The Cannabist Company Holdings Inc. (CBSTQ) Earnings Call Transcript & Summary

All right. Thank you, everyone, for joining. We're going to kick things off here. My name is Sean Mansouri. I'm a Managing Director with Gateway Investor Relations, where I head up our firm's cannabis practice. With us today, our first executive in our fireside chat series is Nick Vita, CEO of Columbia Care, who I've had the pleasure of working with for the past year now. For a quick background on Columbia Care, they're the first and one of the largest multistate operators in the country, founded in 2012 and currently have active operations in 14 different markets in the U.S. today.

Now we're not going to have time to touch on every single one. So Nick, I'd like to focus on some of the largest and most meaningful markets first, if that's all right. Kicking it off with California where you just announced a pretty meaningful acquisition yesterday. What does your current footprint in California look like today? And how does this acquisition position you to be a leader in the state?

So we have -- if I include the assets and the operations from Project Cannabis, we have an indoor cultivation facility, we have a large manufacturing facility, we have a dispensary in San Diego, 3 more in L.A. and then 1 in San Francisco. I think that the most important thing that Project Cannabis brought to us and that we brought to them was the completion of the fully integrated model, which I think is critical for its success in California. We had always thought that because of the maturity of the market, there would be a fairly robust sort of supply chain existing that you could rely on, as you would in any normal industry. But that's just not the case. There's still a supply shortage of high-quality flower. And one of the things that we had already invested in that Project Cannabis, I think, was lacking and, frankly, was a drag on their -- both their top line and their margin profile was the ability to actually translate some of their more exotic strains and some of their very well-recognized brands that were flower-based into concentrates and finished goods. That alone will allow us to withdraw from a lot of contract manufacturing relationships, and as a result, save somewhere between 10% and 15% on the gross margin level. But in addition, we can begin to manufacture a number of new products. We can actually push the TGS product pipeline and brand pipeline as well as the Columbia Care medical product pipeline through our existing distribution infrastructure, and also leverage the 100-plus dispensaries that Project Cannabis distributes through on a wholesale basis. So it was really kind of a one-stop shop that allowed us to kind of check all the boxes to optimize our operational efficiency and really tap into the entire state TAM.

That's amazing. Now one of the most consistent themes you hear about cannabis in California is, of course, the black market, making it a really challenging environment to operate in. What would you say to those that believe you can't perform well in a state like California?

Well, I think that there are 3 fundamental problems that people have kind of really relied on in California. Number one is the prevalence of the illicit market and the comfort with it. Let's take them in order. Whether you're talking about the Governor or even the Mayor of L.A., and both of whom are kind of left and center, in spite of the progressive sort of policies, they are pushing very aggressively to direct people into the regulated market, out of the illicit market, and they're doing that using law enforcement as a blunt instrument. So we're seeing in almost every market, a significant change in behavior that's being driven by access. And they may not be incarcerating people as a result, but they're definitely disrupting, making it very, very hard for competitors in the illicit market to operate. So that's one of the sort of the secular trends that we're seeing in California that they're -- and they're doing a much better job than they are, frankly, in a lot of the East Coast states that we operate in. And that's kind of one of ironies. Second is that I think what COVID taught the entire country in the entire world is that safety matters, right? Biosecurity matters. Making sure you have a reliable third-party that you can sort of tap into or accessing whatever product you're interested in is very important to the consumers, especially consumers that are spending discretionary income. And so for us, the ability to sort of describe our cultivation processes as clean, the fact that we can test and actually independently validate the quality and the consistency of those products, the fact that we have real manufacturing discipline gives our consumers an enormous amount of comfort and, frankly, also the intermediaries because product liability is something people haven't really talked about. But if you're a dispensary operator and you're putting products on your shelves, you don't want to be the person that sold a bad batch to XYZ. So from soup to nuts, every part of the supply chain is much more focused on the fundamentals. And then third, California is a remarkable market because the illicit market is a leading indicator for what the total available market is. So if you just look at it on its face, what you're talking about is the most deeply penetrated market in the world, the largest market in the world. And ironically, there are a handful of businesses like probably cannabis that are so well operated that they're actually generating free cash flow, which is an anomaly in the cannabis industry. And so if you're telling me that we could actually create a fundamental footprint in the largest market in the world that allows us to become a market leader, just as we've done in Colorado, which is the second largest cannabis market in the world. We can leverage what we've just acquired in Colorado. We can leverage our medical capabilities. We can leverage all of our shared services and run an operationally efficient business. And by the way, we can do that for a multiple but substantially less than what most people are paying for on cash flow negative or licenses that are not even operating at this point. In every single sense, it was a much smarter use of capital and a much smarter way for us to accelerate our business.

Right. So let's actually pivot to that. Colorado, of course, one of the biggest cannabis markets in the world. You recently entered that state via acquisition, closed on the deal with TGS the other week, and you immediately became a market leader in the state. So what excites you most about the opportunity in Colorado? What do you believe you can take away from TGS and not just leverage in California but in other states? And how that would benefit your operations overall throughout the country?

Well, I think Colorado, in spite of it being slightly smaller than California, actually has a more mature market in my opinion. It's a 2-tier system rather than a 3-tier systems. So from the standpoint of using Colorado as a proxy to see how long and how quickly the cycles that basically evolve once you translate from not -- no regulations to medical regulations to adult-use regulations, that's an important skill set that I think people underestimate the value of. To the extent that we now have in our team, a SWAT team of people who know exactly what has happened in the precedent markets. They know how quickly things evolve. They know what they need to do to maintain cost of goods sold discipline. And these guys are the lowest cost, if not one of the lowest cost, cultivators in the state of Colorado, and therefore, one of the lowest cost coleaders in North America. They have done a phenomenal job of leveraging their sort of seed-to-sale retail business. They are now moving very quickly into the wholesale business, which is going to be a massive opportunity because in spite of these markets being so mature, there's still a massive drought of high-quality flower because they're still operational issues due to the -- I guess, the young nature of many of the operations. And then finally, it's still a fairly fragmented market. So if you have a balance sheet, if you have stock, if you have a footprint, if you have the core competency in that market, I mean, in the hyper local markets to understand where you want to position yourselves from a retail perspective versus a wholesaler's perspective, you can really sort of move forward quickly and consolidate that market. And that's how we think about Colorado, which is we now have the footprint in every one of our markets that gives us the critical mass to succeed. Now the question is how do we absolutely establish a dominant position. And I don't think anyone is really going to give you credit for being a leader in a secondary market. You have to be a leader in one of the primary markets. And so when we're talking about whether New York, New Jersey, there's markets on the come; Florida, a market that's in transition; or Colorado and California, we have basically planted our flags in a very meaningful way, and we are now the -- basically the guys to catch. And I think that really matters because when you look at the systems, whether the cultivation systems, manufacturing systems, when you look at the brands that we've incorporated into our umbrella of brands and when you look at the form factors and the way we can actually leverage SOPs and know-how into new environments, it's moving a lot faster than we had expected and in a very positive way.

Right. Right. So why don't we flip to the Midwest here. I know we don't have a lot of time to get into each market, like I said. I understand both Pennsylvania and Ohio are top 5 markets for you, and that's purely with medical sales, right? [indiscernible] there yet. How would you characterize those markets for you today? And how do you see your depth in those states evolving over the next 12 to 18 months?

Look, I think I would say they're both surprises. They're -- in some respects, they're stunning. Pennsylvania has a population about half of Florida's, but the cannabis program has about the same number of patients registered. Ohio is a market that I think a lot of people disregarded and now they're scrambling to enter. We still have room to add one more dispensary, but we're fully integrated with 4 dispensaries, cultivation and manufacturing. And we're seeing a very robust retail experience as well as a very robust wholesale opportunity. And so I actually think that these states, in spite of their being, let's call it, very center of the political spectrum, you see opportunities, whether it's the Governor of Pennsylvania sort of talking about moving to adult use. Whether that happens or not, I don't know, but the program itself just continues to grow and it continues to be wildly successful. And in Ohio, even though you have a very cautious government and a cautious regulatory framework, the fact is the demand is there, and the program itself has been successful much faster than people expected. So I think they're both surprises to the upside. They continue to perform, and we couldn't be happier with what we're seeing evolve among the consumers. And usually, what happens is the consumers drive political sentiment.

Right. And what would you say from a supply perspective there, right? We see the medical numbers and the patient counts growing up considerably. Is there enough supply to meet all this demand?

I think people have invested in Ohio because it's a large state. But I would also expect that there will be -- as you see a moderation of the regulatory frameworks, you'll see supply crunches. So we're actually investing in Ohio right now to expand our canopy and to really position ourselves as one of the leading suppliers, both in the wholesale and the retail market, because we think that, that's -- it has many of the same characteristics as a state like Illinois, except it's got a lot more people. So we're pretty excited about what we see happening in Ohio.

That's great. And on the East Coast, you're vertically integrated in Massachusetts. Last year, you opened up your first adult-use store in the state. What kind of results are you seeing there after the conversion from medical to adult use? And what do you think your market presence looks like there down the road?

In Massachusetts, I think in -- which is a very good leading indicator for almost every East Coast state, you have a significant pent-up demand. Many of the medical programs like in New York, New Jersey are frankly at their pilot stage. They're not even sort of really deeply held programs at this point because they haven't -- not given enough time to mature. But in Massachusetts, we saw a hyperbolic growth rate once those conversions occurred. We're co-located in Lowell. In Greenfield, we have obviously fully integrated manufacturing and cultivation capabilities that are continuously being extended. And then we have our Boston location, which is -- which would be the only downtown adult-use dispensary. That's going through the city of Boston's process right now. And so we expect to see some movement there sometime during the month of September. And knock on wood, if we're successful, I think that will position us to be the clear leader in the state of Massachusetts.

And how about from a wholesale perspective, are you building out a relevant footprint there?

We've tried. And every time we add more capacity to our cultivation and manufacturing, we actually end up selling it through our own channel, which obviously has a higher-margin profile, but doesn't really give us the ability to sort of speak our speak of our -- speak to our sort of our wholesale ambitions. And so it's a little bit of -- we're kind of damned if you, damned if you don't. But we've made the decision we think is in the best interest of our supply chain, of the communities we serve and as our shareholders. But we hope that the next phase of expansion in Massachusetts will give us the ability to finally tap into the wholesale market because at the point, it still appears to us to be very, very tight.

Right. Right. Well, good problem to have, right? The demand is so strong in your dispensaries that you have to sell your own flower.

Yes.

The upcoming election cycle, of course, is top line for most cannabis investors. Aside from outright federal legalization, what are you closely watching for?

It's very funny. This is one of the few issues that seems to be sort of bipartisan in nature. And I say that because whether you're talking about the Republican Party or the Democratic Party, I think at different times of day, you may see cannabis used as sort of a whipping post, but ultimately, everyone understands the value of the sort of medicinal use, right? I think you begin to sort of diverge from the left and the right once you get out to sort of wholesale legalization. But I think at a -- up to a certain point, which is very, very meaningful, you can see absolute agreement from both sides of the political aisle in driving those decisions forward at the federal level. But in addition to all the activity that we're seeing in the federal -- and by the way, neither Biden nor Trump have ever really made cannabis a primary issue for them and for their platforms, but neither of them are going to be obstructionists when it comes to reform. And so I think we're sort of heads we win, tails we win, which is a very unique place for us to be as an industry. More importantly, we're seeing incredible, incredible developments at the state level, at the municipal level. So you're seeing these programs convert from medical to adult use at a pace we hadn't expected. We're now seeing activity in 11 of our states to actually convert from medical to adult use, which is I think more than anyone else in the industry. I wish I could say that was by design, it's really by luck. But the fact of the matter is each one of those is an opportunity to really perform and see what we experienced in Illinois and Massachusetts. And so we're cautiously optimistic that it's not just a federal sort of -- a federal freight train that's moving down the tracks at a very rapid speed towards reform. We're also seeing the same type of very positive movement at the state level because the states need to be in a position where they're preempting the federal government to really hold on to those tax dollars and those economic gains. And so there's this actually self -- or sort of a self-propelling initiative to sort of be first rather than being last because being last could be [indiscernible] for tax reasons.

Right. So I feel like most investors seem to agree that New Jersey and Arizona are the most likely to convert here next year on the ballot. Which of those 2 states are you more excited about? I understand you have presence in both, but does one perhaps see a bigger lift from adult-use than the other?

I think that -- but they're both very, very good markets. New Jersey -- and I think that what's so fascinating is that people forget about this. For a moment, I'll kind of pick on Washington D.C. for a second. People think about adult-use as being a wonderful opportunity for the captive markets, and so you saw that massive spike in places like Massachusetts and Illinois. But then you take a D.C. -- a market like D.C. or Delaware, where you have 600,000 to 1 million residents, but you have in D.C., you have 25 million visitors a year, right? That's what happens in Las Vegas, right? There are 2.3 million residents in Nevada, but they have tens of millions of visitors to Vegas every year. Same thing in Colorado with 40 million visitors every year. That has a huge impact on these markets because this is a celebratory consumer product. And so when we think about Virginia and New Jersey, I think, first of all, we have the opportunity to be a leader in both. Virginia, long term, will actually be, I think, more favorable to operating because there's just a -- it's a -- you still have that Southern Democrat sort of approach, which is sort of trust but verify, whereas in New Jersey, I think you'll have a little bit more sort of an opening. But even so, these municipalities are very focused on controlling this as a controlled substance. So I wish I could tell you sort of one was more exciting than the other. I think New Jersey comes first, but Virginia is right on the tails. And then you look at Arizona. Arizona is coming as well, but Arizona is a very mature market. So you have this really interesting dynamic between the developed markets and mature medical markets and then this conversion of the, let's call it, the nascent medical markets into adult use.

Sure. Sure. Let's touch on the balance sheet for a moment. You've raised north of $70 million this year, which is really impressive considering the turbulent period we've all experienced with the pandemic. What kind of investments are you looking to make now? Are you fully financed to build out your current infrastructure, excluding any potential M&A?

So we have -- we're now acquiring -- the core business of Columbia Care before TGS and before Project Cannabis was tracking very, very, very quickly to EBITDA positive. And so all of the expectations we'd set for the public markets, I think we're either on track or ahead to meet. The addition of TGS and the addition of Project Cannabis sort of really pushed us into that not only EBITDA territory, but very close to cash flow from -- free cash flow positive. And so our goal right now is to really kind of maintain a healthy cash balance in the balance sheet for strategic uses. We don't really need a whole lot in terms of CapEx because we've spent so much already in 2019 and first half of 2020. There -- of course, there will be some discretionary sort of opportunities that we take advantage of. And then you've got M&A that we continue to look at. But that -- whether we use cash for that or stock, as you saw with Project Cannabis, it was an all-stock deal. And so we were very happy with not only the accretion, but the way we were able to manage our balance sheet and sort of equitize ourselves in the process. And I think that actually gives us one of the cleanest balance sheets in the industry simply -- and if you look at the industry and problems that have come up, it's always come down to integration risk and balance sheet risk, and we really don't have either one.

Right. On that note, why does someone like Project Cannabis decide to join an MSO like Columbia Care as opposed to the next guy?

Well, I think that there's an element of sophistication with the groups that we've spoken to, and you have 2 categories of sellers. You have -- or operators. You have operators that came in for a quick buck, and they view this as an opportunity just to make some money and leave. And you have the operators that want to build a sort of a best-in-class operation. Project Cannabis, TGS these are organizations that wanted to be the best in their markets, and they have that reputation, and it was hard earned, by the way. For us, we fit in perfectly with what Project Cannabis had, right? Things that they needed, we provided; and the things we needed, they provided. And so it was a perfect sort of overlap in terms of the way we could combine forces. But as important, they have an exceptional leadership team, an exceptional operating team. So that DNA now gets to be transferred to our national platform. For them, this was -- they created Project Cannabis to kind of create their own foothold in the Southern California market and then expand North, which they did. But now they're looking for a way to take that capability and really accelerate it across the national platform, and we're delighted to be that platform. So with anywhere up to 11 markets transitioning to adult use, having this team on our team will make us better and more effective at competing, and not just because they have brands and SOPs, not just because they're a market leader in one of the most important markets in the world, but because they really know how to run a business properly. So for us, we're -- they had looked at us and they said, we're going to -- they assumed that they were going to own stock in somebody's company. It's nice to see kind of the best operators looking objectively at the competitive landscape and saying, we have to take stock and someone would rather take this stock than that stock, and that's really the decision they made based on what they saw in us and based on how we've sort of conducted ourselves throughout the process. And we've been in the due diligence process and conversation process for almost a year now. So it's actually -- we've had a lot of time to kick one of those tires.

Okay. Last one before we open up for Q&A. One of the more common themes we hear about investors discuss today is about the importance of depth over breadth, right? So you've obviously built out an expansive footprint over the last several years, but how are you thinking about the next phase of growth? Are there any other markets you need to get into? Or is it about getting deeper?

So I -- look, we will continue to apply for markets through the RFP process because it's the single best way to preserve shareholder value and really expand in a nondilutive way. It also allows us to maintain our top line growth rate because we'll continue to open up new markets as time goes on. But if you go down the list of the 16, 17 markets that we're in currently, most of them we're in a top 3 position, right? I mean if you're -- even in -- if you look at whether it's Delaware; Massachusetts; New York; Ohio; Pennsylvania; Virginia, Washington, D.C., and these are all markets where we're #1 or #2 in of market share, in terms of revenue, in terms of -- and certainly in terms of financial performance. And so there are definitely markets where we have the ability to sort of lean in and continue to expand like we're going to -- like we've done in Colorado or like we've done in California. But you're going to see us really focus on profitable growth, on leveraging and scaling our fixed assets and on really utilizing the human capital that we've spent the past several years developing and giving them the leash to actually succeed in a way that we don't think other people will be able to compete because they really do work well as a cohesive team. So it's about not only just sort of maintaining our leadership position with that infrastructure because a lot of folks have -- they've been able to be successful in 1 or 2 or 3 markets, but guess what, by the end of this quarter, we're going to be EBITDA positive in 10 markets, right? And so it's great if you're successful in one market, that doesn't really move the needle if you're an institutional investor. And if you're in one market, you have an enormous amount of operating risk. What you really need to have is a balanced platform where all of your facilities are performing and where you can frankly flex in and out of the shared services that every company has to maintain just as a matter of course. And that's kind of how we think about the next phase, which is looking at the markets that we're in, sort of making sure we have the right infrastructure to sort of take advantage of this conversion to adult use, which is coming. And then opportunistically looking -- opportunistically looking at M&A to kind of increase that critical mass so that we can go from a #2 player to the definitive #1 player, so that we can expand our footprint from being in New York, a 30% market share to a 40% market share.

Right. We've probably got time for just one question. Let me check what's been submitted here in the virtual chat boxes. So what smaller market that you're in today are you most excited about and why?

By smaller market, I'm going to use population as a proxy for that. Delaware and D.C. are probably the smallest markets we're in, and they're probably among the smallest markets in the country. I think D.C. has the highest per capita use of cannabis of any jurisdiction we're in, in the United States. It has one of the largest visiting populations in the United States, and it has a limited license structure that is opening up. But ultimately, we think about sort of the same kind of dynamics you have in a place like Vegas, where you have this massive inflow, a constant inflow of visitors, we see the same thing in D.C. So I would say D.C. is a market that we're interested in and interested in seeing because it has an opportunity to really kind of turn into a very attractive market. But as far as the star performers of this year, Delaware is actually one of them. And one of the reasons why Delaware is so interesting is that you have a lot of people from D.C., Virginia and Maryland and Pennsylvania going to the Delaware shore. And guess what? Because of COVID, a lot more people are spending more time on the beach than they did before. They're not necessarily going to the office every day. So we've seen a massive, massive increase in the activity in Delaware, and that's gone from kind of seasonal in nature to being permanent and that's pretty exciting. But those are kind of just small markets. I think as far as the economic model is concerned, New York ironically has one of the smallest markets in the country. But with 20 million permanent residents and 250 million visitors a year, and considering we only have 3 -- we have 3 of our 4 dispensaries downstate and we have the best sort of home delivery network in the state of New York, I actually think that, that's going to be a market that turns out to be bigger than California once they transition to adult use. So that's -- I would say that that's -- we're obviously the market leader in New York. So -- and it's not even -- it's by a large margin. So we're pretty excited about what New York can offer.

Excellent. Excellent. Well, look, I really want to thank you for your time today. And Nick, this has been great. I hope it was informative to the audience. We'll be sure to follow-up with the participants, and look forward to staying in touch.

Great. Thank you very much.