Green Thumb Industries Inc

CNSX:GTII

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, and welcome to Green Thumb's Fourth Quarter and Full Year 2022 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 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 Shannon Weaver, Vice President of Communications. Please go ahead.

[Shannon Weaver, Director of Internal Communications]

Thank you, Betsy. Good morning and welcome to Green Thumb's fourth quarter and full year 2022 earnings call. I'm here today with Founder and CEO, Ben Kovler; President, Anthony Georgiadis and Chief Financial Officer, Matt Faulkner.

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 the earnings press release issued today, along with our reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the 2021 annual report filed on Form 10-K. 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 SEDAR filing. Please note all financial information is provided in US dollars unless otherwise indicated.

Thanks, everyone. And now, here's Ben.

[Ben Kovler, Chief Executive Officer]

Thank Shannon. Good afternoon everyone, and thank you for joining our fourth quarter and yearend 2022 conference call. We have evolved the format for today's call, now that Anthony has assumed the role of President and Matt is our new CFO. I'll lead off with an overview of our results and some observations on the current state of the industry. Anthony will discuss our operations. Matt will dive into the financials and then I'll close with some final comments. All right, so let's get started.

We feel good about our fourth quarter and full year 2022 results posting $259 million of revenue with $81 million of adjusted operating EBITDA and $1.02 billion in sales with $311 million of adjusted operating EBITDA respectively. Like other companies across industries, we face new challenges in 2022, the highest inflationary environment in 40 years at hit consumers in the pocketbook, high interest rates that further squeeze access to capital, especially in cannabis, and the concern about a recession that continues to loom over the economy.

Even so, Green Thumb reached a new milestone in 2022 as we crossed $1 billion in revenue. This is a 14% increase in revenue year-over-year, and it represents nearly 5X category growth, which was 3%, but 2022 was not just an income statement differentiator for Green Thumb. We are also proud of our year ending cash position of $178 million and full year cash flow from operations of nearly $160 million, both of which are net of paying the government almost $120 million in cash.

Additionally, in 2022, we extended the maturity of our senior debt, $250 million at 7% to April 2025. On a GAAP basis, we reported a net loss of $51 million in the fourth quarter and net income of $12 million for the year, both of which included $89 million impairment charge related to our Nevada business that Matt will cover in more detail. Without this impairment charge, our net income would've been $12 million for the fourth quarter and $75 million for the year.

I also want to point out that concerns around price compression in our industry are very real. The days of fat margins and easy money and cannabis are waning. As people digest punitive tax rates and high cost of capital, the dollars run out and margins slip. We are in the midst of a washout that will leave the industry with fewer operators, not more. This is ironic as politicians and operators are talking about including more folks, not less.

The pricing pressure has squeezed margins to a spot that given 20E [ph], there is not the cash flow for the marginal player, but if we zoom out, we see year-over-year unit growth of 28%, which is the best indicator for us of debt consumer demand, given the changes in pricing. This massive unit growth on a like-for-like basis continues to show us that cannabis is an essential purchase for American consumers.

By now, you probably know that cash is king of Green Thumb. It guides every decision we make and every dollar we spend. Given no meaningful federal relief on 280E [ph] and banking restrictions, having a strong balance sheet is absolutely critical to executing our growth strategy and creating sustainable value for our stakeholders.

Over the past three years, we have paid $340 million in state and federal income tax. Give you a glimpse at some of the irony and current tax policy during that same time, Illinois collected over $1 billion in cannabis tax dollars. Yet our business and new social equity start-ups in Illinois cannot deduct dispensary employee wages or dispensary rent on their Illinois tax return, a solid double dip by the state.

The US cannabis industry reached $26 billion in 2022. That is tremendous growth from virtually zero a decade ago. This kind of growth attracts a lot of prospectors and get rich quick hopefuls. For a variety of reasons, these folks will get caught and eaten by the bear. We believe true success in this industry boils down to managing capital and producing amazing products. We believe in rhythm, Dogwalkers, Incredibles and Beboe.

We've been doing what we said we would do since going public in 2018. So by now most of US focused, disciplined, hardworking, and true believers in the rights wellbeing through cannabis and the long-term viability and vibrancy of our industry.

For those just getting to know us, we look forward to demonstrating these traits to you consistently over the short and long term. We are confident that our company is in good shape to weather the macro turbulence by paying attention to the fundamentals, studying the consumer, and practicing common sense while running a sustainable business.

What does worry me is the dimming promise for fresh participation in this industry, especially for black and brown entrepreneurs. Green Thumb has strongly advocated for the opportunity to build wealth among those most impacted by the war on drugs. With the best intentions, many states instituted social equity license programs. This generated a lot of excitement and hope in those communities, but there's been some unintended consequences that have led to widespread disappointment.

When you're in an industry with severely restricted access to capital and you have to contend with the [indiscernible] tax penalty as a single operator, it becomes very difficult to create real value, once awarded a licensed to operate a retail or cultivation facility. The very people that social equity licenses were supposed to help are less pretty helpless.

We believe everyone would benefit from a solution of these problems from the federal government. Consumers would have more buying options, a new cohort of entrepreneurs would emerge, communities would thrive from new business formations and existing operators could expand product distribution. Until then, Green Thumb will continue to fight the good fight by advocating loudly in supportive organizations and programs geared towards preparing those entrepreneurs for the hurdles ahead.

It is by no means hopeless, but it's taking too long for state social equity programs to achieve meaningful results. With almost nine out of 10 Americans favouring some form of cannabis legalization, you would think federal representatives would pay closer attention to their constituents and pass safe banking, but right now, the best way to create change is to drive more people to vote, especially the younger generations. That's why RISE Dispensaries is a premier sponsor of headcounts in cannabis voter project, and we look forward to registering new voters and increasing voter participation across the country at dispensaries as well as concerts and festivals.

We look out and continue to see an industry that can triple in size over the next decade, and while we have entered the middle innings, this is a marathon and not all runners will finish. We are confident in the ingredients we have in place since 2014. We have the right team, the right assets in the right states. We respect the plant, believe in the product and the wellbeing it creates.

Now I'll turn the call over to Anthony, our newly appointed President to talk about our operational progress in 2022 and what to expect in '23. Anthony?

[Anthony Georgiadis, President]

Good afternoon, everyone. Thanks for joining. As Ben mentioned, despite experiencing a number of headwinds outside our control, 2022 is a solid gear for Green Thumb. We generated record revenue and adjusted operating EBITDA. We completed the rebranding of our RISE retail store model concept. We rolled out throughout 2023. We ended December with $178 million in cash, notwithstanding the $237 million in gross CapEx we invested back into the business throughout the year and our favorite, we generated $159 million in operating cash flow while remaining 100% current on our taxes with our largest financial partner, Uncle Sam.

Other accomplishments include the launching of adult-use sales in Rhode Island and the completion of CPG capital expansion projects in Ohio, Maryland, Pennsylvania, Florida and New Jersey. In addition, the company drove expansion of its rhythm, Dogwalkers, Beboe and Incredibles brands through the launching of additional RYTHM flower strains, the Dogwalkers 12 pack, and a variety of ratio gummies from Beboe Incredibles to address the effect based market such as the Snoozzzeberry Gumming.

Yet, while our business and financial performance was respectable, it was a tough year. We experienced price compression in many of our markets. We lived through a hyperinflationary environment combined with a global supply chain crunch that drove up both capital investment costs as well as operating costs, and we got left at at the altar by our forensic Washington on fundamental basic banking reform.

Unfortunately, as we look ahead, it seems the macroeconomic and consumer challenges in 2022 will remain with us for a while as a result. Now more than ever, we believe that cash flow generation and balance sheet management are critical components of long-term success. Disposed well for green thumb shareholders has both are core to our DNA and have been since our founding in 2014.

At the same time, not all is doom and glue. We have a number of positive catalysts that should allow us to continue to grow revenue and generate healthy cash flows, even if various fundamentals in many of our markets don't improve. They include opening of additional retail stores in Pennsylvania, Nevada, Minnesota, Virginia, and Florida.

Continued strong momentum in New Jersey, Virginia, Minnesota, Connecticut, and Rhode Island. Strong demand and shared growth for Rhythm Flower where we continue to leverage our best in class indoor infrastructure to compete at the premium end of the value chain and the potential commencement of adult new sales in Maryland.

As we look ahead to the balance of the year within CPG, we intend to continue to focus on the consumer through innovation and expansion of our product portfolios, as well as improving overall operational efficiency and product quality. In retail, we will focus on execution of our corporate rebrand, further development of our omnichannel strategy, and keeping substantial product depth and diversity on our shelves at industry leading value.

Of course, none of our success will be possible without our incredible team and all their hard work and dedication. As I, as I've assumed the role of president, it's more clear than ever that the star of our team is the team, and in order to continue to thrive, we would need to work together to utilize the playbook that largely got us here. Number one, continue to closely manage our balance sheet, especially our cash levels are outstanding and total investment and inventory.

Two, maintain strict discipline on all capital spending and operating expense investments. Three, operate the business with the focus on cash flow generation above all else. Four, improve operational efficiency, especially on the CPG side of the business, and five, continue to build and develop our team as they are the ones that make the magic happen each and every day.

With that, I'll turn the call over to Matt Faulkner, our new CFO for his review of Q4 and 2022 results, and while Matt may be a new name for all of you, Ben, Matt and I have been working together since prior to us going public in 2018, and he's been a key contributor to our success over the years. So welcome Matt.

[Matt Faulkner, Chief Financial Officer]

Thanks Anthony and hello, everyone. I'm happy to be talking to you for the first time from this seat. As Ben mentioned, we generated just over $1 billion in revenue in 2022, a major achievement and milestone for the company. This represented a 14% increase compared to the prior year.

We reported fourth quarter revenue of $259 million, a 6.4% increase over the fourth quarter last year. The year-over-year increase was primarily driven by the legalization of adult-use sales in New Jersey and revenue generated from acquisitions made throughout 2021.

Other key contributors to our year-over-year performance included the expanded distribution of Green Thumbs branded products, three new store openings and increased traffic, and the company's 77 open and operating retail stores.

Overall, retail revenue increased 14.2% versus the fourth quarter of 2021 and 24.1% for the full year. Fourth quarter comparable sales increased 3.4% over the prior year on a base of 65 stores. Consumer packaged goods' gross revenue increased 1.7% versus the fourth quarter, and 6% for the full year. Gross profit for the fourth quarter was $124 million or 47.8% of revenue compared to $129 million or 52.8% of revenue for the fourth quarter last year.

For the full year gross profit was $504 million or 49.5% of revenue versus $492 million or 55.1% in 2021. The decline in gross margin percent for the quarter and year was primarily driven by price compression and inflationary factors.

Turning to OpEx, selling, general and administrative expense for the fourth quarter was $80 million or 30.9% of revenue compared to $74 million or 30.5% of revenue for the fourth quarter 2021. SG&A excluding depreciation, amortization one-time transaction costs and stock-based comp, which we refer to as normalized operating costs approximated $50 million compared to $53 million in Q3 and $57 million last year. Cost control in this current environment is critical, and these results provide the evidence of our success in managing those costs.

Total SG&A for the full year was $294 million or 28.9% of revenue, an increase from $277 million or 31% of revenue in the prior year. Normalized operating costs as a percent of sales for the year was 21.3% compared to 22.2% last year, translating to a $9 million reduction in cost for the year.

During the fourth quarter of 2022, the company also recorded a non-cash impairment charge of $89 million related to its Nevada business. This consisted of two charges, a $58 million goodwill impairment charge, and a $31 million write-off of the essence trade name as a result of the rise rebranding,

The company generated net loss of $51 million or $0.22 per basic and diluted share during the quarter. This compares with earnings of $0.10 per basic and diluted share reported last year. Excluding the non-cash impairment charge of $89 million, adjusted basic and diluted earnings per share were $0.05 for the quarter.

Adjusted operating EBITDA, which excludes non-cash stock-based compensation, other non-operating costs, and the impairment charge I just described was $81 million or 31.3% of revenue for the quarter as compared to $76 million or 31.2% of revenue for the fourth quarter last year. Improvement in operating costs as a persona of sales drove the year-over-year increase in adjusted operating EBITDA.

The company generated net income of $12 million or $0.05 per basic and diluted share for the year. Excluding the non-cash impairment charge of $89 million, adjusted basic and diluted earnings per share were $0.32 for the year. Adjusted operating EBITDA for the full year was $311 million or 30.6% of revenue compared to $308 million or 34.5% of revenue last year.

On the liquidity front, we ended the year with a strong balance sheet including cash of $178 million and working capital of $205 million compared to $160 million last year.

In summary, we feel good about our Q4 and full year results and look forward to the future. We've been thoughtful in deliberate in choosing the right markets, expanding our branded product distribution to go deeper in these markets and investing wisely in facilities to meet consumer demand. As we look forward, we'll continue to maintain our focus on execution and high value CapEx allocation to maximize returns to our shareholders.

With that, I'll turn the call back over to Ben.

[Ben Kovler, Chief Executive Officer]

Thank you, Matt. In closing, I'm very grateful to the entire Green Thumb team, from our incredible cultivators who grow the highest quality flower to our thousands of team members who serve our patients and customers and our dispensaries across the country.

The combined efforts and dedication of our team delivered outstanding results in 2022. This year, we published our inaugural social impact report. In building the report, I was struck by how important creating meaningful change is to Green Thumb's culture. It's the glue that holds us together, from the plants we grow, to the products we produce, to the wellbeing we deliver to customers. You can find our social impact report on our website, and we hope you take a few minutes to read it.

I am optimistic about the future of the US cannabis market and Green Thumb's leadership role in it, and while cannabis is a complicated, highly regulated business, the demand from Americans remains. We're also living with a great deal of uncertainty, economic pressure on consumers, a highly divisive federal Congress and global anxiety. All of these things are beyond our control. So we will focus on what we can control, how and where we invest your dollars and the quality of Rhythm Flower and Dogwalkers pre-rolls and Beboe gummies. We need to concentrate there and the rest will follow.

We are intensely focused on cash generation and best use of capital to deliver returns and create long-term value for all of our stakeholders. Come what may in 2023, we are prepared to weather it while keeping our eyes fixed on the horizon. The long-term cannabis opportunity remains immense, if you have the right ship to navigate it.

With that, we'll open up the call for questions. Operator?

[Operator]

[Operator instructions] The first question today comes from Matt McGinley with Needham. Please go ahead.

[Matt McGinley, Needham]

Thank you. So I know that you had previously hoped that you could sustain a 50% gross margin rate or better, but this quarter, you were a few points below that. What additional actions can you take to sustain or improve gross margin in 2023 and now that Illinois seems to be experiencing a more rapid pace of wholesale price compression, should we assume that the '23 rate will be lower than what you were able to achieve here in the fourth quarter?

[Anthony Georgiadis, President]

Hey, Matt, this is Anthony. I'll take that one. Great question. Here's what I'll say. Number one, every quarter's different and obviously no one likes to see the gross margin line go down. Two, while we do have some scale that we're still growing into on the CPG side of the business, price, we're not immune to the price impact that we're seeing in a number of these markets.

And when you impact that, what makes the data somewhat murky is that we've got two things kind of happening on the price front. You've got folks that are trading down. So they're still buying an eighth of cannabis, but they're trading down. They're literally buying a less expensive kind of brand that may not be up to the same quality level. And at the same time, you have true price compression where you have light products that are effectively priced less than they were called a quarter ago.

So, as we look ahead to the rest of the year, that's one of the things we're going to be watching pretty closely. We are doing a few things to combat it and you saw what we did here and within the fourth quarter. Number one, gross margin isn't the only lever that we have within the business to kind of watch margins. So we're obviously closely watching the SG&A line.

We are working hard to get more operationally efficient on the CPG side of the business, and at the end of the day, we're also -- we continue to look at the verticality that we're seeing within our marks to see if there's more that we can do on that front. At the end of the day though, for us, it's all about cash flow. So while, gross margin is a component of that, we've got other tools in the toolbox that we're kind of utilizing to minimize the impact.

[Operator]

The next question comes from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.

[Matthew Baker, Cantor Fitzgerald]

This is Matthew Baker on for Pablo. For our first question, we were wondering what explains the steep drop in prices -- in retail prices in Illinois since early December? From our view, it seems quite sudden and we want to know if it's stabilizing or worsening. And then secondly, I was wondering if you could remind us of where you may have new capacity coming through our store ramp up in 2023. Thank you.

[Anthony Georgiadis, President]

All right, Matt, this is Anthony. I'll take that one. So, we're seeing some price impact in Illinois, but not to the extent that you're kind of alluding to. One of the things that could be happening is obviously with Missouri going, don't use that may be impacting a lot of the border stores there, but generally speaking, while we're seeing some compression, it's nothing that's as extreme as we've seen in other markets. Can you repeat your second question?

[Matthew Baker, Cantor Fitzgerald]

Yeah, just wondering if you could remind us of where you have new capacity coming through or store ramp up in 2023?

[Anthony Georgiadis, President]

Oh, sure. Okay. So let's start on the retail side, which I mentioned in my prepared remarks. We've got a goal of opening approximately a mid-teen number of additional stores this year, and it's really, across the following markets, Virginia, Pennsylvania, Minnesota, Nevada and Florida. And then on the CPG side, we've got capital projects that have bled into this year from last year.

But we've got a new facility in Virginia that we'll be operationalizing Minnesota. Our New York facility should turn on near the tail end of this year. We have additional New Jersey capacity coming online, and then we also have a small expansion taking place in in Connecticut.

[Operator]

The next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

[Eric Des Lauriers, Craig-Hallum Capital Group]

Great. Thank you for taking my questions and congrats on the strong cost controls here in the quarter. My question is on his cost control. So normalized operating expenses, as you guys called out have decreased pretty materially both in absolute terms and as a percentage of sales quite impressive considering the growth of your -- the growth of your asset base and of course the inflationary environment as well.

Do you feel that we've reached kind of a new base level of OpEx? Like should we think of -- any of these normalized expense levels possibly coming down further in '23? I know you've mentioned some efforts around, increasing efficiency around CPG. Just wondering how you feel on this sort of Q4 base level of normalized operating expenses? Thank you.

[Matt Faulkner, Chief Financial Officer]

Sure. Thanks for the question, Eric. This is Matt. I can take that. So as a reference, we saw a normalized operating cost in the 21% to 22% range for the past two years, and we expect that trend to continue, but at the same time, we also plan to keep a close eye on spend to balance short-term profitability targets with long-term strategic objectives. So, given the fixed cost base that you operate with number of retail locations, there's only so much of a floor you can hit, but we feel pretty good about where we are at and how we can maintain that level.

[Operator]

The next question comes from Spencer Hanus with Wolfe Research. Please go ahead.

[Spencer Hanus, Wolfe Research]

Good afternoon. Thank you for taking the question. It looks like sales trends in 4Q came in a bit a bit ahead of expectations, but can you talk about what you're seeing quarter to date from a sales perspective? And then I guess just taking a step back and thinking about the industry as a whole, what is the catalyst here for pricing to stabilize, and when do you think we could see some capacity exit the market here as they become increasingly capital constrained out there?

[Matt Faulkner, Chief Financial Officer]

Thanks, Spencer. This is Matt. I can start off there. While we don't provide guidance, we know that seasonality is a factor and we expect Q1 revenue to dip to the mid -- dip from the Q4 revenues by the mid-single digit. And Ben, you want to take the…

[Ben Kovler, Chief Executive Officer]

Sure. Hey Spencer, it's Ben, on capacity coming off or pricing stabilizing, you're starting to see it depends on which market. It's obviously a bottom up decision. And it starts with when the capital comes into the markets and we're able to really hone in on where and how places like Massachusetts have experienced, what they've experienced and what states we're looking at, where we're putting capital and seeing what other capital is out there.

But I think the data of money tumbling in, which creates a lot more supply, which is what really creates the price deflation in some of these markets is oversupply. And we look out in markets where we're spending in, where we have a lot of confidence given there's lack of a lot of new capital coming in, people are really digesting the tax penalties, interest rates are 400 or 500, both spreads, they're up. So the cost of capital is higher, which gives us some confidence. Too early to call bottom, but I would say we're studying the data and we're not more worried than we were. So I think that's stabilizing.

[Operator]

The next question comes from Andrew Partheniou with Stifel, please go ahead.

[Andrew Partheniou, Stifel]

Good evening. Thanks for taking my questions and congrats on the great cash generation this quarter. I have a two part question and a little bit of a follow on from the last question, thinking about working capital management and, and namely your inventory. Just wondering if you can talk to your inventory levels and, and how do you feel about your turnover? Do you see this as being a big source of cash in 2023?

And for the second part more about the environment that you operate in. Do you see any risk that other companies might be monetizing their inventories? And that could be a new source of price compression? And if so which markets do you think are most at risk? Cognizant you just mentioned that you're not really more worried than you were before or about pricing.

[Ben Kovler, Chief Executive Officer]

I'll take the first part of that, Andrew. So, when we look at our inventory level, we feel pretty good about our inventory level. While inventory is up from last year, we still feel we're in a good position. And between the mix of our CPG inventory and retail inventory monetizing that is not a significant concern of ours. We continue to turn the inventory at a consistent pace and we expect to see that in the future.

[Matt Faulkner, Chief Financial Officer]

And Andrew, I'll take the second question just as it relates to what's happening kind of in the world around us relative to kind of inventory levels and could that kind of further push pricing down? Look, in 2022, we felt it pretty good. We felt it in Pennsylvania, Nevada, and Massachusetts.

And in all three of those cases, I think it was a situation where you just had supplies in the greater demand that have built up over a period of time. For this year, PA seems like it's stabilized. So has Nevada, Massachusetts a little bit unclear. I also think that there's some of the activity that we're seeing in Florida I think is a driver of what you just described. I think a lot of the price compression we're seeing down there is there's a little bit of over-building, and now there's kind of a resizing.

Fortunately, when we look across our portfolio, other places where it could pop up, we have some positive catalyst coming, right? So you look at a place like Maryland, and that's probably a market where you have elevated inventory levels, but with adult use coming, that should hopefully absorb some of that inventory.

We've certainly seen that happen in Connecticut as well as some of the other markets that have launched over the last several years, but we're watching it close. Could that drive some further price compression? I think so, but it fortunately for us it's limited to a few markets and not as kind of widespread as if we were totally operational within a number of the West Coast markets.

[Operator]

The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

[Aaron Grey, Alliance Global Partners]

Hi, good evening and thanks for the question. Could you provide some color about your current relative pricing and brand mix amid the continued pricing pressure? Some detail on how you look at managing price gaps going forward, and whether that might differ between your premium and value brands. Are you comfortable with the shared capture, you're getting right now from [indiscernible] amid the trade down with Constrained Wallet, or potentially looking to make some adjustments? Thank you.

[Ben Kovler, Chief Executive Officer]

Yeah, thanks Aaron. Hey, it's Ben. I'll take it. We like where we're at, we can improve, is sort of the short answer. And what I would say is we like rhythms positioning our premium. We think we have room to, to upgrade and continue with, whether it's a reserve or various limited time offerings that you'll see coming there on the high end in Flower. We think we have some of the best flower in the game and we know we can continue to do better and we have a lot of things happening to drive that over the, say the next six to 18 months on the high end, on the value price.

Now we're studying this all the time, and in the biggest category like flower you mentioned, we love Ann Shine, we have opportunity in good green and then we continue to parlay into the next category in the next category, whether its pre-rolls, vape concentrate, or edibles. And it's a very similar kind of analysis, understanding where the consumer is we have unbelievable proprietary data to see exactly what's happening on a daily basis with the consumer, and we use that to drive decisions on what to package and how to sell it and what price. So we're comfortable with where we are. We think we got more upside to go.

[Operator]

The next question comes from Michael Lavery with Piper Sandler. Please go ahead.

[Michael Lavery, Piper Sandler]

Thank you. Good evening. It's, Hey Michael. Clear. It's clear that the, the supply and demand has been driving the, the, the pricing moves. Some of the oversupply, you can see at least maybe a faint light at the end of the tunnel, but ideally it'd be a little more consistently driven by brand equity. How far away is that from happening? You've got some of the brands that, that stand out a little bit relative to others maybe you've got a little better line. So I don't know what it takes for, for, for that to really carry more weight.

[Ben Kovler, Chief Executive Officer]

Sure. Thanks Michael. It's been -- keep in mind this industry is in -- it's a nascent stage, right? We're, we're under a decade. The idea of national marketing and national brands is really brand new. And you're seeing Rhythm Flower or Incredibles with sort of the best national distribution around maybe a handful of other names in the entire sector. So, we're able to see on a micro basis, state by state able to take pricing power, which is really what a brand is through that trust and through that, that platform to, to build that. And we think it just continues to grow.

So I can't tell you, in three years it's going to work, but we see over time the ability where the national marketing, the standards and the brand develops that relationship with the consumer that drives the price, and that people are not just buying any pre-roll because they don't know what stuff is in it, which is what we've seen out west and in other places.

They have the trust in Dogwalkers, they know it's not trimmed. They know what they're going to get, and we continue to invest in that kind of basic promise with the consumer. And I think if you look over time, you've been able to see that happen with some of the best brands. The key is for us is watching what, what others failed at and why things didn't work so well and trying to improve from there. So I, I think more brand equity to be developed and more scale than dollars spent on the brands that'll show up in that. But we, we'll revisit over the next medium term.

[Operator]

The next question comes from Scott Fortune with ROTH capital. Please go ahead.

[Scott Fortune, ROTH capital]

Good afternoon. Thanks for the questions. Real quick, looking at consumer demand, you mentioned the 28% year volume lift. Can you unpack that a little bit? Especially from your side GTI, what you're seeing is the pricing comparison compression helping penetrate the illicit consumer shift to the legal side just provide more of, a little bit of color of that value demand side and consumer groups or demographics are really continuing to drive that growth to offset this pricing compression we're seeing throughout the, throughout the country here.

[Ben Kovler, Chief Executive Officer]

Hey, Scott, you mind just maybe synthesize that question a little bit? You were a little muffled, so I just want to make sure we heard it right.

[Scott Fortune, ROTH capital]

Yeah, I just wanted to unpack the, that volume with BDSA has been called out for 28% on the year. You think that's coming from a shift from the enlisted side to the legal side, new consumers just kind of unpack the, the consumer side for the, for the volume gets here.

[Anthony Georgiadis, President]

Oh, that's a good, yeah, that's a very good question. Look, I think the reality is it depends by market? I think that there's, as price has continued to compress and a number of these markets, when you put your bank and act like a consumer, why would you, why would you buy an untested, unregulated product if you can go to a store for the same price? It's something that at the very least is tested by a third party lab within a, a much more controlled environment.

So, I definitely think there's conversion from the from the legacy or unregulated market into the state license markets. The other factor here is there's a whole host of other kind of macroeconomic factors that are showing up here.

And again, it really, it it's really driven by, at least for our stores, where they are within the country, and then what are the macroeconomic kind of impacts that, that are happening in the markets where we're most prevalent, call it Pennsylvania, Illinois and some of the mid-Atlantic states.

So I think generally though the biggest driver is probably that kind of conversion to the illegal marketplace. At the same time, I think there's also just more widespread acceptance. My guess is everybody on this phone has heard the term cannabis from their family members a lot more in the last three months than they ever did call it in the previous 12 to 18 months. So I think there are new consumers new patients continuing to enter our stores on a regular basis, and that's obviously also driving some of the growth.

[Operator]

The next question comes from John [ph] with CTIG. Please go ahead.

[Unidentified Analyst]

Hey guys. One question that pretty surprised that hadn't come up previously was Virginia expansion. There's been some pretty pessimistic news out of the state over the last week. Are there any kind of changes to the planned spending environment there for you guys? And then similarly, is there any kind of optimism that has come about in the last month or so out of other expansion states, mainly Pennsylvania and Minnesota?

[Anthony Georgiadis, President]

Sure, John, this is Anthony. I'll take that one again. Look, Virginia, we're all obviously aware of the news does not look like adult use. Sales are going to go live in 2024. However, what I'll tell you is this, the medical program continues to evolve. The state continues, do a really nice job of opening up that program for the patients and simplifying the process of registration as well as access in general.

We do have an expansion there. Obviously if adult use was coming, we feel a lot better about it, but at the end of the day, this is a phased expansion. So, we built in such, it's prepped and ready to increase the capacity for the existing medical market. And then we've got two more stores that we plan to open there between now and the end of the year.

The other markets, Minnesota and Pennsylvania, Minnesota is probably more further along the Pennsylvania. We'll see how that evolves through the end of legislative session. And then in Pennsylvania, that's one we're watching closely. I know that a lot of us really are and are involved with that. But right now it's probably a little bit murky to kind of opine on what direction that's going to go and when.

A - Ben Kovler

The only thing I would -- John, the only thing I would chime in is very hard for us to make capital investment decisions based on the political landscape or the political headline. Facilities take a year to build supply chain is tricky. So nothing about happening in Virginia really adjusts our bullishness on the demand from the people from Virginia we think are going to buy adult use which month, which year is unclear.

Same thing with New York or Minnesota or PA and we spent accordingly because we understand the net demand from the consumers and across the country. That demand is coming true. The path is not straight, the headlines are contrary to where that's going often, but we're bullish on Virginia, we're bullish on Minnesota, and we're bullish on pa and we think in 24 months to 36 months, all three of those markets will be significantly bigger than they are today.

[Operator]

The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.

[Matt Bottomley, Canaccord Genuity]

Hey, good evening everyone. Just wanted to ask a question on, on Nevada specifically, given some of the headwinds in that market, is there any other color you have on, on the dynamics of what's happening there? Is it simply just price compression like everywhere else? Are there changes in, in sort of tourism habits and, and people that go in and of Las Vegas, how many times they're purchasing? Are there frequency or frequency of visit or potential basket size?

And then as just a broader question, are there other markets you think that when you look at your portfolio, it might make sense to streamline them a little more? There's been some press releases from some of your peers that have done that, particularly on the west coast. And I'm just curious as we're in 2023 now, if you think pairing back asset exposure or CapEx in some of your non-core markets might make sense in the current environment.

[Ben Kovler, Chief Executive Officer]

Great. Matt, I'll take the first one. Look, the Nevada market, it had a tough year. It was off 20% gone from effectively a $1 billion in '21 to mid-eight hundreds in '22. So, for us we've seen a few things happen in that market. Price was, it was one of the first places we saw severe kind of price erosion that happened relatively quickly.

It was right off the heels of COVID and it, it came fast and furious. There is kind of a few other things happening in that market which are unique. The tribes play a unique kind of a role in that market that I think is having a bigger impact than did anyone really kind of understand at this point. And then at the same time, I wouldn't be surprised if there was a lot of product that continues to cross state lines from California into the state that is eroding kind of the state license market. In terms of the second question, I don't know, Ben, you want to.

[Matt Faulkner, Chief Financial Officer]

Yeah, sure Ben, I can hit it. In terms of existing markets, it's funny the question that's really the answer to one of the prior questions about folks asking what's it going to take?

I think as you've seen people exit, like us people in the industry are out of money. Literally the cash is very tight, not on our balance sheet, but it's elsewhere. So as you've seen people exit markets, there was a relief among those operators that are very tight because as supply leaves, as people shut down, at least the pricing stability in sort of a better market for those that can survive.

So we're in the midst of it. You don't see green thumb leaving anywhere. We really like where we're at. We've built this portfolio in a calculated, really precise surgical manner, and we understand where we are, the distribution channels and who those consumers are. And we like sort of the upside embedded in this portfolio. It's driven all the decisions up until now. But we're constantly evaluating it and we're not afraid to be wrong. So I like, I like the question. Thank you.

[Operator]

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

[Ben Kovler, Chief Executive Officer]

Thank you. Thanks everybody for joining us and look forward to updating you later this spring. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.