Planet 13 Holdings Inc.
Q1 2022 Earnings Call Transcript

Published: 16 May 2022

[Operator:]

Hello, everyone. Welcome to the Planet 13 Holdings 2022 First Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded on May 16, 2022. 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. [Operator Instructions] 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 First Quarter 2022 financial results released today. The press release, the company's 10-K, including MD&A and financial statements, are available on the SEC website, EDGAR and SEDAR, as well as on our website, planet13holdings.com. Before I pass the call over to management, we'd like to remind listeners that portions of today's discussion include forward-looking statements. There can be no assurances that such information will prove to be accurate that 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 with the United Securities and Exchange Commission and on SEDAR, and we encourage listeners to read those statements in conjunction with today's call. The 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, and does not assume any liability for disclosure related to any company mentioned herein. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measure, please refer to today's press release posted on our website. Planet 13's financial statements are presented in U.S. dollars, and the results discussed on this call are in U.S. dollars, unless otherwise indicated. On the call today, we have Bob Groesbeck, Co-Chairman and Co-CEO; Larry Scheffler, Co-Chairman and Co-CEO; Dennis Logan, CFO. I will now pass this call over to Larry Scheffler, Co-Chairman and Co-CEO of Planet 13 Holdings.

[Larry Scheffler:]

Good afternoon, everyone, and thank you for participating in our first quarter call. We'll keep this call short since we last talked to you about 1.5 months ago. We're going to discuss our performance in Nevada and California and let Bob provide an update on our other growth initiatives later in the call. As we talked about last quarter, January and February are some of the slowest months for tourist traffic in Las Vegas. And this year was also impacted by the peak of Omicron. We saw traffic improve in March and into April as tourist season starts to pick up, and COVID becomes a lesser concern. Despite the slower macro market, significantly less tourist traffic and all the new dispensaries added in Nevada over the last year, we still maintained our share around 10% for all retail sales. We continue to complete extremely well -- compete extremely well in Nevada in a very tough environment, more tilted towards locals than tourist customers. In Q1 in Nevada, we generated $16.3 million from SuperStore, $2.2 million from curbside and delivery, and $2.3 million for Medizin and $2 million from wholesale and other total Nevada revenue of $22.8 million. The lower sequential SuperStore revenue was directly related to lower tourist traffic in January and February. Based on Las Vegas tourist statistics, visitor volume was down 18% compared to December. Our offerings targeted at locals like curbside and delivery and our Medizin dispensary hit sales in line with the state's sales figures. Our Nevada wholesale continues to perform incredibly well, growing 26.7% sequentially as we've taken a more shelf space in dispensaries across Nevada. This is after growing 15.4% sequentially in Q4. This is especially impressive when you consider sales for the entire state was down roughly 7% in Q1. Our portfolio is showing broad-based strength. According to a research firm Headset, TRENDI at 5% of the embedded market for both the concentrate and vapor categories in Q4; HaHa was 10% edibles and 5% of beverages. Looking ahead at Nevada, we're starting to see sales pick up in line with typical seasonal trends. We're carefully monitoring how tourist trends develop with increased inflation, higher gas prices, which can impact Las Vegas tourist numbers, especially for visitors from California, which typically over-index as Planet 13 shoppers -- excuse me, Planet 13 shoppers. We continue to update you on how we see these trends progress through the year. Turning to California. Sales were down from Q4 due to weaker consumer and significant Omicron COVID disruptions, including staffing and restrictions. We closed the acquisition of Next Green Wave on March 2, 2022, allowing us to vertically integrate and expand into wholesale for the first time. We've been very impressed with the cultivation facility and with the quality of the employees. Seeing this firsthand has given us added confidence in our decision to build out our Florida cultivation facility, pattern off of the Next Green Wave California facility. On May 2, we introduced TRENDI, our first brand crossover into California, with lines of small batch unique flower strains. We will be launching vapes and concentrates in the coming months, followed by HaHa, our super popular edible lines. These will be available at both our store initially and then at wholesale once we built up enough supply. In total, we generated $2.9 million in California during the quarter. Looking ahead in California, the major unlock for our store will be the completion of the highway on-ramp that directly adds about 20 minutes of driving time to anyone coming from the beach or using the 405 freeway. On the wholesale side, we recognize that California is one of the most challenging wholesale markets in the world, and our focus will be on the small profitable operations that expand our brand presence. With that, I'll pass it over to Dennis to discuss our financials.

[Dennis Logan:]

Thank you, Larry. Before I begin, I would like to remind everyone that all numbers discussed on today's call are stated in U.S. dollars, unless specifically stated otherwise, and that we are reporting under U.S. GAAP and are classified as a U.S. domestic issuer. So the macro headwinds from Q4 carried over into Q1 with Omicron, disrupting operations in tourism in California and Nevada, along with increased inflation, putting pressure on the consumer. Despite these headwinds, we generated approximately $25.7 million in revenue during Q1 2022, an 8% increase over the prior year period. The increase was attributable to our California expansion and significant growth in our Nevada wholesale business. Looking ahead at Q2, we have seen stronger tourist traffic in April, more in line with typical seasonal trends, but are very aware of the macro pressures facing the consumer and the impact that could potentially have on the Las Vegas tourist traffic. Specifically, California tourists typically drive being impacted by the price of gas. The tourist consumer this year is in a different position than they were last year with -- when interest rates were lower, inflation was lower and stimulus checks were in hand, among other factors. The weaker Q1 2022, coupled with the change in consumer dynamic, is leading us to take a more cautious view of sales growth over the balance of the year. Gross margin decreased to 50.2%, down from 54.7% in Q1 2022 compared to the prior year quarter. Lower gross margin in the quarter was due to a higher portion of local customers compared to tourists in Las Vegas, pricing pressure in California and a higher portion of wholesale as part of the overall sales mix. We continue to target 50% or higher gross margins for the long term, with gains from vertical integration and automation offsetting pricing pressures. Sales and marketing expense was $603,000 this quarter, down from $1.8 million in Q4. We continue to experiment with the optimal sales and marketing expense mix with a focus on maximizing profitability over top line revenue. The company spent approximately $11.4 million on general and administration expenses. This excludes share-based compensation in the quarter, down from $12.3 million during the Q4 quarter of 2021. SG&A in Q1 2022 was inflated by approximately $1.5 million with onetime expenses associated with the Next Green Wave transaction and the company's transition to the U.S. domestic issuer status that we finalized in Q1. For the balance of the year, we anticipate some cost pressure, with the biggest one being on wages. We are acutely aware of the current macro environment and are focused on prioritizing profitability and cash flow over unprofitable revenue growth. The company generated positive operating cash flow in the quarter. And as of March 31, 2022, we had a cash balance of $62.1 million, no debt and are current on our sales and income tax payment obligations. In a constrained capital market, we have one of the cleanest capital positions, providing a company with immense flexibility and removing the risk of being forced into any unfavorable debt or equity financing to fund operations. Our capital priorities are the continued build-out of our Florida operations and expanding our Nevada cultivation capacity. We have the capital on hand to complete all of our priorities, and we'll continue to update the market periodically on the build-out and CapEx requirements of each of our strategic initiatives. And with that, I'll pass the call over to Bob.

[Bob Groesbeck:]

Thank you, Dennis, and good afternoon, everyone. In Florida, we've been making significant progress on the build-out of our Florida road map. We've announced 2 of our neighborhood dispensaries so far, and we'll continue to roll out those announcements and the lead-up to the start of sales. Each dispensary is in a high-traffic local market on major thoroughfares and typically adjacent to other destination retail like Home Depot, Walmart or grocery stores. This is a setup to prove successful at our Medizin dispensary in Nevada, making one of the higher-producing local dispensaries in the state. Our cultivation and production build-out were also on track to start producing harvest in line with the dispensary openings. As a reminder, the build-out is prefabricated modular building patterned after the Next Green Wave California cultivation facility. It is entirely indoor, climate controlled, and we've proven the ability to grow premium flower out of the same type of facility in California. Combined with premium genetics, we expect to produce high-quality flower to be the core of our operations in Florida. The modular build significantly speeds up our time to market, reduce costs, all while maintaining the quality Planet 13 has become known for. We're on track for our previously disclosed time line and feel good about starting sales in the early part of next year. In Nevada, we are working with regulators on lounge regulations and are exploring a plan to convert our restaurant into an infused restaurant and cannabis lounge, allowing us to drive increased revenue and new customer opportunities from the same footprint. At the same time, we are doing diligence with various partners on additional ways to diversify revenue at the SuperStore and drive traffic. In addition to our negotiations with the cannabis museum, we are working closely with prominent Las Vegas club designers and operators on due diligence around the traditional nightclub that we use the remaining space at the Las Vegas SuperStore. We think these entertainment options are potential synergistic fit given our location squarely between the Las Vegas Strip and the adult entertainment district. We will update you further on these plans as they continue to develop. We received approval and began on the build-out of the cultivation expansion at our Bell facility in Las Vegas in April this year. This expansion will add 22,000 square feet of indoor premium cultivation space that will be reserved for Medizin flower. Once again, we believe this will unlock improved gross margins, increase customer traffic, and ultimately, more profitability. In Illinois, the license is still held up by regulatory and legal delays. And at this time, we do not currently have any insight into when that license will be available. But when we do, we have a plan in place that will be implemented once we have more clarity from the courts and the regulators. In 2022, our focus is to maintain our 8% to 12% market share in Nevada and continue to grow wholesale share in the state while executing on accretive and diversified revenue opportunities such as the cannabis restaurant, lounge and nightclub. In California, we are focused on improving profitability through increased sales and operating leverage in our dispensary, increasing vertical integration and entering into profitable wholesale agreements. In Florida, our developing operations will continue to drive growth in 2023. Overall, as a company, we are focused on expanding profitability and cash flow given the tough macro operating background. With that said, I'd again like to thank everyone for participating. And now I would ask the operator to open the lines for questions. Thank you.

[Operator:]

[Operator Instructions] Your first question is coming from Bobby Burleson from Canaccord.

[Bobby Burleson:]

I'm not sure if this happened to anybody else, but it seems like the audio was going in and out. So I may have missed a little bit. I had a question about just price sensitivity of consumers, what you're seeing at the SuperStore and any contrast between what those consumers are doing and what you're seeing in Santa Ana. Just any color on differences may be there.

[Dennis Logan:]

Sure. Bobby, it's Dennis. I'll take a stab at that, and the others can jump in. So SuperStore, I think the biggest impact for us, Q1 '22 versus Q1 '21 and Q4 was really the number of tourists coming to the store. Average ticket was in line with Q4 '21 in that $124 range. So that was good. It was up significantly from the Q1 '21 at $113, but the numbers are down. Same with Medizin, the number of customers were down in line -- as Larry mentioned, in line with the state's decrease in revenue. And our average ticket was around the same -- in that same price than it was prior -- actually increased Q1 over Q1, and it was in line with Q1 to Q4. So that's where we're really seeing that in Nevada. It's really a number of tourists coming to the store issue, and specifically January, February, more so than March, and as we see those numbers tick back up in April into May. And then at the Orange County location, average ticket was -- we didn't have it last year in Q1. So average ticket was in line at that $80 range in Q1 '22 compared to Q4 '21 and a number of customers coming in. We were off a little bit of, off about 8% in customers in California. But overall, the customer traffic seems solid and is coming back and growing. I think with that 405 on-ramp offering under Warner Boulevard, should see that traffic number tick up. And if we can maintain the average ticket in that store and introduced -- as Larry mentioned, we're vertically integrating that Next Green Wave acquisition into our operations, we will be able to push our own brands into there and capture more margins. So we should see a significant improvement in California over the back half of '22.

[Bobby Burleson:]

Great. And then just a quick follow-up. Curious in terms of tourist traffic in Las Vegas. What the tealeaves look like right now? What you guys are seeing in terms of the setup for the summer?

[Dennis Logan:]

Yes. Now I'll turn that over to the guys on the ground. Bob and Larry?

[Bob Groesbeck:]

Bobby, hi. It's Bob. We're optimistic. We're seeing a significant uptick, particularly in the events arena, concert area. We're seeing a lot of traffic. We had some really nice traffic the latter part of last week due to several big concert events and talent. Again, I say that with some caution, however. It's just the overall economy here seems solid. But with rising gas prices, food, rents, it's going to have an impact, and it's already having an impact, I think, here at the registers. Folks are starting to tighten their belts even when they come to Vegas. So we're going to continue to mark -- to watch that very closely and -- but as I said, as far as traffic goes, we're excited right now where things are and where things are trending through the balance of the summer.

[Bobby Burleson:]

And do you think that, that price sensitivity puts you guys out of a little bit of an advantage given the progress you've made on vertical integration and wholesale?

[Bob Groesbeck:]

Well, I think it helps, for sure. I mean, obviously, it's a margin we pick up. We get -- they're selling -- our manufactured products is significant. So it gives us an opportunity to create incentives to drive traffic, great opportunities for the customer to register.

[Operator:]

Your next question is coming from Doug Cooper from Beacon Securities.

[Doug Cooper:]

First, just on a housekeeping thing. What was the revenue contribution from Next Green Wave in the quarter?

[Dennis Logan:]

Doug, let me just pull it up here for you. It was -- it's around -- it's about $465,000 for the month of March. Like we only had it in -- we only owned it to the last 28 days of March.

[Doug Cooper:]

So the Santa Ana store did then roughly $2.5 million?

[Dennis Logan:]

Yes, $2.4 million, $2.38 million, $2.4 million.

[Doug Cooper:]

The recent California budget proposal pertains to cannabis, and particularly, cultivation tax going -- being 0 essentially, I guess, starting in July that goes up and collecting excise taxes for the retailer and then increased -- I guess, increased policing if I can call that for the black market, I think, for the legal activity to credit, I think you call it a little more level playing field. And just if you have any comments on the proposed California budgets and what that means for you guys?

[Bob Groesbeck:]

Yes, Doug, Bob. How are you? Yes. It's obviously -- it's a ray is sunshine in what's been a pretty dark market over there for a while. So the big question is, of course, if whether the Governor signs off on it. But anything we can get by way of tax release particularly on the cultivation side, we'll take it where we can. And it's going to take a concerted effort by the state to really rein in the black market. And it's nice to see that they're actually allocating funds to law enforcement to do something along those lines. So from that standpoint, we're positive. But again, until a bill is signed, it's nothing but talk.

[Doug Cooper:]

Right. What is the timeline for that in terms of the next steps with recent…?

[Bob Groesbeck:]

Well, I don't know the exact timetable. According to our lobbyists the other day, it is of the highest priority in the Governor's Office. So we'll see what happens.

[Doug Cooper:]

Just in terms of -- you mentioned in your talk, I guess, that you've taken -- if I can remind, right, and taking a bit more conservative stance to the remainder of the year. Can you quantify that? What does that exactly mean in terms of your expectations for growth year-over-year? Is that sort of flattish? Or really your thoughts on when you mention -- when you say that.

[Bob Groesbeck:]

Yes. Dennis, why don't you jump in here?

[Dennis Logan:]

Yes. Make sure -- yes. So Doug, if we look at Q1, overall revenue was up sort of 7.9%. For the company as a whole, we were down in Nevada as kind of 3.5% of the SuperStore. I think the SuperStore turns back around and become flat to slightly positive over the balance of the year. We'll start to see some uptick and pick up this negative 3% from Q1. The unknown really is the Medizin store. I mean the locals seem to be a bit more impacted by the -- obviously, by the inflationary environment than the tourists are. So that's where we're seeing some pressure. The upside to that is, though, our wholesale business in Nevada has picked up quite nicely because we do have some of the best-selling products. So the mix is going to be -- it will be interesting to see where we come out. I think revenue-wise, again, I think will be positive for the year on a quarter-over-quarter or year-over-year basis. Again, if the summer continues to where we think it will go, and we should see that translate into some decent margins as our average tickets are up and we can push more of our own product through that vertical integration, we get our expanded cultivation facility online, pushing our own flower and getting our flower to that 50% vertical integration market where we are with the vapes and the edibles.

[Doug Cooper:]

Okay. In this market environment, it seems like the cash preservation becomes important and obviously becoming free cash flow positive. So far, you got a lot of cash now to continuing, some of which is obviously allocated to Florida or a bunch of that was allocated to Florida. Maybe the plans for on-site restaurant and lounges have been tempered a little bit given, for sure, that alcohol can't be included, I think, for that, right? What about Illinois? Would you ever, with this license in limbo now and maybe some of the things that have changed in Illinois in terms of competition or your wholesale prices coming down, would you consider walking away from that? Or is that still a priority?

[Dennis Logan:]

I mean we would -- all things are on the table. It's Dennis. Bob, you can jump in. All options are on the table. We're really waiting to see when that license gets granted. We looked at a bunch of opportunities to vertically integrate in Illinois, but we're taking a cautious approach, as Bob mentioned. If the market is not right, we would sell that license to a third party. If it looks like it's promising, we'll take a cautious approach and build it out. I don't think you'll see us put a SuperStore into that market anywhere similar to what we have in Nevada and probably smaller than -- if we were going to do it, smaller than the one in Orange County. But you're right, we're not married to it. And so given that it's a single outpost, and if we can find the right opportunity, we'll take a look at it. But right now, we're not spending any money on Illinois.

[Doug Cooper:]

Can you just remind us -- maybe, Dennis, just remind us what the CapEx budget is in Florida. Of the $62 million you had as of March 31, how much of that is allocated to Florida?

[Dennis Logan:]

Well, our Florida budget overall was sort of in the $25 million to $30 million range. We've already spent probably $4 million of that -- $4.5 million of that on the cultivation assets that we have. And then the approach we're taking on the retail is defying smaller kind of Medizin-sized stores, just like a smaller amount in prominent locations and lease those facilities and spend between $500,000 and $1 million on the build-outs and make sure we can get them rent-free until we get the cultivation asset up and running. So we're having some good success on that one. So call it, total $25 million of the $62 million would probably go to Florida. And we're looking at between another $5 million to $7 million on the cultivation expansion in Nevada coming up through kind of Q2, part of Q3 that will come online, end of Q3, where the first crop is probably coming off late Q4, early Q1. And then the other initiative that Bob had mentioned, we are exploring options and alternatives but haven't allocated any capital to that as of yet. So we hope we'll have to come back to you guys. I mean the one caveat being -- I think Bob did mention talking about transitioning [TRENDI] into that on-site consumption lounge, we think that, that lets us get into that consumption lounge space with a pretty premium offering and not having to spend a lot of capital to convert debt at that restaurants and do it, infuse kitchens/infuse consumption lounge. So looking at all options on that as well.

[Doug Cooper:]

So is it fair to say on the $62 million, let's call it, you'll have $30 million of unallocated…

[Dennis Logan:]

Yes. I mean that's -- yes, $30 million unallocated right now is what’s really sort of dry powder to do it along way to make sure we can continue meeting all our objectives. So -- and then we have the option once Florida is built out, we look at potential sale leasebacks to recoup some of that $30 million that we spend on those assets, but that's sort of after it's build-out. So...

[Doug Cooper:]

Okay. And I guess my final question on the inflationary side. When we talk to wage growth, what are we talking about in terms of wage budget? Is it 5%, 6%? And can you -- you talked about the Bell tightening on the consumer. Can you pass those along to the consumer? Or other dispensaries raising prices at all?

[Dennis Logan:]

So they don't seem to be. I mean we pushed through some price increases. Our average tickets are up -- I would say, the average ticket is up sort of 9%, 10% of the dispensary this quarter over the last quarter and sort of in line with where we were in Q4 to Q1. So we did put some price increases through in Q4. They seem to be holding, but the price -- the pressure on the wages front and on the labor front, it depends on -- it really depends on the position we're hiring for. Yes, we're seeing sort of some increased pressure at the bud tender level, but it's not nearly as intense as it is at the, let's say, the accounting department level. Trying to find -- we're seeing lots of pressure and trying to -- people trying to approach our talent and people leaving for higher paid positions. So as they -- as we go, we look at -- this is an opportunity for us to sort of -- we can rightsize the labor force and keep -- hopefully keep the good people and then just sort of let that cost control, even work its way through as we go.

[Operator:]

Thank you, ladies and gentlemen. This concludes our Q&A session and conference call. Thank you for attending today's presentation. You may now disconnect.