Harvest Health & Recreation Inc.
Q4 2020 Earnings Call Transcript

Published: 30 Mar 2021

[Operator:]

Good afternoon, and welcome to the Harvest Health & Recreation conference call to review fourth quarter 2020 financial and operating results and discuss the company's performance outlook. At this time, all participants will be on a listen-only mode. The call will begin with prepared comments by management, followed by a question-and-answer session. Today's conference is being recorded. I would now like to turn the call over to your host, Christine Hersey, Director of Investor Relations for Harvest. Thank you. You may begin.

[Christine Hersey:]

Thank you. Good afternoon, everyone, and welcome to Harvest's Fourth Quarter and Full Year 2020 Earnings Call. On today's call are Founder and Chief Executive Officer, Steve White; and Chief Financial Officer, Deborah Keeley. 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 company's report filed with the United States Securities and Exchanger Commission and Canadian securities regulators, including our annual report on Form 10-K. This report along with today's earnings press release and a PowerPoint presentation will be available under the Investors section of our Web site. Harvest assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise following today's call. Throughout the discussion, Harvest will refer to non-GAAP financial measures, including adjusted 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 filing. Please note, all financial information is provided in U.S. dollars, unless otherwise indicated. I'll now turn the call over to Steve White, Harvest's Founder and Chief Executive Officer. Please go ahead.

[Steven White:]

Thank you, Christine. Good afternoon everyone, and thank you for joining us. I appreciate your continued support and interest in Harvest, and the opportunity to provide you with an update on our organization. Over the past year, our company has sharpened its focus and redefined key aspects of our strategy in how we measure our own success. As a top multi-state operator in the U.S., we have a unique opportunity to build a scalable and sustainable cannabis business during this time, and the current patchwork of laws and regulations limits the number of competitors serving this rapidly growing industry. We have worked over the past year to streamline our operations and deepen our footprint in our defined core markets, which offer fast and favorable returns. We plan to use the returns from our investments in those markets as the foundation for future growth as we identify and enter new states that meet our criteria for capital allocation. Each market that we have selected for significant capital investment has specific attributes that make the market attractive. How do we identify which markets to pursue? Our preferred markets have several traits in common. Generally speaking, they are well populated state regulated markets with limited license structures that allow operators to enter organically through license awards or through acquisitions of existing assets. All of our preferred markets allow us to build significant scale to generate attractive returns.

[Deborah Keeley:]

Thank you, Steve. Good afternoon, everyone. I'm going to provide an overview of our fourth quarter financial results and our 2021 outlook. Please refer to the press release and slide presentation for full details. We had a great fourth quarter building upon the momentum from our improved third quarter results. During the fourth quarter, we completed several key achievements including realized continued revenue growth, completion of a bought deal financing and divestiture of non-core assets and repayment and conversion of debt. For the fourth quarter, revenue was $69.9 million, representing an increase of 85% year-over-year, and 13% sequentially. Approximately 85% of our fourth quarter revenue was derived from our core markets

[Operator:]

Our first question is from the line of Aaron Grey with AGP. Please go ahead.

[Aaron Grey:]

Hi, good evening. Thanks for the questions, and congrats to the strong end of the year and start to the first quarter. So, my first question is regarding the full-year guide, so seems to be based off strong first quarter, $87 million, and that's not including -- you didn't have adult use for Arizona for three weeks. And you had Pennsylvania opening, you only had a couple weeks of that. So, off to the strong run rate for second quarter that imply, and for the back-half of the year, just seems like it's relatively modest sequential growth especially given the expectations for additional stores coming online and cultivation. So, would love to just get some additional detail regarding kind of the puts and takes behind that guidance, how many stores you have planned to opening, and maybe timing of that, to help with the modeling? Thank you.

[Deborah Keeley:]

Sure, and happy to answer that question. So, we had a great catalyst in Q1 with Arizona rec, and due to that we saw a much larger jump in sales between Q4 and Q1, it was about a 23% implied increase. And with that uptick in revenue in the first quarter, it was primarily driven by the launch of rec in Arizona. But in March, we also saw the influence of another round of stimulus checks. So, we currently have limited data to be able to determine what the steady state of future recreational sales will be. And because of those factors, we're comfortable with the revenue target that we have given based on the limited data that we have thus far. Also, keep in mind that our revenue target does not include any new acquisitions or entrants into new markets. And it's about a 64% implied increase over our 2020 $231.5 million in revenue. And I'll have Steve go into details on the store openings.

[Steven White:]

Yes, and starting, I guess, going back one step, one of things, Aaron, to keep in mind is that when you look at the investments that we made in 2020, a lot of those were in cultivation and manufacturing capacity which are going to -- that the returns on those investments are going to come in form of higher margins rather than higher revenue in many instances. In addition, what you probably should note is a -- well, is the fact that we also have made some changes to our licensing category. We cancelled a contract that was -- that fit in that revenue stream, resulting in lower revenue coming in, in 2021, but higher margins. With respect to the second part of your question about number of store, that the -- I mean we haven't given like a broadly, number of stores we anticipate opening in 2021. And the reason we haven't done that is we did it specifically by state. So in Arizona, what we told you is three stores were coming online. I can tell you one of them you should expect by the summertime. The other two, we're really concentrating on finding the right locations. And so our focus is on getting in the right places, rather than getting them opened fast. We don't have many more stores left to open in the state of Arizona. In Pennsylvania, we do have six additional stores to open. And internally, one of our operational focuses for the year is to make sure that we get open and operating as much as we possibly can in the state of Pennsylvania. So, we'll be moving as quickly as we can there, but we don't have exact dates as to when we will get them open, but we are moving very quickly. As it pertains to Florida, which is the other place where we have the ability to open additional stores, what we've said is we've been making some investments in cultivation and manufacturing capacity. And primarily what we need to do is make sure that existing six stores don't run out of product. Once we get to that place we can comfortably open new stores. We do have additional capacity coming online shortly, and we do expect store openings in Florida, in 2021.

[Aaron Grey:]

Thanks for that color, that's really helpful. And then just specifically on Arizona, sounds like it's been a strong start there, above your own expectations. You speak to some tightening supply and inventory levels, but seems like you guys have been able to stock up ahead of that. Do you feel comfortable kind of being able to state inventories for your stores ahead of your additional cultivation coming online or do you feel like that could tighten for you guys as well or do you feel like you're comfortable meeting both the adult use and medical demand for your stores? Thanks.

[Steven White:]

Thank you. What I would say is this. This is a process that we've been planning for -- well, for years. So, we've known for a number of months that there was going to be a greater demand on the wholesale market. And so, as an organization we took the steps necessary to ensure that we would have product available for customers and that we would not have interruptions at the retail level. We haven't seen anything that would indicate that any of our planning along those lines was off. So we don't have an expectation that we'll be running out of any products.

[Aaron Grey:]

Okay, great, thanks. I'll pass it along.

[Steven White:]

Thank you, sir.

[Operator:]

Your next is from the line of Kenric Tyghe with ATB Capital Markets. Please go ahead.

[Kenric Tyghe:]

Thank you, and good afternoon. Just so with respect to gross margin performance in quarter, I wonder if you could help us better understand whether that was purely a function of mix, whether there was an increased promotional activity ahead of recreational use, and in January? And just better unpack, if possible, the gross margin, not just performance in quarter, but with respect to your comments, look into the first quarter and increases. Just trying to tease the noise out of that gross margin number in the fourth quarter if we could, please.

[Deborah Keeley:]

Sure. So, we still expect gross margins to improve over time, but there may be variations in our margins from quarter-to-quarter due to product and market mix, as you saw in the fourth quarter. As more of our cultivation facilities come online, we expect our gross margin percentages will increase. And as we said in the last call, our goal is to have our gross margins in the high 40% to 50% range.

[Kenric Tyghe:]

Thanks, Deborah. And Steve, if you could, just on Arizona, some great color and some really useful insight there. Clearly you were ready to very ready; this has been a long time in the making for you and the team. And I know that the data doesn't exist with respect to Arizona rec, but could you give us your read on whether your sort of success in quarter and the numbers we've seen was just -- how big a lift we saw in the market or whether you think that you were just that much more ready and that, again, while it's just your read, your take on share, share positions, and what you say on the ground in terms of readiness. I mean, as ready as you were, do you see a bunch of your competitors scrambling? How should we think about that? How should we think about sort of the takeaway from your readiness versus market readiness, and the read-through from there for the year?

[Steven White:]

Thanks, Kenric, it's a good question. I wish that I could give you market share information, but we don't -- we don't have it in Arizona yet. We've seen some sales information published, but we immediately knew by looking at it that it was inaccurate. So, from that we can't figure out what our market share is. So what we have to go on is largely anecdotal. I can tell you that based on -- there were a handful of operators in the state of Arizona that were, to different degrees, prepared for the transition. For us, internally, it was a -- something that we identified very early on in the process before -- that we knew that for this calendar year one of our biggest drivers as an organization was gaining market share during that transition. So, we made some estimates about how we thought the market would develop. What we can tell you is we're ahead of those estimates. What I can't tell you is whether or not that's because the market is just way better than we thought it would be or if we just way outperformed our peers. Anecdotally, I think there are a -- I'm confident in saying that we've done very well relative to the rest of the market. We know in a number of stores that we have tested our throughput capacity, so you can't do much better than that.

[Kenric Tyghe:]

That's great, Steven. And thank you for that. Maybe I can squeeze in one quick related question here. So, looking to the landscape, and as well as you know Arizona, your position in Arizona, your sort of market or sort of leadership there as well, if you had an incremental dollar to deploy today. Do you think that Arizona, with what you know about the marker, has got ahead of itself, and that it wouldn't be where you'd be spending that money if you could? In other words, just how far did you think that valuations would become for those who are trying to play catch-up?

[Steven White:]

So, if you're -- yes, so your question specifically relates to the M&A environment in Arizona, and whether or not it's too expensive to buy here. And my answer to that question is in situations where everybody knows that something is for sale it gets too expensive. And so for us, it's we're back to the place where we have to be. We have to outwork people and be more creative in order to find good deals. We do think that there are opportunities for continued expansion in the state of Arizona, but if what we see is a process whereby everybody is bidding an asset up, and that's not a process that we're going to successfully participate in and so we would look to deploy dollars, those types of dollars in other places.

[Kenric Tyghe:]

[.:]

[Steven White:]

Thank you, sir. Appreciate it.

[Operator:]

Your next question is from the line of Matt Bottomley with Canaccord Genuity. Please go ahead.

[Matt Bottomley:]

Good afternoon, Steve and Deborah, thanks for taking the questions. Just going back to the market share commentary, again, you may you likely don't have this data, but I thought I'd just throw it out there. If there's any other color you can give us when we size the market, I think most published reports I've seen peg the mature market at somewhere north of $2 billion and change. Do you have any idea if your market share is under or overperforming your proportionate share of current retail and any other color on how you think that started out in the beginning of Rec here?

[Steven White:]

So, I can't answer. But here's the best I can do to answer that question. So, we anticipate that the market will continue to grow over time, and that at maturity, it'll be about a $2.5 billion market. We know that when something -- we're two months into the process. And so we're not near maturity at this point. But nearly half of our stores are performing at what the market average will be at maturity. That would tend to suggest that we're outperforming the market unless we're just all wildly wrong about the size of the Arizona market. So I'm trying to be a bit reserved in my comments related to it, because I don't have good market data. But we're very excited about how we had started in the Rec market here in Arizona.

[Matt Bottomley:]

Okay, thanks. That's helpful. And then just another question on Florida and apologies if this was implied in some of the commentary, but I'm just trying to ascertain if are you currently, before completing these various expansion projects that you outlined, are you currently supply constrained for your remaining six stores? Or are you able to open a few incremental locations using your current build, given that it's forced vertical integration?

[Steven White:]

We're supply constraint. And so at our existing six stores, when they have additional products, they perform better than when they don't, and so we do at times run out of product. So for us, we could open more stores, we have the sites available to us, but we believe that the prudent thing to do is build up that capacity, so that they the stores can actually perform well, once they're open.

[Matt Bottomley:]

Got it. And just one more quick one for me on the profitability going into fiscal '21 here, yet a 13% EBITDA margin for Q4, so clearly the mature landing spot for that I'm happy to hear your commentary on where you think that might be over the longer term. But certainly would be somewhere much higher than 13%. So can you give us any color on where that's tracking maybe any sort of goalposts into next quarter on that $87 million and then maybe not trying to twist your arm to give us a number for the full-year, but maybe at maturity, once your current platforms ramped-up, where do you see that mature EBITDA margin going, some of your peers have guided to over 40%, others have been more conservative in sort of the mid-30s. Just curious where you think that falls?

[Deborah Keeley:]

So we have not provided EBITDA or EBITDA margin guidance at the company level or by the state. But what we can generally say is that, we expect to realize much higher operating leverage in our Arizona operations because of the throughput of that revenue using a same footprint infrastructure.

[Matt Bottomley:]

Okay, thanks again, guys.

[Steven White:]

Thank you, Matt.

[Operator:]

Your next question is from the line of Michael Lavery with Piper Sandler. Please go ahead.

[Michael Lavery:]

Good evening. Thank you. Just wanted to get a little more sense of how much of an impact you thought stimulus checks had I know for the rec to medical comparisons, it makes sense to try to exclude that. But how much of a bump are you seeing there? Is it anything you can try to quantify?

[Steven White:]

Thanks, Michael. It's not something that frankly, we're not prepared to quantify it at this time because I don't know that, I'm not sure that we've seen the end of the impact of that and so our hope is that, when we have our Q1 call in May, we can talk in more detail about what that bump look like. But it was definitely noticeable. And it looks like there may still be some remnants from it.

[Michael Lavery:]

Okay, fair enough, that's still helpful. And just on Florida, can you give a sense of, is there an optimal scale just to kind of from either margin perspective, or just to have the product availability? And do you feel like, are you there yet or how far away is that?

[Steven White:]

Yes, there is an optimal scale, and we're not there yet, frankly. So, we would need to continue to make investments as we're in our cultivation and manufacturing capacity. And then when we think about scale, and we think about operating leverage, it also means continuing to as we make those investments continue to open-up additional storefronts in that market. Right now, our footprint in that market today we have six open stores, they're supply-constrained. So we're not at optimal at this point.

[Michael Lavery:]

And do you have a sense of how far away from that you might be?

[Steven White:]

I don't know but frankly, I don't think anyone's reached optimal, optimal is, Florida is a market where you can go, you can just keep going deeper. And so it is a place where you would until you outstrip the patient growth or customer growth once you have recreational sales, we just don't, we haven't seen what the limits are. So we haven't seen optimal yet. But it's a really big market that's growing very, very quickly.

[Michael Lavery:]

Okay, great. Thanks so much.

[Steven White:]

Thank you, sir.

[Operator:]

Your next question is from the line of Graeme Kreindler with Eight Capital. Please go ahead.

[Graeme Kreindler:]

Hi, good afternoon. And thank you for taking my questions. I had a follow-up question with regard to Arizona. And with respect to what you seen in Q1 today, did you have any throughput restrictions in the stores as a result of health and safety measures for COVID-19? And as we continue to see re-openings, can you discuss what the Arizona landscape looks like today or what's expected into Q2, regarding what you might be able to accommodate on throughput and whether that might put a greater stress on supply? Thanks for that.

[Steven White:]

Thank you for the question. So, in short, I think the safety protocols associated with COVID-19 do affect throughput, just because you're spacing people out in a way that you wouldn't otherwise do in a non-pandemic environment. We don't know when I mean, obviously in the State of Arizona, the Governor has eliminated mask mandates across the state. We as an organization, however are going to continue to follow CDC guidelines, so that today does not affect us as an organization. I don't know when we'll get to the point where we can stop following some of the protocols that we currently have in place. But I can confidently tell you that when that does happen, we can push more customers to the stores.

[Graeme Kreindler:]

Understood. Thanks for that. Then, just switching gears for a second here. You mentioned that the 2021 outlook does not include any upside for M&A. I'm wondering given the amount of organic growth initiatives that you outlined in investments in your current portfolio for the year, is the company looking at anything perhaps more from a Greenfield perspective getting exposure in states that it's currently not in or potentially looking at any new license applications for some other states on the horizon? What's the focus look like over the next couple of months here when you look at that portfolio and footprint? Thank you.

[Steven White:]

You bet. The focus is relatively narrow. I mean, there are states that we have not made it a secret that we would be interested and they fit our criteria for capital allocations and there are places we think that we could make investments and see fast and favorable returns. We have looked at different opportunities in some of those states. But to date, we haven't seen anything that would afford us an opportunity to intelligently enter into a new State. But it's something that we do continue to evaluate but it would have to be a situation where the opportunity looks as good as one of our current -- our four core market states.

[Graeme Kreindler:]

Understood. Thanks for color. That's it for me.

[Steven White:]

Thank you, sir.

[Operator:]

And your next question is from the line of Andrew Partheniou with Stifel GMP. Please go ahead.

[Andrew Partheniou:]

Hi, thanks for taking my questions and congrats on the great outlook here in Arizona ret. You guys covered a lot here and apologize if you guys mentioned some of these things, I had some technical issues and drop call, but in Arizona, where there any kind of product quantity purchasing restrictions in place, I know you've mentioned that you tested the throughput of your stores and without the safety protocols you could increase throughput. But I'm wondering if on top of that traffic throughput is there, was there any kind of a limit to how much customers could purchase and as the market continues to roll out here if there were restrictions on that, when do you think those restrictions would be alleviated and potentially higher basket sizes could result?

[Steven White:]

Thank you, Andrew. The restrictions on purchase sizes or amounts are those that are mandated by the state. So Harvest haven't created any additional restrictions on our customers be they recreational or medical. Those restrictions are 2.5 ounce limit for medical patients and a one ounce limit for recreational patients, five grams of which can be concentrated. So those things are set in the initiative. And so, those things like the licensing regimes are not going to change.

[Andrew Partheniou:]

Okay. Thanks for that. And I don't know if you providing this kind of color, but are you able to quantify the production expansions that is currently ongoing in your course dates?

[Steven White:]

Yes, what we have said is that we have -- so in Arizona, I can kind of run through them. We haven't given actual square footage or canopy size increases, but we are expanding our indoor capacity in Arizona, our greenhouse capacity in two locations. We are currently expanding capacity in two locations in Florida, which includes greenhouse and indoor. We are currently expanding our indoor capacity in the state of Pennsylvania. In Maryland, we've just started the permitting process to expand additional indoor capacity there.

[Andrew Partheniou:]

Okay, great then. And maybe one last thing turning back to Arizona, could you give any color in terms of out of state purchases, do you guys have any kind of statistics on that? What you've seen so far and potentially what you guys could see going forward?

[Steven White:]

So, typically speaking, when recreational sales start in a state you, the bulk of those purchases come from people within that state, typically it's difficult to do a good job to educate tourists about the opportunity to purchase cannabis, especially if they come from places where they can't do it. The short answer to your question is I don't have any specific statistics, but what I can tell you is, as we are starting to see additional tourist traffic in the state of Arizona as we started to open up more and more, we will continue to see more tourist traffic, but as a percentage of the whole early on in a program that is it's typically very slow. The outlier that we've seen historically has been Illinois, where they saw a much higher percentage of outer staters, and those outer staters generally drive across the border to purchase because they can't in their home states. If you look at Arizona and its proximity to other states, you're not going to have California is driving to Arizona to purchase cannabis or Nevadans; the only place where you would see that opportunity as people from New Mexico or folks who come to Arizona every year for spring training or any of the other things that people come for, but so far we don't have a lot of data about where our customers are coming from. So, we're working on the assumption that the bulk of them are local.

[Andrew Partheniou:]

Thanks for that color.

[Steven White:]

Thank you, sir.

[Operator:]

And your final question is from the line of Russell Stanley with Beacon Securities. Please go ahead.

[Russell Stanley:]

Thanks for taking my question, just following-up on Arizona and just wondering beyond the purchase limits that you referred to. What are you seeing from the standpoint of consumer behavior amongst adult use customers compared to medical consumers? And I'm asking more around lessons learned around product preferences and price points and how might that inform a product selection and pricing strategy going forward?

[Steven White:]

So there's a couple of general observations we can make keeping in mind that our sample size is really, really small at this point. And so overall what we're seeing is that they spend less than medical patients. And that's the biggest difference that that kind of, and it's not a significant difference, but it is very obvious in the data that we're collecting. As far as product mixes and things of that nature, it really does very wildly by location. And so we're going to do a little work before our next quarterly call to see if we can understand a little bit better, what some of those patterns look like. But right now the data that we're seeing is a little bit all over the place.

[Russell Stanley:]

Understood. And just my second question around Maryland. What kind of wholesale penetration do you have now? The third-party dispensary's there and my revisit looking for a fourth retail location there?

[Steven White:]

So on Maryland, we have historically sold to most dispensaries in the state of Maryland. And so, we've shipped cultivated product and manufactured products all over the state of Maryland. We are looking and furthermore, everything that we produce whether it be cultivated or manufactured, we sell very quickly, which is why we're undertaking the current expansion. With respect to the opportunity to add an additional retail license, we didn't mention it on today's call, because we've mentioned it before. And we haven't made a subsequent announcement. So it is something that we continue to look at as an opportunity for us. But it's gone slower than we originally anticipated, but it is ultimately going to -- it will ultimately be true. I think that we will have four retail facilities in the state of Maryland. I just don't have a good idea of when and where that fourth location will be.

[Russell Stanley:]

Understood. Thanks for the color.

[Steven White:]

Thank you, sir.

[Operator:]

And we have no further questions at this time. I'd like to turn the call back to management for closing remarks.

[Steven White:]

So, there will be no closing remarks. Thank you for joining us though.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.