Planet 13 Holdings, Inc. (OTCQX:PLNHF) Q2 2022 Results Conference Call August 15, 2022 5:00 PM ET
Company Participants
Mark Kuindersma – Head, IR
Bob Groesbeck – Co-Chairman and Co-CEO
Dennis Logan – CFO
Conference Call Participants
Bobby Burleson – Canaccord
Doug Cooper – Beacon Securities
Operator
Hi, everyone. Welcome to Planet 13 Holdings 2022 Second Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded on August 15, 2022. [Operator Instructions]
I will now turn the call over to Mark Kuindersma, Head of Investor Relations for Planet 13.
Mark Kuindersma
Thank you. Good afternoon, everyone, and thank you for joining us today. Planet 13 Holdings Second 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 portions 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. Slide 13’s financial statements presented in U.S. dollars and the results discussed during this call are in U.S. dollars unless otherwise indicated.
On today’s call, we have Bob Groesbeck, Co-Chairman and Co-CEO; and Dennis Logan, CFO. I’ll now pass the call over to Bob Groesbeck, Co-Chairman and Co-CEO of Planet 13 Holdings.
Bob Groesbeck
Thank you, Mark, and good afternoon, everyone, and thank you for participating in our second quarter call. Larry’s flying, and hopefully, will be able to join us here shortly. I’ll start with a review of what we are seeing in our operations today followed by various growth projects before passing to Dennis to review our financials.
Since our last call, we’ve seen a significant increase in macro uncertainty, including higher inflation, lower consumer sentiment and a rapidly rising interest rate environment. This has been particularly apparent in Las Vegas as spending on shows, hospitality and cannabis all being down year-over-year.
According to the state data, cannabis sales were down 20% year-over-year through April and May. Despite the slower macro market with a significant decrease in tour spending and an increase in competition, we have still maintained our share of roughly 9% of all retail sales in Nevada.
In Q2, in Nevada, we generated $16.9 million from the SuperStore, $2.1 million from the curb side and delivery, $2.5 million from Madison and $1.8 million from wholesale and other for a total Nevada revenue of $23.3 million. We are taking steps at the SuperStore with unique discounts and special offers for Nevada residents to try and capture more local traffic during this period of depressed tour spending.
Our brands continue to perform well, both in-store and in the wholesale market. While absolute wholesales were lower in the quarter, this is just a reflection of the total market decline. Our market share for all of our brands held steady or improved. According to research firm, Headset, TRENDI had 5% of the Nevada market for concentrates and vape categories in Q2. The TRENDI brand also took a 3.5% share of the pre-roll market, which put us in the top 10 rankings for the first time. HaHa was 8% of edibles and 8% of beverages, and Dreamland Chocolates was another 4% of the edibles category.
Looking ahead in Nevada, we don’t see any signs at the macro environment or the consumer we’ll see any relief in the back half of this year. In June and July, we saw a material weakening of the consumer as it dealt with increased inflation, including higher gas prices, food and housing. Las Vegas saw an atypical decline in hotel occupancy in June and an average revenue spend per room dropped significantly, meaning that people did come, but they weren’t spending like they used to. We will be carefully monitoring the consumer inflation and the macro outlook as Dennis will speak to later, and we will be matching our variable spend to the situation with a focus on profitability and cash preservation.
Turning to California. Sales were up sequentially 7% for our dispensary and delivery. We are making incremental progress on generating new consumers and creating a loyal repeat customer base. We still are being hampered by an overall downturn in the economy and have had some limited negative impacts continually associated with construction of our nearby freeways.
On the cultivation production side, we started to introduce our popular Nevada brand starting with TRENDI in May, which has seen a very good consumer response. The next product line we’ll be looking to bring over is our Medizin flower line with its unique genetics. In total, we generated $4.9 million in California during the quarter, up from $2.9 million in the previous quarter. As a reminder, Next Green Wave was integrated as of March 2. So we had a full quarter of contribution in Q2.
On the wholesale side, we recognize a challenging environment that the California market presents. We are focusing on maintaining a portfolio that is profitable, and we will not chase revenue at the expense of profitability and cash flow. At the same time, we believe if we can demonstrate brand equity and profitability in this challenging state, it will make us a more attractive partner for investors and other cannabis companies.
Turning to our growth projects. In Florida, we secured a location for our cultivation production campus and are advancing as quickly as possible to construction and build out. The team has done a good job of prebuying our building supplies to avoid production delays and help insulate us from the rising cost of materials and supply chain interruption.
The facility that we’re building is patterned after our Coalinga operation, which has proven its ability to grow premium flower that can compete in an incredibly challenging market like California. Combined with premium genetics, we expect to produce high-quality flower that will be the core of our operations in Florida. We signed leases for 3 of our initial dispensaries each in high-traffic local markets on major thoroughfares, and typically adjacent to other destination retail operations like Home Depots, Walmarts or national grocery chains.
In Nevada, lounge regulations have passed. We are preparing an application to convert our restaurant into a consumption lounge, creates a straightforward conversion for an incredibly high-end unique consumption lounges as close to Las Vegas Strip as possible. We expect our application to be successful and expect the time line and capital expenditure required for the conversion to be relatively minimal. We will update you on the licensing progress and conversion as we move forward.
Construction is substantially complete, and we are just waiting final approvals of our Nevada cultivation expansion at Bell Drive. We expect plants in the ground in Q4 of this year. This expansion will add approximately 22,000 square feet of indoor premium cultivation space for Medizin flower and our other brands. We still find that there is a significant shortage of premium quality third-party flower in Nevada, and we believe this extra cultivation will unlock improved gross margins, increased customer traffic, and ultimately, more profitability.
In Illinois, we’ve been granted our adult-use dispensary license. We have a couple of locations that we previously scouted and are working with our real estate team to determine the best location based on revenue potential lease costs and the time of capital expenditure needed to open. We’ve also agreed to an option with Frank Cowen, our social equity partner that allows us to purchase the remaining 51% ownership in our Illinois dispensary at our discretion. The option is another example of prudent capital deployment to acquire dispensary license.
Looking back at the 3 goals we set at the start of the year and our performance so far, goal 1, for instance, was to maintain roughly that 8% to 12% of market share for retail sales in Nevada, which we’ve achieved. And we continue to grow wholesale share in the state while executing on accretive and diversified revenue opportunities such as cannabis lounge. In Q2, we came in at roughly 9% on our share of the retail sales. Our wholesale brands held or grew share, and we are making good progress towards a first of its kind cannabis consumption launch.
And number two, to improve profitability in California through increased sales and operating leverage at our dispensary, increased vertical integration and enter into profitable wholesale operations. In Q2, we saw modest growth from our dispensary, increased vertical integration and successfully entered into the wholesale markets.
And three, our build operations out in Florida that will drive growth in 2023. In Q2, we acquired the land for our cultivation production campus and are advancing as fast as possible to continue to target midyear 2023 for sales to begin in Florida. We are executing on all 3 of our goals. A year from now, we plan to have more than doubled our dispensary count in a number of states we have operations in.
As a company, we recognize the challenging macro and capital markets environments we are navigating. Our priority is profitability and cash preservation while enduring — while ensuring, rather, we are in a position to capitalize on industry growth.
So with that, I’ll pass it over to Dennis to discuss the financials.
Dennis Logan
Thanks, Bob. Before I begin, I’d just like to remind everyone that all numbers discussed on today’s call are in United States dollars unless specifically stated otherwise.
As Bob mentioned, uncertainty we faced in Q2 is indicative of our path forward toward an unprecedented macro environment that is seeing a consumer dealing with higher interest rates, record inflation and a general fear for the future of the economy. In Q2 2022, we generated $28.4 million in revenue. This is a 10.6% sequential improvement over Q1 2022, driven by seasonality and a full quarter of the Next Green Wave asset in our operations. Compared to Q2 2021, revenue was down 13.9% quarter-over-quarter with a substantially weaker consumer who is dealing with, again, record high prices for everything from gas to food.
Looking ahead at Q3, we’ve seen a material weakening in consumer spending across the board in Nevada, with the most up-to-date Las Vegas tour stats showing a significant drop in average revenue per room at the hotels, a proxy for how much consumers are spending on entertainment when in Las Vegas. Over the course of the year, our goal is to maintain our market share in Nevada, which we recognize may be a challenge given our higher exposure to tourism than the rest of our competitors in the state.
Gross margin in the quarter decreased to 49.4%, down from 50.2% last quarter. We expect to see gross margin pressure continue as more revenue comes from local customers in Nevada, wholesale customers in California and compared to prior quarters. In June, we also started to see pricing pressures in Nevada as competition intensified with total Nevada state sales down 13% year-to-date as of May, which is the last month in which the state has published data. We continue to target 50% or higher gross margin for the medium to long term with gains through vertical integration and automation, offsetting pricing pressure and our mixing shift to wholesale with the addition of the cultivation assets in California.
Sales and marketing expense was $803,000 this quarter, up from $603,000 in Q1. The increase was driven by marketing around key events during the quarter and new campaigns to drive traffic. We maintain a critical eye on this line item and are focused on only doing marketing that we believe has a strong ROI.
The company spent $9.9 million on G&A expenses in the quarter, and this excludes share-based compensation, down from $11 million last quarter. We are making progress on reducing costs across the organization and have further room for improvements in cost savings. Even though we are adding additional expenses in Florida as part of our build out in that market, and we still expect to reduce the G&A number.
The company has generated positive operating cash flow of $1 million in the first 6 months of the year, while at the same time, staying current on all our tax payment obligations and expanding our working capital needs in California. As of June 30, 2022, the company had a cash balance of $52.6 million and no debt. This is down from $61.6 million at the start of the year as we spend approximately $10.2 million on expansion initiatives with our Nevada cultivation facility in our Florida operations.
In a constrained capital market, we have one of the cleanest capital positions, giving us immense flexibility and removing the risk of us being forced to do into an unfavorable debt or equity financing. As we’ve discussed our priorities of building out our Florida road map, finalizing our Nevada cultivation expansion and pursuing our Illinois growth opportunity, and we have the capital on hand to execute on each, we will continue to update the market periodically on the build-out and CapEx requirements of each initiative we’re working on.
I would now like to ask the operator to open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We do have a first questioner, Bobby Burleson from Canaccord.
Bobby Burleson
So I guess my first question is just trying to understand California. Maybe you can walk us through — I mean I think Las Vegas is pretty clear cut in terms of less traffic around conventions, et cetera. But maybe what are you seeing afflicting California’s demand — retail demand? And are you seeing any kind of synergies yet in terms of customer traffic between the 2 SuperStores?
Bob Groesbeck
Yes. Bobby, it’s Bob. I’ll take an initial stab at this. No, we’re not really seeing a direct correlation between visits here and in Southern California. We are increasing the awareness down there considerably. People now know we’re there. Our focus, as I said earlier in my comments, is to create that customer loyalty. We’ve done some pretty aggressive pricing specials to get them to the store, and we’re seeing a real nice uptick in repeat customers.
So things are moving in the right direction in a very challenging market. But really, there’s a lot of competition in Santa Ana, which is fine. We don’t have any problem with that on the legal side. It’s basically the black market. It still remains a massive challenge for retail operators and that’s going to continue to be the problem or a problem until the State of California starts taking a much more aggressive position against them.
Bobby Burleson
Fair enough. And then maybe just in terms of what you guys can do to capitalize on the brand awareness, the Planet 13 brand awareness, maybe with less capital-intensive, smaller storefronts that you infill in certain markets. We’ll get an update on that. I know you’re making progress with the license in Illinois and what you’re doing in Florida, et cetera. But where do you stand on that strategy of maybe kind of the Amazon stores that we see here in San Francisco. Do you see a way of a lower cost way of spreading the retail brand in certain markets?
Bob Groesbeck
Well, we’ve taken a look at a number of opportunities through acquisition to open smaller store fronts, particularly in the Southern California area, we’ve been — we’ve hosted a number of inbounds on Northern California opportunities. The problem is I still think there’s a disconnect between what the stores are doing and what their relative valuations are. So a lot of these operators are now running into tax problems, both at the state and federal level. And we’re going to continue to monitor that.
And if we see something that’s valued appropriately and we’ve got a seller is interested in a stock deal, then we’ll move that forward. But we’re not there just yet. And I think our focus now, of course, in California is to continue to integrate the Next Green Wave operation into the store and start carrying our brands from Nevada, as I said earlier, into the Southern California market. And then the retail play will come. There’s no shortage of opportunities down by retail storefronts I can assure you.
Operator
Our next question is Doug Cooper from Beacon Securities.
Doug Cooper
Dennis, can you just give us an update on the sort of pro forma cash position after your CapEx in Florida and Nevada? And we can go to the Illinois in a second.
Dennis Logan
Yes. So as we said, we ended the quarter kind of $52.6 million in cash. The Nevada expansion, most of that was spent in the quarter with — in the 6 months with the $10.2 million on expansion activities in the quarter. We’ve got a little bit left in Nevada to finish off the cultivation facility. And then Florida, we have announced we purchased — we made a land purchase, we had the building delivered to sites. So that’s underway.
The retail expansion. I think we 5 — somebody, Bob, you can correct me if I’m wrong, I think we have 5 lease locations that we have announced to the market. Each one of those will probably cost us $500,000 to $750,000 to build out to our spec. We are getting long rent-free periods and tenant improvement allowances from the landlords. So that’s going to depend on each specific scenario on that one to figure out on a per store level there.
Overall, we budgeted $25 million for Florida. I think we’re well on target to come in under that. And again, Nevada, we had budgeted $7 million for the expansion of the cultivation facility. I think we have — a couple of million we have to spend on building out the rest of the Grand Hallway and building into the consumption lounges as Bob mentioned. We are converting the Trece restaurants into that consumption lounge. So it’s going to be fairly cost-effective for us to do that. We just have to do some upgrades to the HVAC, get separate ventilation in that 1 space, but otherwise there not that expensive to do.
And then moving on to Illinois. We do have to build out a store front at some point in order to secure the license on a permanent basis. Right now, it’s a provisional license, and we are exploring different alternative scenarios anywhere from what Bob alluded to earlier with that smaller store front to kind of a medium-sized SuperStore-type location. We won’t go anywhere near the size, I think, of what we are in Vegas or even to the extent I don’t think we’ll go as big in Illinois as we are in California. So it really is going to depend on where we get that lease location. So budgeting for Chicago build-out at this point is a little premature until we can figure out what kind of location we’re going to get into.
Doug Cooper
Okay. So a couple of million left in Nevada, but how much left to go in Florida out of the 25 budgets?
Dennis Logan
Doing the math, probably — it’s going to depend, Doug. We do have some initiatives we’re working on that may allow us to push some of that CapEx further out into the future. So I look at — we probably have 20 — between 15 to 20 left to go.
Doug Cooper
Okay. So if we got 52 now about 20 to 32 [Technical Difficulty] 2 in Nevada there. It’s down to 30. So you are sort of somewhere between, let’s call it, 25 to 30 excluding Nevada? Is that a conservative sort of assumption?
Dennis Logan
Yes. And we also have options for additional cash. I mean we do have some assets we can do sale leasebacks on so we could probably bring 10 to 15 in cash in the near term on that. So we are looking at ways to augment that balance sheet on a nondilutive basis as well.
Doug Cooper
Okay. In Illinois, just before we move on to Nevada. In Illinois, with a small — let’s just say, a small medium store, is it worth being there for that? I guess just you’re committed to Illinois? Or is it something you can — is there a market if you decided to sell that license?
Dennis Logan
Yes, I’ll defer to Bob on that one in terms of whether that is in the longer term.
Bob Groesbeck
Yes. Look, we think it makes sense to pursue the build-out of the store initially. And again, as Dennis said, we’re not looking to do something of the size that we’ve done here in Vegas, certainly. But Illinois still has some pretty robust market. And it seems like there’s still some upside there. And again, it’s a function of location and everything else falling into place.
So that being said, at some point, if somebody makes us an offer for the asset, then we’ll consider that. But our goal at this point is to move forward and build it out and we’re confident it will be successful.
Doug Cooper
Okay. Moving to the back half of the year, given the preamble you gave on the consumer, so would you expect to be cash flow positive in the second half of the year?
Dennis Logan
It’s Dennis. I mean we would like to be, Doug, and that’s what we’re aiming for. And it’s going to [Technical Difficulty] I think it’s really going to depend on if we can maintain the existing level of consumer tickets and visitors that we’ve had in Q2. Or what happens to it on a go-forward basis in Q3. It is soft so far into Q3, it’s kind of equivalent to Q2. And so we’ll have to see how it goes through the balance of the year. But that’s our intention to try to make sure that we’re spending on an SG&A level and kind of below the gross profit line in line with what the revenue generation capabilities are of our assets so.
Doug Cooper
Okay. So Bob, just on Nevada, I just wanted to confirm some of those numbers you gave in terms of — so room capacity, that’s down as well as revenue per room? But maybe you could just give me some of those metrics if you have it at this particular time.
Bob Groesbeck
Yes. I don’t have the specific data in front of me. But what’s interesting, Doug, is the gaming revenues actually increased and it’s — some of the properties have done pre — that are at pre or above pre-pandemic levels. But what they’re doing is heavily discounting, and we pulled those from the convention business authority website, heavily discounting the room inventory to draw traffic, and we’re seeing that also in the restaurants and across the non-gaming platforms. So it’s real.
And when you have inflation, I know we’re — the talking heads tell us there’s no inflation in July, but last time I checked, it was 8.5%. It’s — it had a negative impact, no question. And we’re seeing that in the store. As Dennis mentioned, we’re seeing that the consumer typically would come in and buy 3 or 4 types of products, now they’re maybe buying 2, and they’re being much more careful in their spend. And we’re just going to continue to watch it. And as Dennis said, we’re going to tighten our belt and be as efficient as we can. We know things will turn, it’s just a question of when.
Doug Cooper
You know the illicit market in California continues to be a problem. Is the illicit market in Nevada out — do you get the impression that it is gaining share?
Bob Groesbeck
Yes. Look, the illicit market in Nevada is very robust as well. I don’t think it’s quite as strong as California, but it’s a real problem. And I am optimistic because I think our governor recognizes that, and he’s — I think we’ll devote the time and the resources to try to rein that in. But it is a problem. Yes, there’s no question about that. And it does have an impact on all of us in the legal market.
Doug Cooper
Okay. And when you’re talking about catering, almost like during the pandemic when there was no tourist in Nevada, shift to catering to some of the local. What quantum are we talking about in price reductions to attract those guys?
Dennis Logan
Well, Doug, it’s Dennis. I wouldn’t say we were doing price reduction, more specials, I would call it, to drive that traffic. Like when you come in, you spend $100, you can buy $25 as a bonus or you spend so much, you can get a discount on our product. So we’re not trying to do a door crash or special. We’ve looked at that in the past, and it has not had a positive impact on margins by doing that. So — but we are focused on trying to maintain that margin level but find ways to drive people to spend more money where they see some value in that extra additional spend that they otherwise might not partake in.
Doug Cooper
So maybe — I mean this is Las Vegas, so maybe you can’t do it, but cutting costs, would you close the store? Or is that always going to be open 24/7.
Dennis Logan
We’ve gone through various phases and so it’s going to depend on the demand. I mean we have had times where we have closed it over certain hours. We’ve shut the restaurant for certain days. I think we’re closed our — Bob, you can correct me. I think we got the restaurant closed 1 or 2 days.
Bob Groesbeck
Yes. Tuesdays and Wednesday. Yes.
Dennis Logan
So we are looking at those situations, Doug, where it doesn’t make any sense between 2 and 4 on a Tuesday morning in the A.M. where we get 2 people in the store, then we definitely look at doing something different until such time like we monitor it on a weekly basis. Day over in a day over day kind of week-over-week scenario.
Doug Cooper
And I guess my final one, just on the lounge, I’m assuming you’re not going to charge cover or anything like that. So is that just to draw traffic into the store essentially so that you can have a place to smoke at arm site? And will the conversion of the restaurant, will that take away some revenue from the restaurant?
Bob Groesbeck
Well, yes. So Doug, that’s a good point. The whole purpose, of course, is to provide an additional traffic driver to the facility. So we think that, that’s going to be very helpful. We don’t think it’s going to hurt traffic at the restaurant at all. In fact, we think it’s going to increase that. You can still buy high-quality food in the restaurant that is not infused. It’s the customers’ choice if they want to infuse foods or the other lines that we’ll offer, whether that be drinks or the ability to smoke in the lounge area. So we’re excited about that because it’s — given our proximity to The Strip, we’re one of the few operators that can really meet the customer or the tourist demand here. And it’s — initially, it will be a novelty, of course. I don’t think anybody has done that with scale in the industry.
Dennis Logan
I think we should also elaborate on with some of the rules that are in place on that single-serve purchase in the restaurant and you can only consume what you buy in the restaurant.
Bob Groesbeck
That’s a good point.
Dennis Logan
You can’t buy in the dispensary and bring your bag over to the restaurant and smoke it. You actually — the way the regs are written, you actually have to buy a single-serve product from the restaurant, et cetera, from the lounge itself and not from the dispensary and then consume it.
Doug Cooper
And just in terms of like proximity to The Strip, then how many other consumption lounges you expect within maybe not walking distance, but short cap right away or whatever to an on-site consumption mode?
Bob Groesbeck
I think initially, Doug, we’ll see maybe 2 or 3. There will be quite a few more, I think, out in the suburban areas. But again, this is an untested and unproven model. So we’re fortunate given the tourist draw that we have here and the customer demand for this type of service, we’re going to be fine. I don’t know how the locals will respond to it when they can just get their car and go home. So it will be interesting to see.
Operator
There appears to be no further questions in the queue. Do you have any closing comments that you would like to finish with?
Bob Groesbeck
Not here. Thank you.
Dennis Logan
No. Thank you. We will end the call. Thanks very much.
Bob Groesbeck
Thank you.
Operator
Okay. Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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