Planet 13 Holdings Inc. (OTCQX:PLNHF) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
Mark Kuindersma – Investor Relations, LodeRock Advisors Inc.
Larry Scheffler – Co-Chief Executive Officer
Dennis Logan – Chief Financial Officer
Robert Groesbeck – Co-Chief Executive Officer
Conference Call Participants
Greg Gibas – Northland Securities, Inc.
Operator
Good evening, ladies and gentlemen, and welcome to today’s Planet 13 Third Quarter 2022 Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Kuindersma, Head of Investor Relations. Mark, the floor is yours.
Mark Kuindersma
Thank you. Good afternoon, everyone, and thank you for joining us today. Planet 13 Holdings Third Quarter 2022 financial results were released today. The press release, the company’s quarterly report 10-Q, including the MD&A and financial statements are available on the SEC’s website, EDGAR and SEDAR as well as on our website, planet13holdings.com.
Before I pass the call over to management, we’d like to remind listeners that a portion of today’s discussion include forward-looking statements. There can be no assurances that such information will prove to be accurate, or that management’s expectations or estimates of future developments, circumstances or results will materialize.
As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect results are detailed in the company’s public filings that are made available with the United States Securities and Exchange Commission and on SEDAR. We encourage listeners to read those statements in conjunction with today’s call.
The forward-looking statements in this conference call are made as of the date of this call. Planet 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law and does not assume any liability for disclosure related to any company mentioned herein.
In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Please refer to today’s press release posted on our website. Planet 13’s financial statements are presented in U.S. dollars and the results discussed during this call are in U.S. dollars unless otherwise indicated.
On the call today, we have Larry Scheffler, Co-Chairman and Co-CEO; Bob Groesbeck, Co-Chairman and Co-CEO; and Dennis Logan, CFO.
I’ll now pass the call over to Larry Scheffler, Co-Chairman and Co-CEO of Planet 13 Holdings.
Larry Scheffler
Good afternoon, everyone, and thanks for participating in our third quarter call. As most of you know I missed the last quarter call, I was stuck on an airplane. I’m sorry, I miss it. I appreciate everybody that missed me and I’m back for this quarter. I’m going to discuss the performances now in Nevada and California, and let Bob provide an update on our growth initiatives later on the call. As we talked about last quarter in June and July, we saw material weakening of the cannabis consumer as they dealt with increased inflation and higher gas prices.
During the quarter, there was an approximately 9% drop in the number of vehicles from California according to the Las Vegas Convention and Visitors Authority. These are customers that usually all represent as cannabis consumers and clearly show how consumers are adapting to the macro conditions. In Q3, in Nevada, we generated $14.9 million from the SuperStore, $2 million from curbside and delivery, $2.1 million from Medizin dispensary and $2 million from wholesale and total revenue in Nevada of $21 million. The lower sequential SuperStore revenue was directly related to lower statewide sales.
Looking at the latest Nevada statewide sales data, the state is on track for a 5% quarter-over-quarter decline, and a 20% year-over-year decline. This has been driven by lower tours, spending on cannabis, and increasingly strained local consumer. This quarter, we also saw an acceleration in more cannabis specific pricing pressure across Nevada. Cannabis prices were down 24% year-over-year, as more dispensaries lowered prices are try and compete for the limited sales. This was coupled with an increase in the supply of flower in Nevada, and also had an impact on the price of flower, despite incredibly aggressive pricing by our competitors and 18% increase year-over-year in number of dispensaries. We’re able to maintain our share of the market at 9%. There are a couple of keys to our success.
First, we implemented unique promotions and discounts, utilizing our robust consumer database to be very targeted and maximize gross profit dollars compared to blanket discounting and price cutting. We continue fine tuning our assortment to match consumer needs and avoid stale inventory. In addition to these initiatives, we continue to deliver the single best consumer experience in Nevada. Like retail, our Nevada wholesale was impacted by pricing pressure and lower sales industry worldwide.
Having said that, our brands continue to show strength from a market share and ranking perspective. Looking at our various brands, HaHa was the number 5 edible brand; TRENDI was number 4 vape brand; and Medizin was – which is our flower brand grew to number 3 highest selling brand flower in September.
As we look into the future, we don’t see any signs of the significant shift in the macro environment. These are predictions of a recession in 2023, and we agree based on what we’re seeing with the consumer on the ground. This will continue to pressure Las Vegas tourist traffic and local consumers, which have a high correlation with economic conditions. We’re also entering into a seasonably slower period of the year from November through February.
Turning to California, we generated revenue of $5.1 million, up 15% sequentially. We saw growth 7% sequentially at our Orange County location. We continue to see sales growth quarter-after-quarter, as we institute the practices that we perfected in Nevada from customer service to project assortment, including our own brands, to marketing and promotion tactics.
On the cultivation and production side, the vertical integration in Nevada, and our owned brands are part of what’s driving incremental traffic to the store. The Next Green Wave team, which is our grow facility continue to improve themselves as expert growers. And we’re pleased with the acquisition and the positive synergies have created our California operations.
On the wholesale side, we generated $2.5 million. This was down from Q2 due to almost doubling the amount of product we allocated to our own shelves in California. We are prioritizing our own shelves as a differentiator in the market and utilizing the extra retail margin to run single item promotions that can draw in new net customers.
Looking ahead in California, we continue to expect incremental gains. California, why incredibly challenging, has not seeing the same price compression sequentially as some other markets are currently. Having said that, it is clear that we’re entering into a challenging period for consumers, and we will continue to be very prudent and conservative with our forecasts and our expenses.
Overall, our company has performed well during this very challenging macro conditions, despite an 18% increase in the number of dispensaries in Nevada, from 86 into 2021, to 107 today, we maintain market share on both retail and wholesale. We take comfort in knowing that we’ve been there before and weathered other economic storms as long as we stay focused and maintain our commitment to outperforming the market, we will reap the benefits as federal legalization changes in the economy improves.
With that, I’ll pass it on to Dennis to discuss our financials.
Dennis Logan
Thank you, Larry. Before I begin, I’d just like to remind everyone that all numbers on today’s call are stated in U.S. dollars, unless specifically stated otherwise. We’ve seen the macro economy worsened sequentially in Q3 along with more specific cannabis pricing pressure. The company generated $25.6 million in revenue in Q3 2022 compared to $28.4 million in Q2 2022, and $9.9 million declined quarter-over-quarter. The major driver of the decline, as Larry mentioned was a significant pricing pressure we saw in Nevada, with prices down 24% year-over-year.
In our California operations, revenue was up 6.4% year-over-year, excluding our push into wholesale. And if we include our wholesale revenue in that it’s up by 111%. Looking at Q4 2022, we know that it is seasonally slower this time of year. Having said that, we are seeing more stability in pricing, not a reversal, but no longer the same downward trend that we experienced in Q3.
In Q3 2022, gross margin decreased to 41.2%, down for 49.4% from Q2 2022. The decrease in gross margin was due to wholesale revenue making up a larger share of our overall revenue coupled with pricing compression as mentioned earlier. Gross margins at our retail operations continue to be in the high-50s in Las Vegas, and in the low-50s in California. We continue to target 50% or higher gross margins at our retail operations, and we expect gains from vertical integration and automation to offset some of the pricing pressure at the retail level. We expect gross margins for our wholesale business to continue to be substantially below the retail business, especially in California.
Sales and marketing expense for the quarter was $938,000, up from $803,000 in Q2 2022, but was almost half of the $1.9 million it was in Q3 2021. We continue to try to be very targeted with our sales and marketing spend, focusing only on activities with a measurable ROI. The company spent $9.3 million on G&A expenses in the quarter, excluding share-based compensation, down from $9.9 million in Q2 of 2022 and $13.2 million in Q3 of 2021.
We are making strides in improving the revenue generated per employee with overall sales and wages about half of what they were a year ago. With the current operating environment, macro economy and pricing pressure across the entire cannabis industry. We will continue to focus on improving our efficiency, maximizing profitability, and are prioritizing controlling costs and maintaining positive cash flow.
The company generated positive operating cash flow of $2.3 million through the first 9 months, while staying current on our tax payment obligations. As of September 30, 2022, the company had a cash balance of $50.9 million and no debt. Since the start of the year, we spent approximately $14.6 million in CapEx between our Nevada cultivation facility expansion and our Florida operations.
As we’ve discussed, our priorities are the continued build out of Florida, as well as focusing on our Illinois growth opportunity. We will be opportunistic and managing the CapEx requirements for these initiatives and continue to seek alternatives that reduce CapEx in order to conserve our cash position. We believe having a strong cash position and being debt free gives us much more flexibility that most other cannabis companies, it allows us to capitalize on opportunities and have a clean share structure when cannabis – when legalization is enabled and larger institutions enter the space.
And with that, I’ll turn it over to Bob.
Robert Groesbeck
Thank you, Dennis, and good afternoon, everyone. I’ll dive right into our growth initiatives in Florida. We continue to make progress on our cultivation build out. There were building delays at the start of the quarter related to permits, delays associated with a backlog and construction services availability and, of course, supply chain issues, some of which were directly related to the recent hurricane. While these delays are disappointing, I’m pleased to report that we’ve had no material damage to our facilities due to the hurricane. We are also opportunistic and looking at methods to reduce the upfront CapEx requirements and the time to market.
Moving over to Nevada, we submitted our lounge application, and we think there’s a strong likelihood that we’ll secure a license. We’ve got a straightforward conversion of our restaurant into an incredibly high end unique consumption lounge, which is as close to the Las Vegas Strip as possible. The CapEx required for this project would be relatively minor, but we will keep you updated on the licensing process and conversion as we move forward.
In Illinois, we submitted our location to the state municipal regulators and are awaiting their respective approvals. Our proposed location is Fountain Square, Waukegan, which is close to the Wisconsin border, and just off the highway between Milwaukee and Chicago. It is a large shopping center, home to multiple big box retailers, restaurants, hotels, and a recently announced casino project.
The plan for the store would be smaller than either the Las Vegas Orange County superstores that will still be experiential, and up to the Planet 13 standards for which our customers have become accustomed to. As a reminder, we’ve agreed to an option with Frank Cowan, our social equity partner to purchase the remaining 51% ownership in our Illinois dispensary at our discretion.
So I’d like to take just a moment to look back at the 3 goals that we set at the start of the year and where we – our performance stands thus far. Our first goal, of course, was to maintain that 8% to 12% of Nevada retail sales and continue to grow wholesale share in the state, while executing on accretive and diversified revenue opportunities, such as the cannabis rounds [ph].
In Q3, we’re still holding approximately 9% share based on the available data that we’ve seen. Our wholesale brands held or grew share, and we’re making good progress towards a first-of-its-kind cannabis consumption lounge. Unfortunately, we’ve seen a substantial industry wide slowdown in Nevada. While this is unquestionably disappointing, we can only control what we control and that is how we compete perform relative to the market.
And number two, California. Our goal, of course, was to improve profitability through increased sales and operating leverage at our dispensary, increased vertical integration and enter into profitable wholesale operations. In Q3, we saw another quarter of sequential growth. And thirdly, with respect to Florida, our objective was to continue to drive growth in order to allow us to open in 2023. The progress on our construction, as I indicated earlier, was a bit slower than desired during the quarter due to permit timing and delays from the hurricane. However, we have multiple opportunities substantially speed up our time to market and reduce upfront CapEx, we will hopefully be in a better position update the market on those opportunities very soon.
We are executing on our goals and controlling what we can control. A year from now we plan to have more than doubled our dispensary count and the number of states we have operations in. As a company, we recognize the macro and the capital markets environment we are operating in, and the risk that they currently pose.
The greatest risk we see today is cannabis companies unable to fund themselves and being forced to take expensive capital prior to regulatory change that will act as a tremendous tailwind for growth margins and cash flow. Because of that, we remain focused on balancing the need to set ourselves up for the long-term through various growth initiatives, maintaining our share and margins today, and conserving capital to be able to capitalize on regulatory change, and a large payoff that will come with uplisting and the removal of 280E.
And with that, I’d like to again thank everybody for participating today. And now I’d ask the operator to open the lines for questions.
Question-and-Answer Session
Operator
Certainly, ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question is coming from Greg Gibas from Northland Securities. Greg, your line is live. Please go ahead.
Greg Gibas
Great. Good afternoon, Larry, Bob and Dennis, thanks for taking the questions.
Dennis Logan
Hi, Greg.
Robert Groesbeck
Hi, Greg.
Greg Gibas
Regarding, I guess, the weakness in Nevada, I know you kind of predicted it and everything. Wondering if you could just comment on differences and pressures on pricing versus maybe lower unit sales, those impact on sales?
Dennis Logan
Sure. it really is more – it is more pricing pressure than it is on a unit basis. Lower customer count is down somewhat kind of quarter-over-quarter. We are seeing that average ticket come down, it’s in the 85, 90 range right now, whereas a year ago, it was 125, 130. So it’s more of a pricing pressure versus a volume game and a reduced number of actual customers making purchases. So it’s combination of both.
Greg Gibas
Yeah, makes sense. Great. And then in terms of, I guess, your outlook may be on supply across the State of Nevada. I know you saw kind of rise a lot this quarter recently. Wondering if you could just comment on the outlook there? And do you expect maybe additional pressures on pricing as a result of that?
Dennis Logan
Yeah, as I think, I said in the comments, we are seeing a slowdown in the price declines in Q4, hopefully moving towards stabilization. I don’t think we are going to see continued pricing pressure. Most of the new supply from cultivation came online, I think over Q2, Q3, which really drove a lot of that that negative decline in price and that seems to be stabilizing. Market seems to be able to absorb it at this current pricing level. And we’re hopeful as the economy starts to improve, and tourists start spending money that that demand gets picked back up.
Greg Gibas
Got it. I guess, last one for me. In relation to California, you mentioned your expectations for more gains there. What do you expect to maybe be the drivers there in terms of getting better gains? And, I guess, why do you think may be pricing held up better in California relative to Nevada?
Dennis Logan
It’s a bit more mature market and the excess inventory of flower really came on last year, last October was when we felt a big hit from the outdoor cultivation. I think the amount of outdoor cultivation this year is less at least that’s what we’re seeing in our wholesale pricing unit in California. We will – we do expect gains, because we are only just starting to integrate our Nevada brands into that Orange County store. We have stopped delivery at the OC store and yet still saw quarter-over-quarter sequential growth in revenue, as we were able to run promotions into that store.
And based on the preliminary data that we’re seeing for Q3, we did see like a 42% increase in customer traffic in the Orange County location in Q3 of 2022 compared to Q3 of 2021. Don’t forget this store opened July 1, 2021. So that’s a first real kind of quarter-over-quarter comparison. And we have this year in 2022, we’ve seen a 22% growth in customer traffic over Q2 of 2022. So we’re seeing some strong demand, some of the impediments to getting to the stores starting to clear up. The freeway construction is starting to ramp up, and we’re seeing the benefits there.
But, more importantly, we’re seeing the benefits of that vertical integration with our wholesale business, where we can run. I think, as Larry mentioned, we can run select promotions to help drive new customers to the store. And that’s really paying off where we can run promotions on inexpensive ads [ph] and then upsell people on other products in that market. So we do see some upside there, and also see some upside from moving our Nevada brands into other retail locations in California.
Greg Gibas
Got it. Thanks for the color there. And I’ll pass it on.
Dennis Logan
Thanks, Greg.
Larry Scheffler
Thanks, Greg.
Operator
Thank you. [Operator Instructions] We have Greg Gibas from Northland Securities with a follow-up. Please stand by. Greg, your line is live. Please go ahead.
Greg Gibas
Great, thanks. Just a couple more for me, quick ones. I guess regarding timing on the cultivation build-out in Florida, and then, I guess, timing on the consumption lounge completion in Nevada, if you provided that?
Robert Groesbeck
Yeah, Greg, let me go with the lounge first. We’re hopeful that Clark County will finalize their ordinance sometime toward the latter part of this year. So, realistically, we’re looking at Q1 before we would actually be able to move forward with – on the permitting. The state has basically put their regulatory structure in place. In fact, we’ve submitted an application as indicated earlier, but you really can’t do anything there until the local jurisdiction grants approvals to. And so there is moment, I know, there’s a lot of pressure on them to get this done. So I’m optimistic that in Q1, we’ll have some more clarity on the timing.
But as I said earlier, for us, it’s going to be a relatively simple build-out for us or conversion. There’s really not a lot of CapEx required. So we’re excited about the ability to transition the restaurant into that lounge. And so, we’ll update the market and update you as we get more information. But that’s really what I have as of now.
Dennis Logan
Florida?
Robert Groesbeck
Yeah. So, Florida, we’ve got steel on the ground, we’re moving forward with our contractors. In fact, most of the week, we’ve been working with the civil folks. So we’ve got a game plan, we’ve basically got sign off on the building, and we’re just moving forward now to get the necessary approvals to start moving dirt. So we’re hopeful by the end of this quarter. We’ll be there. And – but as I said on the call, we’re also looking at some other opportunities that I can’t announce just yet, but it really help accelerate that schedule. And – but we’re excited, things are moving, the hurricane was obviously troubling and concerning, when Ian hit. But, as I said, really no damage to either our cultivation site or the retail locations that we have under various stages of construction.
Greg Gibas
Great. Very helpful, Bob. And, yeah, great to hear that the hurricane didn’t impede things too much. So thanks again, guys.
Robert Groesbeck
You bet. Thank you, Greg.
Operator
Thank you. And there are no further questions in queue at this time. This will conclude today’s conference call. Thank you for your participation. You may disconnect your phone lines at this time, and have a wonderful day. Thank you once again for your participation today.
Larry Scheffler
Thank you.
Robert Groesbeck
Thank you.
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