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Edited Transcript of BYU.V earnings conference call or presentation 26-Mar-20 9:00pm GMT

Q4 2019 Green Thumb Industries Inc Earnings Call

VANCOUVER Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Green Thumb Industries Inc earnings conference call or presentation Thursday, March 26, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Georgiadis

Green Thumb Industries Inc. - CFO & Director

* Benjamin Kovler

Green Thumb Industries Inc. - Founder, Chairman & CEO

* Jennifer Dooley

Green Thumb Industries Inc. - Chief Strategy Officer

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Conference Call Participants

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* Aaron Thomas Grey

Alliance Global Partners, Research Division - MD & Head of Consumer Research

* Andrew Semple

Echelon Wealth Partners Inc., Research Division - Special Situations Associate

* Eric Des Lauriers

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Michael Scott Lavery

Piper Sandler & Co., Research Division - Director & Senior Research Analyst

* Pablo Ernesto Zuanic

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Robert Fagan

Stifel Nicolaus Canada Inc., Research Division - Equity Research Analyst of Healthcare

* Russell Stanley

Beacon Securities Limited, Research Division - MD & Research Analyst

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Alan Brochstein

New Cannabis Ventures - Founding Partner

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Presentation

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Operator [1]

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Good afternoon and welcome to Green Thumb's Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded.

I would now like to turn the call over to Jennifer Dooley, Chief Strategy Officer. Please go ahead.

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Jennifer Dooley, Green Thumb Industries Inc. - Chief Strategy Officer [2]

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Thanks, Mike. Good afternoon and welcome to Green Thumb's Fourth Quarter 2019 Earnings Call. I'm here today's with Founder and CEO, Ben Kovler; and Chief Financial Officer, Anthony Georgiadis.

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 statements are based upon management's current expectations and speak only as of the date of this report. The company cautions readers and listeners that there may be events in the future that the company is not able to accurately predict or control, and the information contained in the forward-looking statements is inherently uncertain and subject to a number of risks that could cause actual results to differ materially from those contained in or implied by the forward-looking statements. The company cannot guarantee any future results, levels of activity, performance or achievements. More information on these risks and uncertainties is provided in the company's reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the annual report on Form 10-K, which will be filed on or before Monday, March 30, 2020. These reports, along with today's earnings press release, can be found under the Investors section of our website. GTI assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Throughout the discussion, GTI will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financials -- financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and SEDAR filings.

Please note, all financial information is provided in U.S. dollars, unless otherwise indicated.

Thanks, everyone, and now here's Ben.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [3]

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Good afternoon and thank you for joining us on our fourth quarter earnings conference call. Before covering our quarterly and full year 2019 results, I want to take a moment to address what the Green Thumb team is doing across the country as it relates to the coronavirus outbreak.

Our first priority has been and will continue to be the health and safety of our team, our customers and our supply chain. Our response team meets daily to closely monitor this evolving and unprecedented situation. We understand the severity of this world-changing event and remain focused on guiding our team and business through it as regulations change, in some cases, day-to-day. To date, all of our stores and facilities have remained open, as local governments have designated cannabis cultivation and retail essential businesses.

As such, we continue to adjust to new regulations and new ways of operating to ensure continued access to cannabis products that our customers have come to rely on, in some cases, for serious medical conditions. In doing so, we are following CDC guidelines for increased sanitation, restricted nonessential visitation and travel and controlled entry and access throughout our facilities to support safe social distancing. Additionally, we are working with our regulatory partners to expand services such as delivery and curbside pickup to ensure customers have continued safe access to products that provide relief, especially in these uncertain times.

Despite the macro environment, we remain bullish on the medium- and long-term prospects of the sector and our business. Our prudent capital allocation philosophy serves us well, especially in times such as these. We will continue to take care of our team so they can take care of our customers. Our success squarely rests on the dedication of our fantastic team to deliver the results that we will share today.

With that said, I'm pleased to report that 2019 truly demonstrated our consistent execution against our clear strategy to distribute brands at scale. We delivered $216 million in total revenue, beating our internal expectations and, for those that remember, exceeding our initial IPO road show estimates. We hit our new store opening guidance by opening 20 new stores, more than doubling our retail fleet across the country. We closed our strategic acquisitions on time and tripled the size of our team. And most importantly, we guided the business through an inflection in the back half of 2019 as we converted to positive adjusted operating EBITDA. We are now moving towards positive free cash flow in 2020, all while maintaining a strong balance sheet. This sets us up well for the future as we build on our solid foundation for sustainable growth.

I am pleased to share that in February, GTI's registration with the SEC as a domestic issuer became effective. As a result, our financial reporting, including our year-end financials, now complies with U.S. generally accepted accounting principles, or GAAP. Anthony will provide more color on this later, but we view our transition out of foreign issuer status and into SEC compliance as an important step in providing investors with increased transparency and comfort.

Now to our results. Fourth quarter revenue was $76 million, an increase of 11% quarter-over-quarter, while full year revenue increased 246% from the prior year to $216 million. This marks our fourth consecutive year of tripling our annual revenue. Growth was fueled largely by the expanded production and distribution of our brand portfolio, new store openings and increased foot traffic to our retail stores, especially in Illinois, Pennsylvania, Massachusetts and Florida. Our brands are now distributed in 8 markets, steadily expanding our strategy to distribute brands at scale. Finally, New Jersey retail opened during the quarter, and we are proud to now be generating revenue in all 12 of our markets.

From the start, we have rejected the concept of growth for growth's sake. Instead, we are highly focused on driving profitability and are pleased to report that we are making considerable progress on the bottom line. Adjusted operating EBITDA for the quarter was over $14 million or about 19% of revenue. We are beginning to see scale in our business reflected in the continuous improvement in our operating margins.

Looking back on 2019, we had growth across our entire business as we continued to execute our Enter, Open, Scale strategy. We entered 3 new markets, California, Colorado and Connecticut, with the closings of several acquisitions. In addition, we won a cultivation and processing license in Ohio and 3 retail licenses in California. We opened 20 stores nationwide and ended the year with 39 locations, delivering on our target guidance of 35 to 40 stores by year-end. We scaled our business in many ways. We expanded our brand production and distribution capabilities in Nevada by adding 2 cultivation facilities, 3 operating retail stores in Las Vegas, and we won additional retail licenses. We put significant capital to work to expand capacity and improve production standardization and automation across key markets. On the brand side, we broadened our portfolio to include the much-loved Beboe brand, which marked our entry into the luxury CBD and beauty market; and incredibles, one of the most established and trusted chocolate and gummy edible brands.

In summary, we had a very busy year leading to solid performance. The fourth quarter was especially active across our business segments and really sets us up for 2020. On the consumer product side, we are executing our strategy to distribute brands at scale. The depth and breadth of our brand distribution will continue to expand into the year. Investments made during the fourth quarter of 2019 in new markets like New Jersey and Ohio are expected to begin operating later in 2020. This will expand the production and distribution of our flagship Rythm brand in 8 markets and bring total GTI brand portfolio distribution to 10 states across the country.

We continued to put money to work towards the core production, packaging and brand assets to ensure our brands have a competitive advantage into the future. We had our first harvest in Maryland in December, which allowed us to launch Rythm flower there in the first quarter of this year. And with the financing from IIP, our major CapEx projects to drive production scale in Illinois and Pennsylvania began to bear fruit in the fourth quarter. Those will continue to be a major focus ahead.

Our retail business delivered strong results for the quarter. Same-store sales again exceeded 50% for the quarter off a comp base of 14 stores opened for at least 12 months. Sequential quarter-over-quarter sales grew approximately 15% on a base of 19 stores. While we were intensely focused in the fourth quarter to position our retail business to win on day 1 of adult-use in Illinois, we were also very active in opening locations across the country. I am very proud of our retail team that had an amazing accomplishment at the end of the fourth quarter. We opened 6 stores in 5 weeks across 5 states, including Pennsylvania, Florida, New Jersey, Connecticut and Ohio. This is an example of real execution, and we have an A team getting it done. During 2019, we opened 20 stores, ending the year with 39 retail locations across the nation right on target.

The adult-use program in Illinois that kicked off January 1 has been nothing short of action-packed. As the first company to open a medical dispensary in Illinois 5 years ago, this was obviously something we were very focused on. And overall, it's been a success. The state has seen over $75 million in sales in the first 2 months. A viable, credible, robust multibillion-dollar industry is unfolding right in front of our eyes. As we speak here today, demand is still outpacing supply. It was all hands on deck for all operators, including the team at Green Thumb. Heading into January 1, we reinforced our supply chain and streamlined logistics across our operations as we work to meet demand. We successfully had 4 open stores for adult-use sales on day 1. And today, we have 6. All of this has allowed us to maintain consistent and continuous service for our customers, and I am so proud of this team.

The range of consumers who walk into our stores every day, different ages, different socioeconomic backgrounds and everything in between, continues to give me great conviction that cannabis is being widely accepted as a legitimate means to improve the well-being of Americans. We believe the strong rollout of adult-use sales in our home state demonstrates the tremendous opportunity ahead as recreational programs emerge throughout the country. States such as Pennsylvania, New Jersey, New York, Connecticut, Ohio and Maryland can look to Illinois as a model for recreational programs. These states have the opportunity for fulfilling a genuine need of their citizens for job creation and for tax revenue. And for states that may be looking for economic stimulus, they might consider cannabis more seriously this year. Thanks to our strategic plan, we have strong footholds in these markets and are well positioned to capture the opportunities ahead. For all of these reasons and more, we remain bullish on the industry and on our business.

I want to point out that our LEAP program in Illinois can be a model for social equity in other states. To date, we have counseled over 200 social equity applicants since the program launched in August 2019. Licenses are scheduled to be awarded in May. And at that point, our program will pivot to become a business incubator that will help license winners set up for success. It will be fun to share lessons learned and best practices with a new generation of business entrepreneurs in this incredibles industry.

Looking ahead to 2020. Disciplined capital allocation and profitable growth will continue to guide our operating playbook in the new year through these unprecedented times. We are adjusting to an even more rapidly changing environment. The truth is, it is not unlike how we've always operated, constantly iterating and improving to best serve our customers. Lately, this has meant bringing curbside pickup to our stores in Illinois and launching expanded delivery infrastructure in Nevada as the states move to delivery-only during this time. In fact, on Tuesday this week, Massachusetts eliminated adult-use and has now limited sales to medical-only at least through April 7. We remain very close to all these situations and adjust as necessary while at the same time looking ahead. We expect to make further progress on the scale chapter of our strategy to reinforce our operating foundations in our existing markets in both consumer products and retail.

Given the environment, we are cautiously optimistic but know that the future still has great uncertainty. In light of the environment, at this time, we will not be providing full year 2020 or new store opening guidance. However, we have some visibility into Q1 and can say that we expect to see between 20% and 25% top line growth in the first quarter.

Our mission to promote well-being through the power of cannabis and our strategy to distribute brands at scale are deeply aligned. We will keep building on the foundation laid in 2019 to continue to win in 2020, however that looks as the world continues to evolve.

With that, I'll turn the call over to Anthony to review our financial results for the fourth quarter and the year.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [4]

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Thanks, Ben, and hello, everyone. I echo Ben's comments on the pandemic. We couldn't be more proud of our dedicated team and how they've handled themselves in the current environment. We've all been through hell these past few weeks, and our team keeps trucking on.

Before I touch on our financials, let's talk about our transition to U.S. GAAP. This past summer, we learned the majority of our voting securities were held by U.S. residents. As a result, we no longer qualify for foreign private issuer status, requiring us to register with the SEC as a U.S. domestic issuer. I'm happy to report that just last month, our registration as a domestic issuer became effective. Starting with Q4 and full year 2019, our financials now conform to U.S. GAAP standards. While learning IFRS was a fun exercise, we welcome the change to GAAP as it sets up well for our business and our shareholders. As part of this transition, certain adjustments were made that rolled through our Q4 and 2019 financials, some of which I will touch on later.

Q4 revenue approximated $76 million, representing an 11% increase over Q3. For the year, we generated $216 million in revenue, more than triple our 2018 total of $63 million. 3x annual top line growth managed to keep things interesting here at Green Thumb. While our M&A activities supplemented some of our growth, the majority of it was driven the old-fashioned way. We made more and we sold more. By year-end, we had successfully generated revenue from all 12 of our markets.

Our net retail wholesale revenue split during the quarter. We ended at 69 by 31, respectively. This is up from 64 by 36 in Q3 and was primarily impacted by short-term capacity constraints in wholesale and strong retail revenue growth via same-store sales and new store openings. When we calculate this ratio, we net out intercompany revenue against our consumer products business, which understates its true size. In Q4, intercompany revenue approximated 19% of total revenue.

Our consumer products revenue grew 10% over Q3, largely driven by strong performance in Illinois and Pennsylvania. Throughout Q4, our wholesale CapEx projects in Illinois, Massachusetts, Pennsylvania, New Jersey and Ohio progressed nicely. As of today, Phase 1 of our Illinois expansion and our Massachusetts expansion are now completed, and our Illinois Phase 2, New Jersey, Pennsylvania and Ohio projects remain on track.

On the retail side, Q4 revenue increased 20% over Q3, largely driven by same-store sales exceeding 50% as well as the 6 new stores we opened in Florida, New Jersey, Ohio, Pennsylvania and Connecticut. We ended the year with 39 locations, consistent with our stated guidance of having 35 to 40 opened stores by year-end.

Gross profit for the quarter was $40.6 million or 54% of revenue. While direct comparisons to previous periods are difficult due to IFRS to GAAP transition, we estimate that our fourth quarter gross margin under IFRS would have been 150 basis points greater. The biggest impact to gross profit is the inclusion of lease expense and cost of goods sold. We continue to be encouraged by the progress we've made on this line item of our P&L and our ability to recognize meaningful operating leverage on the consumer product side of our business as we scale.

SG&A expense for the quarter was $45.6 million or 60% of revenue. There's a lot of noise in this number, as D&A and noncash stock-based comp approximated $17.7 million with 39% of reported SG&A. Both of these items had significant Q4 true-ups associated with our IFRS to GAAP conversion. On a normalized basis, if you strip out these 2 noncash expenses, our SG&A grew by approximately $3 million quarter-over-quarter or 10%. As we look ahead to 2020, we believe that we can continue to experience significant operating leverage via revenue growing at a faster clip than our cash-based SG&A.

In addition to SG&A, the company also incurred $4.1 million in total other expenses for the quarter and $22.5 million for the year. As a reminder, these expenses include the mark-to-market of our strategic investment portfolio as well as interest and other expenses associated with the debt raise completed last May. Our investment portfolio, which totaled $24 million at year-end, continues to provide synergistic value to our core business.

Turning to profitability. Our adjusted operating EBITDA for the quarter and year was $14.4 million and $28.3 million, respectively. Building a sustainable cash flow-positive enterprise was a key goal of ours for 2019. The prudent expense management we exhibited, along with the cost-conscious culture we've built over the last several years, has put the company in a unique position within the industry.

On the liquidity front, we ended the year with approximately $47 million in cash and $91 million in long-term debt. Both during and subsequent to quarter end, we completed 3 sale-leaseback transactions with IIP, allowing us to leverage our fixed asset base to double down on key wholesale market expansions in Pennsylvania and Illinois. As the capital markets severely tightened in mid-2019, we revisited our capital allocation strategy and developed relationships with nondilutive capital partners such as IIP. Looking ahead to 2020, we continue to take a close look at all capital projects, knowing that all scheduled projects are fully funded. We take great comfort in knowing that our business is on track to self-fund its future growth.

In summary, we feel very good about our Q4 and full year results. We went into the year with the stated goal of building out our infrastructure and moving all markets along our Enter, Open, Scale operational curve. We achieved that goal as we are now operational and have generated revenue in all 12 of our licensed markets. In addition, we are well positioned in a number of key state markets that should drive meaningful revenue and cash flow for the business over the coming year. Looking ahead, I anticipate us continuing to execute against our playbook, recognizing that focus drive excellence all the while navigating the unknown environment with a focus on safety, compliance and prudent capital behavior. Now more than ever, the star of the team is the team.

With that, I'll turn the call back over to Ben.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [5]

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Thanks, Anthony. I want to thank our team for all their hard work for closing out 2019 on a strong note and kicking off 2020 with the successful launch of the Illinois adult-use market, new store openings and more sale-and-leaseback financings. While we are actively executing on our strategy, we remain vigilant on the worldwide pandemic that has profoundly impacted all of us. We understand there's a lot of uncertainty ahead. But we believe our continued store accessibility, strong business model and balance sheet will be the source of strength upon which our shareholders and customers can rely. Our ability to show kindness and goodwill to each other and our communities has never been more important.

Here at GTI, as a team and as individuals, we will uphold our commitment to promote health and wellness in our communities and to support one another. We believe our products and services are helping people in this difficult situation. We remain hopeful that recovery is on the horizon, and we will be stronger on the other side. And to all the doctors, nurses, scientists, health organizations and first responders working diligently to treat patients and find cures, thank you. And finally, to our Green Thumb team on the front lines, thank you for all you do. Stay healthy and safe, everyone.

And with that, I'll turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Robert Fagan from Stifel GMP.

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Robert Fagan, Stifel Nicolaus Canada Inc., Research Division - Equity Research Analyst of Healthcare [2]

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Congrats on a great quarter here.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [3]

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Thanks, Rob.

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Robert Fagan, Stifel Nicolaus Canada Inc., Research Division - Equity Research Analyst of Healthcare [4]

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Yes. So I wanted just to see if you guys can comment a bit on the recent trends in the Illinois rec market. Are we seeing any acceleration or deceleration in March versus the trend for the first 2 months? And in terms of the supply situation, knowing that it's constrained currently, how long do you think that you would -- expect that to last?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [5]

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Sure. So with adult-use launch in January and a strong January, where the market really went up 2.5x from a $25 million December to a roughly $65 million January and February, I think we've seen stronger demand in March. I think you'll see continued growth. But let's think about what's happened a little bit in January. There's been a lot of fear. There's been a lot of uncertainty. Are the stores going to be open or not? And so we've seen a surge. We've seen strong demand.

To the second part of your question on when will supply meet demand, we go back to the same math you said before. We think the market in medical and the tight inventory market was a $25 million market on a monthly basis of total retail sales. We think that goes up at least 10x to be a $2 billion to $3 billion market just from Illinois, and that's before out of state, which we see is a significant percentage. So we see that ramping. Like I said, 2.5, that's not 10. So we got to see that continue to March. And I think supply will come on line in lumpy forms but slow and steady throughout. And I think that'll start to show up as menus get increased depth and more product offerings and things like that.

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Operator [6]

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Your next question comes from Eric Des Lauriers from Craig-Hallum Capital.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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I offer my congrats to you as well on a great quarter. I was wondering if I could just kind of touch on your wholesale strategy, especially in robust markets like Illinois and Pennsylvania. Can you talk some about the competitive dynamics you're seeing? We've seen some media articles out discussing the increase in use of slot fees in the industry as well as essentially shelf-swapping with MSO peers. Can you just talk about what you guys are seeing out there and how that might be evolving?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [8]

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Sure, happy to. In supply-constricted markets, we're seeing a lot of hand-to-mouth, where product, especially on the flower side, given the yields and things, be tight on the shelves. We're not seeing any arrangements among multistate operators, to your question there. And frankly, we have not seen a lot of irrational pricing where, with tight demand, you think pricing could skyrocket. We've seen pricing firmness on the margins. Some are taking price, but we see stability on price as we manage through this.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Okay. Great. And then just one follow-up for me. I know you guys don't like to guide, and I respect the fact that you guys are kind of withdrawing the retail store count guidance this year. But I just wanted to touch on free cash flow. In one of your prepared comments, Ben, obviously, with your relationship with IIP, that significantly helps to lower CapEx on your end. Wondering if you guys feel comfortable stating when you might get to free cash flow positive and if that could possibly be in 2020. And that's it for me.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [10]

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Sure. This is Anthony here. Obviously, we've got a great relationship with IIP. They effectively helped us finance all wholesale projects that we're currently undergoing here in 2020.

As it relates to the cash flow-positive nature of the business, look, we've seen a lot of momentum on this starting in the middle of last year, and we've carried that momentum into 2020. So I think as we look ahead, we anticipate the business to continue to perform extremely well. And obviously, one of the things that we're doing in our seat is making sure that we're closely watching all OpEx to ensure that we get solid operating leverage, so that the business is in a unique spot relative to its ability to generate cash flow. Now obviously, the events that have taken place over the last few weeks create a lot of unknowns for us. That's something we're navigating very closely. But we had a lot of solid momentum heading into this year, and that's continued since January.

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Operator [11]

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Your next question comes from Vivien Azer from Cowen.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

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Congrats again on a good quarter. I'll reiterate that, for sure. Question on gross margin. It seems like over the course of 2019, ex biological assets, you guys are now comfortably in a cadence where you can put a five handle on that impressive gross margin expansion in the quarter. So Anthony, anything to call out there in terms of puts and takes in terms of gross margin? And then as a follow-up to that, I know you guys are not in a position to give guidance nor should you. But what would it take for your gross margin to fall sub-50 given the run rate that you're on?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [13]

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It's a great question, Vivien. And yes, we've seen nice momentum in the gross margin line. Just a reminder, retail gross margin is pretty consistent. So where the business gets strong operating leverage is really on the consumer product side of the business. We have continued to effectively grow into the facilities that we built, and now we're currently expanding them. And so looking ahead to 2020, assuming nothing changes, we anticipate there could be additional upside within that gross margin line, depending on the wholesale revenue split as well as how quickly we can grow the consumer product side of our business. But you're absolutely right. We have seen nice momentum there. Our goal is obviously to not look back and let that thing go below 50 points. And in the event that it would, there's probably a few things that would really have to happen. One, we'd probably have to see a material change in our retail gross margins. And then on top of that, perhaps with some of the large expansions that we're doing, where we're effectively ramping up the fixed cost pretty dramatically, particularly in Pennsylvania and Illinois, we'd have to see a relative drop in the revenue to not cover that fixed cost expansion. So as of now, we're not seeing it. But again, the future is a bit unknown given the recent events, and it's something we're watching very closely.

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Operator [14]

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Your next question comes from Pablo Zuanic from Cantor Fitzgerald.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [15]

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Just can you remind us about the cadence and timing of your expansion and magnitude in Illinois and Pennsylvania in terms of capacity? When does that kick in and the magnitude in those 2 states?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [16]

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Sure. This is Anthony here. So let's talk about Pennsylvania. We're in the middle of a doubling effectively of our capacity in that state. My guess, before this coronavirus hit, we were on track for that expansion to be completed in the early part of Q3. We'll have to see how the corona plays a role in that timing.

As it relates to Illinois, we've already completed Phase 1 of our Illinois expansion. We have effectively 3 more scheduled phases that really kind of start rolling off in early Q3. So we expect to see the increase in capacity run through our P&L at some point in the third quarter and then continue to kind of ramp from there as the other phases are finished.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [17]

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And then just a quick follow-up. I mean, obviously, you're guiding for 20%, 25% sequential growth in the first quarter, 11% in the fourth. That acceleration, as you said, Illinois, 2.5x bigger market, but any other states that are aiding that acceleration? Or is it mostly just about Illinois improving the sequential rate in the first quarter?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [18]

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Sure. We're now generating revenue in 12 of our markets, but there are a number of other states that are performing quite nicely. We're obviously very bullish on New Jersey. Nevada, we think, there is a lot of upside. And then we have the other markets, including Ohio, Connecticut, Maryland, Florida that continue to see nice growth within those submarkets. And so while Illinois and Pennsylvania are where we've kind of made the capital -- the big capital bets, we continue to see nice growth across really all the markets that we operate in.

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Operator [19]

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And your next question comes from Michael Lavery from Piper Sandler.

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Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [20]

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Can you touch on just some of your capital allocation priorities and if they've changed at all? And maybe specifically, thinking that the withdrawing or not having any store guidance makes sense, but is that because you've already changed plans or just recognizing uncertainty around that? And then just as a follow-up also on the 1Q color. Can you give a little sense of how that may look between wholesale and retail? Is it -- would it be right to think retail will continue to have the much better momentum?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [21]

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Thanks, Michael. This is Ben. I would say to the second part of your question, on the first quarter, we see momentum on both sides of the business. We can obviously turn the dial as the steady progression of increased wholesale comes on line.

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Michael Scott Lavery, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [22]

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Okay. And on the capital allocation?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [23]

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Yes. So the capital allocation priorities and how that swings, so our capital allocation priorities, as we've been pretty clear, on the wholesale production side remain in Illinois and Pennsylvania, heavily financed through the sale-leaseback. I would say below those top 2 priorities is New Jersey and Massachusetts for us, although there continue to be opportunities. As Anthony mentioned in his prepared remarks, it's nice to have the wholesale fully funded on the production side with capacity because we spent a lot of last year building the foundation opening 41 stores. So this year, the stores that are in the pipeline that are already constructed that are built are already funded or we have the rest of the capital on the balance sheet. Incremental storage can come from operating cash. To the point a little while ago about when does the free cash flow kick in, you start to see the inflection points work their way down the income statement, from revenue to EBITDA to adjusted operating EBITDA and then income to free cash flow. And so we're in the driver's seat to figure out what of that we want to spend or not. So we have the plan, obviously, pretty firm, for the near term and can adjust for the back half of the year based on what we see. And clearly, every day is an adjustment here. So we're watching this thing day-to-day, seeing what's happening in the markets, being very careful. But we believe in the size and the markets to put the big CapEx in to the wholesale production on that side.

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Operator [24]

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Your next question comes from Matt Bottomley from Canaccord Genuity.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [25]

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I hope everyone is doing well. The first question I have is just on how you sort of -- your outlook maybe for 2020 with respect to what is a very turbulent macro environment here outside of even the cannabis sector. And how you sort of look at, a lot of operators in March of this year are really showing all-time highs on certainly week-over-week basis with respect to surge in demand as a lot of these cannabis platforms, cannabis stores, remain essential services. But as distribution potentially becomes more difficult, potentially a lot of states are going to go to delivery-only, I'm just curious what your viewpoint is on where this market might go in the next couple of months here, as hard as a question that might be? And what some of the contingencies you guys have in order to continue delivery to a lot of your patients on the medical side?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [26]

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Sure, Matt. Thank you. So we're planning 2020. We've got a pretty detailed plan coming in. So we have the ability to be flexible on some of it. But like I said, it's day-to-day, as this -- as everybody adjusts to a very changing environment. We're all dealing with something we've never dealt with before, and so we're analyzing it. We're thinking about how to not make a major mistake. We're thinking survival. We're watching the cash, and we're in this for the long term. So we can throttle with that sort of in mind. I would say we remain on plan, though we have some marginal CapEx spend that we can adjust like I mentioned, some of the hiring plans, some of the other things in the business that are within our control to keep things okay. It's a nice position to be in to have the business funded and to have cash on the balance sheet and have a business performing. And if things change, we can adjust.

I would say for March, we've seen strength. We've seen adjustments. We're obviously adding to the fleet of delivery. We're building delivery infrastructure. It's been an IT priority for a while. It elevates to the top of the list. As we build that out, it's been, I think, 96 hours or something since it's been off. And we have plenty of cars being approved every day as the team converts. And we adjust. And so we get nimble, and we think about which workforce is where and how can we optimize. But what doesn't change is the consumers' need or demand on this product. And again, particularly in these times of uncertainty, we've seen increased demand. So we see our part in fulfilling that demand. I think over time, to your question of how is it going to look, you tell me, apocalypse or not and where is the world going, and I can tell you on cannabis, but it's going to be in demand and there's wallet share there. But if nobody ever has a job and nobody ever leased their house, things are going to change. We don't think it's that way. We're optimistic by nature, and we're planning to weather the storm and come out on the other side of it, particularly geography-by-geography as we adjust.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [27]

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Appreciate that. Very helpful. And then maybe my second question is just more on sort of management's philosophy here in these very turbulent times. You guys have probably been the best example of a company that's been conservative and prudent in their capital allocation. So given where valuations are, and my understanding is in the private sector, they've come down just as much, is this an opportunistic time for a company like GTI? Or is it just still uncertain right now where the focus is on just sort of buckling up and executing in the states and markets you already are versus looking for where potentially there could be some accretive opportunities given where things are lying right now?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [28]

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We're analyzing that every day. We're looking where is the best use of shareholder capital to generate the best returns. And I can tell you, it's turned to especially where our portfolio is and where the world is that the best use of the incremental dollar for us is within the business. We're analyzing lots of things. We're very hesitant effectively in the M&A environment to inherit somebody else's problem. We spent many years putting this business into a position to be free cash flow-positive, to be in a position to play offense and/or weather the storm, and we're seeing that right now. So we love allocating capital into our business. We're looking at everything that's going out there -- on out there in the space, particularly California. That just remains very dynamic all the time. But you don't have to swing at every pitch. And so we like our position right now. I see the incremental dollars, especially our cash, being best used in our business, as it creates the future business in T+1 at a very low multiple of EBITDA. And so all day long, we want to invest capital like that.

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Operator [29]

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Your next question comes from Aaron Grey from Alliance Global Partners.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [30]

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Congrats on the quarter. Just one question for me. Most have been answered. Just want to circle back to the wholesale and retail mix and how we look at that kind of going forward even past the first quarter. So that certainly sounds like demand within your own stores are certainly able to kind of eat up a lot of the -- some products you have. But as you move forward and you have these expansion in markets like Pennsylvania and Illinois, now at what point do you start to see that wholesale shift and mix start to come back up? Because you're also going to be opening up more stores both in Pennsylvania, also in Illinois and other markets. So what point does that expansion kind of outpace the retail store opening and you see that mix start to shift back into wholesale?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [31]

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Yes. It's a good question. So we kind of got hit by a perfect storm in the fourth quarter on this front. Our plan for 2020, as we penciled it out, we showed effectively a split that looked closer to 60-40 overall, retail-wholesale, and that's net. And I think we'll certainly see kind of that shift to start in the first quarter, and it really all comes down to our wholesale capacity because that's a business that's a bit stair-step in terms of its revenue growth. And so with the Phase 1 Illinois expansion that took place as well as some of the other wholesale work that we did, we should start to see that kind of breakdown that ratio evolve closer to the 60-40 that I just mentioned.

Now the one thing that's unique is that with our stores, we've got to keep the shelves filled. So if third parties out there aren't fulfilling demand for us, then we have to supply that demand ourselves. And so that's an area where effectively, we don't have as much control because we obviously have to keep product on the shelf at our stores. And so that's one thing that could impact that ratio on a go-forward basis. But with our -- with the wholesale capacity expansions that we have in place as well as what we're seeing from our seat, we think the wholesale revenue split, like I said, will normalize closer to the 60-40 that we kind of projected for the year.

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Operator [32]

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Your next question comes from Graeme Kreindler from Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [33]

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I wanted to ask specifically about the Nevada market and the operations there as of late. Given that's a tourist-heavy market and the market's move to delivery-only and a shutdown of a lot of the attractions and events there, I was wondering what the trends look like sort of into the recent weeks here on that market as well as the expectations or what the historical customer mix was between visitors to the state versus people local to the state?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [34]

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Sure. Great question. I'll start by answering the end of your question. In terms of our -- in terms of the breakdown of tourist versus local, our business was heavily, heavily focused towards local business. If you just look at our stores and the breakdown, which is something obviously we study pretty dramatically, the 5 open stores that we have in the state, I'll tell you that no one really knows what's going to happen within that market over the next 4 to 6 weeks as effectively, an economy that's based on tourism as those dollars effectively dry up. We'll have to see and watch it closely. And right now, with the unique dynamic of delivery where you have certainly not enough cars delivering product on the market, it's hard to get real visibility into the size of that market and how that's going to shake out. But our business historically has been overwhelmingly local. And so we're closely monitoring and watching this to see how overall sales will be impacted.

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Graeme Kreindler, Eight Capital, Research Division - Principal [35]

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And then as a follow-up question, just without having the full financials in front of me, just wanted to get a -- more of an appreciation for what the actual cash spend on CapEx is going to look like. I know there's a lot of uncertainties in the environment, but maybe you could talk about sort of capital plans. Is that level supposed to, again, look pretty sustained relative to how it was in the past couple of quarters? Or do the sale-leaseback transactions really alleviate a lot of the cash spend in the beginning of the year? Or does that kick in sort of later in the year?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [36]

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Sure. On the capital plan, obviously, with the dollars that we've taken down from IIP, those projects are going on. As it relates to the retail spend as well as some of the other kind of maintenance CapEx that have within the business, that's something we're closely monitoring and looking at, particularly as these next 4 to 6 weeks kind of unfold to see -- to really kind of shape that discussion internally as far as what dollars we're going to spend and when and how. I'll tell you that heading into this, we have this penciled out pretty closely. And so as things started to unfold with corona, we certainly sharpened the pencil. But it's something we would end this year with a maniacal focus on cash and making sure that we didn't have to tap the capital markets to execute our 2020 plan. And so the impact that we would have is really on the business and then how much of that impact is going to have on the cash flow generation of the business that we had planned to use on CapEx that would be self-funded. So that's really where we would actually see the impact and is something that is, again, in the coming weeks, we'll have more visibility on it.

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Operator [37]

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And your next question comes from Andrew Semple from Echelon Wealth Partners.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [38]

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Congrats on another great quarter.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [39]

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Thanks, Andrew.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [40]

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First one for me. We've heard a lot of commentary in the marketplace about the supply and demand side and how those have been impacted by the coronavirus. I just want to pick your brain a little bit on the regulatory side of the equation and what that looks like for the balance of 2020. So are you seeing any potential impact on security and regulatory approval to open new stores, to get products to market? Any states in particular that you think the time lines have been pushed out? I'm particularly thinking of Nevada and Massachusetts adult-use dispensaries. But any additional color there would be appreciated.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [41]

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Sure. So this is Ben. I think if we step back a minute and you look at cannabis, we've quickly gone from illegal to essential. And in the time of maximum panic and maximum uncertainty that we've never seen, cannabis has been deemed across the country as an essential service both on the medical side and mostly on the adult-use side across the country. So I think the biggest thing on the regulatory side is in the very active conversation, especially as we think about some of these markets, say, all the markets east of the Mississippi that are effectively tightly regulated, limited supply, limited operators that have active conversations with regulators, people who are worried about safety, compliance, right? Nobody is trying to take advantage of the system. Everybody is trying to get patients to feel better but do it in a respectful, honest way. So it's been amazing to watch, whether it's Connecticut or Ohio or Illinois or Maryland or Florida, as everybody adjusts and issues guidance like we talked about from curbside to delivery and things like that.

We've seen Massachusetts eliminate adult-use. That's primarily, at least from what we hear from inside and from outside, about preventing interstate travel. So people coming, say, from New York to Massachusetts, so we know the out-of-state bit there is quite strong. So I think that's a prudent decision, especially in this environment. And as we see Nevada ramp up the delivery business, we see short-term hiccup. But again, like what Anthony said, the net demand is no different from the consumer, especially with the local demand. The question is how much money that are in people's pockets or which wallet share gets cut first remains to be seen. We have confidence in cannabis in that wallet share. So I think it remains fluid around the country and what's going on, but we're very active in these conversations and are proud to continue to serve the customers.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [42]

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Great. Just one follow-up here. I know it's extremely early stages, but you are investing a lot in developing this delivery infrastructure and curbside pickup capabilities. Have you received any indication from any of the regulators you deal with as to whether these practices would be permitted to continue once these stay-at-home orders are ultimately lifted?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [43]

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Well, to be really candid, it's been hard enough talking about what we want to do now versus what they think they might do ahead. I think regulators are operating with the safety first. I want to make sure we don't make a major error. So I think common sense would say, if the program goes with delivery and goes smoothly and there's no major complaints and not a lot of noise and no problems, they might be inclined to keep it. That said, regulators, state regulators, municipalities don't often operate with common sense. So we remain vigilant but TBD. But obviously, the world is adjusting. And so technology is a major partner to the consumer in how they access the product. And whether that's delivery, curbside, drive-through, you name it, we see that continuing to evolve.

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Operator [44]

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Your next question comes from Scott Fortune from Roth Capital Partners.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [45]

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Congrats on a good quarter. Everything's been asked. A couple of questions. First is your staff employee situation, especially in states that stay at home. How that's coming about and the ability that our state regulators are allowing you to hire pretty quickly from that standpoint? Or is that at risk here?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [46]

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So clearly, the health and safety of the team remains the top priority. So in a state like Illinois where they're stay at home, essential employees, who we've armed our team with, whether it's badges or tags for cars or proper communication channels for essential employees to get to work, and as we rotate staff, whether that's split shifts, things like that. I would say, from a priority standpoint, with regulators, the first step was essential services. And the second step is going to be, like you mentioned, accelerated badging. Often, the badging process and time to have somebody hired in the space takes a painfully long time. And I think people are potentially going to use some common sense. We've seen different approaches in different states in order to hire. And especially if you think of the pool of talent from industries like hospitality or restaurant and food service, there's lots of able bodies who want to be employed. And the biggest relief we can bring to our team on the front lines is more troops effectively. And so we continue to work that channel and continue to remain open, subject to the right health and safety guidelines.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [47]

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And then real quick, can you provide any color? There's been a lot of demand, pent-up, coming on board ahead of these regulations. Any color on products moving, flower, vape versus more edibles from that standpoint?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [48]

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I mean, to put it crudely, I would say everything is moving. I think given where the demand has gone, it's too hard to see the difference within the basket, especially if you think of respiratory risk given COVID. You might say, "Oh, there would be less of that." It's just hard to tell, given how strong the demand is. Whereas with vape-gate, last year, we did see share go down in vape.

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Operator [49]

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Your next question comes from Glenn Mattson from Ladenburg and Tillman.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [50]

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Good quarter as well. Most things have been asked, obviously, and I don't mean to beat this over the head. But just on Illinois and the -- as it relates to and how it compares to Massachusetts. So obviously, as you mentioned, Ben, that the Massachusetts ban was partly related to or maybe wholly related to kind of tourism. Is that kind of something that the powers that be in Illinois are thinking about? Can you maybe just kind of help us think about the pros and cons, what they're weighing as far as whether or not to keep adult rec open or to shut it down temporarily? Just so we can kind of think about what to look for as these developments unfold?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [51]

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Sure. I think they're using as common sense of an approach as possible. There's enough stores open in the state that are able to serve the market currently, and we see that continuing. I mean, there's not a New York City nearby here, but I think everybody is watching it. We've seen the medical market go to curbside, which has alleviated some of that crowd. We've seen hours -- elderly, or what we call young at heart, special designated times and other kinds of combinations.

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Operator [52]

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Your next question comes from Alan Brochstein from New Cannabis Venture.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [53]

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First of all, how refreshing to hear you actually meet consensus, trade execution last year. Congratulations.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [54]

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Thanks, Alan.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [55]

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Yes. My question is really a philosophical one. I'm not trying to pick on you guys. You and your other (inaudible) large survivors have done a fantastic job of accessing the debt markets, you were the first, I believe, as well as near-term CapEx with sale-leasebacks. So that's all great. But Ben, I know you're a capital markets person. You understand this. All of you have balance sheets now that are a little riskier. And I'm just wondering how do you go about thinking about fixing your balance sheets over time? Might you divest in certain markets if the capital markets remain challenging? Or how are you thinking about your equity?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [56]

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So this is Ben. Thanks, Alan. I would say that in general, the way we're thinking about the capital markets is if they closed and went out of business, we'd be fine to continue to operate the business for the foreseeable future. The business should produce enough cash that we can throttle what that growth CapEx looks like. And if we turn off the growth CapEx and didn't open more, the business would produce free cash. So you can certainly build equity with retained earnings over time. It's not as fast as other ways, but we're very comfortable with that. So we view ourselves in a strong position. We like where the business is with enough -- with really the production CapEx funded and the demand curve that we're willing to kind of double down on, short-term blip or not. We believe these markets are going to be multiples the size that they are now. And as we put these dollars in, they're going to generate multiples of themselves shortly and then over time. So I think that's how we would look at it. I don't know if, Anthony, do you want to comment?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [57]

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Yes. Alan, the only thing I would add is that you're probably looking at kind of the liability side of people's balance sheets and then effectively how levered they are. When we went out to market on the debt raise, we didn't take down the full amount that we could have because we wanted to get a better sense for how the business performed. And so we started with, call it, a little over $100 million. And here we are in the fourth quarter, where we've got adjusted operating of plus or minus $14 million, just under $60 million effectively run rate. And now we're in March, and obviously, we've got 2 months in the early part of the year that we at least have visibility to. And so we're quite comfortable with the total debt that we have on our balance sheet and our ability to service it with all of our covenants and then some. And I would just say that we've continued to take a measured approach to the liability side of the balance sheet. We didn't take it lightly when we added debt to our balance sheet back in 2019, and we don't take it lightly when we're making big capital decisions within the business. And so we're okay slowing down the business if we need to, if it's the prudent thing to do for the shareholders. I think we've proven that, and I think we'll continue to prove that.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [58]

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Okay. Great. My follow-up question is just regarding -- and I know this is an extremely difficult environment to forecast both on the retail side and other factors. But I'm just curious, if this is going to be a prolonged environment where we're struggling with shutdowns and things like that in the states. I'm just wondering [what you are seeing] on the production side. Whether it's a GTI or out in the rest of the industry where there's a lot more capital shortages and people may not be able to keep their doors open, I'm just wondering where do you think you guys are in terms of being able to meet your own demand. It sounds like you're prepared to shift that way if it ever becomes real.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [59]

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Yes. Where will -- are we able to meet the demand? I mean, the CapEx and the production numbers are funded. We think the market -- like I said, in Illinois, there's more demand than supply out there. And as we look at the total capital going into the space, it's not fully funded. So it's a very advantageous position to be allocating capital into that space. I'm not sure if you meant if the world falls off and there's no demand there or how we plan for an undersupplied markets across the country. But we're prepared for both. It's -- we find ourselves fortunate in the position we're in heading into this environment.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [60]

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All right. Sorry, I wasn't clear, Ben. I was just asking, it seems like some of your competitors may have some supply issues due to capital markets as well as you and others may have challenges just getting people into the facilities in certain states. I'm just -- worst-case scenario-type stuff. I'm just wondering, of your own demand, you mentioned it earlier that you might have to supply more of it in Pennsylvania and Illinois, I guess. Can you supply all of it? That's my question.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [61]

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We hope that the business and the industry remains where all the participants lean on each other and function cooperatively, which is what's happening. We're filling shelves and everybody else is filling shelves. We hope that everybody doesn't fall down. There'll be some, but I think there's enough supply coming out on these markets. But it's not sole-sourced. So we feel confident in what's going on. The supply side will limit some of the growth. And it's the supply side that will determine the growth rate in Illinois for this year and for the foreseeable future. It's essentially the same thing in PA, same thing in New Jersey, and we'll watch that.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [62]

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Yes. The only other thing I would add, Alan, is one of the things that gives us great comfort in making some of the big wholesale bets that we have is having the retail on the back end. Such that in the event that we if needed to, we could effectively turn the business and fill more of our shelf space if absolutely necessary.

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Operator [63]

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Your next question comes from Russell Stanley from Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [64]

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Just I wanted to ask on New Jersey and how the -- how your first dispensary is performing at this point and what your plans are in terms of time lines for your second and third.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [65]

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Great question, Russ. So we're very bullish on the New Jersey market. We have 1 store open in Paterson. It's right on the edge of Paterson in Bergen County. It's performing above expectations. We see a lot of demand in that state. We are working furiously to site our second and third location. And I'll tell you that the local jurisdictions have gotten a little bit, I don't want to say, squirrely, but they're hesitant given the referendum that's taking place in New Jersey at the end of this year. I think they understand it, if we knock on their door, that you have to have the adult-use conversation. And some of those folks are just not ready to do that until they actually get a sense for how their local jurisdictions will shake out in terms of for or against adult-use. But I'll tell you that we're in the northern, northern region of New Jersey. We think it's the most attractive region for a variety of reasons, and there are a lot of great places that we could put stores that we think will be flagships effectively for the business.

In terms of timing, I think it's preliminary to say. Obviously, corona has put -- has added a speed bump into the equation. And -- but in any event, it's a top priority for the business and is something that we remain very focused on. And hopefully, on our next call, we've got more of an update on that front. But we'll see.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [66]

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That's great color. Just on Illinois, I guess, a similar question, your time lines on your eighth through 10th locations. And if I could sneak one in there, just on Naperville, given the results of the referendum. When do you think you might be able to turn that store over to adult-use, given the steps that are required?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [67]

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Thanks, Russ. Yes. And to just set the stage, we have 5 medical stores which we can convert or add adult-use to each 1 of those 5 as well as open up 5 other ones. And so since the adult-use has come, of the additional licenses from the 55 medical, those 55 additional adult-use stores, only 2 have opened. Both have been ours on the adult-use side. And so we're the only ones to have the sole adult-use stores open. The 3 more coming, I think we have good visibility on one of them in a suburb of Chicago called Niles that we expect to open in the second and third quarter of this year, again, caveated on what's happening with COVID and where the world heads, and the other ones behind that so we can be prudent. Again, we can control the dial here in terms of capital spend and go fast or not. We love our portfolio here with 7 open stores.

To your last point, yes, Naperville, which became kind of the poster child for opt-out in Illinois, put it on the ballot as was the arrangement after they opted out, and it passed. And it passed somewhat overwhelmingly with strong support. And so now that'll go to the city council for various local jurisdictions and zoning, and we're right there. So we're confident. I think 2020 is reasonable but don't like to overpromise.

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Operator [68]

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Your next question comes from Robert Fagan from Stifel GMP.

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Robert Fagan, Stifel Nicolaus Canada Inc., Research Division - Equity Research Analyst of Healthcare [69]

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I had a little technology issue when I first got on the line. But Anthony, I'd like to revisit something you said about the gross margin under IFRS treatment. It would have been about 150 bps higher. Would have that translated to a stronger EBITDA as well? Or is the lease treatment just switching from cost of goods sold to SG&A? And in that sense, yes, just wondering if there could have been maybe some depreciation as well that's buried in the cost line that would have been excluded from EBITDA otherwise.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [70]

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Yes. So great question, Robert. You're correct. Our gross margin under IFRS would have been greater and so would our EBITDA as well. So effectively, the biggest difference, at least for us, is that lease expense now runs back through the P&L. So historically, it didn't. Then obviously, there was a change in both GAAP and IFRS as it relates to treatment. And now going back to GAAP, we have lease expense running through both cost of goods sold and then also SG&A. And so you're absolutely right. We would have seen -- that would have dropped to the bottom line, and we would have had greater adjusted operating EBITDA than we posted.

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Robert Fagan, Stifel Nicolaus Canada Inc., Research Division - Equity Research Analyst of Healthcare [71]

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Okay. Good. But you obviously used the new convention going forward. But interesting, nonetheless.

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Operator [72]

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And there are no additional questions at this time. I will turn the call back over to the presenters.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [73]

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Sure. Thanks, everybody, for dialing in. We wish everybody health and safety as you stay at home and we get through all this together. We will talk to you again in May as we review our first quarter. Thanks, everybody.

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Operator [74]

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