Verano Holdings Corp.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Verano Holdings Corp. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I'd now like to turn the conference over to Mr. Aaron Miles, Head of Investor Relations. Please go ahead.

[Aaron Miles:]

Thank you, and good morning, everyone. Welcome to Verano's first quarter 2021 earnings conference call. I'm joined today by George Archos, Chief Executive Officer and Co-Founder; and Brian Ward, Chief Financial Officer.

[George Archos:]

Thank you, Aaron. Good morning, and welcome, everyone. Before we jump in, I would like to thank you for joining our Q1 earnings call. I am very pleased with our strong results for the quarter, as well as the momentum we continue to gain in solidifying our financial position, while also developing a footprint that supports our ability to deliver on our objective of finishing the year as a top operator in the space. This includes being a top three producer of both revenue and EBITDA, while maintaining industry leading margins driven by sound operations and strong expense management. In addition to revenue and EBITDA performance, we expect to maintain strong financial health, which includes an industry leading rate for a non-dilutive credit facility. And given our strong positive cash flow, we avoided a need for sale leaseback as a method of raising capital through deleveraging of our own real estate portfolio.

[Brian Ward:]

Thank you, George. It's a pleasure to speak with you all today. I cannot overstate how proud I am of what we are accomplishing. Our strong performance from the quarter conveys the amazing work our team has put in and suggests an acceleration in growth going forward, which we believe we are set up to achieve. To start, I'll begin my remarks by reviewing the financial highlights from the first quarter 2021 and then discuss our balance sheet and capital agenda. Please note, the financial information is reported on a pro forma consolidated basis as if the AltMed acquisition had closed on January 1, 2021, compared to the actual closing, which took place on February 11, 2021. Also all currency is in U.S. dollars unless otherwise noted. First quarter 2021 revenue was $143 million, up 117% year-over-year, driven largely by growth in Illinois and Florida. We continue to experience positive impacts from investments we've made to expand wholesale capacity during 2020 and 2021 year-to-date, across 7 active cultivation and production facilities. We also observed strong retail growth with same-store sales up 26% from Q4 2020. In addition to the continued success within our existing retail operations, we experienced significant growth driven by the impact of adding dispensary throughout the course of the first quarter. As noted on the last earnings call, although a large portion of our revenue was generated in Illinois and Florida, which we believe represent the greatest near-term opportunities for Verano, we are encouraged by the progress we're making in Arizona, Pennsylvania, New Jersey, Maryland and Ohio heading into the remainder of 2021. Gross profit for the first quarter 2021 on an unadjusted basis, and excluding the impact of biological assets was $89 million compared to $50 million in the same period last year. As a percent of revenue gross profit was 62%, preserving one of the strongest margins in the industry. We did experience a slight decline from the 63% generated for the full year 2020 due to the impact of costs associated with investments made across numerous cultivation facilities and developing new retail locations. Looking ahead, although we anticipate some variation in margins, we expect to maintain a profile in the low 60s as we progress through 2021.

[George Archos:]

Thanks, Brian. Before turning it over to Q&A, I want to briefly cover how I envision our performance shaping up for the remainder of the year. While I was extremely pleased with the results from Q1, it was still very much a foundational quarter for us, and I feel that we are at the beginning stages of an acceleration throughout 2021. I anticipate solid results in Q2. Including the impact from acquisitions, we believe we can generate revenue approaching $200 million, while also maintaining our signature of a strong EBITDA margin profile in the low-40s on an unadjusted basis. Looking towards the remainder of 2021, the impact of pending acquisitions, cultivation expansion efforts and organic retail growth, we anticipate continued acceleration at the Q3 and expect Q4 to be our strongest yet. Much of our success to this point and my confidence surrounding future growth and prosperity is the byproduct of an incredibly talented management team paving the way for Verano with great purpose. I've said it before, people, process and product, these are the pillars on which our business is built. Our leadership team elevates the entire Verano family to perform at its peak. Evidenced by our position as a national leader in the retail vertical, and the considerable share our CPG brands uphold across our markets. As a new entrant into the public market, but among the strongest operators in the space, we will continue to work diligently to produce the results that we know we are capable of. Thank you for taking the time to listen and please note that we appreciate your support. With that operator, you may now open it up for Q&A.

[Operator:]

First question comes from Kenric Tyghe.

[Kenric Tyghe:]

A couple of quick questions for me. Just George in Illinois, you guys have -- you've kept obviously your store limit. Can you just speak to or help us better understand the impact of the accelerated stores, names we saw late in March that have continued through the quarter? And then part two of that question, any further insights you can provide on the long awaited 75 new licenses that we're looking to see in the back half of this year?

[George Archos:]

Good morning, Kenric, and thank you. The accelerated store count was due to the stores having to be opened by March 31st. So the initial 110 store count had a deadline of Q1 of this year. So that's why you saw the majority those stores get open. And the 75 stores, we anticipate that legislation will hopefully award those in the month of June. That's what we're currently hearing. So we'll see what happens by the end of this session. We're eagerly awaiting the social equity applicants to come online, so we can help them get the businesses up and running and we view that as a big positive for Illinois.

[Kenric Tyghe:]

Thank you, George. And just to that end, I mean, a big print in Illinois in the quarter where we all saw the headlines. But where were the biggest surprises in terms of your performance in that market? Was it a function of the traffic you called out during the prepared remarks, that average uptick that you called out? I mean where relative to your own expectations on this quarter were the biggest surprises for the team?

[George Archos:]

To be perfectly honest, no surprise here. I mean, this is our home state. We are coming from the retail side of the business. January and February are typically slow months in the retail sector. What we're seeing here in Illinois, in March usually there's a big uptick around spring break, which is exactly what happened. More importantly, we're seeing the vaccine rollout work and effective across our entire state. So even here at our home office, we're starting to see people walk around in the City of Chicago. You’re starting to see restaurants open back up, and you're seeing increased traffic throughout our entire retail platform. So it's exciting to see, we believe we're going to have a great year. And that we're definitely looking forward to getting some tourism back into Illinois as well.

[Kenric Tyghe:]

That's great. A quick follow on before I get back in queue. Any chance, Brian, you could sort of help us carve out the 13.5 million in sort of transaction acquisition related? How much of that was your listing related versus acquisition, which might be deemed a little bit more of a recurring expense? Any breakdown or additional color you can or will provide on that?

[Brian Ward:]

Yes, absolutely, Kenric. So of the adjustments, I would say a couple of million dollars is related to the IPO that occurred in the quarter. And then, most of the balance is largely related to the AltMed merger, as well as a couple of the acquisitions. So notably, acquisition related costs are now payments, et cetera. But yes, with the IPO effective in the first quarter, that was certainly a fair amount of the expense there.

[Operator:]

Question comes from Russell Stanley.

[Russell Stanley:]

Just wondering around Arizona, the acquisitions that you've closed there. Wondering if you can tell us how integration is proceeding? And in terms of potential further M&A in that state, just wondering what the impact to date has been of the Trulieve-Harvest announcement on valuation expectations?

[George Archos:]

Thank you, Russ. Good question. Integration is going very well in Arizona. The teams are working together across the entire platform there. We're currently expanding the cultivation footprint. We're integrating both of those cultivation assets, putting best practices in place. On the retail front, we're getting our flagship store ready in Phoenix. That should be opening here soon. We'll most likely be rebranding all the stores to follow expanding footprint, but more importantly, the people have been great. And that's really what this is all about. This is a people business. We're working well together on the corporate level as well as on the ground. And it's been tremendous to see Arizona come together. On the M&A side, there could be some future transactions that take place for us in Arizona, obviously fit the portfolio of our current Verano brand. And that we anticipate there still to be good transactions as well, as they happen and when they happen. As far as valuations, the Trulieve-Harvest merger was great -- great team at Harvest. Obviously, that's our key state. We commend them on a great deal. I think that's a good merger. I don't think it affects valuations on the private side. That's a big company across a big national footprint. So we're seeing the profile stay pretty much the same, and we only transact within a certain profile. So we feel confident that we'll continue to be able to do well in Arizona.

[Russell Stanley:]

Thanks for the color. If I could just sneak one more in on New Jersey. You just -- you recently opened your second dispensary. Just wondering when a third might get up?

[George Archos:]

Absolutely, yes, we actually have inspection on our third coming up here shortly. And we should be opening up some time in June. So we're looking forward to that, that'll finish our retail footprint, cultivation expansion is nearing completion as well. So we're looking forward to the adult-use transition and we'll be eagerly awaiting lines at our front doors. We will be ready for it and I think it's really an exciting time for Verano and the industry.

[Operator:]

Next question comes from Andrew Semple with Echelon Capital Markets.

[Andrew Semple:]

My first question this morning, just asking on some of the M&A and your outlook there. Now you're starting to approach your regulatory tasks in some of your limited license markets, Illinois, Pennsylvania, Ohio, Maryland. Do you view your M&A priority in the months ahead as continuing to go deeper in your existing states? Or do you think maybe it's time to start looking at adding a new state to the next and expanding your horizon?

[George Archos:]

Thanks Andrew. Good question. First, we want to stick to going deeper, that's been our strategy. We spoke on additional M&A that we'd like to transact upon to make our footprint where we'd like it to be. As far as additional space, there's no rush for us. Executing at a high level within our current 14 state footprint is definitely the priority. There's big expansion opportunities in almost every one of our states on the cultivation side, wholesale side, there's also adult-use transition in multiple states that we believe will happen over the next few years. And that takes a lot of work to be ready. So for now, we're going to continue on our strategy of going deeper, and executing at a high level within our current 14 states.

[Andrew Semple:]

Just another question here. The EBITDA margins for the quarter were obviously very impressive. I would like to get your thoughts on whether pending M&A might have somewhat of a near-term impact on that margin level, particularly since many of the pending acquisitions or those that have recently closed have been retail stores, not necessarily the full EBITDA margin that you experienced on a vertically integrated business? And then looking beyond kind of the near-term impact, do you feel like you'd be able to get those assets back to your portfolio level, 50% EBITDA margins kind of over the longer period, as you bring on additional cultivation and wholesale capacity to get more vertical?

[George Archos:]

I'm going to defer to Brian. And then I'll recap after he’s done. Brian?

[Brian Ward:]

Yes, Andrew. So to provide a little bit more color on where we think EBITDA margins are going to land, I think there is some volatility as we get acquisitions integrated. But as we kind of alluded to, we are really committed to on an unadjusted basis EBITDA margins in the low 40s. And part of that has to do with the expansion at all of our cultivation facilities where we're going to see that benefit coming online, as well as having vertical benefit in the State of Pennsylvania. And so, of course, a lot of the M&A recently has been retail in nature, but as we strike that right balance between wholesale and retail, frankly, we want to be winners in both verticals and believe we can. We do believe that EBITDA margin profile is going to sustain. So, on an unadjusted basis in the low-40s. Of course, there are going to be some adjustments, especially related to all the acquisitions, and there will be some volatility between the corner -- between the quarters. But I think for the full year, we're very comfortable staying in that low-40s on adjusted margin. And it's kind of part of our secret sauce.

[Operator:]

. Next question comes from Neal Gilmer with Haywood Securities.

[Neal Gilmer:]

May be wanted to follow-up on Pennsylvania and you kind of made some prepared remarks there. When -- can you give us sort of timeline when you expect to sort of be at your maximum capacity in that state as far as the build out of another cultivation and further dispensary openings?

[George Archos:]

We're actively planning that second cultivation currently. It will take some time, depending on zoning, construction schedules, et cetera. We anticipate that coming online sometime in 2022. Don't have an exact date yet, but we're working on it and it's pedal to the metal on that cultivation facility.

[Neal Gilmer:]

And then maybe -- and I think it was in your prepared remarks, but I might have missed it. Just with respect to your revenue mix between retail and wholesale, so how you expect that to trend going forward? Obviously, I think it’s fairly weighted towards the retail side in Q1. Are you expecting those sorts of levels to be maintained as we move forward through 2021?

[George Archos:]

Yes, we anticipate them balancing out a little bit. Obviously, it’s heavily skewed in Florida. All of that revenue goes towards the retail level. But over time, as cultivation comes online, we add cultivation capacity in Pennsylvania. We expect that to balance out. But we were very comfortable with where we're at currently.

[Operator:]

And at this time, I'll turn the call over to Mr. George Archos for closing remarks.

[George Archos:]

Thank you, everyone, for joining us today. It's been a pleasure and we look forward to our next earnings call. Have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.