Grown Rogue International Inc. (GRIN) Earnings Call Transcript

As a reminder, during the course of this conference call, Grown Rogue's management may make forward-looking statements based on current expectations, estimates, and assumptions. These statements are subject to risk and uncertainties that could cause actual results to differ from those expressed or implied. These risks are described in the Risk Factor section of the company's filings and other public disclosure materials. Any forward-looking statements made on this call speak only as of today and Grown Rogue undertakes no obligation to update or revise them in the future except as required by law. During today's call, we will also refer to certain non-GAAP financial measures including EBITDA and adjusted EBITDA. These measures do not have standardized meanings under GAAP and may not be comparable to similarly titled measures used by other companies. Grown Rogue believes these measures provide useful supplemental information to investors, but they should not be considered a substitute for GAAP results. A reconciliation to the most directly comparable GAAP measures is included in the press release issued earlier today. With that, I'll turn the call over to Obie Strickler, Chief Executive Officer of Grown Rogue. Obie, please go ahead.

Great, thank you. And thanks, everyone, for joining today. I'm going to try and, you know, just try keeping today's commentary a little brief. Another very solid quarter. And what continues to impress me the most is, you know, we talk about this a lot, just the amazing team that we have at Grown Rogue. We're running a few projects in parallel right now with New Jersey, Minnesota, and Illinois. And the team is just working their tails off every day to bring these projects forward into fruition. The problem-solving, collaboration, passion, and intensity just continues to inspire me every day to do, you know, my best work individually. And, you know, watching the team execute has just been, you know, pretty spectacular in '26 and, you know, previously. I haven't worked in too many industries, as many of you probably know. You know, it's probably a factor in how focused, you know, we maintain ourselves at Grown Rogue. But it sure feels like this one brings a lot of, you know, a unique set of challenges and just difficulties and all the things that go in with being a successful cannabis business. And so, you know, we spent a lot of time recruiting for experience, agility. And what we've seen so far, which is kind of awesome, is that our culture ends up largely being self-selecting. We end up getting a lot of references from our team and those close to us with, you know, great talent and people that want to join kind of the mission that we set ourselves, you know, out on. Before I get into some market-specific comments, one thing I wanted to share today was the internal pillars that we refined last year as we really began to lean into our growth efforts. You know, we worried a lot, you know, myself included, about keeping our scrappy, you know, entrepreneurial, get s*** done culture, you know, if we continue to expand. We're going to do our best to try and maintain that and be intentional about avoiding extra management layers, unnecessary bureaucracy, and all the things that kind of slow down your nimbleness and flexibility. At our core, we're in the doers, and maintaining that is going to be super critical to our success as we go forward. So, again, last year we clarified and kind of defined, you know, our core beliefs as an organization. We coined these the pillars of Grown Rogue culture. Love the plant. With our Rogue Valley heritage, cultivation is our passion and it starts with sourcing and breeding the best genetics. Our genetics reflects the creative inspiration of our team and company. #2, we are craft cultivators. Our goal isn't to be the biggest, but to have right-sized facilities and production goals that allow us to produce boutique-quality flower at scale. We are consumers at our core and pride ourselves on sharing our craft with the World. #3, continuous improvement. We are constantly iterating and improving our practices to increase quality and yield. This relentless focus ensures we continue to win in a rapidly maturing and increasingly competitive industry. #4, cost control. We aggressively manage costs across the business to ensure the best possible pricing to our customers and ensure our business makes money regardless of market pricing. It doesn't help the plans for our customers. Why are we doing it? #5, the last one, team-first mentality. Everything we do starts with our amazing team. It's the engine that drives us every day, filled with fun, respect, accountability, and hard work. At Grown Rogue, we don't just grow plants, we grow leaders. So those are the 5 pillars, um, just something, again, we put together for our team just to refine and really give clarity to like how we show up every day and the intention that we bring into, you know, our working environment. So getting into the markets. So I'll start with New Jersey. Honestly, just particularly pleased with how New Jersey has been progressing is really get our flywheel going, you know, seeing that 100% of our packaged flower sales this quarter coupled with we actually purchased some bulk products in the open market to continue to fulfill the demand that our brands have started to kind of, you know, demand inside of, um, the, on the market out there. So that was kind of an awesome kind of addition to what we did in Q2. Actively constructing to get to our full 16,000 square foot capacity. And want to reiterate, we expect to have that completed by the year-end. You know, that involves turning on 3 additional flower rooms, you know, plus a mother room, but just, you know, getting that full facility built out and to its, you know, 100% capacity. Still have some work to do, you know, to get our yields and costs, you know, to the excellence we're seeing in Michigan and Oregon, but feeling good about where we sit and how this canopy expansion will bode as we finish up '26 and move into '27. One thing I wanted to call out in New Jersey is around our ASP. You will see if you're looking at the KPIs, how it increased from last quarter as we realized that one of our products called Yeti Ready to Roll was being included in our ASP. This product is 100% comprised of shake that would normally go to extract, you know, for around $250 a pound. But with demand so high in New Jersey and kind of the opportunity set that sits there, what we've been doing is taking that material, grinding it up, and putting it into Yeti ounce bags that we call ready to roll and selling this for around $1,000 a pound. That being said, this weight is not included in kind of our flower yields and the way we like to manage our business. And then with that lower price point, you know, it's artificially impacting our flower ASPs. So we've chosen to exclude that side of our reporting metrics. Oregon was worried starting the year around where Oregon was sitting. Especially around the pricing environment. It was really nice to see some modest price recovery in Oregon over the last quarter, and we're definitely hoping that continues. Demand remains high. The team is super locked in and executing at a high level as we continue to manage a very competitive marketplace. We've completed a lot of the technical improvements that we talked about last call, you know, that are driving some of the incredible numbers out of Michigan. So excited to continue to see yield and cost improvements in Oregon, you know, over the coming months and, you know, throughout the rest of kind of, you know, activity there. Switching to Michigan, I mean, 90 grams square foot of flower and a $277 pound of cost, I think that kind of says it all. I don't think I was really, really excited to see that. There's not a lot to kind of elaborate on there. The execution of that team, you know, particularly against, you know, the challenging state environment right now in terms of the pricing, you know, environment that we're living in has been pretty amazing. Just watching them lean in, grind, push forward, great product, good yields, record yields, frankly. And just, yes, super excited about the way they're navigating this pricing cycle, the wholesale tax that was implemented earlier this year. And they're setting new standards for what we can expect and how the rest of our states are going to push towards, you know, cost control and, you know, growing, you know, good, strong yields. Illinois, we got plants into the building in early June and are expecting our first harvest in September. It's been super great to watch the team come together. I was talking to one of our guys who's out there this week, our VP of Production, and just, you know, the energy, the culture, the way everything is coming together out there is super exciting. And, you know, like with anything, startup, new project, takeover, you know, the fires that come with that as you're turning back on a facility. Just really impressed watching the way the team's navigated that. As you know, due to regulatory, we started with 5,000 square feet. We've already submitted 5,000 square feet of canopy. You know, we've submitted already and gotten approval to go to 10,000 square feet, you know, which we're in the process of completing. We need to do a little bit of upgrade work to kind of meet our standards. There's some lights to order, a little bit of retrofitting, which we anticipated. And we're expecting to be at the full 10,000 square feet of flowering canopy by the end of the year. Yes, again, excited about Illinois, excited to bring that product into the market, and looking forward to seeing what the initial output in terms of quality will be. Minnesota at the finish line of phase I. You know, we talked, you know, working through some, like, last items with local and state kind of occupancy metrics, always dealing with the last kind of, you know, big push on the construction side. But hopefully, you know, you can never really gauge timeline when you have regulatory kind of uncertainty. But, you know, very optimistic that we're going to be able to bring plants into the building sometime in August. And then very optimistic around our previously stated timelines, you know, with first harvest by the end of the year and then selling products in the Minnesota market, you know, starting in Q1 of '27. The team is a consistent theme for us and particularly excited about how the team is stepping up in Minnesota. Our previous general manager in Oregon, who had been with us for 5 or 6 years, is relocating to Minnesota to get that project set up for us. And then also our cultivation leadership, we spend in a considerable amount of time on site over the next 6 to 12 months to make sure we get our production dialed in and just hit that market with our best foot forward. So, again, great quarter. Excited to see what the team is doing. Excited about kind of the expansion of the projects in front of us. And yes, just head down, continuing to work. So with that, I'll hand it over to Josh.

Thanks, Obie. I just wanted to take a minute to talk about capital allocation and how we keep our discipline with business development and reflect on the time and energy that I've continued to spend on evaluating distress in the industry. And I think the first mention here, although not something worthy of disclosure on our end at the time, it is publicly available information that we bid for 4Front's Massachusetts operations, and ultimately the bidding became too rich for us earlier this year. What was most intriguing to us in this deal was a very well-constructed cultivation facility that was right in our wheelhouse, about 15,000 square feet of flowering canopy in a 50,000 square foot building. It was a right-size opportunity that also included a couple of high-performing stores. And we had high conviction in the execution of what is a competitive market in Massachusetts. Our approach to capital allocation is likely different than what I perceive to be the situations for most of our peers in the industry, in large part because it comes through the lens of applying our core competency. That core competency that, you know, Obie alludes to, the efficient production of quality flower. Putting that into an appropriate infrastructure is really the core focus of our, excuse me, of our, of our, I'm going in circles here for a moment. It is the core focus of our business development plans. So when you take that flower-forward ethos that you hear from us frequently, it doesn't preclude us from including manufacturing or retail when we look at deals. And it's one of the reasons that I alluded back to the Massachusetts example of a moment ago. If we're taking something on, it's because of how we trust our team's core competency to be the value driver. We also don't have unlimited bandwidth, and this ties directly to being choosy to those situations that we think we can generate $0.75 of operating profit for every $1 we invest. I don't think that this can happen immediately in those deals, but once we've had 12 to 18 months to improve performance, this is the return profile we're after. This is a high hurdle. A lot of opportunities to buy private or public players with existing profits that would be a discounted EBITDA multiple, perhaps benefiting from arbitrage between our public multiple and what we can buy. But this is not our approach. We aim to map our bandwidth against true value-enhancing opportunities to grow our platform, not for scale itself, but for what we see as the team-building benefits of bringing our passion for quality products to customers. I'll end by highlighting that in Bengal Capital's second quarter investor update that gets posted on Substack, we wrote about cultivation math specifically, as in the math of cultivation. And I'll warn that it's a little bit of a long essay is how I would describe it. But it ties directly into why I'm in this seat and my view that this is one of the best opportunities for adding value that I've seen in my career. I will now hand it over to Andrew.

Thanks, Josh. All right, briefly, I'd just like to remind everybody that we do report our Michigan excise tax as revenue. We do charge this out to our customers. The exposure to that tax is often shared with customers, but ultimately you have to pay this amount to the state, so the corresponding expense is recorded in general and administrative expenses. And really just going to keep this short and sweet. We had a great, clean, easy quarter. Reported it out pretty quickly. And the team's got a lot of work to do, a lot of projects in front of it for Q3. We're going to put our heads down and get back to it and execute.

Thanks, everyone. Great. Thank you, guys. With that, we will open it up to any questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have a question from Aaron Edelheit from Mindset Capital, your line is open.

I wanted to congratulate you specifically on some of the cost figures and the production. I'm looking at Michigan, I think that that's a quarterly record in terms of harvest and cost. And I wanted to ask, is there any reason why what you're doing in Michigan couldn't be replicated in Oregon, maybe in yield, let's just talk yield, and in New Jersey and eventually Illinois and Minnesota long-term.

From a practical perspective, Aaron, and good question, no. There's no reason why we should not be able to replicate those. Each market is going to be slightly different in terms of how we manage, you know, volume of capacity based on what we think the market demand is. And then each market will have slightly different, you know, kind of like mechanical support systems, you know, to kind of influence this additional technology we put in to drive these yields and effectively lower the costs, you know. We started installing a lot of these in Oregon, so I would expect to see that coming in kind of Q3, Q4. We got a big chunk of our facility kind of outfitted for relatively low cost. Like I mentioned last time, this is measured in very low six figures to do this work, which has a fantastic ROI. Illinois may be a little different in terms of the mechanical needs in order to do that. And so your costs may go up. And so as we evaluate that market -- Same thing in New Jersey, same thing in Minnesota as we evaluate the markets and look at where the demand sits, what the cost profile is. It's definitely set a new standard in terms of what the expectations and the potential is inside of our assets. And so, you know, actively evaluating those to look at, you know, when's the right time. And then, you know, what is the cost to install them? And, you know, how does that work out? But again, our goal right now in New Jersey is to get the rest of the building built, you know, get the rest of the flower rooms turned on, you know. We've already started doing some planning around how we would kind of construct this additional opportunity. And Illinois is just early, right? We're just getting that turned on. And we expect Minnesota to be kind of similar in terms of where we go. And so one of the beauties in Oregon and Michigan with these mature kind of markets is, you know, we are able to make those decisions because we don't really want to build extra capacity. So this is an expensive way to get there. You look at like Minnesota and do you, you know, do this pack and get, you know, higher yields and less rooms? Do you build up more infrastructure? What's the trade-off there in terms of overall kind of production capacity? It's all things the team is working on, but it's not unlikely to think that 90 to 100 grams a square foot of flower and sub-$300 pounds is the new standard and normal that we'll be pushing against.

[Operator Instructions] We have a question from Brian Park. Your line is open.