Verano Hldgs Corp

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Verano Holdings fourth quarter 2022 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I'd like to turn the conference over to Juliana Patera, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Verano's fourth quarter and full year 2022 earnings conference call. I am joined today by George Arcos, Chief Executive Officer and Founder, Brett Sommer, Chief Financial Officer, Darren Weiss, Chief Operating Officer, and Aaron Miles, Chief Investment Officer. 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 and CDAR including our financial statements and MD&A for the quarter and year ended December 31st, 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 in isolation from or as 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 and less otherwise noted. I will now turn the call over to George. Please go ahead.

Good morning, and thank you for joining us. I'll begin today's call by highlighting our strong fourth quarter and full year 2022 performance. after which I will give Brett the floor to review the financials in further detail. I will then provide my thoughts on 2023 and speak to the exciting path we see ahead of us here at Verano. I will then close with a discussion regarding our capital allocation plans, including providing guidance around certain financial metrics. I am extremely pleased with what we were able to accomplish in 2022. Throughout the year, we've maintained agility in navigating our industry's evolving environment, managing the business by diversifying our portfolio, and improving efficiencies while aiming to protect the bottom line. Our strategy since inception has been to build a self-sustaining business set up to thrive even under extreme market uncertainty, making no assumptions about changes to federal law. To date, the net result of these efforts has been the creation of what we feel is one of the strongest cannabis companies in the industry, with the belief that it is positioned to endure difficult macroeconomic conditions while generating cash flow and building long-term value. Turning to the results, I am proud to report that in 2022, we generated over $879 million in revenue, representing 19% growth year-over-year and $324 million in adjusted EBITDA, representing a 37% margin. New Jersey and Florida were the largest contributors to our growth in 2022, which Brett will speak to in more detail later. Looking at the fourth quarter of 2022, results were in line with our guidance. with a revenue of $226 million and adjusted EBITDA of $79 million, representing a 35% margin. Fourth quarter retail sales were up 1.7%, driven by strength in our New Jersey operations as our final adult use location contributed a full quarter of sales, offsetting softness in Pennsylvania. We also had another quarter of improved vertical sell-through in our retail channels, increasing over 100 basis points sequentially to 47%, demonstrating the strength and breadth of our brand portfolio and SKU mix. Gross wholesale revenue for the quarter was down 6% sequentially, largely due to increased supply coming to the New Jersey market, which we anticipated, in addition to some price compression in Illinois. Notably, the Verano product line was the number one brand in New Jersey for 2022 based on sales data according to BDSA. So we are optimistic regarding future wholesale growth once additional dispensaries in the state open. We have always looked to appropriately supply each market in which we operate. So in Illinois and Massachusetts, we have scaled back total output and optimized headcount as we've seen some recent oversupply in these states. Please note we maintain the ability to ramp up production once we see the opportunity to put additional supply on shelves. Throughout 2022 and to date in 2023, we took decisive actions and made numerous investments to fortify our business, portfolio, organization, and value chain. We continued thoughtfully paced growth by adding 29 dispensaries during the year, a 32% increase in our retail footprint versus 2021. Adding 21 in Florida, two in Nevada, two in Pennsylvania, and four in West Virginia. Subsequently, we added five dispensaries across Florida and Pennsylvania. Similarly, we continued to increase our cultivation capacity, mainly in New Jersey on the launch of the adult use program and in Florida to support additional store count. In October 2022, we also strengthened our balance sheet by refinancing our debt in a rising rate environment, which included significant optionality by allowing us to prepay the first $100 million with only a $1 million prepayment fee. We expect to be able to decrease our blended cost of capital by leveraging our unencumbered real estate. In addition, we continue to enhance and expand our portfolio of strong brands. First, by launching Savvy, a value-tiered brand which was quickly embraced by consumers with a brand representing 15% of Verano flower sales in the fourth quarter on a unit basis. On that note, we are very proud of how our brands have performed. For some, even with only a short time on shelves, According to BDSA, Savvy is now the number one top-selling large-format flower brand in Maryland after launching in the fall. Savvy holds a top-five spot in Massachusetts and Pennsylvania and a top-ten spot in Arizona and Illinois. As we expand this product line, we anticipate Savvy's popularity to continue to grow. We also launched Bits midway through the fourth quarter, which is a lower-dose edible line paired with a range of adaptogens. Bits is now the top 10 best-selling edible brands in a number of our key markets. Lastly, our Verano brand continues to perform well. Per BDSA, Verano is ranked as a top five brand nationally. Of note, Verano's brand performance is particularly compelling given that we only produce in seven of the 13 states included in this data set. In addition, we continue R&D as we explore new brands and form factors. Specifically, we've seen success with our new line of solvents extracts and have plans for launches in additional select markets over the coming months. Relatedly, we also successfully launched a niche line of specialized infused pre-rolls at a premium price point in Illinois. We anticipate rolling this out in other markets throughout the year. In an effort to provide deeper insight into our business, we want to highlight a few efficiency metrics that management utilizes to monitor and evaluate our business. For example, We closely track dollars per labor hour, which helps us determine how efficiently our retail outlets operate. I am pleased to report that this measure increased over 26% quarter over quarter. Similarly, we look at transactions per head at retail, which also went up 14% quarter over quarter. At our CPG facilities, units produced per head increased 6%, while cost per gram decreased 9% sequentially. These metrics demonstrate our continued operational improvements. I am very pleased with what we accomplished, even while navigating a complex and challenging inflationary environment. And now I will turn it over to Brett to cover the financial results before I provide a more detailed outlook for 2023.

Thanks, George. I'm pleased to deliver our solid financial results today. I'll begin by covering full year results before drilling down into the fourth quarter results. Revenue for the full year increased 19% versus 2021 to $879 million, driven by the adult use New Jersey sales and increased contribution from Florida as we expanded our footprint. On a gross revenue basis, excluding intersegment eliminations, 72% of sales were derived from the retail business, with the largest contributions from Florida, Illinois, and New Jersey. The remaining 28% of sales were derived from the wholesale side of the business, with the largest contributions being from Illinois, New Jersey, and Connecticut. Gross profit for the year was $423 million or 48% of revenue versus $331 million or 45% of revenue in the prior year. On an adjusted basis, this was $517 million or 59% in line with what was previously communicated. SG&A expenses were $357 million for the year or 41% of revenue versus $271 million in the prior year or 37% of revenue due to increased costs associated with the 29 dispensary openings, which can take up to six months to fully ramp up. On an adjusted basis, SG&A was $249 million, or 28%. We continue to optimize headcount and expenses in our retail operations to strike a balance between prudent expense management and enabling continued growth. We have seen a decline over time from our Q2 peak in this cost and a percentage of sales. We had a net loss for the year of $269 million driven by impairments to an Arizona cultivation license and to Pennsylvania and Arizona Goodwill. Notably, impairments were the biggest driver of our deferred tax liability decrease of approximately $50 million. Adjusted EBITDA for the year was $324 million, or 37% of revenue. Moving on to the financials for the fourth quarter of 2022, revenue was $226 million, up 7% year-over-year, driven by adult use sales in New Jersey and increased retail contribution from Florida store openings. Gross profit for the quarter was $103 million, or 46% of revenue, versus $109 million, or 52% of revenue, in the prior year, driven by increased discounting and cost increases associated with expansion activities. On an adjusted basis, this is $125 million, or 55%, driven by the inventory reduction we spoke about on the last earnings call. Ultimately, we reduced inventory days by 17% quarter over quarter, and while this was a drag on adjusted EBITDA, it has made us leaner and faster to pivot, as well as freeing up some cash and helping us continue to build a stronger balance sheet. SG&A expenses were $81 million for the quarter, or 36% of revenue, versus $82 million in the prior year, or 39% of revenue. driven by lower stock-based compensation and decreased M&A activities, offsetting increased costs associated with additional stores. On an adjusted basis, this was $62 million, or 27%, in line with the lower target we previously communicated. We had a net loss for the fourth quarter of $216 million, driven primarily by the one-time impairments previously discussed. Adjusted EBITDA was $79 million, or 35% of revenue. This quarter, Verado filed for a tax rebate known as the Employee Retention Credit, This credit is worth $11 million net, and we qualified given that we met certain criteria for our operations during the COVID cycle. This credit is an offset to payroll tax, which is included in our adjusted EBITDA, so this credit is also included, even though it is one time in nature. Also, if this credit was excluded, our adjusted EBITDA margin would have remained above 30% for the fourth quarter and above 36% for the full year, even with the inventory drag we previously discussed. Turning to the balance sheet and cash flows, we ended the year with $85 million in cash and cash equivalents. Cash flow from operations for the year was $94 million. George will speak to our cash flow expectations in more detail later. CapEx spend for the fourth quarter and full year was $9 million and $119 million, respectively. Net of PP&E disposals, this was $9 million and $113 million, respectively. Spend for the fourth quarter was slightly lower than our guidance of $20 million, as some projects carried over into the first quarter. We still expect $25 to $50 million in CAPEX spending for 2023, spent largely on Florida and Pennsylvania retail expansion, Connecticut JV retail partnerships, and minor cultivation projects. In addition to the deferred tax liability decrease discussed, other significant changes on the balance sheet include the reduction of acquisition consideration payable to $18 million, a decrease of about $35 million. The remaining balance will be materially paid out this year. We continue to approach 2023 with a cost focus and will continue to opportunistically manage our cost of capital as we evaluate uses for excess cash. Overall, I'm very optimistic about 2023 and look forward to the year ahead. And now I'll hand it back to George to wrap up.

Thanks, Brett. As we look ahead to 2023, we are confident that our business will build on the momentum and strength from 2022. We anticipate that our brands will continue to deliver value to patients and consumers across our strategically curated geographic footprint. This includes two states converting to adult use in 2023, Connecticut, which launched in January, and Maryland, which we anticipate to launch in the second half of the year. So far, we have seen a strong start to the adult use program in Connecticut, in line with our expectations. In the first four weeks at our Resembly Meritan location versus the same period in the prior year, sales more than bubbled, while sales of our in-house brands at Zenleaf Meridian nearly quadrupled. This speaks to our leading wholesale position in brand power, resulting from the quality of our CT pharma operations and products in the state. We continue to work with the local municipality for our other medical store to gain formal approval to convert to adult use. Additionally, we are making progress with our six social equity joint ventures, each of which plans to open a hybrid retail location. We are supporting each venture through the entire retail launch process from zoning to opening day and expect our first joint venture to open its doors to adult use and medical consumers as soon as next month. As mentioned, Maryland is another state slotted for a 2023 adult use program launch. We are heartened by the progress the state is making as recently as this week in advancing the adult use initiative, getting us closer to adult use sales. Maryland's medical program has presented challenges to vertical operators, including steep pricing reductions. Despite that, we worked to increase Verano sell-through by 13% to nearly 44% in the fourth quarter sequentially. And on the wholesale side, despite a difficult pricing environment, we increased revenue sequentially by nearly 6%. We have held a legacy presence since the early days of Maryland's medical program, and we are well positioned ahead of the anticipated increased demand. With nearly 40,000 square feet of cultivation and four dispensaries in the state, we look forward to serving adult use consumers soon. The Pennsylvania, Florida, and Ohio markets provide our portfolio with additional adult use upside as we are optimistic these states could legalize adult use sales within the next two years. Taking a look more broadly, the industry continues to face challenges from a tax and banking perspective. While we were encouraged by the momentum surrounding a passable safe banking passage, we were disappointed this did not pass in 2022. However, this has not impacted our business. We have built a business to be self-sustaining and have never run the company relying on contingencies related to federal legalization. However, we will be ready to swiftly capitalize on any federal changes if and when they occur. And the impasse at the federal level has not prevented states from advancing state-level reform. including, for example, New Jersey's recent legislation around 280E and Illinois' progress on the same issue. Overall, we expect 2023 to be an inflection point for the industry and believe that it will be particularly difficult for smaller operators as they struggle to stay afloat in the absence of banking or tax release and continue pricing pressure. However, this is a potential opportunity for Verano to acquire operators in attractive markets at favorable valuations. Since the founding of the company, we have said we would be painstakingly strategic about growing our footprint. That is precisely what we have done and what we will continue to do. And now we believe we are in an even stronger position as we evaluate developing opportunities at attractive prices. Though we anticipate an appetite for M&A in 2023, we will also remain disciplined, patient, and highly selective. Looking ahead, the number one priority in 2023 will be continuing to strengthen the balance sheet, and focus on generating as much cash flow as possible. We understand that preserving cash is more important now than ever before, given the burdensome tax structure our industry faces and the difficult capital markets environment. We have always sought to employ a thoughtful approach in deploying capital with discipline and balance, and we will continue to do so. Regarding CapEx, we have sought to appropriately build out footprint to maintain strong market positions. While we spent $119 million in 2022, we made the decision late last year to significantly decrease our spend for 2023 based on internal assumptions of market growth and of bell use activations. We are reiterating guidance of $25 to $50 million of capital for the year and await further state-level legislative movement that would justify additional spend ahead of growth. I want to clarify that we will not step back CapEx at the expense of growth. So if we see opportunity, we will invest ahead of it appropriately. But in the meantime, we are able to fully supply our markets with our current footprint. Given our significantly lower CapEx expectations and continued focus on efficiencies within the business, we anticipate generating between $50 to $75 million in free cash flow for 2023. In addition, we plan on evaluating the best use of excess cash from an ROI perspective with an eye towards our cost of capital. Regarding our expectations for the first quarter of 2023, we anticipate flat top-line performance versus the fourth quarter. We also expect continued margin unfavorability for inventory rightsizing. However, as mentioned earlier, our focus is on the cash flow production of the company, and we anticipate generating positive free cash flow and increasing our cash balance sequentially. We look forward to sharing our results on our next earnings call, which is scheduled for May 10th, 2023. The official announcement will be distributed subsequent to this call. With decades of experience building businesses for longevity, downturns are not new to me. And even with market conditions deteriorating in certain states, I believe the strength of our strategy is more apparent than ever. We do not need to exit any unattractive, fragmented markets as we have had the wherewithal to avoid them from the start. We have methodically built today's footprint, and we see the opportunity on the horizon to strategically build off this base. I want to thank the incredible Verano team for their efforts last year. We are re-energized, and we are excited. With that, operator, please open up the Q&A.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll go first to Matt McGinley at Needham.

Thank you. My first question is on the gross margin in the step-down. It's about a nine-point quarter-over-quarter drop. Was that mostly the aging inventory reduction that you noted and maybe more of a one-time pressure in the fourth quarter or the first quarter? Or is that 55% now the new run rate given what you noted with the price decline in New Jersey and Illinois? Good morning, Matt. I'll pass off to Brett.

Hey, Matt. Yeah, so that decline is driven almost entirely by the inventory reduction that we had kind of messaged on the call last quarter. In terms of what does that mean for the future, you know, we're going to continue to manage our inventory and kind of dial it in to make sure that, you know, we're supplying the right level of product to the market. You know, over the last years, we've had our new openings and we started to understand the markets better. It was more focused on making sure we had the right so we didn't shorthand anyone, but now it's more dialing in. So you're going to continue to see us manage the inventory level, and there will be some impacts from that. Obviously, we can't talk about what that will be, but you would expect we're going to see some more of that over the course of the year.

Okay. And then the cash flow from ops, how much of the $94 million in operating cash flow that you generated this year was an increase in your income taxes payable balance? And we don't have the full balance sheet yet, but it looks like you did have a step up in inventory in the fourth quarter. Is that the case? And if so, I guess, what drove that if you're reducing that inventory, which is pressure and gross margin?

Yeah, so inventory did step down. You'll see it when the 10K comes out after this call. In terms of the taxes, it's hard to say specifically because obviously we're accruing at different levels this year than we did last year because our profits are different and our revenue is different as well. So there is some benefit of that, but of that operating cash flow, about half.

Thank you. Thanks, Matt.

We'll move next to Aaron Gray at Alliance Global Partners.

Hi, good morning, and thank you for the questions. So I just want to continue on with the gross margin. I certainly understand the inventory step-downs or inventory and how that might have an impact. But just talking about in terms of the brand portfolio, can you just remind us in terms of obviously the increase you've had in terms of the value brands with Savvy having its success outside of this inventory right-sizing? And how do you think the brand portfolio evolves in the near term? It's not like you expect Savvy to continue to increase outperformance and impact on margin outside of the inventory impact that you're having. Thank you.

Good morning, Aaron. Pass it off to Brett to get on the margins.

Yeah, so other than the inventory movement, I don't think our margins are all that different than what we would have expected them to be. We've talked in the past about having an adjusted gross margin in that kind of 59% to 61% range, and that's kind of the same place that we feel that we're at when you don't think about the inventory piece. In terms of the brands and the differentiation there and the fact that we're going to some more value-oriented branding, that allows us to sell more and allows us to sell to reach other customers and to help offset as people get more price conscious. We're still making it ourselves, selling it ourselves, so we're getting good margins from that as well. Even though it is slightly dilutive on the lower side, it's being offset with volume and I think overall We're still pretty happy with where our margins are.

Okay, great. Thank you.

And then you guys did speak to M&A opportunities kind of coming up. Obviously, we talked about in the past a disconnect between the public and private markets. A lot has changed in the last couple of months, particularly with SAFE not passing. So talk about whether or not those opportunities are actively becoming available now or you think they will be in the next couple of months. What type of markets you might want to be going into, new markets, expanding deeper into existing markets, any color in terms of how you're seeing those potential M&A opportunities evolving? Thanks.

A combination of both. I mean, we want to continue to go deeper in some of the markets that we're in, and we're also looking at expanding in other markets. But we're being, like we said on the call, highly selective. There are opportunities currently that we are evaluating, and we believe there will be much more opportunities between now and the next couple of years than it There's no rush for us to do anything. We have a fantastic base. We have good organic growth. We have adult use ahead of us preparing for certain markets. So we'll continue to evaluate and we'll make decisions as we see fit. As far as valuations, when the public valuations come down, so do the private ones. Maybe not as steeply as some of the public valuations have, but in order to make a deal, it still has to be highly creative for Verona in order for us to transact. So we'll be selective and you know, we anticipate some deals in the next 24 months.

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

We'll go next to Kendrick Teague at ATBCM.

Thank you, and good morning. George, you spoke to a strong performance in New Jersey. You also highlighted that, you know, as increased capacity has come online, you've seen some constraints at wholesale. Could you speak to how orderly do you expect the evolution of that market to be just given some of the capital constraints, given some of the real estate availability and the like? How should we think about that, the evolution this year as we get into the first full year of New Jersey?

Good morning, Kendrick. Great question. Obviously, we love New Jersey. Legacy State for us, adult use has been fantastic for the company and for other operators there. What I generally see happening is We think dispensaries will continue to open throughout the year, albeit slowly, because zoning is very difficult in the Northeast, particularly in New Jersey. But I don't see much cultivation capacity coming online. We're not hearing of projects being built out. Obviously, there's not much cash available to the cannabis companies currently, especially new operators. So we see it as a strong opportunity for us for many years to come. So we think, although we might see some decline in some of our retail outlets, if the municipalities will have stores closer to us, I think we'll be in a very strong position to be able to supply the wholesale market. We build a large scale facility there, high quality, one of the best facilities that we have in the company. So we, you know, we really like what we see in the future for New Jersey.

Thanks, Joe. That's great color. And if I could just on the balance sheet, you know, commentary with respect to, you know, preservation of cash and strengthening the balance sheet. Could you sort of speak to that in the context of the, you know, deferred tax liability situation? How are you thinking about your priorities as, you know, uses of cash? And also perhaps, you know, just philosophically how you think about, you know, some of the, let's call them some of the levers in the discussion.

I'll pass off to Brett and I'll add any additional comments. Go ahead, Brett.

Sure. So in terms of the deferred tax liability, I just want to remind the deferred tax liability is an artifact of the M&A transactions that we do from equity, and it's a disconnect between the IRS taxes and the U.S. GAAP tax calculation. So it's just a time delay in terms of how the taxes come through. The income tax payable, I think, is what you're referring to in terms of, you know, similar to the question we were asked a few minutes ago. We think about that the same way we have in the past. We've stuck to that 12 to 18 months past the filing date is when we intend to take care of those taxes. And we are fully on that plan right now. We haven't deviated. In terms of what we plan this year, it's very similar. So the obligations that we incurred in 2021 are going to be paid off here in 2023. And you'll see that tax balance kind of maintained at the level that it's at or maybe slightly below. The deferred taxes are a liability and a liability as part of the balance sheet. You will see that that is reduced. It's reduced by about $50 million. The biggest movement in that is related to the impairment. So when we impair it, we no longer have that gap between the IRS and between U.S. gap taxes, and it's reduced on our balance sheet.

But there's no actual cash tax impact of that. I appreciate that. I'll get back in queue.

We'll take our next question from Scott Fortune at Roth MKM.

Yeah, good morning. Thanks for the questions. Obviously, a challenging environment out there with margins in mind here. You've been able to hold SG&A flat and becoming more efficient from that standpoint, or are There are additional cost savings or opportunities to kind of move levers to drive margins there. Just a little color on, you know, specifics to return kind of to your margin levels that you want. And then follow on to that, you know, are you seeing any pricing stabilization with the tight capital markets and obviously the cutback in CapEx? Are we seeing some pricing stabilization in key states? And maybe call that out with respect to kind of March, end of March, usually picks up in seasonality, kind of your sense there.

Good morning. All good questions.

We have seen some price stabilization. I think Q4 was kind of a dip, and we're starting to see things stabilize here in Q1 and moving forward. We feel pretty comfortable with that. Seasonality is a thing, so we're coming out of that. March usually starts to pick up here, so a lot of the markets in the Northeast, the cold markets, we're starting to see the pickup, and we're excited about it. Overall, I can pass off the bread on anything else, but that's kind of how we see things here. Sure.

On the margin, I'll address in two different aspects, because it's not just the SGA, but the GM as well. And I know that has been a question here so far, and I want to make sure that we drive that point home. But in terms of the SGA on an adjusted basis for about 27% in Q4, but that's actually stepped down. So it's not kind of maintaining. We're actually continuing to step down. Where's that going to look, or how's that going to look next year? I think we have cost control in that space. If you think about what generally drives increased SG&A in our business, it's more stores. We are adding a few more stores, but we're adding revenue at the same time. From a margin perspective, I wouldn't expect significant swings unless we announce some investments or that sort of thing. And then on the gross margin, again, we've communicated in the past between 59 and 61 on an adjusted basis. And other than inventory here in Q4, and then also favorable impact of inventory in Q3, that continues to remain at that level. So if you think about a just natural level of gross margin on a justice basis, it's right around that 59 to 61 sort of percentage.

I appreciate the call. And then real quick, one last one from me. Can you provide a little more overall growth from a transaction volume standpoint versus pricing? And then kind of the opportunity from a wholesale standpoint, obviously, New Jersey went for more stores coming on board in Illinois.

Are there drivers on the wholesale growth side in 2023?

The drivers on the wholesale side will continue in Illinois and New Jersey as stores open. We have the supply. Illinois, unfortunately, we believe there's some oversupply in the state. So to manage that, we're continuing to slowly ramp down the facility and keep enough inventory in place to be able to fully supply what happened because these stores are opening slowly than anticipated. Brett, you can comment on the rest. And that goes the same with New Jersey, as we mentioned earlier.

Yeah. I would just say, you know, we don't give out necessarily our gross margin or, sorry, gross revenue growth quarter over quarter because, you know, we're Discounts are very real in this industry, and the gross pricing isn't necessarily something we talk too much about. But what we can tell you is that, yes, we are transacting higher volumes. We are transacting higher gross revenues. So we are seeing that increase period over period over period.

Appreciate that. I'll jump back to the queue.

We'll go next to Russell Stanley at Beacon Securities.

Good morning, and thank you for taking my question. Just wanted to follow up on, George, on your comments around Illinois and stores opening, I think, a little slower than expected. I guess, what's your latest view on how many new doors you might see in that market? I think in November you were thinking we might see a third of the 192 licenses get open. Just wondering what your latest thinking is, given we're almost a quarter of the way through the year.

Hey, Russ, this is Aaron.

Could you repeat that?

Russ, sorry, my phone cut off. I got you. I was speaking to myself. So still hoping he's in Illinois. I think we see about the 35 to 45 stores this year. It's a pretty slow start. Again, zoning is very difficult in a lot of these municipalities, but we are helping a handful of groups that are opening their stores, and I think there's a couple other groups that are helping as well. So I think that store count is probably pretty right on point for the year. I think 35 to 45 stores, from what we're seeing and who we're talking to, that's kind of what happens for the year in Illinois.

Got it. Thanks for that. And maybe if I could on the on the CapEx guidance. You came in under what you were expecting in Q4, and you've reiterated the range for 23. I guess in real terms, it looks like maybe you're actually reducing CapEx in that sense, given some spillover from Q4 into 23. So just wondering what you may have pushed out or eliminated from your 2023 plan there.

So at the end of 2023, we made our plans. Nothing has changed. You know, we feel very confident with what we're about to open. And we're just looking at optionality in the future. You know, PA, Florida, Ohio, and some of those adult use markets. So we're ready to jump. You know, PA facility, we have a second facility built. It's ready to turn on pretty quickly with some additional construction. Florida, the second facility is built. We'll continue site work and adding spaces we see fit. And in Ohio, we just added the capacity there. So we'll watch the adult use market. So we feel very confident with what we said. As far as You know, your push comment, we didn't really push. We left the range at 25 to 50. Some of it spilled over into Q1, so we still, you know, feel pretty confident in that range, and we'll adjust throughout the year if we see any opportunities that come up.

Great. Thanks for the call. I'll get back in the queue.

We'll move to our next question from Andrew Simple at Echelon Capital Markets.

Hi there. Good morning, and thanks for taking my question. I just want to go back to the comments made earlier about using maybe the real estate that you own to lower your average cost of capital. Just wondering how you would potentially use those proceeds from a possible debt financing. Would you use those to pick away at tuck-in M&A opportunities or would your first priority be to reduce some of the existing debt outstanding, I know you're able to pay back $100 million of that with de minimis penalties. So how are you thinking about potential uses of proceeds if you were to lower your cost of debt capital?

Depending on what M&A opportunities arise, it could be a combination of both. If we don't have any real M&A opportunities, any cash, then most likely we'll be paying down child-related debt. I mean, that was obviously why we structured the deal that way. Our goal is to knock down that debt, and it's something we want to do. That being said, if our capital is better well spent in an M&A deal, then we'll do that. But right now, that opportunity is, you know, continue to build a balance sheet and knock down the debt to put us in a strong position.

And in terms of the M&A opportunities you're seeing across the U.S. landscape, are you focusing more on – potentially markets that are mature with some operators that may be struggling or maybe not be growing as fast as they might otherwise be without stronger balance sheets? Or are you looking to lay groundwork in new and emerging markets as they unfold? It's both.

It's whatever we think is a great opportunity. If it's a state with limited licenses, that's new or we have an opportunity to be first to market, obviously we will definitely look at that. It's something we're good at. If it's a mature operator in a mature market where we feel we can add brands, optimization, automation, et cetera, and make it a better deal for us, we'll also do that as well. We've done both. We'll continue to look at every opportunity that comes across our desk, and we'll transact if and when it makes sense for Verano.

Great. That's helpful, and congrats on Q4 results, and I'll get back into Q. Thank you.

Thank you. Have a great day.

Next we'll move to Matt Bottomley at Canaccord Genuity.

Good morning everyone. I just wanted to go back to some of your commentary around one of the questions in New Jersey. And just if you could provide any more insights on where you currently are in terms of your own internal capacity to service that market. Do you have more M&A dollars or do you have any more CapEx dollars? Allocated there we've had some of your peers kind of mentioned They're kind of capped out right now with respect to their ability to increase overall production So just wondering kind of where you are in that landscape in your own facility Hey, good morning, Matt So our facility is fully built out no real additional cat backs other than some maintenance cat backs and maybe some additional equipment here And there's things change in the automation side.

We do have additional capacity to add to the wholesale market we left, you know, we have some rooms that were available to turn on some different tiers, etc and So as the store count ramps up in the state, we can continue throughout that process. But the store openings are going to be slow. So right now, we're focused on the current wholesale market that we have at hand as well as our stores, and we're in good shape.

Got it. And then just one other for me. This may be a Florida-related question, but you had mentioned in some of the prepared remarks about promotional activities and discounting. Is that more specifically related to what's happening in Florida? I get a lot of inbounds on the dynamic there, given that we're still seeing a pretty wide dispersion between the overall growth in volume versus some of the sample data everyone looks at, whether it's BDSA. So I'm just wondering what your experience is in Florida or if that commentary was more broadly related to markets in general.

It's more broadly related. I mean, a discounting game is something that happens everywhere. As markets mature, different discounts are put in place, etc. So it's something that we evaluate by market. Florida is also one of them. Some pretty heavy promotional activity in Q4 towards the holidays. We've seen that balance out now, but that's an ebb and flow. We watch every single market and we pivot when it makes sense.

And is there anything specific in Florida that's notable with respect to the dynamic, just given that it seems to be over the last two, three quarters, a trend that a lot of MSOs have talked about on these calls with respect to the need to discount in-store?

It just depends what's going on for market. Even within Florida, It's not like the entire state's discounting. It's by region, different stores. You have people that open new stores. They do heavy discounting. They get a new customer. So, again, it's an ebb and flow. Right now, we feel like it's kind of balanced out a little bit. It hasn't been as aggressive as it was in Q4. We'll continue to watch throughout the year what happens. I think the last couple of years, a lot of supply came online in Florida. I think that's going to balance out as well with cash being a priority for people. MSOs and other operators that could need to build in their balance sheet. I'm not sure how much is going to be deployed in Florida in cultivation until this adult use news comes out. So we'll see how it balances out for the year.

Got it. Okay, thanks. Appreciate all that.

And there are no further questions at this time. I would like to turn the call back over to George for closing remarks.

Thank you, everyone, for joining us today. We'll see you in the next call.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.