Glass House Brands Inc (GLAS) 2023 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Glass House Brands fourth-quarter and full year 2023 investor call. I would now like to turn the conference over to Mr. John Brebeck, Glass House Brands, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Julie, and welcome, everyone, to the glasshouse brands. Fourth Quarter and Year End 2023 Conference Call for the period ending December 31st, 2023.

I'd like to remind everyone that matters discussed during today's conference call could constitute forward-looking statements that are subject to the risks and uncertainties relating to glass house brands' future financial or business performance. Actual results could differ materially from those anticipated in those forward-looking statements. Risk factors that may affect results are detailed in glass house brands, periodic filings and registration statement, and these documents may be accessed via the CDR plus database.

I'd also like to remind everyone that this call is being recorded today, Thursday, March 28th, 2024.

And I would now like to introduce Mr. Kyle Kazan, Co-Founder, Chairman and Chief Executive Officer of glass house brands. Kyle, over to you.

Thank you, John.

Good.

Good morning, everyone, and thank you for joining us for today's call. Before discussing our results, I'd like to refer everyone to our Fourth Quarter and Year End 2023 press release for you can review our numbers in more detail. 2023 was a year of remarkable growth for glass house brands. As I stated in our last quarterly call, companies and investors continue to manage through tough times in this industry. Whether it is dealing with the high tax burden of two 80 E. local cannabis taxes, state excise taxes, competition from illicit operators, the large We deserts in approximately 65% of California or conversely, the oversaturation of stores in much of the 35% of the state, which allows labor retail. The reality is that many of our California peers are struggling to survive. In fact, it is likely that more retailers like Medmix, we'll be shutting their doors and will cause brands and distributors to shutter operations as collateral damage. Given this dour outlook, we use our vertical integration to navigate sales to the most creditworthy as we balance growing sales with operating losses, I'd like to offer a special tip of the cap to our credit and sales teams who have worked so well together and making prudent decisions. I'm proud of our 2023 results year in which revenue increased by 89% to a record 160.8 million, while adjusted EBITDA reached 24.5 million and operating cash flow was 23.2 million. We wrapped up 2024 with the fourth quarter and actually we're up to 2023 with a fourth quarter in which we produced almost £103,500 of biomass above the high end of our guidance of 100 to GBP120 and also 37% higher than the same quarter last year. With no expansion in cultivation footprint, we continued to see strong demand in the market and ended the year with finished goods inventory relative to sales of less than two weeks.

Our 2023 results and achievements are all part of a longer journey. Last house has delivered rapid sustainable growth since its inception. Our 2023 revenue is 2.5 times higher than 2021. The year in which we publicly listed and 2023 gross profit dollars are five times higher than 2021. This growth, this growth has brought welcome recognition in March of 2023, the Financial Times ranked glass house brands number 105 out of the 500 fastest growing U.S. companies in terms of 2018 to 2021 compound average growth rate for revenue. And this year, we were named to the OTC. best 50 for 2020 for an annual ranking based on prior share price performance and growth in trading volume for the highest ranked U.S. cannabis company on the list, I recently spoke at the inaugural benzene cannabis market spotlight on California and was asked about my attitude towards a potential rescheduling?

I'll repeat my answer here. Everyone who is in this industry has like a starving person coming through the desert and then we get a cracker and we feel like, oh, my God, this cracker is amazing. And so we think Schedule three is amazing. So we'll take rescheduling. But the truth is that cannabis really should be and needs to be not just rescheduled, but the schedules because the move to Schedule three does not get anyone released from prison and does not prevent anyone from being put into prison. We remain optimistic about the potential benefits rescheduling could bring, including the removal of the to 80 E. tax burden, improved access to financial services such as commercial banking and lending and facilitation of medical research for cannabis. Meanwhile, I'm frustrated to say that all progress towards legalization has been entirely led by the states. Thank you to those many brave people and legislators, we'll keep moving the ball forward despite the federal government's total their election of marijuana reform stuff, despite it being favored by the overwhelming majority of Americans already this year, lawmakers in New Jersey and Arizona have introduced legislation to authorize interstate marijuana commerce pending a change in federal policy that these bills are enacted. New Jersey and Arizona would join three West Coast states California, Oregon and Washington that have already adopted laws, allowing their governors to forge agreements to permit interstate marijuana commerce. I applaud this forward thinking by both states and urge the Biden administration to provide full federal legalization in line with the president's campaign promises. Our business is built to prosper in the state of California, and we are doing that, but we also believe that California is going to be the biggest winner in cannabis around the country and around the globe when we eventually get the chain's taken off our risks and feet and of course, the real winner will be the patients and consumers who will have the ability to enjoy the best quality marijuana at the lowest prices, just like every other industry in our great country. Greenhouse five began cultivation operations on January 22nd and started the first harvest on March 18th. I'm happy to announce that approximately 700,000 square feet was fully planted on March 19th, we expect to begin generating revenue in the second week of April. I would like to commend our cultivation team for a job well done. They produced more than £350,000 of wholesale biomass and greenhouse six and our casinos in for Darryl farms and kept our nursery fully functioning well, they nearly doubled its initial size through Phase two expansion. Cultivation team accomplished everything at the same time that they also completed the greenhouse five retrofit. This was a significant logistical and operational challenge and the team rose to it greenhouse five assisted greenhouse to greenhouse six and incorporates everything we have learned to date at the So Cal farm greenhouse five has better airflow, better climate control and is more complete than greenhouse six was at start-up. We are excited to put these new tools to work and expected improve ramp up versus that of greenhouse six.

I'd like to briefly recap key highlights of glasshouse this fourth quarter operating results. Mark will also provide additional detail on the numbers.

Consolidated fourth quarter 2023 revenue grew by 30% 35% year on year to $40.4 million, exceeding our guidance of 38 to 40 million. Gross margin was 45%, down nine percentage points on a sequential basis and up 14 percentage points compared to Q4 of 2022. Quarter-over-quarter decline in gross margin was mainly due to the anticipated lower mix of flour and wholesale biomass production and sales that we discussed in our third quarter earnings call. This is this decreased company gross margin by five percentage points and result resulted in average selling price of $272 per pound, just above guidance of $270 per pound, but down from the three 36 per pound in the third quarter cost per pound was $121, resulting in a second half cost to production of $120 per pound in line with guidance. Wholesale gross margin was 49%. Additionally, we saw margin deterioration in our retail business due to intensifying promotional competition. While CPG flipped into a loss at the gross margin level, primarily due to approximately 1.9 million in inventory write-offs with over half associated with discontinuing the production of our field and forbidden flowers brand.

Adjusted EBITDA was $3.8 million coming in below the low end of our guidance of five to $7 million. Having said that, this was our fourth straight quarter of positive adjusted EBITDA. I'm also extremely proud of the team for delivering four straight quarters of positive operating cash flow in 2023, a first for glass house brands, we produced 1.4 million in operating cash flow in the fourth quarter of 2023, well ahead of guidance of negative operating cash flow of two to 5 million.

In summary, glasshouse delivered another strong quarter. We could not have done so without the dedicated efforts of the entire team, which I believe is the best collection of agricultural and corporate talent in the industry. More important than that is how the team works together to achieve our common goals.

One thing that many people lose sight of in the cannabis industry is that everything starts with the plant and as such it's an agricultural business. Our focus has always been to use the added scale of each new greenhouse to bring our costs down since day one. We've been focused on quality and COGS, COGS COGS. Also keep in mind that going into the ramp-up of greenhouse five, we didn't have enough biomass to meet our customers' demands. We need more inventory and are very excited to be bringing greenhouse five online. I would like to tell you about one of the most exciting products we've released in a long time, a product that I believe will allow us to fuel growth by taking share from the illicit market by most accounts. The legal cannabis market in California is about $10 billion annually and roughly twice the size of the legal market. The best way to take share from the illicit market is to provide tested safe cannabis of higher quality and at a lower price than the illegal market do so we have already begun introducing a low cost eight ounce package of fresh, all as well branded flower into our stores, and we expect to have the product available at all 10 of our owned retail dispensaries in time for 20, even after adding local cannabis tax, state sales tax and state cannabis excise tax, the product will cost the consumer $9.99 or less out the door because all as well as growing at our farm, not only can we assume or assure consistent quality, freshness and delivery. We also expect to earn strong profit margins. This is the next logical step in the evolution of our business model. And I'm excited as we roll it out like everything else we do is a big win for the California consumer who can now buy legally grown and tested high-quality cannabis at or below the price of flower sold by the illicit market. We are also about to launch another initiative to bring prices down for consumers at our retail stores and ensure we are priced competitively in all the markets we compete. We are shifting to a strategic pricing model at all pharmacy and natural healing centers, retail stores signifying a fundamental change in our approach to pricing and customer engagement. Our experience at the Pottery store, which operates in the most competitive environment of any of our stores in the store where we first implemented this model in April of 2023, saw revenues and margins initially fall but foot traffic doubled within six months as consumers responded very favorably, while revenue and gross margin dollars recovered to and surpassed levels that existed before the change. Each location has its own specific demographic profile, competitive landscape and base profitability levels, which dictate the pricing strategy will employ any amount of revenue growth needed to get back to the base level of gross profit. It's for the consumers has been wonderful for glass house brands. As I mentioned before, we are looking to sign management service agreements with other retail dispensary operators in California. This would allow glasshouse to fully leverage our existing retail management talent and strong portfolio of brands to create a co-op system for participating stores. Large and small can benefit from a unified marketing strategy, greater bargaining power and purchasing and a wider selection of products leading through increased foot traffic and sales. It's a win-win for everyone and especially for the California consumer. We have decided to overhaul our CPG. brand strategy to improve profitability, glasshouse farms plus products and all as well are the key pillars we will focus on going forward while the monocytic tinctures line covers the elderly pain and fleet management segment. At this point, we have made a strategic decision to stop production of the Forbidden flowers and field brands. These were high-quality products that nonetheless have not achieved the market place acceptance and economics required to merit continued promotion and production unrelated subject. We are in the process of implementing a SAP. based enterprise resource planning system company-wide, which was designed specifically for cannabis, we expect that analytics provided will facilitate improved costing capability, benefiting both our marketing efforts and of course, the bottom line, the adoption process is expected to take about a year.

With that, I'll turn the call over to Mark Vendetti, our Chief Financial Officer, to discuss our financial results for the quarter in detail, following which Co-Founder and President, Graham, for our Mark and I will take your questions Mr. remarks over to you in MD&A, which are reported in U.S. dollars and prepared according to US GAAP.

Please note the numbers we are sharing are still preliminary and unaudited at this time and are subject to change. First of all, I want to briefly discuss the restatement we disclosed on March fourth, 2020. And more importantly, the restatement impacted only our CPG. and retail businesses and did not impact our record Q2 or Q3 2023 results nor our Q4 2023 results, and they have no impact on our guidance as well for 2024.

One aspect of the restatement is focused on how we accounted for the relationship with our former distributor herbal from inception of the agreement through Q1 2023. Our interpretation of the contract with variable as a third party distributor was based on several facts when we sold product terminal A. took ownership of the product risk of loss or damage and the risk associated with selling it and collecting the payments from their customers. After after review, we concluded that the appropriate way to account for sales of our brands to our stores through herbal blends is an inter-company transaction because our brands are being supplied to our stores solely through herbal and no other distributors. This resulted in a reversal of revenues. We had booked per product sold by our CPG. unit to herbal that were eventually sold to our stores. Additionally, it resulted in a reclassification of delivery expense from cost of goods sold to a reduction in revenue. The net result was a reduction in revenue and a similar reduction in the cost of goods sold, resulting in an immaterial change to gross margin during the restatement periods. In addition, we restated Q1 2023 impairment expense in Q4 2020 to impairment expense, moving 2.6 million of impairment expense from Q1 2023 CPG. impairment into Q4 2022 as a result of goodwill impairment analysis performed for December 31st, 2022. We also recognized an additional 2.6 million of impairment expense in Q4 2022 related to additional goodwill identified during the review of allocation of the purchase consideration for 2022 acquisition, the charges and the changes in timing are non-cash and do not impact the operating cash flow of the Company.

Now briefly recapping our full year 2023 financial highlights. We reported revenue of 160.8 million, an increase of 89% compared to 2022. This was primarily driven by a 155% increase in wholesale biomass revenue. We sold 339,000 tonnes of wholesale biomass in 2023 versus £172,400 in 2022, a 97% increase. The increase in weight sold was driven by production of almost £357,000 during the year, an increase of 84% versus 2022. We also benefited from and from a higher average selling price of $312 per pound during 2023, up 43% versus 2022 gross margin dollars were 81 million, up 291% versus $20.7 million in 2022. Full year gross margin percentage, 50% compared to 24% in 2022. The increase was primarily driven by improvement in wholesale biomass gross margins, which increased from 22% in 2022 to 55% in 2023. Factors contributing to this improvement were more weight sold, increased average selling price and a reduction in cost of production to 136 per pound in 2023 from $144 per pound in 2022. Our efforts to so-called slow growth in operating expenses paid off in 2023 is cash operating expenses, which include impairment charges, depreciation and amortization and stock compensation were 55.2 million, increasing by only 19% year on year. Well short of the 89% growth in consolidated revenue. We generated $24.5 million of adjusted EBITDA in 2023, which translates to a 15% adjusted EBITDA margin. This was an improvement of 46.8 billion versus 2022 adjusted EBITDA loss of $22.3 million. Full year 2023 operating cash flow was $23.2 million, a 64 million improvement versus negative $40.8 million in 2022.

Turning now to our fourth quarter results. Net revenue for the fourth quarter of 2020 2023 was 40.4 million, just above the high end of our guidance of 38 million to 40 million consolidated gross profit was $18 million or 45% of net revenue of net revenue, up from 9.2 million or 31% in the fourth quarter of 2022, but down from a record high 26 million or 54% through 2020.

General and administrative expenses were 13.3 million in Q4 2023 falling 3% from $13.7 million last year and 13% from 15.2 million last quarter. Key factors influencing the decline versus Q3 2023, where a pickup of nearly 1 million due to a release of a portion of the bad debt reserve and $0.6 million decrease in share-based compensation, sales and marketing expenses were $0.63 million, down from 0.86 million during the same period last year and up slightly from 0.56 million in Q. three international fees of 1.9 million were relatively unchanged versus $1.9 million in Q4 2022 were up slightly versus $1.7 billion in Q3 2023. Depreciation and amortization in Q4 2023 were $3.5 million, essentially flat to three and dominantly up from $3.4 million in the same period last year. Adjusted EBITDA was 3.8 million in Q4. The sequential decrease from a record high of 10.7 million in Q3 2023 was primarily due to the weather issues we discussed on our Q3 call, including a combination of unseasonably low sunlight, high humidity and higher temperatures. We estimate this reduced adjusted EBITDA by approximately 3.9 million in Q4. In addition, we also incurred 1.9 million of inventory write-down. Costs of CPG. was 1.1 million associated with stopping production on our field and for big power brands. These are noncash expenses and mostly associated with in-process inventory. We decided it didn't make sense to convert the finished goods.

Now turning to the balance sheet. We ended the year with 32.5 million of cash compared to 37.9 million at the end of Q. three and 14.1 million at the end of 2022. During the quarter, we spent $6.1 million in CapEx, mainly for Phase two expansion at Candelaria. The Company was able to generate positive operating cash flow 1.4 million despite paying out $5.7 million in cash for state and federal income taxes for 2020. To recall that our practices to pay federal and state income taxes for the prior year in the fourth quarter. Also, beginning in December, the Company began paying down $625,000 per month on the senior secured loan in line with the terms of the credit facility. Our cash balance was supplemented with 2.2 million inflow during the quarter from the second and final close of the 15 million Series C offering.

Now diving a bit deeper into our specific business segments. The core wholesale piloting this product, $26.8 million in revenue during the quarter, up 71% year over year, down 21% sequentially. And this growth was growth was with no capacity increase flower as a percent of volume mix for wholesale biomass sales were down eight percentage points versus both Q3 of this year. Q4 of last year. Flower share of total mix had been similar to three average selling price would have reached $313 per pound. Revenue would have been 4 million higher than reported and wholesale biomass gross margin would have reached 55% during the 2023, we saw some high profile business failure. California was one of the largest distributors, herbal and one of the largest e-comm commerce delivery services craft or shutting their doors. You've also seen a prominent regional retail dispensary chain post all the two into 12 California storefronts due to liquidity issues, detailed pricing pressure and high competition for shelf space. Amongst brands has made both the retail and wholesale CPG space challenging with retailers and branded players continue to experiencing cash flow liquidity issues. Retail and CPG revenue combined was $13.7 million versus guidance of similar to Q3 2023, $14.3 million was also down 5% versus last year. Fourth quarter retail revenue was 9.6 million compared to $10.1 billion the previous quarter and $0.6 million in Q4 20 and 2022. This reflects the increasing level of price discounting and promotional activity we are seeing in the market. As discussed earlier, we will be price competitive in all markets we competed, please no comparison to 2022 are negatively impacted by the change in how excise taxes are paid in the state of California in 2023. In 2022, excise taxes were paid by the distributor to the state and included in retail cost of cost of goods sold and revenue. Starting in 2023, dispensaries were responsible for collecting and paying excise tax to the state. And as a result were not included in retail results. The amount of excise tax paid by glasshouse for fiscal year 2023 was over 5 billion and over $1.2 million for Q4 2023. Fourth quarter CPG revenue was $4.1 billion compared to 4.3 billion last quarter. We remain committed to our policy of selling to dispensaries that are current on payments and to avoid high accounts receivable exposure to any single buyer. And these policies are the key reasons that we have not experienced material accounts receivable payments default. This is good news for glass house. On the branded front, the combined dollar sales market share of glass house farms and all while flour rose from 2% in Q3 2022 to 3% in Q4 2023. In fact, all well entered the top 10 list of California flower brands by units sold for the first time ever in Q4 2023. Based on headset estimates, we continue to see a decline in overall cultivation licenses and a shift toward larger players in the spaces during the fourth quarter of 2023, the number of active mixed light outdoor cultivation licenses declined by 6%, a total of 280 licenses leaving the market. We estimate an equivalent of approximately 2 million square feet dropped out of the market in Q4. This is more than the cultivation area of greenhouse five and greenhouse six combined January and February 2024 saw a decline of only 24 weeks late and outdoor lighting. We took an impairment charge of $23.8 million for goodwill and $8 million for intangible assets related to our retail business unit. Q4 retail has several dispensaries that are under were underperforming their revenue income and cash flow projections. And based on our current performance and trajectory. It was necessary to take an impairment charge for goodwill against the purchase price and the value allocated against the license of these stores. This is a non-cash charge that did not impact the operating cash flow of the Company in Q4 2023, and that will not be impacted in 2020.

For Next, I'd like to discuss our tax situation. We are current on all California specific cannabis taxes, including local sales and excise tax. We are monitoring the situation in the state regarding the potential delinquency of other retailers who may not be making their excise tax payments for only making partial payments. It has been our practice to pay federal and state income taxes in the fourth quarter of the year for the prior year, and we plan on maintaining that practice for 2024.

We are also evaluating our tax planning for 2023, and this has resulted in a $4.8 million reduction of our full year 2023 tax provision of 9.3 billion. We are planning to use the same approach to request refunds from the State of California that should exceed 1 billion. Please note This still includes the impact of two maybe and we are watching what is happening in the industry regarding to 88 and because we will not file and pay 2023 federal taxes until later this year, we have time to make adjustments to our strategy.

Finally, we filed for the ERTC. during the second half of 2023 and expect to receive a refund of 11.5 billion until we receive payment. We are not including the amount in our cash planning or guidance.

I'll now provide first quarter 2024 guidance for key operating metrics. We expect total revenue to be between 28 and $29 million, roughly a 3% growth compared to Q1 23. At the midpoint of guidance, average selling price for wholesale biomass is assumed to 80 per pound, which is down 3% versus the same quarter last year. We are producing a higher mix of trim this year versus last year, which is depressing the average selling price slightly versus Q1 last year. But selling price for flower and small is up versus last year, and it's been running slightly above our initial forecast for the quarter. We have seen prices steadily increased since the beginning of Q4 2023, and they have been slightly over $700 per pound since early February. Q1 24 production is projected to be at $185 per pound, which is a 5% reduction to Q1 last year based on £60,000 of biomass production, which would be a 25% increase versus Q1 last year with most of the increase coming from Kermit, small retail and CPG revenue is expected to be down slightly from Q4. And as we continue to plan for a highly promotional and price driven retail landscape landscape. We expect consolidated gross margin to fall sequentially to approximately 40% down versus the Q2 Q4 level of 45% in addition, we expect adjusted EBITDA to be negative 2 million to negative $4 million and operating cash flow to be negative 3 million to negative 4 million. This is being driven by start-up spending and working capital investment and turning on production of greenhouse five, we expect to end the quarter with a cash balance of approximately $21 million as a result of as a result of negative operating cash flow, CapEx spending of approximately 4 million to complete Phase two expansion, our quarterly dividend payment of 1.9 million in the first full quarter of debt principal payment of 1.9. Given that greenhouse five will have its first full quarter of production and sales in the second quarter, we would like to provide some basic guidance. We expect to record high quarterly revenue in Q2 of 52 million to 54 million, up 86%, 86% sequentially. And 19% year on year. At the midpoint of the guidance, production is expected to more than double over Q1 levels to 125 to £127,000 due to the new greenhouse by production and improved growing conditions as we move toward the peak summer growing season. While cultivation cost per pound is forecast at 150 per pound, which is up 8% to last year. Greenhouse five will be in a start-up mode and producing at about 70% of what we expect on a going basis, this will reduce production output and increase and increase cost production per pound. In the second quarter, we are planning for an average selling price to increase to three 50 to 3 55 on a higher percentage of power in the production of sales mix, assuming similar pricing, what we are currently experiencing during the second half of Q2, we expect Q2 retail and CPG revenue to be roughly flat to Q1. We will provide additional guidance regarding Q2 2024 consolidated gross margin, adjusted EBITDA and operating cash flow when we report our Q1 2020 results. Today, we are also providing initial guidance for some key full year 2024 metrics. We expect to grow consolidated revenue to 215 to $220 million in 2024, which is a 35% growth at the midpoint of guidance. Combined with the increase in revenue, we expect adjusted EBITDA to exceed $50 million and operating cash flow to be in the mid 30 million range. Cash flow will grow at a slower rate than adjusted EBITDA due to working capital associated with starting up greenhouse five. Greenhouse five will have its greatest impact on revenue, profits and cash flow in the second half of the year. And we expect wholesale biomass production to rise about 47% versus 2023 at the midpoint of guidance to five 20 to 500, £30,000 of production with a cost of $135 per pound, which is roughly flat to our 2023 cost of 136 as initial start-up cost for greenhouse five will bias cost offers. We have made a conscious choice of the emphasizing increasing production quickly to generate extra revenues and gross margin dollars over a lower full year cost metric. Our long-term cost of production production target remains to be below $100 per pound. We expect pricing to largely follow last year's pattern pattern, raising rising when production is low in the early months of the year and falling as summer harvest began to begin to hit the market in Q3. We typically get higher concentration of flower and smalls as a percent of volume production mix in the second half of the year, which helps offset lower prices. We project an average selling price of between three 15 and $320 per pound for 2024, which is up slightly from the 2023 average selling price of $300,000. We expect combined revenues of retail and CPG to be to be basically flat compared to last year as a difficult market, market conditions for both retail and brands are likely to continue in 2024. Our strategic pricing plan for the retail business should result in lower retail revenues in the beginning of the year and have executed properly higher foot traffic and a rebound in revenue revenues as the year wears on. And addition, there is a strong probability of high-profile defaults by retailers and brands, which could change market dynamics for those who survive.

And with that, I will turn it back over to Carl. Kyle.

Thank you, Mark.

Most listeners on this call will know that gaining the release for those incarcerated and federal and state prisons for nonviolent candidates. Offenses does it cause that I care deeply about. I'm a board member of Mission green, which was founded is run by wells and Angeles glass house works closely with Weldon promotion is flower brand reform, which works release, rebuild and reform, the lives of those incarcerated for cannabis offenses by working directly with them to assist in their release as well as to help them rebuild their lives by offering scholarships to Oak Street Dame University. Recently, former heavyweight champion. Mike Tyson lent his voice to this cause in a video for reform, which we helped produce and which has received more than 1.75 million views. Iron might call them President Biden to get Clemente to cannabis offenders because in his words, some people go to prison get killed and never come home. I can add to that. People should look into the fact that this is really a mild medicine and that people are doing murders time for it. We applaud Mr. Tyson for the video and for the letter, he subsequently sent to President Biden on February 20th in his letter, Mr. Tyson referenced a September 2021 letter signed by dozens of artists, athletes, lawmakers, academics, other professionals and myself asking the president to issue a general partner for all federal cannabis offenders. He added that he joins the Weldon project, Drake killer, Mike TI. Dion Sanders and others in a call to end the madness of federal marijuana prohibition, Tyson added I grew up in tough neighborhoods where people lived in fear of drug warriors. And I've seen the heavy cost paid by the poor and people of color, it's passed time to reconcile with these communities. Marijuana should not be a crime. The first step is truly the approximately 3,000 people remain incarcerated in federal prisons by America's war on marijuana and to wipe the slate clean for those convicted of federal marijuana offenses literature, widespread press coverage and media outlets across the nation. Again, I applaud the Champs efforts and fully endorse those sentiments. I highly recommend that listeners take a look at an article written by Michael release of FOX News after an interview with me on the issue of those in prison for the nonviolent dealing of cannabis. Simply put, I strongly sympathize with those forgiven long sentences and federal and state prisons for typically selling less marijuana than we harvest in one hour. And I must point out that glass house and all of those in carp incarcerated in federal prison sold candidates as the schedule one drug that it currently is classified.

Please take a moment to ask your federal representatives to push President Biden to use his partner. And I would also like to announce the date for our third annual investor session, which will be held concurrent with our Annual General Meeting on June 21st at our so-called farm for those shareholders who have not attended in the past as well as those who joined in either or both of the last two years I warmly welcome you to come visit our farm and Cambria and see what the future holds for glasshouse. We will be hosting tours of our greenhouses and you'll be able to see a robust canopy of flower and cannabis and our newly retrofitted greenhouse five, our executive team will be on hand for the traditional investor session question and answer session with shareholders. Like the glasshouse in her name, we believe in transparency and want all of our shareholders to visit to see how we are running our collective company. It is worth the time and the effort.

Lastly, before we take your questions, I would like to invite institutional investors and sell-side analysts on this call to our first-ever Investor and Analyst Day on September 12th, stay tuned for more details on this event.

With that, let me turn it back to the operator for questions.

(Operator Instructions) Mike Regan, Excelsior

Sorry about your line is now open via video on Tom quick question. So on greenhouse by being in startup mode. Are you at 70% capacity?

I can tell us, I guess how long it will be in that 70% capacity versus full capacity and sort of what you would need to see to push it up to 100%?

Thanks, Mike.

Jerome take rental as well as Graham to go through Enlighten and Mike Hi, John, thanks for the call today are Tom.

So couple of things. One is we started planting in that late January, so we're not going to have the full year and there's about 65 days before we start harvesting some part part of it is just the amount of time we have. Yes, there is us being conservative. It's a new greenhouse new facility. As you run through things, you always find a couple of things that you need to tune up. But overall, I'd say our expectations are that greenhouse fiber should do as well or better than greenhouse six. We made a number of improvements in there and the way that we manage the shading to removing gutters, increased airflow and better segmentation of blackout, curtains and valves. So we actually expect that to be our most productive greenhouse yet. I think we probably need a quarter. So nice to see a little bit of each of the season. So as we move through the year, each greenhouse really is a pretty neat to outperform. So we'd like to say that in the spring, a bit of a somewhat better in the winter, but I think the team's pretty well up to see it already, and I'm very optimistic for what we're going to see coming out of that.

So Mike Mark Vendetti here. Just one other point, just from a more longer-term perspective, great greenhouse five is about 8% better than greenhouse six. So just on a size basis, we do expect greenhouse five will give us more biomass disease, 8% better.

Got it. Okay. Is this just basically sort of like this and ramping it up? And maybe I guess sort of maybe it makes sense because you want a fully planted until you actually got it fully dialed in. So so I guess it would be a full year of 24 sort of dialing it in and 25 would be when it sort of and going forward? Or am I misunderstanding that?

you suggested just for clarity because it has five as Poland plant and now the greenhouse is completely full. We just tend to be a bit more conservative and say, I know first kind of run through. I don't think it's going to take us a full year until we so we get it up to speed, just like with the new harvest and Maryse, you can make your training and adjustments to the automation and making tweaks to the system. But I expect the greenhouse to ramp quickly and actually expect it's going to it's going to be as good or better than six and as Mark mentioned, it's also about a 8% larger and smaller square footage of Canopy Growth spurts. But we're optimistic and expecting that expecting it to do very well.

Okay.

And then in terms of them is shuttering the Irvine flowers and build brands. Is there a way we can sort of think about the cost savings from that or how have they can sort of help margins longer term this facility that was losing money. If you decide to shut them down, you wouldn't have shut down. They were doing really well, right so when you think about that in terms of the benefit of that,

so Mike, did you know, in the fourth quarter, the two brands combined were less than 2% of the CPG. revenue. So they had become pretty immaterial to the revenue perspective and they were contributing no gross margin at all to the company. So the big issue for us in Q4 is the fact that we once we decided to start producing, we just had resin in raws and another in process. We've been keeping until we made the final decision and as a result, we wrote that off.

So Tom, I think the simplest thing to do is basically I assume it has or said another way if you wanted to understand the impact in our Q4 results. I was just basically going to add 1.1 million back for the real because now that won't happen again, there will be no impact to revenue growth or gross margin in terms of the base business because it wasn't contributing anything as you guys are sort of going, I guess going forward, are there any sort of cost savings or is it more redeploying all the resources that were previously working on some main contributing no margin to the new all well brand that can produce that is producing more margin sort of like it at reallocating resources are nicer, reducing resources. We've seen, as we mentioned, really strong growth with all well for the last, you know, couple of quarters. And so it's going to be more of a family affair reallocation of resources on particularly, you know, all too well does both on flower and edibles in our facility where field is made or was made was doing or raws and resin and edibles as well. So just again, it's okay to assume it has no, we just adjust out the 1.1 million and really assume it's got no impact on revenue or gross margin going forward. The bigger bigger issue is now it's I'm going to say just the distraction of having two extra brands that weren't or contributing to the company.

And now the focus is really on again, the three main brands with Bob, a suite of brands fitting out very specific needs at Great Lakes, a lot of people at on my big my view, it might be worthwhile just to touch real quick on the

CBG. strategy and we continue to be long-term believers that cannabis is going to be a CPG product like all the other products out there. So the idea that forever and always have sold dedicated dispensaries is not I'm not in a thesis that we believe and we believe it's eventually going to migrate into the where you see other things like nicotine and alcohol things that are highly regulated, the pay taxes that require licenses. And when this develops into a $100 billion business, it's going to be there's no chance that the seven elevens and the grocery stores are not going to want a piece of that. And at that point, brand is brand building, particularly brands from California is going to be extremely valuable. And so what we're seeing with all is well in process, combined with some of the most consumed flower and California by units, California, obviously the largest cannabis and most certainly the most competitive cannabis market in the world by focusing then on the big three of glasshouse, all as well and plus allows us to really dive deeper into those brands where we're seeing success I think all is well, in particular noteworthy and important because both on the edibles and now on the flower side, what you're seeing is that you can consumers can get quality tested variety. Our consistent fresh product are essentially the same place with taxes that they would find for illicit cannabis. And while we certainly don't believe anyone should be interested for cannabis We do want to see the illicit market replaced by a state license to market. And we think the prudent way to do that is to have it out competed economically on price. And that's what particularly all as well as shown success. And so that's where we want to double down and focus on.

And then as Gary mentioned, the focus, everything behind the main brand is driving the shift. So thanks a lot.

Andrew Semple, Echelon Capital Markets.

Good morning.

Thanks for taking my questions. First off on the first one would be just on the cost guidance of $135 per pound for the full year 2024.

If I have got my math right.

It looks like you're guiding that suggests an average cost per pound of about 120 in the second half of the year. That would be relatively consistent with where you ended in the second half of 2023. So just going forward and just I guess, what are the main drivers that you see to reach your long-term target of $100 per pound cost reduction relative to the 120 level you expect to be at the end of this year and maybe how conservative is that full year cost per pound guidance for for?

Thanks for the question, Andrew.

I appreciate you getting up early on. Graham, you want to address that?

Yes, sure.

Yes.

So we've got actually quite a few initiatives that we're pretty excited about.

In terms of cost reduction, obviously scale helps, right. If you think about the fixed costs that we amortize them there as we produce more pounds on a per pound basis, those numbers drop naturally because you're doing a better job of amortizing it.

The other thing is we're doing quite a bit on, I'll call it like automation and efficiency, driving a particular example of areas that we're starting to look into things that you find in other large industries like pluggable optical sorting and ways that we can do more and more effective sorting with less human intervention. And in this case, in a way, that's actually more gentle than a person would basically result you end up with a higher quality product as well.

The other part of it is if you think about the ramp up, we still if, for example, and a large portion of our flower. So as we're increasing capacity by 40, 60, 80%, that requires a significant ramp up. And the team that does that and one of the things that we factor in is that in a term or has been coming for years is more efficient than someone who just walked in the door. And so as you're ramping up, we tend to derate the efficiency of those new additions for a period of time until they get their training, so to speak. So I think that the $99 per pound cost target continues to be very much a potential for us. We're starting to build line of sight to the things that we're going to do there. And a part of that is increasing the denominator in the number of pounds produced. And then part of that is bringing extra efficiency and other partners bringing scale. But I think as we move forward, we continue to be as or even our confidence thing happens that that's an achievable target.

Great.

Great.

Glad to hear the second question would be on as you're approaching the timing of realizing your first harvest from greenhouse five. Imagine you're already very much engaged with some of your customers there on absorbing that capacity. Do you have any concerns on your ability to supply sell through the incremental production? And given the guidance, it would seem like you're not concerned there, but just wanted to clarify that.

Yes, sure. So I mean, one, one of the things that makes me the most optimistic is the fact that every week and things like that, our sales team is calling asking when that first harvest greenhouse five wins. The first harvest from greenhouse five. They're actually in the environment right now where they're selling faster than we can grow it and are excited about and really they're allocating. And from two customers trying to keep them happy at this point because there's not enough flower supply to go around. And so as a reminder, in Q1, that's our lowest production part of the year because that's when we get the least amount of sunlight. So these guys are really excited to have the additional volume because it all out and then to a more satisfied our customers and not have to ration them on what they're able to get.

I'm also I may have misunderstood you there, but just a point of clarification, we have already had our first harvest from greenhouse five. It just happened the product actually current and currently in the dry room and a couple of weeks away from being initial curing process. And then it will be processed and handed over to the sales team to sell it. And they're they're chomping at the bit. So mean if you look at what has come out of the market in terms of licenses, I think as Mark mentioned, we're putting back end with greenhouse five and about 700,000 or so square feet of canopy is actually a very small part of what's left, even since we started the greenhouse five retrofit project about six months ago, we've seen billions of square feet of cultivation lead the market. We're putting back in several hundred thousand. So net-net, the supply is actually significantly less than it was when we started the project. And that makes us very comfortable comfortable. There's demand for the product that we're going to be producing.

Great, great.

And final question, if I may. On the outlook, you're pointing to some significant stress on retailers out there. Obviously, some of those retailers are also pushing your products, probably both for your CPG products, but also more significantly in all the brands that you're powering with your wholesale B2B business on. Is there anything Ratos can do to support some of those retailers.

And I think the obvious follow-up question there would be whether you're interested in acquiring and these are potentially distressed retail locations to ensure that. So there's still adequate distribution in the market?

You know that that's a very good question, Andrew. And I would tell you that, unfortunately, I think that where there's too many stores in India and the 35% of the markets that have retail, I think it like with Mad Men who had all kinds of money, had all kinds of advantage I think I think we're just unfortunately going to see some of the some of the retailers have got a business, but we saw herbal, which was the last or the largest distributor in the state a business. And what we've tried to do is we tried to support herbal all the way till the bitter end, and we did it. But we did everything we could smartly to make sure we didn't see part of collateral damage. And so when it comes to the retail, we have a very good credit team and a very smart sales team. So we are trying to be as supportive as possible. But at the same time, it is such a difficult market out there that we are just being as careful as we possibly can so that we don't get caught up in in losses that might have otherwise been seen in regards to buying more stores. And we have 10 that we own. I think the best way we can be helpful would be to help stores by taking over management and using have a very, very skilled team and buying prowess to help them maybe get get them to profitability. So so we're out there talking to folks about about managing stores.

I think we can best help on your slide.

Maybe one other one other note on not just the the landscape out there, what you are seeing some compression in terms of dollars is really not a lot of change in terms of consumption on a unit basis. So people are still out there smoking as much will they ever have and arguably probably more people smoking meat today than yesterday and more will smoke tomorrow than them today. So I think what state could do to help us, we'll need more retail. And as Carl mentioned, you need retail that's distributed in a way that's accessible and we need lower taxes right now in California averaged $3 and consumer spend about a bucket that goes to taxes, but you're not really seeing consumption drop. There probably is some migration back to the illicit market because of the lack of access and the high taxes, particularly on for Howard. And the number one thing that we can do and are doing there is bringing high-quality, fresh, tested, only licensed legal and tax paid power for a better value than what the illicit market offers. And that's exactly what we're doing with our nine 99 eight and bringing that to more stores through management as I think something would bring the consumer back into the light side of the market where we don't like to see them Understood.

And those sound like some sensible strategies to avoid risks, go back to the glasshouse and use of capital.

Thanks for taking my questions. I'll get I'll get back to school.

Pablo Zuanic, Zuanic & Associates.

Thank you. Good morning, everyone. My question, firstly on the CBG side and you are can you clarify a couple of things there. Just a reminder of your wholesale revenue, how much of that is branded and how much is that white label and how has that evolved over time? And what's the ideal mix longer term? And then the second question, if you can just clarify in terms of these new skew, I believe you said it's a new brand at night and the nine per on paydowns, I don't know if my hits the numbers are right, but also will in oh nine or nine per gram is to 83 according to hits at all as well, Celso to 65 plus sells it for 27 per gram. So I'm just trying to understand how new is in 1999 in case or the hit the numbers around? Thank you.

So, Pablo, when SDS?

Thanks for the question. Mark, do you want to do you want to stress that?

Yes.

So I'll take I'll take the first part. So we disclose on our CPG business and our wholesale business separately. So the wholesale business is first sales of unbranded, our unbranded biomass to generally, it's other distributors throughout Australia up throughout the state school, then you know, put it into their brands or reseller. And so that does not include any revenue for our RCPG. branded business, we disclose separately our CPG. business again, which was $4.1 billion in the fourth quarter. And that is basically the sales of glasshouse farms all as well and plus to our distributors and not through our own stores.

You below expectation, again from from a guidance perspective, is given the difficulty in the market for CTG. for the cannabis consumer market in general, we're assuming CPG is going to be relatively flat for 2024, and we watch the market closely. And again, we see brands leading. We've seen retailers having trouble, but we are not going to chase revenue at the expense of not being able to collect the payments or the cash from the sales.

And then the wholesale revenue again, that is if you if you look at guidance for 2020 for the and when I say all of the increase is really being driven by the incremental production coming on, we'll bring in-house five. And then can you discuss kind of rephrase the second question again for those of AgroFresh,

whether apologies for not only no difference in terms of your disclosure within wholesale and CBG. I guess I want to I'm going to switch the question. So you know, strategically, I think Carl said longer term, right, seven 11 retail changes. So, you know, maybe you want to be on dispensaries because there's going to be many other retailers.

Are there.

I totally agree you want to build brands and BCBG. But by the same token, if that's the way the industry evolves, and I know we are talking very long term, probably then you know, the advantage of growth of biomass in our book of long term. How does how does that play into that or that assumption that the industry looks more and more like CBG? That's that's why I'm asking the question in terms of your mix over time, you know, on the what I would call non-retail revenue, how much of that you want to be branded versus what I would call white labeled biomass. That's Dataquest.

Thanks.

Current causes that you wanted to address that.

Okay. You know, Pablo, I would tell you that that's a little bit of a crystal ball question. But I think I think over time fuels see, you'll see brands like almost, I would say, like Essentis. And you'll see like Driscoll, strawberries, things like that. And CPG will matter, but I don't think you're going to have very many best most for cannabis in the future. And ultimately, like cigarettes like alcohol, you're going to see branded product be the main driver. And I'm hopeful that and we won't just be until inside other people's brands. And so we've really you can see we've focused in on primarily all's well and glasshouse farms as our to kind of have higher shelf and a lower shelf for value. And we think that like, for instance, nine 99 out the door every day we really find we think that's going to be a game changer and we think we will be able to entice people to come from the illicit market to come to the legal market. But yes, yes, it's difficult just because timing is always is always tough, but we think that if you give the best possible value to consumers, your brands will win and ultimately, we think glass out farms, we think all is well. And we also think plus gummies are priced really, really competitively and are at amazing value. And if it advises consumers, then we think those will be big winners. And I will tell you if you look around the U.S. and around the country and you compare with all the taxes, we have to layer any California versus everywhere else. And you just compare what you can get in almost any other state of California is an amazing value. And then when you actually test the products, it just goes through the roof. So I'm very bullish long term that this will bode well with the consumer. And given the fact that we have three more very large greenhouses that have yet to turn on. We have a very bright future ahead of us when interstate commerce via through the states or whether it happens, federally happens, but I would tell you, I think we're doing everything we can. We can do to put ourselves in a position to be winning to be winners.

Understood.

Great.

Yes, if I may want to add that to more.

So just to clarify, in terms of I mean, all is will a glass house, of course, more premium filter as well, a lower more value in terms of the new brand, you are launching a 99. Is that well below ours?

Well, I'm just trying to reconcile the metrics I'm looking at here in terms of pricing, if you're going to see a range, how much lower is that compared to what all's well retails right now?

So all of what is that brand?

We in our stores we have gone ahead and lowered the price. Mark, do you want to share the numbers behind it?

So I think I'll just say, um, you know it or if you go into our store in order to get it under $10 with sales and excise tax, you're you're going to have you're going to be paying somewhere around 7,000 a quarter retail, um, you know, if you're if you're going to go to a different dispensary, you're probably going to see it priced, I don't know, 30% to 40% higher. So significant incentive for you to come in to all as well. And again, one of the benefits when we sell our brands into our stores is we capture the entire profit, right? That retail would be capturing where we're relying on our lower cost of goods production. So our margins for our brands in our stores are significantly higher than the average retail margin. We report for the stores?

Yes, of course, and one last one. So you know, we see a lot of California brands selling in other states, either by, you know, licensing their brands there or we've seen some operators buy assets in Michigan and other states also silver brands there. How are you thinking about building your presence in other states either for your brands that in other ways, or that's just not a priority right now.

So another great question. And we've approached many, many times to one grow glasshouse farms outside the state of California. And thus far, we've just said we've looked at that as a distraction also. We don't think we can grow the find candidates that Graham and his team do here in California and outside of the state, at least at least today, that that's our position even and we've been able to ask to grow in Europe. So we've stuck So stay completely focused and on and California in regards to plus gummies or maybe a Mama suit tinctures?

I would tell you that we've had discussions and we may have some news coming in the not-too-distant future.

Thanks.

Thank you, Paulo. Always good. It's always good to hear you your your voice and your question.

There are no further questions at this time. I will turn the call back over to Carl Christenson for closing remarks.

Thank you, operator, and thank you, everyone, for your interest and for joining us on today's earnings call. The team and I greatly appreciate. Appreciate it.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.