Verano Holdings Corp. (PNK:VRNOF) Q1 2023 Earnings Call Transcript

Verano Holdings Corp. (PNK:VRNOF) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning, and welcome to the Verano Holdings Corp First Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Julianna Paterra, Vice President of Investor Relations. Please go ahead.

Julianna Paterra: Thank you, and good morning everyone. Welcome to Verano’s First Quarter 2023 Earnings Conference Call. I am joined today by George Archos, Chief Executive Officer and Founder; Brett Summerer, Chief Financial Officer; Darren Weiss, Chief Operating Officer; and Aaron Miles, Chief Investment Officer. During this call, we will discuss our business outlook and make forward-looking statements within the meaning of applicable US and Canadian securities laws which are based on management’s current assumptions and expectations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance and achievements of the business or developments in the company’s industry to differ materially from those implied by such forward-looking statements.

Actual events or results could differ considerably due to risks and uncertainties mentioned in our filings on EDGAR and SEDAR, including our financial statements for the quarter ended March 31, 2023. In addition, throughout today’s discussion, we will refer to non-GAAP financial measures that do not have any standardized meaning prescribed by GAAP, such as EBITDA, adjusted EBITDA and free cash flow. Management believes, non-GAAP results are useful to enhance the understanding of the company’s ongoing performance, but these are supplemental to and should not be considered in isolation from or as a substitute for GAAP financial measures. These non-GAAP measures are defined in our earnings press release and available on our website at investors.verano.com, which also includes the reconciliation of these measures to the most comparable GAAP financial measures.

Lastly, all currency is in US dollars, unless otherwise noted. I will now turn the call over to George. George, Please go ahead.

George Archos: Good morning everyone. I am pleased to report results for another strong quarter, which were in line with our internal expectations. This morning, I will cover the first quarter IN more detail and provide an update and our progress towards our free cash flow guidance. We remain very optimistic especially given this quarter’s performance. Top line came in a bit higher than we anticipated as the first quarter is usually softer than the fourth quarter due to seasonality. We’ve seen steady performance from our portfolio and anticipate seeing upside from new adult use markets, along with the opportunity for deeper penetration and increased market share in existing markets. Near term, we maintain our excitement about the Connecticut market as a leading producer in the adult-use program and look forward to adult-use sales commencing in Maryland in July.

On that note, we were extremely pleased to see Governor Moore of Maryland, officially signed adult use legislation into law. We have been preparing for this moment since entering the market in 2017, including optimizing our footprint and expanding our suite of offerings to meet a variety of consumer taste and preferences. Our efforts have been worthwhile, as sequentially we grew net wholesale revenue by 11% in the first quarter in Maryland. Verano is no stranger to the introduction of an adult-use program to an existing medical market. And after being through this many times before, most recently in Connecticut just months ago, we are ready and excited for what we expect to be a robust program launch. We continue to lead the way with a CPG brand performance in Connecticut and are pleased to see steady and robust demand several months after adult-use sales commenced.

Retail sales remained strong, with sales trending modestly upwards since legalization in January. At the moment, we have one adult-use location. It’s our second medical only location is waiting zoning approval. Additionally, we anticipate opening our six social equity joint venture dispensaries over the course of the second half of 2023, including our first store within the next 60 days. This expanded footprint will provide the opportunity to increase vertical mix in the state, while also supporting social equity efforts in Connecticut. In Florida, we recently took the number two spot in the state, in terms of ounces of smokable products sold, while also preserving the pricing integrity of our catalog, a reflection of our higher-quality all indoor grown flower.

We now have 66 MÜV dispensaries across the state and with a few more planned openings for the year, we anticipate continuing to strengthen our foothold in this medical market in advance of a potential adult-use ballot initiative. We are hopeful the current adult-use initiative will make the 2024 ballot, as we believe that Florida offers the largest opportunity of the states contemplating adult-use legalization. Lastly, in Illinois, as we discussed on the last call, we are optimizing Canadian production in order to appropriately meet demand. This decision is driven in large part by the slower-than-anticipated pace of new dispensary openings. Despite these delays, we continue our efforts to streamline operations, increase yields and introduce new brands and products.

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For example, in the first quarter, we increased our yields by 23% along with increasing finished dry grams per employee by 40% versus the prior year. And on the retail side, although sales were roughly flat versus the prior year, we increased dollars per labor hour by nearly 40%, even in a depressed pricing environment. Separately, as none of our retail locations are near the Missouri border, our store has been largely unaffected by Missouri’s recently launched adult-use program. As previously discussed, we are tireless in our pursuit of operational excellence. In the first quarter, we increased the sale of Verano products at the retail level by 150% year-over-year and increased dollars per terminal by 63% year-over-year. We are proud of the progress we continue to make and look forward towards further improvements that better enable us to serve our markets.

Turning to cash flow, we are reiterating our $50 million to $75 million free cash flow guidance range as well as tightening the range of our CapEx guidance to $35 million to $50 million. With over $8 million of free cash flow for the quarter we anticipate free cash flow to accelerate over the course of the year. We feel our operations are stronger than ever with a $17 million in cash flow generated from operations, after slightly decreasing our taxes payable balance while also servicing other cash obligations. As we mentioned on the fourth quarter call, we continue to evaluate production and inventory levels to ensure we are appropriately supplying our markets. As a result, we expect fluctuations in our gross margins throughout the year. Ultimately, we view inventory rightsizing as a positive for the business, as it aligns with our goal of appropriately deploying cash.

Though, this will also impact adjusted EBITDA margins in the short-term, this is the right move to build cash reserves and focus on free cash flow generation. I will now pass it to Brett, to review our results in further detail, before I provide commentary regarding my outlook for the year.

Brett Summerer: Thanks George. I’m very pleased to report strong results for the quarter. First quarter 2023 revenue was $227 million up 12%, compared to the first quarter last year driven primarily by strength from retail and wholesale adult-use sales in New Jersey and Connecticut, slightly offset by retail declines in Pennsylvania. Sequentially, revenue was up 1% despite significantly lower discounting. On a gross revenue basis, excluding intersegment eliminations 70% was derived from the retail side of the business and 30% from the wholesale side of the business. Gross profit for the quarter was $109 million or 48% of revenue. On an adjusted basis, generally excluding depreciation, amortization and stock-based compensation this was 57%, an improvement of about 1% versus the fourth quarter of 2022 driven by the decreased discounting offset by seven days of inventory reduction.

Our sell-through remains high, at about 46% for the quarter excluding Florida Arkansas and Michigan as we do not wholesale in those markets. SG&A expenses were $75 million for the quarter or 33% of revenue. On an adjusted basis, generally excluding depreciation, amortization and stock-based compensation this was 26% of revenue an improvement of nearly 1% versus the fourth quarter driven by decreased professional fees and marketing expenses. On an adjusted basis versus the prior year, this is an improvement of 2% due to the rightsizing our staffing levels. We expect adjusted SG&A to remain in the 26% to 28% range for the foreseeable future. We had a net loss for the quarter of $9 million and adjusted EBITDA of $71 million or 31% of revenue for the first quarter down $8 million or four percentage points versus the fourth quarter.

However, keep in mind that we had the ERC credit last quarter which provided a benefit of $11 million or 5% of EBITDA. So we are performing better now than we were in Q4. Turning to the balance sheet and cash flows, we ended the quarter with $95 million in cash and cash equivalents. Cash flow from operations for the quarter was $17 million even while decreasing our taxes payable balance to $248 million. It’s worth pointing out that, unlike many in our peer set Verano has had positive operating cash flow every quarter since we went public. This is our ninth quarter in a row of positive operating cash flow which includes six quarters of positive free cash flow as well. Regarding taxes payable, we anticipate our tax payable balance to remain around $250 million throughout the year.

CapEx spend for the first quarter was $9 million, as some projects from the fourth quarter trickled into the New Year. Lastly, we decreased acquisition consideration payable balances by $3 million. Additionally, the majority of the remaining balance is paid in early April, leaving us with de minimis outstanding. I think it’s important to note, that we have maintained one of the strongest balance sheets in the industry and we are further committed to strengthening it through the course of the year which was highlighted in this quarter’s performance. Looking ahead, we plan to build our cash balance throughout the year and we’re very comfortable with where we stand today. This was a very strong start for 2023, and I look forward to building off this base throughout the remainder of the year.

I’m excited about the opportunities that are in front of us and remain focused on growing the business in the year ahead. And now, I’ll hand it back to George.

George Archos: Thank you, Brett. Although, new measures have been introduced at the federal level, as I’ve said, we never manage the company based on legislative assumptions. We will continue to focus on the business and things in our control while monitoring government actions to make sure we are in a position to take advantage of opportunities that may arise. In the meantime, we continue to operate in a punitive environment that is hindered by government in action including the application of 280E to the cannabis industry, which requires us to pay estimate of greater than $100 million of excess income tax liability for 2022. As a result of the outdated treatment of cannabis at the federal level, we have limited options to manage our banking needs and are forced to take on debt at rates much higher than we think our risk profile warrants.

We are extremely proud of what we have been able to accomplish given the draconian restrictions, but there is no telling what we can achieve once we see meaningful legislative change. Despite continued government setbacks, we are managing to not only survive but thrive. Looking ahead, we are very optimistic given movements in key states as well as conversations around meaningful reform at the federal level which continues to have bipartisan support. We have strong footholds in Ohio, Pennsylvania and Florida all of which are showing positive momentum towards adult-use legalization. This aligns with our strategy of building a strong presence in medical markets, so that we are well positioned at the onset of adult-use sales. We have successfully done this in Illinois, New Jersey, Connecticut, Nevada and soon in Maryland.

In addition to legalization efforts at the state level, we are seeing progress towards decoupling the application of 280E under federal and state tax laws. Just this week, the New Jersey governor signed a bill unburdening our industry from the onerous impacts of 280E at the state level. As we discussed in our last call, New Jersey is among our top three contributors to both retail and wholesale revenue, so we expect an immediate positive impact to our bottom line from this move. Additionally, Connecticut has recently signaled its intent to decouple 280E in legislation filed on Monday. It’s inspiring to see states such as New Jersey and Connecticut take this bold step to support one of the fastest-growing industries in this nation, and I hope to see similar courageous actions by leaders across additional states.

Regarding the remainder of 2023, I want to echo my sentiments from our last call. We continue to view this year very positively. We are evaluating a number of M&A opportunities some in new markets and some deepening our reach in current markets. To reiterate, we remain very selective in evaluating assets to best ensure accretion to our portfolio, especially in light of decreased valuations. We are very excited about Verano’s future and the portfolio that we are building. And with that, operator you can open it up for Q&A.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Aaron Grey with Alliance Global Partners.

Operator: Your next question comes from the line of Scott Fortune with ROTH MKM.

Operator: Your next question comes from Don Angela Bolt [ph] with Beacon Securities.

Operator: Your next question comes from Andrew Semple with Echelon Capital Markets.

A – Unidentified Company Representative : Hey, this is Jacob on the backup line. I think the main line went out. We’re going to get everyone in the back up.

Operator: This is the operator. One moment, we are having technical difficulties.

Unidentified Company Representative : Apologies everyone, we got disconnected. Brett, you want to continue.

Operator: [Operator Instructions] Your next question comes from Matt Bottomley with Canaccord Genuity.

Operator: With no further questions I would like to turn the call back over to George Archos CEO and Founder for closing remarks.

George Archos: Thank you everyone for your time today and we’ll see you in the next quarter.

Operator: This concludes today’s conference. Thank you for your participation. You may now disconnect.