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Edited Transcript of BYU.V earnings conference call or presentation 20-Nov-19 10:00pm GMT

Q3 2019 Green Thumb Industries Inc Earnings Call

VANCOUVER Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Green Thumb Industries Inc earnings conference call or presentation Wednesday, November 20, 2019 at 10:00:00pm 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 Samuel Bernstein Kessner

William O'Neil + Co., Incorporated - Equity Research Analyst

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Eric Des Lauriers

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

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Matthew Pallotta

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

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst

* Michael Scott Lavery

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Robert Fagan

GMP Securities L.P., 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 GTI's Third 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 GTI's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded.

I will now 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, David. Good afternoon, and welcome to GTI's Third Quarter 2019 Earnings Call. I'm here today with Founder and CEO, Ben Kovler; and Chief Financial Officer, Anthony Georgiadis.

Today's discussion and responses to questions may include forward-looking statements based on management assumption. Actual results could differ materially from those anticipated and stated here today. Please refer to the earnings release and GTI's SEDAR filings for risk factors which may impact forward-looking statements made on this call.

Throughout the discussion, GTI will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as EBITDA and adjusted operating EBITDA, which is defined in the press release issued earlier today. 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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Thank you, Jennifer. Good afternoon, and thank you, everyone, for joining on our third quarter earnings conference call. At a high level, there is positive momentum in the U.S. cannabis industry. Programs are expanding, consumers are choosing cannabis, and they are feeling better. Regulations are working, and the sky has not fallen.

Here at GTI, we are executing against our inter-open scale strategy to distribute brands at scale, and it is delivering a clear path to profitability. We generated $68 million of revenue in the third quarter across 11 of our 12 markets, and we feel confident in the continued execution of our business plan, supported by solid top and bottom line growth. This is 52% revenue growth over last quarter and more revenue than we generated for the entire 2018 year.

Our bottom line growth is fueled by a focus on cost and operational efficiency. As you have heard us say before, we believe adjusted operating EBITDA is the most meaningful metric to understand the true health of our business. We are proud to report $14 million of adjusted operating EBITDA for the quarter, up from $5 million in Q2. Improving from $5 million on $44 million of revenue last quarter to $14 million on $68 million of revenue this quarter or a 10% margin to 20% margin is the true operating leverage we have been working towards. These results are proof points of our fiscal discipline since day 1 in managing growth while containing cost.

Our base business continues to grow. Excluding the addition of Integral Associates for the quarter, we saw over 30% gross revenue growth from both our consumer products and retail businesses. It is important to note that this includes big and fast-growing markets like Pennsylvania, which essentially doubled in size over the last quarter. And while we anticipate absolute dollar growth to continue, we are seeing the proportionate quarterly growth rates at 10% to 15%.

Core to our ability to execute is our proactive and conservative approach to capital allocation, especially important in light of the severe capital constraints for our industry. This intense focus has served us well and is not new. Our balance sheet is strong, with ample liquidity and financial flexibility to support our growth initiatives. In May, we completed a very timely and successful $105 million privately placed debt financing. And last week, we finalized a $40 million tax-efficient sale-leaseback transaction on our Pennsylvania production facility. 100% of these proceeds will go on our balance sheet to be used for strategic growth.

Our cash position at quarter end was about $66 million. And it is important to note, this is net of all acquisitions and prior to the sale leaseback. This puts us in a fortunate position to have sufficient capital to fund our growth into the foreseeable future, and this allows us to be aggressive with our capital allocations where the ROIC and probabilities of success are the highest.

In the near term, we remain focused on expanding distribution of our branded products, opening new retail stores and positioning our business to scale. This is a very active focus for our team here in our home state of Illinois, which will open up for adult-use sales in just 41 days. GTI kicked off Illinois' medical program with the sales on day 1 in 2015, and we look forward to doing the same for the adult-use market on January 1, 2020.

The tidal wave of demand you have heard me mention over the last year is about to hit Illinois hard. Our team is working to ensure our brands and retail stores will do their part in supplying the market while continuing to provide products to our medical patients. We expect to have at least 3 retail stores selling adult-use cannabis on day 1, while we continue to prepare the rest of our adult-use stores for opening shortly thereafter.

However, retail access is only half the equation. The stores must be stocked with product. This is where our consumer products business supports our retail business. Supply will tighten across the market as demand in flex and supply takes time to come online. A rule of thumb for supply would be 6 months to build and 6 months to grow. So any capacity coming online January 1, or frankly any time in the first half of the year, means the project had to start before the bill was even signed.

We will continue to add capacity throughout the year to support this growth. And we will optimize and allocate resources that generate the best outcomes for our business and customers as we have always done.

So let's unpack what that means relative to our progress this quarter. On the consumer products side, our brands are produced, distributed and available in retail locations in 8 states today, underscoring the leverage of the platform we have built over the last 4 years. As you may know, our brand portfolio includes Rythm, The Feel Collection, Dogwalkers, Dr. Solomon's, Beboe and incredibles and are collectively sold in over 700 retail stores. Distribution supports building brand awareness, and the momentum is strong on our flagship brand, Rythm. Now produced and sold in 6 out of our 12 states in which we operate, Rythm's Brownie Scout variety was recognized by High Times and most recently won the coveted award for Chicago's best strain.

Our brands are only as good as our ability to deliver on their promise, and I am proud of our team's commitment to producing high-quality products. And the action extends across our portfolio. We launched incredibles gummies in Nevada and a tart product extension in Massachusetts and Illinois. In addition, we launched The Feel Collection this quarter in Illinois. Dogwalkers introduced the Big Dog line extension in Massachusetts to complement our core mini-dog multipack, which we also just launched in Maryland. The full-flowered nature of Dogwalkers keeps the quality bar high, and we are pumped with the positive feedback on our flagship pre-rolled brand.

To that end, we continue to build out additional capacity and improve standardization and automation. Our goal is to produce safe, consistent and high-quality output across each of our markets. Projects remain on track to more than double capacity in adult-use markets like Illinois and Massachusetts as well as big and growing markets like Pennsylvania. Opening activities for our manufacturing operations in New Jersey and Ohio continue and are expected to begin generating revenue in the first half of next year.

Turning to our retail business, momentum continues. Our core business remains strong, with same-store sales continuing to exceed 50% for the quarter off a comp base of 13 stores opened for at least 12 months. Sequential quarter-over-quarter sales exceeded 20% on a base of 17 stores. We also opened 4 new Rise stores in the quarter, 2 in Florida, 1 in Ohio and 1 in Pennsylvania. As part of our acquisition of New York-based Fiorello Pharmaceuticals, we added 3 open stores in Manhattan, Rochester and Halfmoon and a fourth store in Nassau County coming soon.

In October, we scaled our retail footprint in Connecticut with the acquisition of Bluepoint Wellness, a medical dispensary located in the city of Branford. The dispensary complements our current assets in the state, which includes a cultivation center in West Haven and a future dispensary in Westport.

Year-to-date, we have opened 14 stores. We have 33 stores open today, and we reiterate our prior guidance to have 35 to 40 opened stores at year-end.

Finally, we strive to be good stewards and community partners and see this as a necessary responsibility given the privilege of this opportunity. We continue to be strong advocates for equitable participation in the cannabis industry through our pro bono LEAP program. Since the program's launch in August, our in-house application team has lent their expertise to nearly 100 prospective applicants who could not otherwise access professional guidance on the dispensary license application process in Illinois. We look forward to continuing this effort with our incubation program as the winning applicants are awarded. It is a very exciting time here in our home state.

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

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

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Thanks, Ben, and hello, everyone. Thank you for listening. As our earnings release highlighted, we had a successful third quarter. How successful? Let's dig into the numbers to find out. Please note that all figures are in U.S. dollars.

In the third quarter, the company generated $68 million of top line revenue, a 52% increase over Q2 and just under a 300% increase over a year ago. In addition, we serve patients and consumers across 11 different states. Both our consumer products and retail businesses continued their strong momentum, with our retail wholesale revenue split ending at 64 by 36, respectively. This is up from the 58 by 42 ratio we experienced in Q2 and was primarily impacted from having a full quarter of Integral included in our results. In addition, it is important to note that this ratio nets out in our company revenue against our consumer products business or 15% of total revenue effectively understating its true size.

On the consumer products side of our business, revenue increased 52% over Q2. Growth was primarily driven by market share expansion, product line extensions and a full quarter of contribution from Integral. We are now producing and distributing our brands in over 700-plus stores in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and Pennsylvania. While a mouthful, 8 states has a nice ring to it.

On the retail side, revenue increased 68% over Q2. We currently have 33 opened stores and anticipate closing the year with 35 to 40. Same-store sales remained strong, exceeding 50% for the quarter. We continue to be extremely proud of our retail team and the 1 patient, 1 consumer at a time approach they live by each day. Despite the daily challenges associated with everything retail, they make it look easy.

Similar to Q2, the company achieved record gross profit during the quarter. Before biological adjustments, we generated approximately $35 million in gross profit or 51% of net sales, a slight decrease from last quarter. Below the gross margin line, we incurred $36.7 million of operating expense. This figure includes $1.2 million in nonrecurring expenses and $4.7 million in noncash stock-based comp. Excluding these, operating expenses totaled $30.8 million or 45% of sales, which compares favorably to the 55% of sales experienced last quarter. The basis points we gave up in gross margin percentage we more than made up for in operating leverage.

Our focus is the same as it has always been. Grow revenue at x, hold the line on gross margin percentage and grow operating expenses at a rate less than x. As many of us learned in our prior lives, when you can do all 3 at the same time, you get to experience the sunny side of operating leverage.

In addition to operating expenses, the company also incurred $13 million in total other expenses. These expenses include the mark-to-market of our strategic investment portfolio as well as interest and other expenses associated with the debt raise we completed in May. As highlighted on our balance sheet, our investment portfolio now sits at just under $19 million. It continues to nicely supplement our core business.

As you may recall, last quarter, we accomplished a financial milestone by delivering positive adjusted operating EBITDA for the first time as a public company. In Q3, we made additional progress and generated positive EBITDA of $1.6 million, a material increase from our $9.4 million loss in Q2. On an adjusted operating EBITDA basis, we generated $14.1 million, up from $5 million in Q2. Getting this very important metric into 8-figure territory feels good. And growing adjusted operating EBITDA by $9 million, off a revenue increase of $23 million, feels even better as it highlights the upside of successful execution of the scale portion of our playbook.

On the liquidity front, we ended the quarter with approximately $66 million in cash and $97 million in debt. As Ben mentioned, just last week, we further optimized our balance sheet and strengthened our cash position by completing a sale-leaseback transaction on our Danville, Pennsylvania cultivation and processing facility. All in, this financing provides the company with approximately $40 million of additional powder. We continue to like our balance sheet position and ability to execute on these sorts of financings for our shareholders.

On our last call, we likened our mid-Q2 debt raise to grabbing the umbrella when it was sunny. In this case, we've decided to stay inside for a while and take heed to the words of the late Robert Hunter. If the thunder don't get you, then the lightning will.

In summary, we feel good about our Q3 results. This quarter will be much of the same, along with much preparation ahead of adult-use going live in our home state of Illinois. While we've seen the medical to adult-use newly before in Nevada and Massachusetts, we're approaching this transition with cautious optimism and our standard expect-the-unexpected type attitude.

Last, we can't say enough about our team that is now 1,300-plus strong. We continue to challenge ourselves, support one another, all the while celebrating the victories and having some fun.

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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Thank you, Anthony. As you know, the cannabis industry continues to evolve and evolve fast. Our fundamentals remain strong, and we are keeping our heads down, focused on execution despite the industry volatility. That said, we are watching and remain opportunistic. We are on the offensive to build a capital-efficient and sustainable business that will generate long-term shareholder value by executing against our founding playbook to distribute brands at scale. Our consumer products and retail businesses contribute meaningfully to top line growth as we work hard to improve profitability.

Our balance sheet is well positioned to support our plans, and we believe our judicious approach to capital allocation will further support our execution. We anticipate these ongoing efforts will deliver a total revenue exceeding $200 million for the year, which would mark our fourth year in a row tripling annual revenue.

But none of this will be possible without our team, and I want to thank them for their hard work in delivering another solid quarter. In addition, we remain grateful for our communities, customers and shareholders for your continued support.

With that, I'll turn the call over to the operator for any 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 the line of Vivien Azer with Cowen.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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So as I think about your adjusted EBITDA margin, clearly, very, very impressive in the quarter at 20%, but I'm thinking about kind of modeling that forward. And with the New York acquisition of Fiorello Pharmaceuticals having closed, I mean, I assume that's EBITDA dilutive. I have a hard time imagining that actually any of you guys are making money in New York. So number one, can you just comment on the EBITDA profile of New York, and then number two, how that might impact the EBITDA margin trajectory over the next coming quarters?

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

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Thanks, Vivien. I appreciate that. What I would say is probably your instincts on the size of New York and as you model it are not that far off. And we don't view that single market as a big determinant in the EBITDA margin going forward. There's a lot of moving pieces in order to do it, and we've stayed away from guiding on specific margin going forward. But we're focused on it. Keep in mind, we have Ohio ramping, New Jersey coming online soon, and certainly, the acquisition of New York all play into it. At the same time, bigger, larger markets continue to scale.

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Operator [4]

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Your next question comes from the line of Michael Lavery with Piper Jaffray.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [5]

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Could you just touch on the ramp-up in Illinois? And there's clearly some excitement there for the rec launch. But what do you see as some of the watchouts maybe we should have in mind and how to think of how it could build? And also, maybe the margin impact as far as just if there's significant ramp-up costs to make sure we keep in mind as we think about the first or even second quarters and then just kind of plays out?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [6]

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Sure. Thanks, Michael. This is Ben. Very exciting time here in Illinois. First state in the Midwest to legalize, first state in the country to do it broadly through the legislative measures. And the entire industry, regulators, customers, everybody's pitching in to make this a success. So I think it's a big deal that we're going to launch on January 1, and all signs point to that.

I would say, for us, on the margin impact, big capital investment going in. I'm not quite sure how much runs through the P&L prior to impact the actual margin, but we're aggressively scaling in both Rock Island and Oglesby as we get ready, and we're spending in retail. We have new stores coming online. We have remodels to improve efficiency and throughput. And everybody's working pretty hard.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [7]

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And when you talked about the 6 months' lead time, can you just give a little more color of how you see the competitive landscape and yourselves fitting into that? It certainly seems like there will be a build over the course of the year, but how do you see yourselves positioned in terms of how that plays out?

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

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Yes. We view everybody cooperating together to make this thing a success. There's a big amount of demand coming versus the supply that's in the market today that is already pretty tight. So what I mean by the 6 months is if you're going into raw land or you're going to build a new addition to the facility, which many groups are, it's a 6-month process from drawing, permitting, construction. And maybe if you hustle, you could do it in 90 days, 120 days, would be very fast. And then you have the 6 months of growing, which you could obviously shave that down a little bit. But to be conservative, new supply from day 1 takes a year to come on the market, and we've seen that in many different markets.

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Operator [9]

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Your next question comes from the line of Robert Fagan with GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [10]

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Congrats on the fantastic quarter. Really nice print there.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [11]

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Thanks, Robert.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [12]

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Yes. So I thought I'd ask about capital allocation strategy. Ben, you kind of alluded to maybe an aggressive stance, perhaps, so I was wondering if you may comment a little bit on how you kind of see that being weighted on either platform development in existing states or maybe versus strategic M&A opportunity.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [13]

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Sure. Yes. This is Ben, Robert. I'll take that. Capital allocation is the name of the game. And what I believe in and what we do is allocate to the highest ROIC opportunities with the highest probability of success, where we can take advantage of things like first-mover advantage and where we have scale and where it can work. So by aggressive, I don't necessarily mean tip over. I mean love our bets. And going somewhere where you have the probability in your favor and you can see what to do and you have a first-mover is a comfortable position, and that's where we field being aggressive. But we're not banking on capital markets to change. We like the position we're in, and we love where we're putting the capital.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [14]

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Okay. Great. And as a follow-up there, I can't help but notice that the guidance for $200 million in sales for the year or maybe a little bit over $200 million seems a tad bit conservative given the year-to-date results. Any chance you guys can give us some goalposts as to how much above $200 million you may be thinking about? And what could be some of the drivers for that next quarter revenue?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [15]

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Sure. I look at it a little less of guidance and more just there's confidence in where we're going. I would say, we would say at least $1 higher. And things are good in the business, particularly without pending acquisitions, with enough cash on the balance sheet and with confidence in what's going on, with new stores opening. And if you think about it as you ramp revenue or you model out the business, retail growth is pretty linear. We turn on a store, that gets going, and it ramps in a linear fashion.

As you turn on a phase in a cultivation or wholesale production facility, that's a step function up. And as I mentioned in the prepared remarks, Pennsylvania had that last quarter with a real step function forward. So we're excited as those new ones come online in 2020.

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Operator [16]

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Your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Congrats on a great quarter. And so the sale leaseback, obviously a great alternative source of funding for you guys. Can you talk about any risks you see with these sale leasebacks and how or where you think about potentially tapping into this alternative source of funding going forward?

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

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Sure. So this is Anthony here, and thanks for the question. I think, look, we've looked at the sale leaseback kind of opportunity, I'd say, for a few years at this point. We got to know the IPR folks really even before they went public. So it was an ongoing discussion, just kind of getting to understand their business and how they approach it and how they could potentially be a partner to us.

So first off, we feel extremely comfortable with that counterparty. And then what we saw was a real opportunity to take advantage of an asset on the balance sheet and utilize that asset to invest further in the business for the shareholders. In terms of future risk, we did it in a market, Pennsylvania, that we know extremely well, where we've got, obviously, a facility up and running. And we had a -- 7 stores currently open and operating, with more coming. So we feel pretty good about the position there, and it's something that we'll certainly keep our eyes open to into the future.

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Operator [19]

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Your next question comes from the line of Aaron Grey with Alliance Global Partners.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [20]

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Just quickly on gross margin. It looks like it was flat or slightly down over the quarter sequentially. So was that mainly a driver of just a higher mix of retail? So just any color there. And then how to expect the kind of line item going forward in terms of gross margin. Should they continue to be more of a function of the mix between wholesale and retail?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [21]

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Yes. It's a good observation. The retail gross margins are pretty consistent within the business, where you get the real operating leverage. I mean certainly, you get some on the retail side, but particularly on the host -- on the consumer products side of the business. So yes, when facilities are fully ramped, the consumer products margin is materially better than the retail kind of gross margin. In terms of kind of going forward, look, it's something we watch, I would say, daily at this point, particularly at the retail side of the business to make sure that we're holding exactly where it needs to hold and then on the wholesale side that we're achieving kind of the operating leverage that we should as we kind of grow into the expansion of each of these facilities.

So it's hard to really say where gross margin is going just because all these markets are different. And with supply and demand and some of the imbalances that we currently see in some of the markets, that could have an impact at some point. But we feel good about where it stands, and our goal is to keep it where it is today and if not, try to improve upon it.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [22]

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Great. That's helpful. And then just one other question, just in terms of capital allocation and kind of as we look ahead to next year in 2020. Can you talk about maybe how you prioritize the states? And I know you've mentioned it kind of in the past, but would it be fair to say states such as Pennsylvania, Illinois and maybe even Nevada might be at the top of the list over other states just forward as you look ahead to 2020?

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

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Sure. I'll take that. This is Ben. We're in a fortunate position with a lot of good opportunities. Like I mentioned, we want to look at the best ROIC. We want to see the highest probability of success. And one of the things is timing and how important first-mover advantage is. So certain of our markets will take advantage of that first-mover advantage, where in other markets, slightly putting it at second tier. Not to say it's a worse return because there's a lot of good opportunity is something we're forced to do often.

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Operator [24]

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Your next question comes from the line of Andrew Kessner from William O'Neil + Co.

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Andrew Samuel Bernstein Kessner, William O'Neil + Co., Incorporated - Equity Research Analyst [25]

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So I'm not used to seeing this typically with cannabis companies, but I would have actually expected SG&A to be higher than it was given the full quarter of Integral and some ramped-up spending in places that aren't generating revenues yet like New Jersey. So were there any existing components of your OpEx that you perhaps scaled back on during the quarter? Or what was the reason for the relatively modest quarter-over-quarter ramp-up there?

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

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Sure. No, there was nothing that kind of stands out in terms of cuts that we made. Look, I would say, like other -- like a number of other companies in our space, we have a number of open positions that we're trying to fill. At the same time, we do watch markets that have not turned on. We're very judicious about when and how we spend those dollars. It's something that, really, ever since we started this business, we've just had to be extremely judicious about the capital because we really don't -- we're of the mindset that until the market is kind of is up and running, we try to spend as little amount as possible as needed on the operating expense side of the business.

But there is nothing specific that we actually did, I would say, going forward. Obviously, that number should continue to grow. And it's just a matter of how that grows relative to our revenue. We don't have a set kind of -- we obviously have budgets and everything else, but we take a close look at operating expense as a percent of revenue. And as long as we feel like that's heading in the right direction or at least is at a manageable level, then we're comfortable with that.

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Operator [27]

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Your next question comes from the line of Graeme Kreindler from Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [28]

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I just wanted to discuss the CapEx line specifically. It looked like it was elevated in the quarter. And I know you've laid out the number of stores you want to end the year with as well as some investments on the cultivation side of things. But I was just wondering, in terms of how that figure is expected to trend quarter-over-quarter, are we seeing it reach sort of close to a peak here as the portfolio continues to get built out? Or can we expect that line to continue to ramp up as we continue to invest at retail and at wholesale?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [29]

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Sure. Hey, Graeme, it's Ben. I would say the real exercise here is what the sources are that determine the uses of capital. We have huge opportunities and a lot of good allocations to make. And we're watching the balance sheet to see how -- where the cash is in order to make the best possible decisions. So I would study the sources in order to figure out what the uses are as we got plenty of opportunity for that capital.

But a lot of the capital that went in last quarter and will continue to go in this quarter is some of that step function up on wholesale capacity expansion. More expensive than retail, it's step functions up and it's long-lasting and very durable.

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Operator [30]

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Your next question comes from the line of Brett Hundley from Seaport Global.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [31]

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I have 2 questions. So the first one is on Illinois. Can you talk about what options you might have in response to the decision inside Naperville? Or is it simply just that you have to wait for a potential March 2020 voter referendum? And then I just have a follow-up on Florida.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [32]

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Sure. I'll take that. This is Ben. Yes. As you mentioned, so just backing up a little bit, every one of Illinois' 55 open medical stores has the ability to open a same-site adult-use facility. That's so long as the local municipality, city, county, whatever is the governing body, opt in and allows it for zoning and other things. And so Naperville opted out. And like you mentioned, that in March 2020, there will be a voter referendum that could change that course. But until then, the Naperville store does not have the ability to open adult-use because the local governing body has said no, which is totally fine.

We think sometimes these things take time. We value being a very good positive member of the community. We've been operating in Naperville since 2015, and we're excited about the future there. Currently, moving an existing medical facility and carrying that adult-use is something still under discussion. And we think, over time, different kinds of options may open up.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [33]

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I appreciate that. And then on Florida, can you just -- can you update us on your strategy in Florida? And kind of next to that question, do you have to be in this state? Like is Florida critical to you guys? And I appreciate the comment.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [34]

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Sure. I would say, at a high level, Florida is a really nice business for us. It's growing. But with everything in this business, in this industry, really, time and capital allocation means everything. So do we have to be in the state? No. We love the state, though. An excellent market, high growth, loyal customers. Our flower is doing great. 5 stores open now, more coming, another one opening this quarter, we think. But again, we have to weigh all the options. So I think a 6-month or some kind of delay in Florida doesn't hurt us given the first-mover advantage. That's a big deal in places like Illinois and Pennsylvania. So we plan to play that.

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Operator [35]

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Your next question comes from the line of Scott Fortune from Roth Capital Partners.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [36]

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A little bit of a follow-up on some of the states. I know wholesale, you're really well-penetrated in Illinois, 100% dispensaries in Pennsylvania. Are there other states like Massachusetts or -- that are going to give additional penetration in your view?

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [37]

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Sure. This is Anthony. There are -- honestly, in addition to Illinois and Pennsylvania, we have a great business, a great wholesale business in Massachusetts and in another state, Maryland. The biggest challenge in Massachusetts candidly is product. We could probably service all the stores in the state, but the reality is we wouldn't do a great job because we just don't have the product available to do so. So we've had to be pretty selective in our partners there. Same goes in Maryland. That's a business that -- I still think that we have the top-selling vape pen in that state. We have incredible penetration and some that we're very focused on. We also have flower coming online here in the near future.

But it's not -- in addition to that, obviously, Nevada and a few of the other markets that we operate in, we feel pretty good about our wholesale position in some of the other markets.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [38]

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Okay. And then real quick, any color on Beboe and the CBD offering and kind of expanding that going forward here?

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

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Yes. It continues to go well. We've recently launched in Nordstrom's. And we love the brand. And really, I would say, most importantly, the consumers are loving the brand. We continue to allocate capital in time with the most attractive opportunities, so with people specifically working on the supply chain as we begin to scale that nationally on the THC side and unroll the CBD.

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Operator [40]

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Your next question comes from the line of Mike Hickey with The Benchmark Company.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [41]

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Hey, Ben, Anthony, congrats, guys, on a solid quarter. Great to see a profitability ramp. Just curious on the touchback on your $200 million guide for the year. Sorry if you made this completely obvious, but on a sequential basis, from 3 to 4, and got new stores open and you have seasonality, any reason you should suspect a sequential decline in sales into 4? And if so, could you again make obvious the headwinds that you can create from that, please? And I have a follow-up.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [42]

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The short answer is no. There's no headwinds. You should not expect deceleration. We've never given guidance. People ask about it a lot. We're trying to talk about where the business is going and show confidence in where we're headed.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [43]

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Say, on the vape side, I thought it would be nice if you could sort of color in some of your thoughts on the regulatory environment, how you see the opportunity there or risk that's impacting this business, consumer behavior around the vape. And almost, obviously, it looks like maybe that's key, but I'd like to secure your thoughts there, and what you're doing, I guess, to ensure your consumers' safety as it relates to vape products.

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [44]

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Sure. Thanks. Good question. So I would say, high level, consumer and patient safety is our #1 priority. Full stop. Rythm cartridges are always whole plant extract using terpenes from the plant. And big picture, as this happened, I think there's, short-term, a lot of attention on this, but this sets up very well for the regulated and tested products. So we test all of our hardware, all of the oil. And every one of our pens is tested, and ingredients are listed. So our hardware is tested for things like heavy metals, which have been issues in some markets. And the CDC conclusion that the vitamin E is the root cause of the problem recently and particularly in the illegal markets, people buying product from the illegal market is what's creating the problem, not product from regulated states with tested product. That's the key. And of course, no vitamin E in any of our products, never been, no chance.

I would say, for some of the market stats, peak to trough, we saw maybe 300 to 500 basis point decline in the category. And actually, that started to rebound. But interestingly, we don't see the pie shrinking. We saw consumers electing alternative methods and often looking for quick consumables. So it ended up switching over to pre-rolls and edibles.

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Operator [45]

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Your next question comes from the line of Matthew Pallotta from Echelon Wealth Partners.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [46]

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2 quick ones. First, in the note you guys put out in the press release, you stated that the Illinois, Pennsylvania and Massachusetts cultivation and manufacturing facilities are undergoing expansion. Obviously, with the sale leaseback in Pennsylvania, the additional $19.3 million, that's going towards an expansion.

With Illinois and Mass, are the plans you're speaking of -- or the expansion plans you're speaking of here incremental to what you were planning, say, last quarter or 2 quarters ago, you're expanding beyond that level? And then the second thing is just on the EBITDA, on incremental sales from last quarter, it looks like you had about a 37% margin. Is that something that you guys see being maintained over the next few quarters? Or do you expect there to be a bit of lumpiness due to some costs in certain states where you're ramping up?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [47]

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Sure. So I'll hit the first one, and then I may ask you to repeat the second one. I'm not sure I truly followed it. But wholesale production capacity expansion in Illinois, Pennsylvania and Massachusetts, so obviously, the sale leaseback can further the growth in Pennsylvania as we've seen that market. Just high level, we have 7 open stores in Pennsylvania today, with licenses to open 18. The market is growing, and everybody needs more product. So we've continued to ramp that.

Illinois plan currently is -- looks much different and is much bigger than it did at the beginning of 2019. The passing of legalization changed things, and we're excited about that. In Massachusetts, I would say, it's had the littlest change in the last quarter or 2. And I'm actually excited to say that the inspection for the additional wholesale flower rooms happened a few weeks ago, and I believe we have approval to begin growing here very soon.

So that's at the tail end of that expansion, and the market is excited for that flower. And then maybe if you could repeat the margin question, I will let Anthony hit that.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [48]

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Yes. Basically, on the incremental amount of sales, looking at how EBITDA jumped from last quarter and on what sales jumped from last quarter, the margin on that incremental sales was about 37%. And I'm just asking if you see that as you continue to ramp sales in the coming quarters, do you see the operating costs underneath that being a little bit lumpier? If you have some costs in other markets where you're still ramping up, such as New Jersey, that's pre-revenue, or with the expansions going on in these markets we just spoke of, that might slow down that EBITDA margin on the incremental revenues.

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Anthony Georgiadis, Green Thumb Industries Inc. - CFO & Director [49]

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Yes. Look, this is Anthony. It's a great question. We're looking at this now really as quickly as we can at the end of each month to get some good visibility into it, to really project out the business. I think that there are so many variables at play, it's really hard to say if the future operating leverage is going to be at, below or above that, call it, high-30s mark. Our goal is to get that number up as high as possible because, obviously, the more we can -- the more leverage we can get out of the revenue dollars, the better it is for the business.

But right now, I'd say it's really tough to say. And ask me to -- ask us that question in 2 quarters and we'll probably have a much better answer for you because, look, this business is scaling very fast. And again, there's a tremendous number of variables at play here that will impact that -- true operating leverage.

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Operator [50]

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(Operator Instructions) Your next question comes from the line of Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [51]

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Congrats on the quarter. A question -- my question is around Nevada. Just wondering what your latest plan is there for the buildout of those retail licenses in the context of the state and the legal disputes and certain municipal moratoriums. Can you give us a sense as to what your latest plan is there?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [52]

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Sure. 2 stores currently under construction. I think we'll see one in January and maybe 2 -- the second one at the end of the first quarter, maybe early second quarter. So with the litigation and various lawsuits settling, we're excited about going forward.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [53]

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Great. And if I could follow up with a similar retail-oriented question in Pennsylvania, given the growth, you've seen licenses for 11 more locations there. Can you give us a sense as to what the buildout cadence might look like into 2020?

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

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Sure. I think we're getting comfortable with the low single digits per quarter, so 1 or 2 a quarter. I'm not sure if that's the exact rollout for all of 2020, but we're excited about these. So King of Prussia coming online very soon. New Castle behind that and looking at several of our different markets there. The Pennsylvania market has been an example of success in a tightly well-regulated program that's serving patients very well.

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Operator [55]

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Your next question comes from the line of Alan Brochstein with New Cannabis Venture.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [56]

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Congrats on the very strong quarter. I have a big picture question. And obviously, since the last call, things have changed greatly for the capital markets. And the leaders are separating themselves from the pack, and you would be in that group. And I'm just wondering if you could address your outlook for the whole market in terms of what's going to happen with some of distressed operators that are holding assets that may not be able to perform due to lack of capital, and you guys have shown the ability to raise capital. And given your confidence in investors, do you -- what do you think is going to happen in the market overall, and what role do you expect GTI to play?

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Benjamin Kovler, Green Thumb Industries Inc. - Founder, Chairman & CEO [57]

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Thanks for the question, Alan. I appreciate that. We're working hard every day to do that, and it's a major team effort. So big picture in the industry, what we see if we just step back and look at it, we see legalized, regulated cannabis revenue in the U.S. coming in north of $1 billion every month, literally. So that's 10x the size of Canada. Canada is under $100 million. So we see that continued growth and continued going forward.

You mentioned the operators. I think, like I mentioned in the prepared remarks, our priority is head-down, execute. But we're not, not paying attention. We have a deep team, we know the operations, we understand every single state, and we're prepared to be opportunistic, to move fast and to be aggressive. And at the same time, like Anthony said, we're prepared to stay inside and continue to execute on what we have because we love what we have.

Personally, I don't think it's at the end. I think the cycle continues to unfold. And I think the market, particularly in the biggest market, is also the toughest market. And that's okay. We don't need to play in the hardest games out there. We like playing when the deck is loaded in our favor and the probability of success is highest for shareholders. That's been our ethos since we started, and we're going to continue with that.

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

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Sounds good. Just a quick follow-up. On -- in Illinois, it sounds like you have a little bit of a trade-off between serving the new adult-use market and your existing patients. Can you just kind of walk us through the limitations that you see and how you're going to handle that?

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

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Sure. So look at some of the numbers. Illinois is doing, as a medical program, a plus or minus $25 million a month in sales. So it's running at a $250 million to $300 million run rate. We think the rec market, the adult-use market in a state with 13 million people is $2 billion to $3 billion from the local population. So that's 10x the size. So it's not possible for the industry to scale 10x in 6 months. In fact, new supply is going to take a little while to come online. So it's incredibly important for us to serve the patients in Illinois. They've been the start of this program. We're loyal with them. And I think, over time, things will balance out.

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Operator [60]

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There are no further 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 [61]

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Sure. Thank you all for joining. We look forward to updating you again in the new year. And in the meantime, have a happy and healthy holiday season.

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Operator [62]

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