Russell Stanley

Russell Stanley inquired about the magnitude of CapEx increases from major shipbuilders in the defense sector, asking how Graham Corporation plans to allocate its own CapEx spend going forward. He also asked about Graham's M&A strategy following the FlackTek acquisition, specifically if future M&A would focus on the three existing platforms or seek new ones. Finally, he asked about Graham's strategy for pursuing new work and programs with the U.S. Navy beyond its current sole-sourced projects.

Answer

CFO Chris Thome explained that Graham's defense platform remains healthy, and the company has been making capacity investments for several years, aiming to continue investing 7%-10% of revenue without seeing disproportionate demand. President and CEO Matt Malone clarified that FlackTek adds a third core technology platform, and the immediate focus will be on investing in these three areas, with potential for additional platforms longer term. Malone also stated that Graham's core competencies in precision fabrication and high-speed rotating machines are highly applicable to new Navy opportunities, and the company is bolstering its commercialization strategy to proactively offer value.

Russell Stanley asked about Graham Corporation's strategy for pursuing new work and programs from the U.S. Navy, beyond its current sole-sourced engagements.

Answer

Matt Malone, President and CEO, highlighted that Graham's core competencies in precision fabrication and high-speed rotating machines are highly applicable to new opportunities. He mentioned pursuing adjacencies and bolstering their commercialization strategy to proactively offer value to customers, moving from an inbound to a more outbound approach.

Russell Stanley from Beacon Securities inquired about the sustainability of the high Q1 EBITDA margins, which are approaching the fiscal 2027 target. He also asked about the growth potential for aftermarket sales in the defense sector and sought clarification on whether the recently announced torpedo order was included in Q1 bookings.

Answer

CFO Chris Thome explained that the strong Q1 margin was driven by a high mix of aftermarket sales (20% vs. 15% prior year) and that margins are expected to normalize within the full-year guidance range. President & CEO Matthew Malone detailed the defense aftermarket opportunity, highlighting fleet maintenance for existing submarines and spare parts for torpedo programs. Thome confirmed the new torpedo order would be booked entirely in Q2.

Russell Stanley from Beacon Securities inquired about the sustainability of the high Q1 EBITDA margins, potential future headwinds, the growth opportunity in defense aftermarket sales, and the timing of a recent torpedo program order.

Answer

CFO Chris Thome attributed the strong EBITDA margin to a favorable sales mix with a high percentage of aftermarket work (20% of sales), noting he expects a return to a more normalized level, thus reiterating full-year guidance. CEO Matthew Malone highlighted the defense aftermarket opportunity in fleet maintenance for existing submarines and spare parts for torpedo programs. Thome clarified the new torpedo order would be booked in Q2.

Russell Stanley of Beacon Securities inquired about the sustainability of high EBITDA margins, potential headwinds, the growth opportunity in defense aftermarket sales, and the booking timeline for a recent torpedo order.

Answer

CFO Christopher Thome attributed the strong Q1 EBITDA margin to a favorable aftermarket sales mix, which was 20% of sales, and expects margins to normalize within the full-year guidance. President & CEO Matthew Malone highlighted growth in defense aftermarket through fleet maintenance and torpedo program spares. Thome confirmed the new torpedo order will be booked in Q2.

Russell Stanley of Beacon Securities inquired about the drivers for the fiscal 2026 gross margin guidance, the business impact of the new radiographic equipment investment, and the current state of the M&A pipeline regarding target quality and valuations.

Answer

CFO Christopher Thome confirmed the gross margin outlook is primarily affected by tariffs and the absence of a prior year's training grant, which the company aims to offset with process improvements. President & COO Matthew Malone explained that the new X-ray equipment will significantly improve efficiency and quality for complex Navy welds and can be leveraged for the energy and process markets. Malone also described the M&A pipeline as robust, with opportunistic valuations for strategic acquisitions of smaller, privately-owned businesses.

Russell Stanley from Beacon Securities asked about the company's ideal book-to-bill ratio to balance growth with customer lead times, given the natural lumpiness of orders. He also questioned what the company is seeing regarding supply chain and labor challenges and the potential for more funding from the BlueForge Alliance.

Answer

CEO Daniel Thoren stated the annual goal is a 1.1x book-to-bill ratio to support 8-10% organic growth, noting the pipeline is robust. President and COO Matthew Malone added that strategic investments are aligned to support this growth without extending delivery times. Regarding funding, Mr. Thoren confirmed the government plans to continue supplier development programs and that Graham has several proposals in with customers, expressing optimism due to their 'shovel-ready' projects.

Russell Stanley questioned the implied gross margin compression in the second half of the fiscal year, given the strong recent performance, and asked how the election results might influence the company's acquisition strategy.

Answer

CFO Christopher Thome clarified that the guidance reflects a typical seasonal slowdown in Q3 revenue and that they are comfortable with the full-year range. Regarding M&A, Thome stated that their strategy remains opportunistic, supported by strong organic growth, and is not expected to change due to the new administration.

Russell Stanley from Beacon Securities asked for an update on the wholesale competitive environment in New York, given Curaleaf's early production advantages.

Answer

Chairman and CEO Boris Jordan explained that New York remains a strong, growing market, but the primary challenge has been 'inversion'—illicit cannabis from other states entering the market due to the lack of a track-and-trace system. He noted that recent enforcement by the OCM against an illicit distributor has led to a recovery in Curaleaf's wholesale sales, suggesting a positive growth trajectory if enforcement continues.

Russell Stanley asked about the performance and margin trends of Curaleaf's wholesale business in New York, particularly how the company is managing price competitiveness given the market dynamics.

Answer

Chairman and CEO Boris Jordan described the New York market as a 'moving target,' noting strong 2024 margins but highlighting a new challenge from illicit California flower entering the regulated market. He expressed confidence that the implementation of a seed-to-sale system in Q3 will resolve this issue and stated the company is actively making regulators aware of the problem.

Russell Stanley requested an update on the growth bottlenecks in Germany, such as telemedicine adoption and pharmacy logistics, which were mentioned on the previous earnings call, asking about progress and remaining challenges.

Answer

Executive Chairman Boris Jordan stated that the market is growing faster than anticipated and that these bottlenecks are providing the company with necessary time to scale its supply chain effectively. He expressed confidence that the industry is working through these issues and expects to see continued outsized growth from Germany in the upcoming quarters.

Russell Stanley asked for clarification on the Q1 gross margin improvement, wanting to understand the specific impact of improved asset utilization versus the headwind from a reduced vertical sales mix.

Answer

CFO Edward Kremer explained that the impact from a lower vertical mix was minimal. The primary driver of the 120 basis point sequential margin improvement was better cost absorption from bringing more cultivation rooms online to meet demand. He confirmed that the positive impact of asset utilization significantly outweighed any decline from vertical mix.

Asked about plans for underperforming stores, the wholesale growth strategy, and the timeline for market stabilization in New Mexico.

Answer

The company is evaluating three stores in Colorado for closure and license reallocation. The wholesale strategy focuses on both expanding door penetration and growing the product portfolio with new brands. They anticipate New Mexico's net store count will turn negative in Q2 as closures accelerate and openings slow down.

Russell Stanley of Beacon Securities inquired about the potential for further increasing the mix of in-house brand sales outside of Florida and asked about the specific drivers behind the Q2 adjusted EBITDA margin outperformance relative to the company's own forecast.

Answer

President & CEO David Goubert responded that the company is currently satisfied with its internal brand mix, especially with a brand rationalization and relaunch planned for Q4 2023 and Q1 2024. Regarding the margin beat, Goubert attributed the success to a combination of factors: improved state-level management optimizing retail and wholesale (citing Nevada as a key example), efficiency gains in cultivation and manufacturing, and SG&A reductions. He noted that while these efforts are paying off, the company is maintaining its mid-20s EBITDA margin guidance for the second half of the year to account for margin pressure from planned inventory reduction.

Russell Stanley of Beacon Securities inquired about Ayr's Florida retail strategy, asking if the company is considering relocating legacy stores in anticipation of adult-use cannabis sales. He also asked for an update on efforts to drive traffic to its Massachusetts stores and the success seen so far.

Answer

President & CEO David Goubert explained that while they are always evaluating store locations, any relocations would be minimal, with roughly 90% of retail CapEx focused on opening new stores in untapped areas of Florida. Regarding Massachusetts, Goubert stated they are not yet where they need to be on retail traffic and consider it a second-half 2023 opportunity. He emphasized that a key focus in Massachusetts is also on growing their wholesale presence across the state's 300+ dispensaries.

Russell Stanley inquired about the company's plans for managing working capital, with a specific focus on inventory management, asking about targets for inventory turns and the expected timeline to achieve them.

Answer

CFO Brad Asher stated that improving working capital through inventory management is a key objective for 2023. Key actions include rightsizing the workforce to align with sales volume and implementing broader supply chain optimizations. He noted that while improvements will occur throughout 2023, the most significant impact on working capital is expected in the second half of the year due to operational lead times.

Russell Stanley from Beacon Securities asked for clarification on the timeline for achieving positive operating cash flow, noting the language changed to "within the next few quarters," and inquired about the potential ceiling for the sell-through of Jushi's branded products.

Answer

Chairman and CEO Jim Cacioppo explained the timeline for positive operating cash flow was broadened to Q3, Q4, or Q1 2024 to reflect the unpredictable, "chunky" nature of cash flow items like final payments on large CapEx projects. He stated that the company is not yet at its maximum for branded product sell-through (currently 47%) and sees significant room for growth, especially in Pennsylvania and Virginia, by introducing a full menu of SKUs in all product categories.

Russell Stanley from Beacon Securities asked for clarification on the company's target to achieve operating cash flow by Q4, questioning the role of working capital release in reaching this goal, especially while ramping up cultivation.

Answer

CEO, Chairman and Founder Jim Cacioppo clarified that the goal is to be free cash flow positive in Q4, after accounting for capital expenditures and interest. He stated that they do not anticipate a significant positive contribution from working capital changes, as inventory levels are already in line after being addressed in the previous year.

Russell Stanley from Beacon Securities inquired about the potential ceiling for vertical sell-through in Jushi's markets and what regulatory initiatives are needed to accelerate growth in Virginia's medical market.

Answer

CEO Jim Cacioppo explained that the vertical sell-through limit varies by market, reaching up to 70% in Nevada and Virginia, while being closer to 50% in Pennsylvania where customer selection is a priority. Regarding Virginia, he stated that the regulations are already well-developed and the primary focus is on improving operational efficiency. He highlighted the upcoming transition to the better-funded Cannabis Control Authority (CCA) in January 2024 as a key positive step for streamlining operations and profitability.

Russell Stanley asked about SG&A reductions, inquiring where the normalized level might be and how much leaner the company could get. He also asked for an update on Georgia's market growth and the potential for pharmacies to distribute cannabis products.

Answer

CEO Kim Rivers stated that while she couldn't provide a specific normalized SG&A number, the focus is on optimizing operations and eliminating redundancies without compromising service standards. Regarding Georgia, she said market growth is proceeding as expected, similar to Florida's early days, and that the company is developing relationships with independent pharmacies in anticipation of new rules allowing them to distribute cannabis, which could significantly increase distribution points.

Russell Stanley inquired about future investment plans for the Florida adult-use ballot initiative campaign and the company's near-term lobbying focus for accelerating growth in the Georgia medical cannabis market.

Answer

CEO Kim Rivers stated that the Florida campaign will transition to a more public-facing posture, and while Trulieve is committed to seeing it through, the level of investment may depend on contributions from industry peers. For Georgia, she emphasized a focus on educating the legislature, in partnership with patients and physicians, about the need for a more robust program to adequately serve the state's 25,000 registered patients.

Russell Stanley from Beacon Securities inquired about the next steps for the Florida adult-use ballot initiative, specifically the process for the Supreme Court review. He also asked for an update on the expected timeline for commencing sales in Georgia.

Answer

CEO Kim Rivers explained that the Florida Supreme Court has until April of the following year to review the ballot language, and if it does not, the language is deemed approved. She noted the campaign has incredible momentum. Regarding Georgia, Rivers stated that Trulieve is ready to open its first two retail locations and hopes to have a clear path to opening within the next 60 days, as the state is eager to provide access for its 25,000 registered patients.

Russell Stanley of Beacon Securities Limited sought confirmation that all necessary corrective actions have been taken in New Jersey and that the company is now just waiting for crops to cycle through. He also asked if Ascend is considering converting any existing traditional stores into the outlet model.

Answer

CEO John Hartmann expressed high confidence that the New Jersey issues have been fully remediated, citing visible improvements in plant quality and month-over-month increases in grams per square foot. On the outlet strategy, he stated that the company recognizes the model's value and will continue to test and deploy it thoughtfully where it makes sense, without committing to converting existing stores.

Russell Stanley of Beacon Securities asked for an updated view on the number of new social equity dispensaries expected to open in Illinois in 2023. He also inquired about the initial performance of the new Tinley Park outlet store and plans for the tenth Illinois location.

Answer

Abner Kurtin, Executive Chairman, noted disappointment with the slow pace of openings, citing capital and real estate challenges for licensees. Frank Perullo, President and Interim Co-CEO, estimated that an additional 20 to 30 stores might open in 2023 and highlighted a looming legislative deadline. Regarding the Tinley Park store, Frank Perullo stated its performance has opened above expectations. He also mentioned that the format of the tenth store will depend on its final site selection.

Russell Stanley from Beacon Securities inquired about the expected number of new dispensary openings in Illinois for 2023 and the potential upper limit for in-house brand sales penetration before it might negatively affect customer traffic.

Answer

President and Interim Co-CEO Frank Perullo stated that new store openings in Illinois are slower than anticipated due to capital and real estate challenges for new licensees, projecting between 50 to under 100 new doors in 2023. Executive Chairman Abner Kurtin added that Ascend plans to be more proactive in helping these licensees open. Regarding brand penetration, Frank Perullo confirmed the company's goal is 50%, with plans to reassess upon reaching it. Abner Kurtin noted that as long as product quality and diversity are maintained, a high percentage of own-brand sales is achievable.

Russell Stanley of Beacon Securities Limited asked for Verano's latest views on the 'Smart and Safe' adult-use cannabis initiative in Florida. He also requested an update on the timeline for new dispensary openings in Illinois and the potential impact on the state's wholesale market.

Answer

CEO & Founder George Archos expressed strong optimism for the Florida adult-use initiative, viewing it as a viable 2024 ballot measure that could be a 'game changer.' Regarding Illinois, he estimated that about a third of the newly licensed stores could open in 2023, noting that a few were already opening and placing wholesale orders, which he sees as a major positive for Verano and for increasing consumer access.

Russell Stanley from Beacon Securities Limited questioned if 40%+ EBITDA margins are achievable in the medium term and inquired about the company's tempered expectations for adult-use cannabis legalization in Florida.

Answer

CEO George Archos responded that while a 40%+ EBITDA margin is not unachievable, it is not prudent to reiterate that guidance due to macroeconomic uncertainty. On Florida, he clarified that the revised outlook is a 'reality check' on legalization timelines and a reflection of disciplined capital allocation. He emphasized that Verano is fully prepared to expand its cultivation footprint in Florida and Pennsylvania once market conditions are right.

Russell Stanley inquired about the anticipated path to adult-use legalization in Florida, the retail opportunity in Miami, and the impact of working capital on the quarter's cash from operations.

Answer

CEO George Archos projected that Florida's adult-use legalization would likely be a 2024 voter referendum. CFO Brett Summerer clarified that working capital was a drag on cash from operations in the mid-teens of millions, primarily due to inventory build-up for New Jersey's adult-use launch.

Russell Stanley of Beacon Securities requested an update on the expected timing for the issuance of new retail licenses in Illinois, given ongoing legal challenges. He also asked for clarification on the 2022 CapEx guidance of $185 million to $250 million, specifically what factors would push spending towards the upper end of that range.

Answer

CEO George Archos stated that due to litigation, he does not anticipate new Illinois licenses to be issued until next year, leading to a 'flat patch' for the state. Regarding CapEx, he explained the wide range is driven by project timelines. Hitting the high end depends on the rapid, on-schedule completion of new facilities in Pennsylvania, Florida, and Connecticut, and expansions in other states, without supply chain disruptions. The low end would reflect projects being pushed into the following year.

Russell Stanley of Beacon Securities asked for the company's perspective on a recent court ruling in Nevada that paused new dispensary licenses and their strategy to navigate the situation. He also inquired about potential M&A activity in Arizona, given competitor actions and upcoming adult-use potential.

Answer

CEO Hadley Ford characterized the Nevada legal challenges as unfortunate but not unexpected in the cannabis sector, expressing confidence that the licenses would ultimately be secured. Regarding Arizona, he confirmed that M&A is a core part of their strategy and they are actively evaluating opportunities. He acknowledged higher prices in the market but believes accretive deals are still achievable.