Good afternoon, and welcome to Green Thumb's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the conclusion of formal remarks. During the question-and-answer session, we would ask for a limit of one question and one follow-up question per person. As a reminder, a live audio webcast of the call is available on the investor relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I will now turn the call over to Leah Rosenfeld, Senior Director, External Communications. Please go ahead.
Thanks, Gary. Good 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 our actual results to differ materially from these statements. These risks and uncertainties are detailed in the earnings press release issued today, along with the report filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the 2021 annual report filed on Form 10-K. This report, along with today's earnings release, can be found under the investor section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.
Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and SEDAR filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone, and 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, and we continued 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 ninth consecutive quarter with positive free cash flow from operations. This quarter, we had a 200 basis point decline in gross margin versus last quarter, but still came in above our stated goal of 50%.
That said, and as I have repeated before, we are more focused on cash flow than margins, which can fluctuate quarter to quarter considering all the moving pieces in our business. Some of these include starting up operations in new markets, possible delays in adult use sales, as well as investments made in any given quarter to better serve our customers. While margins are important, and we've discussed the 50% gross margin goal, I think a more important factor for us and the industry is cash. Last weekend was the Berkshire Hathaway annual shareholders meeting in Omaha with legends Warren Buffett and Charlie Munger. Several folks from our team were able to listen to Warren say that cash is, quote, "Like oxygen.
It is there all the time, but if it disappears for a few minutes, it is all over. We live on that cash oxygen and plan for that to continue. The focus on cash has been in our DNA since the very beginning. It's a discipline that 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. To our way of thinking, follow the cashish. Now, for a short update on our most recent acquisitions. In 2021, we entered three states, Virginia, Rhode Island, and Minnesota, and we like our setup in each of them.
All three are catalysts for future consumption of our products, and we are excited to bring our authentic brand, like RYTHM, Dogwalkers, and Incredibles, to more Americans. As you know, Virginia has already passed adult use legislation, and we've begun scaling our operations by adding two stores this year and expanding cultivation capacity. Adult 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 added our sixth store 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 three of these acquisitions were quickly and fully integrated into the Green Thumb family, something we have improved at over the years. Now for the New Jersey news. On October 11th, New Jersey gave the green light for seven operators, including Green Thumb, to begin adult use. The long-awaited prohibition in the Tri-State area has finally ended, and as anticipated, we have seen strong demand in our stores, Rise Paterson and Rise Bloomfield. On an industry level, on the first day of adult use sales in New Jersey, approximately 12,000 customers purchased nearly $2 million of recreational cannabis products.
While this is certainly a cause for celebration, it is also a good example of positioning and patience by Green Thumb. We first entered New Jersey by winning a vertical license in December 2018. The license had virtually zero cost to investors. We decided to plant the Green Thumb flag in Paterson, an economically disadvantaged area, to build the cultivation and processing facility necessary to create supply for retail sales while bringing important job creation to the community. In 2019, one year after being awarded the license, we opened our first store in Paterson, followed by two more stores in 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 positions 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 of top line net revenue and $67 million of adjusted operating EBITDA. Total net revenue decreased $1 million over the previous quarter, with gross CPG revenue declining $4 million and gross retail revenue declining $1 million. As I previously highlighted, the difference between gross revenue and net is intercompany 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 biggest contributing factors. The balance of the decline was attributable to start-up costs associated with New Jersey adult use and recently completed wholesale facility expansions.
On the SG&A side, excluding depreciation, 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 increase was payroll-related, primarily across our retail and shared service functions. We continue to closely monitor our overall SG&A spend relative to our top-line growth and margin performance, as our intrinsic goal remains to keep gross margins and adjusted operating EBITDA margins at or above 50% and 30% 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 a warrant liability associated with our senior debt facility. Net of these expenses, the company generated approximately $29 million in net income, or $0.12 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 of cash. During Q1, we invested approximately $60 million in gross CapEx when including the spend associated with our sale-leasebacks. 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 position, along with our positive cash flow from operations, translates into better sleep for our stakeholders.
As we look ahead at the balance of the year, you can expect us to continue to do a few simple things. Number one, tune out the noise and control what we can control. Two, be the consumer. Everything we do is through that lens. Three, watch our cash. Four, be ready to be opportunistic when others are fearful. New Jersey adult use kicked off on 4/21, and early results look eerily similar to Illinois circa 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. Good news is if you are a shareholder in Green Thumb, you have action in all three. Back to you, Ben.
Thank you, Anthony. Before we open for questions, I will end on a couple items that I believe to be both important and urgent. The first is creating a diverse and equitable cannabis industry. I'll be honest, this is very hard. For more than three years, we've been struggling to find an equitable solution in our home 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 three-pronged 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 at higher ed institutions like Olive-Harvey College in Chicago, Medgar Evers College in New York City, and the Cleveland School of Cannabis.
Our Green Thumb brand of flower products was specifically created to help fund nonprofit organizations who are doing the groundwork in their communities to create real and sustained 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 five more organizations with missions that are aligned to education, expungement, or employment to help create opportunity and change in impacted communities. Tackling systemic change is a tall order, and we want to be part of the solution as we believe this industry should create new wealth, particularly in minority communities. At Green Thumb, what keeps us excited and motivated every day is bringing the American people access to well-being. We think this is a real American story. America has created the problem.
Remember, every year, more than 100,000 Americans die from alcohol-related causes and another 75,000 Americans from opioid overdoses. Cannabis is helping, yet it's understudied, stigmatized, and illegal. We step back, and we think the country is stressed out and under extreme anxiety. Factors like COVID-19, inflation, social inequality, and the war in Ukraine have put us on the verge of a virtual panic attack. In these tough, unpredictable times, our mission to promote well-being through the power of cannabis is more important than ever. If you haven't tried our product, now might be a good time. Find your rhythm, America. Enjoy the journey with Dogwalkers. We'll open it up to questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, we would ask for a limit of one question and one follow-up per person. Our first question comes from Leon Cooperman with Omega Family Office. Please go ahead.
Thank you. I appreciate it. I guess the question I'd ask you is, you know, you said if you were a shareholder in Green Thumb, you gave some, you know, positive things, but you also have a 65% decline from the high. Are we just waiting for legalization as the only lever to pull to turn around sentiment? Or basically, is there things the company can do in their control? I assume since you come across as cash is king, and given the cost of capital in the industry, the odds are repurchase is not in the picture. I look at Bloomberg and I see two or three pages of insider selling. I see no insider buying. You know, if you think this story is so good, why we're not seeing any insider buying? That's it. Thank you. Good luck.
Great. Thanks, Lee. In fact, I do not think we're just sitting around waiting for federal change for anything to happen. I think the business in the U.S. 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 industry at 30%. A billion-dollar company at 30% EBITDA margins puts us in a pretty good spot where the industry has 400,000 Americans working in it productively. Instead of federal change in D.C., I think I would turn it back and say we need financial change in New York. The New York Stock Exchange and the Nasdaq will not list our company.
As you're concerned about stock price, my comment on stock price would be, you know, what you know, and what my mentor's mentor has said for a long time, you know, the stock market is a short-term voting machine, long-term weighing machine. Until there's more access to buying stock at mainstream exchanges from the mainstream exchange to hit the plain vanilla long-onlys 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 mark-to-market world. You're right. You know, we listen to Buffett, we think about cash is king, and we're running the business our ways because we think this is a $75 billion-$100 billion U.S. industry. We're comfortable with that.
Are you fully invested in the company? Or it, you know. You have all the right buzzwords, but I don't see the action. I see insider selling, I don't see insider buying. That was my point. I know the company.
Sure.
is not gonna buy, but what's gonna make the management buy?
You don't see any real insider selling.
I don't know. I look at Bloomberg.
What you see is people recover a little bit of their position. As you know, we are huge believers in awarding the team with equity, they get equity. Sometimes there's filings because you get equity as a tax trigger and things like that per the rules, but you do not see any sign of insider selling at all. We're convinced. I'm the largest holder of the company, and we have bullish view on the medium and long-term nature, both of the industry in the U.S. 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 three 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 buzzwords, but.
We can clear that up, but that's fine. I hear you. That's good. I appreciate it. We have conviction. You know what I really think, to be really totally candid with you, is influencers in New York like yourself, who have a voice with the New York Stock Exchange and the Nasdaq, will not let us be listed. This is leading to real damage in the industry. I think if we could have a voice with the New York Stock Exchange or the Nasdaq, the board on TV to talk about it. CNBC we have trouble with. If we can't list on the New York Stock Exchange, Americans can't buy the company that is selling them product that is enabling well-being. I can buy as much stock as you want.
If there's no buyers on an institutional basis in New York, and you have a voice on CNBC, you know, we're happy to discuss it.
I take my battles and live with war, and that's about it. I'm not looking for more battles. Thank you and good luck.
Thank you.
The next question is from Matt McGinley with Needham. Please go ahead.
Yeah, thank you. Can you help better define the drivers of that 215 basis points decline in gross margin you had in this quarter? I know the price decline was most of that pressure last quarter, but raw material and wage inflation are new factors that you called out. I guess, was that price decline more acute this quarter? And how should we think about that impact of raws and labor inflation through the remainder of the year and how that will impact your margin rate?
Thanks, Matt. Yeah, Anthony here. You know, what I mentioned in my prepared remarks was the you know the biggest driver of the compression that we saw on the gross margin line was really price. Some price activity that we saw in Pennsylvania and Nevada and Massachusetts. The other factor is obviously inflation, which everyone in the industry is dealing with. Additionally, we had some staffing where we staffed up in advance of New Jersey adult use. On top of that, we've had additional staffing in some of the facilities where we just recently completed some expansionary CapEx. 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.
As we further unpack it, you know, 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. We're watching it closely. That was the biggest driver of the decline. Like we said, long term, we fully believe that we can kind of achieve the 50% kind of gross margin level within the business.
Okay. In the first quarter, the industry revenue was soft based on a host of factors that you clearly were not immune to. Has the recovery in April and the opening of adult use sales in New Jersey given you the confidence that you can resume top line growth again in the second quarter? Or is that outlook a little bit premature?
Look, I'd say at this point, we're one month in. April was stronger than January and February. We're watching it closely. I would say right now we're comfortable saying that, you know, we should achieve flat sales. At this point, that's what we're comfortable saying, given we're only call it, you know, a third through the quarter.
Okay. Thank you.
The next question is from Vivien Azer with Cowen. Please go ahead.
Hi. Thanks so much for taking the question. This is Harrison Vivas on for Vivien. Look on New Jersey, understanding it's still early days, it looks like the product assortment is pretty limited. Can you just kind of offer some line of sight on when we should expect to see additional form factors like pre-rolls in your stores? Thanks.
Sure. You know, great question. Look, we obviously think that the more products that hit the market, you know, that's what's really gonna drive kind of market expansion. I would say in the early days, you know, 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 well, you know, including kind of the Snoozeberry that obviously is doing well in a number of markets. We have Dogwalkers currently on the medical side, so it's only a matter of time before we can introduce those on the adult use side.
Understood. That makes sense. Just as a follow-up, Matt kind of talked about the improvement that we've seen into 2Q. Like we cover the broader CPG space. Altria called out better than expected benefit from federal tax returns. Can you comment on how that's impacted your business?
Yeah. I'm not sure we have quite as big a pulse on that. If you look at last year's impact on the federal government with Biden being elected and then the check distribution was felt more materially. No real comment on this year.
Understood. I'll hop back in the queue. Thanks.
The next question is from Camilo Lyon with BTIG. Please go ahead.
Thanks, and good afternoon, everyone. Anthony, I was hoping you could give a little bit more clarity on helping us understand what the run rate is of SG&A. I think there's about a $50 million add back, acquisitions and other to get back to Adjusted EBITDA. I'm just curious, what's the right level of expenses that we should be thinking about going forward?
Yeah. 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. Internally, we focus on a normalized SG&A level. You know, we did see a $4 million increase from Q4 to Q1. We went from $57 million to $61 million. 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 gonna have to continue to invest in the team, particularly as we kind of look ahead and see expansion coming in the Northeast via adult use.
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, you know, 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. Could you parse out what the acquisition component was of that $15 million add back? I'm assuming that was from LeafLine mainly, right?
Yes. Well, what's interesting about at least this quarter is that when we see a change in our contingent liabilities, that actually runs through the SG&A line. You know, in this case, the big number that you referenced, essentially we had an earn-out. You value that earn-out over time, and you constantly kind of revalue that earn-out. Based off the performance of the underlying business, you know, we estimate that the liability associated with that earn-out 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. You mentioned. You're pretty clear and articulate on the gross margin buckets. Now that New Jersey is on, it would seem that Q1 margins, gross margins would be the nadir for the year, and that you'd steadily improve going forward a la sequel. Is that a fair way to think about the progression through the year?
You know, I think we've given enough, and you know, we'll see what the eight ball says.
I'm sorry, say that one more time.
We're not commenting anymore on the future. I know the ask, but I think Anthony's given enough guidance.
Got it.
The next question is from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.
Hi, this is Matthew Baker on for Pablo. We have two questions today. I know this was touched on a bit, but can you guys explain why there's such a large difference between the number of SKUs available on the medical menu compared to the rec menu in New Jersey? I'll ask a follow-up afterwards.
Great. Yeah. The priority in the New Jersey market is to continue to serve the medical patient. There's very specific regulatory guidance on how much product based on, you know, proven run rates and pull through of different products and different SKUs, form factors for the medical patient. Essentially, as I said in the prepared remarks, and as we believe and as we've sort of tried to preach along the country, is to prioritize the medical patients who are getting, you know, more relief for, you know, stated condition. That menu is deeper. Same thing happened in Illinois, less regulated, but more voluntary, but same exact sort of situation. Over time, you'll see more products, more SKUs, more brands to the adult use side. It was a successful start.
We see plenty of upside as those menus equalize, more form factors, more guidance from the state on detailed products.
Okay, got it. 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?
You know, the count is applications.
What was the other one?
Number of patients.
Number of patients. Basically counts are public. You can get that. We're not gonna comment on an individual state per capita spend, but it's pretty easy.
The total amount in the state divided by the number of patients in the state. Keep in mind, the number of purchasing patients is always different to get the ticket. But I would not say there's material differences among many states. If the question is what products are available, what's on the menu, and how big is that patient count. We remain very bullish on Virginia and Minnesota, I think the two states you asked about. In terms of zoom out, if you look at the populations in those states and look at where the capital has gone in to build that supply, these states are gonna consume a lot of cannabis.
Minnesota has the exact same population as Colorado, and Colorado's gonna put around for a long time and run rate $1.5 billion-$2 billion, and Minnesota is a fraction of that. We don't think the consumers in Colorado, you know, consume differently. It's just been different history and a different setup from a regulatory standpoint. Virginia sets up with the regulations already allowing adult use, with several operators hard at work, and we hope more entrants into the industry. You know, the governor is supportive of economic growth, tax revenue, and jobs. I believe up and down, that's what this industry can deliver.
All right. Thanks.
Thanks.
The next question is from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi. Good evening, and thanks for the questions. First question from me. I think you mentioned in the prepared remarks that New Jersey was eerily similar to Illinois, so I just wondering if you could kind of, you know, detail what you meant by that. Was that more store performance, what you saw on the flip, in terms of uptick there? 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 a inventory level versus, you know, just supplying your own stores, and entering more of the wholesale market on the adult use side. Thank you.
Sure. Thanks, Aaron. You know, I'll take one event at a time. History doesn't repeat. It rhymes. You know, I mean, look, demand was big, you know, there were lines out the door. You know, fortunately, it was something given the experience 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. We feel like we did a nice job with that. Each and every day, we're gonna get a little bit better. Flow's gonna get better. The amount of products on the menu is gonna improve. You know, as we look ahead, we're very bullish on the prospects.
If you could, do you mind just repeating your second question?
Yes. On wholesale for New Jersey versus just having inventory for your own stores and how you're looking at wholesale on the market.
Yeah, Matt alluded to it, but you know, the regulators in New Jersey are doing a great job of making sure that the medical program continues to thrive and making sure that every operator in the state really continues their focus on the patients. Now for us, we certainly plan on wholesaling, but what we wanna do is build up enough supply so that we can confidently kind of satisfy the medical needs that we have within the state, and then secondarily, we'll turn to wholesale. So, you know, look, we take a long-term approach. We're not gonna do something shortsighted that's gonna put us offside with the regulators or the market or really the patients, because they're really why we're here and how we got here. 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. 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. Thanks very much. Second question from me. You know, in the on scale, obviously I've seen you guys have, you know, been on scale for a while, and you obviously have a number of markets. We'll continue to scale out. As we kind of think of, you know, the next phase, you know, one state, you know, I kinda think of as Massachusetts, right? Now you're at max, you know, six stores there. You know, limited cultivation you have there for 100,000 sq ft. You called out some pricing pressure. 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's limited license starting to get more competitive, and how you guys look to execute, and continue to improve within those types of marketplaces? Thank you.
Yeah, great question, and Massachusetts is a good case. We like our business out there. The key thing to keep in mind, certainly we have room up to more than. We could go more and grow if we wanted up to the 100,000. We're not at the cap. It's a question of allocation of capital and what the business looks like today. Today, the Massachusetts business looks very good to us in terms of the cash flow and the requirement of incremental invested capital, and if we have to put in capital, what that turns into from a business. We think of Massachusetts more as grounds to build brands with consumers there that are buying a lot of cannabis, loving the product.
As the rules evolve, 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 build with consumers there is incredibly important, and the business produces, you know, it's a profitable business for us. We are not investing into a $50 million grow in Massachusetts. That would not make sense on an incremental invested capital basis.
All right. Great. Thank you very much. Now I'll jump back into the queue.
Thanks.
The next question is from Spencer Hanus with Wolfe Research. Please go ahead.
Good afternoon. With the pace of gross margin compression over the last two quarters, why should 50% gross margins really be the floor for the business? 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. Good. Look, it's a great question, Spencer. Look, there's a lot of leverage within the gross margin line that we can actually pull. 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 product 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 at true capacity.
You know, 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 a 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. Net-net when we kind of unpack 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 we just.
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. I guess just on in terms of pricing, where do you think we are in the reset that's taking place across the country? I have a follow-up on New Jersey.
Pricing is very fluid. You know, it's, you know, you have to kind of really understand the markets that we operate in to really understand and really kind of see what's happening, kind of, you know, within pricing of those markets. What 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. 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. Whether or not that's gonna continue to evolve, it certainly could. You know, in some cases we're seeing kind of continued movement and others we're seeing stability.
It's a little premature to kind of say, where are we in the cycle, because to answer that, you really have to kind of look at it on a market to market basis.
Okay. Fair enough. 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? Pricing is still elevated obviously given it's a new market, but as we start to see cultivation ramp, when do you think we start to see promotions really start to flow through there? I know it's a crystal ball, but best you can give on that would be helpful.
Your question on run rate, this is Anthony. I think north of that. You know, look, 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. We think we should see kind of growth from here. Your next question related to was related to wholesale expansion within the state, I believe?
Yeah. How do you think about pricing going forward as production starts to ramp in that market more?
Yes. Right. You mentioned something about promotional line. I mean, look, it's very early days, right? You know, I'd say that we're gonna take this, call it one week, one month at a time. For us, we're working hard on the wholesale side of the business to get enough product available for both our stores, both in the medical and adult use side, and then others. You know, the promotional activity and what we see within the market, you know, candidly, we'll take it as it comes, and just one day at a time. It's hard to really assess it from here, you know, but these markets are fluid and certain things can happen. At this point, it's too premature for us to kind of speculate.
Great. Thank you.
The next question is from Eric Des Lauriers with Craig-Hallum Capital. Please go ahead.
Okay, great. Thanks for taking my questions, and congrats on 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? Thanks.
Categories. Yeah, I mean, look, thanks, Eric. You know the business well. It's driving a lot of our decision-making. I, you know, 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 leaves out for where we think there's less differentiation, less room for the consumer to pay a pricing premium based on that brand. The places we like to invest, obviously, or I think, I hope are 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 likely consume that product. The ready-to-consume pre-roll, Dogwalkers, the nation's best-selling pre-roll joint, is an obvious win. It's a real resonates with the consumer. We think that category continues to expand.
We see category growth there. We look at consumables, ready-to-consume, whether it's edibles or other sorts of form factors. Certainly with cans and beverages, those are categories we wanna be betting on. I think you can look in the basket and see, you know, which parts are out, not necessarily because the consumer won't pay for it, but certainly around scale or where we've chosen to place bets. We're big fans of other things in the basket, but you can't do everything all the time. We really are trying to prioritize around who the consumer is in the future, what's that form factor, what's that brand that's gonna resonate with them in order to lead the pricing.
When we look out in the world and we see branded products driving experience for Americans, that gives us a lot of conviction in what we're doing.
All right. Appreciate that. Last from me here, on the trade-off between your CPG sales to third party versus your own retail. Can you just remind us of the changes in this quarter? Just kind of more broadly speaking, can you kind of talk about, you know, tactical changes, you know, to sort of, you know, increase margins, you know, here and there versus any strategic changes? Just, you know, I guess, just overall comments on that sort of trade-off between CPG sales to third party versus own retail. Thanks.
Yeah, look, it's a great question. It's a topic 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. In certain cases, if we think it makes sense to ship more of our own wholesale goods to our own retail stores, we'll do that. In this case, we consciously pulled down the amount of wholesale goods that we were using to kind of feed our retail stores, and we shipped some of those goods to the outside. Again, it really is driven by what's happening at the market level. In Q1, that was a decision that we consciously kind of made within a few markets.
How we're gonna kind of impact that line on a, you know, in the second quarter and beyond, it's really just a case of business optimization and what we think makes sense for the business at that moment in time.
All right. Appreciate the color. Thanks, guys.
The next question is from Scott Fortune with Roth Capital. Please go ahead.
Good afternoon and thanks for taking questions. Just to kind of kick on the retail side, that was down sequentially. What are the metrics driving that primarily? Are you seeing recent traffic in terms returning back to a more normalized or the average basket size kind of down from that side? Kind of just looking for normalized traffic levels as you're seeing going forward here in starting within the second quarter, kind of what you think from that standpoint.
Yeah. Thanks, Scott. It's Ben. Good question. I think there's a couple ways to look at it. Top down with the first year-over-year decline -3%, you know, we look at it bottom up, what's driving that? You know, the market in 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 board, to your question on transactions and tickets, you're seeing tickets marginally down, and you're seeing transactions up. Depends which market you look at that without, say, the one down market where they go up a lot. That's the general gist across the market. Which aligns with what we're saying, right?
Product pricing under pressure, massive transactions up, massive new consumers as we think of these markets grow over time, or at least the ones where we're investing real shareholder capital in, have massive growth potential ahead. I think the one factor just sort of underlying a lot of these questions is that there's gonna continue to be an influx of capital creating new supply into these markets. Remember, it's a state-to-state market. As regulations change and as things happen with the consumer, this vector is what's happening in the capital markets. We're already seeing operators change their positions. We love it with where we're sitting.
You know, we've been investing this CapEx and coming soon are these states that we've been talking about, New Jersey, which we've been talking about on this call for eight quarters in a row, since this thing passed, that was about to pass, just turns on. I think that's important to see how as we go. Just to go a little bit more detail on the PA market, zoom out a little bit. PA is a market without pre-rolls, without edibles, and a medical market that ripped and surged for four 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 of capital for supply into that market for what's coming.
Got it. Appreciate the detail. Real quick follow-up on that. With you know, price deflation compression environment kind of overall coming about, can you provide more of the initiatives and opportunities on looking at the operations side to increase yield, production efficiencies, kinds of operating lean from that side to drive the cost down? Kind of where you're looking at from the you know, production operations side to continue to drive cost down with this pricing deflation environment currently?
Yeah. Look, Scott, you hit them. I mean, the two biggest drivers, look, you unpack it again, it's largely wholesale driven. So when you look at the wholesale side of the business, it's like, okay, how do you drive gross margin there? There's really two big drivers. Number one, it's higher yields. Number two, it's greater throughput units per labor hour. 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, you know, 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 adult use demand, and you 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 purely similar from the consumer at the store, it's not the same for Green Thumb from a setup standpoint. You know, we have greenfield sites in Illinois that are robust with 200+ employees at each site, that we've been able to scale since 2015. In New Jersey, what I went through on the timeline located in Paterson with density and in northern New Jersey, you know, we certainly don't have the $100 million capital investment in New Jersey that we had in Illinois since 2015. From our standpoint, that's a little bit different. Keep in mind, we have three stores, two 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 invested capital. We certainly look forward to more products, more diversification there. From a P&L standpoint for Green Thumb, it's not nearly similar.
Got it. No, I appreciate the color. Thanks.
From a magnitude, I would say from a business characteristics, it is. From a consumer standpoint, it very much is, because we know the consumer quite well, and it excites us. Go ahead.
The next question is from Ty Collin with ATB Capital Markets. Please go ahead.
Hey, thanks for taking my question. I wanna touch on the labor cost inflation piece. Do you feel that there's more of that to work through in the coming quarters to keep pace with the market? Do you see that higher labor cost baseline as a 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. You know, where it goes from here, really difficult to say. I mean, obviously we're focused on building just an incredible high-performing team. But look, we've seen pressure on that line item as of late. How that's gonna kind of unfold over the next couple quarters and into the long term, you know, difficult to say. We're gonna focus on what we can control. You know, not prepared to sit here and say that it's definitely gonna put that 30% at risk on the long term, but I would say check back in a couple quarters, and we may have a different opinion on that, either positive or negative.
Got it. Okay, thanks for that color. 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 more of a staple or a discretionary product on balance, and how you think about the durability of cannabis demand in the context of the pressures we're seeing on consumer wealth today.
You know, we strongly believe in the durability of this product as a place in the American consumer lifestyle. We see a 99%+ 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 price. I think deflation, I think there's pricing pressure on products from operators who have issues, but over time, you think about the experience trade-off. You think about the price of an alcohol consumption versus the price of a joint, and it's sort of mind-numbing. 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.
That gives us a lot of confidence.
Got it. Thanks for taking my questions, guys.
Sure. Good one.
The next question is from Howard Penney with Hedgeye. Please go ahead.
Hey, thanks very much for the question. 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 two or three markets, I assume, is something you work with day-to-day, knowing that there's a normalization somewhat involved in pricing and pricing is coming down. It's a day-to-day part of the business. Is there any or was there any behavior by any, you know, companies in those markets that may have been one-off in nature or, you know, a sign of desperation or, you know, any, you know, excessive discounting or promotional activity, any one of the markets that would say that, you know, pricing pressure this past quarter was more than you would have seen normal?
I don't know if I answered that question properly.
Yeah. Thanks, Howard. It's Ben. I think the answer is yes. You know, some operators have done some irrational things on pricing. It's not private information to go out and see what's going on, as people figure out their margins or even their viability. You know, we're all in pain, you know, on the verge of just people eating their friends. It's not a pleasant thought, but how to operate in, 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 our verticality, with the size of that business, with what's going on, and then again, the power of our branded product, whether it's indoor premium RYTHM flower or Incredibles, as we can bring Snoozeberry to every single store in the state, et cetera, we're bullish on those markets.
Just lastly from me, the incremental capital spend for the balance of this year is going into what markets?
The continued CapEx that we continue to do is a lot of the finish of the same markets we've been talking about, but Virginia, New York, now Minnesota, as well as New Jersey. It continues to be in the market, Connecticut, with adult use. It's not some of the markets where you're seeing more maturity, where we have a nice cash flow business and established brands. Not as expensive to invest in those as it is to build, like I said, a $50 million cultivation facility that over the T plus one, two, three generates attractive returns for us. I think what you're saying is other folks put a lot of capital in, it's hard to make money in cannabis. There are not a lot of people that have done that. I think capitalism is pretty efficient.
I think when stocks are down as big as they are, there's not as much money sloshing to these opportunities, which is why we have a lot of conviction of where our investment is based on the consumer, not the noise outside. It only makes us a little bit more optimistic of some of the spend that continues this year to be cannabis.
Thank you.
Thank you.
Excuse me. The next question is from Matt Bottomley with Canaccord Genuity. Please go ahead.
Hey guys, thanks for all the color this evening. Just wanted to go back to, you know, you had chatted a little bit about the sort of normalized run rate, SG&A. Maybe just at a higher level, is there an easy way to sort of describe or outline the difference between the reduction in Adjusted EBITDA versus the increase in capital from operations? I know there were some transaction costs and other non-cash things within the SG&A. Is there an easy way to kind of reconcile that?
There's really not, Matt. I think, you know, the statement of cash flow is when it's published, will give you kind of better color there. Yeah, there's a number of things that kind of obviously, you know, run through that operating cash flow number. It all starts with adjusted operating EBITDA and kind of goes from there. We feel good about it. 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. You know, as we look ahead, one of the things we're maniacally focused on is just making sure that we manage our working capital levels, and that they're right-sized for the revenue that we're effectively using them to generate.
Okay, great. I'll go through the rec more carefully. 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. 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 flower in Minnesota, Rhode Island potentially as a rec market, clearly New Jersey turning online.
Are there other things that you can just point to that you think will promote growth specifically for GTI 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 and the seasonality of what's going on and why the second quarter sets up pretty well in the third quarter, et cetera. We said the same thing heading into the fourth quarter with where the seasonality is. I think we've talked about the catalyst, but it's adult use. It depends which quarter, which year. We think the 40+ million Americans that don't quite have adult use product is a major catalyst. I can't tell you which quarter Connecticut, New York, or Virginia turns on. You mentioned Minnesota, as we continue that investment, it really just started. We just closed it this year. So as you look out for a major catalyst, you have a 6 million or about 6 million person state that really is not consuming that much cannabis.
I mean, the number on Minnesota is pretty small on an annual basis, you know, under 100 versus Colorado, that's a 10x or 15x that market with two operators. You go through the math 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 and ends up being a lot of upside. We think the $25 ± billion of the U.S. market, zooming out, triples and over time will grow.
There'll be billions of dollars 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. We feel good about where our boat is and that wave that is pushing us out. You know, behind the wave is some chum, and it's tough to be there. We are excited about the future for the American cannabis consumer with all those catalysts that we mentioned, including new product drops, new strains, and various other things.
Okay, great. Thanks, Ben.
Thanks, Matt.
The next question is from Sean Chettle with Private Investor. Please go ahead.
Yeah. 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 the last year. Every quarter, you guys are making profits, and it seems like every single quarter that stock's going down. Like, could you come up with some creative ways to, like, keep it at a standard? I mean, you guys are making profits.
I appreciate the question.
You're losing the same amount of money. Like, it's your peeps that are doing it.
Appreciate the question. Our focus continues to be on building the most buoyant business.
Yeah, I know. I mean, you're giving away money and cash to, like, different communities. How about giving away some of those stocks? Like, buy some back some stocks and give those away. Give some stocks to your employees. Like, somehow keep that, like, I know it's an OTC stock and it's just a joke right now. It's like, up to you basically to talk to your peers and your colleagues, just tell them to stop selling. Buy some of that back. Create a floor and build on it.
Yeah. Appreciate the question. There's an open market every day. You're welcome to it. We think we're building a business that'll have the largest weight over the medium and long term, and it 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 said on this call many times. We grabbed an umbrella when it was sunny. It is not sunny today. I think the nature, and you can hear it in the questions and some of the edge, that's fine. Over here in the business, we continue to run the business for the medium and long term, not for the trading of the stock. That's not our business.
We looked at counsel from Munger and Buffett over the weekend on how to do this, thinking about the cash, thinking about the farm. 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. It's a good call. Look forward to giving you guys the next update after the second quarter. I sure 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.