Green Thumb Industries Inc. (GTII) Earnings Call Transcript & Summary

Good afternoon, and welcome to Green Thumb's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] 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'll now turn the call over to Grace Bondy, Corporate Communications. Please go ahead.

Thanks, Anthony. Good morning, and welcome to Green Thumb's Fourth Quarter 2021 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 the reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the annual report filed on Form 10-K, which we expect to file later today. This report, along with today's earnings release can be found under the Investors section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Throughout the discussion, 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 Sedar filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now here's Ben.

Thank you, Grace. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2021 earnings call. 2021 was a great year for Green Thumb. Our team's strong execution delivered results we are proud of. For the full year, revenue grew 61% to $894 million, and GAAP net income more than quadrupled to $75 million. Increased scale and operating leverage drove adjusted EBITDA growth of 71% to $308 million. Interestingly, we committed over $200 million in CapEx to invest ahead of the demand curve in the U.S. in 5 states that we can underwrite. We delivered our sixth consecutive quarter of positive GAAP net income and eighth consecutive quarter of positive cash flow from operations. But beyond the numbers, we're grateful to our team, our customers and our communities who supported us along the way, and we are all even more excited about the future. It can be difficult to avoid the noise in cannabis, plenty of wormholes and dead ends of noisy chatter. I believe we have done an okay job filtering out of that noise, focusing on where the puck is going and studying the tremendous potential of the great American growth story. The growth trajectory may not be linear, but over the long term, we are quite confident it will be up and to the right. The timing of the rollout of adult-use in various states is quite difficult to predict. But when it happens, we are confident that the demand is real. Although companies reviewed the competitive pricing, we, at Green Thumb, have focused on premium cannabis and developing brands that are in high demand and less prone to pricing pressure, while at the same time, investing in skilled production of certain items that will drive down the marginal cost per unit. As we've been saying for quite a while, our long-term adjusted EBITDA margin goal of more than 30% remains intact. It is worth noting that some sales trends vary quite a bit month-to-month and that is not surprising this emerging industry given what's going on. So while Illinois saw sales volumes decrease in January, December was a record month. And for the full year 2021, total sales grew 67% to $1.8 billion year-over-year of Illinois alone. Overall demand remains healthy but the Illinois market is being artificially capped by the lack of progress in Springfield issue social equity licenses and diversify the ownership base in a space away from what is really a white-dominated group of men. All of our laws for Illinois and social equity; one, we think the constructive conversations with the folks in power to resolve the issue would help; two, Illinois will be a blueprint for how not to achieve any equity or to how not to let anybody black or brown into the industry. It's actually quite a good thing in our opinion, because we believe we need to create a culture where it's okay to make the states, but it's not okay to learn from them. And so we are seeing other states of equity provisions and their cannabis laws study Illinois as a cautionary tale. So we can all learn and we can all get better together. There's a lot of discussion about cannabis reforms and new laws at the federal level. While the market may not be waiting -- while the market may be waiting with [indiscernible], we agree that we're not. We think we are in an optimal position to take advantage of the changes that seem inevitable. But I would repeat what I've said before, we operate our business without the need for federal change. As you can see, despite a wonky to at-ease structure, the business was able to generate over $132 million of cash flow from operations and over $75 million of GAAP net income. That's about $0.33 a share. Until then, we did the executing a plan that puts Green Thumb in a position to win based on what we know now, not what may or may not happen sometime in the future. And the core thing we know now is the American consumer is choosing cannabis for well-being. So there are many hurdles in these emerging industries, especially those with decentralized regulatory structures. So our plan remains very simple, not easy. We want to execute the business plan to focus on the consumer and the product. Everything we've accomplished in 2021 was specifically designed to build long-term value for all of our stakeholders. And so now, I'll point out some of the major achievements in 2021 that reflect our Enter, Open, Scale strategy as it's really been our North Star since inception. So starting with Enter. We entered 3 new states in 2021, Virginia, Rhode Island and Minnesota. We entered Virginia through our acquisition of Dharma in July when we acquired a production facility and 1 retail store. Since then, we opened 3 additional retail locations, and we continue to bolster our position both on retail and production ahead of adult-use sales in 2024 and maybe sooner. Rhode Island, while it's the smallest state by area, it is actually the second-most densely populated after New Jersey. We acquired 1 of the 3 available state licenses in August, which gave us a medical dispensary and cultivation facility. And most recently, in December, we're super excited as we entered Minnesota through our acquisition of LeafLine Industries, which is one of only 2 licensed cultivators in the Minnesota cannabis market. And as you know, Minnesota and Colorado have approximately the same population of 5.7 million people. With this transaction, we added 5 open medical dispensaries and a large cultivation production facility. Due to some of the details on the licensing and the medical program, Minnesota is really an underserved state, and we believe we can expand our capabilities to provide patients with greater access to well-being through cannabis. In fact, this week, maybe today, the first legal sales of flower are beginning, and our Minnesota stores are proud to offer several strains and flowers to patients for the first time ever. Having done this a few times, I would encourage patients -- for the patients as the market begins to accelerate, we believe tomorrow it will only get better. With Minnesota, we extended our footprint to 15 states, and we love our 15-state market, especially considering that our cannabis operations now serve over 50% of the U.S. adult population. Furthermore, several of our states, is really important to note, Virginia, New York, New Jersey and Connecticut have all passed adult-use as on the near-term, medium-term horizon. Here, at Green Thumb, we really like where our chips are on the board. The Open part of our strategy. In 2021, we made a lot of progress opening new stores. We added 22 stores to the family. We opened 10 and fired 12 in various deals, I'll walk through a few. We ended the year with a store count of 73 and as of today, sit at 76. As always, when it comes to new store rollouts, we undergo a rigorous due diligence process, which includes determining the best use of capital to achieve the highest returns. We opened new stores in Nevada, with Rise Reno, a third store in New Jersey in Bloomfield we encourage you all to come to soon, and an additional store in Pennsylvania with Rise Warminster. In Massachusetts, a combination of acquisition and new store openings, we opened 5 new stores for a total of 6, 3 adult-use and 3 medical. And we're excited about the most recent store Rise Chelsea just outside of Boston, which gives us a unique 6-store footprint in the common well. We have 4 locations in Virginia, 2 Rise stores in Salem and Abingdon and in February, we opened 2 more, Rise Christiansburg and Rise Lynchburg. In Illinois, we expanded our Rise Mundelein store to enhance our guest experience with an on-site consumption lounge and private smokeasy. We also encourage all of you, you're in Chicago, it's close to O'Hare, be in touch, make a reservation, we love to welcome you out there. Major hats off to our retail team for an extraordinarily productive year. And if we look at the third part of the business plan, Scale. To position our company for sustainable, profitable growth, we must understand and operate with scale. Beyond scale and retail locations, it also requires investments in building the infrastructure to support growth. We have been building, expanding and improving several production cultivation facilities in places like Illinois, Ohio, Massachusetts, New York, New Jersey, Minnesota, Rhode Island and Virginia. That's where the CapEx is going that you see that we've spent. Our end game is to not only to stay ahead of the demand curve, especially in those states that has passed adult-use legislation, but it is also to produce the highest quality and safest cannabis experiences for our consumers. And all of these dots must be connected to achieve our ultimate goal, building brands at scale to satisfy the American consumers' growing demand for well-being through high-quality, safe and reliable cannabis products. We're very proud of our family of products and the early consumer relationships being formed with those brands. RYTHM, incredibles, Dogwalkers, Beboe, Dr. Solomon's and now Good Green have the brands that shaped need to build what we would like to see. The scale we have built, combined with the information that we have developed has set us up to make high probability well-informed decisions. And while this may sound ambitious, it is not. Each day, I remind us of the power of that special consumer connection with the brand that truly makes all of this possible. And as you all know, the sooner this goes on in this space, cannabis is a complex business, but rest assured you can count on us to thoughtfully execute our strategy that has been working since we started this incredible journey. We have accomplished a lot in a short period of time, but I truly believe this is just the beginning. There's a lot of opportunity ahead, but we will take it in chunkable bites that we can digest and we can execute against. We like having the optionality that comes with positive free cash flow, after-tax and a strong balance sheet. We like growth, but not for growth sake. We're building Green Thumb to prosper over the long term so that all of our many stakeholders may also prosper. With that, I'll turn the call over to Anthony for his financial review.

Thanks, Ben, and good morning, everyone. Thank you for listening. As you've just heard, the economy closed out a strong 2021, generating $894 million of top line net revenue and $308 million of adjusted operating EBITDA. It's humbling to think how far we've come since going public in 2018, a year in which we generated $62 million of net revenue and $22 million of adjusted operating EBITDA. In just 3 years, our team has been able to drive current monthly financial performance that now sees the results for all 2018. Other highlights for 2021 are the following: Year-over-year revenue growth is over 60%; gross margins were approximately 55%; adjusted EBITDA margins in excess of 34%; 6 closed M&A transactions and entry into the Virginia or Minnesota markets. Net team growth of approximately 1,500 team members and $128 million in cash taxes paid to our largest financial partner, the U.S. government. For those of you who read [indiscernible] letter this weekend, this comes out to approximately $350,000 cash taxes per day. Said differently, the team had hell of a year and our 2021 gross CapEx spend of $229 million sets us up for 2022 and beyond. Turning to the fourth quarter. The company posted $244 million of top line net revenue and $76 million of adjusted operating EBITDA. Total net revenue increased 4% over Q3 with gross CPG revenue growing 3% and gross retail revenue growing 8%. Prior to accounting greater company revenue, this led our gross CPG to retail revenue breakdown at 42% and 58%, respectively, about flat with last quarter. Consistent with previous periods and despite some headwinds experienced during the quarter, we attribute our top line growth with solid execution, high-quality differentiated products and continued strong demand within our respective markets. On the profitability front, the company generated gross margins of approximately 53%, a 260 basis point decline over Q3. The distant gross margins was primarily attributable to moderate pricing pressure experienced on both the CPG and retail side of our business. At no point, we, at the management team, assumed that our historical gross margin performance was repeatable into perpetuity. However, we remain confident that our scale, diversified market base and focus on premium products will help support our efforts in keeping this critical metric at or above 50%. On the SG&A side, excluding depreciation, amortization, onetime transaction costs and stock-based comp, normalized operating costs approximately $57 million, a $5 million increase over $52 million incurred in Q3. The lion's share of this quarter-over-quarter revenue -- quarter-over-quarter increase was both payroll and marketing related, principally reflecting our team expansion to close to 4,000 members. In 2022, we will continue to closely monitor our overall SG&A spend growing to our top line growth and margin performance with the goal of maintaining gross margins, adjusted operating EBITDA margins at or above 50% and 30%, respectively. Other expenses in the quarter approximated $4 million, which primarily reflects noncash gains associated with our investment portfolio as well as interest expense from our senior debt facility. Net of these expenses, the company generated $22.8 million in net income or $0.10 per share, our sixth consecutive quarter of positive earnings per share of the business. In addition, we generated an adjusted operating EBITDA of $76 million or 31% of revenue. Moving on to our balance sheet and cash flows. We ended the year with approximately $230 million of cash. During the quarter, Green Thumb made healthy tax payments to Uncle Sam and reinvested over $75 million in gross CapEx when including the spend associated with our sale/leasebacks. On our last call, I communicated our plan to increase far best in a number of key markets that we believe will help drive the next phase of growth for Green Thumb. Our balance sheet and positive cash flow from operations provides us substantial financial flexibility and we remain bullish on our usage of capital and the cash on cash returns we can generate in this next phase of Prohibition 2.0. As we look ahead to 2022, I anticipate repeating the following same themes that you've heard previously. The star of the team is the team. Taste the soup by Ray Dalio, lead with the consumer in mind every step of the way and embrace our role in responsibility within the industry to continue to chip away at the wall of prohibition that has caused our country and its constituents, countless lives, dollars and opportunity. We hope that you and your family stay safe during these uncertain times, and hope you all are as excited as we are for what's to come. Back to you, Ben.

Thanks, Anthony. Taste the soup? I like that. Yes, 2021 was indeed a productive and busy year. We accomplished a lot delivering strong results and set ourselves up well for the future. Financially, we're in comfortable shape with positive cash flow and over $200 million in cash on the balance sheet. I'm proud that we earned the reputation for thoughtfully allocating capital for focusing on strong execution and most importantly, for doing what we say we are going to do. I'm also proud of our team's commitment to our core principles. They adhere to a standard of excellence that elevates a company's leadership position in an emerging industry. In a brand new frontier, it is very important for us to stay grounded and to stay humble. Giving back has been an important part of our mission since the beginning. And with every new store opening, we donate first-day profits to local organizations for making a positive impact on their communities. We also believe it is our responsibility to help fix some of the problems created by the war on drugs. Today, there are approximately 40,000 Americans still incarcerated for marijuana offenses; 40,000. Given the wide utilization of cannabis, the irony is beyond cruel. We strongly believe in the plans potential to improve well-being, which is important work when considering that every year, more than 95,000 Americans die from alcohol abuse and another 100,000 Americans die from opioid overdose. Those numbers are staggering to us. Social equity is also a very important concept for us, especially in the cannabis business. Our LEAP program in Illinois was very successful in helping individuals apply for social equity licenses. We recently launched a sister program with Leap Connecticut in partnership with the NAACP Greater Newhaven and Vicente Sederberg to promote social equity applicants with essential knowledge about how to apply for a cannabis license in Connecticut and tips for operating a successful cannabis business. I think this is incredibly value-add as we think the next chapter for cannabis in the U.S. could be about new wealth creation. Good Green, our line of cannabis products dedicated to creating opportunities for marginalized communities impacted by the war arm drugs continues to support nonprofit organizations. In 2021, Green Thumb provided grants to 3 nonprofit organizations through Good Green brand program. Each organization fit one of Good Green's core principles, which are education, employment and expungement and have done amazing work to create opportunity and change in black and brown communities. We encourage you to check them out on the website and get involved. We are currently in our second round of grant-making to qualified applicants. This work we do with our communities is part of our DNA and really inspires passion throughout our organization. I believe our commitment to the communities we serve positions us to attract top talent aligned with our core principles. With that in mind, we're very pleased to welcome Dorri McWhorter as a -- to welcome Dorri as she recently joined the Board of Directors. Dorri is currently the President and CEO of YMCA of Metropolitan Chicago and a lifelong advocate of bringing community leaders together to promote social equity and lasting change. Welcome, Dorri. I'm excited you're here, and I'm truly excited around the board. Stepping a little bit back, I would be remiss not to mention that our hearts and hopes to go out to the brave people in Ukraine. Eradicating injustice has always been core to our mission and our values as both painful alarming to witness Russia's aggression -- aggression towards its neighbor, a sovereign state, nothing could be more unjust when we're watching happen along with the whole world, we're watching and praying for a peaceful resolution. Finally, back to the U.S. and cannabis. As I said many times before, we are still in the early innings of this great American cannabis growth story. The U.S. legal cannabis market is already a $24 billion industry, and we actually believe the market can more than triple over the next decade. We think it's still day 1 for cannabis, it's definitely day 1 for Green Thumb and the best is yet to come. So stay tuned. With that, Anthony and I will welcome any and all of your questions.

[Operator Instructions] Our first question comes from Vivien Azer with Cowen and Co.

So my question is for Anthony. Thank you very much for the context around your aspirations to hold gross margins at or above 50% as well as the adjusted EBITDA margin at or above 30%. But just looking back to the sequential degradation that you saw in gross margin, in particular, in the fourth quarter, I was wondering if you could just unpack that a little bit. Is it product mix, geographic mix, a combination, if you could just maybe offer a gross margin bridge of some kind that would be really helpful?

Sure, Vivien, and excellent question. So let's zoom out a little bit. Obviously throughout kind of -- throughout the year from each quarter, we saw a little bit of kind of growth within the gross margin line. And in the fourth quarter, when I explained in my prepared remarks, that we started to see some price settling that really roll through both the retail and the CPG reporting to the business. And that -- really the pricing was probably the biggest driver in terms of the quarter-over-quarter decline that we saw. Historically, gross margins on the retail side of the business remain relatively consistent. We did see some market kind of aberration in the fourth quarter. And then obviously, on the wholesale side of the business, given the verticality that we have within most of the markets that we operate in, we saw a similar kind of impact there. So there were some other things that kind of roll through that line. But that's typical on a quarterly basis, there's going to be a little bit of noise. But just zooming out, really the biggest driver was just some of the price settling that we saw in a few of the markets.

Our next question is from Camilo Lyon with BTIG.

Congrats on just a remarkable amount of consistency that you're putting out quarter-to-quarter. Following up on the last question on gross margin, Anthony, you talked about some states showing that price compression. Can you tell us what state that is most impactful on the gross margin? And how do you think about the levers that you have at your disposal to kind of alleviate those pricing pressures? Is it from a greater focus on some of your other key products and more of your premium end flower getting into the market? Is it some other mechanisms around marketing and positioning relative to the other brands? How do you view your optionality around kind of recapturing some of that pricing pressure that you felt in Q4?

Yes. Sure Camilo, so let me just -- let me unpack that quickly. So 2 questions there. First one is, okay, which markets did you really experience kind of the price settling that rolled in the gross margin line? And second, what kind of tools does the business have a disposal to effectively counteract us? So relative to the first question, look, there's constant kind of price movement within all of the markets that we operate in. These are nascent markets you've got -- given the different kind of regulatory structures and the supply-demand kind of economics that are at play within each of these markets, we do see kind of month-to-month and quarter-over-quarter swings. In the fourth quarter and the state data really shows that Pennsylvania and Nevada overall were 2 of the markets where you saw some flattening on the total size of the market and that effectively -- that lack of growth kind of resulted in some price compression that took place at a competitive level. And then in terms of what we're doing within the business to counteract those, I mean, look, when we've talked about this a few times one, obviously, at scale within the business. We're leaning in there. We have a diversified kind of market base. It's one of the things we love about our businesses is that we're not beholding on 1 or 2 markets. At this point, we're operational in 15 markets. They are in different kind of stages within their kind of growth cycle. And then last, we said before, but it's brands. It's building effectively some pricing, the ability to kind of price our products given kind of the premium kind of focus that we have and having some real price control instead of effectively letting the market dictate price 100% of the time. So look, again, these markets are nascent. We're watching this closely. We live this day to day, and it's something that we're going to be navigating over the next few quarters.

That's great. And if I could ask just a follow-up on the brand topic. Now that you've had the brand portfolio really start to gain prominence in all of your states to varying degrees. How do you view the buy-versus-build decision going forward, with respect to your brand portfolio?

Yes. It's Ben. We're trying to study and learn as much as we can all the time, being close to the product and the consumer is helpful for us. The hurdle is pretty high to buy, but if things make sense, we're willing to do it. It's is about looking at the portfolio composition broadly, it's about the pricing and then it's really about capabilities. One of the things is we're not going to do everything forever. The business does a lot of different things. And I think specialization, focus is okay for us. So we're constantly examining it. The best place for us to be in the acquisition space in brands just speaking candidly, it's something that we don't do ourselves, inventing and creating is hard. So -- and that's where it is. But we love the brand. We love the consumers' relationship with the product around the country, and we think there are some special things going on out there in our house of brands, and family of products and others, but we know the consumer is developing a relationship with this product in a long last and sticky way.

Our next question comes from Matt McGinley with Needham.

The industry data would suggest that you did better than most in the fourth quarter with your wholesale revenue, but it looks like the net revenue is actually still down $3 million, sequentially. I guess, can you -- how should we think about that decline in the fourth quarter relative to the growth in the CPG segment. I think most of us would assume you have into the first quarter through the duration of 2022. And I think, Anthony, relative to the comments you made on gross margin, was that decline in wholesale revenue driven by pricing or was there also something that happened in a specific market on the wholesale revenue? I'm assuming that's probably along the same line as what you already gave in your remarks on the gross margin?

Yes. I mean, look, like I said, there was some movement in the fourth quarter just across the business, particularly now in the number of markets that we're operating in. I guess, just kind of stepping back, though, again, as we kind of look at it, the markets where we're seeing kind of some of this activity, it's something we're watching closely. Obviously, we're kind of leaning into the verticality in the business that we have. So one of the reasons why you saw the decline that you did was just the company ended up effectively shipping more product to its own retail store base, thereby creating more intercompany revenue for the quarter, which dropped that kind of that net wholesale number that you referenced. Part of that was just supply driven. Again, within these markets, our retail stores were big buyers of product. And sometimes, if we cannot kind of fulfill the demand that we have at the retail level from third parties, we have no choice but to effectively divert product from our own facilities on wholesale facilities for our retail stores. So in some ways, really just the availability of product at each of the market levels is a big driver of that intercompany number. In terms of where it's going, really hard to predict, like I said, because the supply and demand kind of dynamics within each respective market play a role in driving that kind of that figure on a quarter-to-quarter basis.

My second question is on inflation. Can you help us frame where you're seeing this occur right now or where we're likely to see inflationary pressure that would impact your P&L and balance sheet? And what do you think the best tools are that you have at your disposal to tend to offset those headwinds the cash flow and margins?

Yes. Look I think this is something that I think all the operators in the space are navigating. On the balance sheet side, it's really just some of the capital projects that we have ongoing. From that perspective, obviously, you're seeing an increase in both the labor cost of construction as well as raw material. A lot of the commodities obviously have seen a run up and the supply chain shortages have just put additional pressure on that. Within the business, look, we've got a lot of raw material coming in from overseas, primarily Asia, obviously seeing growth there. The shipping rates are just not a huge kind of number within the business but in terms of the rate of growth that we've seen in terms of the cost to ship containers across the ocean drastically kind of increased. And then obviously, kind of on the payroll front, we've seen an increase there just in terms of staffing at the retail and wholesale kind of levels. So look, it's showing up, showing up on the balance sheet. It's going to show up on the P&L. We're not going to make excuses. It's candidly -- it's just something that we're going to have to kind of deal with and navigate through. And as we look ahead, it's something we're just going to closely watch throughout 2022 and just kind of make adjustments on the fly, accordingly.

Our next question comes from Pablo Zuanic with Cantor Fitzgerald.

Sorry, I joined the call late, so I'm sorry if this was asked already, but I'm very impressed with your recent deals in Rhode Island and Minnesota. I know they look like small states, but there's only 2 licenses in Rhode Island, 3 -- sorry, 2 in Minnesota and 3 in Rhode Island. So the question is, do you have visibility in places like Virginia, Rhode Island, Minnesota, where you invested almost $500 million combined that there will not be any new medical licenses issued for the next 2 or 3 years? And remind us, in those 3 states, if you have any caps on stores and cultivation?

Pablo, it's Ben. Thanks for the question. Yes. Look, we love those states too. We think the same thing you are. We're not against new licenses coming into the various states because is net of 2 licenses enough to serve 6 million people? No. It's kind of work great. It's about first mover, it's about scale, and there's a lot of nuances in each state. I think you asked how many stores are in each state. I can try to do it, but we can follow up on any details. But in Minnesota we have 5 open, going to 8 per the law now with those other 3 in various stages. Virginia, we have 4, like we mentioned, fifth coming soon and the sixth -- and really the sixth is our on-prem at the production. And Rhode Island is 1 store, 1 production. We'll invest a little bit to scale that up. Rent coming, not enough product from our own supply and supply ourselves, small state, but the same math applies whether there's 0s or not. So it's really the same game, especially with what's going on. And just big picture of new licenses in, we don't lose a lot of sleep on new license coming in, we like our product. We love the first mover. We like having the lowest cost dollars out there to go do what we're going to do. And at the end of the day, we think consumers have a relationship with our brands that are going to want us. It's just so early in some of these markets can't even buy flower is what's going on in some of the markets is just early, and we know what that demand curve is going to look like. So that's what we're underwriting. And even if you double the licenses in each of the states, it doesn't make us really flinch either on price paid, on dollars being allocated on demand curve or anything like that because we can find a RYTHM and enjoy the journey with Dogwalkers and what Beboe can bring to people is pretty differentiated. And so we're excited about that.

That's good color. Look just a quick follow-up. Can you give an update in the case of New Jersey, I think you applied for 2 stores, when will you apply for the third store to go rec if you have any visibility on that and something with New York, you have 4 medical stores supposed you can add 4 more, but do we know when you can start adding those 4 stores?

Thanks, Pablo. Great question. Short version of answer is no visibility and no answer on New York. So we have 2, we're confident. New Jersey is learning as we go. We hope to partner with state and health through this. It's going to turn on. I do not know when, and I have no offering of commentary about when because it's a tricky process here as everybody learns it together. And New York, help fill passes, we are active doing what we said we were going to do. We bought the PRISM and Warwood again. Locking people up for marijuana now we can employ people in marijuana, it's a major change into what's happening in society in the U.S. So we really want to put that on display. And regardless of what else is going on in the state, 20 million people, there's $5 billion of demand. We're not tenting out for $2 billion in sales out of the gate in any way, shape or form for us. We're putting in dollars where we can create amazing returns on those invested dollars and ridiculously low multiples of EBITDA out 24 months. And it's a great stakeholder to shareholders. And actually, it's great for consumers to some degree, so we're pumped about that. On timing or details of stores, nothing, I think we're kind of sitting behind many of the others that are going to come in, but the ROs do have a first spot here, and we're going to get going. But I don't have a lot of clarity on the additional stores.

[Operator Instructions] Our next question comes from Eric Des Lauriers with Craig-Hallum.

Congrats on another strong quarter here. Ben, a follow-up on the last question for me. So obviously, the timing of New Jersey and New York adult-use sales beginning is out of your hands. But can you talk about when you expect your production operations to be sort of fully up and running? And then if we should expect a large wholesale presence out of the gate or if you guys will have more of a focus on vertical or intercompany sales?

For New Jersey?

For both New Jersey and New York, if you can?

You said timing right for wholesale retail? We're going to optimize the business like we always do. Capacity step-up in New Jersey, we're in Paterson. I think we doubled the number of flower rooms, as there's a storm, there's a lot of different things but that is online and coming together. So we will have more products. We'll optimize with the operators in the state in order to best serve the consumers and keep the patients satisfied with product that's the priority. So I can't tell you where it's going to go. I don't really know, but we're good at optimizing that. We like the 2 retail locations that will be approved for rec. And so that's going to be strong. No real commentary on New York. There's early stage. We're pretty head down building, doing what we say we're going to do is just building this cultivation campus and getting things right in Warwood. And we'll come up for air, I don't know one of the -- 2 or 3 conference calls ago, I think I threw out the date 1/1/23 is rec in New York, which is very far away, which is obviously now less than 10 months after today, seems very close. Amazing how that changes. So I think there'll be a rec sale in New York in 2023. I think I do believe that, but I have no real insight actually.

Our next question will come from Spence Hanus with Wolfe Research.

Just a follow-up on the price settling you guys saw in 4Q. Have you seen any improvement as you look to the first quarter? And then how did the promotional intensity in the lower end of the market compared to what you saw in some of the higher quality indoor products that you guys are selling as well?

Sure. Good question. I would say that we are not seeing kind of the rate of change that we saw in the fourth quarter in the current moment. Again, this is real time these markets move pretty quickly. But just what we're seeing, we are starting to see some kind of real settlement. That relates to kind of the initial question. Mind just repeating the second one that you had?

Yes. Could you just talk about the promotional intensity in the lower end of the market compares to what you're seeing in the higher quality indoor flower sales?

Yes. So look, we talked about this before. But obviously, where we're seeing kind of the most, call it, compression, is really on the lower end of the market. It's kind of the -- kind of low to mid kind of quality levels across all the various categories. In Pennsylvania, for example, given the lack of edibles obviously that it just gets pushed into -- flower, that's really just where it shows up. So it doesn't get spread out across as many other categories as it does in perhaps other markets. But net-net, that's really kind of what we're seeing. And like I said, it's real time and something that we're watching closely on a day-to-day, week-to-week basis.

Got it. That's helpful. And then what does the industry think of the brands is going to be a big impact on where margins settle over the long run? But how do you think GTI and the broader industry can just pull forward the shift in mindset for consumers to shift to purchase by brands versus the current convention out there really THC per dollar?

Well, at this time, just trust responsibility, consistent product that delivers on its promise, we'll develop our relationship with the consumer. I think to the last question, the premium flower is essentially the most resilient, high-quality flower drives the business, try to let the store, core consumer, and that's a key core product. So that's important.

Our next question comes from Aaron Grey with Alliance.

So a question for me, retail, up sequentially, you talked about acquired stores as well as traffic being called out in the press release. I just want to know if you could speak to average basket, same-store sales down 1% sequentially since guys called out traffic that implies a lower average basket. So I wanted to know whether you could speak to how much of that might have been the pricing pressure that you've spoken to, but also the broader consumer and the wealth impacted by inflation? So any color on the basket and health of the consumer would be appreciated.

Yes, so good question. Really what we saw, look, the average ticket has continued to slightly kind of come down. Now I will say that that's largely because of effectively some of the pricing pressure that we did see. So the use per transaction is really not moving much, but the ADT is -- did come down a bit. Look it's come down since it kind of -- since it peaked during COVID, kind of -- it's really just kind of in a more normalized state today. But the quarter-over-quarter decrease that we did see in ADT was just directly correlated really to some of the price declines that we saw in a few of the markets. So units per transaction is relatively consistent. And we anticipate that will probably stay the same. And our guess is that we're in a more normalized state than we were call it, 3 quarters -- 3 to 4 quarters ago during the peak of COVID.

Our next question comes from Michael Lavery with Piper Sandler.

Can you just update us on the capacity outlook and obviously, partly just helping us think about that as we model the wholesale line? I know you touched on some of the shifts to selling to your own stores and maybe a little bit of a pricing pressure. So I know that's a factor for probably what the next maybe couple of quarters. But should we still expect the capacity step up in the second half or what's the right way to just think about how that unfolds?

Yes. I mean, look, it's better. We're spending a lot of CapEx. We don't turn on anything we'll not have been a good use of funds.

I guess specifically just maybe how can you pinpoint the timing is what I was getting at.

Not much. We shied away from making predictions and then walking it back and changing things. I don't know when New Jersey is going to turn on rec. I don't know when Connecticut is going to turn on rec. I don't know when New York is on rec. And basically, our CapEx projects are essentially on time, on budget. There's some delays in the supply chain, but Anthony and the team are all the way down, does just an amazing job sourcing these things. So I will tell you places like Ohio, Maryland and New Jersey, just off the top of my head, have new rooms planted that have not yet hit revenue. So therefore, within the next 6 months, roughly, those have to come on. They're not $100 million CapEx spend, but they're material for those markets. And again, just Ohio, New Jersey, Maryland, all states we like all with demand coming in pretty strong setup. But I think just zooming out is, how should we think about it, yes, continued investment it would take a year. So the money goes in, a year later, the project is there a 6 months to grow the plants.

That's helpful color. And just on...

Before business -- sorry, Michael just one other thing to make sure everybody understands, it's very important. We scaled and Anthony mentioned in his pre-comment everybody's talking about the margin, which is not something we run the business on, by the way. We run the business on the free cash flow and the sustainability of the cash. But if we spend $200 million last year in CapEx, we're underwriting more revenue coming out of that CapEx, otherwise, why would it be expensive? We do not need the same kind of SG&A scale that we've had before. So if you think through the percentages and the 2,000 basis points to 20% from 50% to 30% and what that is getting scaled over essentially, we've already taken the weight by putting on the SG&A spend before the revenue is hit. All 3 of those markets have materially increased spend and not yet flowing through. So it's kind of important to see out -- I think people are very quarter-to-quarter based that gets everybody's got their own business and their own lens. But we're building the business for shareholders for the long term, and we believe in the capital spend that we're doing on where the industry is going to be in 3 to 5 years. We have a lot of conviction on that. So we're not as concerned in the short term. Everything we said applies to the medium and long term, and we like where the business is going to be because of those states, and I'm just -- Virginia, New York, New Jersey gets 41 million Americans that have legalized candidates coming their way, where 24 months ago, they were essentially in the desert, literally. And that's not even including some of the other states going. So -- it feels to us like the industry is digesting on this growth. We look at the industry quarter-to-quarter numbers and see the whole thing. We don't think in 3 years, the U.S. is only a $25 billion industry. If it was, it wouldn't make a lot of sense to spend the way we are. We think it's going to go up and to the right. I just thought a little help as you think about the spend on the growth and all this stuff. It's not a quarter-to-quarter play over here. As you know, it's hard to hire the right people, we're building a major team, but I'd rather bring somebody in the door now to say, hey, here's not going to get prepared for 2024. You've got 18 months, and that's how we're trying to build and set up the business.

Our next question comes from Andrew Partheniou with Stifel.

Just to start off with the housekeeping item. Could you talk a little bit about what that $4.5 million onetime charge added into the Q4 EBITDA is? And from my actual question, it's more of a follow-up as to what you just discussed. You had negative operating leverage in Q4. Lots of head count that you talked about. Could you discuss what we should expect going forward? You are investing across your platform. You continue to integrate the acquisitions. At what point could we see this reverse to positive operating leverage?

Yes. I'll start and then hand it to Anthony on the nonoperating and 4 in and 4 out fund. I think the pace of spend on the SG&A will slow because what we decided to do is instead of being behind, scale it in advance, one. Then a couple of the same things turned on exactly when we thought, but I didn't want to be super late. So we're very comfortable with what we have here. It's a little slow from a slope standpoint on the bid because the infrastructure here should support hundreds of millions of dollars of more revenue, said another way, right? And if we get scale to 20% of revenue, right, that 50% to 30%, you should see scale in the business it's hundreds of millions of more revenue come on over time. So that's what we see. The SG&A has all the labor for retail. So that's not so scalable. These box essentially has the cost that it has. But it's really the production facilities and all this CapEx spend it takes a while to hit the revenue line that then doesn't increase the spend and then flows through. You want to hit the other income?

Yes. I think, Andrew, you referenced kind of $4.5 million adjustment. Look, GAAP's an interesting animal. The adjustment you're referencing was nonoperating noncash. Just given kind of the GAAP's nature of our P&L, we've got a number of things that kind of roll through there in terms of consumer liabilities as well as just kind of other business items that like I said, are nonoperating and noncash-related that rolled to that other kind of income expense line. So we'll have additional detail you'll be able to kind of track it. If you look, we're a bit of old school on this, we look at our adjusted operating EBITDA growth in cash flow from operations. And I think anyone that's got going through this knows that unfortunately GAAP is not always kind of the best metric to use in assessing kind of the initial performance of the business. And so, but that $4.5 million you referenced was noncash nonoperating.

Our next question comes from Ty Collin with Eight Capital.

I'm just wondering if you could talk a little bit more about the opportunity you see in Minnesota and the thinking behind the acquisition there? I mean is that primarily to get in ahead of a potential flip to adult-use or does Minnesota medical market kind of stand up by itself with flower and edibles coming online later this year? How good is the return profile in Minnesota, even absent adult-use?

Great. Good question. Excellent and then it could be even better. We underwrite it as simply as what's the demand, what's the supply, the supply/demand, what's our [indiscernible] product, all the other sort of like competitive setups here, but even if there's more operators in the state, we think that 6 million people's demand now to your point, it is record or medical without any political insight, rec is coming. Why would it not? It doesn't make any sense to us for not to mean you pull it or will you do several other things, but it will only -- $500 million in taxes. Hundreds of millions of dollars being spent in places like Ohio, Virginia, Illinois, it's quite a good economic stimulus program. It provides a lot of jobs. There's a lot of organized labor that can come and construct these facilities. So we're not underwriting it based on which session on which politician, we're underwriting based on the U.S. consumer want cannabis for well-being. People want to sleep better, people want more well-being, everybody hates being hung over. It's just like so obvious. So we think that it continues. So in order for the $25 million to get to $75 million, somewhere -- some of the states like Minnesota, New York, New Jersey, Virginia all these have to actually turn on and go forward. So we think it goes up into the right over time. We're in no rush. We've got a lot of work to do. We bought a facility found it the exact way we would run it. Things are upgrading. Flower sales in the market this week we're very excited about. There's a lot of work to do. We see unbelievably attractive return on invested capital, even incremental capital into the Minnesota market out in the short and medium term. Why would we not? How big is the market there going to be? Colorado's $2 billion. A lot of operators Colorado pricing is different, but something pretty big. That make sense?

Yes, it does. Appreciate it. That makes sense. Great.

And again, flower in the market is a big deal with 6 million people have never been able to buy flower and now you can buy flower. I want to reiterate, that's a big deal.

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

Appropriately, time question here. I want to follow up on that dried flower comments. So we've seen regulatory approvals for dried flower incurring in several of your medical markets, including Virginia and New York late last year, Minnesota today. Just want to gauge how the patient response has been to dry flower in Virginia and New York so far? Are you seeing the same level of uptick in those 2 markets that we've seen in some of the other markets across the U.S., such as Illinois, Pennsylvania and Florida? And do you have any early indications for Minnesota as to the demand there? Has there been any sort of early registrations or patients signing up in queue this morning? Any color there would be helpful.

Yes. So good question. So there's anomalies within all the markets that you just kind of referenced. So let's start with York yes, we saw an inflection effect when flowers went live, what's unique about the New York market is that there was a quasi-flower product in advance -- available in advance with whole flower. So while we did see kind of a pickup in the retail side of the business, it wasn't as dramatic as we've seen in other markets like we did it in [indiscernible] that was just because like somethings like the quasi flower product already. Minnesota, I mean literally say state 1, call it or, I guess, yesterday. So to be very early to kind of stay there. I guess it's a great product by within the next hour or 2 on how things are going. And then in Virginia, look, we did see it pick up. One of the issues in Virginia is that the patients -- there's a number of patients, I think, close to 8,000 now that have applied for their medical card have not yet received the medical card. So that's really kind of the gap in the system right now. It's just an administrative kind of work that need to kind of work through. My guess is once we see kind of a more normalized patient count, we'll actually see kind of the true impact of flower, which is given kind of the new to patient base -- it's difficult to draw kind of meaningful conclusion there. Again, 8 million person state, very bullish on the long term and excited about where or going there.

Our next question comes from Scott Fortune with ROTH Capital Partners.

This is [ Nick ] stepping in for Scott. I was just wondering if you could provide a little more color around the recent industry-wide vape recall in Pennsylvania and kind of the state department's process there? It looks like your competitors were proportionately more effective than you were, which may have opened up some additional market share opportunities for GTI? So any update there would be helpful.

Sure. So for every benefit, what we're referring to here, there is a vape recall in Pennsylvania. So zooming out, we produced really 2 lines of vape out of our wholesale facility. We had our RYTHM full spectrum CO2 vape pen that's been on the market since really inception. We also have a new line our [indiscernible] that was very new, and that's been on the market for less than a month. And it's the [indiscernible] digital line that was impacted by the recall was relatively nominal in the year. I think really just glad we had them and we just started to kind of brand production on that. In terms of what we've seen, look, obviously, a lot of people have kind of scramble to kind of satisfy the market needs for one of them. The team is doing a great job of just kind of adjust in real time, working to kind of increase throughput, just given some of the short-term kind of supply challenges that we're seeing given the number of products get pulled off the market. I think it's premature to kind of say, say, we're going to be able to grab share in this kind of situation. I think right now, what we're trying to do is really to service the market, kind of help out our partnerships across the retail store base there and just make sure we've got a healthy chunk of it on the market for all the PA vape consumer. So stay tuned. We'll see what happens and if this kind of shapes its way through and if there's kind of a resolution, in the meantime, we're going to continue to kind of really diversify and focus on our RYTHM baseline and continue to perform exceptionally well, and we've got big expectations for the current year.

Our next question comes from Mike Hickey with The Benchmark Company.

Ben and team, congrats on the quarter guys, on revenue. Just curious on, I guess, your updated view of the beverage category. I think it's been about a year since you initially sort of introduced us and you'd be going into the category. Obviously, you've done a lot since then. So curious your learnings so far as relevant of the category and sort of that maybe the price margin mix as it becomes a bigger piece of the business?

Sure. This is Ben. Just before I let beverage to your question, just on the PA vape for the last question. The strategy and the thinking is not all in this together. This is not an opportunity for Green Thumb to step ahead of somebody or something like that. Nobody likes a surprise. We're all trying to serve patients who want to feel better. This is crazy to happen like this. But everybody is dealing with it together. So we really are in partnership with the industry to sort of fill the stores, make sure patients get what they need and sort of continue to adjust. It's not a doggy dog and pound on our friends situation. Everybody wants safe, healthy vape and consumers tell you what they like. So just caught us a little bit by surprise around here to be candid. And then in terms of beverage, so still a very small part of the category, it's active, 1%-ish, some markets, it will creep higher. So to the last point, when it become part of the business to actually think about its impact to the P&L? Doesn't. However, I think it's a very unique product from a -- who the consumer is that uses it, what the use case is, what it can substitute against and what it does for on-prem social consumption. So we continue to invest, watch, study, be close to the consumer. I mentioned the on-prem, we'll have more of those opening up. We believe cannabis is an experienced business and we continue to invest in that. But the dollars and cents of can any other beverage in the business or even in the industry is not yet super material, but you never really know. And so, we view it as a bet on the future and an understanding of who the consumer is, how, why, where and the experience is quite good. And again, I still don't think anybody likes to be hung over, and it's going to offer a lot of -- some of the benefits without a lot of the downside.

Obviously, you guys are pretty focused here, but you do have a lot of retail in national, you serve a lot of markets you'd scale manufacturing. And do you sort of look at, at some point, look at products potentially outside of Canada, something ancillary to drive growth?

We try to stick to our niche. Do what we know which is cannabis product -- branded cannabis products, something makes a lot of sense, we'll look at it, but that's what we got.

Our last question comes from [ Devon Doyle with Clover Investments ].

Ben, I understand where we are with the state-by-state issues and the competitiveness and also where we are in the consolidation of cycle. I just wanted to know if you could give me some more color on the vision on the wholesale operation once we see its legalization in interstate commerce. I just want to know do you have the cultivation capabilities to revise for the nation? And do you intend to export in the future to other countries?

Sure. Yes. Good opportunity to just reiterate, what we do on the flower side is high-end indoor premium flower. We don't view ourselves as a supplier of commodity cannabis to input to the market. So no, I mean all of a sudden, 300 million Americans could buy our products, we don't have enough products in the states we're in. We don't have excess inventory. I don't -- the question is really like I think it's up to all is to examine inventory line items here and see what's going on. And if you think something's up here, let me know, we'll double triple quadruple check we don't think there's an inventory issue. Therefore, no. If all of a sudden, you can sell our flower or RYTHM to the country, that's not nearly enough. That's not what we're up to. We don't see that coming today, tomorrow. So that doesn't really bother us too much. But again, high end into a premium flower, we don't go top down as they hear so much of the market being there how much we need to grow. We say, here's what $20 million could get us, here's what $80 million could get us, here's what $180 million could get us. What makes sense based on that market, the operators, the timing, the product all of the other factors. But we don't do things like supply the whole country, we do things like what's the return on invested capital based on the demand.

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

Sure. Thank you. Thanks, everybody, for joining us. We'll be back with first quarter results in May. I hope everybody has a nice spring season. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.