GTII’s earning release.
What I Said last Q:
- Revenue increases 14% with Retail +15% (growth accelerated QoQ) and Wholesale +12%
- Nice cash balance post Q end, with very reasonable debt and no major maturities in the next year.
- EBITDA growth continues
- Net Operating Profit increases for 6th QoQ in absolute terms
- Wholesale revenue increase slowed as % and in $ amount QoQ… really nit picking here.
- Gross Margin reduced 1.6% to 55.4%, but second best in last four Q’s
In a flat market sales environment, like we said in Cura Quarter In Pictures, you want to see a sales increase relative to market and an improvement in GM$’s. This is because if revenue growth is going to slow down you would hope the company BRANDS outperform market and the company tightened up other parts of the operation, like Gross Margin $’s and GM %, SGA and EBITDA. GTII held serve on GM% and improved on the other three operating metrics.
They also added three new acquisitions in the Q:
- Dharma Pharmaceuticals in Virginia: July 1, 2021. PP $91 million with contingent $65 million upon opening five more retail stores in three years. G/I was $155 million or 170% of PP not including contingency.
- Mobley Pain Management and Wellness Center and Canwell processing in Rhode Island: August 1, 2021. PP $71 million and 2.5 million more GTII shares contingent. G/I was $120 million or 169% of PP not including contingency.
- Greenstar Herbals of Massachusetts: September 1, 2021 PP $49 million and 663,810 shares contingent. Liberty Compassion of Massachusetts: June 1, 2021: PP $65 million (Liberty was acquired last Q but is combined with Greenstar in notes). Combined G/I $123 million or 108% of PP not including contingency.
Those G/I percentages on Dharma and Mobley could be new records. Very limited licenses in VA and RI.
- Sales increase 5%
- Gross Margin remained stable at 55%
- SGA decline in $ and as % of sales.
- Of $7 million in incremental GM $3.6 million or 51% translated to EBITDA
- $58 million Net Operating Profit +$7 million QoQ and new record
- Net income $20 million, 5th consecutive positive result.
- Sales velocity slowed to lowest $ growth since December 31, 2019
- 73% of growth in the Q was non GTII products sold in GTII stores.
- Same store YoY sales decreased for 5th consecutive quarter
- Same store QoQ sales decreased to lowest increase (+1%) in six quarters
Open up the fins and MDA and follow along
Income Statement Drivers & Breakeven Sales: Trend
Table 1: Revenue by Segment
Retail in 13 States (+2 QoQ): California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Ohio, Pennsylvania, Virginia (added QoQ) and Rhode Island (added QoQ).
CPG Only in 1 States: Colorado
Store count: 65 (+7 for Q): IL 9, NJ 3 (+1 QoQ), CA 2, PA 16 (+2 QoQ), MD 3, NV 7, OH 5, CT 3, FL 7, and MA 5 (+2 QoQ), VA (+1 QoQ), RI (+1 QoQ)
Manufacturing facilities: 16 +3 QoQ.
Sales growth continued its climb with QoQ increase of +5% to $234 million. The +$12 million increase was the lowest since December 31, 2019 Q.
Retail sales grew 7% QoQ by $11 million to $161 million. They entered two new states via acquisitions (VA and RI) and opened seven stores throughout the Q. Retail of other companies’ products accounted for +$8.6 million +8%, while GTII products in GTII stores increased $2.3 million +5%, and increased to $113 million to $48 million, respectively.
The GTII own product sales mix was reduced slightly to 30% this Q. Retail of others merchandise accounted for 70% of Retail sales, also stable QoQ.
Non GTII products sold in GTII stores was 73% or $8.6 million of the QoQ growth for the Q for GTII. GTII products sold via their stores or wholesale was 27% of growth or $3.2 million.
Their CPG brands grew +3% QoQ and their Wholesale to other companies’ stores grew +1% QoQ or $0.9 million to $73 million. This is the lowest increase in wholesale since December 31, 2019. This could be attributable to prioritizing their stores shelves versus other store shelves. Finished Goods inventory growth in the past four quarters has been only $20 million but has supported sales growth of $77 million, which is very efficient. Mind you, GTII operates in states where they can purchase inventory for wholesale and their stores.
Retail Sales: Trend and Peer
Revenue per Average Store Opened in Q:
A steady upward trend in their retail store sales.
Revenue per average GTII stores open in the Q decreased -1% to $2.6 million for the Q.
QoQ same store sales decreased to +1%, the lowest in the six Qs we have been tracking the metric. YoY same store sales declined to 14% from 34%. The 14% is the fifth consecutive quarter of slowing YoY same store growth.
This will be an interesting metric to follow going forward. As it will likely show inflection as saturation is reached (likely not for a while for some states), but conversely the wholesale revenue should increase as saturation of retail means more competing stores to wholesale too.
They trail only Trulieve and Cura in retail revenue. However, CURA needed 109 stores to get their $224 million ($2.1 million/store), Trulieve had 91 to get their June 30, 2021 figure ($2.4 million/store), while GTII is at 65 stores ($2.6 million/store). GTII’s SGA is lower as % of sales, as they operate much fewer stores than their competitors, and SGA expenses are below the GM line.
Wholesale Sales: Trend and Peer
Wholesale increases have slowed QoQ for the last four Qs. This could be a result of prioritizing their stores shelves over others. Although with retail growth slowing by 50% QoQ you would think that enough product would be available for wholesale.
They need the new Illinois licensed stores to open to absorb more sales. The lottery winners for those stores were announced in Q2C2021 but are caught up in lawsuits.
Annualized Sales per PPE + Goodwill+ Intangibles:
This is my attempt to try and normalize those companies growing organically and those acquiring operations. I have added PPE + ROU + G/I and divided Annualized Sales by that figure to determine who is being efficient with their long-term asset capital. This metric is subject to “burps” in Qs where acquisitions are onboarded mid to late quarter without gaining the full Q of operating results on the books.
With the acquisitions this Q $312 million in G/I was added to the books while PPE and ROU of $99 million was added. These both increased the denominator. As not all acquisitions were on board for a full Q Sales, GM and EBITDA (the numerators in these annualized metrics) GTII will not get full benefit of the entire Q. As such, the metric fell in the Q from $0.72 to $0.57. We will see how this regularizes next Q.
Income Statement Drivers & Breakeven Sales: Peer
Second to Cura on Sales.
Gross Margin: Trend & Peer
GTII has been a metronome in GM%. Either 55% or 57% for the last five Qs. GM was stable at 55% QoQ. No narrative is given in MDA on any QoQ. On CC they indicate the ramp of CPG has costs ahead of revenue (grow, harvest, cure, ship, sell). Given sales mix was very stable I cannot offer much narrative.
Absolute GM was $130 million up from $123 million +$7 million from last Q.
Annualized Gross Margin per PPE + Goodwill+ Intangibles:
This is my attempt to try and normalize those companies growing organically and those acquiring operations. I have added PPE + ROU + G/I and divided Annualized Gross Margin by that figure to determine who is being efficient with their long-term asset capital. This metric is subject to “burps” in Qs where acquisitions are onboarded mid to late quarter without gaining the full Q of operating results on the books.
With the acquisitions this Q $312 million in G/I was added to the books while PPE and ROU of $99 million was added. These both increased the denominator. As not all acquisitions were on board for a full Q Sales, GM and EBITDA (the numerators in these annualized metrics) GTII will not get full benefit of the entire Q. As such, the metric fell in the Q from $0.40 to $0.31. We will see how this regularizes next Q.
Gross Margin: USA Peer
This peer group is led by the heavy leaning single state operator from “Fortress Florida” TRUL and then CWEB on non-THC side.
GTII is sandwiched between TER and Harvest in 4th place.
Gross Margin: North American Peer
The first 10 slots are all US companies, as they get to generate retail margins versus wholesale in Canada. This difference will lead to different scaling issues with SGA, as we have seen with the scaling of Canadian retailers. However, US Retailers are generating far more sales than Cdn per store locations.
As a comparison to Canada, Village Farms had a 44% GM% in Canada, which has national pricing, is highly competitive and does not benefit from verticality. ACRG, the only MSO to show retail and wholesale GM, generates a 48-50% retail GM, similar to CL two Illinois stores that are partially owned.
That GTII, who only has 56% of their stores in favorable margin markets, is at 55% GM% means they are either really doing well on wholesale GM% (as it is 31% of overall sales) and/or they are also above 50% on retail GM%.
SGA & SBC as % of Sales: Trend
What I said for many Q’s: They lumped SGA, SBC and depreciation under one line item without a schedule
Note: I have decided to apply 1/3 deprecition to CoGS (production related) and 2/3 to Opex (store and corporate related). This has been applied throughout review period.
As I mentioned in the preamble… it is these slower growth quarters where you want to see a tightening of operations.
SGA, with seven new stores opened this Q, decreased QoQ by $1.3 million to $55 million. SGA seems to be GTII’s “secret sauce”. For the past six quarters it has ranged between 23-25% of sales. I do wish they would provide a schedule.
SBC was reported at $5.0 million a decrease of $0.7 million QoQ. As the founders have super shares the SBC is minor.
Depreciation increased to $11 million from $10 million.
Total OPEX as % of sales was 31% of sales a decrease from 32% last Q. Opex decreased $0.6 million QoQ in absolute terms.
SGA & SBC as % of Sales: Peer
GTII is the lowest in aggregate SGA 24% and lowest aggregate SGA + SBC 26%, with VRNO in second presently at 27% on the latter. This is where GTII is outperforming their peers.
+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer
GTII needs only 55% of existing sales at present GM% and OPEX to generate a +NOP a decrease from 59% last Q.
GTII was +$58 million NOP positive this Q versus +$51 million last Q. Q2 halted the streak of growing NOP at five Qs, Q3 increased NOP to a record level. The increase of $7 million in GM was aided by a decrease in Opex of $0.6 being the reason.
Other Income (Expenses) aggregate was +$0.5 million versus +$2.4 million last Q.
- Other income swung from +$6.8 million to +$8.1 million this Q. This is all fair value adjustments on warrants driven as stock price retreated in the Q.
- Interest expense was up by $3 million at negative $7.6 million.
Income tax of $37 million rounds out the expenses, an increase from $30 million last Q. That 280e tax is a burden given NOP was $58 million.
This leads to a Net Income of +$22 million versus +$23 million last Q. Five positive Net income in a row.
+Net Operating Profit Sales Breakeven divided by Current Q Sales: North American Peer
Again, MSO are dominating the top part of this graph. Where MSO’s could start to falter versus Cdn LP’s is opening up more retail stores which will add OPEX and will need capital to roll out new stores. Whereas the Cdn LP’s should be fully built out on cultivation and reap more GM$’s without the need for more capital IF THEY CAN SELL THROUGH and IF they are not burning through OPEX. (Two big “IFs” in there).
EBITDA: Trend and Peer
They have “transaction costs and other non-operating costs” of $0.9 million not broken out in income statement. I would lean into allowing transaction costs but the split with “non-operating costs” is not disclosed, so not sure what they are.
EBITDA increased by $3.6 million to $80.2 million, the increase in sales with stable GM% was the driver. They trail Trulieve and surpassed CURA in this metric this Q.
With Q interest at $7.6 million and Current Portion of Leases and Loans of $8 million they have very good debt serviceability. With existing EBITDA, they could take on a sizeable chunk of traditional debt.
Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)
We have added this metric to look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA. This metric is subject to “burps” in Qs where acquisitions are onboarded mid to late quarter without gaining the full Q of operating results on the books.
With the acquisitions this Q $312 million in G/I was added to the books while PPE and ROU of $99 million was added. These both increased the denominator. As not all acquisitions were on board for a full Q Sales, GM and EBITDA (the numerators in these annualized metrics) GTII will not get full benefit of the entire Q. As such, the metric fell in the Q from $0.25 to $0.20. We will see how this regularizes next Q.
Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars
This metric is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced. Essentially EBITDA without the I + T added back.
GTII decreased $6.6 million in this metric QoQ to $35.3 million. The slide is due to Interest and Tax increases aggregating $10.2 million outpacing EBITDA growth.
This shows the relative stark discrepancy between TRUL, VRNO and GTII well north of CURA and CL.
Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales
GTII in fourth place. VRNO in first has a sizeable footprint as well. TRUL will get there with HARV acquisition, and it will be interesting to see where they end up after loading the G/I.
GTII actually slid backwards from 17% to 15% in this metric QoQ for reasons stated in prior section.
+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer
At 39% of current sales levels at current GM% and Cash OPEX$’s GTII could generate a +EBITDA. This is an improvement over 42% last Q.
+EBITDA Sales Breakeven divided by Current Q Sales: North American Peer
Balance Sheet Items of Note:
Cash is at $286 million a decrease of $73 million QoQ this is largely from outflows for the purchases this Q. Subsequent to Q end, GTII raised $33 million debt under their $250 million credit facility.
GTII is actually pretty thin on inventory as they have $92 million (+$19 million) on hand versus $98 million in CoGS last Q. They do operate in some states that allow wholesale, so they can supplement their inventory from those suppliers. A less than 1:1 Inventory to CoGS ratio is very tight and efficient but could stymie growth.
FG delta strengthened this Q +$7.9 million to $42 million.
GTII has the leanest inventory to sales as compared to peers at 0.94:1 Inventory to Q CoGS.
PPE increased $83 million to $325 million, while Right of Use Assets increased $15 million to $174 million. Largely acquisition driven. Of the PPE amount $89 million are assets under construction + $42 million for the Q.
Intangibles and Goodwill increased by $137 million and $175 million to $549 million and $597 million, respectively. This was from the acquisitions in the Q.
Contingent commitments increased $58 million in Current to $68 million and $35 million in Long Term to $40 million from this Qs acquisitions.
Warrant liability reduced $13 million to $34 million as GTII share price contracted.
Deferred Taxes increase $36 million to $80 million as a result of the goodwill and intangibles in the acquisitions in the Q.
Share capital increase $184 million to fund share side of acquisitions.
What I said last Q:
Progress is back to an upper case “P”, with sales increasing 14%, which is what we were loosely eyeballing the markets that report.
Nice to see GTII products in their own stores re-ramped, as that was one of the only nits from last Q.
They are well capitalized with ample cash and low debt maturities and current obligations.
The market responded favorably to the earnings +5.5% as I type, but the market did take a similar amount off them yesterday.
Why is GTII reacting differently to their peers? Less of a retail footprint, which was put (silently) in the cross hairs in the CAOA draft bill would be my guess, coupled with nice margins and less exposure to Florida (which is a great market under current structure but will be a hard pivot if adult use and interstate came into the picture).
There are very few companies that would get a Progress (large “P”) with sales growth of 5%, but GTII really kept everything else pretty tight.
The YoY sales decline trend is reflective of the maturing of their stores and competition popping up in states. Eventually markets will hits saturation and per store retail sales will drop, but new markets will open in 2022. Non GTII products sold in GTII stores was 73% of the QoQ growth for the Q.
Wholesale revenue growth was nominal in the Q.
Cash plus cash generation is sufficient, and GTII has debt options available if needed.
Overall, an impressive quarter.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has a position in GTII and will not start nor divest in the next five days.