Planet 13 Holdings Inc. (PLTH) Earnings Call Transcript & Summary

Greetings, and welcome to today's Planet 13 First Quarter 2023 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mark Kuindersma, Head of Investor Relations. Mark, the floor is yours.

Thank you. Good afternoon, everyone, and thanks for joining us today. Planet 13 Holdings' First Quarter 2023 financial results were released today. The press release, the company's quarterly report 10-Q including MD&A and financial statements are available on the SEC website, EDGAR and SEDAR as well as on our website, plant13holdings.com. Before I pass the call over to management, we'd like to remind listeners that portions of today's discussion include forward-looking statements. There can be no assurances that such information will prove to be accurate and that management's expectations or estimates of future developments, circumstances or results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect the results are detailed in the company's public filings that are made available with the United States Securities and Exchange Commission and on SEDAR. We encourage listeners to read those statements in conjunction with today's call. The forward-looking statements in this conference call are made as of the date of this call. Planet 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law, does not assume any liability for disclosure related to any comment mentioned herein. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's press release posted on our website. Planet 13's financial statements are presented in U.S. dollars and the results discussed during the call are in U.S. dollars, unless otherwise indicated. On the call today, we have Larry Scheffler, Co-Chairman and Co-CEO; and Dennis Logan, CFO. I'll now pass the call over to Larry Scheffler of Planet 13 Holdings.

Good afternoon, everyone, and thank you for participating in our first quarter call. We'll keep this call brief since it wasn't that long ago that we last did this. On our Q4 call, we identified that we're starting to see price stabilize in Nevada. Those early signs that have carried on throughout the quarter, and they're continuing into Q2. After multiple quarters with sequential declines, we saw sales increase at the SuperStore. This has almost all been driven by pricing dynamics as the number of tickets have been relatively consistent or growing throughout that time, even with new dispensaries opening. We're optimistic that Q4 marks the low point for pricing and that we've reached the supply and demand equilibrium. We expect demand to continue to grow at a steady pace and supply to be either flat or declined based on the tough funding requirements and some smaller subscale competitors growing liabilities and tax bills. In Q1, in Nevada, we generated $14.3 million in revenue from the SuperStore, $1.7 million from curbside and delivery, and $1.9 million from Medizin. Once again, we've been able to maintain our share of Nevada retail sales above 8% for the quarter. This is in line with our long-term goals. In addition to the $17.9 million in retail sales, we generated $2.3 million from Nevada wholesale and others. Total Nevada revenue was $20.2 million in Q1 2023 compared to $20 million in Q4 2024. The largest area of growth in Nevada quarter-over-quarter is once again our wholesale business, which grew 13% sequentially. Our cultivation and wholesale teams continue to execute at a high level. We're consistently creating new products, getting them into shelves across the state and delighting both local and tourist customers. Through the first quarter, our brand kept at a prominent position in Nevada. Per BDSA, Medizin was the #5 flower brand in Q1, HaHa moved up to the #3 candy brand and Dreamland was the #1 chocolate brand and TRENDI the #5 brand in the state. These statistics account for products sold at our stores or on third-party shelves, demonstrating the immense brand building value of the SuperStore. It is the reason why partner brands and celebrities like Mike Tyson, Lil' Kim and Stiiizy continue to launch their products in Nevada with us. Looking ahead in Nevada, we expect to see our incremental growth as pricing remains consistent and demand in unit volume continues to grow. We also expect traditional seasonality this year with Q2 and Q3 being stronger than Q1 and Q4. The one caution is that there is still significant risk in the economy with consumers clearly struggling with an increased cost of living and uncertainty about how the continued rise in interest rates will impact consumers over the remainder of the year. Turning to California. In Q1, we generated $4.7 million in revenue compared to $4.9 million in Q4 2022. This breaks down to $2.1 million from retail, $2.6 million from wholesale compared to $2.4 million from retail and $2.5 million from wholesale in Q4 2022. Looking ahead, we believe this is a good base in California. We will see incremental improvement in our wholesale business. During the remainder of 2023 and beyond, we've outlined these 3 key deliverables we want to achieve this year to be successful. Number one, maintain and build the core. This means continuing to generate north of 8% of Nevada's retail sales, grow wholesale revenue in Nevada and California and generally improve the quality of our stand-alone operations in both states. Number two, increased sale -- excuse me, increased scale. Significantly, we want to finish and open our Illinois dispensary this year and start to demonstrate why we think this might be the best dispensary in our portfolio after the Las Vegas SuperStore. We're also focused on progressing the build out of our Florida cultivation to set us up for success in 2024 and continue to evaluate and when appropriate, pursue accretive M&A. And three, improve profitability and cash flow and preserve capital. This will be particularly accomplished as we get more scale and able to spread our corporate costs out over a higher revenue base. The other key piece is a piece is the continued streamlining of operations and the efficiency improvements. If we can execute those 3 goals, 2023 will be a successful year for Planet 13. Taking a look at how we are doing so far. The core of our operations remain strong. We are a predominant player in Nevada, maintaining, again, market share north of 8%. Nevada wholesale revenue was up 13% with a number of wholesale accounts up 3%. Meaning each account becoming more productive. Our cultivation expansion is improving yield and potency now that we've gotten a couple of harbors through and fine-tuned our operations. Overall, the core of our business remained strong giving us a solid base to grow on. We are leveraging that base to add scale in more markets to improve our financials and ensure we are a long-term industry winner. In Illinois we've made significant progress. We purchased dispensary location and started renovations. We've also purchased the remaining 51% of the Illinois dispensary, it is now 100% owned by Planet 13. Overall, we have paid less than $10 million for this dispensary, which will project at less than 1x the sales if we assume the average revenue for a dispensary in Illinois, and given the quality of our location, we expect to be well above that average. We are thrilled about the potential of this dispensary and think it might ultimately be the second, again, best location in our portfolio. It is in a prime shopping area adjacent to a massive casino project, guaranteeing a steady flow of customers. Although the store has a smaller footprint, we'll have lower operating cost expenses in SuperStore, it will still provide the distinctive customer experience that Planet 13 is renowned for. We are aiming to launch the dispensary later this year. In Florida, progress has been slower than we would like on our build-out and some of the opportunities we thought we had to speed up our time, the market fell through. We're continuing to explore all options to bring cultivation online by the end of the year in a cost-effective way. In addition to potential M&A in Florida to speed up time to market, we're exploring other accretive M&A opportunities with an eye on scale, profitability and overall attractiveness. Ultimately, none of the deals we explored in the quarter met our criteria after going through our extensive due diligence process. The deals available in the market continue to get more attractive, but due diligence is critical and crucial. We will remain disciplined to ensure every deal is in the interest of shareholders. This pursuit of growth and scale hindered our profitability in the quarter, but operationally, excluding fees associated with M&A, we would have been cash flow positive again. Even including the onetime M&A costs, while excluding the reduction in share-based compensation included in SG&A, we've lowered our general and administrative expenses by 10.5% in the last year, demonstrating our commitment to finding efficiencies and lowering our fixed costs. Overall, we're off to a solid start on our goals for 2023. The core remains strong, and outside of Florida, we are making rapid progress on our growth initiatives and improving profitability. Before I pass the call on to Dennis, I'd like to take a minute to recognize Mike Harman, our Board member and Audit Chair who passed away in April. Mike was with Planet 13 since we went public in 2018. He helped us with important projects like our conversion to U.S. GAAP and SEC registration. He was a valuable source of advice and a steady presence on the Board. Joining the Board as the new Audit Chair is Lee Fraser. Lee has over 20 years of experience at publicly traded companies and private businesses overseeing financial reporting, large-scale construction projects and real estate portfolios. He has done this for world famous companies like Warner Bros and Fox Corporation. As I look at our goals for 2023 and our ongoing expansion projects, couldn't think of a better Board member or one of with relevant experience for us to lean on. With that, I'll pass it over to Dennis to discuss our financials.

Thank you, Larry. Before I begin, I'd just like to remind everyone that all numbers on today's call are stated in U.S. dollars, unless specifically stated otherwise. In Q1 2023, we generated $24.9 million in revenue. This compared to $24.8 million in Q4 2022, essentially flat sequentially and down 3% year-over-year. Overall, wholesale growth offset a slight decline in sales at the retail level in California. This is consistent with what we talked about on our Q4 2022 call where we expected revenue to be relatively flat for the first half of the year with growth towards the end of the year driven by the opening of our Illinois dispensary. In Q1 2023, gross margin increased sequentially to 43.7%, up from 43% in Q4 2022. The sequential increase was a result of higher utilization rates at our cultivation facility, and we think there's still some room for incremental improvement, especially with price compression slowing. Having said that, we don't expect gross profit to reach north of 50% again because of the diluted impact on the margins from our growing wholesale operations. Gross margins at our retail operations continue to be in the high 50% range in Las Vegas and in the low 50s in California. We continue to target 50% or higher gross margins for our retail operations, and we expect gains from vertical integration to offset some of the pricing pressure at the retail level. Sales and marketing expense for the quarter was $1.3 million, up from $1 million in Q4 2020. We've ramped up our marketing spend ahead of the traditionally busier tourist season to capture a higher share of total sales. That includes activities like more cab advertising, celebrity partnerships and direct drive referrals. Excluding share-based compensation expense, the company spent $10.2 million on SG&A expense in the quarter, down from $11.4 million in Q1 2022, a 10.5% decrease from Q1 2022. During the quarter, we spent approximately $1 million on fees and expenses incurred on potential M&A opportunities that did not materialize during the quarter. We do not expect that this level of spend should be repeated in future quarters. However, we will continue to explore accretive M&A and other paths for value creation for our shareholders. These onetime fees and expenses significantly impacted our profitability and cash flow in the quarter. Excluding these onetime items, operating cash flow before changes in working capital would have essentially been breakeven. We expect lower onetime costs in future quarters and better operating cash flow. As an organization, we recognize that this is the metric cannabis companies are being judged on, and that aligns with our long-term internal rubric. As of March 31, 2023, the company had a cash balance of $42.7 million and no debt. During the quarter, we used $5.2 million in operating cash flow, $1 million of that was used for the onetime fees and expenses as discussed previously. I know the $3.9 million in cash was used for working capital as we increased some inventory ahead of the 420 day and paid down some outstanding liability. We used $4.5 million in investing cash flow, approximately $0.9 million to buy the remaining 51% of Planet 13 Illinois and spent $2.5 million to buy the building for our Illinois dispensary and begin construction. We plan to enter into a sale leaseback on this building when it is finished to continue with our asset-light approach. We also spent $1.1 million approximately on facility upgrades at the Las Vegas SuperStore. As Larry indicated earlier, our priorities as we look ahead to 2023 are to build scale and increase profitability and operating cash flow. Everything we're doing is aimed at building the strongest Planet 13 possible without the need for any additional outside capital. With that, I want to thank everyone for participating on the call. We now ask the operator to open the line for questions. Thank you.

[Operator Instructions] The first question is from Doug Cooper with Beacon Securities.

Just sort of a quick one off the top. Just in the press release, it says Q1 2023 adjusted EBITDA loss of $680,000. And then if I scroll down the actual I think it's $680,000 positive EBITDA. I just wanted to make sure I got everything right here.

Let me take a look at that Doug. I know you must have looked at it, so I'm positive it was right. Give me a second. Keep going with your question. We'll get back to you.

Yes. I guess my only question is on the balance sheet. You guys talked about the preservation of capital as much as possible. Can you just talk about the remaining committed CapEx, I guess, for Illinois and Florida, and maybe Nevada too. We'll call it, from an adjusted cash perspective, how much should we think you have left after those committed CapEx requirements?

Yes. So we'll start with Illinois. We are budgeting another $2.5 million on the build-out of that location and hope to have it open before the end of this year. I think the plan is to have that open sometime in early Q4. And so that should take care of the CapEx and we obviously have some working capital that we need to spend to ramp up prior to that opening, but not CapEx. The SuperStore, we have a few more upgrades. We're going to have to do with that facility to facilitate some additional tenants that may be moving in and talking about the potential for that consumption lounge at some point as well, as part of that. So I think we're budgeting $2.5 to $3 million for that.

Sorry, how much?

$2.5 million to $3 million for that.

$2.5 million to $3 million, okay. Yes.

And then Florida, we -- our target is probably $750,000 per store, retail store that we're going to open. Obviously, we have 6 under -- or approximately 6, I can't remember if we've announced all 6 or not, but -- under lease right now that we're working on to build out of those. And then it comes down to the cultivation facility in order to feed those stores. Again, we are looking at alternatives to make sure we can get to market quicker and without spending any cash if we can on it, but it's failing that, we will have to spend, I want to say, near term, probably between $5 million and $10 million. And if we did a full build-out of the building that we have on site there that will give us sort of think 45,000, 50,000 square foot facility, we could be in the $15 million to $20 million in total. We hope to actually spend that and my goal is not to spend that cash. But worst-case scenario, in order to comply with our commitments to the MMU, we might have to spend this.

Let me -- if I can, let me just add on to the money spent on Phase 4 Planet 13 Las Vegas. It is to extend the hallway down another 100 feet to the other end of the building with another grand entrance and do the gray shell for the -- we've announced at Cannabis Museum, they will start work here in a week. And in about 6 months, they'll be open for its 14,000 square foot, 2-storey interactive museum. Along with that, we'll have 2 retail centers that we'll be able to lease out in the new hallway also. So all of that will add even more traffic as the museum opens along with the retail centers and the added income of minimum of $200,000 a year just in lease base to the museum.

Okay. So just on a worst-case scenario, if I can call it that, Dennis, between Illinois and Nevada, let's call it 5 plus the build-out of the Florida plus that's 4.5, it gets me to 9.5, call it, 10. And then at the upper end of $20 million for the wholesale or for the cultivation 20, that's -- let's call it, $30 million is kind of a worst-case scenario.

Yes, worst case scenario, Doug, for sure. It is expected to be much less than that, significantly less than that as we go forward here.

Yes. Let me just say one other thing that's positive, but we have our site in Coalinga, the main growth listed now for just under $9 million, even we sell between $8 million or $9 million and then we've got interested people looking at it right now. That's just one more added thing that will go into our bank account.

The Illinois dispensary, we'll have spent $5 million on it and we'll do a sale leaseback on that so we can recapture much of that capital as well.

And sorry, Larry, just that site you just referred to, that's the site in Nevada, that's for sale?

That's the one in Coalinga. Coalinga.

The California cultivation. Yes.

Sorry, where is that? Where is that? Coalinga?

That's in Coalinga, California, about 1.5 hours southwest of Fresno.

And sorry, what is there?

This is a 35,000 square foot indoor growth facility.

That's our California cultivation.

Okay. And you are doing a sale leaseback on that or sorry what?

Yes, sale leaseback.

Sale leaseback.

Okay. Got it.

Again, same with Chicago will be said so.

Got it. Okay. And so the Illinois, what should we expect breakeven EBITDA level? What kind of -- how long do you think to ramp up to sort of 15% EBITDA margin? How -- what level of sales would you need to get to that? And when could we expect that in your budget?

Well, we've had a lot of internal debates on what that store will do, Doug. I mean, we're closer to the Nevada -- sorry, the Wisconsin, Illinois border than any of our competitors and closer to the highway than some of the best-performing stores in that state. When we initially put the plan together, we were forecasting in the $10 million to $15 million revenue annually. We think it sets a very, very conservative number, likely be double -- triple that to the extent it will take us to ramp up. I think we should have that store ramped up and revving on all engines sort of by April, May of '24 assuming we get it open in early to mid Q4. So call it, 3 to 4 months to get it open and stabilized. And then by that point in April, I think we're getting to the EBITDA margins you're talking about. And the revenue run rate north of $15 million annually.

Okay. And the gross margin, do you think it would be sort of similar to California, low 50% range?

Yes, yes. Because it is a pure retail play, there's no vertical integration there.

Yes. Okay. Okay. So that's it from me, except just to confirm the EBITDA in the quarter was positive $680 million after the adjustments. Is that correct?

Yes, probably I'm going to pull it up back up here. Let me come back to you, Doug. I've been answering your question. So give me a minute.

Well, just looking at the press release, total revenue 24.9%, gross profit -- $680,000?

Yes, whatever is in the press release -- yes, the press release is correct, yes.

While he is looking that up, I guess Dennis is hoping for $15 million in Chicago.

Conservatively, we...

And that's why I want to say, Dennis, I agree with you conservatively. You got to remember the #1 dispensary in Illinois is 7 miles farther south of us on the freeway and 7 miles away from the freeway, which is rise. And they're supposedly our inside information about $104 million last year. So that is very conservative in my mind also. I'm much more positive on how much closer we are to Milwaukee metro area and the lack of competitiveness of other dispensaries where we decided to put ours right on the freeway at the [indiscernible].

And Larry, where do you say that rise with dispensary was?

That's 7 miles further south of us in the Waukegan and 7 miles south from Waukegan on the freeway and 7 miles west of the freeway. In Mundelein owned by GTI.

Doug, that bullet point in the press release, it disagrees with what's in the table. The table is correct.

Okay. Perfect.

Okay. We have no further questions in queue. We have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.