Green Thumb Industries Inc. (OTCQX:GTBIF) Q1 2022 Earnings Conference Call May 4, 2022 5:00 PM ET

Leah Rosenfeld - Senior Director, External Communications

Ben Kovler – Chief Executive Officer

Anthony Georgiadis - Chief Financial Officer

Lee Cooperman - Omega Family Office

Harrison Vivas - Cowen & Co.

Matthew Baker - Cantor Fitzgerald

Aaron Grey - Alliance Global Partners

Spencer Hanus - Wolfe Research

Eric Des Lauriers - Craig Hallum

Scott Fortune - ROTH Capital Partners

Howard Penny - Hedgeye Risk Management

Matt Bottomley - Canaccord Genuity

Good afternoon, and welcome to Green Thumb's First Quarter 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the conclusion of formal remarks.

During the question-and-answer session we would ask for limit for one question and one follow-up question per person. As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb 's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded.

I will now turn the call over to Leah Rosenfeld, Senior Director External Communications. Please go ahead.

Thanks, Gary. Good morning and welcome to Green Thumb’s first quarter 2022 earnings call. I'm here today with Founder and CEO Ben Kovler, and Chief Financial Officer, Anthony Georgiadis. Today's discussion and responses to questions may include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

These risks and uncertainties are detailed in the earnings press release issued today, along with our reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the 2021 annual report filed on Form 10-K. This report along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligations to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and cedar filing. Please note all financial information is provided in US dollars unless otherwise indicated. Thanks, everyone. And now, here's Ben.

Thank Leah. Good morning everyone, and thank you for joining our call today. We reported another solid quarter for Q1. Revenue increased 25% year over year to $243 million. Our seventh consecutive quarter of positive GAAP net income came in at $29 million or $0.12 per share and we continued to benefit from increased scale and leverage to deliver adjusted operating EBITDA of $67 million and free cash flow from operations of $55 million. This is our ninth consecutive quarter with positive free cash flow from operations.

This quarter, we had a 200 basis point decline in gross margin versus last quarter, but still came in above our stated goal of 50%. That said, and as I've repeated before, we are more focused on cash than margins, which can fluctuate quarter-to-quarter, considering all the moving pieces in our business. Some of these include starting up operations in new markets, possible delays in adult use sales, as well as investments made in any given quarter to better serve our customers.

So while margins are important, we've discussed a 50% gross margin goal, I think the more important factor for us and the industry is cash. Last weekend was the Berkshire Hathaway Annual Shareholders Meeting in Omaha with legends Warren Buffett and Charlie Munger. Several folks from our team were able to listen to Warren, say that cash is quote 'like oxygen'. It is there all the time, but if it disappears for a few minutes, it is all over.

We live on that cash oxygen and plan for that to continue. The focus on cash has been in our DNA since the very beginning. It's a discipline that will never abandon because to us and many of our mentors, the best path to true value creation is building a business that can generate attractive cash flow over the long term and deliver consistent high return on incremental invested capital. So to our way of thinking, follow the cash-ish.

Now for a short update on our most recent acquisitions. In 2021, we entered three states, Virginia. Rhode Island and Minnesota and we like our set in each of them. All three are catalysts for future consumption of our products and we are excited to bring our authentic brands like Rhythm, Dog Walkers and Incredibles to more Americans.

As you know, Virginia has already passed adult use legislation and we've begun scaling our operations by adding two stores this year and expanding cultivation capacity. Adult new sales are coming and we are working hard to be ready. After months of negotiation, both the house and Senate of Rhode Island introduced a bill to legalize adult use cannabis sales in March. Sales could potentially begin as early as October 2020.

In Minnesota, we added our sixth store in Mankato, located in the Southern part of the state. In March, we began selling flour [ph] in Minnesota dispensaries, and we were proud to offer legal high-quality flour to Minnesota patients for the first time. The introduction of edible in Minnesota last year, which will -- the introduction of edibles in Minnesota later this year, which will bring patients another form factor to improve their wellbeing, should prove another catalyst to the market.

All three of these acquisitions were quickly and fully integrated into the Green Thumb family, something we have improved at over the years.

Now for the New Jersey news, on October 11th, New Jersey gave the green light for seven operators, including Green Thumb to begin adult use sales. The long awaited prohibition in the tri-state area has finally ended and as anticipated, we have seen strong demand in our stores, RISE Paterson and rise RISE Bloomfield.

On an industry level, on the first day of adult use sales in New Jersey, approximately 12,000 customers purchased nearly $2 million of recreational cannabis products. While this is certainly a cause for celebration, it is also a good example of positioning and patients by Green Thumb green dump. We first entered New Jersey by winning a vertical license in December, 2018. The license had virtually zero cost to investors.

We decided to plant the Green Thumb flag in Paterson and economically disadvantaged area to build the cultivation and processing facility necessary to create supply for retail sales while bringing important job creation to the community. In 2019 one year after being awarded the license, we opened our first store in Paterson followed by two more stores in two more stores in Paramus and Bloomfield in 2021.

Today we are processing medical patients and adult use customers at RISE Bloomfield and RISE Paterson with RISE Paramus serving medical patients only at the current time.

The goal in New Jersey has always been to expand access to wellbeing through cannabis in a state with over nine million residents. To that end, we remain focused on prioritizing the needs of our New Jersey medical patients while ensuring a great experience for our new adult used customers. This focus positioned us well for the adult use transition in New Jersey, a market that is now estimated to reach $2 billion in sales in the next couple of years. The key takeaway here is that we are playing a long game, one that requires patience and discipline to reap big rewards. Patients and discipline are core skills we work on every day.

The great American growth story continues to be alive and well. Americans are continuing to choose cannabis for wellbeing, and we believe that our brands will be a core part of that lifestyle. We continue to have conviction in our core market thesis, which is proven every day by increasing consumer demand. We believe in the plans, we believe in our products and we are committed to promoting wellbeing to the power of cannabis for the American people.

Now I'll turn the call over to Anthony to cover our financials. Anthony?

Thanks Ben. Good afternoon, everyone. As you just heard, the company posted respectable first quarter, generating $243 million of top line net revenue and $67 million of adjusted operating EBITDA. Total net revenue decreased $1 million over the previous quarter with gross CPG revenue, declining $4 million and gross retail revenue declining $1 million. As I've previously highlighted, the difference between gross revenue and net is inner-company revenue and the company sold 4 million less product to itself in Q1 than it did in Q4.

During the quarter, the company generated gross margins of approximately 51%, 200 basis point decline over Q4. Pricing headwinds in Pennsylvania, Nevada and Massachusetts, along with inflation were the biggest contributing factors. The balance of the decline was attributable to start-up costs associated with New Jersey adult use and recently completed wholesale facility expansions.

On the SG&A side, excluding depreciation and amortization, onetime transaction costs and stock-based comp, normalized operating costs approximated $61 million, a $4 million increased over the $57 million incurred in Q4. The majority of increase was payroll-related primarily across our retail and shared service functions.

We continue to closely monitor our overall SG&A spend relative to our top line growth and margin performance as our intrinsic goal remains to keep gross margins and adjusted operating EBITDA margins at or above 50% and 30% respectably.

Other income for the quarter approximated $6 million, which primarily reflected a non-cash non-operating gains associated with our investment portfolio, as well as the warrant liability associated with our senior debt facility. None of these expenses, the company generated approximately $29 million in net income and $0.12 per share, our seven consecutive quarter of positive earnings per share for the business.

Moving on to our balance sheet, we ended the quarter with approximately $174 million of cash. During Q1, we invested approximately $60 million in gross CapEx when including the spend associated with our sale lease back. On a trailing 12 month basis, the company has invested approximately $240 million in gross CapEx. We remain bullish that our capital allocation decisions of today will pay rewards for our shareholders tomorrow.

On our favourite topic, cash, we generated just over $55 million in operating cash in Q1. We remain vigilant in minimizing our inventory and other working capital accounts to ensure our cash is working for us versus getting trapped on our balance sheet and AR and inventory. In addition with the capital markets essentially close to cannabis businesses, our substantial cash position, along with our positive cash flow from operations translates into better sleep for our stakeholders.

As we look ahead to the balance of the year, you can expect us to continue to do a few simple things. Number one, tune out the noise and control what we can control. Two, be the consumer. Everything we do is through that lens. Three, watch our cash. Four, be ready to be opportunistic when others are fearful. New Jersey adult news kicked off on 4/21 and early results look yearly similar to Illinois circuit, January, 2020. Congrats to our team for all they did to make the launch of success. It truly did take a village.

Next up is some combination of New York, Connecticut, and Rhode Island. Good news is if you are a shareholder in Green Thumb, you have action in all three. Back to your Ben.

Thank you, Anthony. Before we open for questions, I will end on a couple items that I believe to be both important and urgent. The first is creating a diverse and equitable cannabis industry and I'll be honest. This is very hard. For more than three years, we've and struggling to find an equitable solution in our home State of Illinois. We hope other states are able to find.

Green Thumb will continue to be an active voice for change and equity about the program in Illinois and the industry as a whole. I strongly encourage other cannabis operators to join us in this fight. It is far are too quiet. The only way this industry is going to be successful is if others can share in it and it's not solely a group of white men like me. The opportunity is now for our industry, but it will take a village, including industry operators, state regulators and the media to demonstrate the genuine commitment to equality and inclusion.

Helping restore the damage caused by the war on drugs, which delivered a terrible blow to communities of color has been core to Green Thumb's mission from the beginning and while close to 75% of Americans live in state with legal access to Cannabis, it seems beyond outrageous that there are 40,000 Americans incarcerated for illegal use.

Systemic injustice isn't a battle that any single organization can take on alone, but at Great Thumb, we're fully committed to a three-part approach, including more education, non-profit investments and enabling new entrepreneurs. Education is one of the most powerful tools and our leap programs in Illinois and Connecticut are providing social equity applicants with the knowledge and skills on the licensing process and how to operate a successful cannabis business.

Over the last year, we've committed more than $250,000 set of scholarships that will help black and brown students gain access to cannabis education programs at higher Ed institutions like Olive Harvey College in Chicago, Medgar Evers College in New York City and the Cleveland School of Cannabis.

Our Green Thumb brand of flower products was successful -- was specifically created to help fund non-profit organizations who were doing the groundwork in their communities to create real and stained progress against the harms from the war on drugs. And we recently announced our second round of grand recipients last week. We look forward to partnering with five more organizations with missions that are aligned to education, expungement or employment, to help create opportunity and change in impacted communities.

Tackling systemic change is a tall order, and we want to be part of the solution as we believe this industry should create new wealth, particularly in minority communities. At Green Thumb, what keeps us excited and motivated every day is bringing the American people access to wellbeing. We think this is a real American story. America has created the problem.

Remember every year, more than 100,000 Americans die from alcohol-related causes and another 75,000 Americans from opioid overdoses. Cannabis is helping yet it's understudied, stigmatized and illegal. We step back and we think the country is stressed out and under extreme anxiety. Factors like COVID 19, inflation, social inequality, and the war in Ukraine put us on the verge of a virtual panic attack and in these tough unpredictable times, our mission to promote wellbeing through the power of cannabis is more important than ever. So if you haven't tried our product, now might be a good time. Find your rhythm America, enjoy the journey with Dog Walkers.

We'll open it up to questions. Operator?

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Lee Cooperman with Omega Family Office. Please go ahead.

Thank you. I appreciate it. I guess a question I'd ask you is, you said if you were a shareholder in Green Thumb, you gave some, positive things, but you also have 65% decline from the high. We just waiting for legalization as the only lever to pull, to turn around sentiment or basically is there things the company can do in their control?

I assume since you come across as cash is king and given the cost of capital in the industry, the odds are repurchase is not in the picture. I look at Bloomberg and I see two or three pages of inside of selling. I see no inside of buying, if you think this story is so good, why we're not seeing any inside of buying, that's it. Thank you. Good luck.

Great. Thanks Lee. Yeah. It's Ben. As you know, you've been with us a while the story remains intact. I do not think we're just sitting around waiting for federal change for anything to happen. I think the business in the US and the industry has proved, since we started prior to going public, when it was more of an idea to create a billion dollar industry, a 30% -- a billion dollar company at 30% EBITDA margins puts us in a pretty good spot where the industry has 400,000 Americans working in it productively.

So instead of federal change in DC, I think I would turn it back and say, we need financial change in New York. The New York stock exchange and the NASDAQ will not list our company and as you're concerned about stock price, my comment on stock price would be, what you know and what my mentor's mentor has said for a long time, the stock market is short term voting machine, long term weighing machine. And until there's more access to buying the stock at mainstream exchanges from the mainstream exchange to hit the plain, even though long only, or even the retail investors on something like Robinhood or other sorts of exchanges and allow more demand to come in as a supply demand market to market world and so you're right. We listen to above, we think about cash is kind and we're running the business out of ways because we think this is a $75 billion to $100 billion US industry,

You’ve fully invested in the company where, you have all the right buzz words, but I don't see the -- I see inside of selling. I don't see inside of buying. That was my point. And I know the company's not going to buy what's going to make the management buy?

You don't see any real insider selling. We are huge believers in awarding the team with equity as they get equity. Sometimes there's filings because you get equity, there's a tax trigger and things like that for the rules, but you do not see any swap with insider selling. It all work too convicted with the large -- I'm the largest shareholder of the company and we have bullish view. I'm a medium and long-term nature, both of the industry in the US and our business.

Well, my recommendation is go look at Bloomberg and see what you see. And what I see is nothing but inside selling for three pages. I don't see any inside of buying whatsoever. I see options, renders and I'd see outright sales and you know what I'm talking about. I think you got all the buzz words, but…

We can clear that up, but that's fine. I hear you. That's good. I appreciate it. We have conviction. You know what I really think to be really totally candid with you is influencers in New York like yourself who have a voice with the New York stock and the NASDAQ will not let us be listed. This is leading to real damage in the industry. And so I think if we could have a voice with the New York stock exchange or the NASDAQ, the board on TV to talk about it, CNBC, we have trouble with.

If we can't list in the New York stock exchange, Americans can't buy the company, that is selling them product that is enabling wellbeing. I can buy as much stock as you want. If there's not buyers in an institutional basis in New York and you have a voice on CNBC, we're happy to discuss it.

I take my battles with Elizabeth Warren and that's about it. I'm not looking for more battles, but thank you and good luck.

The next question is from Matt McGinley with Needham. Please go ahead.

Yep. Thank you. Can you help better define the drivers of that 215 basis point decline in gross margin that you had in this quarter? I know the price decline was most of that pressure last quarter, but raw material and wage inflation are new factors that you called out, I guess, was that price decline more acute this quarter and how should we think about that impact of raws and labor inflation through the remainder of the year and how that will impact your margin rate?

Thanks, Matt. Yeah, Anthony here. So, what I mentioned in my prepared remarks was the biggest driver of the compression that we saw in the gross margin line was really price, some price activity that we saw in Pennsylvania, in Nevada, in Massachusetts. And the other -- the other factor is obviously inflation, which everyone in the industry is dealing with.

And then in addition, we had some staffing where we staffed up and then they had some New Jersey adult use and then on top of that, we had additional staffing and some of the facilities where we just recently completed some expansionary CapEx. So, look, we're watching these markets closely. There's a lot of things that kind of go into the gross margin line and as when we further unpacked it, the biggest driver was really on the wholesale side of the business where we know we get great leverage when we pop more revenue through that portion of the business. So we're watching it close. That was the biggest driver of the decline and like we said, long-term, we fully believe that we can kind of achieve the 50% kind of gross margin level within the business.

Okay. And in the first quarter, the industry revenue was soft based on a host of factors that you clearly were not immune to, but has the recovery in April and the opening of adult use sales in New Jersey, given you the confidence that you can resume top line growth again in the second quarter, or is that outlook a little bit premature?

Look, I'd say at this point we're one month in. April was stronger than January and February. We're watching it close. I would say right now we're comfortable saying that, we should achieve flat sales. But at this point that's what we're comfortable saying, given we're only calling, a third through the quarter.

The next question is from Vivien Azer with Cowen. Please go ahead.

Hi, thanks so much for taking the question. This is Harrison Vivas on for Vivian. Look on New Jersey, understanding it's still early days, it looks like the product department has been pretty limited. So can you just kind of offer some line of sight on when we expect to see -- when we should expect to see additional form factors like pre-rolls in your stores? Thanks.

Sure. Great question. And look, we obviously think that the more products that hit the market, that's what's really going to drive kind of market expansion. I would say in the early days, we're focused on getting basic flower items on the menu and bit by bit, week by week, you should see an expansion.

Obviously we're incredibly focused on getting our dog walkers and our Incredibles into the market. We think they'll do exceptionally well. As what, including kind of the stew berry that obviously is doing well in a number of markets, we have dog walkers currently on the medical side. So it's only a matter of time before we can introduce those on the adult use side.

Understood. That makes sense. And just as a follow up, Matt kind of talked about the improvement that we've seen into 2Q. Look, we cover the broader CBG space. Also you called out better than expected benefit from federal tax returns. So can you comment on how that's impacted your business?

Yeah, I'm not sure we having quite as big pulse on that. If you look at last year's impact from the federal government with Biden being elected and then the Check distribution was felt more materially, no real comment on this year.

I'll hop back in the queue. Thanks.

The next question is from Camilo Lyon with BTIG. Please go ahead.

Thanks. And good afternoon, everyone. Anthony, I was hoping you could give a little bit more clarity on helping us understand what the run rate is of SG&A? I think there's about a $50 million aback acquisitions and other to get back to adjusted EBITDA, but I'm just curious, what's the right level of expenses that we should be thinking about going forward?

Yeah, so, the SG&A line item on the P&L has a number of things running through it that are non-cash and non-operating. So, internally we focused on a normalized SG&A level. We did see a $4 million increase from Q4 to Q1. We went from $57 million to $61 million.

Roughly speaking the breakout of that was, 50% driven by additional kind of payroll on the retail side of the business, as well as payroll on the shared service function side of the business. Look, I would say that we're going to have to continue to invest in the team, particularly as we kind of look to see expansion coming in the Northeast, the adult use, but obviously it's something we're watching very, very closely to make sure that, we don't get too far ahead of ourselves in terms of our staffing. as we look ahead.

So I think on a run rate basis, real time we're at $61 million. I would anticipate that number growing. Now how fast that grows will really be a big drive -- really be driven by top line growth, as well as kind of what we're seeing on the gross margin line.

Got it. And then, could you parse out what the acquisition component was of that $15 million add back? I'm assuming that was from leaf line mainly, right?

Yes. Well, there's -- what's interesting about at least this quarter is that when we see a change in our contingent liabilities, that actually -- it actually runs to the SG&A line. So in this case the big number that you referenced effectively, we had an earn out. You value that earn out over time and you constantly kind of revalue that earn and based off the performance of the underlying business, we estimate that the liability associated with that earn has declined, and we're forced to take that benefit through the SG&A line, which is why we add it back on adjusted, operating EBITDA.

Perfect. And then you mentioned that you're pretty clear and articulate on the gross margin buckets. But now that New Jersey is on, it would seem that Q1 margins, gross margins would be the deer for the year and that you'd steadily improved going forward all else equal. Is that a fair way to think about the progression through the year?

Yeah. I even given -- we'll see what the eight ball says.

I'm sorry. Say that one more time.

We're not commenting anymore on the future. I know the ask, but I think Anthony's given enough guidance.

The next question is from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.

Hi, this is Matthew Baker on for Pablo. We have two questions today. I know this has touched on a bit, but can you guys explain why there's such a large difference between the number of skews available on the medical menu compared to the rec menu in New Jersey? And I'll ask a follow up afterwards.

Great. yeah, the priority in the New Jersey market is to continue to serve the medical patient. There's very specific regulatory guidance on how much product based on, proving run rates and pull through different products and different skews form factors for the medical patient.

So essentially, as I said, in the prepared remarks, and as we believe, and as we sort of preach -- try to preach along the country is to prioritize the medical patients who are getting more relief for, stated condition. So that menu is deeper. Same thing happened in Illinois, less regulated, but more voluntary, but same exact sort of situation and over time, you'll see more products, more skews, more brands to the adult use side. It was a successful start. You see plenty of upside as those menus, equalize more form factors, more guidance from the state on detailed products.

Okay, got it. And for the follow up question, just regarding the medical markets in Virginia and Minnesota, can you guys give an estimate on what you guys expect like the average patients spend per month and the current count of active patients in each of the states.

Applications, what's the segment. So patient counts are public. You can get that, and we're not going to comment on individual state per capita spend, but it's pretty easy to take the total amount in the state divided by the number of patients in the state. Keep in mind the number of purchasing patients is always different to get the ticket.

But I would not say there's material differences among many states. If the question is what products are available, what's on the, and how big is that patient count? And we remain very bullish on Virginia and Minnesota. I think the two states you asked about.

In terms of zoom out look at the populations in those states and look at where the capital has gone in to build that supply. These states are going to consume a lot of cannabis. Minnesota has the exact same population as Colorado, and Colorado's been around for a long time and run rate $1.5 billion to $2 billion in Minnesota is a fraction of that.

So we don't think the consumers in Colorado, consume differently. It's just been different history, a different setup from a regulatory standpoint. And Virginia sets up with the regulations already, allowing adult use with several operators, hard at work, and we hope more entrance into the industry. The governor is supportive of economic growth, tax revenue and jobs and, I believe up and down, that's what this industry can deliver.

The next question is from Aaron Grey with Alliance Global Partners. Please go ahead.

Hi, good evening and thanks for the questions. So first question for me, I think you mentioned in the prepared remarks that New Jersey was yearly similar to Illinois. So just wondering if you could kind of detail what you meant by that? Was that more store performance, what you saw on the flip in terms of uptick there.

And then secondly, just on New Jersey, any commentary in terms of expectations to maybe, start wholesaling in the market and how you feel on inventory level versus, just supplying your own stores and entering more of the wholesale market on the Adobe side. Thank you.

Sure. Thanks Aaron. So I'll take one by one bonds. Look, demand was big. There were lines out the door and fortunately it was something given the experience we had in Illinois in early 2020, we kind of knew what to expect. The key was having a solid launch, taking care of the team, taking care of the consumer and effectively treating people well.

We feel like we did a nice job with that and each and every we're going to get a little bit better. The flow is going to get better. The amount of products on the menu is going to improve and so, as we look ahead, we're very bullish on the prospects. If you could, do you mind just repeating your second question?

Yeah, just on wholesale for New Jersey versus just having inventory for your own stores and how you're looking at wholesale on the market.

Yeah. Ben alluded to it. But look, the regulars in New Jersey are doing a great job, making sure that the medical program continues to thrive and making sure that every operator in the state really continues their focus on the patients. Now for us, we certainly plan on wholesaling, but what we want to do is build up enough supply so that we can confidently kind of satisfy the medical need that we have within the state and then secondarily, we'll turn to wholesale.

So, look, we take a long-term approach. We're not going to do something shortsighted that's going to put us off size with the regulators or the market, or really the patients, because they're really why we're here and how we got here. And so we'll just take a measured approach. We just completed a wholesale facility expansion in Paterson. We have a new facility that's about to break ground. So, long-term, we're confident in our prospects of being a big player within the wholesale side of the New Jersey market.

All right. Great. Thanks very much. And second question for me inter-open scale, obviously I think you guys have been on for a while and you obviously have a number of markets. We will continue that out, but as we kind of think of the next phase, one state they, I kind of think of as Massachusetts, right? So now you're at the max, six stores there, limited cultivation we have there for a 100,000 square feet. You called out some pricing pressure.

So, as you start to see, you might have scaled out to potentially year maxes for retail and cultivation. How do you think about next steps for state like that? That's limited license starting to get more competitive. And how do you guys look to execute and continue to improve within those types of marketplaces? Thank you.

Yeah, it's a great question. And Massachusetts is a good case. We like our business out there. The key thing to keep in mind, certainly we have room up to more than the, we could go more grow if we want it up to the 100,000. We're not at the cap, but it's a question of allocation to capital and what the business looks like today.

So today, the Massachusetts business looks very good to us in terms of a cash flow and the requirement of incremental invested capital and if we have to put in capital what that turns into from a business. We think of Massachusetts as more, a grounds to build brands with consumers there that are buying a lot of cannabis, loving the product and as the rules evolve, the different kinds of things that can come into play.

You're talking about inputs, form factors, sizes. There's been some unique rules in Massachusetts, but we think the brand build with consumers, there is incredibly important and the business produces, is a profitable business for us. We are not investing into a $50 million grow in Massachusetts. That would not make sense on an incremental invested capital basis.

All right, great. Thank much and I'll jump back into the queue.

The next question is from Spencer Hanus with Wolfe Research. Please go ahead.

Good afternoon. The pace of gross margin compression over the last two quarters, why should 50% gross margins really be the floor for the business? And then related to that, how are you thinking about where we are in the pricing reset that's taking place across most markets in the country?

Pardon me? Everybody's appears the speaker line has dropped from their location. I'm going to -- we'll put you on the, and some music and wait for them to reconnect. One moment, please.

All right. I think we're back live. Ben and Anthony still here. Sorry about that everybody. Hopefully, we didn't lose too many people, but I think we're over to Spencer with Wolfe Research. Hopefully Spencer, your call is live.

Yeah. Hey guys, I hope you can hear me. I am sorry for the mic drop question there. But..

Hopefully it was a good one.

It was, it was but with the pace of gross margin compression over the last couple quarters, maybe just provide a little more context on why 50% should really be the long-term floor for the business. And then I guess, related to that, how are you thinking about where we are in the pricing reset, but just taking across -- that's taking place across a lot of markets in the US.

Yeah, it's good look, it's a great question, Spencer. Look, there's a lot of levers within the gross margin line that we can actually pull. So and I'll just -- I'll call off with you. One, and I really alluded to it a little bit, my prepared remarks, but there's tremendous in the business, which is something, if needed, we certainly can pull to ensure that we kind of keep gross margins where we need them. That effectively means selling more of our own product at our own source.

The other thing is scale that we anticipate to achieve at a lot of our wholesale facilities, which are not even -- not anywhere close to operating at true capacity. We look at kind of just general CPG businesses overall, and we're confident that based off the kind of pre-unit economics that we're seeing, even in the number of the markets kind of out west, we're confident that we can achieve kind of a 50% kind of gross margin line across the business.

There's obviously factors out of our control inflation being, one of them, which has a real impact, particularly on certain portions of the business. But net, net, when we kind of unpack it, it's a number we're comfortable kind of using is our kind of north star, because there's a lot of levers that we can kind of pull and manage to make sure that we achieve it because we just -- it's a number that we just view as critically important with the long-term prospects of the business in achieving margins that that we're looking to target for our shareholders.

Got it. That's helpful. And then I guess just on, in terms of pricing, where do you think we are in the reset that's taking place across the country and then I have a follow up on New Jersey.

Pricing is very fluid. You have to kind of really understand the markets that we operate in to really understand, to really see what's happening, within pricing of those markets. We like about our portfolio is we have a very diversified portfolio of states. So that diversification provide some insulation from some of the near-term and short-term volatility that we're seeing.

And still in the number of these markets on the east coast, I would say what's happening is that the value proposition is being set by the consumer and so, whether or not that's going to continue to evolve, it certainly could. In some cases we're seeing kind of continued move it and others we're seeing stability. So it's a little premature to kind of say, where are we in the cycle? Because to answer that you really have to kind of look at it on a market-to-market basis.

Okay. Fair enough. And then just on New Jersey, 12,000 customers, $2 million of product on the first day. What do you think is the normalized run rate given the 12 stores -- 12 stores that we have open in the state thus far? And then pricing is still elevated obviously given it's a new market, but as we start to see cultivation ramp, when do you think we start to see promotions really start to flow through there. I know it's a crystal ball, but best you can give on that would be helpful.

So your question on run rate, this is Anthony, I think north of that, look, we don't have a crystal ball and we know, one of the biggest limiting factors right now is product on the menu as well as kind of throughput at the store. So we think we should, see kind of growth from here. Your next question -- was related to was related to wholesale expansion within the state, I believe.

Yeah. How do you think about, so yeah. How do you think about pricing going forward as production starts to ramp in that market more?

All right. You mentioned something about promotion a lot. Look, it's very early days, right? So, I'd say that we're going to take this call one week, one month at a time. For us, we're working hard on the wholesale side of the business to get enough product available for both our stores, both in the medical and adult use side, and then others.

Where in the promotional activity unit and what we see within the market, candidly, we'll take it as it comes and just one day at a time. It's hard to really assess it from here, but these markets are fluid and certain things can happen, but at this point, it's super premature for us to kind of to speculate.

The next question is from Eric Des Lauriers with Craig Hallum Capital. Please go ahead.

Okay, great. Thanks taking my questions and congrats on the consistent cash flow here. Can you talk about just the product categories that you're seeing ice pressure in and how that may be influencing your approach to the wholesale business or to your branding approach to the consumer.

Yeah. Thanks Eric. And you know, the business well, it's driving a lot of our decision making. I'm cautious to give a lot of detail on what's going on. I think the proof is in the pudding, which brands we're investing in and which form factors we believe in and what that leaves out for where we think there's less differentiation, less room for the consumer to pay a pricing premium based on that brand.

So the places we like to invest obviously are, or I think I hope we're obvious are indoor high end premium flour, which we believe in the rhythm brand. We believe that the consumer over the long term will continue to like to consume that product. The ready to consume pre-roll dog walkers, the nation's best-selling pre-roll joint, is an obvious win. It's a real resonator with the consumer and we think that category continues to expand. We see category growth there.

Then we look at consumables ready to consume, it's edibles or other forms of form factors, certainly with can and beverage. Those are categories we want to be betting on. And I think you can look at the basket and see which parts are out not necessarily because the consumer won't pay for it, but certainly around scale or where we've chosen to place bets.

We're big fans of other things in the basket, but you can't do everything all the time. And so we really are trying to prioritize around who the consumer is in the future, what that form factor, what that brand that's going to resonate with them in order to lead to pricing, and we look out in the world and we see branded products, driving experience for Americans, and that gives us a lot of conviction in what we're doing.

All right, appreciate that. And then last one for me here. On the trade-off between your CPG sales to third party versus your own retail, can you just remind us of the changes in this quarter and then just kind of more broadly speaking, can you kind of talk about tactical changes to increased margins, here and there versus any strategic changes? Just, I guess just overall comments on that trade-off between CPG sales to third parties versus own retail. Thanks.

Yeah, look, it's a great question. We talk -- it's a topic we talk quite a bit quite a bit about just internally. Look, to really understand it kind of, again, it goes back to the market by market what's happening and in certain cases if we think it makes sense to shift more of our own wholesale goods to our own retail stores, we'll do that.

In this case, we consciously pulled down the amount of wholesale goods that we were using to kind of feed our retail stores. And we shift some of those goods to the outside. Again, it's really is driven by what's happening at the market level. And in Q1, that was a decision that we consciously kind of made within a few markets. How we're going to kind of impact that line, in the second quarter and beyond, it's really just a case of business optimization and what we think makes sense for the business at that moment in time.

All right. Appreciate the color. Thanks guys.

The next question is from Scott Fortune with ROTH Capital. Please go ahead.

Good afternoon and thanks for taking the questions. Just to kind of stick on the retail side that was down sequentially and what are the metrics driving that primarily? Are you seeing recent traffic and turns returning back to a more normalized or the average basket size kind of down from that side? Kind of just looking for normalized traffic levels as you're seeing going forward here in starting within the second quarter, kind of what are you seeing from that standpoint?

Yeah. Thanks Scott. It's Ben. Good question. I think there's a couple ways to look at it. Top down with the first year over year decline, minus three, we look at the bottom up, what's driving that. The market in PA and I think Anthony mentioned it in his opening remarks with PA, Massachusetts and Nevada really driving that to remove that it's up, I think broadly across the world to your question on transactions or tickets, you're seeing tickets marginally down and you're seeing transactions up and it depends which market you look at, but without say the one down market where they go up a lot that's a general gist across the market.

We comply with what we're saying, right? Product pricing under pressure massive transactions of massive new consumers. As we think these markets grow over time, or at least the ones where we're investing real shareholder capital in have massive growth potential ahead. I think the one factor just sort of underlying a lot of these questions is that there's going to continue to be an influx of capital creating new supply into these markets. Remember the state to state market.

So as regulations change and as things happen with the consumer as disconnected is what's happening in the capital markets, we're already seeing operators change their positions. We love it. With where we're sitting, we've been investing this CapEx and coming soon on these states that we've been talking about New Jersey, which we've been talking about on this call for eight quarters in a row since this thing pass was about to pass, just turns on. So I think that's important to see out as we go.

Take for just to go a little bit more detail on the PA market zoom out a little bit PA is a market, without pre-rolls without edibles and a medical market and a medical market that ripped and surge for four years out of the gate, the fastest of any medical of market we've seen at $12 million plus or minus people in the state. So I think it's important to keep that context or how big we see that market with our 16 stores and our careful allocation of capital for supply into that market for what's coming.

Got it, appreciate the detail. And then real quick follow up on that, with price deflation compressed an environment overall command board. Can you provide more of the initiatives on and opportunities on looking at the operation side to increase yield production efficiencies, operating lean from that side to drive the cost downs where you looking at from the production operations side to continue to drive cost downs with this pricing deflation environment currently.

Yeah, it look Scott, you hit on money. The two biggest drivers, but when you unpack it again, it's largely cool sale driven. So when you look at the wholesale side of the business, it's like, okay, how do you drive gross margin there? There's really two big drivers.

Number one, it's higher yields. Number two, it's greater throughput here for labor hour. Very focused on both. I would say that, as we look across the portfolio, more encouraged by the opportunity that we think we see within our own business, and it's something that, between now and the rest of the year, the team is very, very focused on it. We think there's potential unlock there, which can be very beneficial for the shareholders, and we see opportunity.

Got it. And one last quick one. You mention New Jersey being like Illinois. When did Illinois become full production for you kind of having enough production to meet wholesale adult youth demand and you kind of see that from a timing standpoint for New Jersey occurring that way?

No, I think it's important Scott, to understand the set up in Illinois and New Jersey, while yearly similar from the consumer at the store. It's not the same for Green Thumb from a setup standpoint. We have Greenfield sites in Illinois that are robust with 200 plus employees at each site that we've been able to scale since 2015 and in New Jersey, when I went through on the timeline, located in Paterson with density and in Northern New Jersey, we certainly don't have the $100 million capital investment in New Jersey that we had in Illinois since 2015.

So from our standpoint, that's a little bit different. Keep in mind we have three stores, two adult use market is what it is. We have 10 stores here in Illinois very different setup. We, again, look at cash flow generation return on incremental invested capital. We certainly look forward to more products, more diversification there. But from a P&L standpoint for Green Thumb, it's not exactly, it's not nearly similar.

Got it. No, I appreciate the color. Thanks

From a magnitude. I would say from a business characteristics, it is from a consumer standpoint, it very much is. So we feel like we know the quite well and that excites us.

The next question is from Ty Collins with Eight Capital [ph]. Please go ahead.

Hey, thanks for taking my question. I wanted to touch on the labor cost inflation piece. Do you feel that there's more of that to work through in the coming quarters to keep pace with the market? And do you see that higher labor cost baseline is a potential risk to the longer term 30% margin target given the stickiness of those cost.

Look, I'll say that, we're dealing with the same thing that everyone else is dealing with. So, where it goes from here, really difficult to say and obviously we're focused on building just an incredible high performing team, but look, we've seen -- we've seen and pressure on that line item as of late. How that's going to kind of unfold over the next coming call it quarters and in the long term, difficult to say.

We're going to focus on what we can control. Not prepared to sit here and say that it's definitely going to put that 30% at risk on the long term, but I would say check back in couple quarters and we may have a different opinion on that, either positive or negative.

Got it. Okay. Thanks for that color. And then then Ben, with the backdrop of another rate hike today and continued high inflation, I guess I'm curious whether you're viewing cannabis as more of a staple or a discretionary product on balance and how you think about the durability of cannabis demand in the context of the pressures we're seeing on consumer wealth today.

We strongly believe in the durability of this product as a place in the American consumer lifestyle. We see a 99 plus percent industry. That's all, off-prem mostly sold in a, sealed childproof bag, not a lot out and be open. We think it's in a primitive nature for where this is for what the consumer experience can be.

There's a lot of talk of price. I think, deflation of things like there's pricing pressure on products from operators who have issues, but over time we think about the experience tradeoff. And you think about the price of an alcohol consumption versus the price of a joint. And it's sort of mind, I mean, we talk about the metric of price per buzz and there's reasons that other executives take an interest in cannabis and why the consumer is moving over here. So, so that gives us a lot of confidence.

The next question is from Howard Penny with Hedgeye. Please go ahead.

Hey, thanks very much for the question. I actually had a question on the pricing then, and I think you actually may have alluded to the answer to this question. The pricing that you called out in the two or three markets, I assume is something you work with day-to-day, knowing that there's a normalization, some of the than pricing and pricing's coming down. So it's a day to day part of the business.

Is there any, or was there any behavior by any, companies in those markets that may have been one off in nature or, sign of desperation or, any, excessive discounting or promotional of any, any run of the markets that would say that, pricing pressure, this past quarter was more you would've seen normally, I don’t know if I answered that question probably, but?

Yeah. Thanks Howard, this is Ben. Yeah, I think the answer is Yes. Some operators have done some irrational things on pricing. It's not private information to go out and see what's going on. As people figure out their margins or even their viability, I've been thinking on the verge of just people eat their friends. It's not a pleasant thought of how to operate in a capitalist environment, but we're out there watching what's happening.

We love our position. The boat feels very secure. If you take a market like Massachusetts with our verticality, with the size of that business, with what's going on and then again, the power of our branded product, whether it's indoor premium and Rhythm flour or Incredibles. And as we can bring snooze buried to every single store in the state, et cetera, we are bullish on those markets.

And then just lastly for me, the incremental capital spend for the balance of this year is going into what markets?

The continued CapEx that we continue to do is a lot of the finish of the same markets we've been talking about. But Virginia, New York, now, Minnesota, Jersey, as well as New Jersey, it continues to be in the market, Connecticut with adult use. It's not some of the markets where you're seeing more maturity, where we have a nice cash flow business and established brands. It's not as expensive to invest in those as it is to build, like I said, a $50 million cultivation facility that over the T-plus 1, 2, 3 generates attractive returns for us.

I think what you're seeing are other folks put a lot of capital in and it's hard to make money in cannabis. There are not a lot of people that have done that. I think capitalism is pretty efficient. I think when stocks are down as big as they are, there's not as much money slashing to these opportunities, which is why we have a lot of conviction of where our investment based on the consumer, not the noise outside. It only makes us a little bit more optimistic at some of the spend that continues this year to be candid.

Excuse me. The next question is from Matt Bottomley with Canaccord Genuity. Please go ahead.

Hey guys, thanks for all the color this evening. Just wanted to go back to you had chatted a little bit about the, the sort of normalized run rate SG&A maybe just at a higher level. Is there, is there an easy way to sort of describe or outline the difference between the reductions in adjusted EBITDA versus the increase in cash flow from operations? I know there was some transaction costs and other non-cash things within the SG&A so is there an easy way to kind of reconcile that?

There's really not Matt? I think, the statement of cash flow is when it's published will give you kind of better color there, but yeah, there's, there's a number of things that kind of obviously, run through that, that operating cash-flow number. So it all starts with adjusted operating EBITDA and kind of goes from there. We feel good about it.

And again, like, like I kind of mentioned in my prepared remarks, we're, we're constantly looking at places where we feel like cash can get parked unnecessarily, particularly on the balance sheet. So, as we look ahead, one of the things we're manically focused on is just making sure that we manage our working capital levels and that they're right size for the revenue that we're, that we're effectively using them to generate.

Okay, great. I'll go through the rec more, more carefully. And then also just in terms of, know, not looking for, for anything specific that's forward looking but maybe just sort of some bullets on, on what the growth catalysts are just given that the environment isn't impacted pretty negatively with inflationary pressures and some of the other things that were mentioned on this call.

So I know you -- you're calling for maybe a, a flat Q2 print potentially, but the second half of Q2 is typically where, where we get to this, some of the more seasonal highs of it. you mentioned flour in Minnesota, Rhode Island, potentially as a rec market, clearly New Jersey turning online. So are there other things that you can just point to that you think will promote growth specifically for GPI in your portfolio in sort of the next couple of quarters without sort of commenting, if you think that they will or won't happen?

I, I mean, I think you said it in, in your question, Matt, you understand the industry quite well and the seasonality of what's going on and why the second quarter sets up pretty well in the third quarter, et cetera. We said the same thing heading into the fourth quarter with where the seasonality is, but I think we've talked about the catalyst, but it's adult use depends, which quarter, which year, but we think the 40 plus million Americans don't quite have adult use product is a major catalyst.

I can't tell you which quarter Connecticut, New York or Virginia turns on, you mentioned Minnesota as we continue that investment. It really just started. We disclosed it this year. So as you look out for a major catalyst, you have a 6 million or about 6 million person states. It really is not consuming that much cannabis. I mean, the, the number on Minnesota is pretty small on an annual basis under a hundred versus Colorado, that's a 10 or 15X that market with two operators.

And you go through the math with each state for things like that. We have product introductions, we have brand introductions and we're at a place with the scale of the business to invest in those brands. That again, we think are impacting the American experience through cannabis. There's a lot of demand for this product. If there wasn't, there would not be people lined up around the corner at these stores in New Jersey. So that's what gives us a lot of conviction. There ends up being a lot of upside.

We think the 25 plus or minus billion of the us market zooming out triples and over time will grow. There'll be billions of dollars of added to the markets that green thumb has been investing tens of millions of dollars in for the last several quarters. That's what gives me a lot of comfort, gives the team a lot of comfort. That's what we're working very hard on. And we feel good about where our boat is at that wave.

As it's pushing us out, behind the wave is some jump and it's tough to be there. But we are excited about the future for the American cannabis consumer with all those catalysts that we've mentioned, including new product drops, new strains and various other things.

The next question is from Sean Chle with a private investor, please go ahead.

Yeah. Hi. I had some concerns too, about how much stocks you guys are selling. You guys are down like 30% in the past 30 days. And like almost 70% in last year, every, every quarter you guys are making profits. And it seems like every single quarter of that stock's going down and like; could you come up with some creative ways to like, keep it at a standard? I mean, you guys are making profits. I appreciate the question losing the same amount of money and like, it's your peaks that are doing it?

Appreciate the question. Our focus continues to be on building the most business. I would say the,…

Yeah, no. I mean, you give away money and cash to like different communities. How about give away some of those stocks, like buy some back some stocks and give those away, give some stocks to your employees. Like somehow keep that, like I know it's OTC stock and it's, it's just a joke right now. And it's like up to you basically to talk to your peers and your colleagues. Just tell them to stop selling, buy some of that back, create a floor and build on it.

Yeah. And appreciate the question. There's an open market every day and you you're welcome to do is you choose. We think we're building a business, that'll be have the largest weight over the medium and long term. And then is currently being voted off the island and our capital markets. That's very clear. That's why we put enough cash on the balance sheet.

In order to withstand this kind of capital storm I've said on this call, many times we grabbed an umbrella when it was sunny. It is not sunny today. I think the nature, and you can hear it in the questions and some of the edge. That's fine. But over here in the business, we continue to run the business for the medium and long term, not for the trading of the stock. That's not our business. We looked at council from Munger and buffet over the weekend, and how to do this, thinking about the cash, thinking about the farm. But I appreciate the question.

This concludes our question and answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.

Thanks for all the questions. Interesting call look forward to giving you guys the next update. After the second quarter, I encourage you guys to get outside this spring and enjoy it. Thank you all

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.