Green Thumb Industries Inc.
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Good afternoon, and welcome to Green Thumb's Third Quarter 2021 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. In an effort to keep the duration of the call to one hour, we would ask for a limit of one 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 Grace Bondi Corporate Communications. Please go ahead.

[Grace Bondi:]

Thanks, Matt. Good afternoon and welcome to Green Thumb Third Quarter 2021 earnings call. I'm here today with Founder and CEO and Ben Kovler, and Chief Financial Officer Anthony Georgiadis. Today's discussion and responses to questions may include forward-looking statements, which are subject risks and uncertainties that could cause our actual results to differ materially from these statements. These risks and uncertainties are detailed in our earnings press release issued today, along with our reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the annual report on 2020's Form 10-K, and the quarterly report filed on Form 10-Q, which we expect to file Friday when the SEC reopens after Veterans Day. This report, along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligations 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 release and SEC and cedar filing. Please know all financial information is provided in U.S. dollars, unless otherwise indicated. Thanks, everyone. And now, here's Ben.

[Ben Kovler:]

Thank you, Grace. Good afternoon everyone, and thank you for joining our third quarter 2021 earnings call. Green Thumb team delivered strong results this quarter, reflecting solid execution and continued positive momentum in our business. Revenue for the third quarter was $234 million up 5% sequentially, and 49% year-over-year. We posted our fifth consecutive quarter of positive GAAP Net Income, our seventh quarter of positive cash flow from operations and adjusted EBITDA grew 53% year-over-year to $81 million. That brings year-to-date revenue and adjusted EBITDA through 3 quarters to $650 million and $232 million, respectively. We ended the quarter with cash and cash equivalents of $286 million, which gives us flexibility to invest with an eye towards long-term returns for all of our stakeholders. Now, I'm going to tell you about some exciting development inside the business. Recent M&A execution and our thinking on brand and the overall industry. Anthony will then discuss the financials, and we will hit Q&A. On September 9th, we broke ground on our war with your cultivation and production facility. The irony of building a cannabis campus on the ground of this formal federal prison that locked up people for cannabis, is not lost on any of us. On the precinct shutter, hundreds of jobs were eliminated in the community of Warwick. We're planning to reverse the cycle by creating high paying jobs in the legal cannabis business that will reinvigorate the local economy, something we've done before in our communities in Illinois and Pennsylvania. On October 16, we celebrated the grand reopening of our Rise Meadville store, which was Green Thumb's first retail store, open ed back in 2015. And in fact, yesterday was the 6th year anniversary for Rise Meadville and the Illinois Cannabis program. With the reopening we believe rise Meadville is now the first location east of the Mississippi River to offer on-site purchase and consumption of cannabis. It is also the first store in Illinois to offer roll through card service for medical patients to pick up their orders. We look forward to continuing to enhance our patient and customer experience, and bringing these new concepts to other retail locations when regulations permit. We've been busy on other fronts as well. Since the last call, the Green Thumb family has grown. Strategic M&A and strong execution brought new folks onto the team. In July, Virginia became our 13th market with the close of DARVA Pharmaceuticals. We love the investment into Virginia given their population of 8.5 million people and a path to adult-use regulation. We look forward to working with the newly elected Governor Glenn Youngkin and his administration to drive growth and opportunity for the people of Virginia. We currently have 2 stores opened, Rise Abingdon and Rise Salem, with 4 more in the works. We plan to allocate capital to production in the coming quarters to position us to serve the growing consumer demand for rythm, incredibles, and Dogwalkers in the great state of Virginia. In August, we entered Rhode Island, our 14th state, and welcomed Summit Medical Compassion Center to Green Thumb. Summit is one of only 3 dispensaries in the state of Rhode Island. And in September, we partnered with Tom Morey and the great team at Greenstar Herbals. In Massachusetts, would be that operates 2 adult use retail locations, one in Dracut and the other in Maynard, with a third expected to open soon in Chelsea, which is less than a mile from Encore Boston Harbor. On September 15th, we opened Rise Bloomfield, our third store in New Jersey, bringing our total store count to 65 at the end of the third quarter. And subsequent to the quarter, we closed on the acquisition of Maryland Health and Wellness Center, a single retail site in Hagerstown, bringing our total store count to 4 in Maryland, and 66 nationwide. We continue to execute on the thesis of building brands at scale for American consumers who are choosing cannabis for well being. We believe in our brands and their ability to connect to consumers and create loyalty over time. While the industry is still in the first chapter of the brand's building book, we are learning from early successes and mistakes in order to optimize our playbook for the future. We see the and remind everyone that we are all in this together. We continue to believe its first-mover advantage and surfing ahead of the wave. Our growing scale combined with the information Ed we have developed, will set us up to make high probability bet and informed decisions to optimize long-term value for all of our stakeholders. In terms of the state of dates, third quarter legal cannabis sales in the United States were $6 billion, which was flat for the second quarter. Illinois and Pennsylvania are each a $1 to $2 billion market, and we think both have the power to more than double over time. California continues to be a $3.5 to $4 billion market, while Colorado is north of $2 billion. We believe the future for New Jersey, New York, Connecticut, and Virginia will rhyme with those experiences, and we like Green Thumb 's position in each of those markets ahead of adult use. Based on this setup, we will allocate capital appropriately and prudently. We will continue to build branded products to meet consumers where they are and satisfy the demand. That consumer demand gives us conviction in high-end indoor premium power increase simple goal and as Anthony likes to say, tank at scale, which really means high-quality, consistent flour and available nationally. Our flagship brand in Flour is called Rhythm, and we're pleased with the product quality across the country with more room for improvement and growth. Find your rhythm is a universal message that commenced with the American in their daily experiences and special occasions. This is only the beginning. Last quarter, we introduced the launch of Good Green across five states, Illinois, Maryland, Massachusetts, New Jersey, and Pennsylvania, and sales are strong. Following popcorn flower and value price has a spot in the market, and we think aligning that to a brand that is dedicated to investing in non-profits, fighting the harm created by the failed war on drugs is a good plan. To accomplish this, we made an initial commitment of $1.3 million on grants from Good Green sales. And we were excited to have received over 80 applications in the first round from non-profits to support Good Greens' core pillars, education, employment, and expungement. Just recently we announced our 3 winners received unrestricted grants of 75,000 each. Philadelphia lawyers for social equity, that helps eliminate criminal records, blocking people from employment. Innovation works Baltimore, whose mission is to close the racial and wealth divide in neighborhoods, and Why not prosper, which helps incarcerated women's successfully transition from prison to reentering society in Philadelphia. Our second round of applications is now open. So if you know someone who is involved in a non-profit that has a mission that is aligned with repairing some of the harms created by the war on drugs. Please encourage them to go fly at www.goods.green. We continue to thoughtfully execute the business plan to distribute brand at scale. I'm proud of what we have accomplished to date, but feel we're just getting started. We like the positive cash flow from operations net of acuitive taxes. We sleep well at night knowing that regardless of when the federal government and takes action on people's freedom to choose cannabis, we have built Green Thumb to prosper. We plan to stick to our core playbook, which includes tuning out the noise, prudently, allocating capital, obsessing over the consumer, and focusing on execution. We're having fun and continue to believe it is still day 1 for cannabis in the United States. With that, I'll turn the call over to Anthony for his financial review.

[Anthony Georgiadis:]

Thanks, Ben. And good afternoon, everyone. Thank you for listening. As you just heard, our momentum continued during the third quarter with the business generating record revenue, EBITDA, and our fifth consecutive quarter of positive EPS. At a high level, in Q3 the Company posted $234 million of top-line net revenue and $81 million of adjusted operating EBITDA. Total net revenue increased 5% over Q2 with gross CPG revenue growing 3% and gross retail revenue growing 7%. Prior to accounting further Company revenue, this left our gross CPG or retail revenue breakdown at 43% and 57%, respectively, about flat with last quarter. Please note that 100% of our CPG revenue consists of branded products sold to retail stores as the Company is not currently wholesale any bolt biomass to other operators. Consistent with previous periods and despite the overall industry being flat quarter-over-quarter, we attribute our revenue growth to successful execution, high -quality differentiated products, and strong consumer demand across our market base. On the profitability front, the Company's gross margin percentage performance equals Q2, at 55.4%. just reiterating something I've said in the past, our goal remains to keep this very important metric at or above 50%. As time evolves, we anticipate our scale and diversified market-based will help support us in continuing to achieve this goal. On the SG&A side, excluding depreciation, amortization, and stock-based comp, normalized operating costs approximated $52 million, a $5 million increase over the $47 million incurred in Q2. Incentive with the growth experience from Q1 to Q2, most of this increase was payroll-related. That differently, we're executing on our previously stated goal of accelerating our investments in our team and infrastructure. For both now has approximately 3,400 onboard and the journey continues. In the coming quarters, the Company will continue to closely watch SG&A spend relative to its top-line growth. Other income for the quarter approximated 800,000, which primarily reflects non-cash gains associated with our investment portfolio, as well as interest expense from our senior debt facility. Net of these expenses, the Company generated 20.2 million in net income. In addition, the Company generated over 81 million in adjusted operating EBITDA, close to 35% of revenue. Moving onto our Balance Sheet and cash flows, we ended the quarter with approximately $286 million cash. During the quarter, the Company made healthy tax payments to Uncle Sam, and invested over $85 million in gross capex when including the spend associated with our sale leasebacks. On our last call, I communicated our plan to increase our bets in a number of key markets that we believe will help drive the next phase of growth for Green Thumb. Subsequent to quarter end, we've raised the remaining $33 million of capacity we had under our $250 million debt facility. Consistent with our initial rates, this is a non-brokered offering led by long-term investors. We remain bullish on our uses of capital and the cash-on-cash returns we can generate in this next phase of proration 2.0. As we had delayed Q4 in 2022, we want to give thanks to our team, our investors, and other members of the extended Green Thumb family. With utter trust and dedication, none of our accomplishments thus far will be possible. In addition, in advance of Veteran's day, we must recognize all those who served and the sacrifices they have made to protect our freedom. In closing, I'll leave everyone with this; as the world around us continues to evolve, our strategy largely remains the same, with a few unique but simple themes. Number 1, be the consumer. People's connection to cannabis are personal in real. We continue to believe that our success is directly correlated with our ability to thinking like a consumer every step of the way. Two, quality matters. As the competitive spirit in each market of all, we're confident that our ability to cultivate and produced premium flower and other cannabis products and scale with the consumer pocket book in mind, will set us apart from others. Last, no matter what challenges present themselves, we can't forget that our opportunity is built on years of sacrifice by men before us. We have an obligation to try right some of the wrongs created by war on drugs. You all enjoy the upcoming holidays seasons with your loved ones, and look forward to speaking with you all in the New Year. Back to you, Ben.

[Ben Kovler:]

Thank you, Anthony. In closing, the headline for this quarter and the remainder of 2021 is that we're laying tracks for growth in 2022, 2023 and beyond. In the third quarter, our gross capital expenditures, which includes sale leaseback transactions, exceeded $85 million, which brings year-to-date gross capex over $150 million. And as we all know, it's not how much you invest, its what the investment will ultimately return, That is something we never lose sight of and it dominates our capital allocation discussions. I'm proud that we have earned the reputation for thoughtfully allocating capital, for focusing on strong execution, and for doing what we say we're going to do. Before we live by each and every day and knowing that none of this would be possible without your support and our amazing Green Thumb team. Special shout out and thank you to all of our team members across the country. We appreciate everything you do for our patients and our customers every day. As I've said many times before, we are still in the early innings in this great American cannabis growth story. We do not believe the U.S. market will look like Canada, given the current regulatory environment. The U.S. legal-cannabis market is already a $24 billion industry. And as new states, new products and new consumers come into the market, we believe the market will triple over the next decade. That means there'll be $50 billion more of legal sales to come. But what kind of market capital that creates? What will that do for the American consumer experience? And how can we position Green Thumb to take advantage of that for our stakeholders? Finally, tomorrow is better than today, and out of the men and women in uniform who sacrificed so much to protect our freedoms. Green Thumb has partnered with Happy for veterans with mental health. This worthy organization is dedicated to connecting beds with mental health support, as well as overcoming pharmacal stigmas around treatment for those who need. Suicide is a massive problem in the veteran community with numbers approaching 7,000 per year or 20 per day. We applaud the House VA Committee's support of research into medical cannabis as a viable treatment option for veterans. COVID-19 has amplified mental health issues in the United States broadly, especially in the veteran community. Our team is proud to partner with Happy to support this much needed endeavor to provide adequate resources to our vets. So on this Veteran's Day, let's all remember just how much we owe those who answered the call of duty. With that, we'll turn the call to the Operater and we welcome your questions.

[Operator:]

We will now begin the question-and-answer session. In an effort to keep the duration of the call to 1 hour, we would ask for a limit of 1 question per person. At this time, we will pause momentarily to assemble our roster. Our first question will come from Camilo Lyon with BTIG. Please go ahead.

[Camilo Lyon:]

Thanks, and good evening, everybody. Really nice job on that consistency, especially in light of a fairly competitive environment. I wanted to dig into CapEx spend at that acceleration CapEx. You've got a lot of opportunity, there's definitely more than you are spending on. I'm curious to know specifically what were the project, 1 or 2 projects that really took a bulk of that incremental CapEx? I'm guessing it's the New York facilities since you broke ground on that. And if it is, what are the plans and timelines for when that will go live? Particularly now that the state allows the sale of whole flower?

[Ben Kovler:]

Thanks, Bose, it's Ben, appreciate your question. I think we used the analogy last quarter, we have conviction where cannabis demand and the size of the market at '24 going to $80 billion is going. And we really puts the chips on the table in the markets where we see a lot of growth coming to high level. The new capex is focused on New York, New Jersey, Connecticut, Virginia, or markets where our dollars use is coming. When the cash leaves the balance sheet is always a little different. We use the golf cart to jam the gas. Sometimes it jerks a little later. So where New York has broken ground, it's not a huge piece of the capital from a cash flow standpoint, obviously committed to that, we have the capital, we're ready to go. But when a cash leaves the balance sheet, sometimes it's not totally aligned. But I would say high level those 4 markets continue to dominate our conviction on where Canada's growth is going to come.

[Anthony Georgiadis:]

Our next question will come from Pablo Zuanic with Cantor, please go ahead.

[Pablo Zuanic:]

Thank you. Ben, just in general, I mean, when you talk about -- when we've seen these as mostly pressure in New York and New Jersey since internalization. Can you talk about whether that something you are seeing in your business and whether that's in any way impacting overall profitability of the business? Clearly, gross margins were stable quarter-on-quarter, we just talk about there has been a negative effect from economic station do so sales for you in New Jersey and New York, thank you.

[Ben Kovler:]

Hey, Pablo, it's Ben, can you repeat the beginning of your question.

[Pablo Zuanic:]

What the line. No. So other companies have talked about that since decriminalization started in New York and New Jersey, does there has boosted the illicit trade and affected sales of legal stores, right? And I'm just wondering. You have pretty good retail sales growth, 7% sequentially. So I'm just wondering if you saw a decline in New York and New Jersey sequentially that you can highlight, like other --

[Ben Kovler:]

Got it. Yeah. I didn't hear you on the legal market. Sorry. Totally understand the question. No. It may really impact our business. As you know, those are small for us in the scheme of things. But I think it's a good point. I think how states figure out enforcement and regulation of turning on adult-use, not enforcing illegal stores. 5-6 years ago, I don't think that existed in some markets; it's now the beginnings of existing. There's products -- there's other things, lack of testing, central consumer dangers and things like that. But it has not impacted our P&L. There's a huge amount of demand in New York. It's going to find its way. It already is. There's a massive market there. We're excited to bring the product and the brands that we know how to do and deliver to those markets.

[Operator:]

Our next question will come from Vivien Azer with Cowen, please go ahead.

[Vivien Azer:]

Hi, good evening, thank you. Anthony, I have a question for you. You guys don't offer guidance, and I think that's absolutely appropriate, but you have tested 2 quarters of sequential contraction of 100 basis points in your adjusted EBITDA, and it well explains in terms of the headcount there are certainly going to be ebbs and flows as you expand into new markets. But if you could just maybe help us think about is head count the major driver, is that what we should be tracking in terms of forecasting your adjusted EBITDA levels, or any other helpful color without offering guidance that you can provide will be very helpful. Thank you.

[Anthony Georgiadis:]

Yes, it's a great question, Vivien. And so you're right, in my prepared remarks, I mentioned that payroll was the biggest driver of cost of $5 million SG&A normalized SG&A increase. We had this big energy new continue to be the case. Obviously, what we're doing is we're closely watching the top-line. And as we head into 2022, we'll up and down, we haven't seen a spend accordingly, based off the demand in the business. That's really where we're seeing the biggest kind of growth and obviously we have some marketing extended as the top-line growth continue to feed as well. But looking at, I would say the payroll, who will continue to be a happy portion is of any of the SG&A expense increases will occur.

[Operator:]

Our next question will come from Matt McGinley with Needham, please go ahead.

[Matt Mcginley:]

Thank you. The net wholesale business grew only about 1% in the third quarter, but the acquired assets you have in quarterly would have likely been additive to that segment. Is there anything to note here in terms of market weakness by state? And was the CPG growth primarily volume growth or did you see any declines in realized pricing?

[Anthony Georgiadis:]

That's a good question. So in terms of the CPG growth, so the facility that we acquired in Massachusetts, we have some work to do there in terms of the flower production, so it really didn't show up on the P&L as of yet, That is certainly kind of one of the reasons why maybe greater CPG growth. But overall, we didn't have any additional facilities really turning on. As you know, the way our CPG revenue works is there is that function in terms of as we bring on new capacity. If we don't bring on new capacity and our facilities are already operating at max capacity the numbers can't really get any higher. But certainly, it's something that the team is working on, and as we look ahead, we're making some improvement.

[Ben Kovler:]

Yeah. I guess I'll jump in Matt. In those states of teeny bit of color, Rhode Island, there's really no net outside sales and neither in Virginia, so seeing a CPG from that M&A I understand your question, you're right. But when you look at it, there's not a lot of wholesale distribution of product yet in those states, particularly in Virginia versus where we think it will be in 24, 36 months.

[Operator:]

Our next question will come from Eric Des Lauriers with Craig - Hallum Capital. Please go ahead.

[Eric Des Lauriers:]

Great. Thanks for taking my questions and congrats on a very solid results here. So pricing, obviously popular topic in the industry now and sure will be for a long time here. Can you talk about some of the pricing trends that you guys are seeing from a product category perspective is it similar across the board you're seeing it any categories fairing better or worse than others, And then how should we think about how that all fits in with your brand portfolio here? Thanks.

[Anthony Georgiadis:]

Great question, Eric. So, I think what we're seeing, when we talk about it internally, is more price settling, then the impression, because really when you peel back the onion, gone are the days when call it in the market like Pennsylvania where every flowers sell for $55 to $60.8, and now the product need to stand on its own GDP. So obviously the majority of our brands sit on the premium side of the equation. We think that bodes well for us. Really what we're seeing is that, at least in flower kind of premium seems to be holding price. And as you work down to different kind of other value levels, that's really where you're seeing some of the erosion. But obviously something we're watching very closely, and just as a business, we're very focused on just maintaining.

[Operator:]

Our next question will come from Owen Bennett with Jefferies. Please go ahead.

[Owen Bennett:]

Good evening, guys. This is actually Derek calling in for Owen. Congrats on the quarter. Quick question -- excited to hear about the consumption site in your Netherlands facility. Can you just dig deeper into the different objectives you have within your consumption site strategy and maybe different states you're targeting for that? Also maybe some additional color on potential alternative monetization opportunities as that strategy comes to fruition?

[Ben Kovler:]

Sure, thanks for the question. In terms of state regulatory environment, I think we are really only have clarity on one additional state which is Nevada, which is crystallizing what those means with few people talked about those do plan to bring allows their shopping the massive amounts of tourists coming, special event, special occasion, huge opportunity. I think to grow that business we think is about total size of market can be so much bigger. Others, particularly unique regulatory structures there around tourism, casino that prevent a lot of that. So it's only a matter of time. And there's not another state that's really right on the radar. But again, putting our best foot forward, and us leading by example of how this sub-sector, or new thing can be regulated safely, continuing to just lead with education and self rules that we think are based on experience being pretty conservative, help set up to win -- our North Star continues to be the consumer, the consumer just consuming the product. That said, so, why are we not offering environment that's great, half of all is on - prem, roughly pre - COVID. So that makes a lot of sense, guys from PNL and monetization standpoint too early non-factor, we're willing to invest and learn, but it's not a material impact either way on expenses or revenue uptick.

[Operator:]

Our next question will come from Aaron Grey with Alliance Global Partners, please go ahead.

[Aaron Grey:]

Hi, good evening and thank you for the question. So I was curious if you could provide some color in terms of maybe some of the contribution that you received from the acquisitions on the retail side? Again, some nice color there on the CPG side. And then, more specifically on the comparable sales, sequentially 1%, could you provide some detail whether or not that was more driven by transactions or basket size? I know year-over-year was more transactions in the PR, but that would be very helpful Thank you.

[Ben Kovler:]

Sure. Good question, I will answer the second 1 first, it's transactions versus basket size driving it. We're seeing more people buy and more often and a bigger audience, versus incrementally growing the basket, or if you zoom out on the basket, so big change of COVID, got 18 months or almost 2 years now, coming back to where we were. And on the first question, we're not going to comment on any specific store performance.

[Operator:]

Our next question will come from Scott Fortune with ROTH Capital. Please go ahead.

[Scott Fortune:]

Good afternoon and thanks for taking the questions. You've been very active, kind of more M&A on the side of things without going third detail in the markets that you're seeing more favorable evaluate -- are you seeing more favorable evaluations? And looking at operators or brands, and potentially evaluations from a private side, to continue your M&A activity going forward here, how do you view the market?

[Anthony Georgiadis:]

Sure, I can take that. Hey, Scott. Thanks for the question. Not a lot of new from me on that; like everything's on the table if it makes sense, we're really thinking about how to drive long-term shareholder value. The business plan is enter open scale. It helps us think about that landscape -- how pricing is affected in the private market versus the public market. Things are mark-to-market every day and really susceptible to the capital markets flows and supply and demand, Where as private Company valuations are moving like that. But the capital markets are thin, And we're watching the unbelievable opportunity investment inside our business, like I mentioned, New York, New Jersey, Connecticut, Virginia, start to find kind of better opportunities than a raw Dallas air into the production given the demand coming and the regulatory setup. So it's a very high bar at the same time, as you saw view. what we consider very high value, very strategic M&A makes sense, so. You continue to look, I would continue to say that we don't think we're in the business of a transformative transaction within the industry in the U.S. at the moment, but everything's on the table. We like to answer the phone and we also like to say no, so we're here.

[Operator:]

Our next question will come from Glenn Mattson with Ladenburg. Please go ahead.

[Glenn Mattson:]

Hi, thanks for taking the questions. Congrats on the quarter. So part of the story with GTI has been finding the best markets, and then executing the heck out of them, and that's been a driver of a solid margin throughout. But I'm just wondering if you think about the business in a national footprint and building brands on a national scale, not every market is going to be as good as Illinois or Pennsylvania. And you have a runway, still a number of good markets yet to come. But long-term would you be willing to -- which is more important? Would you sacrifice margin to build brand presence in some other markets or would you just get those, generally speaking, and then just trying to execute on the best markets possibly?

[Ben Kovler:]

Hi Glen, yes, good question. Little hard to answer it simply. Making decisions on capital allocation, we have a pretty good north star on what we're trying to do, and it's a trade-off in those two kinds of things that you're suggesting in different sorts of spend. Like I said, it's the early innings of the brand-building game and what brands have essentially meant in cannabis, probably in the last 10 years, being available, being there, eventually getting consistent, and then it's the beginning of what is chapter 2 on its way to many more chapters. So overall we'll put more dollars into it for sure. We're watching the $24 billion go to $80 billion, we're allocating capital where we need to be weighing the things like first-mover, brand equity, competition, and differentiation, is really about the relationship with the consumer that can lead to the aspirational pricing power that gives a brand something we look towards the most simple commodity sold products. We don't think cannabis is, but I water is, a wise pricing power there, how does that work? Pretty good rhyme for us. We're just sort of conscious of where we are in the cycle of the decade of growth and not want to get too far over our skis. But we have a lot of cash. We're looking spend, so it's like we sleep really well and we're watching and evolve. I think it's a very exciting next 3 to 5 years for brand-building in cannabis, unbelievably exciting actually.

[Operator:]

Our next question will come from Andrew Partheniou with Stifel. Please go ahead.

[Andrew Partheniou:]

Thanks for taking my question, and congrats on the results here. Maybe just thinking about big picture, Ben, you talked about how the U.S is not Canada, there's definitely a lot of focus on price right now. Could you walk us through what makes you so confident in that assessment? What about the regulatory structure is different where we won't see that result? And how do you see yourselves and your brands being positioned and advantageous in that situation?

[Ben Kovler:]

Sure. I think that's a great question. And there's a couple of key things I would reiterate. In unlimited competitive market in the U.S. in any consumer products, there are brands that exist, there's differentiation and people pay pricing power for whatever reason across brands. So we think the confidence of a brand exists because we've seen it every day. Two, the regulatory structure of cannabis is so fundamentally different from where we see with unlimited amount of license or essentially that, lack of quality product, and the market although that maybe it's changing. In a regulatory environment where -- maybe the people on the phone know more than I would, but the government is heavily involved in some of the supply chain distribution channels. Branding is quite limited. Product sets are quite limited. And really can't compete with things that are going on that the consumers want. Quality in Flour and form factor. So that core setup, which is the legal cannabis market in the United States, is often producing some of the best, most innovative, forward thinking, branded product, form factors and different things. Second, with legality in Canada, the amount of capital, the fall in price of capital, and the dynamics of the Canadian Capital Markets set up unlimited capital flowing into the space to build the Taj Mahal of cannabis and we can see where that lands. The case is not the same here. And I think that rational capital allocators, with higher costs of capital, and a federally illegal business that we see continuing -- unlikely, to massively overspend to then tip over. It just seems a little less likely, though the capital markets are ruthless and , and people get greedy and they swing. So we're watching it. You can see in micro markets. But we think overall, if an industry is going to go from 25 billion to 80 billion, I said like 4 times on this call because that's our core thesis. And we get that if you look at Colorado and regardless of the pricing and you look at California and even other more mature markets, or you go to Washington, gives us a real conviction in a high amount of demand and products that will move through the legal channel in the US. So that investment has been the same thesis really since 2014 when we started, we continue to check our math pretty regularly. And so far so good. And just look, the money's where amount is look at the cash flow moving into the capex into the states because I just believe New York is going to be a multi-billion-dollar market. I'm very sure Virginia is going to be a multi-billion-dollar market, New Jersey, the list goes on, and that's what we think we can do in the best interest of all stakeholders.

[Operator:]

Our next question will come from Andrew Semple, with Echelon Capital Markets. Please go ahead.

[Andrew Semple:]

Good evening, and thanks for taking my question. My question here is on the $85 million gross capex spend within the quarter. I'm sure you guys were excited to publish that number because we all know within the ball Lowe. Just wondering on the allocation between that CapEx between your new markets, Virginia, Rhode Island, and the additional assets in Massachusetts compared to your existing business. And also on the CapEx, how many quarters ahead do you think we're going to be at this more elevated spend rate?

[Ben Kovler:]

Good question. Was about I can start Andy can fill in if I miss anything.

[Anthony Georgiadis:]

Again, the timing of the cash and when the market is coming out and how we make the decisions, you heard us talk for a long time in Illinois and PA and the dialogue is beginning to change to New Jersey, New York, and Virginia, just get to say the same thing. Which dollar went where it doesn't matter so much. We've a very fortunate relationship on the sale leaseback with IIP. We like the cost of the capital, we liked the setup and comfortable allocating bottom-up and top-down and sideways. The way we are doing the capital allocation to make the decisions. But we don't make a decision just to set the table off -- okay, we're going to spend a $100 million in New York and build a cannabis campus. Okay, $100 million of these leads to cash flow to balance sheet next quarter and then it's built. So the decisions made, zoning happens, the curve work, the cash begins to leave over a periods curve, the teams done a great job, not a good job, a great job of managing the cash flow, and we're basically on time on budget. And do better the cash flow management at the same time as to power its market till we want. Our global supply chain, we're not immune to various pieces there, but that's how we're managing. we're confident -- I can't tell you what next quarter or anything's going to be, but we think 2022 is going to be a similarish year to 2021 -- from a spend standpoint, not back to 2018 levels.

[Operator:]

Our next question will come from Matt Bottomley with Canacord Genuity. Please go ahead.

[Matt Bottomley:]

Hi. Good evening, Ben and Anthony, thanks for taking all these questions. Just wondering if we can maybe drill down a bit -- not into the particulars of anything at the granular level with GTI, but maybe at a higher level with some segment disclosures. I know that that's something that investors are looking more and more for, given that there's more and more states coming online, and everything gets consolidated up and even results when they are positive, it's hard to parse it out. I'm just wondering if we could speak maybe more holistically to maybe Illinois and Pennsylvania, which are 2 key markets. And what you're seeing there at a very high level with getting into too many specifics, if you can with the state's continuing to regulate and allow for more capacity retail store openings. If you think there's risks of headwinds in those markets, which are arguably two of the strongest markets in the U.S., and I know are very important to certainly your near-term growth prospects. So just wondering if you can comment on those two markets specifically, or anything else that might be more segment-related on an honest state-by-state basis?

[Ben Kovler:]

Sure. Hey, man, it's Ben. Illinois MBA. Pretty simple story. I think you're right on it. Holistically, we think as I said in the prepared remarks, over our run rate in actual between a million and two billion now, we think both easily double over time. Why is that not happening more quickly, and if you look at the curve and it's not that hard to see them flattening, GOMO has only a 110 stores. It's incredibly frustrating that the new licenses can't get out. I've been vocal about it, a lot of people have, we're still stuck in the courts and we have not heard from the Governor's office or anybody try to accelerate that, it's frustrating. 110 stores should at least double, the market will go up, new folks can enter the industry and new wells can be created, because $1.5 billion is going to 2 point something and then it's going to 3 point something. We've said the same thing now for a few years. And in the meantime, the market's going to model along, stores will grow, But it's not going to inflect the way it should to meet the demand. PA, a little bit of a different story if you look at that from overtime, quickly accelerated, we're into a 4% to 5% patient penetration rate or run rating. We think 1.3 billion to 1.5 billion total side, easily going to 3 to 4 billion same size of Illinois, and it's a medical market, so it's open on the medical, but we have not gotten their act, there's a lot of discussions, there's positivity coming from the legislature -- Governor Wolf has been banging the table for adult use. And just to remind everybody, states legalized adult user generating more tax revenue from cannabis than they are from alcohol. This is a major revenue growth driver, a major job creator. And we're seeing governors across the country embrace that, Republican and/or Democrat. It really doesn't matter. This this is a movement and consumers are demanding it and it's becoming hard to quantify any sort of material costs of other things, except relief from the courts and other things. So PA wreck (ph) you'll see big step-up, Illinois when the stores get out, you'll see step-up,

[Anthony Georgiadis:]

And in the meantime, things continue positively. Keep in mind in PA, no edibles. If you look across the segment, across the industry, there's a lot -- maintained is a part of the basket spending a little bit on the market. It's edibles that's not allowed. There are no pre -rolls. We cannot sell Dogwalkers in PA due to the rules. So those regulatory constraints are temporary and eventually we think the consumer demand materializes and we're very bullish on both of those markets.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.

[Ben Kovler:]

Well, thanks everybody for joining us. We look forward to giving you a year-end update some time in the first quarter. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.