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Weed-legal states 'seeing more cannabis tax dollars than alcohol tax dollars,' Green Thumb CEO says

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Green Thumb Industries CEO Ben Kovler discusses the cannabis company's ability to grow in an ever-expanding market that anticipates future legalization in more states as cannabis tax dollars are outpacing alcohol tax dollars in states that have already endorsed legalizing the substance.

Video Transcript

ZACK GUZMAN: Welcome back. As earnings season rolls on, we've got a rare beat, albeit a slight one, in the cannabis space. It's been a tough year for a lot of the industry, but Green Thumb Industries is popping off of their stronger than expected quarter. As I said, a little bit above expectations here when you look at revenue, as well as adjusted EBITDA. The company actually posted their fifth consecutive quarter of positive gap net income, delivering more than $20 million on that metric or $0.08 per diluted share.

And for more on what we learned in the quarter here, happy to welcome back into the program the CEO of Green Thumb Industries, Ben Kovler joins us now. And Ben, just showing the results of the quarter there. As I said, slightly above expectations on the top and then when you look at EBITDA. But what did you see in this quarter as, you know, the rest of the industry has been shaky in supply constraints? How did Green Thumb, how were they able to manage that?

BEN KOVLER: Sure. Thanks, Zack. Great to be here again. Continued execution from the Green Thumb team. You've seen it over time. We continue to execute into our thesis, which is this is a massive new consumer products industry. And we positioned the business for all of our stakeholders in order to take advantage of that.

ZACK GUZMAN: Yeah, gross margins, too. I think a lot of people are calling those out, rather, 55.4% unchanged year over year. When you talk about being able to do that with the expansion into more states and building out your guys' footprint, talk to me about what you have on the horizon there and how the company is able to do it.

BEN KOVLER: Yeah, we have a lot of growth on the horizon. We're really building the business today for what the business is going to be in 2022, 2023, 2024, and beyond. And you can see that the leading indicator, as you look inside our numbers, is really the capital expenditures, as we go build the infrastructure in states like Virginia New York, New Jersey, Connecticut, all four of which, if you think about it, legalized in 2021 this year, none of which have opened yet for that. So we're building that sort of infrastructure.

In terms of the gross margin, it's often an output of a lot of things happening underneath. We're pleased with where it is, but we're not managing the business to a certain margin. We are pleased, like you said, with positive gap net income. That's a differentiator. We're pleased with positive free cash flow from operations. The business is producing cash. We also have a lot of cash on the balance sheet, over $250 million. And that allows us to play offense on behalf of all of the stakeholders.

ZACK GUZMAN: Yeah, I mean, it's pretty impressive, as I said, in what's been kind of a tough year for cannabis, not just US companies, but also Canadian players as well. You mentioned Virginia and expanding there. I'm not sure how large of a role a Republican governor candidate coming out and saying that he doesn't want to roll back Virginia's legalization had.

But we heard that from Governor Youngkin on the campaign trail, saying that he wasn't going to do it. And, you know, Republicans have been hesitant. I know the Gallup poll was just out, showing that Americans overwhelmingly now are in favor of legalizing marijuana at the federal level. But we haven't seen changes come through. It hasn't seem to stop you guys. So I mean, does that not matter? Do investors maybe not care as much as long as you can put up the numbers still that these changes are elusive?

BEN KOVLER: Well, several things there in your question. Great question. First of all, the business and the stock are often not connected. They're not the same thing all the time. Stock is a short-term voting machine, long-term weighing machine. On the ground, Governor Youngkin and elsewhere, it's very hard to argue. We look forward to working with the administration and being productive.

But it's very hard to argue with the hundreds of thousands of people that work legally in the cannabis industry in the country. It's one of the largest job creators right now. And across the country in states where there's legal cannabis, we're seeing more cannabis tax dollars to those states than alcohol tax dollars. So it's a major economic engine of growth in the US. And we're just seeing massive support. Voters, as you said, it's greater than two-- you know, two out of three support legalization. We really don't see a lot of resistance.

ZACK GUZMAN: Yeah, the other thing, too, I mean, I don't know if you think that investors right now might be sleeping on the industry, and maybe it is because changes have taken longer. But we are now hearing a group of 23 governors coming out to really show their support for what Ed Perlmutter has been trying to push for a few years now, the Safe Banking Act, to get the industry access to financial products here. It sounds like he's pretty confident. I know he's been confident in the past, but pretty confident in this way, it's going to work. Sixth time might be the charm here. How confident are you on maybe finally seeing that pass?

BEN KOVLER: To be really candid with you, Zack, not something I totally focus on from a federal standpoint. There are 40,000 people in jail. We need to get those people out of jail. That's like a joke. That's a problem. These are these lives. This is America. They've got to get out of jail. Next is we need banking. And so some sort of clarity on banking, like you said, and we think eventually the federal government's going to get around to doing something.

So it's hard for me to handicap when or how that's going to happen. We've certainly seen now Republican momentum at a federal level recently as early as last Friday. And the probability has increased of something happening at a federal level. But it's hard to say what that exact probability is. We've operated, we built Green Thumb to be independent of the need for federal change. We are already in, deep in the US cannabis industry, serving awesome products for American consumers across the country every day.

So we look to the federal policy to do things like get people out of jail and open up opportunity through banking, through loans, so that new people can enter the industry and create a lot of new wealth. There's a massive new consumer products category here. And there should be a lot of access to new people coming in the industry.

ZACK GUZMAN: Yeah, I guess, operationally, the better question there would be on those states that you mentioned that aren't yet allowing legal sales, but have positioned to do so rather shortly. So I mean, when you look at those maybe in New York, New Jersey, Virginia, what does that look like in terms of the expectations for when investors can start to see the investments you've made there start to pay off?

BEN KOVLER: Yeah, it's really hard to be precise, but we know over the coming years, there's going to be a massive multibillion dollar market in Virginia, a multibillion dollar market in New York, and a multibillion dollar market in New Jersey. So that's easy for us to underwrite. We're putting our capital, our money where our mouth is by investing and building that infrastructure, because we know consumers like the brands and the products we're building. It's hard to guide on exactly what time. We know New Jersey is legalized.

A lot of people have said a lot of different things about when. I'm usually on the over and the over under bet, because things don't tend to happen as they're prescribed. But we know at the end of the day, the consumer likes the product. 21 and over, legal cannabis is something that is happening across the country. And it's just hard to precisely time it. So if you look out at our business for what we're doing and how we're spending 2023, 2024, look to be very good years as growth is coming across the country.

ZACK GUZMAN: Last time I had Ross Gerber on the show, he was giving me flack for not being close enough to the parties, what the young kids are doing these days when it comes to cannabis. You and I last time we chatted, I think we were talking about drinks and that form factor really taken off. I mean, what are you seeing there, I guess, in kind of the growth of non-smokable cannabis and kind of whether or not it still lives up to the hype that we heard a few years ago?

BEN KOVLER: Well, yeah, Zack, you got to get to the place where the young people are. It's all about the young people in America. And we're seeing this as currently a $25 billion US industry, going to $80 billion. That's just massive. As we look at the different categories, first, if you think about the cannabis as a whole category, the entire category is off-prem. That means consumed away from where you buy it. Whereas the alcohol category is half on-prem, half off-prem.

And so we see drinks like Cann and other things enabling the experience for on-prem in the low dose form factor. But it's very, very early. And so we're seeing massive adoption in whether it's edibles, consumables, flower, pre-rolls, vape, and other things, driving growth in the industry.

ZACK GUZMAN: Yeah, I think if I remember correctly, didn't you have an Illinois-- I think it was a Chicago location open up that was more attuned to on-prem. I mean, is the reason that's not there, is that mostly regulatory across all these other states and kind of trying to make sure you can't use it on-prem? Or is that maybe a different reason in holding back that kind of growth?

BEN KOVLER: It's early, Zack. Yes, we have what we believe is the first east of the Mississippi location for on-prem. You can purchase and consume cannabis in Mundelein, RISE Mundelein. We'd love to welcome you over there. You can get pretty close to the product. We have all kinds of form factors available. The reason it's not-- just, it's just brand new. This is a brand new industry. You can't buy edibles in the state of Pennsylvania. You can't buy legal cannabis in many states in the South and the Southeast.

So it's really prohibition 2.0 sort of unfolding before our eyes in slow motion. It's very fortunate for where we sit to go take advantage of that for consumers and to bring it. But it's early. We were talking as early as four or five years ago about things like, you know, enlightening people to the idea that cannabis is an exit drug and helping people get off of opioids and leading to less deaths. That's a very different thing than come to a small concert venue or a comedy bar and have cannabis. So, very different.

ZACK GUZMAN: It's been pretty fascinating to watch the growth of the industry here. And as I said, a company like Green Thumb now delivering with their numbers in the latest quarter, topping expectations. Ben Kovler, Green Thumb Industries CEO, appreciate you coming back on here to chat with us again. Be well, sir.

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