Verano Hldgs Corp

Good day and thank you for standing by. Welcome to the Verano Holdings Corp second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. Should you require any assistance, please press star zero on your telephone keypad and an operator will assist you. During today's call, there will be a question and answer session and instructions will be provided at that time. I will now turn the conference over to Juliana Patera. Please go ahead.

Thank you all and good morning, everyone. Welcome to Verano's second quarter 2022 earnings conference call. I am joined today by George Arkos, Chief Executive Officer and Founder, Brett Sommerer, Chief Financial Officer, and Aaron Miles, Chief Investment Officer, as well as Rich Terapchak, our Corporate Controller. All financial results for the second quarter ended June 30th, 2022 and related comparisons to prior periods included in this release are preliminary have not been reviewed or audited, are based on the company's estimates, and were prepared prior to the completion of the company's financial statement close process. During this call, we will discuss our business outlook and make forward-looking statements within the meaning of applicable U.S. and Canadian securities laws, which are based on management's current assumptions and expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results performance, and achievements of the business or developments in the company's industry to differ materially from those implied by such forward-looking statements. Actual events or results could differ considerably due to risks and uncertainties mentioned in our filings on EDGAR, including our statements and MD&A for the quarter ended June 30, 2022. In addition, throughout today's discussion, we will refer to non-GAAP measures that do not have any standardized meaning prescribed by GAAP, such as EBITDA, adjusted EBITDA, and free cash flow. Management believes non-GAAP results are useful to enhance the understanding of the company's ongoing performance, but are supplemental to and should not be considered in isolation from or as a substitute for GAAP financial measures. These non-GAAP measures are defined in our earnings press release and available at investors.verano.com, which also includes the reconciliation of these measures to the most comparable GAAP financial measures. Lastly, all currency is in U.S. dollars unless otherwise noted. I will now turn the call over to George. Please go ahead.

Good morning, and thank you for joining us today. I am extremely pleased with what we accomplished in the quarter and how we continue to position the company as a top operator in the space to drive long-term growth and profitability. To start, I will provide a high-level overview of the business. Then our CFO, Brett Summers, and new corporate controller, Rich Tarpacek, We'll review our second quarter 2022 financial results in more detail. And lastly, we will open up the call to answer your questions. Before I begin, I want to comment on the state of our pending audited financial restatements, which is still moving through quality control checks with Baker Tilly. However, we are comfortable enough with the numbers to share them with you today. As Juliana mentioned, these are subject to change, but in our eyes, the numbers are final, and in the name of transparency, we want to share everything possible. Starting with financials, we generated solid revenue in the quarter of $224 million, an increase of 12% year-over-year and 11% quarter-over-quarter. Top-line growth was driven mainly by strong sales in New Jersey as the state transitioned to adult use on April 21st and increasing market share gains in Illinois. While we were pleased with the top-line performance in the quarter, our main focus was on investments in key markets to position the company ahead of anticipated growth. This was highlighted by an increased headcount in both the retail and cultivation to appropriately staff locations to absorb the expected increase in demand. This included a significant focus on New Jersey, where we added over 200 employees this year. We also made significant investments in automation, making New Jersey one of the most efficient facilities in our footprint. In addition, we opened 15 stores since the end of the first quarter, including 12 in Florida, two in West Virginia, and one in Pennsylvania. We staffed up our Connecticut cultivation facility as we continue to bring more rooms online as we position ourselves in that state ahead of anticipated adult use transition. Also, we increased staffing levels in our Massachusetts and Nevada facilities. While these actions contributed to the higher than anticipated SG&A in the quarter, we fully believe that these investments will help continue to fuel the business for growth throughout the remainder of the year. In addition to operations, and I will touch on this in more detail later on, we continue to beef up our back office capabilities. This includes significant investments in accounting, financial planning and analysis, as well as in our securities legal practice. In light of all these investments, we still produce a strong adjusted EBITDA margin of 34%, which I believe is not only impressive given some industry headwinds, but also given the challenging macroeconomic environment as a whole. We have also enhanced our focus on opportunities to recognize efficiencies in the business. We firmly believe that we have set the benchmark in the space as the top tier operator, and we have demonstrated time and time again, we have the ability to adapt in a highly dynamic and rapidly growing space. Our focus will always be optimizing profitability, but not to the detriment of potential future growth. That said, as we evaluated the performance of every retail location in our DD cultivation capabilities, we were able to identify and eliminate a significant amount of costs from SC&A. We believe these savings, along with the anticipated growth from our recent investments, should have a positive impact on EBITDA. We are currently viewing the business in three pillars, financial reporting, operations, and capital allocation. We expect the standard we have set on the operational side to apply to financial reporting, and we will not rest until we are operating at the Verano standard. I will speak to all three areas today, but first I will begin with an update on financial reporting. As we've discussed on previous calls, we have been very active since going public, including 16 acquisitions with 14 closed, one equity raise in addition to our GoPublic financing round, two favorable debt amendments, and converting from IFRS to GAAP while transitioning to a new auditor. We rapidly accelerated our presence as a publicly traded company, and to say our accounting team had a lot to manage is an understatement. We have continued to funnel resources to the team while we maintain a firm commitment to enhance and streamline our financial reporting capabilities. As I highlighted, we have been building out our finance and accounting capabilities for the past few months, along with implementing updated standards and procedures. We want the efficiency of our financial reporting to mirror that of our operations and will continue to fine-tune this side of the business to make sure we are viewed as best in class from that perspective. We recently welcomed our controller, Rich Taropchak, from 2-6, where he served as chief accounting officer. He also holds experience from Reynolds Group Holdings, where he served as controller and was involved with public processes of two divisions, during multi-billion dollar spin-offs. Additionally, he served as Chief Accounting Officer of Navistar and is a board member of the Illinois CPA Society. We will also continue to explore and implement other proactive measures as we work to instill the utmost confidence within the investor community. We will continue to bolster this department and further stabilize our footing with the ultimate goal to prepare the company for inclusion into the U.S. capital markets once possible. With a gap conversion behind us, we initiated a deep dive into the financials. This effort led to some discoveries which resulted in the restatement. The main restatement issues focused on our accounting of restricted stock units issued under our equity incentive plan and our Q1 tax provision calculation. We feel these restatements are indicative of the added bandwidth and resources to our team. While we had to recognize higher SG&A and COGS expenses related to RSUs, This had no impact on our cash flow statements, and the increased college expense actually resulted in a reduced tax obligation for Verano. We have implemented additional procedures and added additional resources to address the issues identified. Moving on to operations, the executive team has spent the last few months scrutinizing every aspect of the business, looking for opportunities to improve upon what was already a strong foundation. These include efficiency levels, improving margin levels, and building Verano culture. We ran through this exercise simply because we are never satisfied with the status quo, especially as the economic environment changes around us. In that vein, over the last year and particularly over the last several months, we have seen dramatic shifts in consumer preferences. Despite having been historically focused on the premium and high end of the value of price spectrum, we have been busy adapting and adjusting our portfolio of offerings to ensure that we're able to meet patients and consumers where they are. Over the last quarter, we successfully rolled out our mid-tier essence brand, aimed principally at creating a more accessible option for consumers wanting to get their hands on Verano strains and to widen our consumer base. Rounding out our tiered approach to value, we are proud to have announced yesterday the launch of our value brand, Savvy, which we discussed rolling out in Q3 during last quarter's earnings call. I am so proud of the team for quickly and efficiently bringing this line to market, demonstrating our agility and ability to address the changing consumer demand that we've seen given macroeconomic changes. As our savvy brand will be a lower priced item, we anticipate a subtle impact of margins related to the offering. However, as we deploy efficiency measures including automation across the country, we anticipate being able to offset some of the margin impacts. Moving to some of our key markets, in New Jersey we are happy to report that demand remains robust. Basket sizes in our adult use locations have even increased slightly versus the first few weeks of adult use sales. We have one of the most robust menus in the state measured by skew count across multiple form factors. We also have ramped up capabilities at our state of the art 120,000 square foot facility to meet the growing demand and we'll continue to position ourselves for future growth opportunities in the state. In addition, we are thrilled that Neptune, our Jersey Shore location, began selling to adult use consumers earlier this month. This location is approximately two miles from the Jersey Shore and popular landmarks such as the Asbury Park Boardwalk. In Pennsylvania, we had a strong launch of our Verano product line earlier this month. We've generated excitement for the brand and launched a full product line within our 14 dispensary footprint with plans to roll out to dispensary partners throughout the state. And in Illinois, we continue to gain market share in flour. Our namesake brand gained 310 base points of market share quarter over quarter. And I think this is only the beginning as we continue to roll out additional products across the value spectrum. We are also looking forward to the recently awarded 185 social equity retail licensees, opening new dispensaries and becoming valued wholesale customers. We are excited to introduce new consumers to our brands and further supplying the Illinois market. Overall, our portfolio is performing well despite external macroeconomic pressures. You've seen large, very established non-cannabis CPG companies struggling in this environment, but we believe in our ability to adapt and succeed. Of course, these pressures are not solely related to cannabis, but are applicable across the board. We are cautiously optimistic, but will continue to watch consumer trends very carefully. Lastly, I want to discuss our capital allocation strategy. Our goal has always been and remains to return value to shareholders in the most efficient way possible. We continue to employ this approach and are constantly assessing all investment opportunities in front of us to ensure we are making the right decisions at any point in time. Year-to-date through the second quarter, we have spent $87 million on capital expenditure projects, largely in Pennsylvania and Florida, that we deemed as having high ROIs given our initial internal projection on state-level adult use legislation. However, our strategy has always been to invest ahead of growth. but never too far ahead of growth at the risk of diluting ROI. We strive for agility when and if any legislative environments change. We will change alongside them. Specifically, we now believe Pennsylvania, Maryland, and Florida will likely take longer to launch adult use programs than we were projecting a few months ago and are therefore adjusting the timing of the next phase of cultivation expansion in these states. Changes in demand and consumer preferences at retail have also caused us to modify some of our improvement and expansion plans to ensure that we are using capital to its greatest impact and effect. We previously guided to $185 to $250 million in CapEx spend for the year, but we now estimate a range of $130 to $160 million. Given the age of our business and operation sites, maintenance CapEx is very low. We expect to spend less than $10 million this year. Our evaluation of capital is not solely based on what we're spending, but also what we could be saving. We recognize that we carry one of the higher income tax payable balances. However, part of our capital allocation strategy is to lengthen our tax payment cadence. This strategy is not unique to Verano and has been utilized amongst other large U.S. companies. The cost of penalties and interest for this are significantly below the available cost of debt. We continue to have multiple opportunities to tap into higher cost options to bring this balance down, including but not limited to unfavorable sale leasebacks. We have avoided these unfavorable agreements, given they come at a very high cost of debt. Therefore, we have chosen to avoid this path. We have one of the highest cash flow from operations to EBITDA conversions in the industry, which ran above 50% based on full year 2021 GAAP numbers. To fully understand what we are accomplishing by deferring our taxes, we believe investors should look at lease liabilities, taxes payable, and gross debt to EBITDA for a fair leverage metric within the industry. If you account for the premium we carry on the income tax payable line in comparison to the industry average, we still have one of the highest cash flows even at conversion rates in the industry. In addition, even inclusive of our taxes payable, which we consider the payables as a source of pseudo-debt, we are under levered versus our peers. That said, we still do carry what we feel is the appropriate amount of debt for the business. We have always had the mindset to take only what we need and move on to the next facility when required. Without delving into the specifics, we continue to have very productive conversations with potential lenders in light of our facility-inspiring wave throughout the next year. Before turning it over to Brett, we'll go into more detail on some of the items I have to highlight. I want to reiterate our never-ending commitment to operating as a best-in-class company across all pillars of our business. Now withstanding some of the growing pains we have experienced over the first half of this year with respect to financial reporting, I am very proud of the effort and resilience of your Verano team. and confident that we are moving in the right direction. I will now turn it over to Brad before I give a final few thoughts on the remainder of this year.