Verano Holdings Corp.

Thank you, and good morning, everyone. Welcome to Verano's first quarter 2021 earnings conference call.

I'm joined today by George Archos, Chief Executive Officer and Co-Founder; and Brian Ward, Chief Financial Officer. During this call, we will discuss our business outlook and make forward-looking statements which are based on management assumptions and expectations.

Actual events or results could differ materially due to risks and uncertainties mentioned in our filings with SEDAR, including our financial statements and MD&A for the fiscal year ending December 31, 2020, and our financial statements and MD&A for the three months ended March 31, 2021. In addition, throughout today's discussion Verano will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA, adjusted EBITDA and free cash flow.

These non-IFRS measures are defined in our earnings press release issued earlier today and available at investors.verano.com which also includes the reconciliation of these measures to the most comparable IFRS financial measures. Please note the financial information is reported on a pro forma consolidated basis, as if the AltMed acquisition had closed on January 1, 2021, compared to the actual closing, which occurred on February 11, 2021.

As a point of clarification, the financial statements we filed on SEDAR are in accordance with IFRS which includes the contribution from AltMed beginning on the day of the actual closing of February 11 versus our fiscal year on January 1st. With that being said, results will differ between the IFRS numbers filed with SEDAR and the pro forma consolidated numbers reported today.

Lastly, all currency is in U.S. dollars unless otherwise noted.

I will now turn the call over to George. Please go ahead.

Thank you, Aaron. Good morning, and welcome, everyone.

Before we jump in, I would like to thank you for joining our Q1 earnings call. I am very pleased with our strong results for the quarter, as well as the momentum we continue to gain in solidifying our financial position, while also developing a footprint that supports our ability to deliver on our objective of finishing the year as a top operator in the space.

This includes being a top three producer of both revenue and EBITDA, while maintaining industry leading margins driven by sound operations and strong expense management. In addition to revenue and EBITDA performance, we expect to maintain strong financial health, which includes an industry leading rate for a non-dilutive credit facility.

And given our strong positive cash flow, we avoided a need for sale leaseback as a method of raising capital through deleveraging of our own real estate portfolio. That said, while it's been just a little over a month since we reported 2020 full year earnings, the rate at which we are progressing has continued.

And the momentum we've built which we touched on during our last call has not slowed down. However, I want to emphasize that while the pace and volume are relatively unprecedented, every move and decision we've made has been carefully considered and supports our strategic vision for the company.

Ultimately, we are accomplishing what we set out to and we are delivering on our stated objectives. We plan to access capital markets and close on the AltMed transaction providing an entry into both Florida and Arizona and we did.

After going public on the Canadian Securities Exchange we gained approval to be quoted on the OTCQX, which allows us to gain exposure and broaden our U.S. investor base.

Beyond that, we are preparing and continue to position Verano for inclusion in the U.S. capital markets as consideration for U.S.

based cannabis companies continues to materialize. We also plan to go deeper on our core states and we did.

We made significant strides developing and enhancing our footprint in Illinois, Pennsylvania and Ohio, while establishing a top three position in Arizona. Not including AltMed, we've announced 10 accretive acquisitions since going public and two since our last earnings call, including Agri-Kind which upon closing will unlock vertical integration in Pennsylvania with an active 62,000 square foot state-of-the-art cultivation and production facility.

And Agronomed Biologics, a Phase II Approved Clinical Registrant, which will allow us to build a second cultivation and production facility plus six new dispensaries, the first of which just recently opened in Chester, Pennsylvania to conduct medical marijuana research in partnership with Drexel University College of Medicine. We believe these two acquisitions in combination with our previously closed transactions in Pennsylvania will enable us to maximize our footprint and secure a true leadership position in the market.

Given the number of transactions we've announced, the consideration between physical assets and paper licenses and for competitive reasons, we have not provided specifics around 2021 EBITDA multiple state for each deal. However, I can share directionally that we believe the numbers are in line with or better than market average, which nets out in the mid-single-digit range.

Notably upon closing, all announced transactions, and including shares to be issued resulting from the C$100 million bought deal announced in February, we expect total dilution of less than 7.5%. That said, we remain vigilant and focused on the strategic use of our stock as currency, always mindful of potential dilution.

We recently announced the filing of our Base Shelf Prospectus. And although we have no imminent plans to utilize the shelf prospectus, we believe it provides optionality for us to stay nimble and will give us the ability to capitalize on opportunities as they arise.

Lastly, between cash on hand, cash produced, proceeds from going public, the [bar-keel] and our outside credit facility, we are adequately equipped to meet the cash requirements for each transaction, while also maintaining a strong cash position. Regarding the upsides of our existing credit facility by $100 million, we were able to lower our cost of capital with demonstrably improved terms, including an industry leading rate for a non-dilutive credit facility of 9.75%, further validating the progress of both Verano and our industry.

And finally, we plan to expand our vertical operations and rebid. Pending completion of the Agri-Kind and Agronomed acquisitions in Pennsylvania, and the near complete construction of our newest cultivation facility in Massachusetts, we will have established vertical integration in 9 of our 11 active markets.

At the same time, we've invested in the expansion of 7 active cultivation and production facilities across our footprint in parallel with increasing sales, growing patient counts, adult-use policy adoption, and a general trend of rising demand. Of note, when our potential cultivation capacity is reached in Pennsylvania, in combination with the build out of our remaining retail locations, which will maximize our footprint in the state, we expect to capture a sizable portion of wholesale market share from existing players.

Before providing a current summary of our operating footprint, I want to again highlight the efficient progress we've made this year on the M&A front. With that, our operating footprint consists of 75 total active dispensaries, including 2 associated with pending transactions with plans to add 10 or more by the end of the year.

9 active cultivation and production facilities totaling over 800,000 square feet with the 10th in Massachusetts expected to come online in Q3, which will add approximately 26,000 square feet to our total. I'd like to quickly note that these do not include a second facility which will be developed in Pennsylvania, and vertical integration in 9 of 11 active states once Massachusetts cultivation comes online, including all 7 of our core markets.

Now turning to our strong results from Q1. We continue to differentiate our company by executing a strategy of operational efficiency, driving strong margins and a profitable bottom line.

I am very pleased to announce first quarter 2021 revenue of $143 million, top line quarter-over-quarter growth of 27% and 117% first quarter growth year-over-year. The split between retail and wholesale revenue was approximately 69% and 31% respectively.

New store openings and acquisitions may weigh for pronounced year-over-year growth in retail revenue. We expect the positive change in the wholesale side of our business over the next several quarters driven by increased capacity resulting from broad cultivation expansion efforts.

The split skewing somewhat heavily toward retail is also influenced by tremendous performance in Florida, where our revenue folds into the retail channel. Going forward, we would anticipate this leveling out slightly once all expanded cultivation capacity comes online.

We also generated substantial organic growth with same-store sales increasing approximately 90% compared to the first quarter of 2020. I'd also like to highlight the organic expansion efforts carried out on the retail side of our business during Q1.

We brought 4 new dispensaries online across 4 states. We also continue to enhance our standard operating procedures across our retail network, which has led to increased throughput.

The average number of daily visits increased from approximately 4,000 in the first quarter of last year to more than 10,000 in the most recent quarter with proven efficiencies based on same-store daily transaction growth of 71%. We also experienced improved point of sale activity in the quarter as our customer spent on average around 7% more per basket compared to the same period of last year.

Given our balanced approach, we drove strong sales growth on the wholesale front producing over 28% year-over-year revenue growth in the first quarter. The momentum we have gained from our efforts to increase wholesale capacity throughout 2020 and into 2021 provides a sturdy foundation for us to gain market share in strategic states throughout the remainder of the year.

Moving on, I’d like to point out what we are most encouraged by from this quarter, which is our performance on the bottom-line. Our strong revenue growth in combination with a focus on operational efficiency across all active markets drove positive net income of $8 million exclusive of biological assets and $75 million of adjusted EBITDA or an industry leading margin of more than 52% of revenue.

I am very pleased with our progress and how we are poised to accelerate our national leadership position in the industry in both the retail and wholesale verticals. We will continue working towards closing our pending acquisitions, completing cultivation expansion efforts and bringing additional capacity online, while maintaining our pace in organic retail expansion by opening new doors as planned and continuing to streamline and enhance our operations.

With that, I will now turn the call over to Brian to provide more details around our strong financial results. After which I will cover our outlook for the remainder of 2021.

Brian, take it away.

Thank you, George. It's a pleasure to speak with you all today.

I cannot overstate how proud I am of what we are accomplishing. Our strong performance from the quarter conveys the amazing work our team has put in and suggests an acceleration in growth going forward, which we believe we are set up to achieve.

To start, I'll begin my remarks by reviewing the financial highlights from the first quarter 2021 and then discuss our balance sheet and capital agenda. Please note, the financial information is reported on a pro forma consolidated basis as if the AltMed acquisition had closed on January 1, 2021, compared to the actual closing, which took place on February 11, 2021.

Also all currency is in U.S. dollars unless otherwise noted.

First quarter 2021 revenue was $143 million, up 117% year-over-year, driven largely by growth in Illinois and Florida. We continue to experience positive impacts from investments we've made to expand wholesale capacity during 2020 and 2021 year-to-date, across 7 active cultivation and production facilities.

We also observed strong retail growth with same-store sales up 26% from Q4 2020. In addition to the continued success within our existing retail operations, we experienced significant growth driven by the impact of adding dispensary throughout the course of the first quarter.

As noted on the last earnings call, although a large portion of our revenue was generated in Illinois and Florida, which we believe represent the greatest near-term opportunities for Verano, we are encouraged by the progress we're making in Arizona, Pennsylvania, New Jersey, Maryland and Ohio heading into the remainder of 2021. Gross profit for the first quarter 2021 on an unadjusted basis, and excluding the impact of biological assets was $89 million compared to $50 million in the same period last year.

As a percent of revenue gross profit was 62%, preserving one of the strongest margins in the industry. We did experience a slight decline from the 63% generated for the full year 2020 due to the impact of costs associated with investments made across numerous cultivation facilities and developing new retail locations.

Looking ahead, although we anticipate some variation in margins, we expect to maintain a profile in the low 60s as we progress through 2021. Moving on, we maintained exceptional expense management with first quarter 2021 SG&A expense of $29 million or 20% of revenue, compared to $14 million or 21% of revenue in the same period last year.

Operational efficiency is crucial to our leading expense management, which is a testament to our teams and their ability to collaborate and to streamline practices across our organization. As demonstrated by our results in 2020, we are efficiently scaling our business and generating operational leverage.

Please note, we anticipate some fluctuation in SG&A going forward as a result of acquisition integration, and as we make investments in headcount to help propel our business as it grows. Net income in first quarter 2021, including the impact of biological assets was $126 million, compared to $72 million in the same period last year.

Excluding the impact of biological assets, net income was $8 million in the first quarter 2021. First quarter 2021 EBITDA on an unadjusted basis was $60 million or 42% of revenue compared to $37 million in the same period last year.

After adjusting for one-time expenses related to other expense, gain from investment in associates and acquisition related costs, adjusted EBITDA in the first quarter 2021 was $75 million or more than 52% of revenue compared to $41 million in the same period last year. As always, we take tremendous pride in our ability to expand the business and make investments in infrastructure, which includes dispensary openings, expansion of our cultivation facilities, along with acquisitions, all while maintaining an industry leading margin profile.

Now, turning to the balance sheet and cash flows. We ended the quarter with $112 million in cash and cash equivalents.

Please note, this does not include the previously announced $100 million upsizing of our existing credit agreement with an industry leading 9.75% rate for a non-dilutive facility, measurably lowering our cost of capital. The volume of our investments in capital expenditures remains elevated as we continue to expand our infrastructure in-line with experience and anticipated growth in the market.

In the first quarter of 2021, our investment in capital expenditures totaled $38 million. We anticipate a continuance of investment in our business for the near-term, and project to close out 2021 in excess of $100 million in total CapEx.

Cash flow from operations for first quarter 2021 was $42 million and free cash flow was $4 million. Before turning it back over to George, there are a few items I'd like to reiterate.

First, while this was a strong quarter relative to our key performance indicators, we feel we're at the beginning of a ramp up, which should produce accelerated quarter-over-quarter growth for the remainder of 2021. Second, to support our stated objective of solidifying a national leadership position, we will continue to make sound investments in CapEx to propel our growth.

Next, as George mentioned, we are preparing the company to take advantage of the U.S. capital markets as our industry continues to gain more acceptance.

This, of course, involves the conversion of our financial reporting to U.S. GAAP, a process that we anticipate beginning in Q2 with potential for completion in Q3.

I can assure you that we will continue to take the necessary steps and are working diligently to operate under the U.S. umbrella and maintain readiness.

And most of all, as we work swiftly to pave our own differentiated path to the top, we do so with an operator's mindset and work ethics, maintaining industry leading margins, even through the considerable expansion of our business. Now, I'll turn it back over to George.

Thanks, Brian. Before turning it over to Q&A, I want to briefly cover how I envision our performance shaping up for the remainder of the year.

While I was extremely pleased with the results from Q1, it was still very much a foundational quarter for us, and I feel that we are at the beginning stages of an acceleration throughout 2021. I anticipate solid results in Q2.

Including the impact from acquisitions, we believe we can generate revenue approaching $200 million, while also maintaining our signature of a strong EBITDA margin profile in the low-40s on an unadjusted basis. Looking towards the remainder of 2021, the impact of pending acquisitions, cultivation expansion efforts and organic retail growth, we anticipate continued acceleration at the Q3 and expect Q4 to be our strongest yet.

Much of our success to this point and my confidence surrounding future growth and prosperity is the byproduct of an incredibly talented management team paving the way for Verano with great purpose. I've said it before, people, process and product, these are the pillars on which our business is built.

Our leadership team elevates the entire Verano family to perform at its peak. Evidenced by our position as a national leader in the retail vertical, and the considerable share our CPG brands uphold across our markets.

As a new entrant into the public market, but among the strongest operators in the space, we will continue to work diligently to produce the results that we know we are capable of. Thank you for taking the time to listen and please note that we appreciate your support.

With that operator, you may now open it up for Q&A.

A couple of quick questions for me. Just George in Illinois, you guys have -- you've kept obviously your [10] store limit.

Can you just speak to or help us better understand the impact of the accelerated stores, names we saw late in March that have continued through the quarter? And then part two of that question, any further insights you can provide on the long awaited 75 new licenses that we're looking to see in the back half of this year?

Good morning, Kenric, and thank you. The accelerated store count was due to the stores having to be opened by March 31st.

So the initial 110 store count had a deadline of Q1 of this year. So that's why you saw the majority those stores get open.

And the 75 stores, we anticipate that legislation will hopefully award those in the month of June. That's what we're currently hearing.

So we'll see what happens by the end of this session. We're eagerly awaiting the social equity applicants to come online, so we can help them get the businesses up and running and we view that as a big positive for Illinois.

Thank you, George. And just to that end, I mean, a big print in Illinois in the quarter where we all saw the headlines.

But where were the biggest surprises in terms of your performance in that market? Was it a function of the traffic you called out during the prepared remarks, that average uptick that you called out?

I mean where relative to your own expectations on this quarter were the biggest surprises for the team?

To be perfectly honest, no surprise here. I mean, this is our home state.

We are coming from the retail side of the business. January and February are typically slow months in the retail sector.

What we're seeing here in Illinois, in March usually there's a big uptick around spring break, which is exactly what happened. More importantly, we're seeing the vaccine rollout work and effective across our entire state.

So even here at our home office, we're starting to see people walk around in the City of Chicago. You’re starting to see restaurants open back up, and you're seeing increased traffic throughout our entire retail platform.

So it's exciting to see, we believe we're going to have a great year. And that we're definitely looking forward to getting some tourism back into Illinois as well.

That's great. A quick follow on before I get back in queue.

Any chance, Brian, you could sort of help us carve out the 13.5 million in sort of transaction acquisition related? How much of that was your listing related versus acquisition, which might be deemed a little bit more of a recurring expense?

Any breakdown or additional color you can or will provide on that?

Yes, absolutely, Kenric. So of the adjustments, I would say a couple of million dollars is related to the IPO that occurred in the quarter.

And then, most of the balance is largely related to the AltMed merger, as well as a couple of the acquisitions. So notably, acquisition related costs are now payments, et cetera.

But yes, with the IPO effective in the first quarter, that was certainly a fair amount of the expense there.

Just wondering around Arizona, the acquisitions that you've closed there. Wondering if you can tell us how integration is proceeding?

And in terms of potential further M&A in that state, just wondering what the impact to date has been of the Trulieve-Harvest announcement on valuation expectations?

Thank you, Russ. Good question.

Integration is going very well in Arizona. The teams are working together across the entire platform there.

We're currently expanding the cultivation footprint. We're integrating both of those cultivation assets, putting best practices in place.

On the retail front, we're getting our flagship store ready in Phoenix. That should be opening here soon.

We'll most likely be rebranding all the stores to follow expanding footprint, but more importantly, the people have been great. And that's really what this is all about.

This is a people business. We're working well together on the corporate level as well as on the ground.

And it's been tremendous to see Arizona come together. On the M&A side, there could be some future transactions that take place for us in Arizona, obviously fit the portfolio of our current Verano brand.

And that we anticipate there still to be good transactions as well, as they happen and when they happen. As far as valuations, the Trulieve-Harvest merger was great -- great team at Harvest.

Obviously, that's our key state. We commend them on a great deal.

I think that's a good merger. I don't think it affects valuations on the private side.

That's a big company across a big national footprint. So we're seeing the profile stay pretty much the same, and we only transact within a certain profile.

So we feel confident that we'll continue to be able to do well in Arizona.

Thanks for the color. If I could just sneak one more in on New Jersey.

You just -- you recently opened your second dispensary. Just wondering when a third might get up?

Absolutely, yes, we actually have inspection on our third coming up here shortly. And we should be opening up some time in June.

So we're looking forward to that, that'll finish our retail footprint, cultivation expansion is nearing completion as well. So we're looking forward to the adult-use transition and we'll be eagerly awaiting lines at our front doors.

We will be ready for it and I think it's really an exciting time for Verano and the industry.

My first question this morning, just asking on some of the M&A and your outlook there. Now you're starting to approach your regulatory tasks in some of your limited license markets, Illinois, Pennsylvania, Ohio, Maryland.

Do you view your M&A priority in the months ahead as continuing to go deeper in your existing states? Or do you think maybe it's time to start looking at adding a new state to the next and expanding your horizon?

Thanks Andrew. Good question.

First, we want to stick to going deeper, that's been our strategy. We spoke on additional M&A that we'd like to transact upon to make our footprint where we'd like it to be.

As far as additional space, there's no rush for us. Executing at a high level within our current 14 state footprint is definitely the priority.

There's big expansion opportunities in almost every one of our states on the cultivation side, wholesale side, there's also adult-use transition in multiple states that we believe will happen over the next few years. And that takes a lot of work to be ready.

So for now, we're going to continue on our strategy of going deeper, and executing at a high level within our current 14 states.

Just another question here. The EBITDA margins for the quarter were obviously very impressive.

I would like to get your thoughts on whether pending M&A might have somewhat of a near-term impact on that margin level, particularly since many of the pending acquisitions or those that have recently closed have been retail stores, not necessarily the full EBITDA margin that you experienced on a vertically integrated business? And then looking beyond kind of the near-term impact, do you feel like you'd be able to get those assets back to your portfolio level, 50% EBITDA margins kind of over the longer period, as you bring on additional cultivation and wholesale capacity to get more vertical?

I'm going to defer to Brian. And then I'll recap after he’s done.

Brian?

Yes, Andrew. So to provide a little bit more color on where we think EBITDA margins are going to land, I think there is some volatility as we get acquisitions integrated.

But as we kind of alluded to, we are really committed to on an unadjusted basis EBITDA margins in the low 40s. And part of that has to do with the expansion at all of our cultivation facilities where we're going to see that benefit coming online, as well as having vertical benefit in the State of Pennsylvania.

And so, of course, a lot of the M&A recently has been retail in nature, but as we strike that right balance between wholesale and retail, frankly, we want to be winners in both verticals and believe we can. We do believe that EBITDA margin profile is going to sustain.

So, on an unadjusted basis in the low-40s. Of course, there are going to be some adjustments, especially related to all the acquisitions, and there will be some volatility between the corner -- between the quarters.

But I think for the full year, we're very comfortable staying in that low-40s on adjusted margin. And it's kind of part of our secret sauce.

May be wanted to follow-up on Pennsylvania and you kind of made some prepared remarks there. When -- can you give us sort of timeline when you expect to sort of be at your maximum capacity in that state as far as the build out of another cultivation and further dispensary openings?

We're actively planning that second cultivation currently. It will take some time, depending on zoning, construction schedules, et cetera.

We anticipate that coming online sometime in 2022. Don't have an exact date yet, but we're working on it and it's pedal to the metal on that cultivation facility.

And then maybe -- and I think it was in your prepared remarks, but I might have missed it. Just with respect to your revenue mix between retail and wholesale, so how you expect that to trend going forward?

Obviously, I think it’s fairly weighted towards the retail side in Q1. Are you expecting those sorts of levels to be maintained as we move forward through 2021?

Yes, we anticipate them balancing out a little bit. Obviously, it’s heavily skewed in Florida.

All of that revenue goes towards the retail level. But over time, as cultivation comes online, we add cultivation capacity in Pennsylvania.

We expect that to balance out. But we were very comfortable with where we're at currently.

Thank you, everyone, for joining us today. It's been a pleasure and we look forward to our next earnings call.

Have a great day.