Verano Holdings Corp. (PNK:VRNOF) Q1 2024 Earnings Call Transcript

Verano Holdings Corp. (PNK:VRNOF) Q1 2024 Earnings Call Transcript May 8, 2024

Verano Holdings Corp. beats earnings expectations. Reported EPS is $0.03881, expectations were $-0.08. Verano Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Verona Holdings Corp. First Quarter 2024 Earnings Conference Call. 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] Thank you. I would now like to turn the call 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 2024 earnings conference call. I am joined today by George Archos, Chief Executive Officer and Founder; Brett Summerer, Chief Financial Officer; Darren Weiss, President; 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, 2024. In addition, throughout today’s discussion, we will refer to non-GAAP financial measures that do not have any standardized meaning prescribed by GAAP. Management believes, non-GAAP results are useful to enhance the understanding of the company’s ongoing performance, but these are supplemental too 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’ll now pass it to George.

George Archos: Good morning, and thank you for joining our first quarter 2024 earnings call. We have a lot of great news to go through this morning, but first let me provide a road map. I’ll begin today by providing an overview of the quarter, followed by commentary on the ground breaking news regarding the DEA’s acceptance of the recommendation to reschedule cannabis, another significant domino to fall in the fight to legalize cannabis and unlock the cannabis industry’s full potential. We are, obviously, thrilled about the news but I want to reiterate as I have been saying for the last several years we never build Verano’s business based on assumptions of federal, regulatory or legislative movements and the company is positioned to continue achieving strong results, independent of federal changes as evidenced by our first quarter results.

After Brett reviews the numbers in detail, I’ll close with thoughts on our unique position for growth in 2024 in addition to our updated outlook for the year. We had a much stronger start to the year than originally anticipated with $221 million in revenue and 30% adjusted EBITDA margins for the first quarter, providing a strong launch path for the remainder of the year as we have and will continue to take action to position the company ahead of a number of really exciting potential catalyst. We have been able to consistently get ahead of adult-use transition opportunities, which has given us what we believe is one of the strongest portfolio positions in the industry. This includes Illinois, New Jersey, Connecticut and Maryland, all states in which Verano has a leading presence.

Ohio’s upcoming adult-use program further accelerates this momentum as we can leverage our five dispensaries, the maximum currently allowable in the state and our high-quality indoor cultivation facility. Pennsylvania also primed to approve adult-use in the near-term is another state where we have built a leading footprint ahead of this possible transition with 18 affiliated dispensaries in high-quality indoor cultivation. However, and most notably Florida, which will have adult-use on the ballot in November is a monumental opportunity for us as we look to strategically grow our already deep footprint of 74 dispensaries and counting, all of which are supplied by our high quality indoor cultivation facilities, and Floridians roughly one million of whom have joined the signature campaign to put the issue on the ballot have been voicing their undeniable support for legal and safe cannabis.

With the State Supreme Court affirmative ruling, confirming their right to vote on the issue this November, they will finally have the opportunity to say yes to legal or adult use cannabis. As soon as we heard news of the ruling, we stepped up our support of the smart and safe Florida campaign with over a $2 million contribution. This program units operators to educate the voter base on the countless economic health and wellness benefits. This incredible plan provides millions of Americans and more than 800,000 Florida medical patients every day. We are thrilled to join smart and safe Florida alongside our peers and a large veteran coalition as we campaigned together for lasting change for the residents and visitors of Florida. We are incredibly excited about the opportunity in Florida and I’ll let the numbers speak to why.

In 2023 we generated $222 million revenue in Florida given our experience in other states that transition to adult use. If you assume a similar pattern of a 2.5 times to 3 times increase in revenue that would translate to between $300 million and $450 million in incremental annual revenue. And we think this estimate is conservative given the state’s large tourism influx of over 135 million people annually. As a reminder, we are the second largest footprint in this 100% vertical high margin market. Our expansion plans are already underway in Florida to significantly increase our high-quality indoor cultivation capacity. We temporarily shut down some rooms in our cultivation facility in the first quarter as we built them out to increase capacity.

And we have since ramped those rooms back up and expect to significantly increase output by this summer. Looking ahead, we will continue to focus on growing the highest quality flower in Florida for what we see as the largest overnight growth this industry has ever experienced. Additionally, we anticipate adding new Muv branded dispensaries this year across Florida to further prepare for the anticipated increase in demand. Given our deep experience in adult-use transitions, we are also bullish on our ability to grow our market share both ahead of and during adult use. We look forward to November but in the meantime we are focused on supporting the smart and safe Florida campaign alongside our industry peers. Moving on, last quarter we discussed the positive growth trajectory of the wholesale side of our business and we were extremely pleased with its performance in the first quarter which helped offset some of the anticipated softness on the retail front.

In fact, the strength of our brands and wholesale platform helped us outperform our initial expectations and add nearly 50 new dispensary customers largely across New Jersey and Illinois. And we continue to see wholesale growth with our dispensary partners consistently demanding that the Verano house brands holds a meaningful presence on their shelves. In New Jersey, retail performed as expected given seasonal softness combined with their continuation of new dispensary openings. But as I previously mentioned, we saw our business grow with net wholesale revenue up 130% and the number of net wholesale orders up over 300% versus the prior year period. With the strength of our wholesale platform nearly offset the normalization in retail sales in absolute dollars for the quarter, new doors are showing strong interest in carrying our products evidenced by the 21 new accounts gains in the quarter and we were still above a 90% penetration rate for the state.

This positive momentum has continued into the second quarter as we are seeing continued strength in net wholesale revenue. We are similarly excited about our Illinois wholesale market which saw sequential net wholesale growth each month in the quarter paired with 45 basis points of market share gains according to BDSA. Verano entered 15 new doors in the quarter keeping up with new dispensary openings in the state. As we look forward we continue to see third-party dispensaries as a growing wholesale opportunity as the number of retail doors grow in both New Jersey and Illinois. We believe a growth in dispensary count is directly correlated to organic consumer growth as new customers of patients find and engage with cannabis. And we look forward to serving a growing and passionate consumer base.

And in Ohio, our team is working hard to prepare for adult use by increasing our output in advance of the anticipated growth in demand with an expected full launch date we are exploring the addition of our six dispensary per current regulatory proposals. In the interim we feel very prepared with today’s five dispensaries and look forward to serving a large consumer base in the near future. Our mission here at Verano is to cultivate progress and we are doing that by focusing on differentiation, innovation and disruption. To that we launched Cabbage Club, a first-of-its-kind US cannabis membership club, and it is off to a great start with our enrollment after initial launch exceeding our internal goals. By offering an annual paid membership, we can provide our most passionate consumers with a trove of benefits, including in enrollment gifts, monthly credits for retail purchases, early access to limited edition strains, priority pickup lines and even warm cookies when visiting their favorite Zen leaf.

And we have more great stuff coming. We view the Cabbage Club as a symbiotic relationship with our most prized patrons who clearly recognize the value in the program as membership continues to grow. As planned, we rolled out Cabbage Club in New Jersey and Illinois to start, and we anticipate rolling out the green carpet and additional states in 2024. Turning to rescheduling. The news suggesting we will see the DEA rescheduled cannabis from Schedule 1 to 3 in the near future, only affirms what we’ve always known. Cannabis is an incredible plan that provides numerous health and wellness benefits, contributes billions of dollars to local economies and supports close to 0.5 million careers across a growing number of states. We have been preparing for months for possible opportunities that may result in this announcement.

So when we heard the news, not only did we feel thrilled we felt prepared. Beginning with capital market preparedness, we are an SEC filer, completing our first SOX audit for the year ended 2023 and continue to build out our financial reporting capabilities. We migrated our listing to Cboe Canada last fall, where we achieved senior exchange status, which we believe gives us a first-mover advantage should US exchanges ferment cannabis listings. Additionally, we currently remain eligible for both the MSCI and FTSE indices. We are proud to provide that what we view as the deepest level of transparency in our industry in financial reporting, offering state-by-state revenue per segment. While our credit facilities over two years from the term expiration as prudent stewards of capital, we are already exploring options, including refinancing and have paid off $50 million this year.

bringing the facility down to $300 million in principal, retaining optionality to pay down an additional $50 million in the future without any additional prepayment premium. In connection with the prepayment, our lender has agreed to release certain real estate assets valued over $50 million, providing us more opportunity to lower our overall cost of capital with lower interest rate mortgages. As a reminder, a DEA rescheduling decision is an important step towards operating as a normal business. We may have the opportunity to significantly improve our credit terms, resulting in lower cost of capital. Our consumers might be able to use credit cards, which we estimate would modestly increase basket sizes. Further, we could have a much less burdensome cash management system, allowing us to earn interest on our significant cash balance.

And more importantly, our employees would be safer as we anticipate a decrease in break-ins industry-wide, with dispensaries holding less cash on premises. Our vendor pool could also greatly widen. And lastly, we could expect incremental institutional investor comfort. Although, we don’t think a Schedule II designation alone would be enough for a US listing, we think there’s a chance that a Schedule 3 decision with continued momentum for certain exchanges. So as usual, we remain proactive in that arena. And perhaps most tangibly, should the DEA’s rescheduling proposal take effect, we would benefit greatly from operating under a fair tax regime. We estimate we would have saved over $80 million in taxes in 2023 alone. Cannabis acceptance continues to gain momentum.

And while I know everyone, including me, is anxiously awaiting an announcement, it is still a major win at the highest levels of the government continue to discuss normalization of cannabis at the federal level. I will now turn it over to Brett before providing some final thoughts.

Brett Summerer: Thanks, George. Revenue for the quarter decreased 3% versus the prior year period to $221 million, driven by pressures in New Jersey retail as expected as dispensaries continue to open across the state. On a gross revenue basis, excluding our segment eliminations, 66% of sales were derived from the retail business with the largest contributions from Florida, Illinois and New Jersey. The remaining 34% of sales were derived from the wholesale side of the business with the largest contributions from New Jersey, Illinois and Connecticut. We welcome the steady increase in proportion of the wholesale side of the business we’ve seen over the past few quarters as it is generally the most profitable arm of the business and expect that trend to continue through 2024.

Gross profit for the quarter was $113 million or 51% of revenue versus $109 million, or 48% of revenue in prior year. The increase in gross profit was driven by higher third-party wholesale sales of Aroma products. SG&A expenses were $90 million or 41% of revenue versus $75 million in the prior year period or 33%. The increase in SG&A expenses primarily driven by new dispensary openings. In addition to investments in people processes and technology we had a net loss of $5 million driven by the provision for income taxes as we currently account for income taxes under the 280 tax code. Adjusted EBITDA for the quarter was $67 million or 30% of revenue. Turning to the balance sheet and cash flows. We maintain a strong balance sheet ending the quarter with $194 million in cash and cash equivalents though.

Notably this balance does not reflect the $50 million prepayment towards our credit facility made in April. Even inclusive of that, we are still well above $100 million in cash reserves providing us the flexibility for either continued deleveraging CapEx or M&A. Cash flow from operations for the quarter was a very strong $31 million. And we spent $10 million in CapEx largely on Florida cultivation expansion and various dispensary openings. Previously we had guided to $25 million to $50 million in CapEx as a base for the full year excluding opportunistic activity such as Florida adult use preparation. As George mentioned, we have begun some expansion initiatives in our Florida facilities and we’ll be studying the latest polling results to inform future large expansion initiatives.

As always, we strive to remain one step ahead of growth and based on our experience in the six other transition markets. We are confident that will strike the right balance and remain market leader in Florida given recent industry news. On the tax front, we have been following the situation very closely and have engaged third party legal and accounting firms who are helping us execute our strategy. We are also eagerly awaiting rescheduling outcomes because of its impact on our tax liability. Lastly, we expect flat to sequential topline growth in the second quarter putting us back on what we see as a continued growth trajectory for the year. And now I’ll hand it back to George to wrap up.

George Archos: Thanks, Brett. We have very deliberately and strategically designed our footprint to be one of the most diversed and deep in the industry offering strong upside in each of our markets after a steady 2023 during which we deepened our moat versus competition grew our routes deeper into our communities and strengthened our financial foundation. I couldn’t be happier about the momentum we have built and I’m confident in our growth opportunities. With this incredible start to the year. We are ready to propel forward. With each passing year more Americans acknowledge the medicinal properties of the cannabis plant and the benefits of swapping cannabis for unhealthy behaviors. 70% of 25 to 34 year olds preferred cannabis alcohol according to the latest pull from New Frontier data.

I want to repeat the statistic, 70% of what will soon be the largest consumer spending age group pre first cannabis to alcohol which is currently over a $250 billion market in the US alone. We look forward to realizing the benefits of operating as a normal business. Once we have a final rule from the DEA and cannabis is rescheduled. We generated $73 million of free cash flow in 2023 while operating under today’s restrictive and punitive environment. So imagine what this company can accomplish. Once these metaphorical handcuffs are removed and Verano has its own momentum on top of this positive structural shifts in Illinois New Jersey two of our largest revenue contributors. We are strengthening our wholesale position and poised well for future growth as a top four and top two market shareholder respectively.

We have a new adult-use market ahead of us this fall in Ohio providing what we expect will be a 2.5 times lift in sales in the state. And most importantly, we have the possibility of legalization of adult use on the Florida ballot this November. We see a huge opportunity ahead of us given our footprint in Florida the second largest in the state alongside a history of maintaining a very strong market share. In closing, our first quarter marked a period of remarkable achievements across multiple fronts. And while we’re all patiently waiting for more news from D.C., the industry has experienced a tremendous amount of momentum on which Verano is positioned to capitalize. Operator, you may open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Matt McGinley from Needham. Please go ahead. Your line is open.

Matt McGinley: Thank you. So with the portal what happened or how does your strategy change from the fourth quarter the first quarter, in the fourth quarter you had a nice both the revenue and market share gains in the first quarter. It looked like you gave some of that back was that related to you taking those winds down to increase the capacity? You had something changed competitively in the market?

George Archos: Well, a couple of things. Good morning, Matt, by the way. Q4 was a very strong quarter for them. So coming off of that we anticipate a little bit of drop off in Q1 as we normally do. But the majority of it was the construction that was going on at the at large facility in Apollo Beach, so it was anticipated. It was also needed. And we expect a big bounce back here coming into the summer.

Matt McGinley: Got it. And on the SG&A, you’ve been managing that pretty well with the store growth, and that’s been steady on a dollar rate basis for the last few quarters. This quarter, you had a slight revenue decline, so rate went the wrong way for you, but you also had an increase in the core dollars. Was there something unique about the expense in this quarter? Or is it just the new G&A dollar level given the growth you’re having at the retail level?

George Archos: Definitely new G&A dollars, and we do anticipate to hire throughout this year to get prepared for these new adult-use markets. So we’ll see a little bit of a hit there. But as we have in the past, we hit these new adult-use markets in a very strong and deliberate manner, and we expect to do the same coming up with Ohio and hopefully PA in Florida.

Matt McGinley: Thank you.

Operator: Our next question comes from Aaron Grey from Alliance Global Partners. Please go ahead. Your line is open.

Unidentified Analyst: Good morning and thank you for your questions. This is Remi Smith [ph] on for Aaron Grey. Just a quick clarification if I get my first question. The sales guidance, I think you mentioned again that was flat to up sequentially. And then for my first question, in Florida, I appreciate some of the color there with some of the grow rooms that you talked about with investments going ahead to potential ballot in November. But if you could speak a little bit more to specifics for any additional plan cultivation or how many stores you’d like to add just in case for the adult-use scenario, that would be helpful. Thank you.

George Archos: Good morning, Remi. As for Florida, we’re not giving specific guidelines yet on what we’re going to be doing. We’re evaluating our current sites as well as some additional sites. Store count will grow throughout the year. We already had some stores located, planned out, under construction. We’re also opening one up this Friday. So we’ll continue to evaluate sites throughout the state, and we’ll add store count as we see fit. As for guidance, flat top is what we said in the call. Brett, would you like to provide anything further?

Brett Summerer: Yes. I mean flat top is usually what we see a little bit of an increase there, but we’re also seeing some strength, because we had a one-time true-up from a discount that we have been running in parts of the country. So that won’t repeat. That was worth about $3 million in Q1. So that won’t repeat, and we’re going to see a little bit of a lift on that.

Unidentified Analyst: Thank you. And then my second question for taxes. Can you provide enough — provide us an update on your tax strategy? Any filings for refund status of those refunds along with any planned treatment of taxes and 2A [ph] going forward?

George Archos: Sure. So I can’t talk to specifics on that other than to say we have engaged professional firms from a legal and from a tax perspective have been where we’re through that right now.

Unidentified Analyst: Okay. Thank you. I’ll back in the queue…

Operator: Our next question comes from Scott Fortune from ROTH MKM. Please go ahead. Your line is open.

Scott Fortune : Good morning and thank you for the questions. One will focus on kind of retail partnerships in New Jersey, Connecticut and Illinois and driving that wholesale to really offset the kind of the retail sale pressure you’re seeing in a couple of states there from that store competition. But can you provide color kind of on your social equity or retail partnerships looking to put in place here in New Jersey to continue to see that wholesale growth with from their standpoint? And kind of the follow-up on that. Are you seeing wholesale orders become bigger now that after initial kind of wholesale store into the 90% of the stores you’re selling New Jersey from that type of things? Just a little more color on New Jersey as that grows the build out there from retail savings stores?

George Archos: Good morning Scott. Thank you for the questions. Our retail partnerships are always very important to us, have been. We started this business really focused on wholesale. And right now, we’re starting to focus some more on wholesale again. As you see, our wholesale numbers are going to be driving up, and we anticipate that to continue to drive up throughout the year, especially in markets like in cures Connecticut and Illinois. We’re in the majority of the stores throughout those three states and will continue to be on the majority of the shelves as we see fit and the stores that make sense for us. So again, wholesale is very important to us. We’re going to continue to not only grow it in the new social equity and joint ventures, but also grow market share in the stores that are currently open in those three markets.

Scott Fortune: Got it. And then real quick on the cash flow side, the potential additional $80 million from taxes potentially but can you kind of provide the kind of priorities? It seems like you want to still pay down debt and your priorities for investment growth for M&A going forward here. Any are you seeing on the debt financing side and potential talks there with lenders are they starting to treat Verano as normal as a normal tax filer from a cash flow perspective is just kind of little color on the credit side from the one that you’re talking to?

George Archos: Another great question. I mean the three targets are as you just mentioned are be debt reduction, M&A opportunities that we continue to look at throughout the country, and CapEx where we see fit with three new adult use markets that we see coming on the horizon. We’ll be spending some dollars there as well as some other markets to continue to upgrade our facilities, add new stores, et cetera and there’s plenty to do with the cash. Brett, any other comments?

Brett Summerer: No. I mean I would just say, look, it’s always a target-rich environment, particular when you have a lot of money sitting in the balance sheet like we do compared to some of our peers a great place to be but also we want to make sure we’re redeploying that cash and getting the highest returns we can. And frankly, this is a great year for M&A. This is a great year for expansion, and don’t use pretty adult use. And it’s also a great year for thinking about what else you might want to do in terms of retiring debt. So, all of those are very attractive to us. You had mentioned is there different treatment from a tax perspective? Right now, we’re not seeing anything like that. Schedule 3 is something that we’re keeping our eyes on. But we haven’t necessarily seen a lot of movement yet, and which I wouldn’t expect until we see something officially official come through.

George Archos: Also the tax rates in a lending, we will continue to work with local state banks throughout the country and our real estate. But we’re not seeing any major shifts yet in lender availability. But we anticipate it will come soon and we’ll be there ready to jump on the opportunity when it comes to us.

Scott Fortune: Appreciate color. Thanks.

George Archos: Thanks Scott.

Operator: Our next question comes from Russell Stanley from Beacon Securities. Please go ahead. Your line is open.

Russell Stanley: Good morning and thank you for taking the question. First support that’s physically, yes, it’s still bad debt. Wondering if you can talk to participate might be of no geographical your particular interest. Now given the improved on adult use, I imagine there were tourist heavy pockets that are underpenetrated and medical market are now more attractive. And to the extent you can share and love to hear your thoughts on how much greenfield opportunity is there.

George Archos: Hey, Russell unfortunately you broke up in the first part of the answer the other questions. I didn’t hear what markets you’re referring to. Can you please state your question?