Planet 13 Holdings Inc.
Q2 2021 Earnings Call Transcript

Published: 26 Aug 2021

[Operator:]

Hi, everyone. And welcome to Planet 13 Holdings 2021 Second Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded on August 26, 2021. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for research analysts to queue up for questions. . I will now turn the call over to Mark Kuindersma, Head of Investor Relations for Planet 13.

[Mark Kuindersma:]

Thank you. Good afternoon, everyone, and thanks for joining us today. Planet 13 Holdings' second quarter 2021 financial results were released today. The press release, financial statements, and management discussion and analysis are available on SEDAR as well as on our website, planet13holings.com. Before I pass the call over to management, we'd like to remind listeners that a portion of today's discussion include forward-looking statements. There can be no assurance that such information will prove to be accurate or the management's expectations or estimates of future developments, circumstances or results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect results are detailed in the company's public filings that are made available on SEDAR. And we encourage listeners to read those statements in conjunction with today's call. Forward-looking statements in this conference call are made as of the date of this call. Planet 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law. It does not assume any liability for disclosure relating to any company mentioned herein. Planet 13 financial statements are presented in US dollars and the results discussed during the call are in US dollars unless otherwise indicated. On the call today, we have Bob Groesbeck, Co-Chairman and Co-CEO; Larry Scheffler, Co-Chairman and Co-CEO; and Dennis Logan, CFO. I will now pass the call over to Larry Scheffler, Co-Chairman and Co-CEO of Planet 13 Holding Inc.

[Larry Scheffler:]

Good afternoon, everyone, and thank you for participating in our second quarter call. Q2 was a great quarter for Planet 13 with our Nevada operations playing around all cylinders and our California expansion being completed on time and on budget. I'm going to discuss our performance in Nevada and let Bob provide an update on California and our other growth initiatives later on in the call. The Las Vegas SuperStore is coming up on his third year of operations this November. It's been amazing to watch it grow, for the first couple of months when we were doing around $3 million a month and now to over $9 million a month from just a super strong delivery. Month-by-month, we have perfected the customer experience, upgraded and added new entertainment and built reputation through advertising, word-of-mouth and customer, social media. The SuperStore cemented itself as a must-visit for any trip to Las Vegas. We're not done. We've grown our share of Nevada retail sales every single month in 2021. In May the last month with available data, we reached 11.1%, our highest share ever including pre-COVID. We'll finish the retail store and expansion of the SuperStore dispensary space in mid-September providing a further boost to the customer experience and overall throughput potential, which is absolutely necessary on our busiest days. Breaking down the drivers of Nevada revenue. In Q2, we generated $24.3 million from the SuperStore, $3.3 million from curbside and delivery and $3.3 million from Medizin and $1.9 million from wholesale and other for a second – for a record quarter of $32.8 million, a 37.8% increase sequentially over Q1 2021 and 205% increase over Q2 2020. The largest growth driver not surprisingly was in-store sales, which have seen continued strong performance and tourists have returned. We continue to make improvements to throughput, customer entertainment, the diversity of products and the overall experience. And as always, our customers are the best marketeers. Every week there are thousands upon thousands of additional people posting on their Instagram, TikTok and Facebook for their friends and family to see what incredible experience they have enjoyed at the SuperStore. The other large growth driver in the quarter was our wholesale business, which grew 20.5% over the prior quarter. Our brands are gaining recognition across the market. According to Headset, HaHa is now the number two edibles brand in the state and the number three of every brand HaHa for our beverages. TRENDI is the number six vape brand and the number three concentrate brand and I know our flower brand would be there if we had enough supply. Our medicine dispensary has continued to be a solid performer and we're looking forward to the first NFL season at Allegiant Stadium with fans and seeing what impact that has on our medicine our neighborhood store. Looking ahead to Q3. Traffic remained strong throughout July and into August, with August being marginally softer with Las Vegas implementing mask mandates again. While we don't see there will be further lockdown measures, we're carefully monitoring any potential restrictions, taking the steps necessary to be able to operate to our maximum potential under any scenario. Regardless of what measures might come into effect, if any, we're bolstered by our experience successfully working under COVID restrictions and are ready to meet the challenge of any environment. With that, I'll pass it on over to Dennis, to discuss our financials.

[Dennis Logan:]

Thank you, Larry. Before I begin, I'd just like to remind everyone that all the numbers discussed on today's call are stated in US dollars unless specifically stated otherwise. As Larry mentioned, Q2 was a record quarter with strength continuing into Q3. The company generated $32.8 million of revenue in Q2, a 205% improvement over last year and a 38% increase over Q1 2021. In July, our first month with California open, we generated a total of $11.9 million. And in August, we are on track to meet that number. We expect California to ramp over time as we build awareness and optimize our marketing programs. Gross margin before the impact of biological assets improved to 56.9% up from 53.8% last quarter as the tourist customers made up a larger share of revenue. We expect gross margins to fall marginally in Q3 2021, as the contribution from the Planet 13 Orange County ramps up. The California market has a structurally lower pricing and margins than our Nevada operations and we expect that will dilute our margins slightly overall. We continue to target gross margins in excess of 50% for the long term. Sales and marketing expense was $1.5 million this quarter, as we significantly increased our marketing spend in Las Vegas with the return of tourist customers and began marketing more heavily in California. As a percentage of revenue, sales and marketing increased from 2.8% to 4.7% and we anticipate it will increase again in the next quarter as we continue to build awareness in California for our Planet 13 Orange County location. This in longer term, we expect to decrease over time as we optimize our California marketing channel and start the Planet 13 stores start to generate higher revenue. The company spent $10.9 million on G&A in the quarter or 33% of revenue up from $7.8 million or 32.6% of revenue last quarter. We expect this quarter and Q3 2021 to be the high watermarks, as a percentage of revenue as we have already fully staffed up in Orange County and expect G&A as a portion of revenue to fall as revenue from the Orange County store grows. As of June 30, 2021 the company had a cash balance of $136 million. Cash increased over Q4 2020 as a result of a $4 million generated in cash flow from operations. This number included a payment of $8 million in income taxes. We also added $60.8 million from financings offset by $3.5 million spent on CapEx in Orange County. So far this year, we've completed all our outstanding CapEx for the Orange County Superstore Phase-1 build-out, spent $2 million on the dispensary expansion at the SuperStore, $650,000 on improvements at one of our cultivation facilities and approximately $1 million on maintenance CapEx. As Bob will elaborate, we are currently monitoring the legislation around consumption lounges before we finalize the budget and plan for a build-out. The balance of funds after taking into account current construction commitments is earmarked for accretive M&A activity and other expansion opportunities, including the build-out of the Chicago dispensary. Looking ahead we anticipate Planet 13 will transition to US GAAP reporting and become an SEC registrant with a planned effective date of January 1 2022. And with that, I'll pass the call over to Bob.

[Bob Groesbeck:]

Thank you, Dennis and good afternoon everyone. As indicated, Q2 was a fantastic quarter, with strong growth in Nevada and the completion of our first out-of-state expansion on time and on budget. We started off Q3 with continued positive momentum. The initial sales in California are encouraging. Nevada is performing well, despite a tougher operating backdrop with COVID mask mandates currently in place and we secured our next expansion destination as Dennis indicated. Our Orange County store opened in July one on time and on budget. As a reminder we spent about $6 million on licensing and a further $8 million on build-out of that facility. Orange County generated roughly $100000 in its full first month of operation and is on track to top that number this month. We are seeing growth as we start to earn our position and reputation in the Orange County market. I'd echo Larry's comments and remind people that when we first opened the Las Vegas location many people were disappointed in the initial sales numbers. To those people I'll again say, it takes time to build awareness, reputation and ultimately sales. Give us time. We are good at creating experiences and selling cannabis. We've also identified our next expansion opportunity and in Planet 13 style we've done it in an incredibly cost-effective way. Through a partnership we received a dispensary license in the city of Chicago. This has been long one of our targeted expansion areas with a large population high tourist account -- high tourist counts and a robust adult use cannabis market. We are starting to do our research on potential location, but recognize that there are still a number of steps between winning the license and opening a dispensary. We will continue to update our loyal Planet 13 shareholders as we progress towards opening this new dispensary. I know there are a lot of questions about the partnership structure and a social equity applicant process. The Illinois dispensary licensing process was specifically designed for social equity applicants. You've seen ourselves and a number of other companies partner with these applicants to provide the support necessary to open and run a successful dispensary. As part of that structure, we created a subsidiary Planet 13 Illinois LLC which will own the Chicago dispensary license. I can't share much more on the details at this time, but we are extremely pleased with this deal and think it provides a great deal of upside to our Planet 13 shareholders at a very low risk. In Nevada we are monitoring the drafting allowance regulations and will continue to provide input to the regulators as needed. Larry and I have a grand vision of what a Planet 13 Las Vegas cannabis lounge can and should look like and we will share more details once the licensing time lines and regulations are confirmed over the next several months. We also continue to pursue cost-effective M&A that increases our vertical integration in California; bolt-on local dispensaries or cultivation in Nevada and opportunities for new SuperStores supported by network of neighborhood dispensaries in new markets. Our operations in Nevada are taking market share month by month. Orange County opened on time and on budget and it's now up to us to grow awareness and ultimately sales. We've walked down the path to our next expansion and still have over $130 million to pursue accretive M&A. Overall, I'm very pleased with the position Planet 13 is in today and incredibly excited to continue to grow this company and to create long-term value for our shareholders. With that being said I want to thank everybody for participating in today's call and I would now like to ask the operator to open the line for questions.

[Operator:]

Our first question comes from Bobby Burleson with Canaccord. Please proceed with your question.

[Bobby Burleson:]

Thank you for taking my question. So congratulations on the wholesale growth up 20% sequentially. Curious whether or not that was driven by doors that you're opening more store growth, or is it penetrating shelf space at existing stores?

[Bob Groesbeck:]

Bobby thanks. This is Bob. I'll take this. Good to talk with you again. I think it's a combination of everything you just mentioned. It's -- the new product lines of course we're offering received very positive feedback. The reorders we're seeing from our existing customers throughout the state continue to increase month-over-month. So we're really excited about that. We've got some new offerings coming into the market here shortly. We think we can even expand on those numbers. But we're pleased with the progress and we know there's additional upside.

[Bobby Burleson:]

Great. I'm curious, did demand outstrip supply for you guys? How are you guys in terms of capacity -- production capacity?

[Bob Groesbeck:]

Well, we've had some issues meeting demand initially with our -- for instance our sugar soda line that came out recently. It's just -- it's a function of again getting product out. It's also -- we're retooling to expand those lines. And again, as I said, we've got a couple of other offerings coming into the market here shortly. It -- we can meet the demands overall. It -- one thing we can't do -- we haven't been able to do is offer flower into the wholesale markets. So we're working aggressively to rectify that issue as we bring additional capacity online. But that's going to take probably another few quarters I would anticipate. But I'm very confident where we go. The engines firing on all cylinders. So we're excited about meeting that demand.

[Bobby Burleson:]

Great. And then just one more. Curious about Santa Ana or Orange County. You guys are doing some marketing there. It sounds like you're off to a good start. But curious kind of what different approaches are you taking there versus the Las Vegas SuperStore? I'd imagine any other different customer profile? I'm just curious kind of what you're applying to that marketing approach that reflects that specific market?

[Larry Scheffler:]

Well, this is Larry. I'll answer that one. The difference is we use more billboard advertising down there than we do here in Las Vegas. But the main part of an entertainment destination and that again is what it is whether it be locals or whether it be tourists in Santa Ana. It just takes time for that as we get the people in, it keeps expanding and building because as soon as they see it, they're excited about it. And as soon as they see it, they're taking pictures and videos and sending to their friends. Have you seen this yet? If you've been over to this yet? And that's why it's keeping building every day every week. That's what we had to go through also in Las Vegas and you've seen what's happened. They're our best marketeers like I was saying when I was talking and it's -- we feel good about them. We think it's worked great. We think we've got that model down and we anticipate the same thing into Santa Ana happening down here to build through our customers.

[Bob Groesbeck:]

Bobby, let me just add to that too. I think one of the things that's a little bit unique is we started the store from scratch in Santa Ana. So the tourist market down there is not fully stabilized yet. There's still a lot of uncertainty associated with travel and COVID. So we've really kind of directed the majority of our funds, our marketing funds at targeting and creating awareness in the Santa Ana metro area or Orange County rather. So we're really kind of focusing right now on getting the locals accustomed to the store becoming aware of it and building that delivery platform. The tourist part of it will now start to get traction, as we start working into that area. But it's a little slower and it's going to take a little longer as Larry said. But we're very confident that it will all fall into place.

[Bobby Burleson:]

Great. Thank you.

[Bob Groesbeck:]

Yeah. Thank you.

[Operator:]

Our next question comes from Greg Gibas with Northland Securities. Please proceed with your question.

[Greg Gibas:]

Great. Good afternoon, Larry, Bob, Dennis. Thanks for taking the questions and congrats on the strong results in Q2.

[Bob Groesbeck:]

Thanks, Greg.

[Greg Gibas:]

I wanted to -- I guess I know it's early and you can't share too much, but how we should think about at a high level the process and timing of getting the Chicago dispensary up and running? And I guess plans for any cultivation or manufacturing in this state as well?

[Bob Groesbeck:]

That's a great question, Greg. So I mean we're working -- literally today, we've been working to identify sites. We've identified a number of potential sites. Now the licensing process is really kind of the great unknown. Working with our partner in Chicago, we're pretty confident things will move fairly quickly. But I don't want to hazard a guess here today again because it's all -- it's new for all of us. It's new for Chicago and it's around the licensing. So, I'm hopeful over the next few months, we'll see that fall into place and then we'll continue obviously to work around that and identify locations that meet with our criteria. To your second point, yes, we're also looking -- we expect to be integrated in the Illinois market as well. So, we are looking at some cultivation opportunities now in tandem. And we're confident that we will find something that meets our criteria here in the near-term, at least to get us in Chicago.

[Greg Gibas:]

Sure. Great. And yes, I realize you can't share too much. But it seems like a great market for the SuperStore and it's definitely one an exciting market to participate in.

[Bob Groesbeck:]

We're very excited.

[Greg Gibas:]

Follow-up you on kind of the margin side of things and your commentary around sales and marketing expense going forward. Where do you expect I guess that to level out maybe as a percentage of revenue, or I guess when should we expect it to peak? And then kind of how long will it take to maybe ramp or create that awareness that you want in California?

[Dennis Logan:]

Greg, thanks for the question. As I said in my remarks, I think it's going to peak in end of Q3 beginning of Q4 as we work through it. And again building on what Bob said, the tourist market in Santa Ana and Orange County is not really stabilized yet. So, we are focusing more on the local billboard advertising and marketing. So, it's also going to depend on when the tourist customer and a tourist market with Disney having regular opening, et cetera in that area starts to stabilize, so we can really gauge where our marketing spend goes. But I think Q3 will be the peak, kind of, beginning of Q4 will be the peak on a revenue basis -- percentage of revenue basis especially as revenue starts to ramp at that location.

[Greg Gibas:]

Okay, got it. That's helpful. And to follow-up with you there Dennis too on a separate topic. It looks like owned brands represented -- or in-house brands represented 20% versus 28% of sales a year ago. Just wanted to ask I guess what the dynamics there that drove the decline? And was it just introduction of a lot of new third-party products?

[Dennis Logan:]

It was a sales function Greg. So, we had record sales on a nominal dollar basis for all of our brands, all of our house brands and our house products which as a percentage of overall revenue, it was down because revenue was up so much. So, sequential growth quarter-over-quarter year-over-year on our own brand sales on a dollar value basis but percentage-wise down. So, we are, as Larry and Bob both mentioned, rectifying that on flower side with some expansions on one of our cultivation facilities there to try and rectify our ability to provide premium flower. During the COVID shutdown and the mix of product with tourist only returning recently to Las Vegas has been more focused on flower and less on some of the other products as overall buckets of revenue, we see that shifting back towards the historical rates of kind of 35% to 37% flower and the balance being more and you can speak to this massive consumption by the tourists. So, we think that our in-house brands will as a percentage of revenue continue to increase both nominal dollar-wise and overall percentage.

[Greg Gibas:]

Okay, great. Yes, that does make sense. I didn't consider the revenue base there. I guess last one for me. I wanted to ask about, in-store development. If you could discuss maybe any new features or expansions that you're planning at the Vegas or California SuperStores, I noticed some nice announcement out of you regarding adding two to three store and store additions. And I guess I just wanted to ask if you kind of have room for more of those? And you said Phase 1 now, complete at the California SuperStore. But I just kind of wanted to ask what's next there? What should we expect for Phase 2?

[Larry Scheffler:]

Well, Phase 2, as we get moving into, we've always said, in California will be some type of a small coffee shop type thing or small restaurant. And Phase 3 was going to -- and a production facility. Phase 3 was going to be -- is going to be our consumption lounge. We'll be adding on an atrium about 15,000 square feet. Santa Ana itself we talked to the officials there. And actually are working right now on a bill trying to get a law in place. And get it written to do the consumption lounge, so that we can move forward with that part of the operation. In Las Vegas, of course, on the new, which should open towards the end of September, where again, we're going 43 to 85 cash registers. We've just added an 80-foot long by 20-foot tall digital wall with all kinds of special effects. We added nine cylinders that are about four-foot tall, that have a levitation device that we lease out to a lot of our vendors that they rent them from us. And they display their products. We call it Gucci Row. In about two weeks we'll also have our 2,000-square foot retail store open with all our memorabilia and sundries and so on. And we've been talking about a robot in our production facility. We're getting closer now. We're just doing the last of the choreographing of the robots where they actually get into a short pie to looser -- the looser pours the winner a beer live, behind the scenes and then they go back to work on the production line for the soldiers. That's some of the things that are going on here for new items.

[Greg Gibas:]

Okay, great. Yeah. Lot of exciting things and works, I'll pass it on. Thanks guys.

[Larry Scheffler:]

Thanks, Greg.

[Operator:]

Thank you. Our next question comes from John Visintainer with Meridian. Please proceed with your question.

[John Visintainer:]

Hey guys. Congratulations on the quarter, and the continued progress. Yes most of my questions have been answered, so just a couple to kind of quickly recap and think about the dynamics moving forward. First off, you gave some good color on, the August numbers, and kind of where things are from a tourism perspective in Las Vegas. But can you kind of give a little bit more color on how typically seasonality occurs in August? Do things typically fall off a bit given the heat, or is that one of the prime months for travel?

[Bob Groesbeck:]

Well, yeah hey John, it's Bob. Good question. So, summer is obviously obvious is hot. And it's our hottest month. But people come here whether it's hot or not. So that's really not a detriment towards them generally. What has had an impact as Dennis alluded to, and as I mentioned, is the new COVID restrictions. They're not nearly as difficult as they were last year, but just the fact that we've got a mask mandate on again, and there's – it seems like it changes every day with the larger venues here in town. So there's some uncertainty with that, so it may have a bit of an impact. Overall, we're pretty confident how the month is shaped up from a tour standpoint. But the other factor that, we need to consider that's probably more relevant is the fact that kids are going back to school and families aren't vacationing in Las Vegas the latter part of August, because they're getting ready for school again. So that's probably a more meaningful indicator. But I think things are going to ramp-up again considerably in September, as they have historically, and then heading into October. And then Vegas typically will slow down a bit in November, and then of course in December. But one thing that's also, I think, I just want you to be aware of and focused on, we don't really have any meaningful convention traffic back in Las Vegas now. So that's going to take a bit of time for that to ramp-up. So early next year, we'll start seeing the larger shows come back online.

[John Visintainer:]

Okay. That hopefully offset some in the near-term by the NFL stadium et cetera. So that could be nice.

[Bob Groesbeck:]

Yeah, That will be helpful. Yeah. We're excited to see what that does. Yes, of course.

[John Visintainer:]

Okay. And then the other question I just had was regarding challenging pricing dynamics for flower in California for a lot of cultivators, producers. Does that change the dynamic for you guys at all in terms of seeking out vertical integration? Does the pricing get to a point where it's favorable for you continue as a non-vertical integrator?

[Bob Groesbeck:]

Well, we've always expected to be integrated. So we're actively pursuing opportunities now. I mean, just the margin pickup alone on own project – on our own products makes it worthwhile. We're fortunate that, we're a large buyer, and we've got some leverage over our vendors. But yeah, look at the end of the day it's important that we've got our product lines and our products in our stores. And that's what we're going to do in California. Dennis, I don't know, if there's anything you want to add to that on the margin side.

[Dennis Logan:]

Yeah. No, Bob. That covers off our view on the margin side. I mean, yes John, the California market and flower we're worried on a daily basis what's happening there. But as Bob mentioned, we need to get our own strains in, and control our own product and our own brands. So that's always been the plan. So we will size it appropriately to – we'll size it appropriately for, what our needs are at the start as Larry mentioned in Phase II with the production facility there and then vertical on the cultivation so.

[John Visintainer:]

Okay. Great. Well, thanks guys. Looking forward to catching up again soon.

[Bob Groesbeck:]

All right. Thanks, John.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.