The Operating Landscape With Verano Holdings

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In the second episode of The Growth Chamber, a cannabis podcast series recorded at SXSW’s Cannabis Industry Evolution Summit, Vivien Azer, Cannabis Beverages and Tobacco Analyst hosts a conversation with Chief Operating Officer at Verano Holdings, Darren Weiss. Darren shares his thoughts and expertise as a vertically integrated multi-state operator within the cannabis industry on the current pricing environment, the competitive landscape, perspectives on innovation, and strategies concerning brand segmentation & implementation. The two also discuss social equity, the transition from illicit to licit markets on a state & federal level, and opportunities & challenges to come. Press play to listen to the podcast. 

Transcript

Darren Weiss:

I think getting folks from the illicit to licit markets is going to continue to be an issue in New York and every other state, frankly, because there is no silver bullet. It’s difficult.

Vivien Azer:

Hi. Welcome. This is Vivien Azer, Cowen’s beverages, tobacco and cannabis analyst. Delighted to be joined on our podcast with Darren Weiss, the COO of Verano Holdings. Hi, Darren.

Darren Weiss:

Hi, Vivien. How are you?

Vivien Azer:

So excited to be here with you at South by Southwest?

Darren Weiss:

Very exciting.

Vivien Azer:

Great panel today. And I think it presents a really good opportunity for us to talk about Verano’s business for the benefit of our audience. And as I was reflecting on the evolution of Verano, M&A has been so topical and so important to your growth story. So maybe we can start there.

Darren Weiss:

Sure. Yeah. As a company, I think we’re born out of the M&A space. We started as a single state operator in Illinois. That was our first market. Not long after, expanded into Nevada and Maryland. At that point in time with some new license wins, particularly in Ohio and some other markets, decided to put Verano together, and from that moment on really looked to find operations in key markets that would really help support our mission. And that mission has always been to deliver high quality product, operating primarily in the premium space at profitability, at scale.

              And so, what that means for us has been identifying assets across the country where we have operators who, first of all, have competency in terms of building their business, but know how to rate profitably. We’ve always been and continue to be very conservative and responsible stewards of capital. And so, expect that when we look at M&A opportunities as well. We typically will look for assets in limited license markets, highly regulated markets, markets where there’s somewhat of a barrier to entry, and identifying good operational teams because our method has generally been to incorporate operational teams at the various targets that we’ve acquired, and really bring them into the Verano family as part of the Verano platform.

              So, we did, I think, about $1 billion of deals in 2021, right off on the heels of going public. And frankly, haven’t slowed down much since that time and are always looking at new opportunities. Our M&A strategy, I think, has been a little different than some of our competitors at least in the early days. As you probably know, there was this rush to sort of plant a flag pole in every market. And that was never our model. And it still isn’t our model. It’s why we don’t operate in every market, but at the same time, we know that there are lots of opportunities across a lot of markets. And so, our continued strategy is, I guess, twofold. We have a recent announcement that we’re entering through acquisition, the New York and Minnesota markets, which we view as very transformative for us. And so, there’s still this sort of new market mentality, but we’re also really interested from an M&A perspective in terms of deepening our penetration in the markets that we operate in to enable us to get the best ROI and the footprint that we have.

Vivien Azer:

That depth of market and penetration, I think, makes a lot of sense, knowing kind of the levels of profitability that you guys have consistently been able to deliver. And I would assume kind of the depth coupled with the breadth helps kind of preserve or insulate your margins a little bit because one of the things that we’ve been talking a lot about with CEOs across the industry is the price deflation that we’ve been seeing. Is that part of the strategy to insulate margins with that depth of penetration?

Darren Weiss:

For sure is. So, obviously, the more of the vertical you’re able to own, the more shelf space you’re able to have from a retail perspective. You’re able to retain more of that margin on the sell-through. So that’s absolutely part of it, but more so, more than just margin, it’s also product and brand penetration. So it’s important to us that our brands are visible and ubiquitous in the markets in which we operate. And because a lot of our competitors have been doing the same thing, buying up retail channels and really pushing their own products, we know that you have to stay in that game in order to really be able to push your own products and get folks to recognize and use your brands. But margins, as you said, have been at the forefront, I think, of most everything that we have done over the past five years and we’ll continue to be so. And so, being able to have deeper penetration, especially in those states in which we’re vertically integrated is absolutely a margin play among other things.

Vivien Azer:

State level regulatory landscapes will dictate some of your ability to do that, to be sure, right. Florida, being an outlier, but not really offering the opportunity for wholesale, but as you think about kind of optimizing your portfolio and your footprint, is there a good balance that you guys are targeting in terms of wholesale versus retail mix?

Darren Weiss:

Well, from a top line perspective, I think about 60/40 would be the balance that we would look for. 60% being retail, 40% being wholesale. So, obviously, Florida, as you said, is an outlier. And so in that market, for those who aren’t familiar, you can only sell your own products to your own stores. And sell at retail, you can only sell your own products within those stores. That being said, I think that there’s an opportunity to feature our own products in a more substantive way through our own retail channels, which will also help on the margin side as well.

Vivien Azer:

But it’s interesting how you talk about kind of the balance of that revenue composition because, ultimately, it does come down to stickiness of the top line growth, right. And you guys have a four brand portfolio approach. Can you talk about how you think about your brand segmentation within your own portfolio?

Darren Weiss:

Yeah. We’ve got four primary brands across our markets. We will be launching some additional brands in the coming year, but we’ve also just announced some product segmentation, particularly, on the flower side that we’ve been really excited about. It’s always been a goal of ours to be able to maintain that position as the premium player, but also to participate in lower tiers from a price perspective to really take advantage of the good, better, best strategy that some of our competitors have done successfully as well.

              So, we have launched and created a segmentation between our flower lines and our reserve lines and our essence lines, which is a new thing for us. Bringing our essence lines to a different price point, but being able to still take advantage and utilize that premium line.

              With respect to the other product or the other brand portfolio pieces, we’ve got, I think, a natural separation from a product portfolio and a skew portfolio perspective with respect to the market… Excuse me, the products that are geared more towards the medical side. So the tinctures, the tablets, the pills, the topicals, the pain relief bombs. We’ve been able to sort of segment that part of the portfolio through our Avexia and MUV lines. On the Verano line, the sort of the flagship line, we’re looking at more sort of lifestyle brands and more recreational feel that we give to those products. We’ll be entering the wellness space with some new branding and some new products that I’m really excited about over the course of the year, as well as looking at the beverage space as well, which will be a new brand for us.

              So, we talked a little bit about this on the panel, but the brand side is something that really excites us as a company, seeing the ubiquity and the importance of brands. Verano, as well as a number of our competitors and colleagues are putting a lot of money and resources into really understanding how the brands that we create and that we deploy are attractive to various different consumer segments. For a long time, the cannabis market was just throw out and push as many products as you can, and as many different categories as fast as you can. And we’re seeing, I think, a lot more creativity and a lot more strategy behind that brand implementation, which is exciting for us.

Vivien Azer:

It absolutely is exciting. And as a good analyst, I think it’s also really exciting for investors, right. When I was first talking to the buy side about cannabis in 2016, it was still such a taboo topic. And trying to explain that this was going to mature into an industry that looks like the industries that we’ve been covering for years and years; alcoholic beverages, non-alcoholic beverages, tobacco, that brand segmentation, price point segmentation, form factor segmentation, the importance of innovation. All of that, I think, is really becoming very tangible for investors as you guys express that strategy. So, I think that’s really encouraging, but also I think it helps the consumer get comfortable with the space, right. One of the things that’s been much debated at South by Southwest is how do you migrate the illicit market into the legal market? And part of that is a change in the regulatory landscape. So, New Jersey, hopefully right around the corner. What are your thoughts on the timing there?

Darren Weiss:

We’ll see. I’m less saying when about the prospects. We’ve been candidly frustrated with the pace of change in New Jersey. You have a governor who’s very, very supportive, but the regulatory bodies, I think, are understandably inundated. They’re regulating the current medical program, and they’re also charged with standing up a new adult use program, and they want to get it right, and they can’t be blamed for that.

              Notwithstanding that fact, we are also cognizant that the voice of the people has been heard in New Jersey and other states and folks want this and should have an opportunity to access it. So, we’re hopeful that in the next couple of months, we’ll begin to see legal sales in New Jersey, but it’s been difficult as sitting and waiting. We built out a state of the art, very large facility at Brownsburg with adult use in mind. It’s our largest and most advanced facility to date. And it’s burning a hole in our pocket. We want to turn the gears on and get things moving.

Vivien Azer:

Well, I want to come across the river-

Darren Weiss:

You absolutely should. We would love to have you. Yeah.

Vivien Azer:

And then my home market of New York, it seemed like very early days until there was so much turmoil in the governor’s seat that things were going to accelerate, And New York was incentivized to try to speed things up because New Jersey was moving right along. Obviously, you think that New York offers a lot of potential given your pending acquisition in that market. But how do you think about, number one, the timing on that? And I think even more importantly, if there’s any market where I worry about migrating the illicit market to the legal market, it’s New York because cannabis consumers in New York have a guy.

Darren Weiss:

Yeah, it’s difficult. We talked about this a little earlier as well. First of all, from a timing perspective, I think I do take the state of their word that they are looking for a Q1 2023 launch. And I think that’s eminently doable. I know a lot of the ROs have been preparing for this for quite some time. Obviously, we’re excited once we are able to clear regulatory and other various hurdles to be able to participate in that. So, I think from a supply perspective, you will be okay. We’ve seen our share of missteps from various markets where folks have turned from medical to adult use. Obviously, we talked about New Jersey, Illinois was another one where on the social equity front, they have had tremendous issues in getting that program off the ground.

              We’ve been through it in Arizona, we’ve been through it Nevada and sort of have some experience in terms of how that transition works, but New York is unique in a lot of ways, not just in terms of the size, but in the prevalence of the black market, of the illicit market. I think the state has done a decent job, at least, publicly of at least even very recently with respect to these new licensed set asides and how they’re going to do that. It remains to be seen whether they can implement that. No one’s really gotten social equity right yet, which is quite unfortunate. But I think from a market standpoint, I do remain very, very bullish on that market in the near term. And I think certainly in the first quarter of 2023, you’ll begin to see those robust sales. I think getting folks from the illicit to licit markets is going to continue to be an issue in New York and every other state, frankly, because there is no silver bullet. It’s difficult.

Vivien Azer:

I’m glad you called out the social equity licenses. That’s obviously, I think, such an important topic. And one where I think the MSOs, me as a Wall Street analyst, we need to be thought leaders in correcting some of the wrongs from the field we’re on drugs. And [inaudible 00:13:22], corporate sponsor of Last Prisoner Project, is doing tremendous work, but you guys are doing tremendous work too, right? Even though the states aren’t getting the social equity licenses right, that’s not handcuffing Verano from engaging with the community and trying to make progress there. Can you talk about some of your initiatives there?

Darren Weiss:

Sure. We have a couple of ways of looking at this. First of all, it’s very important to us that whenever we enter markets, we have an opportunity to become members and stewards of the community. Cannabis businesses, I think, perhaps because of the unique history have an opportunity to really be community based organizations, and that’s as true for a mom and pop as it is for a multi-state operator with a hundred and some stores across the country.

              So one thing that we look to do is to improve the communities that we enter, and that involves getting involved in community organizations, dealing with local organizations and nonprofits for workforce development, for education, for expungement clinics and things like that. We’re doing that in Chicago and in some other markets right now. And so, that’s super important.

              And then the other part of it is on the employment side. So it’s very important to me as a leader in the cannabis industry that folks who work in my company and in the industry, more generally, see work in the cannabis industry as a career path. I think for many folks in this space, if you go to dispensaries or cultivation facilities, you see a lot of young people. And a lot of those young people are doing this as sort of a job because they were able to get it. It’s a unskilled labor job, to begin with. They’re learning on the job. It’s important to me that those people have opportunity to see this as a career.

              As a company, I can tell you that most, if not all, of our leaders across the country have started out in our company as frontline employees, as budtenders, as growers, as production staff. And it’s been incredibly rewarding to see the trajectory of these folks come into leadership positions, come into management positions, begin to hire folks from the communities that they came from to sort of fill those ranks.

              So that’s been a big part of our effort and really helping folks see cannabis as a career and a career alternative, and helping the communities that we operated in by offering employment and career.

Vivien Azer:

But the opportunity for advancement, I think, doesn’t get enough attention, right? Because the cannabis narrative is all about job creation, but career advancement and professional development, and really creating that pathway is such a powerful, powerful story. And we heard it a little bit on one of the panels earlier today. I know it’s early still in South by Southwest, but last question, any impressions so far from South by?

Darren Weiss:

It’s been great. I’ve been really impressed with the professionalism of the panels that I’ve had an opportunity to see and the eclectic nature. I mean, you can go and listen to sort of a panel on automation in the tech industry and then the treatment of Asian Americans in film literally within five minutes of each other. So the breadth in eclectic nature is really cool. And just some of the people watching has been really interesting. Having an opportunity to see some of the folks who come here and some of the talent and the impromptu serendipitous conversations while you’re waiting in a Starbucks line have been quite rewarding as well. So it’s been fun.

Vivien Azer:

Oh, yeah. I agree. It has been a ton of fun. Darren Weiss, Chief Operating Officer of Verano Holdings, thank you so much. This is Vivian Azer, Cowen’s beverages, tobacco and cannabis analyst.

Speaker 3:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.


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