REC, and so... That's going to be strong. And I have no real commentary on New York. This is an early stage. We're pretty head-down building, doing what we say we're going to do, which is just building this cultivation campus and getting things right in Warwick. And, you know, we'll come up for air. I don't know, one of the two or three conference calls ago, I think I threw out the date, 1-1-23, is rec in New York, which was very far away, which is obviously now less than 10 months after today. Seems very close. amazing how that changes. I think there will be a wreck sale in New York in 2023. I do believe that, but I have no real insight actually.
spk11: Our next question will come from Spence Haynes with Wolf Research. You may now go ahead.
spk03: Good morning. Just to follow up on the price settling you guys saw in 4Q, have you seen any improvement as you look to the first quarter? And then how did the promotional intensity in the lower end of the market compare to what you saw in some of the higher quality indoor products that you guys are selling as well?
spk15: Sure. Good question. You know, I would say that we are not seeing kind of the rate of change that we saw in the fourth quarter at the current moment. um you know again this is real time these markets move pretty quickly but just what we're seeing we are starting to see some kind of real settlement um you know that relates to kind of the initial question you might just repeating the second one that you have yeah could you just talk about the promotional intensity and the lower end of the market compares to what you're seeing in the higher quality indoor flower yourself Yeah, so, you know, we talked about this before, but obviously where we're seeing kind of the most, you know, the most, call it compression, is really on the lower end of the market. It's kind of the kind of low to mid kind of quality levels across all the various categories. You know, in Pennsylvania, for example, given the lack of edibles, obviously then it just gets pushed into vape and flour. That's really just where it shows up, so it doesn't get spread out. across as many other categories as it does in perhaps other markets. But that's really kind of what we're seeing. And like I said, it's real time and something that we're watching closely on a day-to-day, week-to-week basis.
spk03: Got it. That's helpful. And then whether the industry can convert to brands is going to have a big impact on where margins settle over the long run. But how do you think GTI and broader industry can just pull forward the shift in mindset for consumers to shift to purchase by brands versus the current convention out there, really THC per dollar?
spk14: Just time, just trust, responsibility, you know, consistent product that delivers on its promise will develop that relationship with the consumer. I think to the last question, the premium flour is, you know, essentially the most resilient, high quality flour drives the business, drives people into the store. consumer, and that's a key core product. So that's important.
spk03: Great. Thank you.
spk11: Sure. Our next question comes from Aaron Gray with Alliance. You may now go ahead.
spk02: I think for the question, and congrats on the quarter, So a question for me. Retail up sequentially. Talked about acquired stores as well as traffic being called out in the press release. Just wanted to know if you could speak to average basket. St. Georgeville is down 1% sequentially since you guys called out traffic. That implies a lower average basket. So I wanted to know whether you could speak to, you know, how much of that might have been the pricing pressure that you've spoken to, but also, you know, the broader consumer and the world being impacted by inflation. So any color on the basket and health of the consumer would be appreciated. Thank you.
spk15: Yeah, it's a good question. You know, really what we saw, look, the average ticket has, you know, has continued to slightly kind of come down. Now, I will say that, you know, that's largely because of, effectively, some of the pricing pressure that we did see. So the units per transaction is really not moving much. But, you know, the ADT did come down a bit. Look, it's come down since it kind of – Since it peaked during COVID, it's really just kind of in a more normalized state today. But, you know, the quarter-by-quarter decrease that we did see in ADT was just directly correlated, really, to some of the price declines that we saw in a few of the markets. So units per transaction was relatively consistent. And we anticipate that that'll probably stay the same. And our guess is that, you know, we're in a more normalized state than we were, call it, you know, three quarters, three to four quarters ago during the peak of COVID.
spk02: Okay, great. Thanks for that, Colin. Appreciate it.
spk08: Sure.
spk11: Our next question comes from Michael Lavery with Piper Sandler. You may now go ahead.
spk02: Thank you. Good morning. Hey, Michael.
spk14: Can you just update us on the capacity outlook and, you know, obviously partly just helping us think about that as we modeled the wholesale line? I know you touched on some of the shifts to selling to your own stores and maybe a little bit of a, you know, pricing pressure.
spk10: So I know that's a factor for probably what the next, maybe a couple of quarters, but should we still expect the capacity step up in the second half? What's the right way to just think about how that unfolds?
spk14: Yeah. I mean, look, it's better. We're spending a lot of capex. We don't turn on anything. It will not have been a good use of funds. So I guess specifically just maybe, How much can you pinpoint the timing as what I was getting at? Not much. We shied away from making predictions and then walking it back and changing things. I don't know when New Jersey's going to turn on REC. I don't know when Connecticut's going to turn on REC. I don't know when New York's going to turn on REC. And basically, our CapEx projects are essentially on time, on budget. There's some delays through the supply chain, but Anthony and team and all the way down have done just an amazing job sourcing these things. So I will tell you, places like Ohio, Maryland, and New Jersey, just off the top of my head, have new rooms planted that have not yet hit revenue. So, therefore, within the next six months, roughly, those have to come on. They're not $100 million CapEx spends, but they're material for those markets. And, again, just Ohio, New Jersey, Maryland, all states we like, all with demand coming and, you know, pretty strong setup. But I think just zooming out, he said, how should we think about it? Yeah, continued investment. It takes a year. So the money goes in, a year later, the project's there, and six months to grow the plants. That's helpful, Keller. And just on the core business, sorry, Michael, just one other thing, just to make sure everybody understands, it's very important. We scale, and Anthony mentioned this in his pre-comments, everybody's talking about the margin, which is not something we run the business on, by the way. We run the business on the free cash flow and the sustainability of the cash. But if we spent $200 million last year in CapEx, we're underwriting more revenue coming out of that CapEx. Otherwise, why would we have spent it? We do not need the same kind of SG&A scale that we've had before. So if you think through the percentages in the 2008 point to 20% from 50 to 30, and what that is getting scaled over, Essentially, we've already taken the weight by putting on the SG&A spend before the revenue is hit. All three of those markets have materially increased spend and not yet flown through. So it's kind of important to see out. I think people are very quarter-to-quarter based. I guess everybody's got their own business and their own lens. We're building the business for shareholders for the long term, and we believe in the capital spend that we're doing on where the industry is going to be in three to five years. We have a lot of conviction on that. So we're not as concerned in the short term. Everything we said applies to the medium and long term, and we'd like where the business is going to be because those states, and I'm just writing it down, Virginia, New York, New Jersey, Connecticut, it's 41 million Americans that have legalized cannabis coming their way, where 24 months ago they were essentially in the desert And that's not even including some of the other states going. So it feels to us like the industry is digesting on this growth. We look at the industry quarter-to-quarter numbers and see the whole thing. We don't think in three years the U.S. is only a $25 billion industry. If it was, it wouldn't make a lot of sense to spend the way we are. We think it's going to go up and to the right. I just thought that would be a little helpful as you think about the spend and the growth and all this stuff. It's not a quarter-to-quarter play over here. As you know, it's hard to hire the right people. We're building a major team. But I'd rather bring somebody to the door now to say, hey, here's how to get prepared for 2024. You know, you've got 18 months. And that's how we're trying to build and set up the business. Yeah, really helpful. Thanks for all that. Sure.
spk11: Our next question comes from Andrew with Thiefel. You may now go ahead.
spk07: Good morning, and thank you for taking my question. Just to start off with a housekeeping item, could you talk a little bit about what that $4.5 million one-time charge added into the Q4 EBITDA is? And for my actual question, it's more of a follow-up as to what you just discussed. You had negative operating leverage in Q4, Lots of headcount that you talked about. Could you discuss what we should expect going forward? You are investing across your platform. You continue to integrate acquisitions. You know, at what point could we see this reverse to positive operating leverage?
spk14: Yeah, I'll start and then hand it down to non-operating in the four-in, four-out fund. I think the pace of spending the SG&A will slow because what we decided to do is instead of being behind, scale in advance. One. Then a couple of states didn't turn on exactly when we thought, but I didn't want to be super late. So we're very comfortable with what we have here. It'll slow from a slope standpoint on the fixed because the infrastructure here should support hundreds of millions of dollars or more revenue. Said another way, right? And if we get scaled to 20% of revenue, right, that's 50 to 30, you should see scale in businesses, hundreds of millions or more revenue come on over time. So that's where we see it. You know, the SG&A has all the labor for retail, so that's not so scalable. The box essentially has, you know, the cost that it has. But it's really the production facilities and all this capex spend that takes a while to hit the revenue line that then doesn't increase the spend and then flows through. Do you want to hit the other end?
spk15: Yeah, and I think, Andrew, you know, you referenced kind of the $4.5 million adjustment. You know, look, GAP's an interesting animal. um you know the adjustment you're referencing was not operating non-cash um you know just getting kind of you know gap nature of our of our p l you know we've got a number of things that kind of roll through there in terms of continued liabilities um you know as well as uh just kind of other business items that like i said are not operating and non-cash related um that roll through that other kind of income expense line item so you know our putting notes will have additional detail you'll be able to kind of track it You know, I mean, look, we're a bit old-school in this. We look at, you know, we look at our adjusted operating units. We look at cash flow from operations. And, you know, I think anyone that's kind of, you know, going through this knows that, unfortunately, GAAP is not always kind of the best metric to use when assessing kind of the initial performance of the business. And so, you know, that four-and-a-half-year reference was non-cash, non-operating.
spk07: Thanks for taking my question. Thanks.
spk11: Our next question comes from Ty Collin with Eighth Capital. You may now go ahead.
spk05: Hey, Ben. Thanks for taking my question. I'm just wondering if you could talk a little more about the opportunity you see in Minnesota and the thinking behind the acquisition there. I mean, is that primarily to get in ahead of a potential flip to adult use, or does Minnesota's medical market kind of stand up by itself with flower and edibles coming online later this year? Like, how good is the return profile in Minnesota, even absent adult use? Thanks.
spk14: Great, great question. You know, excellent, and then it could be even better. We underwrite it as simply as, what's the demand, what's the supply? It's supply-demand. You know, what's our edge, what's the product? You know, all the other sort of, like, competitive setups here, but even if there's more operators in the state, we think that for 6 million people's demand now, to your point, is it REC or medical? Without any political insight, REC is coming. Why would it not? It doesn't make any sense to us for it not to. Now you need political will and you need several other things, but Illinois is going to collect $500 million in taxes. Hundreds of millions of dollars being spent in places like Ohio, Virginia, Illinois. It's quite a good economic stimulus program. It provides a lot of jobs. There's a lot of organized labor that can come and construct these facilities. So we're not underwriting it based on which session or which politician. We're underwriting it based on The U.S. consumer wants cannabis for well-being. People want to sleep better. People want more well-being. Everybody hates being hungover. It's just like so obvious. So we think that it continues. So in order for the $25 billion to get to $75 billion, some of the states like Minnesota, New York, New Jersey, Virginia, all have to actually turn on and go forward. So we think it goes up and to the right over time. We're in no rush. We've got a lot of work to do. We bought a facility. It's not at the exact way that we would run it. Things are upgrading. Flowers are hitting the market this week. We're very excited about it. There's a lot of work to do. We see unbelievably attractive return on invested capital, even incremental capital, into the Minnesota market out of the short and medium term. Why would we not? How big is the market there going to be if Colorado's $2 billion? There's a lot of operators in Colorado. Pricing is different, but it's something pretty big. Does that make sense? Thanks, Ben.
spk05: Yeah, yeah, appreciate that. Thank you.
spk14: Great. And again, flour hitting the market is a big deal. Six million people have never been able to buy flour, and now you can buy flour. I just want to reiterate, that's a big deal.
spk11: Our next question comes from Andrew Semple with Echelon Capital Markets. He may now go ahead.
spk14: Great. Good morning, everyone, and congrats on the solid quarter. You know, appropriately timed question here. I want to follow up on that dried flower comment. So we've seen regulatory approvals for dried flower occurring in several of your medical markets, including Virginia and New York late last year, Minnesota today. Just want to gauge how the patient response has been to dry flour in Virginia and New York so far. Are you seeing the same level of uptake in those two markets that we've seen in some of the other markets across the U.S., such as Illinois, Pennsylvania, and Florida? And do you have any early indications for Minnesota as to the demand there? Has there been any sort of early registrations or patients signing up in queue this morning? Any color there would be helpful.
spk15: Yeah, so good question. So there's anomalies within all the markets that you just kind of referenced. Let's start with New York. We saw an inflection, effectively, when flour went live. What's unique about the New York market is that there was a quasi-flour product available in advance of whole flour. But we did see kind of a pickup in the retail side of the business. It wasn't as dramatic as we've seen in other markets, like we did in Pennsylvania, where that went live. That was just because it was a quasi-flour product already. Minnesota, we literally stayed in day one, call it, or, you know, I guess technically there was seven yesterday. So TBD very early to kind of stay there. I guess we'll get a read probably by, you know, within the next hour or two on how things are going. You know, and then in Virginia, you know, look, we did see a pickup. You know, one of the issues in Virginia is that the patients, there's a number of patients, I think close to 8,000 now that have applied. for their medical card, but have not yet received their medical card. So that's really kind of the gluttonous system right now. It's just an administrative kind of work that needs to kind of work through. My guess is once we see kind of a more normalized patient count, we'll actually see kind of the true impact of FLOWER, but just given kind of the new patient base, it's difficult to draw kind of meaningful conclusions there. Again, you know, 8 million persons stayed, very bullish on the long term, you know, and excited about where things are going next.
spk14: Great. That's helpful on the dynamics. Thank you, Andy.
spk11: Our next question comes from Scott Fortune with Roth Capital Partners. You may now go ahead.
spk13: Hey, good morning. This is Nick stepping in for Scott. I was just wondering if you could provide a little more color around the recent industry-wide vape recall in Pennsylvania and kind of the State Department's process there. It looks like your competitors were disproportionately more affected than you were, which may have opened up some additional market share opportunities for GTI. So any update there would be helpful. Thank you.
spk15: Sure. So for everyone's benefit, you know, what we're referring to here, there is a big recall in Pennsylvania. So zooming out, We produced really two lines of bait out of our wholesale facility. We have our Rhythm full-spectrum CO2 bait pen that's been on the market since really inception. We also have a new line, our InShine Vista line. That was very new. That effectively has been on the market for less than a month. And the InShine HISTO line that was impacted by the recall, it was relatively nominal in nature. You know, I think really just what would happen if we just started to kind of grant production on that. In terms of what we've seen, I mean, look, obviously a lot of people have kind of scrambled to kind of satisfy the market needs. We're one of them. The team is doing a great job of just kind of adjusting real-time. working to kind of increase throughput, just given some of the short-term kind of supply challenges that we're seeing given the number of products that got pulled off the market. I think it's premature to kind of say, hey, are we going to be able to grab share in this kind of situation? I think right now what we're trying to do is really just service the market, kind of help out our partnerships across the retail store base there, and just make sure we've got a healthy chunk of vape on the market for all the PAA consumers. So stay tuned. We'll see what happens and if this thing kind of shakes its way through and if there's kind of a, you know, a hammer for resolution. In the meantime, we're going to continue to kind of, you know, really diversify and focus on our rhythm baseline and continue to perform exceptionally well. And we've got, you know, big expectations for the current year.
spk13: Great. Thank you. I appreciate that, Collar.
spk11: Our next question comes from Mike Hickey with the Benchmark Company. You may now go ahead.
spk04: Hey, Ben and team. Congrats on the quarter, guys. Just curious on, I guess, your updated view of the beverage category. I think it's been about a year since you initially sort of introduced stuff that you'd be going into the category. Obviously, you've done a lot of things. I'm sort of curious, your learnings so far, the relevance of the category and sort of maybe the price margin mix as it becomes, you know, a bigger piece of your business. Thanks, guys.
spk14: Sure. Thanks for the question. This is Ben. Just before I hit beverage to your question, just on the PA vape to the last question, and the strategy and the thinking is kind of we're all in this together. This is not an opportunity for Green Thumb to step ahead of somebody or something like that. Nobody likes a surprise. We're all trying to serve patients who want to feel better. crazy to happen like this, but everybody's dealing with it together. So we really are in partnership with the industry to sort of fill the stores, make sure patients get what they need, and sort of continue to adjust. It's not a dog-eat-dog and pound-on-our-friends situation. Everybody wants safe, healthy vape, and consumers tell you what they like. So this caught us a little bit by surprise around here, to be candid. And then in terms of beverage, so it's still a very small part of the category mix, the basket, you know, 1%-ish. Some markets it'll creep higher. So to the last point, you know, when does it become part of the business to actually think about its impact in the P&L? It doesn't. However, I think it's a very unique product from who the consumer is that uses it, what the use case is, what it can substitute against, and what it does for on-prem and social consumption. So we continue to invest, watch, study, be close to the consumer. I mentioned the on-prem. We'll have more of those opening up. We believe cannabis is an experienced business, and we continue to invest in that. But the dollars and cents of can or any other beverage in the business or even in the industry is not yet super materialized. but you never really know. And so we view it as a bet on the future and an understanding of who the consumer is, how, why, where, and the experience is quite good. And, again, I still haven't found anybody who likes to be hung over, and it's going to offer some of the benefits without a lot of the downsides.
spk04: Nice. Thanks, man. Obviously you guys are pretty focused here, but you do have a lot of retail. You're national. You serve a lot of markets. You've scaled manufacturing into you. sort of look at at some point, look at products potentially outside of cannabis, something ancillary to drug growth. Thanks, guys.
spk14: We try to stick to our niche, do what we know, which is cannabis products, branded cannabis products. If something makes a lot of sense, we'll look at it. But that's what we got. Thank you.
spk11: Our last question comes from Devin Doyle with Clover Investments. You may now go ahead.
spk10: Hey, Ben. I understand where we are, you know, with the state-by-state issues and the competitiveness, and also where we are in the consolidation cycle. I just wanted to know if you could give me some more color on the vision of the wholesale operation once we see legalization in interstate commerce. I just want to know, do you have the cultivation capabilities to provide for the nation, and do you intend to export in the future to other countries. Thank you.
spk14: Sure. Thanks. Yeah, good opportunity to just reiterate. What we do on the flower side is high-end indoor premium flower. We don't view ourselves as a supplier of commodity cannabis to input to the market. So, no, I mean, all of a sudden, 300 million Americans could buy our product. We don't have enough product in the States we're in. We don't have excess inventory. And one of the questions, really, I think it's up to all of us to examine inventory line items here and see what's going on. And if you think something's up here, let me know. But we're double, triple, quadruple checking. We don't think there's an inventory issue. Therefore, no. If all of a sudden you can sell our flour rhythm to the country, that's not nearly enough. That's not what we're up to. We don't see that coming today or tomorrow. So that doesn't really bother us too much. But again, high-end into a premium flower, we don't go top-down and say, here's how much the market needs and here's how much we need to grow. We say, here's what $20 million could get us, here's what $80 million could get us, here's what $180 million could get us. What makes sense based on that market, the operators, the timing, the product, all of the other factors? We don't do things like supply the whole country. We do things like, what's the return on invested capital based on the demand?
spk11: This concludes our question and answer session. I'd like to turn the conference back over to Ben Kovler for any closing remarks.
spk14: Sure. Thank you. Thanks, everybody, for joining us. We'll be back with first quarter results in May. I hope everybody has a nice spring season. Thank you.
spk11: This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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