Green Thumb Industries Inc. (GTBIF) CEO Ben Kovler on Q4 2021 Results - Earnings Call Transcript

Green Thumb Industries Inc. (OTCQX:GTBIF) Q4 2021 Earnings Conference Call March 1, 2022 8:00 AM ET

Company Participants

Ben Kovler - CEO

Anthony Georgiadis - CFO

Grace Bondi - Corporate Communications

Conference Call Participants

Vivien Azer - Cowen & Co.

Camilo Lyon - BTIG

Matt McGinley - Needham

Pablo Zuanic - Cantor Fitzgerald

Eric Des Lauriers - Craig Hallum

Aaron Grey - Alliance

Michael Lavery - Piper Sandler

Andrew Partheniou - Stifel

Andrew Semple - Echelon Capital Markets

Mike Hickey - The Benchmark Company

Operator

Good afternoon, and welcome to Green Thumb's Fourth Quarter 2021 Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the conclusion of formal remarks. During the question-and-answer session we would ask for limit for one question and one follow-up question per person. As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb 's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded.

I will now turn the call over to Grace Bondi Corporate Communications. Please go ahead.

Grace Bondi

Thanks, Anthony. Good morning and welcome to Green Thumb’s fourth quarter 2021 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, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

These risks and uncertainties are detailed in our earnings press release issued today, along with our reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the annual report filed on Form 10-K, would be expect to file later today. This report along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligations to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and cedar filing. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now, here's Ben.

Ben Kovler

Thank you, Grace. Good morning everyone, and thank you for joining our fourth quarter and year end 2021 earnings call. 2021 was a great year for Green Thumb. Our team's strong execution delivered results we are proud of. For the full year, revenue grew 61% to $894 million and GAAP net income more than quadrupled to $75 million. Increased scale and operating leverage drove adjusted EBIT growth of 71% to $308 million. Interestingly, we committed over $200 billion in CapEx to invest ahead of the demand curved in the U.S. and by state that we can underwrite.

We delivered our sixth consecutive quarter of positive GAAP net income and eight consecutive quarters of positive cash flow from operations. But beyond the numbers, we're grateful to our team, our customers and our communities who've supported us along the way and we are all even more excited about the future.

It can be difficult to avoid the noise in cannabis, plenty of warm walls and dead ends of noisy chatter. I believe we have done an okay job filtering out that noise, focusing on where the puck is going and studying the tremendous potential of the Great American growth story. The growth trajectory may not be linear, but over the long term, we are quite confident it will be up and to the right. The timing of the rollout is used in various states is quite difficult to predict. But when it happens, we are confident that the demand is real.

And no company is immune to competitive pricing we break down has focused on premium cannabis and developing brands that are in high demand and less prone to pricing pressure, while at the same time invest in scale production of certain items that will drive down the marginal cost per unit. As we've been saying for quite a while our long term adjusted EBITDA margin goal of more than 30% remains intact. It is worth noting in some states sales trends vary and vary quite a bit month to month. And that is not surprising this emerging industry given what's going on.

So while [indiscernible] sales volume decrease in January, December was a record month and for the full year 2021 total sales 67% to $1.8 billion year-over-year. Overall demand remains healthy. But the Illinois market has been artificially cast as the lack of progress in Springfield issued social equity licenses and diversify the ownership base in the space away from what is really a [indiscernible].

One, we think the constructive conversations with the folks in power to resolve the issue with help. Two, Illinois will be a blueprint for how not to achieve any equity at board to how not to let anybody black or brown into the industry. It's actually quite a good thing in our opinion because we believe we need to create a culture where it's okay to make mistakes, but it's not okay to learn from them. And so we're seeing other states have equity provisions in the cannabis laws study Illinois as a cautionary tale.

So we can all learn and we can all get better together. There's a lot of discussion about cannabis reforms and new laws at the federal level. Although market may be waiting with bated breath, we agreed some are not. We think we are in an optimal position to take advantage of the changes that seem inevitable. But I would repeat what I've said before we operate our business without the need for federal change.

As you can see, despite a [indiscernible] structure, the business was able to generate over $132 million of cash flow from operations and over $75 million of GAAP net income. That's about $0.33 a share. Until then, we've been executing a plan that puts Green Thumb in position to win based on what we know now. Now what may or may not happen sometime in the future. And the core thing we know now is the American consumer is choosing cannabis for well being. So there are many hurdles in these emerging industries, especially those with decentralized regulatory structures. So our plan remains very simple, not easy. We want to execute the business plan to focus on the consumer and the product. Everything we've accomplished in 2021 was specifically designed to build long term value for all of our stakeholders.

And so now going on some of the major achievements in 2021 that reflect our enter, open, scale strategy. This has really been our North Star since inception. So starting with enter, we entered three new states in 2021, Virginia, Rhode Island and Minnesota. We entered Virginia through our acquisition of Dharma in July, we acquired a production facility and one retail store. Strengthened three additional retail locations we continue to bolster our positions both on retail and production [indiscernible] sales in 2024 or maybe sooner.

Rhode Island, while the smallest state by area is actually the second most densely populated after New Jersey. We acquired one of three available state licenses in August, which is a medical dispensary and cultivation facility. And most recently in December, we're super excited as we entered Minnesota through our acquisition of LeafLine Industries, which is one of only two licensed cultivators in the Minnesota cannabis market.

And as you know, Minnesota and Colorado have approximately the same population of 5.7 million people. With this transaction we added five open medical dispensaries and a large cultivation production facility. These are some of the details on the licensing of the medical program Minnesota is really an underserved state and we believe we can expand our capabilities to provide patients with greater access to well being through cannabis.

In fact, this week, maybe today, the first legal sales of flour are beginning and our Minnesota stores are proud to offer several strains of flour to patients for the first time ever. Having done this a few times I would encourage patients for the patients as the market begins to accelerate. We believe tomorrow, we will only get better. With Minnesota we expanded our footprint in 15 states and we will have our 15 state market, especially considering that our cannabis operations now serve over 50% of the U.S. adult population.

Furthermore, several of our state's it's really important of Virginia, New York, New Jersey and Connecticut have all passed adult use as on the near term, medium term horizon. [indiscernible] really like where our chips are on the board.

The open part of our strategy. In 2021 we made a lot of progress opening new stores. We added 22 stores to the family. We opened 10 and acquired 12 in various deals along through a few. We ended the year with a store count of 73 and as of today sit at 76. As always, when it comes to new store rollouts we undergo a rigorous due diligence process which includes determining the best use of capital to achieve the highest returns. We opened new stores in Nevada, Rise Reno, a third store in New Jersey and Bloomfield encourage you all to come to some and an additional store in Pennsylvania with Rise Warminster.

In Massachusetts a combination of acquisition of new store openings, building five new stores for a total of six, three adult use and three medical and we're excited about the most recent store Rise Chelsea just outside of Boston, which gives us a unique six store footprint in the Commonwealth. We have four locations in Virginia. Two Rise stores in [indiscernible] two more Rise Christiansburg and Rise Lynchburg.

In Illinois, we expanded our Rise [Mundelein] enhance our guest experience with on site consumption lounge and private smoke easy. We also encourage all of you if you're in Chicago as [indiscernible] make reservation we'd love to welcome you out there. Major hats off to our retail team for an extraordinarily productive year.

And then we look at the third part of the business plan scale. To position our company for sustainable profitable growth we must understand and operate with scale. Beyond scaling utilization, it also requires investments in building the infrastructure to support growth. We have been building, expanding and improving several production cultivation facilities in places like Illinois, Ohio, Massachusetts, New York, New Jersey, Minnesota, Rhode Island, and Virginia.

That's where the CapEx is going that you see when we spent. Our end game development is a ahead of the demand curve, especially those states that passed all these legislation, but it is also to produce the highest quality and safest cannabis experiences for our consumers.

All of these dots must be connected in order to achieve our ultimate goal building brands at scale to satisfy the American consumers growing demand for well being through high quality, safe and reliable cannabis products. We're very proud of our family product and the early consumer relationships being formed with those brands. Rhythm, Incredibles, Dogwalkers, Bebo, Dr. Solomon, and now Good Green has the brand cash needed to build what we would like to see. The scale we have built combined information as we have developed and set us up to make high probability well-informed decisions.

A lot of it may sound ambitous, it's not. Each day I reminded the power of that special consumer connection with the brand that truly makes all of this possible. And as you all know, this call knocking the space head into a complex business and rest assured you can count on us to thoughtfully execute our strategy and has been working as we started this incredible journey. We've accomplished a lot in a short period of time, but I truly believe this is just the beginning. And there's a lot of opportunity ahead and rule picking and comfortable bias that we can digest that we can execute against.

We've always having the optionality that comes with positive free cash flow, after tax, and this strong balance sheet. We had growth but not profusely, we're building Green Thumb to prosper over the long term, to see all remaining stakeholders may also prosper.

With that, I turn the call over to Anthony for his financial review.

Anthony Georgiadis

Thank you, Ben. And good morning, everyone. Thank you for listening. As you just heard, the company closed our strong 2021, generating $894 million of top-line net revenue and $308 million of adjusted operating EBITDA. It's comforting to think how far we've come since going forward in 2018 and year-over we generated a $62 million net revenue and $22 million of adjusted operating EBITDA. It is three years, our team has been able to drive current multi financial influence that now results for all 2018. I will highlight in 2021, if we could file in, year-to-year revenue growth of over 60%, gross margins were approximately 55%, adjusted EBITDA margins in excess of 34%. We closed M&A transactions and entry into the Virginia, Rhode Island, and Minnesota markets.

We had team growth of approximately 1500 team members. And $128 million in cash, cash is turning to our largest financial partner, the U.S. Government. And most of you right off at granular level this weekend, this comes out to approximately $350,000 cash, cash leaves per day. Spread differently, the team had a good year and our 2021 gross CapEx spend a $229 million set us up for 2022 and beyond. During the fourth quarter, the companies had a $244 million of top-line net revenue and $76 million of adjusted operating EBITDA. Total net revenue increased 4% over Q3, and gross CPG revenue growing 3% and gross retail revenue growing 8%. Prior to accounting private company revenue, this led our gross CPG to retail revenue breakdown at 42% and 58% respectively about last quarter.

Consistent with the previous periods and despite some headwind experienced during the quarter, we attribute our top line growth solid execution, high quality differentiated products and continued strong demand within our respective markets. On the profitability front, the company generated gross margins of approximately 53% a 260 basis point decline of our future rate.

And given gross margin was primarily attributable to moderate pricing pressure experienced on both the CPG and retail side of our business. At low point, we at the management team assumed that our historical gross margin performance was repeatable end up profitably. However we remain confident that our scale diversified margin base and focus on premium products while all supported our efforts in keeping this critical metrics at or above 50%.

On the SG&A side, excluding depreciation, amortization, one-time transaction costs and stock based comp, normalized operating cost approximately a $57 million a $5 million increase over the $52 million incurred in Q3. A lions’ share of this quarter-over-quarter revenue -- quarter-over-quarter increase is both favorable in marketing related, since we were letting our team expansion to close at 4000 members.

In 2022, we will continue to closely monitor our overall SG&A spend, moving to our top-line growth and margin performance. With a goal of maintaining gross margins and adjusted operating EBITDA margins at or above 50% and 30% respectively. Other expansion in the quarter approximated $4 million which primarily reflects non-cash gains associated with our investment portfolio, as well as interest expense from our senior debt facility. Net of these expenses, the Company generated $20.8 million in net income or $0.10 per share, our sixth consecutive quarter of positive earnings per share from the business.

In addition, we generated an adjusted operating EBITDA of $76 million or 31% of revenue. Moving onto our balance sheet and cash flows, we ended the quarter with approximately $230 million in cash. During the quarter, Green Thumb made healthy tax payments to Uncle Sam, and we invested over $75 million in gross CapEx when including the spend associated with our sale leasebacks.

On our last call, I communicated our plan to increase our bets in a number of key markets that we believe will help drive the next phase of growth for Green Thumb. Our balance sheet and positive cash flow from operations provides us substantial financial core abilities and we remain bullish on our usage of capital and then cash-on-cash returns we can generate in this next phase of proration 2.0.

As we look ahead in 2022 by intense pay repeatings, the following same themes that you've heard previously. The star of the team is the team. Case per suit [indiscernible.] We with the consumer mind every start of the way and then break it our role and responsibility within the industry, they continue to ship away at the wall of probation that's caused our country in its constituents, countless ways, dollars, and opportunity. You and your family stay safer in these uncertain times and help you all as part of excitements we offer what’s to come.

Back to Ben.

Ben Kovler

Thanks, Anthony. Yes, 2021 was indeed a productive and busy year. We accomplished a lot delivering strong results and center shows up well for the future. Financially, we're in comfortable shape with positive cash flow at over $200 million in cash on the balance sheet. I'm proud that we earned the reputation for thoughtfully allocating capital for focusing on strong execution and most importantly for doing what we say we are going to do.

I'm also proud of our team's commitment to our core principles. They adhere to a standard of excellence that elevate a company's leadership position in an emerging industry, in a brand new frontier it is very important for us to stay grounded and to stay humble. Giving back has been an important part of our mission since the beginning and with every new store opening we donate first day profits to local organizations for making a positive impact on their communities. We also believe it is our responsibility to help fix some of the problems created by the war on drugs.

Today, there are approximately 40,000 Americans still incarcerated for marijuana offenses. 40,000. Given the wide legalization of cannabis, the irony is beyond cool. We strongly believe in the plant's potential to improve well being which is important word when considering that every year, more than 95,000 Americans die from alcohol abuse, and another 100,000 Americans die from opioid overdose. These numbers are staggering to us.

Social equity is also a very important concept for us, especially in the cannabis business. Our LEAP program in Illinois was very successful in helping individuals apply for social equity licenses. We recently launched the sister program LEAP Connecticut, in partnership with the NAACP, Greater New Haven and Cedarburg to promote social equity applicants with essential knowledge about how to apply for a cannabis license in Connecticut and Timmis for operating a successful cannabis business.

This is incredibly value add, as we think the next chapter for cannabis in the U.S. could be about new wealth creation. Good [think] Carolina cannabis products dedicated to creating opportunities for marginalized communities impacted by the war on drugs continues to support nonprofit organizations. In 2021 Green Thumb provided grants to three nonprofit organizations through development of Big Green Grant Program. Each organization fit on the three Green core principles which are education, employment, and expungement. And it does amazing work to create opportunity and change in black and brown communities. We encourage you to check them out of the website and get involved. You're currently in our second round of brand making qualified applicants. This work we do in our communities as part of our DNA and really inspires passion throughout our organization. I believe our commitment to the communities we serve positions us to attract top talent aligned with our core principles.

With that in mind, we're very pleased to welcome Dorri McWhorter. Dorri has recently joined the board of directors. Dorri is currently the president and CEO of YMCA of Metropolitan Chicago, and a lifelong advocate of bringing community leaders together to promote social equity and lasting change. Welcome, Dorri. I'm excited you're here and I'm truly excited you're on the board.

Stepping a little bit back. I would be remiss not to mention that our hearts and hopes go out to the brave people in Ukraine. Graduating and justice has always been core to our mission and our values as well painful alarming to witness Russia's aggression towards its neighbor, sovereign state. Nothing could be more adjustable we're watching happen along with the whole world. We're watching and praying for a peaceful resolution.

Finally, back to the U.S. and cannabis. As I said many times before, we're still in the early innings of this great American cannabis growth story. The U.S. legal cannabis market is already a $24 billion industry. And we actually believe the market can more than triple over the next decade. We think it's still day one for cannabis it's definitely day one for Green Thumb and the best is yet to come. So stay tuned.

With that Anthony and I welcome any and all of your questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Vivien Azer with Cowen & Co. You may now go ahead.

Vivien Azer

Hi, good morning.

Ben Kovler

Hi Vivien.

Vivien Azer

So my question is for Anthony. Thank you very much for the context around your aspirations to hold gross margins at or above 50% as well as the adjusted EBITDA margin at or above 30%. But just looking back to the sequential degradation that you saw in gross margin in particular, in the fourth quarter. I was wondering if you could just unpack that a little bit? Is it product mix, geographic mix combination? If you could just maybe offer a gross margin bridge of some kind? That'd be really helpful. Thank you.

Anthony Georgiadis

Sure Vivien and excellent question. So obviously, throughout kind of drug -- the year, from each quarter, we saw a little bit of kind of growth in the gross margin live. And in the fourth quarter, what I explained in my prepared remarks that we started to see some price settling that really rolled through both the retail and the CPG portion of the business. And that really the pricing was probably the biggest driver in terms of the quarter to quarter decline that we saw. Historically gross margins on the retail side of the business remain relatively consistent. We did see some market kind of aberration in the fourth quarter. And then obviously, on the wholesale side of the business, given the verticality that we have within most of the markets that we operate in we saw a similar kind of impact there. So there were some other things that kind of roll through that line. But that's typical on a quarterly basis, which can be a little bit of delays. But just zooming out really the biggest driver was just some of the price settling that we saw in few of the markets.

Vivien Azer

Thank you.

Operator

Our next question is coming from Camilo Lyon with BTIG. You may now go ahead.

Camilo Lyon

Thank you, and congrats on just a remarkable amount of consistency that you're putting out quarter-to-quarter. Following up on the last question on gross margin. Anthony you talked about some states showing that that price compression. Can you tell us what states that is most impactful on the gross margin? And how do you think about the levers that you have at your disposal to kind of alleviate those pricing pressures? Is it from a greater focus on some of the other key products and more of your premium and flower getting into the market? Is it some other mechanisms around marketing and positioning relative to the other brands? How do you view your optionality around kind of recapturing some of that pricing pressure that you felt in Q4?

Anthony Georgiadis

Yes, sure Lyon. So let me just let me unpack that quickly. So basically two questions there. The first one is, okay, which markets did you really experience kind of the price settling that rolls up gross margin line and second, what kind of tools the business app is supposed to effectively counteract those. So related to the first question look there's constant kind of price movement within all the markets that we operate in, these are nascent markets, you've got given a different kind of regulatory structures and the supply/demand kind of economics that are at play with these markets. We do some kind of month -to-month and quarter-over-quarter swings.

In the fourth quarter and the state data really showed this Pennsylvania and Nevada, overall were two of the markets where you saw some flattening on the total size of the market and that effectively, that lack of growth kind of resulted in some price compression that took place at the competitive level.

And then in terms of what we're doing within the business to counteract those. I mean, look, we've talked about this a few times, one, obviously at scale within the business, we're leaning in there. We have a diversified kind of market base. It's one of the things we love about our businesses is that we're not beholden on one or two markets at this point. We're operational in 15 markets, there are different kinds of stages within their kind of growth cycle. And then last, we said before, which brands it's building effectively, some pricing, the ability to kind of price our products, given kind of the premium kind of focus that we have having some, real price control instead of effective, letting market dictate price 100% of the time. So look again, these markets are nascent. We are watching this closely. We live this day-to-day, and it's something that we're going to be navigating over the next few quarters.

Camilo Lyon

That's great. Thanks for the color on that. And if I get asked to follow up on the brand topic. Ben now that you've had the brand portfolio really start to gain prominence in all of your states to varying degrees. How do you view the buy versus build decision going forward with respect to your brand portfolio?

Ben Kovler

Yes. Thanks to your response. We are trying to study and learn as much as we can all the time and close to the product to the consumers, it is helpful for us. The hurdle is pretty high to buy. But if things make sense we're willing to do it. It's about looking into portfolio composition broadly, it's about pricing. And then it's really about capabilities. One of the things is we're not going to do everything forever. The business does a lot of different things. And I think specialization, focus is okay for us.

So we're constantly examining it. The best place for us to be in the acquisition space in brands just speaking candidly, something that we don't do ourselves. Inventing and creating is hard. So that's where it is. But we love the brands. We love the consumer relationship with the product around the country. And we think there's some special things going on out there. In our house of brands, a family of products and others. But we know the consumer is developing a relationship with this product in a long lasting sticky way.

Camilo Lyon

Got it? Thanks a lot and good luck.

Ben Kovler

Sure. Thanks for questions.

Operator

Our next question comes from Matt McGinley with Needham. You may now go ahead.

Matt McGinley

Thank you. The industry data would suggest that you did better than most in fourth quarter with your wholesale revenue but it looks like a net revenues actually still down 3 million sequentially. Jeff, can you, how should we think about that decline in the fourth quarter relative to the growth in the CPG segment? I think most of us would assume you would have into the first quarter and through the duration of 2022 and I think Anthony like commented on gross margin, was that decline in wholesale revenue driven by pricing? Or was there also something that happened in a specific market on the wholesale revenue is probably along the same lines, we'll be giving your remarks on gross margin.

Anthony Georgiadis

Yes. Look like I said there was a move in the fourth quarter just across business, particularly now given a number of markets that we're operating in. I guess just kind of stepping back, though again, it's we kind of look at the markets where we're seeing kind of some of this activity, it's something we're watching closely. Obviously we're kind of leaning into the verticality of the business that we have. So one of the reasons why you saw the decline that you did was just the company ended up effectively shipping more product to its own retail store base thereby creating more intercompany revenue for the quarter, which dropped that kind of net wholesale number that you referenced.

Part of that was just supply driven. Again, within these markets our retail stores, we're big buyers of product and sometimes if we cannot fulfill the demand that we have at the retail level from third parties, we have no choice but to effectively divert product from our own facilities on wholesale facilities from retail stores. So in some ways really just the availability of product at each of the market levels is a big driver of that intercompany number. In terms of where it's going really hard to predict like I said, because the supply and demand have a dynamics within each respective market we play a role in driving that kind of best finger on a quarter-to-quarter basis.

Matt Mcginley

Okay, thank you. My second question is on inflation. Can you help us frame where you're seeing this occur right now or where we're likely to see inflationary pressure that would impact your P&L and balance sheet? What do you think the best tools are that you have at your disposal to attempt to offset those headwinds to cash flow margins?

Anthony Georgiadis

Yes. Look, I think this is something that I think all the offers in the space are navigating. Yes, on the balance sheet side, it's really just on the capital projects that we have ongoing. In that perspective, obviously, you're seeing an increase in both the labor cost of construction as well as raw material while the commodities obviously have seen a run up and the supply chain shortages have just put additional pressure on that.

Within the business, look we've got a lot of raw material coming in from overseas primarily Asia, seeing obviously seeing a growth there. The shipping rates are just not a huge kind of number within the business but in terms of the rate of growth that we've seen in terms of the cost to ship containers across the ocean have drastically kind of increased.

And then obviously kind of on the payroll front, we've seen that an increase there is in terms of staffing at the retail and wholesale kind of levels. So look it's showing up; it's showing up on the balance sheet; it's going to show up on the P&L. We're not going to make excuses. It's candidly, it's just something that we're going to have to kind of deal with and navigate through. And as we look ahead at something we're just going to closely watch throughout 2022 and just kind of maybe make adjustments on the fly accordingly.

Matt Mcginley

Okay. Thank you.

Operator

Our next question comes from Pablo Zuanic with Cantor Fitzgerald. You may now go ahead.

Pablo Zuanic

Good morning. Sorry, I joined the call late so I'm sorry if this was asked already. But I'm very impressed with your recent deals in Rhode Island and Minnesota. I know they look like small states but there's only two licenses in Rhode Island. Three, I'm sorry, two in Minnesota, and three in Rhode Island. So the question is, do you have visibility in places like Virginia, Rhode Island, Minnesota, where you invest the almost $500 million combined, that there will not be any new medical licenses issued for the next two or three years? And remind us in those three states, if you have any caps on stores and cultivation? Thank you.

Ben Kovler

Well hey Pablo, thanks for the question. Yes, well we run on those states too, we're on the same thing you are. Not -- we're not against new licenses coming into the various states that matter two licenses enough to serve 6 million people? No. I know, work great. It's about first mover, it's about scale and there's a lot of new launches in each state. I think you asked how many stores are in each state. I've tried to do it but we can follow-up on the details. But Minnesota we have five open going to eight for the law now, with those other three in various stages. Virginia, we have four like we mentioned, fifth coming soon. And sixth, which the -- that wouldn’t shake the down permit the production. And Rhode Island is one store, one production.

We'll invest a little bit to scale that up, rent coming not enough product from our own suppliers by ourselves, small state but the same math applies whether there's zeros or not. So it's really the same game that we've both going on. And just big picture on new licenses and then we don't use a lot of sweep on new licensee coming in. We like our product. We love first mover, we like having the lowest cost dollars out there to go do what we're going to do. And at the end of the day, we think consumers have a relationship with our brands that are going to want those. It's just so early in some of these markets came in buy Flour, with what's going on in some of the markets is just early and we know what that demand curve is going to look like.

So that's what we're underwriting and even if you double the licenses in each of the states, it doesn't make us really flinch either on price paid, on dollars being allocated, on demand curve or anything like that. Because get in, find the Rhythm and enjoy the journey with Dogwalkers and what Beboe can bring to people is pretty differentiated. So,we're excited about that.

Pablo Zuanic

Thanks, that's good color. Let me, just a quick follow-up. Can you give an update in the indication New Jersey, I think you apply for two stores. When will you apply for the third store to go right, if you have any visibility on that? And same thing with New York. You have four medical stores, supposed you are going to add four more but do we know when you can start adding those four stores? Thanks.

Ben Kovler

Thanks Pablo, great question. The short part of answer is no visibility and no answer on New York. So we have two, we're confident. New Jersey's learning as we go, built partner with state and help through this. It's going to turn on I do not know when and I have no offering of commentary about when because it's a tricky process here is everybody learns it together.

And New York, you all come bill passes, we are active doing what we said we were going to do. We bought the prison and we're with again locking people up for marijuana. Now we can employ people in marijuana, the major change in what's happening in society in the U.S. So we really want to put that on display.

And regardless what else is going on the state means 20 million people, there's 5 billion of demand. We're not canceling out $2 billion in sales out of the gate in any way, shape, or form for us. We're putting in dollars where we can create amazing returns on those investment dollars in ridiculously low multiples of EBITDA out 24 months. And that's great for stakeholders, shareholders. And actually, it's great for consumers in the country. So we're pumped about that. On timing or details of stores? Nothing. I think we're kind of sitting behind maybe the others that are going to come in but the others do have a first spot here. And we're going to get going but I don't have a lot of clarity on the additional stores.

Pablo Zuanic

Okay, got it. Thank you.

Ben Kovler

Sure.

Operator

[Operator Instructions] Our next question comes from Eric Des Lauriers with Craig Hallum. You may now go ahead.

Eric Des Lauriers

Great. Thanks for taking my question. Perhaps another strong quarter here. Ben, your follow-up on the last question for me. So obviously, the timing of New Jersey and New York and thought your sales' beginning, is out of your hands. But can you talk about when you expect your production operations to be sort of fully up and running. And then if we should expect a large wholesale presence out the gate or if you guys will have more of a focus on vertical or intercompany sales? Thanks.

Ben Kovler

You want on New Jersey?

Eric Des Lauriers

For both, New Jersey and New York if you can. Thanks.

Ben Kovler

You say the timing of the Nevada wholesale retail but we'd optimize the business like we always do. Kind of capacity step up in New Jersey or in Paterson, I think we doubled the number of Flour rooms. Obviously, there's a storm, there's a lot of different things but that is online and coming together. So, we will have more product. We'll optimize with the operators in the state in order to best serve the consumers and keep the patients satisfied with product that that's the priority. So I can't tell you where it's going to go. I don't really know but we're good at optimizing that. We've licensed to retail locations that will be approved for rec and so that's going to be strong.

I have no commentary on New York. It is early stage. We're pretty head down building doing what we say we're going to do which is building this cultivation campus and getting things right in Warwick. And we'll come up for air. I don't know one of the two or three conference calls ago, I think I threw out the date, 01/01/23 is rec in New York which was very far away, which is obviously now less than 10 months after today. Seems very close. Amazing how that changes. I think there will be rec sale in New York in 2023. I think that I do believe that but I have no real insight actually.

Operator

Our next question will come from [indiscernible] with Wolf Research. You may now go ahead.

Unidentified Analyst

Good morning. Just to follow up on the price settling you guys saw on 4Q. Have you seen any improvement as you look to the first quarter and then how did the promotional intensity in the lower end of the market compared to what you saw in some of the higher quality indoor product that you guys are selling as well?

Ben Kovler

Sure, good question. I would say that we're not seeing kind of the rate of change that we saw in the fourth quarter in the current moment. Again, this is real time, and these markets move pretty quickly. But just what we're seeing, we are starting to see some kind of real settlement. That relates to kind of the initial question, just repeating the second one --

Unidentified Analyst

Yes. Could you just talk about promotional intensity in the lower end of the market compared to what you're seeing in the higher quality indoor flower results?

Ben Kovler

Yes. So we talked about this before, but obviously, where we're seeing kind of the most call it compression is really on the lower end of the market. It's kind of loaded -- kind of quality levels across all the various categories. In Pennsylvania, for example, given the lack of edibles, obviously, that it just gets pushed into vape and flour that's really just where it shows up. So it doesn't get spread out across as many other categories as it does and perhaps other markets. But that's really kind of what we're seeing. And like I said, it's real time and something that we're watching closely on a day-to-day, week-to-week basis.

Unidentified Analyst

Got it, that's helpful. And then what does the industry prefer to brands is going to be a big impact on where margins settle over the long run. But how do you think UTI and broader industry can just forward the shift in mindset for consumers to shift to purchase five brands versus the currently mentioned out there really you’d see per dollar?

Ben Kovler

This time just trust, responsibility consistent product that delivers on its promise, will develop our relationship with the consumer. I think to the last question, the premium flower is essentially the most resilient, high quality flower drives the business, tries to go into the store, core consumer. And that's the key core product. So that's important.

Unidentified Analyst

Great, thank you.

Ben Kovler

Sure.

Operator

Our next question comes from Aaron Grey with Alliance. You may now go ahead.

Aaron Grey

Thank you for the question, and congrats on the quarter. So question for me, retail up sequentially talked about acquired stores, as well as traffic being called out in the press release. So I know if you could speak to average basket same store fills down 1% sequentially. This guy has called that traffic that implies a lower average basket, just wanted to know whether you could speak to how much of that might have been the pricing pressure that you've spoken to, but also the broader consumer and the wall being impacted by inflation. So any color on the basket household consumer would be appreciated? Thank you.

Ben Kovler

Yes. So good question. Really what we saw what the average ticket has continued to slightly kind of come down. Now, I will say that that's largely because of [indiscernible] some of the pricing pressure that we did see. So use per transaction is really not moving much. But the ADT did come down a bit like it's come down since it kind of since peak during COVID, kind of, it's really just kind of in a more normalized state today. But the quarter-over-quarter decrease that we did see an ADT was just directly correlated, really just some of the price declines we saw in the market. So units per transaction was relatively consistent. And we anticipate that that'll probably stay the same and our guess is that we're in a more normalized state than we were call it three quarters, three to four quarters ago during the [peak].

Aaron Grey

Great, thanks. I appreciate it.

Ben Kovler

Sure.

Operator

Our next question comes from Michael Lavery with Piper Sandler. You may now go ahead.

Michael Lavery

Thank you. Good morning.

Ben Kovler

Hey Michael.

Michael Lavery

Can you just update us on the capacity outlook and obviously, partly just helping us think about that as we model the wholesale line?I know you touched on some of the shifts to selling to your own stores, and maybe a little bit of a pricing pressure. So I know that's a factor for probably what the next maybe a couple quarters, but should we still expect the capacity step up in the second half? Or what's the right way to just think about how that unfolds?

Anthony Georgiadis

Yes. I mean look, it's better. We're pending a lot of CapEx. We don't turn on anything you will not have been a good use of funds.

Michael Lavery

I guess maybe, how much can you pinpoint the timing as what I was getting at?

Anthony Georgiadis

Not much. We would shy away from making predictions and then walking back and changing things. I don't know when New Jersey is going to turn on and I don't know when it's going to turn on [rack]. I don't know when New York City turn on [indiscernible].

And basically our CapEx projects are essentially on time on budget. There is some delays in the supply chain, but Anthony and team and all the way downjust an amazing job sourcing these things. So I will tell you places like Ohio, Maryland and New Jersey, just off the top of my head have moved planted but not yet revenue. So therefore within the next six months, roughly half those have to come out. They are not $100 million CapEx spend, but they're their material for those markets. And again, just Ohio, New Jersey, Maryland, all states we like all with demand coming and pretty strong setup. But I think just zooming out, [indiscernible] says how should we think about it. Yes. Continue to invest when I would take the year. Money goes in year later the projects there six months to grow the plants.

Michael Lavery

That's a full color, and just –

Ben Kovler

Core business, sorry Michael. Other things to make sure we understand very important we scale and Anthony mentioned in his pre-comments that [indiscernible] margins which is not something we run the business on, by the way. We run the business on the free cash flows and sustainability of the cash. But if we spent $200 million last year in CapEx, we are underwriting more revenue coming out of that CapEx, otherwise, why would be expensive, we do not need the same kind as G&A scale that we've had before. So if you think through the percentages and the 2018, 20%, from 50%, to 30%. And what that is getting scaled over, essentially, we've already taken the weight by putting on the SG&A spend, before the revenue is hit.

All three of those markets have materially increased spend, and not get flown through. So it's kind of important to see out. I think people are very quarter-to-quarter basis based, I guess everybody's got their own business and their own lens. But we're building the business for shareholders for the long term. And we believe in the capital spend that we're doing on where the industry is going to be in three to five years. We have a lot of prediction on that.

So we're not concerned in the short term everything we said applies to the medium and long term. And we'd like where the business is going to be because of those states. And I'm just talking about Virginia, New York, New Jersey, Connecticut's 41 million Americans that have legalized cannabis coming their way, where 24 months ago, they were essentially in the desert, literally. And that's not even including some of the other states going. So it feels to us like the industry is digesting of its growth.

And we look at the industry quarter-to-quarter numbers and see the whole thing. We don't think in three years, the U.S. is only a $25 billion industry. So it was, it wouldn't make a lot of sense to spend the way we are, we think it's going to go off into the right. [indiscernible] you think about the standard of growth and all this stuff, it's not a quarter-to-quarter play over here. As you know, it's hard to hire the right people building a major team, but I'd rather bring somebody in the door now to say, hey, here's how to get prepared for 2024. You got 18 months. And that's how we're trying to build them set up the business.

Michael Lavery

Really helpful. Thanks for all that.

Anthony Georgiadis

Sure.

Operator

Our next question comes from Andrew Partheniou with Stifel. You may now go ahead.

Andrew Partheniou

Hi, good morning, and thank you for taking my question. Just to start off with housekeeping item. Could you talk a little bit about what that $4.5 million onetime charge added into the Q4 EBITDA is and for my actual question, it's more of a follow up as to what you just discussed. You had negative operating leverage in Q4. Lots of headcount that you talked about. Could you discuss what we should expect going forward? You are investing across your platform. You continue to integrate acquisitions? At what point could we see this reverse to positive operating leverage?

Ben Kovler

Yes. I'll start then hand it to Anthony in the non-operating. I think the pace of span of SG&A was slow, because what we decided to do is instead of being behind scale in advance. One. Then a couple of states didn't turn on exactly when we thought but I didn't want to be super late. So we're very comparable what we have here [indiscernible] slow from a slope standpoint on the [indiscernible] because the infrastructure here should support hundreds of millions of dollars or more revenue, said another way, right. And we get 20% of revenue that's 50 to 30 you should see scale in the business hundreds of millions of more revenue come on over time. So that's what we see. SG&A has all the labor for retail. So that's not so scalable, the box essentially has no cost as it has. But it's really good production facilities and all this CapEx spend, it takes a while to hit the revenue line, then doesn't increase the spend, and then flows through. [indiscernible].

Ben Kovler

You referenced the $4.5 million adjustment using [indiscernible] just your referencing was non operating non cash. Just getting kind of GAAP nature of our P&L we've got a number of things that kind of roll through there in terms of contingent liabilities as well as just kind of other business items, like I said, are non operating and non cash related, that rolls through that other kind of income expense line.

So our footing doesn't have additional detail, you'll be able to kind of track it. We're [indiscernible] look at our adjusted operating cash flow from operations. And I think anyone that's got going through this knows that unfortunately GAAP is not always kind of the best metric to use when assessing kind of niche performance of the business and so, but that 4.5 revenues with non cash operating.

Andrew Partheniou

Thanks for taking my question.

Operator

Our next question comes from [indiscernible] with Ace Capital. You may now go ahead.

Unidentified Analyst

Hey Ben thanks for taking my question. I'm just wondering if you could talk a little bit more about the opportunities you see in Minnesota and thinking behind the acquisition there? I mean, was that primarily to get ahead of a potential flip to adult user to Minnesota Medical market kind of stand up by itself with flower and edibles coming online later this year? Like how good is the return profile in Minnesota even as an adult use? Thanks.

Ben Kovler

Thanks. Great question. Excellent and then it could be even better. We underwrite it as simply as what's the demand, what's the supply. Supply demand. What's our [indiscernible] was the product and all the other sort of like competitive setups here. But even if there's more operators in the state we think that for 6 million people's demand now [indiscernible] medical without any political insight, records coming.

Why would it not? It doesn't make any sense to us for not to be political, we'll use other things but Illinois $500 million in taxes, hundreds of millions of dollars being spent in places like Ohio, Virginia, Illinois. It's quite a good economic stimulus program. It provides a lot of jobs. There's a lot of organized labor that can come in construct these facilities. So I would not underwriting based on which session or which politician we are underwriting based on U.S. consumer want cannabis for well being, people want to sleep better. People want more well being. Everybody hates being hungover. It's just like so obvious.

So we think that it continues. So in order for the [25 billion to get to 75 billion], somewhere some of the states like Minnesota, New York, New Jersey, Virginia, all these have to actually turn on and go forward so we think it goes up into the right over time. We're in no rush. We have got a lot of work to do. We bought a facility thought as the exact way we would run it. Things are upgrading, [indiscernible] markets we're very excited about there's a lot of work to do. We see unbelievably attractive return on invested capital in an incremental capital into the Minnesota market out of the short and medium term. Why would we not? How big is the market cannabis Colorado is 2 billion. Colorado pricing is different, but it completely pretty big. Does that make sense?

Unidentified Analyst

Thanks. Yes. Appreciate that. Thank you.

Ben Kovler

Great. And again flower in the market. It's a big deal with 6 million people have never been able to buy flower and now you can buy flower but just I want to reiterate it that's a big deal.

Operator

Our next question comes from Andrew Semple with Echelon Capital Markets. You may now go ahead.

Andrew Semple

Great. Good morning, everyone. And congrats on the solid quarter. Appropriately timed question here. I want to follow up on that dried flower comments. So we've seen regulatory approvals for dried flower occurring in several of your medical markets, including Virginia, and New York last year, Minnesota today. Just want to gauge how the patient response has been to dry flower in Virginia and New York so far? Are you seeing the same level of uptake in those two markets that we've seen some of the other markets across the U.S. such as Illinois, Pennsylvania, and Florida and do you have any early indications from Minnesota as to the demand there? Has there been any sort of early registrations or patients signing up in queue this morning? Any color there would be helpful.

Anthony Georgiadis

Yes. So good question. So there is anomalies within all the markets that you just kind of referenced. So let's start with New York. [indiscernible] an inflection effect, we wouldn't flowering while it's unique enough in New York market is that there was a clause flower product, and that available [indiscernible] whole flower, so but we did see kind of pick up on the retail side of the business. It wasn't as dramatic as we've seen in other markets, like it did in the [indiscernible]. But that was just because like I said, that was like a quasi flower product [indiscernible] so TBD, very early to kind of state there. I guess we'll get a read probably by within the next hour or two on how things are going.

And then Virginia what we did to get back up one of the issues in Virginia is that the patients, there's a number of patients, I think close to 8 million out of apply for their medical card, not yet received a medical card. So that's really kind of a [indiscernible] system right now, it's just an administrative kind of work that needs to kind of work through. My guess is, once we see kind of a more normalized patient count, we'll actually see kind of the true impact of flower, which is getting kind of muted patient base. It's difficult to draw meaningful conclusions there. Again 8 million person stays very bullish on the long term being excited about where we're going.

Andrew Semple

Great. That's helpful dynamics. Thank you, Andy.

Operator

Our next question comes from Scott Fortune with Roth Capital Partners. You may now go ahead.

Unidentified Analyst

Hey, good morning. This is Nick stepping in for Scott. I was just wondering if you could provide a little more color around the recent industry wide vape recall in Pennsylvania and kind of the State Department's process there? Looks like your competitors were disproportionately more effective than you were, which may have opened up some additional market share opportunities for GTI. So any update there would be helpful. Thank you.

Ben Kovler

Sure. So for everyone [indiscernible] call in Pennsylvania. So it's doing now we produce really to live to be a part of our wholesale facility. We have our Rhythm full spectrum here vape pen that's been on the market since really the exception, we also have a new line our [indiscernible] digital line, that was that was very new.

Secondly, been on the market for less than a month. And it's been a month and that was impacted by the recall, it was relatively nominal in nature. I think really just one would have just started to kind of read production on that. In terms of what we've seen, I mean look obviously, a lot of people have kind of scrambled to kind of satisfy the market needs, or one of them. Team is doing a great job of just kind of objective just in real time working to kind of increase throughput, just given some of the short term kind of supply challenges that we're seeing, given the number of products, I think it's premature to kind of say, hey, are we going to be able to grab share this kind of situation, I think right now, what we're trying to do is really just service the market, kind of help our partnership, or partnerships across the retail store base there. And just make sure we got a healthy chunk of being on the market for all the other -- So stay tuned, we'll see what happens and investing kind of shakes its way through and there's kind of a resolution. In the meantime, we're going to continue to kind of really diversify and focus on our Rhythm baseline and key performance session. [indiscernible] for the current year.

Unidentified Analyst

Great, thank you. I appreciate that color.

Operator

Our next question comes from Mike Hickey with the Benchmark Company. You may now go ahead.

Mike Hickey

Hey Ben and team congrats on the quarter guys, just curious on, I guess, your updated view of the beverage category. I think it's been about a year since you initially sort of introduced staffing be going into the category obviously, you've done a lot of sense then. Sort of curious, your learnings so far rather than the category and sort of maybe the price margin mix as it becomes a piece of your business? Thanks guys.

Ben Kovler

Sure, thanks for the question. It's Ben. Just before I hit beverage to your question, just on the PA vape to the last question, in the strategy and the thinking is that we're all in this together. This is not an opportunity for Green Thumb to step ahead of somebody or something like that. Nobody likes a surprise. We are all kinds of sort of patients who want to feel better. It's just crazy to happen like this, but everybody's dealing with it together. So we really are in partnership with the industry to sort of fill the stores, make sure patients get what they need and sort of continue to adjust.

It's not a dog eat dog and pound on our friends situation. Everybody wants safe, healthy vape consumers tell you what they like. So just caught us a little bit by surprise around here and then in terms of beverage, so still a very small part of the category, the basket and 1%-ish, some markets, it'll creep higher.

So to the last one, when does it become part of the business actually think about the impact of the P&L doesn't, however, I think it's a very unique product from a consumer as it uses it, what's the use case is, what it can substitute against, and what it does for on-prem and social consumption. So we continue to invest watch, study, be close to the consumer, I mentioned the on-prem , we'll have more of those opening up. We believe cannabis is an experienced business. And we continue to invest in that. But the dollars and cents of can any other beverage in the business or even in the industry is not yet super material. But you never really know. And so we view it as a bet on the future and understanding of what the consumer is how, why, where, and the experience is quite good. And again, I still haven't found anybody likes to be hungover. And that's going to offer a lot of some of the benefits without a lot of the downside.

Unidentified Analyst

Nice. Thanks, man. Obviously, pretty focused here. But you do have a lot of retail nationally you served a lot of markets you scaled manufacturing and do you sort of look at some point look at products, potentially outside of cannabis, something ancillary, to drug growth. Thanks Ben.

Ben Kovler

We try to stick to our niche, do we know which is cannabis product branded cannabis products something makes a lot of sense. We'll look at it. But that's, what we got.

Unidentified Analyst

Thank you.

Operator

Our last question comes from [indiscernible] with Clover Investments. You may now go ahead.

Unidentified Analyst

Hey Ben, I understand where we are what the state by state issues and their competitiveness. Also where we are in the consolidation cycle. Just wanted to know, if you could give me some more color on the vision of the wholesale operation once we see legalization and interstate commerce? Just want to know, do you have a cultivation capabilities to provide for the nation? And do you intend to export in the future to other countries? Thank you.

Ben Kovler

Sure, thanks. Good opportunity to just reiterate. What we do on the flower side, high end indoor premium flower. We don't view ourselves as a supplier of commodity cannabis to input to the market. So [indiscernible] 300 million Americans could buy our product, no we don't have excess inventory. And one of the questions really like, I think it's up to all us to examine inventory line items here and see what's going on. But if you think something's up here, let me know. We're double, triple quadruple checking. We don't think there's an inventory issue, therefore, no, then all sudden, you can sell our flower rhythm to the country. There's not nearly enough. That's not the world we don't see that coming today or tomorrow. So it doesn't really bother us too much. But again, [indiscernible] into a premium flower, we don't know top down so much the market needs, here is so much we need to grow. We say here's what the 20 million to get us. Here's what 80 million years to get it, here's 180 million and guess what makes sense based on that market, the operators, the timing, the product, all of the other factors. We don't do things like supply the whole country. We don't do things like what's the return on invested capital based on the demand?

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Ben Kovler for any closing remarks.

Ben Kovler

Sure. Thank you. Thanks, everybody for joining us. We'll be back with the first quarter results in May. I hope everybody has a nice spring season. Thank you.

Operator

This conference has now concluded. Thank you for attending this presentation. You may now disconnect.