Green Thumb Indus Sub Vtg

Good afternoon and welcome to Green Thumb's second 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 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 would now like to turn the call over to Shannon Weaver, Director of Internal Communications. Please go ahead.

Thank you, Betsy. Good afternoon, and welcome to Green Thumb's second quarter 2022 earnings call. I'm here today with founder and CEO, Ben Kozler, and Chief Financial Officer, Anthony Georgiadis. 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 Regulator. 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 FDC and CEDAR filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone, and now here's Ben.

Thank you, Shannon. Good afternoon, everyone, and thank you for joining our second quarter conference call. We reported another quarter of solid results which feels particularly good given the current economic environment. Revenue increased 15% year-over-year and 5% quarter-over-quarter to $254 million. We had positive gap net income for the eighth consecutive quarter of $24 million, or $0.10 per diluted share. That's $0.22 per share so far to 2022. We posted adjusted operating EBITDA of $79 million, or 31% of revenue for the quarter, and $146 million year-to-date. Finally, our cash flow from operations is positive $40 million year-to-date. Before I get into more details about the quarter, it's important to acknowledge the challenging market conditions that are putting macro pressure on the economy and consumers. While the market will continue to fluctuate based on various economic factors, doesn't change the fact that cannabis is a growth industry with strong demand tailwinds. As we sit here today, the cannabis market is at a run rate north of $26 billion. In fact, last quarter was the largest quarter of revenue for legal cannabis in the U.S. at over $6.6 billion. Yet, it is still illegal to purchase cannabis for adult use in more than half of the states in America. The transition to adult use in key markets presents massive growth potential. We've had the opportunity to watch that movie in real time this quarter in New Jersey, with Rhode Island and Connecticut coming later this year to markets where green thumb is well positioned to serve the pent up demand. In the second quarter, we had a greater than 300 basis point improvement EBITDA margin versus last quarter, bringing us back above the 30% level. Gross margin was 49.5%, which represents an improvement over the first quarter when normalized for reallocation of certain expenses. Our cash flow from operations was negative for the first time in 10 quarters at minus 15.4 million. However, this was not a surprise for us and something we knew was coming. There were three key drivers. First, two large cash tax payments in the second quarter compared to zero in Q1. Second, inventory bills primarily in Maryland and Ohio And finally, the timing of 2021 compensation bonuses for our team. I think it's helpful to reiterate the tax schedule for U.S. corporations. Tax estimates are due on the 15th of the month in April, June, September, and December. Therefore, we had two payments this quarter, which totaled $65 million to Uncle Sam. Section 280E of our tax code is our current reality, and we take the position of paying taxes in full and on time. we have trained ourselves to think of free cash flow in an after-tax or no-path way. Given the nature of the cannabis industry, the punitive tax code, and the fickle capital markets, we continue to be focused on cash at Green Thumb. We believe operating cash flow is the best measure of a company's financial and operational health, and we're not alone. With the prospects of a bear market and recession, we've noted Wall Street is paying close attention to the fundamental attributes of a business, such as cash flow, balance sheet, and earnings quality, all of which support a company's health and ability to weather whatever comes its way. When you're out of cash, you're out of options, and optionality is very important to us, regardless of any volatile external environment over which we have little or no control. What we can control is our capital allocation decisions and our balance sheet, both of which are strong competitive advantages and why we constantly evaluate our business to ensure we are operating as efficiently as possible. We ended the second quarter with $312 million in current assets, including cash and cash equivalents of $145 million, which supports our ongoing financial and operational health. In June, we strengthened our balance sheet with the innovative industrial properties funding, and in July, we extended the maturity date of our debt until April 2025. These were easy decisions for the benefit of shareholders, and again, buys us optionality. From where I sit, I'm bullish on the enormous market opportunity ahead and feel confident that we have the firepower, strong brands, and team to ride the green wave as the industry doubles, triples, and eventually reaches $100 billion in the U.S. How we get there remains fluid, as there are a number of factors that will impact timing. As I mentioned at the beginning, current market conditions and especially high inflation are putting pressure on consumers across all sectors. On top of that, pricing in cannabis products can vary tremendously across markets. at any time in ways that are difficult to predict, pricing pressure may disrupt an individual market. That is why we have built a diversified portfolio of states with large vertical optionality which provides some insulation for near-term volatility that we're seeing in certain markets. We know that the American consumer is demanding this product for well-being. We see it every day in our stores across the country. In addition, We have major tailwinds coming as new markets turn on adult use sales. We are putting capital into markets that will generate strong returns, but there may be unexpected challenges along the way. New York is a great example of a state that has created a lot of excitement up front, but has regulations that have created more questions than answers. As such, we've tempered our near-term expectations for New York, but even so, are well-positioned in this market and will be patient New Jersey, on the other hand, began adult sales on April 21st, and in the first 30 days, there were $24 million of cannabis sold across just 12 open retail stores in the state. Estimates indicate a $2 billion market in the next few years, which is 7x the current run rate. Connecticut and Rhode Island should launch adult use sales later this year, and DreamThumb is well positioned in both. And in Illinois... Our home state and largest market, we are seeing some positive action. After two and a half years of frustration, social equity licenses are now being awarded, and we expect to see the beginning of new stores opening later this year. This should provide greater accessibility to well-being through cannabis, more diverse and equitable participation in the industry, and an overall lift in the Illinois market. We believe more than doubling of the store base will grow the overall market, even if there is price and pressure.