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Operator
Good afternoon, and welcome to Green Thumb's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the conclusion of formal remarks. During the question and answer session, we would ask for a limit of one question and one follow-up question per person. As a reminder, a live audio webcast of the call is available on the investor relations section of Green Thumb's website, and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I will now turn the call over to Leah Rosenfeld, Senior Director, External Communications. Please go ahead.
Green Thumb 's
Thanks, Gary. Good afternoon, and welcome to Green Thumb's first quarter 2022 earnings call. I'm here today with founder and CEO, Ben Goldler, and Chief Financial Officer, Anthony Georgadis. 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 reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the 2021 annual report filed on Form 10-K. This report, along with today's earnings release, can be found under the Investors section of our website. 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 SEC and CEDAR filing. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone, and here's Ben.
Gary
Thanks, Leah. Good afternoon, everyone, and thank you for joining our call today. We reported another solid quarter for Q1. Revenue increased 25% year-over-year to $243 million. Our seventh consecutive quarter of positive gap net income came in at $29 million, or $0.12 per share. And we continue to benefit from increased scale and operating leverage to deliver adjusted operating EBITDA of $67 million and free cash flow from operations of $55 million. This is our ninth consecutive quarter with positive free cash flow from operations. This quarter, we had a 200 basis point decline in gross margin versus last quarter, but still came in above our stated goal of 50%. That said, and as I've repeated before, we are more focused on cash flow than margins, which can fluctuate quarter to quarter considering all the moving pieces in our business. Some of these include starting up operations in new markets, possible delays in adult use sales, as well as investments made in any given quarter to better serve our customers. So while margins are important, and we've discussed the 50% growth margin goal, I think the more important factor for us and the industry is cash. Last weekend was the Berkshire Hathaway Annual Shareholders Meeting in Omaha with legends Warren Buffett and Charlie Munger. several folks from our team were able to listen to Warren say that cash is, quote, like oxygen. It is there all the time, but if it disappears for a few minutes, it is all over. We live on that cash, oxygen, and plan for that to continue. The focus on cash has been in our DNA since the very beginning. It's a discipline that we'll never abandon because to us and many of our mentors, the best path to true value creation building a business that can generate attractive cash flow over the long term and deliver consistent high return on incremental invested capital. So, to our way of thinking, follow the cashiche.
Warren Buffett
Now, for a short update on our most recent acquisitions.
Gary
In 2021, we entered three states, Virginia, Rhode Island, and Minnesota, and we like our setup in each of them. All three are catalysts for future consumption of our products, and we are excited to bring our authentic brand like Rhythm, Dog Walkers, and Incredibles to more Americans. As you know, Virginia has already passed adult use legislation, and we've begun scaling our operations by adding two stores this year and expanding cultivation capacity. Adult use sales are coming, and we are working hard to be ready. After months of negotiations, both the House and Senate of Rhode Island introduced a bill to legalize adult use cannabis sales in March. Sales could potentially begin as early as October 2022. In Minnesota, we added our sixth store in Mankato, located in the southern part of the state. In March, we began selling flour in Minnesota dispensaries, and we were proud to offer legal, high-quality flour to Minnesota patients for the first time. The introduction of edibles in Minnesota later this year, which will bring patients another form factor to improve their well-being, should prove another catalyst to the market.
Warren Buffett
All three of these acquisitions were quickly and fully integrated into the Greenspelt family, something we have improved at over the years. Now for the New Jersey news. On October 11th,
Gary
New Jersey gave a green light for seven operators, including Green Thumb, to begin adult use sales. The long awaited prohibition in the tri-state area has finally ended, and as anticipated, we have seen strong demand in our stores, Rye's Patterson and Rye's Bloomfield. On an industry level, on the first day of adult use sales in New Jersey, approximately 12,000 customers purchased nearly $2 million of recreational cannabis products. While this is certainly a cause for celebration, It is also a good example of positioning and patience by Green Thumb. We first entered New Jersey by winning a vertical license in December 2018. The license had virtually zero cost to investors. We decided to plant the Green Thumb flag in Patterson, an economically disadvantaged area to build the cultivation and processing facility necessary to create supply for retail sales while bringing important job creation to the community. In 2019, one year after being awarded the license, we opened our first store in Patterson, followed by two more stores in Paramus and Bloomfield in 2021. Today, we are proud to serve medical patients and adult use customers at Rise Bloomfield and Rise Patterson, with Rise Paramus serving medical patients only at the current time. The goal in New Jersey has always been to expand access to well-being through cannabis in a state with over 9 million residents. To that end, we remain focused on prioritizing the needs of our New Jersey medical patients while ensuring a great experience for our new adult use customers. This focus positions us well for the adult use transition in New Jersey, a market that is now estimated to reach $2 billion in sales in the next couple of years.
Warren Buffett
The key takeaway here is that we are playing a long game, one that requires patience and discipline to reap big rewards. Patience and discipline are core skills we work on every day.
Gary
The great American growth story continues to be alive and well. Americans are continuing to choose cannabis for well-being, and we believe that our brands will be a core part of that lifestyle. We continue to have conviction in our core market thesis, which is proven every day by increasing consumer demand. We believe in the plant, we believe in our products, and we are committed to promoting well-being through the power of cannabis for the American people. Now, I'll turn the call over to Anthony to cover our financials. Anthony?
Warren Buffett
Thanks, Ben. Good afternoon, everyone.
Ben
As you just heard, the company posted a respectable first quarter, generating $243 million of top-line net revenue and $67 million of adjusted operating EBITDA. Total net revenue decreased $1 million over the previous quarter, with gross CPG revenue declining $4 million and gross retail revenue declining $1 million. As I've previously highlighted, the difference between gross revenue and net is in our company revenue. And the company sold $4 million less product to itself in Q1 than it did in Q4. During the quarter, the company generated gross margins of approximately 51%, 200 basis point decline over Q4. Pricing headwinds in Pennsylvania, Nevada, and Massachusetts, along with inflation, were the biggest contributing factors. The balance of the decline was attributable to startup costs associated with New Jersey adult use and recently completed wholesale facility expansions. On the SG&A side, excluding depreciation, amortization, one-time transaction costs, and stock-based comps, Normalized operating costs approximated $61 million, $4 million increased over the $57 million incurred in Q4. The majority of increase was payroll related, primarily across our retail and shared service functions. We continue to closely monitor our overall SG&A spend relative to our top line growth and margin performance, as our intrinsic goal remains to keep gross margins and adjusted operating EBITDA margins at or above 50% and 30% respectively. Other income for the quarter approximated 6 million, which primarily reflected non-cash, non-operating gains associated with our investment portfolio, as well as the warrant liability associated with our senior debt facility. Net of these expenses, the company generated approximately 29 million in net income, 12 cents per share, our seven consecutive quarter of positive earnings per share for the business. Moving on to our balance sheet, we ended the quarter with approximately $174 million of cash. During Q1, we invested approximately $60 million in gross capex when including the spend associated with our sale lease tax. On a trailing 12-month basis, the company has invested approximately $240 million in gross capex. We remain bullish that our capital allocation decisions of today will pay rewards for our shareholders tomorrow. On our favorite topic, cash, we generated just over $55 million in operating cash flow in Q1. We remained vigilant in minimizing our inventory and other working capital accounts to ensure our cash is working for us versus getting trapped on our balance sheet and AR and inventory. In addition, with the capital markets essentially closed to campus businesses, our substantial cash condition along with our positive cash flow from operations translates into better sleep for our stakeholders. As we look ahead to the balance of the year, you can expect us to continue to do a few simple things. Number one, tune out the noise and control what we can control. Two, be the consumer. Everything we do is through that lens.
Warren Buffett
Three, watch our cash.
Ben
Four, be ready to be opportunistic when others are fearful. New Jersey Adult News kicked off on 4-21 and early results look eerily similar to Illinois circa January 2020. Congrats to our team for all they did to make the launch a success. It truly did take a village. Next up is some combination of New York, Connecticut, and Rhode Island.
Warren Buffett
Good news is if you are a shareholder in Green Thumb, you have action in all three. Back to you, Ben. Thank you, Anthony.
Gary
Before we open for questions, I will add on a couple items that I believe to be both important and urgent. The first is creating a diverse and equitable cannabis industry. And I'll be honest, this is very hard. For more than three years, we've been struggling to find an equitable solution in our home state of Illinois. We hope other states are able to find a quicker path to an effective model, and we are here to help. Green Thumb will continue to be an active voice for change and equity about the program in Illinois and the industry as a whole. I strongly encourage other cannabis operators to join us in this fight. It is far too quiet. The only way this industry is going to be successful is if others can share in it, and it's not solely a group of white men like me. The opportunity is now for our industry, but it will take a village including industry operators, state regulators, and the media to demonstrate the genuine commitment to equality and inclusion. Helping restore the damage caused by the war on drugs, which delivered a terrible blow to communities of color, has been core to Green Thumbs' mission from the beginning. And while close to 75% of Americans live in states with legal access to cannabis, it seems beyond outrageous that there are 40,000 Americans incarcerated for illegal use. Systemic injustice isn't a battle that any single organization can take on alone, but at Greensound, we're fully committed to a three-pronged approach, including more education, nonprofit investments, and enabling new entrepreneurs. Education is one of the most powerful tools, and our lead programs in Illinois and Connecticut are providing social equity applicants with the knowledge and skills on the licensing process and how to operate a successful cannabis business. Over the last year, we've committed more than $250,000 to set up scholarships that will help black and brown students gain access to cannabis education programs at higher ed institutions like Olive Harvey College in Chicago, Medgar Evers College in New York City, and the Cleveland School of Cannabis. Our Green Thumb brand of flower products was specifically created to help fund nonprofit organizations who are doing the groundwork in their communities to create real and sustained progress against the harms from the war on drugs. And we recently announced our second round of grant recipients last week. We look forward to partnering with five more organizations with missions that are aligned to education, expungement, or employment to help create opportunity and change in impacted communities. Backgoing systemic change is a tall order and we want to be part of the solution as we believe this industry should create new wealth, particularly in minority communities. At Green Thumb, what keeps us excited and motivated every day is bringing the American people access to well-being. We think this is a real American story. America has created the problem. Remember, every year, more than 100,000 Americans die from alcohol-related causes and another 75,000 Americans from opioid overdoses.
Warren Buffett
Cannabis is helping, yet it's understudied stigmatized, and illegal.
Gary
We step back and we think the country is stressed out and under extreme anxiety. Factors like COVID-19, inflation, social inequality, and the war in Ukraine put us on the verge of a virtual panic attack. And in these tough, unpredictable times, our mission to promote well-being through the power of cannabis is more important than ever. So if you haven't tried our product, now might be a good time. Find your rhythm, America. Enjoy the journey with dog walkers. We'll open it up to questions. Operator?
Operator
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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, we would ask for a limit of one question and one follow-up per person. Our first question comes from Lee Cooperman with Omega Family Office. Please go ahead.
Lee Cooperman
Thank you. I appreciate it. I guess the question I'd ask you is, you know, you said if you were a shareholder in Green Thumb, you gave some positive things, but you also have a 65% decline from the high. Are we just waiting for legalization as the only lever to pull to turn around sentiment, or basically is there things the company needs can do in their control. I assume since you come across as cash is king and given the cost of capital in the industry, the odds are repurchase is not in the picture. I look at Bloomberg and I see two or three pages of insider selling. I see no insider buying. If you think the story is so good, why are we not seeing any insider buying? That's it. Thank you. Good luck.
Gary
Great. Thanks, Lee. Yes, Ben. As you know, you've been with us a while. The story remains intact. I do not think we're just sitting around waiting for federal change for anything to happen. I think the business in the U.S. and the industry has proved, you know, since we started prior to going public when it was more of an idea to create a billion-dollar industry at 30%, a billion-dollar company at 30% EBITDA margins, puts us in a pretty good spot where the industry has 400,000 Americans working in it productively. So instead of federal change in D.C., I think I would turn it back and say we need financial change in New York. The New York Stock Exchange and the NASDAQ will not list our company. As you're concerned about stock price, my comment on stock price would be, you know, what you know and what my mentor's mentor has said for a long time, you know, the stock market is a short-term voting machine, long-term weighing machine. And until there's more access to buying the stock at mainstream exchanges, from the mainstream exchange to his – Plain vanilla long-holies or even the retail investors on something like Robinhood or other sorts of exchanges and allow more demand to come in as a supply-demand, mark-to-market world. And so you're right. You know, we listen to Buffett. We think about Cassius King, and we're running the business out of ways because we think this is a $75 to $100 billion U.S. industry.
Lee Cooperman
Are you fully invested in the company? You know, you have all the right buzzwords, but I don't see the action. I see inside of selling. I don't see inside of buying. That was my point. And I know the company's not going to buy, but what's going to make the management buy?
Gary
You don't see any real insider selling. We are huge believers in awarding the team with equity. They get equity. Sometimes there's filings because you get equity, there's a tax trigger and things like that per the rules. But you do not see any swath of insider selling at all. We're convicted. I'm the largest holder of the company. And we have bullish view on the medium and long-term nature both of the industry in the U.S. and our business.
Lee Cooperman
Well, my recommendation is go look at Bloomberg and see what you see. And what I see is nothing but inside selling for three pages. I don't see any inside buying whatsoever. I see options, surrenders, and I see outright sales. And you know what I'm talking about. I think you got all the buzzwords.
Gary
We can clear that up, but that's fine. I hear you. That's good. I appreciate it. We have conviction. You know what I really think, to be really totally candid with you, is influencers in New York, like yourself, who have a voice with the New York Stock Exchange and the NASDAQ, will not let us be listed. This is leading to real damage in the industry. And so I think if we could have a voice with the New York Stock Exchange or the NASDAQ, the board, on TV, to talk about it, CNBC, we have trouble with. If we can't list in the New York Stock Exchange, Americans can't buy the company that is selling them product that is enabling well-being. I can buy as much stock as you want. If there's not buyers in an institutional basis in New York and you have a voice on CNBC, you know, we're happy to discuss it.
Lee Cooperman
I take my bows with Elizabeth Warren. That's about it. I'm not looking for more battles. But thank you and good luck. Thank you.
Operator
The next question is from Matt McGinley with Needham. Please go ahead.
Matt McGinley
Thank you. Can you help better define the drivers of that 215 basis point decline in gross margin you had in this quarter? The price decline was most of that pressure last quarter, but raw material and wage inflation are new factors that you called out. I guess, was that price decline more acute this quarter, and how should we think about that impact of raws and labor inflation through the remainder of the year and how that will impact your margin rates?
Ben
Thanks, Matt. Yeah, Anthony here. So, you know, what I mentioned in my prepared remarks was, you know, the biggest driver of the compression that we saw on the gross margin line was really price, some price activity that we saw in Pennsylvania, Nevada, and Massachusetts. And the other factor is obviously inflation, which everyone in the industry is dealing with. And then in addition, we had some staffing where we staffed up in advance of New Jersey adult use. And then on top of that, we had additional staffing in some of the facilities where we just recently completed some expansionary capex. So, you know, look, we're watching these markets closely. You know, there's a lot of things that kind of go into the gross margin line. And as we further unpacked it, you know, the biggest driver was really on the wholesale side of the business, where we know we get great leverage when we pump more revenue through that portion of the business. So we're watching it close. That was the biggest driver of the decline. And
Matt McGinley
like we said long term we we fully believe that we can kind of achieve the 50 kind of gross margin level within the business okay and in the first quarter the industry revenue was was soft based on a host of factors that you clearly were not immune to but has the recovery in april and the opening in of adult youth sales in new jersey giving you the confidence that you can resume top line growth again in the second quarter or is that does that outlook a little bit premature
Ben
Look, I'd say at this point we're one month in. April was stronger than January and February. We're watching close. I would say right now we're comfortable saying that, you know, we should achieve flat sales. But at this point, that's what we're comfortable saying, given we're only, call it, you know, a third through the quarter.
AFOL
Okay. Thank you. The next question is from Vivian Azer with Cowan. Please go ahead.
Cowan
Hi, thanks so much for taking the question. This is Harrison Vivas on for Vivian. Look, on New Jersey, understanding it's still early days, it looks like the product assortment has been pretty limited. So can you just kind of offer some line of sight on when we should expect to see additional form factors like pre-rolls in your stores? Thanks.
Ben
Sure. You know, great question. Look, we obviously think that the more products that hit the market, you know, that's what's really going to drive kind of market expansion. I would say in the early days, you know, we're focused on getting some basic flour items on the menu, and bit by bit, week by week, you should see an expansion. I mean, obviously, we're incredibly focused on getting our dog walkers and our Incredibles into the market. We think they'll do exceptionally well, you know, including kind of a Snoozeberry that obviously is doing well in a number of markets.
Warren Buffett
We have dog walkers currently on the medical side, so it's only a matter of time before we can introduce those on the adult side. Understood. That makes sense.
Cowan
And just as a follow-up, Matt kind of talked about the improvement that we've seen into 2Q. Look, we cover the broader CBG space. Altria called out better-than-expected benefit from federal tax returns. So can you comment on how that's impacted your business?
Gary
Yeah. I'm not sure we have quite as big a pulse on that. If you look at last year's
Warren Buffett
No real comment on this here. I'll have back in the queue. Thanks.
Operator
The next question is from Camilla Lyon with BTIG. Please go ahead.
spk15
Thanks, and good afternoon, everyone. Anthony, I was hoping you could give a little bit more clarity on helping us understand what the run rate is of SGMA. I think there's about a $50 million ad back. acquisitions and other to get back to adjusted EBITDA. But I'm just curious, what's the right level of expenses that we should be thinking about going forward?
Ben
Yeah. So, you know, the SG&A line item on the P&L has a number of things running through it that are non-cash and non-operating. So, you know, internally, we focus on a normalized SG&A level. You know, we did see a $4 million increase from Q4 and Q1. We went from 57 to 61. um you know roughly speaking the break you know the breakout of that was you know 50 driven by uh additional kind of uh payroll on the retail side of the business as well as payroll on the shared service function side of the business you know look i would say that we're going to have to continue to invest in the team particularly as we kind of look ahead and see expansion coming uh in the northeast via don't use but obviously it's something we're watching very very closely uh, to make sure that, you know, we don't get, uh, too far ahead of ourselves in terms of our staffing, um, you know, as we look ahead. So I think on a run rate basis, you know, real time we're at 61 million. Um, you know, I would anticipate that number growing now, how fast that grows will really be a big drive, really be driven by top line growth as well as kind of what we're seeing on the gross margin line.
spk15
Got it. And then, uh, You know, could you parse out what the acquisition component was of that $15 million? I can assume that was from Leafline mainly, right?
Ben
Yes. Well, what's interesting about at least this quarter is that when we see a change in our contingent liabilities, that actually runs to the SG&A line. So, you know, in this case, the big number that you referenced, effectively we had an earn-out. you value that earn out over time and you constantly kind of revalue that earn out. And based off the performance of the underlying business, you know, we estimate that the liability associated with that earn out has declined and we're forced to take that benefit through the SG&A line, which is why we add it back on adjusted operating even today.
spk15
Perfect. And then you mentioned the, you're pretty clear and articulate on the gross margin buckets. But now that New Jersey is on, it would, it would, theme that Q1 margins, gross margins, would be the nadir for the year and that you'd steadily improve going forward all out of SQL. Is that a fair way to think about the progression through the year?
Warren Buffett
I think we've given enough and we'll see what the AFOL says.
AFOL
I'm sorry, say that one more time.
Warren Buffett
We're not commenting anymore on the future. I know the ask, but I think Anthony's given enough guidance. Got it.
AFOL
The next question is from Pablo Zuanek with Cantor Fitzgerald. Please go ahead.
Cantor Fitzgerald
Hi. This is Matthew Baker on for Pablo. We have two questions today. I know this has touched on a bit, but can you guys explain why there's such a large difference between the number of SKUs available on the medical menu compared to the rec menu in New Jersey? And I'll ask a follow-up afterwards.
Warren Buffett
Great.
Gary
Yeah. The priority in the New Jersey market is to continue to serve the medical patient. There's very specific regulatory guidance on how much product based on proven run rates and pull through different products and different skews, form factors for the medical patient. So essentially, as I said in the prepared remarks, as we believe and as we try to preach along the country is to prioritize the medical patients who are getting more relief or state of condition. So that menu is deeper. Same thing happened in Illinois, less regulated but more voluntary, but same exact sort of situation. And over time, you'll see more products, more SKUs, more brands to the adult use side. It was a successful start. We see plenty of upside as those menus equalize, more form factors, more guidance from the states on detailed products.
Cantor Fitzgerald
Okay, got it. And for the follow-up question, just regarding the medical markets in Virginia and Minnesota, Can you guys give an estimate on what you guys expect, like the average patient spend per month and the current count of active patients in each of the states? Applications?
Gary
Number of patients. So if patient counts are public, you can get that. And we're not going to comment on individual state per capita spend, but it's pretty easy to take the total amount in the state divided by the number of patients in the state. Keep in mind the number of purchasing patients is always different to get the ticket, but I would not say there's material differences among many states. The question is what products are available, what's on the menu, and how big is that patient count? And we remain very bullish on Virginia and Minnesota, I think the two states you asked about. In terms of zoom out, look at the populations in those states, and look at where the capital has gone in to build that supply. These states are gonna consume a lot of cannabis. Minnesota has the exact same population as Colorado, and Colorado's been around for a long time. and run rate of $1.5 billion to $2 billion, and Minnesota is a fraction of that. So we don't think the consumers in Colorado consume differently. It's just been different history and a different setup from a regulatory standpoint. Virginia sets up with the regulations already allowing adult use with several operators hard at work, and we hope more entrance into the industry. You know, the governor is supportive of economic growth, tax revenue, and jobs. And, you know, I believe up and down that's what this industry can deliver. All right. Thank you.
Operator
The next question is from Aaron Gray with Alliance Global Partners. Please go ahead. Hi.
Aaron Gray
Good evening, and thanks for the questions. So first question for me, I think you mentioned in a fair amount of remarks that New Jersey was eerily similar to Illinois. So just wondering if you could kind of, you know, detail what you meant by that. Was that more store performance we saw on the flip in terms of uptick there? And then secondly, just on New Jersey, you know, any commentary in terms of expectations to maybe, you know, start wholesaling in the market and how you feel on an inventory level versus, you know, just supplying your own stores and entering more of the wholesale market on the Adobe side? Thank you.
Ben
Sure. Thanks, Aaron. So I'll take one of Ben's lines. History doesn't repeat its rhymes. You know, I mean, look, demand was big. You know, there were lines out the door. And, you know, fortunately, it was something, given the experience we had in Illinois in early 2020, we kind of knew what to expect. You know, the key was having a solid launch, taking care of the team, taking care of the consumer, and, you know, effectively treating people well. We feel like we did a nice job with that. And each and every day, we're going to get a little bit better. Flow is going to get better. The amount of products on the menu is going to improve. And so, you know, as we look ahead, we're very bullish on the prospects. If you could, do you mind just repeating your second question?
Aaron Gray
Yeah, just on wholesale for New Jersey versus just having inventory for your own stores and how you're looking to wholesale the market.
Ben
Yeah, that alluded to it. But, you know, the regulators in New Jersey are doing a great job of making sure that the medical program continues to thrive and making sure that every operator in the state continues really continues their focus on the patients. Now for us, we certainly plan on wholesaling, but what we want to do is build up enough supply so that we can confidently kind of satisfy the medical needs that we have within the state. And then secondarily, we'll turn to wholesale. So, you know, look, we take a long-term approach. We're not going to do something short-sighted that's going to put us off sides with the regulators or the market or really the patients because they're really why we're here and how we got here. And so we'll just take a measured approach. We just completed a wholesale facility expansion in Patterson. We have a new facility that's about to break ground. So, you know, long-term, we're confident in our prospects of being a big player within the wholesale side of the New Jersey market.
Patterson
All right, great. Thanks very much.
Aaron Gray
And second question for me, inter-open scale, I think you guys have, you know, been on for a while, and you obviously have a number of markets. We will continue that out. But As we kind of think of, you know, the next phase, you know, one state, you know, I kind of think of it as Massachusetts, right? So now you're at the max, you know, six stores there. You know, limited cultivation you can have there for 100,000 square feet. You called out some pricing pressure. So, you know, as you start to see, you know, you might have scaled out to potentially your maxes for retail and cultivation. How do you think about next steps for a state like that that's limited license starting to get more competitive and how you guys look to execute and continue to improve within those types of marketplaces? Thank you.
Gary
Yeah, it's a great question, and Massachusetts is a good case. We like our business out there. The key thing to keep in mind, and certainly we have room up to more than the – we could go more growth if we wanted up to the $100,000. We're not at the cap. But it's a question of allocation of capital and what the business looks like today. So today, the Massachusetts business looks very good to us in terms of the cash flow and the requirement of incremental invested capital, and if we have to put in capital, what that turns into from a business. We think of Massachusetts more as grounds to build brands with consumers there that are buying a lot of cannabis, loving the product, and as the rules evolve, the different kinds of things that can come into play. I'm talking about inputs, form factors, sizes. There's been some unique rules in Massachusetts, but we think the brand build with consumers there is incredibly important, and the business produces, you know, it's a profitable business for us. We are not investing into a $50 million grow in Massachusetts. That would not make sense on an incremental invested capital basis.
Patterson
All right, great. Thank you very much. Now I'll jump back into the queue. Thanks.
Operator
The next question is from Spencer Anas with Wolf Research. Please go ahead.
Spencer
Good afternoon. With the pace of gross margin compression over the last two quarters, why should 50% gross margins really be the floor for the business? And then related to that, how are you thinking about where we are in the pricing reset that's taking place across most markets in the country?
Ben
Yes. Look, it's a great question, Spencer. look there's a lot of leverage within the gross margin line that we can actually pull so um you know and i'll just i'll call off a few one you know and i alluded to it a little bit my prepared remarks but there's tremendous verticality in the business which is you know something if if needed we certainly can pull to ensure that we kind of keep gross margins where we need them that effectively means selling more of our own product at our own source um The other thing is scale that we anticipate to achieve in a lot of our wholesale facilities, which are not anywhere close to operating in true capacity. And we look at kind of just general CPG businesses overall, and we're confident that based off the kind of pre-unit economics that we're seeing even in a number of the markets kind of out west, we're confident that we can achieve kind of a 50% kind of gross margin line across the business. there's obviously factors out of our control, inflation being, you know, one of them, which has a real impact, particularly on certain portions of the business. But net-net, when we kind of unpack it, it's a number we're comfortable kind of using as our kind of North Star because there's a lot of levers that we can kind of pull and manage to make sure that we achieve it because we just, it's a number that we just view as critically important to the long-term prospects of the business in achieving kind of, you know, margins that that we're looking to target for our shareholders.
Spencer
Got it. That's helpful. And then I guess just in terms of pricing, where do you think we are in the reset that's taking place across the country? Then I have a follow-up on New Jersey.
Ben
Pricing is very fluid. You know, you have to kind of really understand the market that we operate in to really understand and really kind of see what's happening kind of, you know, within pricing of those markets. What we like about our portfolio is we have a very diversified kind of portfolio of states. So that diversification provides some insulation from some of the near-term and short-term kind of volatility that we're seeing. And still, in a number of these markets kind of on the East Coast, I would say what's happening is that the value proposition is being set by the consumer. And so whether or not that's going to continue to evolve, it certainly could. you know, in some cases we're seeing kind of continued movement and others were seeing stability. So it's a little premature to kind of say, where are we in the cycle? Because to answer that, you really have to kind of look at it on a market to market basis.
Spencer
Okay. Fair enough. And then just on New Jersey, 12,000 customers, $2 million a product on, on the first day, what do you think is the normalized run rate given the 12, 12 stores that we have open in the state thus far? And then pricing is still elevated, obviously, given it's a new market. But as we start to see cultivation ramp, when do you think we start to see promotions really start to flow through there? You know, it's a crystal ball, but best you can give on that would be helpful.
Ben
So your question on run rate, this is Anthony. I think north of that, you know, look, we don't have a crystal ball and we know, you know, one of the biggest limiting factors right now is product on the menu as well as kind of throughput at the store. So we think we should see kind of growth from here. Your next question was related to wholesale expansion within the state, I believe.
Spencer
Yeah, how do you think about pricing going forward as production starts to ramp in that market more?
Ben
That's right. You mentioned something about promotion a lot. I mean, look, it's very early days. So I'd say that we're going to take this, call it one week, one month at a time. For us, we're working hard on the wholesale side of the business to get enough product available for both our stores, both on the medical and adult use side, and then others. The promotional activity and what we see within the market, candidly, we'll take it as it comes, and just one day at a time. It's hard to really assess it from here. But these markets are fluid and certain things can happen. But at this point, it's too premature for us to speculate.
Operator
Great. Thank you. The next question is from Eric Deloria with Craig Hallam Capital. Please go ahead.
Eric Deloria
Okay, great. Thanks for taking my questions and congrats on the consistent cash flow here. Can you talk about the product categories that you're seeing price pressure in and how that may be influencing your approach to the wholesale business or to your branding approach to the consumer. Thanks.
Gary
Yeah, I mean, look, thanks, Eric. You know the business well. It's driving a lot of our decision-making. I'm cautious to give a lot of detail on what's going on. I think the proof is in the pudding which brands we're investing in, which form factors we believe in, and what that leaves out for where we think there's less differentiation is Less room for the consumer to pay a pricing premium based on that brand. The places we like to invest, obviously, or I think, I hope we're obvious, are indoor high-end premium flower, which we believe in the Rhythm brand. We believe that the consumer over the long term will continue to like to consume that product. The ready-to-consume Greeroll, John Walker is the nation's best-selling Greeroll joint. It's an obvious win. It's a real resonator with the consumer. We think that category continues to expand. We see category growth there. And we look at consumables, ready to consume, whether it's edibles or other sorts of form factors, certainly with can and beverage. Those are categories we want to be betting on. And I think you can look at the basket and see which parts are out, not necessarily because the consumer won't pay for it, but certainly around scale or where we've chosen to place bets. We're big fans of other things in the basket, but you can't do everything all the time. And so we really are trying to prioritize around who the consumer is in the future, what that form factor, what that brand is going to resonate with them. in order to lead to pricing. And we look out in the world, we see branded products driving experience for Americans, and that gives us a lot of conviction in what we're doing.
Eric Deloria
All right, I appreciate that. And then last from me here, on the tradeoff between your CPG sales to third-party versus your own retail, can you just remind us of the changes in this quarter? And then just kind of more broadly speaking, can you kind of talk about tactical changes to sort of increase margins here and there versus any strategic changes? I guess just overall comments on that sort of trade-off between CPG sales to third parties versus owned retail.
Ben
Thanks. Yeah, look, it's a great question. It's a topic we talk quite a bit about just internally. Look, to really understand it, again, it goes back to the market by market, what's happening. And in certain cases, um if we think it makes sense to shift more of our own wholesale goods to our own retail stores we'll do that in this case we consciously pulled down the amount of wholesale goods that we were using to kind of feed our retail stores um and we shift some of those goods to the outside again it really is driven by what's happening at the market level um and in q1 that was a decision that we consciously kind of made within a few markets How we're going to kind of impact that line in the second quarter and beyond, it's really just a case of business optimization and what we think makes sense for the business at that moment in time.
Howard
All right. I appreciate the call. Thanks, guys.
Operator
The next question is from Scott Fortune with Roth Capital. Please go ahead.
Scott Fortune
Good afternoon. Thanks for taking the questions. Just to kind of stick on the retail side, that was down sequentially. What are the metrics driving that primarily? Are you seeing recent traffic and turns returning back to a more normalized or the average basket size kind of down from that side? Kind of just looking for normalized traffic levels as you're seeing going forward here and starting within the second quarter. What are you seeing from that standpoint?
Gary
Yeah, thanks, Scott. It's Ben. Good question. I think there's a couple ways to look at it. Top-down, with the first year-over-year decline, minus three, you know, we look at the bottom-up. What's driving that? You know, the market in PA, and I think Anthony mentioned it in his opening remarks with PA in Massachusetts and Nevada, really driving that. If you remove that, it's up, I think, broadly across the world to your question on transactions and tickets. You're seeing tickets marginally down, and you're seeing transactions up. And it depends which market you look at it without, say, the one down market where they go up a lot. That's the general gist across the market, which complies with what we're saying, right? Product pricing under pressure, massive transactions of massive new consumers, as we think these markets grow over time, or at least the ones that we're investing real shareholder capital in have massive growth potential ahead. I think the one factor just sort of underlying a lot of these questions is that there's going to continue to be an influx of capital creating new supply into these markets. Remember, it's a state-to-state market. So as regulations change and as things happen with the consumer, it's disconnected from what's happening in the capital markets. We're already seeing operators change their positions. We love it with where we're sitting. We've been investing with CapEx and coming soon on these states that we've been talking about. New Jersey, which we've been talking about on this call for eight quarters in a row, says this thing. just turns on. So I think that's important to see out as we go. Just to go a little bit more detail on the PA market, zoom out a little bit. PA is a market without pre-rolls, without edibles, and a medical market, and a medical market that ripped and surged for 40 years out of the gate, the fastest of any medical market we've seen in 12 million plus or minus people in the state. So I think it's important to keep that context for how big we see that market with our 16 stores, and our sort of careful allocation of capital for supply into that market for what's coming.
Scott Fortune
Got it. I appreciate the detail. And then a real quick follow-up on that. With price deflation and compression in the environment kind of overall coming aboard, can you provide more of the initiatives and opportunities on looking at the operation side to increase yield, production efficiencies, kind of operating lean from that side to drive the cost down? What are you looking at from the you know, production operation side to continue to drive cost down with this pricing deflation environment currently.
Ben
Yeah, look, Scott, you hit them. I mean, the two biggest drivers, look, when you unpack it again, it's largely wholesale driven. So when you look at the wholesale side of the business, it's like, okay, how do you drive gross margin there? There's really two big drivers. Number one, it's higher yields. Number two, it's greater throughput per labor hour. Very focused on both. I would say that, you know, as we look across the portfolio, we're encouraged by the opportunity that we think we see within our own business, and it's something that, you know, between now and the rest of the year, the team is very, very focused on it. We think there's potential unlocked there, which can be, you know, very beneficial for the shareholders, and we see opportunity.
AFOL
Got it.
Scott Fortune
One last quick one. You mentioned New Jersey being like Illinois. When did Illinois become full production for you, kind of having enough production to meet wholesale adult use demand? Do you kind of see that from a timing standpoint for New Jersey occurring that way?
Gary
No. I mean, I think it's important, Scott, to understand the setup in Illinois and New Jersey, while purely similar from the consumer at the store, it's not the same for Green Thumb from a setup standpoint. You know, we have greenfield sites in Illinois that are robust with 200 plus employees at each site that we've been able to scale since 2015. And in New Jersey, when I went through on the timeline located in Patterson with density and in northern New Jersey, we certainly don't have the $100 million capital investment in New Jersey that we had in Illinois since 2015. So from our standpoint, that's a little bit different. Keep in mind, we have three stores, two are adult use, Market is what it is. We have 10 stores here in Illinois. Very different setup. We, again, look at cash flow generation, return on incremental invested capital. We certainly look forward to more products, more diversification there. But from a P&L standpoint for Green Thumb, it's not exactly, it's not eerily similar.
Scott Fortune
Got it. I appreciate the call. Thanks.
Gary
From a magnitude, I would say, from a business characteristics, it is. From a consumer standpoint, it very much is. know the consumer quite well and that excites us.
Ty Collins
Go ahead.
Operator
The next question is from Ty Collins with 8 Capital. Please go ahead.
Ty Collins
Hey, thanks for taking my question. I want to touch on the labor cost inflation piece. Do you feel that there's more of that to work through in the coming quarters to keep pace with the market? And do you see that higher labor cost baseline as a potential risk to the longer term 30% margin target given the stickiness of those costs?
Ben
Look, I'll say that, you know, we're dealing with the same thing that everyone else is dealing with. So, you know, where it goes from here, really difficult to say. I mean, obviously, we're focused on building just an incredible, high-performing team. You know, but look, we've seen pressure on that line item as of late. How that's going to kind of unfold over the next coming, call it, quarters and into long term, you know, difficult to say. We're going to focus on what we can control. not prepared to sit here and say that it's definitely going to put that 30% at risk on the long term, but I would say check back in a couple quarters and we may have a different opinion on that, either positive or negative.
Ty Collins
Got it. Okay, thanks for that, Keller. And then, Ben, with the backdrop of another rate hike today and continued high inflation, I guess I'm curious whether you're viewing cannabis as more of a staple or a discretionary product on balance. and how you think about the durability of cannabis demand in the context of the pressures we're seeing on consumer wealth today.
Gary
We strongly believe in the durability of this product as a place in the American consumer lifestyle. We see a 99-plus percent industry that's all off-prem, mostly sold in a sealed, child-proof bag, not allowed to be opened. We think it's in a primitive nature for where this is, for what the consumer experience can be. There's a lot of talk of price, I think deflation and things like that. There's pricing pressure on products from operators who have issues. But over time, we think about the experience trade-off. And you think about the price of an alcohol consumption versus the price of a joint, and it's sort of mind-blowing. We talk about the metric of price per buzz, and there's reasons that other executives take an interest in cannabis and why the consumer is moving over here.
Warren Buffett
So that gives us a lot of confidence. Got it. Thanks for taking my questions, guys. Sure. Good one.
AFOL
The next question is from Howard Penny with Hedgeye.
Operator
Please go ahead.
spk23
Hey, thanks very much for the question. I actually had a question on the pricing, Ben, and I think you actually may have alluded to the answer to this question. The pricing that you called out in the two or three markets, I assume, is something you work with day-to-day, knowing that there's a normalization, some have called it, and pricing is coming down. So it's a day-to-day part of the business. Is there any or was there any behavior by any companies in those markets that may have been run off in nature or sign of desperation or any – you know, excessive discounting or promotional activity in any one of the markets that would say that, you know, pricing pressure this past quarter was more than you would have seen normally. I don't know if I answered that question properly.
Gary
Yeah, thanks, Howard. It's Ben. Yeah, I think the answer is yes. You know, some operators have done some irrational things on pricing. It's not private information to go out and see what's going on as people figure out their margins or even their viability. You know, we often think, you know, on the verge of death, people eat their friends. It's not a pleasant thought on how to operate in a capitalist environment, but we're out there watching what's happening. We love our position. The boat feels very secure. If you take a market like Massachusetts with our verticality, with the size of that business, with what's going on, and then, again, the power of our branded product, whether it's indoor premium rhythm flour or Incredibles, as it can bring snoozeberry to every single store in the state, et cetera, we're bullish on those markets.
Howard
And then just lastly for me, the incremental capital spend for the balance of this year is going into what markets?
Gary
The continued capex that we continue to do is a lot of the finish of the same markets we've been talking about, but Virginia, New York, now Minnesota, as well as New Jersey. It continues to be in the markets. Connecticut with adult use. It's not some of the markets where you're seeing more maturity, where we have a nice cash flow business and established brands. It's not as expensive to invest in those as it is to build, like I said, a $50 million cultivation facility that over the T plus one, two, three generates attractive returns for us. I think what you're saying is other folks put a lot of capital in and it's hard to make money in cannabis. There are not a lot of people that have done that. I think capitalism is pretty efficient. I think when stocks are down as big as they are, there's not as much money sloshing to these opportunities, which is why we have a lot of conviction of where our investment is based on the consumer. not the noise outside. It only makes us a little bit more optimistic at some of the spend that continues this year to be candid.
Operator
Thank you. Thank you. Excuse me. The next question is from Matt Bottomley with Canaccord Genuity. Please go ahead.
Matt Bottomley
Hey guys, thanks for all the calling this evening. Just wanted to go back to, you know, you chatted a little bit about the sort of normalized run rate SG&A. Maybe just at a higher level, is there an easy way to sort of describe or outline the difference between the reduction in adjusted EBITDA versus the increase in cash flow from operations? I know there were some transaction costs and other non-cash things within the SG&A, so is there an easy way to kind of reconcile that?
Ben
There's really not, Matt. I think the statement of cash flows when it's published will give you kind of better color there. But yeah, there's a number of things that kind of obviously run through that operating cash flow number. So it all starts with adjusted operating EBTA and kind of goes from there. We feel good about it. And again, like I kind of mentioned in my prepared remarks, we're constantly looking at places where we feel like cash can get parked unnecessarily, particularly on the balance sheet. So, you know, as we look ahead, one of the things we're maniacally focused on is just making sure that we manage our working capital levels and that they're right size for the revenue that we're effectively using them to generate.
Matt Bottomley
Okay, great. I'll go through the rec more carefully. And then also just in terms of, you know, not looking for anything specific that's forward-looking, but maybe just sort of some bullets on what the growth catalysts are, just given that the environment is impacted pretty negatively with inflationary pressures and some of the other things that were mentioned on this call. So I know you're calling for maybe a flat Q2 print potentially, but the second half of Q2 is typically where we get to some of the more seasonal highs of it. You mentioned flour in Minnesota, Rhode Island potentially has a rec market, clearly New Jersey turning online. So are there other things that you can just point to that you think will promote growth specifically for GTI in your portfolio in sort of the next couple of quarters without sort of commenting if you think that they will or won't happen?
Gary
I mean, I think you said it in your question, Matt. You understand the industry quite well and the seasonality of what's going on and why the second quarter sets up pretty well in the third quarter, et cetera. We said the same thing heading into the fourth quarter with where the seasonality is. But I think we've talked about the catalyst, but it's adult use. It depends which quarter, which year. But we think the 40-plus million Americans don't quite have adult use products as a major catalyst. I can't tell you which quarter Connecticut, New York, or Virginia turns on You mentioned Minnesota as we continue that investment. It really just started. We just closed it this year. So if you look out for a major catalyst, you have a 6 million or about 6 million person state. It really is not consuming that much cannabis. I mean, the number on Minnesota is pretty small on an annual basis. You know, under 100 versus Colorado, that's a 10 or 15x that market with two operators. And you go through the math of each state for things like that. We have product introductions, we have brand introductions, and we're at a place with the scale of the business to invest in those brands that, again, we think are impacting the American experience through cannabis. There's a lot of demand for this product. If there wasn't, there would not be people lined up around the corner at these stores in New Jersey. So that's what gives us a lot of conviction. There ends up being a lot of upsides. We think the $25 plus or minus billion of the U.S. market, zooming out, triples. And over time will grow, there'll be billions of dollars have added to the market that Green Thumb has been investing tens of millions of dollars in for the last several quarters. That's what gives me a lot of comfort, gives the team a lot of comfort. That's what we're working very hard on. And we feel good about where our boat is at that wave that's pushing us out. Behind the wave is some chum, and it's tough to be there, but we are excited about the future for the American cannabis consumer with all those catalysts that we mentioned, including new product drops, new strains, and various other things.
Cantor Fitzgerald
Okay, great. Thanks, Ben.
Gary
Thanks, Pat.
Operator
The next question is from Sean Chettle with Private Investor. Please go ahead.
spk19
Yeah, hi. I have some concerns, too, about how much stocks you guys are selling. You guys are down, like, 30% in the past 30 days and, like, almost 70% in the last year. Every quarter you guys are making profits, and it seems like every single quarter that stock's going down. And, like, could you come up with some creative ways to, like, keep it at a standard? I mean, you guys are making profits.
Warren Buffett
I appreciate the question.
spk19
But you're losing the same amount of money. And, like, it's your peeps that are doing it.
spk10
Appreciate the question. Our focus continues to be on building the most buoyant business, I would say. Yeah, I know.
spk19
I mean, you're giving away money and cash to, like, different communities. How about give away some of those stocks? Like, buy back some stocks and give those away. Give some stocks to your employees. Like, somehow keep that, like, I know it's OTC stock, and it's just a joke right now. And it's, like, up to you, basically, to talk to your peers and your colleagues to tell them the stock's selling. Buy some of that back. Create a floor and build on it.
Gary
Yeah, I appreciate the question. It's an open market every day, and you're welcome to do it. You choose to think we're building a business that will have the largest weight over the medium and long term, and it is currently being voted off the island in our capital markets. That's very clear. That's why we put enough cash on the balance sheet in order to withstand this kind of capital storm. I've said on this call many times, we grabbed an umbrella when it was sunny. It is not sunny today. I think the nature, and you can hear it in the questions and some of the edge, that's fine. But over here in the business, we continue to run the business for the medium and long term, not for the trading and the stock. That's not our business. We looked at counsel from Munger and Buffett over the weekend on how to do this, thinking about the cash, thinking about the farm. But I appreciate the question.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.
Gary
Thanks for all the questions. Interesting call. Look forward to giving you guys the next update after the second quarter. I encourage you guys to get outside this spring and enjoy it. Thank you all.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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