Earnings Call: Q1 2021

May 18, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Verano Holdings Corp. 1st Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr. Aaron Myles, Head of Investor Relations. Please go ahead. Thank you, and good morning, everyone. Welcome to Verano's Q1 2021 earnings Conference Call. I'm joined today by George Arcos, Chief Executive Officer and Co Founder and Brian Ward, Chief Financial Officer. During this call, we will discuss our business outlook and make forward looking statements, which are based on management assumptions and expectations. Actual events or results could differ materially due to risks and uncertainties mentioned in our filings with SEDAR, including our financial statements and MD and A for the fiscal year ending December 31, 2020, and our financial statements and MD and A for the 3 months ended March 31, 2021. In addition, throughout today's discussion, Verano will refer To non IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA, adjusted EBITDA and free cash flow. These non IFRS measures are defined in our earnings press release issued earlier today and available at investors. Verano.com, which also includes the reconciliation of these measures to the most comparable IFRS financial measures. Please note the financial information is reported on a pro form a consolidated basis as if the Altman acquisition had closed on January 1, 2021 compared to the actual closing which occurred on February 11, 2021. As a point of clarification, the financial statements we filed on SEDAR are in accordance with IFRS, which includes the contribution from AltMed beginning on the day of the actual closing of February 11 versus our fiscal year on January 1. With that being said, results will differ between the IFRS numbers filed with SEDAR and the pro form a consolidated numbers reported today. Lastly, all currency is in U. S. Dollars unless otherwise noted. I will now turn the call over to George. Please go ahead. Thank you, Aaron. Good morning and welcome everyone. Before we jump in, I would like to thank you for joining our Q1 earnings I am very pleased with our strong results for the quarter as well as the momentum we continue to gain in solidifying our financial position, while also developing a footprint that supports our ability to deliver on our objective of finishing the year as a top operator in the space. This includes being a top 3 producer of both revenue and EBITDA, while maintaining industry leading margins driven by sound operations and strong expense management. In addition to revenue and EBITDA performance, we expect to maintain strong financial health, which includes an industry leading rate for a non dilutive credit facility. And given our strong positive cash flow, we avoided the need for sale leasebacks as a method of raising capital through deleveraging of our owned real estate That said, while it's been just a little over a month since we reported 2020 full year earnings, the rate at which we are progressing has continued. And the momentum we've built, which we touched on during our last call, has not slowed down. However, I want to emphasize that while the pace and A relatively unprecedented, every move and decision we've made has been carefully considered and supports our strategic vision for the company. Ultimately, we are accomplishing what we set out to and we are delivering on our stated objectives. We plan to access capital markets and close on the Altmet transaction, providing an entry into both Florida and Arizona, and we did. After going public on the Canadian Securities Exchange, we gained approval to be quoted on the OTCQX, which allows us to gain exposure and broaden our U. S. Investor base. Beyond that, we are preparing and continue to position Verano Inclusion in the U. S. Capital markets as consideration for U. S.-based cannabis companies continues to materialize. We also plan to go deeper in our core states and we did. We made significant strides developing and enhancing our footprint in Illinois, Pennsylvania and Ohio, while establishing a top 3 position in Arizona. Not including Olmed, we've announced 10 accretive acquisitions since going public and 2 since our last earnings call, including AgriDyme, which upon closing will unlock vertical integration in Pennsylvania with an active 62,000 square foot state of the art cultivation and production facility. And Agronomid Biologics, a Phase 2 approved clinical registrant, which will allow us to build a second cultivation and production facility, plus 6 new dispensaries, the first of which just recently opened in Chester, Pennsylvania to conduct medical marijuana research in partnership with Drexel University College of Medicine. We believe these two acquisitions in combination with our previously closed transactions in Pennsylvania will enable us to maximize our footprint and secure a true leadership position in the market. Given the number of transactions we've The consideration between physical assets and paper licenses and for competitive reasons, we have not provided specifics around the 2021 EBITDA multiples paid for each deal. However, I can share directionally that we believe the numbers are in line with or better than market average, which nets out in the mid single digit range. Notably, upon closing all announced transactions and including shares to be issued resulting from the CAD100 million bought deal announced in February, we expect total dilution of less than 7.5%. That said, we remain vigilant and focused on the strategic use Our stock as currency always mindful of potential dilution. We recently announced the filing of our base shelf prospectus And although we have no imminent plans to utilize the shelf prospectus, we believe it provides optionality for us to stay nimble and will give us the ability to capitalize Lastly, between cash on hand, cash produced, proceeds from going public, The BAW deal and our upside credit facility, we are adequately equipped to meet the cash requirements for each transaction, while also maintaining a strong cash Regarding the upsize of our existing credit facility by $100,000,000 we were able to lower our cost of capital with demonstrably improved terms, including an industry leading rate for a non dilutive credit facility of 9.75%, further validating the progress of And finally, we plan to expand our vertical operations and we did. Pending completion of the AgroKind and Agronomet acquisitions in Pennsylvania and the near complete construction of our newest cultivation facility in Massachusetts, We will have established vertical integration in 9 of our 11 active markets. At the same time, we've invested in the expansion of 7 Active cultivation and production facilities across our footprint in parallel with increasing sales, growing patient counts, adult use policy adoption and a general trend of rising demand. Of note, when our potential cultivation capacity is reached in Pennsylvania in combination with the build out of our remaining retail locations, which will maximize our footprint in the state, we expect to capture a sizable portion of wholesale market share from existing players. Before providing a current summary of our operating footprint, I want to again highlight the efficient progress we've made this year on the M and A front. With that, our operating footprint consists of 75 total active dispensaries, including 2 associated with pending transactions with plans to add 10 or more by the end of the year. Nine active cultivation and production facilities totaling over 800,000 With the 10th in Massachusetts expected to come online in Q3, which will add approximately 26,000 square feet to our total. I'd like to quickly note that these do not include a second facility which will be developed in Pennsylvania. And vertical integration in 9 of 11 active states once We continue to differentiate our company by executing a strategy of operational efficiency, driving strong margins and a profitable bottom line. I am very pleased to announce Q1 2021 revenue of $143,000,000 top line quarter over quarter growth of The split between retail and wholesale revenue was approximately 69% 31%, respectively. New store openings and acquisitions made way for for announced year over year growth in retail revenue. We expect a positive change in the wholesale side of our business over the next several quarters, driven by increased resulting from broad cultivation expansion efforts. The split skewing somewhat heavily toward retail is also influenced by tremendous performance in Florida, where our revenue folds into the retail channel. Going forward, we would anticipate this leveling out slightly once all expanded cultivation We also generated substantial organic growth with same store sales increasing 90% compared to the Q1 of 2020. I'd also like to highlight the organic expansion efforts carried out on the retail side of our business during Q1. We brought 4 new dispensaries online across 4 states. We also continue to enhance our standard operating procedures across our retail network, which has led to increased throughput. The average number of daily visits increased from approximately 4,000 in the Q1 of last year to more than 10,000 in the most recent quarter with proven efficiency based on same store daily transaction growth of 71%. We also experienced improved point of sale activity in the quarter as our customers spent on average around 7% more per basket compared to the same period of last year. Given our balanced approach, we drove strong sales growth on the wholesale front producing over 28% year over year revenue growth in the 1st quarter. The momentum we have gained from our efforts to increase wholesale capacity throughout 2020 and into 2021 provides a sturdy foundation for us to gain market share in strategic states throughout the remainder of the year. Moving on, I'd like to point out what we are most encouraged by from Markets drove positive net income of $8,000,000 exclusive of biological assets and $75,000,000 of adjusted EBITDA or an industry leading margin of more than 52% of revenue. I am very pleased with our progress and how we are poised to accelerate our national leadership position in the industry in both the retail and wholesale verticals. We will continue working towards closing our pending acquisitions, completing cultivation expansion efforts and bringing additional capacity online while maintaining our pace in organic retail expansion by opening new doors as planned and continuing to streamline and enhance our operations. With that, I will now turn the call over to Brian to provide more details surrounding our strong financial results, after which I will cover our outlook for the remainder of 2021. Brian, take it away. Thank you, George. It's a pleasure to speak with you all today. I cannot overstate how proud I am of what we are accomplishing. Our strong performance from the quarter conveys the amazing work our team has put in and suggests an placed on February 11, 2021. Also, all currency is in U. S. Dollars unless otherwise noted. 1st quarter 2021 revenue Investments we've made to expand wholesale capacity during 2020 2021 year to date across 7 active cultivation and production facilities. We also observed strong retail growth with same store sales up 26% from Q4 2020. In addition to the continued success within our existing retail We experienced significant growth driven by the impact of adding dispensaries throughout the course of the Q1. As noted on the last earnings call, Although a large portion of our revenue was generated in Illinois and Florida, which we believe to represent the greatest near term opportunities for Verano, We are encouraged by the progress we're making in Arizona, Pennsylvania, New Jersey, Maryland and Ohio heading into the remainder of 2021. Gross profit for the Q1 of 2021 on an unadjusted basis and excluding the impact of biological assets was $89,000,000 compared to $50,000,000 in the same period last year. As a percent of revenue, gross profit was 62%, preserving one of the strongest margins in the industry. We did experience a slight decline from the 63% generated for the full year 2020 due to the impact of costs associated with investments made across numerous cultivation facilities and developing new retail locations. Looking ahead, although we anticipate some variation in margins, we expect to maintain a profile in the low 60s as we progress through 2021. Moving on, we maintain exceptional expense management with Q1 2021 SG and A expense of $29,000,000 or 20% of revenue compared to $14,000,000 or 21% of revenue in the same period last year. Operational efficiency is Crucial to our leading expense management, which is a testament to our teams and their ability to collaborate and to streamline practices across our organization. As demonstrated by our results in 2020, we are efficiently scaling our business and generating operational leverage. To help propel our business as it grows. Net income in Q1 2021, including the impact of biological assets, was $126,000,000 compared to $72,000,000 in the same period last year. Excluding the impact of biological assets, Net income was $8,000,000 in the Q1 2021. Q1 2021 EBITDA on an unadjusted basis was $60,000,000 or 42 percent of revenue compared to $37,000,000 in the same period last year. After adjusting for one time expenses related to other expense gained from investment and associates and acquisition related costs, Adjusted EBITDA in the Q1 of 2021 was $75,000,000 or more than 52% of revenue compared to $41,000,000 in the same period last As always, we take tremendous pride in our ability to expand the business and make investments in infrastructure, which includes dispensary openings, expansion of our cultivation facilities, along with acquisitions, all while maintaining an industry leading margin profile. Now turning to the balance sheet and cash flows. We ended the quarter with $112,000,000 in cash and cash equivalents. Please note, This does not include the previously announced $100,000,000 upsizing of our existing credit agreement with an industry leading 9.75 percent rate for a non dilutive facility measurably lowering our cost of capital. The volume of our investments in capital expenditures remains elevated as we continue to expand our infrastructure in line with experienced and anticipated growth in the market. In the Q1 of 2021, our investment in capital expenditures totaled $38,000,000 We anticipate a continuance of investment in our business for the near term and project to close out 2021 in excess of $100,000,000 in total CapEx. Cash flow from operations for Q1 2021 was $42,000,000 and free cash flow was $4,000,000 Before turning it back over to George, there are a few items I'd like to reiterate. First, while this was a strong quarter relative to our key performance indicators, We feel we are at the beginning of a ramp up, which should produce accelerated quarter over quarter growth for the remainder of 2021. 2nd, to support our stated objective of solidifying a national leadership position, we will continue to make sound investments in CapEx to propel our Next, as George mentioned, we are preparing the company to take advantage of the U. S. Capital markets as our industry continues to gain more acceptance. This of course involves the conversion of our financial reporting to U. S. GAAP, a process that we anticipate beginning in Q2 with potential for completion in Q3. I can assure you that we will continue to take the necessary steps and are working diligently to operate under the U. S. Umbrella and maintain readiness. And most of all, As we work quickly to pave our own differentiated path to the top, we do so with an operator's mindset and work ethic, maintaining industry leading margins even through the considerable expansion of our business. Now, I'll turn it back over to George. Thanks, Brian. Before turning this over to Q and A, I want to briefly cover how I envision our performance shaping up for the remainder of the year. While I was extremely pleased with the results from Q1, it was still very much is a foundational quarter for us, and I feel that we are at the beginning stages of an acceleration throughout 2021. I anticipate solid results in Q2. Including the impact from acquisitions, we believe we can generate revenue approaching $200,000,000 while also maintaining our signature of a strong EBITDA margin profile in the low 40s on an unadjusted basis. Looking towards the remainder of 2021, the impact of pending acquisitions, Cultivation expansion efforts and organic retail growth, we anticipate continued acceleration into Q3 and expect Q4 to be our strongest yet. Much of our success to this point and my confidence surrounding future growth and prosperity is the byproduct of an incredibly talented management team I've said it before, people, process and product. These are the pillars on which our business is built. Leader in the retail vertical and a considerable share our CPG brands uphold across our markets. As a new entrant into the public market, But among the strongest operators in the space, we will continue to work diligently to produce the results that we know we are capable of. Thank you for taking the time to listen in, and please know that we appreciate your support. With that, operator, you may now open it up for Q and A. First question comes from Kenric Tyche. Please go ahead. Thank you and good morning. Congrats on the PrintGen's phenomenal results. A couple of quick questions for me. Just George, in Illinois, you guys have you've capsized all your 10 store limit. Can you just speak to Help us better understand the impact of the accelerated store openings we saw late in March that have continued through quarter. And then part 2 of that Any further insight you can provide on the long awaited 75 new licenses that we're looking to see in the back half of this year? Good morning, Kenric, and thank you. The accelerated store count was due to the stores having to be opened by March 31. So the initial 110 store count had a deadline of Q1 of this year. So that's why you saw the majority of those stores get open. And the 75 stores, we anticipate that legislation will hopefully award those in the month of June. That's what we're currently hearing. So we'll see what happens by the end of this session. We're eagerly awaiting these social equity applicants to come online, so we can help them get the businesses up and running and we view that as a big positive for Illinois. Thank you, George. And then just to that end, I mean, big print in Illinois in the quarter, we all saw the headlines. But where were the biggest In terms of your performance in that market, was it a function of the traffic you called out during your prepared remarks, that average basket uptick that you called out? I mean, Where relative to your own expectations on this quarter were the biggest surprises for the team? To be perfectly It's no surprise here. I mean, this is our home state. We coming from the retail side of the business, January February typically sold slow months in the retail sector. What we're seeing here in Illinois in March, usually there's a big uptick around spring break, which is exactly what happened. More importantly, we're Seeing the vaccine rollout work and it's been effective across our entire state. But even here at our home office, we're starting to see people walk around in the city of Chicago, you're starting Restaurants open back up and you're seeing increased traffic throughout our entire retail platform. So it's exciting to see. We believe we're going to have a great year And we're definitely looking forward to getting some tourism back in Illinois as well. That's great. And a quick final one before I get Thank you. Any chance, Brian, you could sort of help us carve out the $13,500,000 in sort of transaction acquisition related? How much of that was your listing related versus acquisition, which might be deemed a little bit more of a recurring expense? Any breakdown or additional color you can or will provide on that? Yes, absolutely, Kenric. So of the adjustments, I I would say a couple of $1,000,000 is related to the RTO that occurred in the quarter. And then most of the balance is largely related to the AltMed merger as well as a couple of the acquisitions. So Notably acquisition related costs, earn out payments, etcetera. But yes, with the RTO effective in the Q1, that was certainly a fair amount of the expense there. Great. Thanks so much, Angela. I'll get back in queue. Thanks, Henry. The question comes from Russell Stanley. Please go ahead. Good morning. Just and congrats on a stellar quarter. Just wondering around Arizona, The acquisitions that you've closed there, I'm wondering if you can tell us how integration is proceeding. And in terms of potential further M and A in that stage, just wondering What the impact to date has been of the Truly Harvest announcement on valuation expectations? Thank you. Thank you, Russ. Good question. Integration is going very well in Arizona. The teams are working together across the entire platform there. We're currently expanding the cultivation footprint. We're integrating both of those cultivation assets, putting best practices in place. On the retail front, we're getting our flagship store ready in Phoenix that should be opening here soon. We'll most likely be rebranding all the stores to follow the Zenley footprint. But more importantly, the people have been great. And that's really what this is all about. This is a people business. We're working well together on the corporate level as well as on the ground. And it's been tremendous to see Arizona come together. On the M and A side, there could be some future transactions that take place for us in Arizona. They fit the portfolio of our current Verano brand. And we anticipate that those will be good transactions as well if they happen and when they happen. As far as valuations, the Truly Harvest merger was great, great team in Harvest. Obviously, that's our key state. We commend them on a great deal. I think that's a good merger. I don't think it affects valuations on the private side. That's a big company across a big national footprint. So we're seeing the profile stay pretty much the same and we only transact within a certain profile. So If I could just sneak one more in, in New Jersey, you just you recently opened your second dispensary, just wondering when your 3rd might get up. Thank you. Absolutely. Yes, we actually have inspection on our 3rd coming up here shortly and we should be opening up sometime in June. So we're looking forward to that. That'll Finish our retail footprint, cultivation expansion is nearing completion as well. So we're looking forward to the adult use transition and we'll be eagerly awaiting Lines at our front doors. We'll be ready for it and I think it's going to be an exciting time for Verano and the industry. Next question comes from Andrew Semple with Echelon Capital Markets. Hi there. Good morning and congrats on the strong quarter. My first question this morning, just asking on some of the M and A And your outlook there. You're starting to approach your regulatory caps in some of your limited license markets, Illinois, Pennsylvania, Ohio, Maryland. Do you view your M and A priority in the months ahead as continuing to go deeper in your existing states? Or do you think maybe it's time to start looking at adding a new state to the mix and expanding your horizons? Thanks, Andrew. Good question. First, we want to stick to going deeper. That's been our strategy. We still have some additional M and A that we'd like to transact upon to make our footprint where we like it to be. As far as additional states, there's no rush for us. Executing at a high level within our current 14 state footprint is definitely the priority. There's big expansion opportunities in almost every one of our states on the cultivation side, wholesale side. There's also adult use transition in multiple states. Wholesale side, there's also a double use transition in multiple states that we believe will happen over the next 2 years. I mean, that takes a lot of work to be ready. So for now, we're going to continue on our strategy of going deeper and executing at a high level within our current 14 states. That's great color. Thank you. Just another question here. The EBITDA margins for the quarter were obviously very impressive. I would like to get your thoughts on whether pending M and A might have somewhat of a near term impact on that margin level, particularly since Many of the pending acquisitions or those that have recently closed have been retail stores, not necessarily the full EBITDA margin that you experienced on a vertically integrated business? And then looking beyond kind of the near term impacts, do you feel like you'd be able to get those assets up to Your portfolio level 50 percent EBITDA margins kind of over the longer period as you bring on additional cultivation and wholesale capacity to get more vertical. Thank you. Thank you. I'm going to defer to Brian and then I'll recap Yes, Andrew. So to provide a little bit more color on where we think EBITDA margins are going to land, I think there is some volatility as we get acquisitions integrated. But as We kind of alluded to, we are really committed to on an unadjusted basis, EBITDA margins in the low 40s. And part of that has to do with the expansion and all of our cultivation facilities where we're going to see that benefit coming online as well as having vertical benefit in the state of Pennsylvania. And so, of course, a lot of the M and A recently has been retail in nature. But as we strike that right balance between wholesale and retail, Frankly, we want to be winners in both verticals and believe we can. We do believe that EBITDA margin profile is going to sustain. So on an unadjusted basis in the low 40s, Of course, there are going to be some adjustments especially related to all the acquisitions and there will be some volatility between the quarters. I think for the full year, we're very comfortable staying in that low 40s on adjusted margin. And it's kind of part of our secret sauce. Next question comes from Neil Gillemer with Haywood Securities. Yes, good morning. I'll echo my comments on the quarter as well. Maybe I wanted to follow-up on Pennsylvania in your comments and prepared remarks there. When can you give us sort of timeline when you That to sort of be at your maximum capacity in that state as far as the build out of another cultivation and further dispensing openings? We're actively planning that second cultivation currently. It will take some time depending on zoning, construction schedules, Etcetera, we anticipate that coming online sometime in 2022. Don't have an exact date yet, but we are working on it and it's pedal to the metal in that cultivation facility. Okay. Thank you very much for that. And then maybe and I think it was in your prepared remarks, but I might have missed it. Just with respect to your revenue mix Retail and wholesale. So how you expect that to trend going forward? Obviously, I think it was fairly weighted towards the retail In Q1, are you expecting those sorts of levels to be maintained as we move forward through 2020 Yes, we anticipate them balancing out a little bit. Obviously, it's a tightly skewed in Florida. All of that revenue goes towards the retail level. But Over time, as cultivation comes online, we add cultivation capacity in Pennsylvania. We expect that to balance out, but we are very comfortable with where we're at currently. And at this time, I will turn the call over to Mr. George Arcos for closing remarks. Thank you everyone for joining us today. It's been a pleasure and we look forward to our next earnings call. Have a great day. This concludes today's conference call. You may now disconnect.