Harvest Health & Recreation Inc (CNSX:HARV) CEO Discusses Consolidation Impact on MSO Valuations

Harvest Health & Recreation Inc (CNSX:HARV) CEO Discusses Consolidation Impact on MSO Valuations


[Intro music]
Narrator: Harvest Health & Recreation Inc. is a vertically integrated cannabis company
with one of the largest footprints in the US. The company has recently entered into a binding
agreement to acquire Verano Holdings LLC, one of the largest privately held licensed
operators of cannabis facilities, for an estimated purchase price of $850 million USD. The deal is one of the largest US cannabis
consolidations in history, and will give Harvest the right to operate up to 200 facilities
across 16 states and territories. Harvest Health & Recreation is listed on the
CSE and trades under the ticker symbol HARV. James West: Steve White joins me now. He’s the CEO of Harvest Health and Recreation,
trading on the CSE under the symbol HARV. Steve, welcome. Steve White: Thank you very much for having
me. James West: Steve, we are meeting on this
momentous occasion of where Canopy Growth has made an offer to purchase all of the stock
outstanding in Acreage Farms which, if concluded, would be the largest transaction in the cannabis
space to date in the form of a merger, and it’s particularly interesting because it’s
a cross-border merger, which nobody really thought would be able to happen in the current
environment where marijuana is Federally prohibited in the US. Now, what are the implications for Harvest
Health & Recreation directly, and the entire sector in the US and Canada, generally? Steve White: So, start with Canada because
that’s the easy one: it’s another instance where Canopy Growth figured out a way to do
something that everybody else thought was impossible, and then they went out and executed
it. So, kudos to them for being first on this. And so the problem now for Canadian LPs is,
the blueprint is now out there, and the blueprint does not require a Canadian LP to make the
acquisition. So this is something that if a consumer packaged
goods company, or an alcohol company was interested in the space, they copy Canopy’s blueprint,
and in they come. That also means that prices get higher, right? So US multi-state operators become more valuable,
because there are more people, you know, looking to purchase them over time, and that’s another
problem for Canadian LPs. For Acreage, it’s a great deal as well. They did, they took, it’s the ultimate private
equity play. They put together a number of assets, they
bundled them together, and they sold them at a much higher price than what they acquired
them for. Kudos to them. Also positive for US MSOs, because we have
more people who could be targeting acquisitions in the US. James West: So the consolidation momentum
that has now been established yet again by Canopy, do you think that’s going to take
the whole sector higher in terms of valuation in the immediate term? Or is it more like a long, slow burn to the
upside that’s just going to keep on going as these bigger companies and bigger deals
happen? Steve White: I think the long term’s easier
to predict, and I do think it is going to go up over time. I’ve given up on trying to predict what
stocks are going to do day-to-day or on the short term. James West: Sure. Steve White: Particularly in this sector;
it’s so volatile, and if it’s, if volatility is something that is a problem for you, this
is the wrong place to be. James West: Right, that’s right. Steve White: There’s a lot of other places
that are safer and a lot easier to deal with. So I think, but I do think short-term, what
we’ve seen is people who, US companies who everyone knows are going to be aggressive
and are going to look to do mergers, acquisitions, look for financial partnerships, those people
will be rewarded, because there is a blueprint available for that to happen. James West: You bet. So for Harvest Health and Recreation, acquire
or acquirer? Steve White: Both. Well –
James West: You’ve already demonstrated –
Steve White: We’ve been an acquirer over time. I mean, but, you know, it is our job as fiduciaries
of the company to make good decisions for Harvest shareholders. If the right financial partner comes along,
it’s a conversation we have to have. We do, and for us, you know, we love what
we’re building. We’re very proud of it. We see incredible upside, and hopefully other
people do, too. James West: Right. In terms of your footprint in the United States,
you seem to have dominance in most of the legal markets that are important from a population
perspective. Do you see any reason for a company like yours
to make a move north into Canada? Steve White: There could be a strategic reason
why we would do that. The problem that we have right now, the disadvantage
we have over the relative to the Canadians is, our stock trades at a severely lower levels
than the Canadians, right? So they trade based on earnings. They trade at 7 times what we trade. So for our stock is therefore more valuable
to us. So we can’t go make Canadian acquisitions
because Canadian stuff, frankly, is too expensive right now. So you know, the Canadian opportunity is a
good one; it’s a legal market. There are companies that are executing well
in the market. For us, that’s a difficult acquisition to
make. Plus, there are so many good opportunities
in the US right now, that’s where our focus is. James West: Okay, so what’s your big problem
that you have to execute on right now in order to sort of backfill the valuation that you
have, even though by your own admission, it’s low relative to Canadians. But you know, there’s this expectation that
these companies, like especially in the Canadian sense, where the valuations are high and they
certainly are not justified by sales and revenue, but so it’s speculative value based on a
future expectation of revenue growth and, ultimately, profit. So in the US, the same thing applies even
though the valuations aren’t there. What’s your approach to that? Steve White: We just have to continue to execute. The unique thing about Harvest is, we’ve
been a profitable company for years. Before we went public, we made money. We learned how to make money because we had
to make money. We didn’t have access to capital the way
that the Canadian companies always have. So we had to run good foundational profitable
businesses. So it’s really about execution. When you tell analysts and you tell The Street
and you tell investors you’re going to do something, you have to go out and do it; so
that’s what we have to continue to demonstrate over time, that that is who we are, that’s
what we’ll continue to do. James West: Sure. In the Canadian context, CEOs like to focus
on the cost of growing and their realized cost per gram in the marketplace, which is,
unfortunately, lower than anybody wants except maybe the consumer, because the government
mandates this pricing model. In the United States, there’s no such limitation,
so you’ve got, in some cases, extremely premium product going for as high as $30 USD
a gram, while at the same time, in California, for example, there’s 200 to 300 percent
more supply than there is demand, and so at the lower end, there’s price competition
that’s threatening to become a commodity price level. Does that sort of scare you at all, or do
you feel that your operation and your asset mix protects you sufficiently? Steve White: Yes. But I think that really underscores the importance
of winning applications when the state issues them, because what you see consistently is,
early on in a market you see that big margin spread. Harvest has traditionally been very good at
going out and getting licenses when they’re issued, building facilities and stores quickly,
and then turning the businesses profitable very, very quickly. Over time, I think we all agree that there’s
going to be a tendency towards commoditization for cannabis. In many instances, it’s going to be an ingredient
in other products; that’s inevitable. We have to be able to, as leaders of these
companies, see around the corner and build the business accordingly. For us, one of the things that we talk a lot
about in the US is, the retail footprint, the wholesale footprint, and then ultimately
using that to build brands. So that’s how we protect our margins. James West: What is Harvest Health’s flagship
product? Steve White: We have a number of products,
actually. So our flagship are really our retail stores;
those are called Harvest, right? So the stock looks like the retail stores. But we have now over, with our recent acquisitions,
we have more than 20 brands under the Harvest umbrella, with hundreds of skus when you add
all those brands together. We have, in multiple states, rolled out, you
know, our biggest – we have some flower brands that are quite popular, we have some
vape brands. Those are the most popular, those account
for the biggest portion of our revenue. James West: The ability to advertise in the
United States, is it uniform across all states? Advertising is more or less permitted? Steve White: Nothing is uniform across the
states in the United States! We have everything from no restrictions to
you can’t do it, and then everything in between. So that’s one of the challenges; it’s
also one of the opportunities that we have. If we can navigate through that better than
other people, it presents an opportunity for Harvest, but nothing is uniform across the
50 states in the US. James West: Wow, fascinating. Okay, well, Steve, we’re going to leave
it there for now. It’s my first time talking to you, and I
really appreciate the conversation. We’ll talk again soon. Steve White: Enjoyed it. Hope to be back soon. James West: Definitely. Steve White: All right.

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