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

Good afternoon, and welcome to Green Thumb's First Quarter 2022 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 will now turn the call over to Leah Rosenfeld, Senior Director External Communications. Please go ahead.

Thanks, Gary. Good afternoon 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 the actual results to differ materially from these statements. These risks and uncertainties are detailed in the earnings press release issued today along with reports filed with the United States Securities and Exchange Commission and Canadian Securities regulator including a 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 obligation to update or provide any forward-looking statement 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. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and CFI links. Please note all financial information is provided in US Dollars unless otherwise indicated. Thanks, everyone, and here's Ben.

Thanks, Leah. Good afternoon, 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. We continue to benefit from increased scale and operating leverage to deliver adjusted operating EBITDA of $67 million and free cash flow from operations of $55 million. This is our 9th consecutive quarter with positive free cash flow from operations. This quarter, we had a 200 base 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 flows and margins which can fluctuate quarter to quarter considering all of 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. Our margins are important and 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, "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 we'll 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 3 states: Virginia, Rhode Island, and Minnesota, and we like our setup in each of them. All 3 are catalysts for future consumption of our products and we are excited to bring our authentic brands like Rythm, Dogwalkers, and Incredibles to more Americans. As you know, Virginia has already passed the adult-use legislation and we've began scaling our operations by adding 2 stores this year and expanding cultivation capacity. Adult-use 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 2022. In Minnesota, we have now 6 stores in Mankato located in the southern part of the state. In March, we began selling flower in Minnesota dispensaries and we were proud to offer legal, high-quality flower to Minnesota patients for the first time. The introduction of edibles in Minnesota later this year which will bring patients another form factor to improve their well-being should prove another catalyst to the market. All 3 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 11, New Jersey gave the green light for 7 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 demands in our stores RISE Paterson and 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 has certainly called for celebration, it is also a good example of positioning and patience by Green Thumb. We first entered New Jersey by winning a vertical license in December of 2018. The license had virtually zero cost to investors. We decided to plant the Green Thumb flag in Paterson, an economically disadvantaged area to build a 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 2 more stores in Paramus and Bloomfield in 2021. Today, we are proud to serve 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 well-being through cannabis in a state with over 9 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-use 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. Patience 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 well-being 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 plant, we believe in our products, and we are committed to promoting well-being through 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 a respectable first quarter generating $243 million in topline net revenue and $67 million in 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 previously highlighted, the difference between gross revenue and net is in our company revenue. 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 bigger contributing factors. The balance of the decline was attributable to startup costs associated with New Jersey adult-use and recently completed wholesale facility expansions. On the SG&A side, excluding depreciation and amortization, one-time transaction costs, and stock-based comp, normalized operating costs approximated $61 million, a $4 million increase over the $57 million incurred in Q4. The majority of the increase is 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% respectively. Other income for the quarter approximated $6 million, which primarily reflected non-cash, non-operating gains associated with our investment portfolio, as well as the warrant liability associated with our senior debt facility. Out of these expenses, the company generated approximately $29 million in net income, 12 cents per share, our seventh consecutive quarter of positive earnings per share for the business. Moving on to our balance sheet, we ended the quarter with approximately $174 million in cash. During Q1, we invested approximately $60 million in gross CapEx when including the spend associated with our sale impacts. 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 favorite topic, cash, we generated just over $55 million in operating cash flow 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 in AR and inventory. In addition, with the capital markets essentially closed to cannabis businesses, our substantial cash condition along with our positive cash flow from operations translates into better sleep for our stakeholders. As we look ahead at the balance per year, we set out to continue to do a few simple things. Number one, tuned up and always in control if we can control. 2, be the consumer. Everything we do is through that lens. 3, watch our cash. 4, be ready to be opportunistic when others are fearful. New Jersey adult-use kicked off on 4/21. The early results was eerily similar to Illinois, which started in January 2020. Congrats to our team for all they did to make the launch a success. It truly did take a village. Next up is some combination of New York, Connecticut, and Rhode Island. If you are a shareholder in Green Thumb, you have actually an offering. Back to you, Ben.

Thank you, Anthony. Before we open for questions, I will end on a couple of items that I believe to be both important and urgent. The first is creating a diverse and equitable cannabis industry. I'll be honest, this is very hard. For more than 3 years, we've been struggling to find an equitable solution for our own state of Illinois. We hope other states are able to find a quicker path to an effective model, and we are here to help. 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 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 a 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. While close to 75% of Americans live in states 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 Green Thumb, we're fully committed to a 3-prong approach, including more education, nonprofit investments, and enabling new entrepreneurs. Education is one of the most powerful tools and our lead 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 to set up scholarships that will help Black and Brown students gain access to cannabis education programs and higher ed institutions like Alan Harvey College in Chicago, Medgar Evers College in New York City, and the Cleveland School of Cannabis. Our Green Thumb brand, the flower products was specifically created to help fund nonprofit organizations who were doing the groundwork in their communities to create real and staying progress against the harms from the war on drugs. We recently announced our second round of grant recipients last week. We look forward to partnering with 5 more organizations, with missions that are aligned to education, expungement, more employment, to help create opportunity and change and impact communities. That going 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 RYTHM, 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 on Ukraine to put us on the verge of a virtual panic attack. 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 RYTHM America, enjoy the journey with Dogwalkers. We'll open it up to questions. Operator.

[Operator Instructions] Our first question comes from Leon Cooperman with Omega family office.

I guess that 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 a 65% decline from the high. We just waiting for legalization is the only lever to pull to turnaround 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 course of capital to the industry, the odds are repurchases, not in the picture. I look at Bloomberg and I see 2 or 3 pages of inside selling. I see no inside of buying, if you think the story is so good, why we're not seeing any inside of buying, that's it.

Great. Thanks, Leon. Yes, 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, you know, since we started prior to going public when it was more of an idea to create a billion-dollar company at 30% EBITDA margins, have put 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 a financial change in New York. The New York Stock Exchange in the NASDAQ will not list our company. As you're concerned about stock price, my comment on stock price would be, you know, what you know and what our mentor's mentor has said for a long time, you know the stock market's a short-term voting machine, long-term weighing machine. And until there's more access to buying stock at mainstream exchanges, from the mainstream exchange to the middle 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 think about cash is king, and we're running the business out of ways because we think this is a $75 billion to $100 billion US industry.

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

You don't see any real insider selling.

I don't know, I'm looking at Bloomberg.

[indiscernible] we are huge believers in awarding the team with equity, they get equity. Sometimes there's filings because you get equity, there's tax trigger and things like that for the rules, but you do not see any swaps that insider selling at all. We're convicted with the large, I'm the largest owner 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. What I see is nothing but insider selling for 3 pages. I don't see any insider buying whatsoever. I see options, surrenders, and I see outright sales. You know what I'm talking about. I think you got all the buzz words, but--

We're clearing that up, but that's fine, Lee. I hear you. That's good. I appreciate 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 Exchange in 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 in the NASDAQ, the board, on TV, to talk about it. CNBC, we have trouble with, if we can't list to 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, you know we're happy to discuss it.

The next question is from Matt McGinley with Needham.

Can you help better define the drivers of that 215 basis point decline in gross margin that you had in this quarter? The price decline was most of that pressure last quarter, but raw material, wage inflation, or new factors that you called out. I guess with 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. Yes, Anthony here. When I mentioned in my prepared remarks, the biggest driver of the compression that we saw in the gross margin line was really some price activity that we saw in Pennsylvania, Nevada, and Massachusetts, and the other factor is obviously inflation, which everyone in the industry is dealing with. Then, in addition, we had some staffing where we staffed up in advance with New Jersey adult-use. Then on top of that, we had additional staffing and some of the facilities where we just recently completed some expansionary CapEx. So, you know, look, we're watching these markets closely. You know, there's a lot of things that kind of go into the gross margin line and 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 pump 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% gross margin level within the business.

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 does 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 where we're comfortable saying given we only call it a third through the quarter.

The next question is from Vivien Azer with Cowen.

This is Harrison Vivas on for Vivian. Look on under Jersey understanding, it's still early days. It looks like the product department is pretty limited. Can you just offer some line of the item when we expect to see when we should about to see additional form factors like pre-rolls in your stores?

Sure. Great question. 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 some basic flower items on the menu, and bit by bit, week by week, you should see an expansion. I mean obviously, we're incredibly focused on getting our Dogwalkers and our incredibles into the market. We think they'll do exceptionally well as what-- you know, including the cannabis juice berry that obviously is doing well in a number of markets. We have Dogwalkers currently on the medical side. So, it's only time before we can introduce those on the adult-use side.

Understood. That makes sense. Just as a follow-up, Matt kind of talked about the improvement that we've seen, into 2 Q. We cover the broader CBG space ultra, called out better than expected benefit from federal tax returns. Can you come in on how that's impacted your business?

Yes. And actually, we have quite as big a pulse on that. If you look at last year's impact from the federal government with Biden being elected and then check distribution was felt more materially. No real comment on this year.

The next question is from Camilo Lyon with BTIG.

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 $15 million add back, acquisitions, and other, to get back to adjust the EBITDA. But I'm just curious, what's the right level of expenses that we should be thinking about going forward?

So, you know, 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 to 61. You know, roughly speaking, the breakout of that was, you know, 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. You know, look, I would say that we're going to have to continue to invest in the team particularly as we plan to look ahead and see expansion coming in the Northeast with the adult-use. But obviously, it's something we're watching very, very closely to make sure that, you know, we don't get too far ahead of ourselves in terms of our staffing as we look ahead. I think on a run-rate basis, you know, real-time, we're at 61 million. You know, I would anticipate that number growing. Now, how fast that grows will 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, you know, could you parse out what the acquisition component was of that $15 million add back in which we know is from was from LeafLine mainly, right?

What's interesting about-- at least this quarter is that when we see a change in our contingent liabilities, it actually runs through the SG&A line. In this case, the big number that you referenced effectively, we had an earnout, you value that earnout over time and you constantly kind of revalue that earnout, and based off the performance of the underlying business, we estimate that the liability associated with that earnout 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 you're pretty clear and articulate on the gross margin buckets. But now that New Jersey is on, it-it-it would seem that Q1 gross margins would be the mid-year for the year and that you've steadily improved going forward all out SQL. Is that a fair way to think about the progression through the year?

I've given enough and, you know, we'll see what the 8 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 that Anthony's given enough guidance.

The next question is from Pablo Zuanic with Cantor Fitzgerald.

This is Matthew Baker on for Pablo. We have 2 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? I'll ask a follow-up afterwards.

Great. Yes. 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 proven run rates and pull-through of different products and different skews form factors for the medical patient. So, essentially, as I said in the prepared remarks and as we believe it to be true, free to try to preach along with countries to prioritize the medical patients who are getting more relief for-- in a state of condition. 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 upsides 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 patient spend per month and the current counts of active patients in each of the states?

Number of patients. 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 persons and 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 menu, and how big is that patient count? And we remain very bullish on Virginia and Minnesota, I think the 2 states you asked about, in terms of zoom out, look at the populations in those states and look at where the capitals 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 a rate of $1.5 billion to $2 billion dollars, and Minnesota's a fraction of that. So we don't think the consumers in Colorado, you know, consume differently, it's just a different history, is a different setup from a regulatory standpoint. And Virginia sets up with the regulations, already allowing adult-use of several operators started working. We hope more entrance into the industry. You know, the governors, supporters of economic growth, tax represents jobs. And, you know, I believe up and down, that's what this industry can deliver.

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

Hi, good evening, and thanks for the questions. So, first question for me, I think you mentioned or made the remarks that New Jersey was an eerily similar to Illinois. So I just wanted you to kind of, you know, detail of what you meant by that. Was that more of historic performance we saw in the clip in terms of uptake there, and then secondly, just on New Jersey, you know, any commentary in terms of expectations to maybe, you know, start wholesaling in the market and how you feel on the inventory level versus, you know, just supplying in your own stores? And in turn more of the wholesale market on the adult-use side.

Sure. Thanks, Aaron. So, you know, the thing with event buying history does repeat a lot. You know, I mean, look, demand was big, you know, there were lines out the door and, you know, fortunately, there was something given to each of the parents we had in Illinois in early 2020 we kind of knew what to expect. You know, the key was having a solid launch, taking care of the team, taking care of the consumer, and, you know, effectively treating people well. I feel like we did a nice job with that and each and every day we're going to get a little bit better. Flow's going to get better. The amount of products on the menu's going to improve. And so, you know, as we look ahead, we're very bullish on the prospects. If you could, do you mind just repeating your second question?

Oh yes, it's on wholesale for New Jersey versus just having inventory for your own stores and how you look at wholesale in the market.

Yes, that eluded to but, you know, look, the regulars in New Jersey are doing a great job of making sure that the medical program continues to drive. 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 constantly kind of satisfy the medical needs that we have within the state, and then secondarily, we'll turn to wholesale. So, you know, we take a long-term approach, we're not going to do something short-sided that's going to put us offsides 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, you know, 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. And second question from me, you know, in terms of open-scale, I see, I think, you know, you guys have, you know, been on for a while and you also have a number of markets who continue that out but, as we kind of think of, you know, the next phase, you know, once they, you know, I, kind of, think of it as Massachusetts, right? So now you're at max, you know, 6 stores there. You know, limited cultivation you can have there for 100,000 square ft. You've called out some pricing pressure, so, you know, as you start to see, you know, you might have scaled out to potentially your maxes for retail and cultivation. How do you think about next steps for a state like that, that's when the licenses start to get more competitive, and how you guys look to execute and continue to improve within those types of marketplaces?

You know, that's a great question and Massachusetts is a good case. We like our business out there. The key thing to keep in mind and certainly, we have room up to the more than the-- We could grow more grow if we wanted, up to the 100,000, we're not at the cap. But as with the question of allocation and capital and what the business looks like today. So today, the Massachusetts business looks very good to us in the terms of the cash flow and the requirement of incremental invested capital, and that we have to put in capital what that turns into from the business. We think of Massachusetts as more of a grounds to build grounds with consumers there that are buying a lot of cannabis, loving the product, and the rules of all the different kinds of things that can come into play. I'm talking about inputs, form factors, sizes. There's been some unique rules in Massachusetts, but we think the brand built with consumers there is incredibly important. The business produces-- It's a profitable business for us. We are not investing into a $50 million growth in Massachusetts. That will not make sense on incremental invested capital basis.

The next question is from Spencer Hanus with Wolfe Research.

Looked at page of gross margin compression over the last 2 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?

Yes, it's a great question, Spencer. Look, there's a lot of levers within the gross margin line that we can actually pull. So, you know, and I'll just call off a few. One, you know, and I alluded to it a little bit in my prepared remarks, but there's tremendous verticality in the business, which is, you know, 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 products at our own stores. The other thing is scale that we anticipate to achieve in a lot of our wholesale facilities, which are not anywhere close to operating to true capacity. And we look at kind of just general CPG businesses overall, and we're confident that based off the kind of per-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, you know, one of them, which has a real impact, particularly on certain portions of the business, but then when we kind of unpack it, it's a number we're comfortable kind of using as 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 it's a number that we just view as critically important to the long-term prospects of the business in achieving kind of, you know, margins that we're looking to target for our shareholders.

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

Pricing is very fluid. You know, you have to kind of really understand the markets that we operate in to really understand, to really kind of see what's happening kind of, you know, within pricing of those markets. We like about our portfolio is we have a very diversified kind of portfolio of states. So that diversification provides some insulation from some of the near-term and short-term kind of volatility that we're seeing, and still in a number of these markets, kind of on the East Coast, you know, I would say what's happening is that the value proposition is being set by the consumer. And so, you know, whether or not that's going to continue to evolve, it certainly could. You know, in some cases, we're seeing kind of continued movement, in others, we're seeing stability. So it's a little premature to kind of state 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 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 float through there? I know it's a crystal ball, but that [indiscernible] you can give on that would be helpful.

So, your question on run rate, this is happening, I think, north of that. You know, we don't have a crystal ball, and we know, you 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 wholesale expansion within the state, I believe.

Yes. How do you think about pricing going forward as production starts to ramp in that market more?

Right. Yes, right. You mentioned something about promotional acts. I mean, look, it's very early days, right? So, you know, I say that we're going to take this call at 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 on the medical and adult-use side, and then others. You know, where the promotional activity and what we see within the market, you know, candidly, we'll take as it comes and just one day at a time. Hard to really assess it from here. But these markets are fluid and certain things can happen, so. 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.

Congrats from the consistent cash flow here. Can you talk about the product categories that you're seeing price pressure in and how that may be influencing your approach to the wholesale business or to your branding approach to the consumer?

Yes. I mean, look, thanks, Eric. 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, which form factors we believe in, and what that leads out for where we think there's less differentiation, less room for the consumer to play-- pay a pricing premium based on that brand. The places we like to invest obviously or where I think I hope we're obvious, are indoor high-end premium flower, which we believe in the RYTHM brand. We believe that the consumer over the long term will continue to like and consume that product. The ready-to-consume pre-roll, the auto walkers, the nation's best-selling pre-roll joint is an obvious win, it's a real resonated with the consumer. We think that category continues to expand, we see category growth there and we look at consumables, ready to consume, whether it's edibles or other sorts of form factors, certainly with can and beverage. Those are categories we want to be betting on. 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 best. 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 lookout 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. The last one we hear 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, you know, tactical changes, you know, to sort of, you know, increased margins, you know, here and there versus any strategic changes. Just, I guess just overall comments on that sort of trade-off between CPG sales to third parties versus own retail.

Yes, look, it's a great question. We talk, it's adopted, we talk 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 good through our own retail stories will 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 shipped some of those goods to the outside. Again, it's really 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 on a, you know, on 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.

The next question is from Scott Fortune with ROTH Capital.

Just to kind of stick on the retail side that was down sequentially. 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, just looking for normalized traffic levels as you're seeing going forward here in starting within the second quarter, tell us what you see from that standpoint?

Yes. Thanks, Scott, thanks. Good question. I think there's a couple of ways to look at it top-down with the first year over year decline, minus 3, you know, we look at bottom-up, what's driving that, you know. The market and PA, and I think Anthony mentioned it in his opening remarks, with PA, Massachusetts, and Nevada really driving that. If you 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 saying the one down market where they go up a lot. That's a general gist across the market, which complies what we're just 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 one factor just 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, it's a state-to-state market. As regulations change, as things happen with the consumers, this is exactly what's happening in the capital markets. We're already seeing operators change their positions. We love it with where we're sitting and we've been investing this CapEx, and coming soon are these states that we've been talking about. New Jersey, which we've even talked about on this call for 8 quarters in a row, has had this thing passed or is about to pass, just turns on. So I think that's important to see how as we go. Just to go a little bit more detail on PA market, zoom out a little bit, PA is a market without pre-rolls, without edibles, and a medical market that ripped and surged for 40 years out of the gate. The fastest of any medical market we've seen in 12 million-plus or minus people in the state. I think it's important to keep that context for how big we see that market with our 16 stores and our sort of careful allocation in 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 and compression in an environment kind of overall [ coming on board ], can you provide more on the initiatives and opportunities on looking at the operations side? To increase yield, production efficiencies, kind of operating lean from that side to drive the cost down. Just kind of what you're looking at from the production operation side to continue to drive cost down with this pricing deflation environment currently.

Yes. Look, Scott, you hit them. The 2 biggest drivers that happened again is largely the wholesale-driven. So when you look in the wholesale side of the business, it's like, "Okay. How do you drive gross margin there?" There's really 2 big drivers. Number one, it's higher yields. Number two, its greater throughput, [indiscernible] very focused on both. I would say that, you know, as we look across the portfolio, we're encouraged by the opportunity that we think we see within our own business and it's something that, you know, 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. One last quick one. You mentioned New Jersey being like Illinois. When did Illinois become full production for you kind of, you know, having enough production to meet wholesale and adult-use demand, and just kind of see that from a timing standpoint for New Jersey occurring that way?

No. I mean, I think it's important, Scott, to understand the setup in Illinois and New Jersey while eerily similar from the consumer at the store, it's not the same for Green Thumb from a setup standpoint. You know, in greenfield sites in Illinois, they're robust with 200-plus employees at each site that we've been able to scale since 2015. In New Jersey, when I went through on the timeline located in Paterson with density in Northern New Jersey, we certainly don't have a $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 3 stores, 2 are 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 debt to capital. We certainly look forward to more products, more diversification there, but from a P&L standpoint for Green Thumb, it's not eerily similar magnitude, I will say, from business characteristics, it is. From a consumer standpoint, it very much is. Because we know the consumer quite well, matters to access. Go ahead.

The next question is from Ty Collin with 8 Capital.

I want to touch on the labor compensation piece. Do you feel that there's more that works there in the coming quarters to keep pace with the market? And do you see that higher labor cost baseline, is that potential risk to the longer-term 30% margin target given the stickiness of those costs?

Look, I'll say that, you know, we're dealing with the same thing that everyone else is dealing with. So, you know, where it goes from here, really difficult to say. Obviously, we're focused on building just an incredible high-performing team. You know, we've seen pressure on that line item as of late. How that's going to unfold over the next coming quarters and in the long-term, you know, difficult to say. We're going to focus on what we can control. You know, 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 a couple of quarters and we may have a different opinion on that, either positive or negative.

Got it, okay. And then, Ben, you know, with the backdrop of another rate hike today and continued high inflation, I guess I'm curious whether you're viewing cannabis as a more of a staple or 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.

You know, we strongly believe in the durability of this product has a place in the American consumer lifestyle. We see a 99% plus industry that's all off-prem mostly sold in a, you know, sealed childproof bag, not allowed to be opened. 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 pricing -- I think deflation -- I think there is pricing pressure on products from operators who have issues, but over time, when you think about the experience trade-off and you think about the price of alcohol consumption versus the price of a joint, and it's sort of mind-numbing. When you 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, that gives us a lot of confidence.

The next question is from Howard Penney with Hedgeye.

I actually had a question on the pricing, Ben, and I think you actually may have alluded to the answer to this question. The pricing that you called out in the 2 or 3 markets I assume is something you work with day to day knowing that there's normalization as some have called it and pricing is coming down. So it's a day-to-day part of the business. Was there any behavior by any, you know, by companies in those markets that may have been one-off in nature or sign of desperation or any excessive discounting or promotional activity in any one of the markets that did say that, you know, the pricing pressure this past quarter was more than what it seemed normally? I don't know if I answered the question partly, but.

Yes. Thanks, Howard. It's Ben. I think the answer is yes. Some operators have done some irrational things on pricing. It's not private information. You can go out and see what's going on as people figure out their margins or even their viability. We [ have been thinking ] on the verge of death people keep their friends. It's not a pleasant thought on how to operate, you know, in a capitalist environment. 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 [indiscernible] with the size of our business, with what's going on. Then again, the power of our branded product, whether it's indoor premium Rythm flower, or incredibles, and [indiscernible] every single store in the state, et cetera, we're 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 continuing CapEx that we continue to do is a lot of the finish of the same markets we've been talking about, Virginia, New York, now Minnesota, as well as New Jersey, it continues to be the market connected 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. Not as expensive to invest in those as it is to build, like I said, a $50 billion cultivation facility that over the T+1, 2, 3 generates attractive returns for us. I think what you're saying is other folks put a lot of capital in and it's hard to make money in cannabis. They're now a lot of people that have done that. I think capitalism's pretty efficient. I think when stocks are down as big as they are, there's not as much money flushing to these opportunities, which is why we have a lot of conviction where our investment is based on the consumer, not the noise outside. It only makes us a little bit more optimistic that some of the spend continues this year, to be candid.

The next question is from Matt Bottomley with Canaccord Genuity.

Just wanted to go back to you chatted a little bit about the normalized run rate, the SG&A. Maybe just at a higher level, is there an easy way to describe or outline the difference between the reduction and adjusted EBITDA versus the increase in cash flow from operations, and 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 flows was published can give you better color there. Yes, there's a number of things that kind of Obviously, you know, run through that operating cash flow number. So it all starts with adjusted operating EBITDA, it kind of goes from there. We feel good about it, and again, like I kind of mentioned in my prepared remarks, you know, we're constantly looking at places where we feel like cash can get parked unnecessarily, particularly on the balance sheet. So, you know, 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 effectively using them to generate.

Okay, great. I'll go through the Rec more carefully. And then also just in terms of, you know, not looking for anything specific that's forward-looking, but maybe just sort of some bullets on what the growth catalysts are, just given that the environment is impacted pretty negatively with inflationary pressures and some of the other things that were mentioned on this call. So I know, you know, you're calling for maybe a flat Q2 print potentially, but, you know, the second half of Q2 is typically where we get to this, you know, some of the more seasonal highs of it. You know, you mentioned flour in Minnesota, Rhode Island, potentially as a wreck market, clearly in New Jersey turning online. So, are there other things that you can just point to that you think will promote growth specifically for DPI 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 think you said it in your question, Matt, you understand the industry quite well in 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 [indiscernible] which quarter which year, but we think the 40 plus million Americans don't quite have adult-use product as a major catalyst. I can't tell you which quarter Connecticut, New York or Virginia turns on. You mentioned Minnesota, as we continued 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 state. It really is not consuming that much cannabis. The number on Minnesota is pretty small on an annual basis. Onto a hundred versus Colorado, that's a 10 or 15 X that market with 2 operators. If you go, there's a map of each state for things like that. We have product introductions, we have brand introductions and we're at a place with the scale of 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. That's what gives us a lot of conviction. There ends up being a lot of upsides. 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 market 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 that's pushing us out. You know, behind the wave is [indiscernible] it's tough to be there, but we are excited about the future for the American cannabis consumer with all those catalysts that we mentioned, including new product drops, new strands and various other things.

The next question is from [ Sean Shuttle ] with a private investor.

Yes. Hi. I have 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 quarter, you guys are making profits and it seems like every single quarter, that stock's going down. And like, could you come up with some creative ways to like keep it at a standard? I mean, guys are making profits, [ crosstalk ] 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 buoyant business. I would say the [indiscernible]

Yes, I know. I mean, you gave away money and cash to like different communities. How about give away some of those stocks, like buy 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 just a joke right now. And it's up to you basically to talk to your peers and your colleagues to tell them the stocks selling, buy some of that back, create a flow and build on it.

Yes, appreciate the question. There's an open market every day and you're welcome to do as 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 in 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 sat 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 is the business. We continue to run the business for the medium and long-term, not for the trading and the stock. That's not our business. We look to council from monger and bump over the week 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. [indiscernible] I look forward to giving you guys the next update after the second quarter, 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.