Verano Hldgs Corp

Good morning. My name is Devin and I will be your conference operator today. At this time, I would like to welcome everyone to the Verano Corp third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question, please press star plus the number one on your telephone keypad. If you have any remarks, please press star and then the number one on your telephone keypad.

Thank you and good morning, everyone. Welcome to Verano's third quarter 2022 earnings conference call. I am joined today by George Arkos, Chief Executive Officer and Founder, Brett Sommer, Chief Financial Officer, Erin Miles, Chief Investment Officer, Darren Weiss, Chief Operating Officer, and Rich Terapchak, our Corporate Controller. During this call, we will discuss our business outlook and make forward-looking statements within the meaning of applicable US 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 and CDAR, including our financial statements and MD&A for the quarter ended September 30th, 2022. In addition, throughout today's discussion, we will refer to non-GAAP financial 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 these are supplemental to and should not be considered an isolation from or a substitute for GAAP financial measures. These non-GAAP measures are defined in our earnings press release and available on our website 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. Given the ongoing litigation surrounding the company's decision to terminate the acquisition of Goodness Growth Holdings, Inc., we are unable to provide commentary in addition to what has already been disclosed in our 8-K filed on October 14, 2022. Goodness Growth has filed a lawsuit in British Columbia, Canada, seeking damages from Verano. Our response to this suit will be filed later today with the British Columbia Court. I will now turn the call over to George. Please go ahead.

Thank you for joining us this morning. Today, I will cover the third quarter in more detail, discuss updates to our capital allocation strategy, including commentary on our refinance debt deal, and finish with my thoughts on Verano's positioning for future growth. I'll then pass it over to Brett to cover financials before I give a few closing comments and provide a fourth quarter outlook. I am extremely proud of what we accomplished in the third quarter, highlighted by revenue of $228 million, representing sequential growth of 2% and year-over-year growth of 10%. We also generated another quarter of strong, adjusted EBITDA margin of 36%, or $82 million, compared to 34%, or $76 million in the prior quarter. This progress and ability to deliver growth is a reflection of our relentless focus to continually adapt the business in light of industry evolution, especially given the current macroeconomic environment. Adaptive measures we drove throughout the quarter, including evaluating headcount and store operations, while exhilarating the launch of new brands and product offerings, including the introduction of mid and value tier items. Overall, the cannabis industry continues to grow at a time when many other industries are contractive. However, it has also faced its share of challenges. Consistent with other operators, we saw demand and pricing pressures for the third quarter in certain markets, such as Pennsylvania and Florida, which were slightly offset by growth in other markets, primarily New Jersey. New Jersey remains an exceptional market for Verano, with our third and final dispensary, Zenleaf Neptune, opening to adult-use consumers midway through the quarter. We are one of the top wholesalers in the state with wholesale revenue up three times over the prior year, and our dispensaries remain busy and efficient with retail revenue up over five times versus the prior year. We expect to see some normalization over the coming quarters as some of the initial adult use excitement wears off, especially versus peak summer months. Additionally, we saw basket sizes decrease slightly in New Jersey versus the prior quarter, which we believe was due to both the increased proportion of recreational sales and inflation-driven pressures as we fight for wallet share alongside other categories. However, we remain bullish about this state. Looking ahead, we expect our mix of wholesale in the state to increase as newly approved dispensaries slowly come online over the next 12 months. Regarding Florida, first and foremost, we are grateful that all of our employees are safe and accounted for following Hurricane Ian. We continue to wish the people of Florida a swift and safe recovery after this tragic event and are grateful for all the first responders who put their lives at risk during such a dangerous time. We also announced our donation to a Florida relief organization last month and will continue to help any of our employees that has sustained significant personal losses. While we were fortunate enough to avoid significant damage at our cultivation facilities, we did incur damage to some of our dispensaries, forcing us to temporarily close certain locations anywhere from a few hours to a week or so. Most locations recovered quickly. All but one of our dispensaries are now up and running, and we have since seen a period of softness that carried through into the fourth quarter. Outside of this historic hurricane, patient growth for the third quarter tapered, which we generally expect as the Florida medical market matures. Despite this, we continue to see value in strategically opening locations as we position ourselves ahead of an anticipated future adult use market. We opened 11 dispensaries in Florida during the third quarter and subsequently opened two more. Of note, we don't expect to see the full impact of a new store opening for about six months, so we generally absorb higher costs initially compared to top-line acceleration. Looking ahead, we anticipate a slower pace of store openings in the fourth quarter versus the third quarter as we grow increasingly comfortable with our footprint in the current medical market. But we still expect some growth from the 61 Florida dispensaries we hold today. Lastly, while the fourth quarter has historically been strong in Florida, given the state's ongoing large-scale hurricane recovery efforts and the impacts from tropical storm Nicole, we are tempering our expectations for the remainder of the year. We continue to face challenges in Pennsylvania from a pricing and demand perspective related to the increase in state dispensary count, which has grown about 20% in 2022 versus 2021. While dispensary count growth offers us additional wholesaling opportunities, this has also added some additional retail pressures. To combat this, we accelerated the launch of our mid-tier brand Essence to complement our premium reserve brand and expect to launch our value brand Savvy shortly. Throughout the quarter, we are also continuing to phase out the Agritine brand as we focus on scaling our namesake brands that were introduced in the market in August. Through our affiliates, we now have 15 dispensaries in the state with one way to open three more. and we look forward to having the opportunity to realize our full potential in the market once all three value tiers are fully rolled out in the state. We remain keenly aware of the current macroeconomic environment and the impact it has had on consumers. As mentioned on our last call, we pulled forward the launch of Savvy, our value brand, in anticipation of the impact that growing inflation would have on our customers. We have also introduced the Savvy brand across Illinois, Florida, Arizona, Nevada, Ohio, Massachusetts, and Maryland. We are very pleased with the initial results we are seeing following the launch of Savvy, and we will continue to tailor our portfolio based upon market trends. Moving on to our capital allocation strategy, I want to reiterate that we are always striving to be prudent stewards of capital. Given potential recessionary pressures, we are taking further measures that we believe will insulate and prepare the business for a recessionary environment, prioritizing cash flow first and foremost. In addition, we decided to strategically delay CapEx projects that we do not believe will provide immediate term returns as we balance short-term return on investment with long-term growth opportunity. At this time, we prefer to hold cash on the balance sheet to provide flexibility. We will continue to monitor and, as we've done historically, react accordingly as progression towards adult use picks up in certain markets. We also have the optionality to reignite these projects at the appropriate time once adult use programs for certain states become clear and we see the ROI potential develop. Given our prior CapEx range included amounts associated with goodness growth to New York and Minnesota assets, In light of our termination of that acquisition, we expect a much lighter CapEx fund than previously disclosed. We are now targeting $20 million in the fourth quarter and $25 to $50 million in 2023. We have less of our cash flow currently earmarked for certain CapEx projects, and we will continue to take a balanced approach to increasing our cash reserves along with utilizing cash in a strategic manner. With that said, last month we announced the refinancing of our $350 million credit facility through October of 2026. This new credit facility provides us with more flexible terms that we believe can save the business money, such as prepayment optionality and ways through which we can decrease our cost of capital. Specifically, we have the option to prepay up to $100 million of the facility, allowing us to delever at what we believe is a low-cost prepayment fee of $1 million. Additionally, we expect to continue to leverage our unencumbered real estate with the goal of bringing down our blended cost of capital to approximately 10.5% in the medium term. We are very pleased with the extended terms we were able to secure in a rising interest rate environment and believe this is an example of prioritizing our investors' best interests. In terms of future growth opportunities, looking ahead, we also continue to ramp up our R&D efforts as we find ways to target new consumer segments. Earlier this month, we announced the launch of our low-dose, high-function edibles line, BITS, a unique brand platform of five flavor varieties that combines five milligrams of THC, complementary cannabinoids, and functional adaptogens. The initial launch of this product line spans six core markets, including Illinois, Ohio, Nevada, Massachusetts, Maryland, and New Jersey, soon to be followed by Arizona and Florida. In addition to expanding our brand portfolio into new and exciting categories, part of our strategic growth plan includes partnerships and licensing opportunities, such as our recent Ric Flair drip cannabis launch in partnership with Tyson 2.0. We also look forward to the tremendous future growth opportunity in five potential future adult use markets, representing 43 million Americans, where Verano maintains scaled operations and competitive positions. Maryland, whose residents voted just last week to legalize adult use sales in 2023, and Connecticut, which should launch in the next six months, as well as Florida, Pennsylvania, and Ohio. In Maryland, a legacy state for Verano, we have positioned ourselves in advance of adult use legalization, as we have successfully done in Illinois, Nevada, and New Jersey, a key tenet of our strategy. We are ready to go and look forward to working collaboratively with state regulators on next steps to ensure another smooth and successful program launch, and are excited to welcome adult use customers at our four Maryland Zenly dispensary locations. On the M&A front, we'll continue to evaluate opportunities to strategically expand our footprint when and at the time is appropriate. Given some of the macro trends in the industry, especially the challenging headwinds many smaller operators are facing, we continue to evaluate opportunities with a critical eye towards accreted growth. Before turning it over to Brett, I want to touch on the momentum we see building in D.C. We are encouraged by the recent announcement of President Biden to review the scheduling of cannabis and pardon prior federal cannabis possession charges. The President's recent directive is part of what we see as growing positive momentum for the industry. From two new states, Maryland and Missouri, having voted to legalize and sell used cannabis in the midterm elections, to recent signals from Senate leadership that banking reform will pass in the lame duck session, we welcome the normalization of an industry that has been far too long marginalized. We don't anticipate a cannabis scheduling decision in short order, but we understand that the US cannabis market of tomorrow won't be the same as it is today. We will continue to have conversations and explore every avenue so that we are best positioned to capitalize on any opportunities that present themselves on the legislative front. In addition, we will continue to push forward with certain partnerships that help to shape the new narrative. We have never been more bullish of movement at the federal level. That being said, our success does not and has never depended upon changes in the federal level, and we are as confident as ever that we can execute irrespective of potential movement. Finally, at the state level, the New Jersey Assembly recently passed a bill that would exempt cannabis companies from the 280E tax code. This bill heads to the state Senate next for consideration, but so far we are also encouraged by this positive action. And now I'll turn it over to Brett to discuss the financials in more detail, after which I will provide some closing comments.

Thanks, George. Today I'll review financial highlights from the third quarter of 2022. But first, I want to briefly cover some of the progress we've made structurally. We continue to add and recruit additional headcount for our finance and accounting teams, including roles specific to internal audit, internal controls, as well as technical accounting and operational finance resources. We're very happy with the renewed relationship with our auditor, and I'm very pleased with how smoothly the transition has gone. Moving on to the financials, third quarter 2022 revenue was $228 million, up 10% compared to the third quarter of 2021 and up 2% sequentially, driven by growth in New Jersey, offsetting softness in other markets. On a gross revenue basis, excluding intersegment eliminations, 30% was derived from the wholesale side of the business, slightly above the second quarter's mix of 27%, primarily due to an increase in New Jersey wholesaling. The remaining 70% was from the retail business. Gross profit for the quarter was $123 million, or 54% of revenue. On an adjusted basis, this was an improvement of about 4% versus Q2. primarily driven by the benefit of more efficient production as we build inventory to support seasonally higher Q4 retail sales. We expect some of this impact to reverse in the fourth quarter as seasonality ramps back down in Q1. Though pricing pressures were a headwind, this is mostly offset by an increase in Verano product sell-through at our stores, which we increased by 6% quarter over quarter to 47%, excluding Florida, Arkansas, and Michigan. SG&A expenses were $86 million for the quarter, or 38% of revenue. On an adjusted basis, this is an improvement of nearly 2%, which reflects the alignment of our cost structure to industry sales expectations. Given the uncertainty surrounding the current economic environment, we will continue to manage our costs in line with our revenue. We had a net loss for the quarter of $43 million and $82 million of adjusted EBITDA, or 36% of revenue, for the third quarter. an improvement of $7 million or 34% of revenue versus the second quarter. Turning to the balance sheet and cash flows, we ended the quarter with $76 million in cash and cash equivalents. Cash flow from operations for the quarter was $21 million and $65 million in the first nine months. CapEx spend for the quarter and first nine months was $23 million and $110 million respectively. Spend for the third quarter was nearly an even split between wholesale and retail projects. Going forward, we expect approximately $20 million in CapEx spend for the fourth quarter as we wrap up some smaller-scale projects. We will strive to match CapEx spend with both economic and legislative developments, but for now we anticipate between $25 and $50 million in spend for 2023. Regarding taxes payable, we made payments of $21 million within the third quarter. Our tax strategy remains unchanged, whereas we leverage our income tax payable as a low-cost source of capital. Lastly, our acquisition consideration payable has decreased to $54 million as over $13 million was paid out in Q3. We have estimated cash payments of $30 million to make in the fourth quarter with a balance being closed out in 2023. Despite a slowing economic environment, consumer demand for cannabis remains strong. Looking ahead, we feel very well positioned for the future and will maintain our agile mindset so we can continue to deliver strong and sustainable results in the year ahead. And now I'll hand it back to George to wrap up.

Thanks, Brett. While we still see a tremendous amount of growth ahead of us, we want to set the appropriate expectations for the fourth quarter. We anticipate revenue that is flat to down versus the third quarter as we're seeing some of the recent trends continue. Similarly, we also expect margins to decline in the fourth quarter, primarily driven by pricing pressures, increased costs ahead of growth, the accelerated rollout of our savvy brands and new markets, and the lingering impacts from the recent events in Florida. Despite market movements and economic challenges, operationally, we are in the strongest position today and we have ever been in before. In addition, we are poised for key adult use markets. As Brett mentioned, and something I want to emphasize, we continue to beef up our accounting and finance teams and recently strengthened our board with the addition of Lawrence Hirsch, who now chairs our audit committee and brings an extremely tenured background. We remain focused on corporate governance as we position ourselves for a potential entry into the U.S. capital markets when possible, which would be game-changing for us. Lastly, we are very optimistic about the current legislative backdrop and look forward to further development. With that, operator, please open up the line for questions.

At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Our first question comes from Aaron Gray with Alliance Global Partners.

Hi, good morning, and thank you for the questions here. And I see the margin improvement there. So first question I have is on Florida. And I see some of the store openings there. But I'm just curious there because volume share looks to have been flat just looking at some of the weekly data despite all the store openings that you guys had, which looks to be about twice as many as the next close competitor. you know, outside of the dynamics of the hurricane, just in terms of the competitive dynamics of the market. Any additional color you can provide on that, particularly given, you know, your particular pricing strategy? I know it remains a promotional market. So are you still comfortable, you know, with the pricing strategy despite, you know, share roughly flat, you know, with store openings? Thank you.

Hey, good morning, Aaron. Thanks for the question. Yeah, I mean, Florida's been a little soft. Normally, we anticipate additional growth around this time of year, but with the hurricane, with what's going on, we've seen a little bit of flatness, and we expect that to continue through the quarter. Pricing pressure there is something we've been talking about. That's why we've been introducing these new brands and new price points to become a little bit more competitive, but we're not changing our structure on the current brands. That price remains intact. They're still very popular. We're just trying to attract a new consumer that, given the current economy, something that we need to do. So that's what we're focused on. We're excited about it. Xavi's done very well in all the launches of these different markets, and we anticipate the same in Florida as it rolls out.

Okay, great. Thank you very much for that color. And then in terms of your lower CapEx plans, it certainly makes sense given the environment. Just any additional color you can maybe provide in terms of markets you spoke to in terms of less earmark for those states and whether or not that states where you're no longer looking for that CapEx, does that include potential cap expense plans you would have had for such as New York with goodness, or is that excluding that? Thank you.

Yeah, including those, right. So Pennsylvania, you know, we anticipated a bell use to come a little bit sooner than what's happening currently. So we paused some construction there. Florida, same thing. We built up a second facility, but we paused future rollout of additional square footage there. New York and Minnesota, both obviously no longer on our CAPEX schedule. So it gives us a little optionality with our cash moving forward, which is a good thing given what's going on in the economy today.

Okay, great. Thanks very much. I'll jump back in the queue. Thanks, Aaron.

Our next question comes from Matt McGinley with Needham. Hello.

Thank you. So on your wholesale program, do you have sufficient supply in New Jersey to be able to grow your overall wholesale business into the fourth quarter, or should we assume that the overall trends that you mentioned with being flat down would pressure both of those segments erratably and that wholesale would be down at around the rate of retail?

Hey, good morning, Matt. New Jersey, we do have additional supply for wholesale. We do need to see more stores open. I think that's going to be the kind of the determining factor of our increasing wholesale sales. We'll see when these new stores start opening, but we do have additional capacity. We just added the third tier to our facility. Again, we didn't want to oversupply the market, so we planted that recently, so we have additional supply coming online. So we're in a very good position in that state, and we're excited for the new stores to open to add additional wholesale demand. But the timing of that remains to be seen. The new stores have to open first. Everyone there is vertical, so the Their additional supply has come online, so we'll see what happens in the near term with the new stores.

Got it. And on the G&A, I mean, despite the pace of store growth you had in the third quarter, you had what appears to be very strong control over your core G&A in the quarter. When you mentioned that margin pressure that you expect to see in the fourth quarter, can you sustain that core G&A dollar base at the same level in the fourth quarter, or is the margin pressure that you're talking about largely going to come from the gross margin side in the end of the year?

And the SG&A side, I think you're going to see us continue to become more efficient there. So that's just saying, should remain pretty flat, but I'll let Brad answer a little further on that.

Yeah, I think the ability to sustain our SG&A percentage is going to stay consistent in Q4, actually probably even improve potentially. just as we see a full quarter of the realization of the actions that we've taken. On the gross margin side, you will see some deterioration there simply because we won't have the same level of efficiency in Q4 that we had in Q3 as we matched our output to what our anticipated demand is going to be in the seasonality associated with the industry.

Okay. Thank you.

Our next question comes from Russell Stanley with Beacon Securities Limited.

Good morning, and thank you for taking my question. Maybe first on Florida, you mentioned that as a potential adult use market. Just wondering what your latest views are on the Smart and Safe initiative and what your interest might be in supporting that going forward.

Good morning, Russ. Florida AU, we believe it's a pretty viable option in 2024 to make it as a valid initiative.

we're excited about it we'll see how that comes along and uh obviously it could be a game changer for the entire industry we view florida as a major driver of this business for multiple companies in the future and we'll see what happens got it maybe on illinois uh wondering what uh from a wholesale perspective what what level of visibility you might now have around uh those new stores coming online from the 185 licenses issued Obviously, a major boost, but wondering if your visibility has improved with respect to timing. I know it's always guessing, but any ideas how many stores you might be thinking about for 2023?

As far as how many stores for 2023, I would put it on the lower end, maybe a third of those stores open in 2023, just based on what I'm hearing. Two stores were recently approved last week, and I think they're opening this week, which is great for Verona. We made a couple shipments there, and we anticipate that that's slowly... come out over the next few quarters. It's exciting for Illinois. We need those additional stores, provides additional wholesale capacity for us and others, and additional access, right? Now we're competing against the black market, and adding additional access to the customers in Illinois is a major positive for us. So we expect good things on the wholesale front there over the next few quarters.

That's great. Thanks for your color. I'll get back to you. Thanks, Russ.

Our next question comes from Matt Bottomley with Canaccord.

Good morning, everyone. Thanks for the questions, and congrats on a very healthy margin profile for the quarter. On the margins, I know you discussed it a little bit already, but I'm just wondering if you could break it down a little bit more with respect to the impacts of macro-level pricing pressures versus your own facility utilization and anything else that might be driving the margin profile. Again, it came in very healthy, but your profile seems to move around

um you know in terms of the bounds more so than your peers so just trying to get an understanding of what's sort of in verano's control versus what might be macro um elements um causing some of these changes hey good morning matt i'll pass off the bread here in venice just for us there is a little bit of bouncing around you have to remember we had quite a few acquisitions last year so as we streamline and integrate those facilities we do make changes mostly for the positive while at the same time we're being offset by what's going on in on the macro side. We are seeing pricing pressures in multiple markets. So although we are becoming more efficient and we are absolutely in the best position we've ever been in from an operational perspective, there's only so much you can do with what's going on in the economy. But I'll let Brett further clarify.

Yeah, sure. So to your point, it is a bit of a roller coaster ride as we go through this. But if you think about it, we did have some pricing pressure and primarily in a handful of states, and that was largely offset with our sell-through. So if you just look at what we've done internally to kind of manage our sell-through and help us offset our pricing margins, our pricing deterioration in our margins, that's kind of a wash. And then the operational efficiency kind of provided the lift from there. So hopefully that gives you the color you're looking for.

Yeah, got it. And then just one more for me. Just on the overall cash flow profile, so it looks like you had about $65 million in for the nine months. Can you just remind us what is expected, whether it's an actual number or just kind of maybe pointing to a previous quarter that might be analogous for how cash taxes will end, will finish down the year? Just trying to get an idea of where the full year cash flow profile will come in, inclusive of some of the different timings of tax payments.

Yeah, again, we continue to manage our tax payments, and we make the choices on timing depending on what we want to do in the quarter, where our cash flows are, and make choices at that time as to what the highest return on investment is. So the strategy hasn't changed, you know, 12 to 18 months on average, outstanding. However, within a quarter, we might move or push and accelerate depending on what the opportunities are. So it's hard for me to sit here today and tell you exactly what we're going to do in terms of this quarter's cash tax payments.

Okay, thanks, guys. Appreciate all that. Our next question comes from Scott Fortune with Roth Capital Partners.

Good morning. Thanks for the questions here. Can you provide a little more color on the wholesale side of the business? And what are you seeing from a pricing standpoint? We know there's been pressure there, but are you seeing any stabilization here in some of your states? And then in respect to your footprint, what states do you have?

a room to kind of meaningfully move up uh your verticality in those days kind of options to uh you know sell more brands in in your own stores from different states level that'd be great hey good morning scott um wholesale pricing stabilization depends on the market we are seeing some prices starting to stabilize a little bit pretty significantly in arizona same with nevada pa we'll see in pretty short order here where they start stabilizing hopefully that happens here soon i think the other thing that Going to play a factor here is you're not seeing as much construction on the cultivation side anymore. So a lot of the CapEx projects that were happening over the last couple of years, I think most of them have come to close and come to fruition. So I don't think we're going to see additional supply, which should help stabilize a lot of these markets. As far as verticality, we do have additional movement. We have some additional canopy that came online in Nevada and in Arizona. So we expect to be able to increase our vertical integration there. Illinois, we're capped, unfortunately, but from the wholesale side, that'll help. Pennsylvania, we do, we will also include some vertical integration there as well. Massachusetts came online. For the most part, that's pretty much it. Florida's obviously 100% vertical. So we see some upside in a couple markets and others. I think we'll have some additional wholesale opportunities.

Got it. I appreciate that. And then real quick, you mentioned CapEx as far as production. Can you provide a little more color on the retail side, store additions, kind of some states there? And then with your current production in Florida, what is kind of the amount that you can support as far as potential new stores in Florida?

We're pretty comfortable with our Florida footprint. We'll probably end the year in the mid-60s, 64, 65 stores. We do have the cultivation capacity to be able to handle probably about 10 more stores above that. So we're in a pretty comfortable position, and we'll continue to open stores as we see fit based on what's going on in the economy. Other markets with additional stores, Pennsylvania, we'll open up three more. We're moving a couple of stores in a couple of key markets, and that's pretty much it for now. We're looking at some additional opportunities in other markets, and we'll see how those play out over the next year.

Thanks. I'll jump back in the queue. Thank you.

Our next question comes from Kenric Taghi with ATB.

Thank you, and good morning. George, just with respect to your comments on a worsening macro environment, some of the pressures you're seeing, could you provide any insight on sort of the promotional discipline you saw at quarter, and perhaps more specifically, concerns you may have around that discipline being maintained as we exit 2022 into 2023? And to the extent you can, we'll dive into any specific markets. That would be great.

Thanks. Hey, good morning, Kendrick. So promotional activity, it's actually been a bit better. But going into the holidays, I'm sure we're going to see pretty significant promotional activity over the next 45 days. So we'll see what that looks like. Traditionally, though, it's actually positive. I mean, this time of year, you see almost all retailers having some type of promotional activity. We'll see how aggressive it gets. But for the first time, we'll be able to participate in all the different tiers of pricing. BAVI, in essence, and reserves, we'll actually be able to do a couple of different unique things ourselves. So we're actually excited to see how the year ends out and what that looks like.

Appreciate that, George. Thank you. And then just quickly, on the CapEx guide for 2023, Can you help us better sort of tease out the buckets on the reset? How much of that reset was goodness related versus just a step down in the cadence in your core operations? Just want to make sure we're getting the sequencing and the cadence corrected.

Goodness would have been roughly 25 to 50, depending on how aggressive we got in Minnesota. And the rest of it was all Toronto based. So we scaled down some cultivation expansion in Florida, Pennsylvania, A couple other markets is based on what's going on in the wholesale front. And retail stores are going to continue to expand, just not as quickly as we had anticipated. We're pretty comfortable with our Florida footprint now. We want to see organic growth with our own stores. So we'll continue to add on strategically throughout the state as we see fit, but not as aggressively as we were. So we feel very comfortable with the position that we're in. Again, right now it's about becoming more efficient, getting all the value tiers, and continue to grow the company organically.

Thanks, Gretchen. Thanks so much, and congrats on the quota. Thanks, Kenneth.

Our next question comes from Andrew Semple with Echelon Capital Markets.

Good morning. Thanks for taking my question, and congrats on the Q3 results. Just want to turn the attention to Connecticut. and how you guys are feeling about your capacity in that market, given that we might see adult use sales beginning in the next couple of months here. Do you feel comfortable you'd be able to be active on the wholesale side in that state?

Good morning, Andrew. We do. We're one of the largest wholesalers currently in the state. We brought in some additional supply. We also will be opening some additional retail sources and JV structures. So we're anticipating pretty good wholesale growth and retail growth in Connecticut. From a timing perspective, we'll see it should happen in a pretty near term. So it'll probably be mostly wholesale growth as we continue to build out and find these new store locations. But we're excited about CT. It's a pretty tight market, and traditionally, you know, CT Pharma has done very well there, and we anticipate good growth in that market.

Great. Glad to hear that. Second, I just want to ask on the outlook that you provide for Q4 point of sales growth flat or down for that quarter. Could you maybe speak to which states might be softest quarter over quarter in Q4? And are you anticipating in that outlook that the flat to down might be more attributable to wholesale given that we typically see retail sales seasonally higher in the fourth quarter? Could you help us kind of understand that? that comment a little bit better?

Yeah, I mean, the majority of that comment is coming from Florida. We're seeing softness that we haven't seen there before. Traditionally Q4, you know, people move back to Florida, you see additional strength, but with the hurricane and with what's going on in that state, we're just not seeing the uptick that we normally see. So we're just being, you know, cautious and we'll see how it plays out. Other markets, you know, you see the numbers, state numbers are all relatively flat or down a percent or two. So, Again, we're being very cautious with what we're doing and, again, focusing on our efficiency and our operations and see how that plays out.

Understood. That's helpful. Thank you very much. We'll get back into queue. Thank you.

And our final question comes from Spencer Hannes with Wolf Research.

Great. Thank you for the question. With the industry's pullback in CapEx, when do you think we'll start to see that increased discipline lead to better pricing trends out there? And then how close is that $25 to $50 million CapEx target for next year to your maintenance CapEx needs? Good morning, Spencer. Maintenance number, Brad can answer on that. He's got that number pretty dialed in at this point. So we'll see how that plays out. I'm sorry, what was the first part of the question? I lost that. In terms of when do you think we'll see the increased capital discipline lead to pricing stabilization in the market? Is that a 23 event? Is that a 24 event? How do you think that plays into the pricing dynamics? Yeah, it's something we talked about earlier. I mean, you don't see the capex being spent on cultivation currently. So that usually takes a year and a half or so to play out. But it'll depend on what happens within the individual markets. So as you see transition from medical to AU, you see a huge increase in demand. And a lot of it will also be based on the economy.

Yeah, just to answer the first question on maintenance cap, it's about $10 million a year.

Got it.

Got it.

So as we see the cap start to get boost, we should see our basket sizes increase, and hopefully demand increases as well. Yeah, that makes sense. And then in terms of New Jersey, I think you mentioned in the prepared remarks that you're seeing demand start to taper there as adult use bump wears off. Curious what you guys can do to drive more interest in the category, just given that we're so new in the launch there. and the state is still understored relative to the population. The biggest driver there is going to be the additional stores. You know, there's only so much we can do with a small amount of stores, and especially throughout the state, there aren't that many open for AU, so as you see the additional stores and you have more access, you'll see an increase in sales.

Okay, fair enough. Thank you.

Thank you, Spencer.

Thank you. Have a wonderful day.

There are no further questions at this time. I turn the call back over to Speaker George Archos.

Again, thank you, everyone. Have a wonderful day, and we'll see you in the next quarter. And happy holidays, everyone.