Step Function Production Jump at Glass House
A Conversation with Glass House Leadership Reviewing Q2's Big Surprise
In a very difficult environment, Glass House Brands (OTC: GLASF) announced a much better than expected second quarter. While the company beat expectations on almost every metric, the real shocker was that production was simply much greater than expected.
Glass House announced a production increase that was at least 30% greater than my estimate and also announced that they expect ongoing annual production to be approximately 30% higher than they previously thought. Instead of 270,000 pounds of annual biomass production, they now expect at least 350,000 pounds and there may be further opportunities to improve from even that number.
What makes these numbers even more amazing is that the weather through the first half of the year in California has been relatively terrible with lots of rain and cloud cover. Consider the results of another public competitor, Lowell Farms (OTC: LOWLF). They run a greenhouse in Monterrey County and reported that production went down by 37% sequentially and blamed tough weather conditions and low sunlight. Glass House increased production by 115% sequentially under the same conditions on a much larger scale.
The evidence continues to mount that Glass House possesses the Ferrari of greenhouses. I believe they possess cost advantage the likes of which I have rarely seen. Consider that Lowell Farms announced a negative gross margin for Q2, while Glass House reported a 61% gross margin.
It is with this background that I hosted Glass House management (CEO Kyle Kazan, President Graham Farrar and CFO Mark Vendetti) in a conversation to review their sensational operational performance in Q2. Here are some highlights from our discussion:
Glass Houses’ new state-the-art packing, drying and storage facility (came online in Q1) helped to deliver the surprise upside in production. And more may be coming down the road as they are only one year into operating their Camarillo facility.
Wholesale margins should rise from Q2 levels of 61% to 65% in Q3 and could approach 70% in Q4. This despite slightly lower seasonal prices. These margins are approaching software gross margins! We dive into why in our conversation. Also consider that these margins are at $650 a pound flower pricing when in New Jersey mediocre weed is selling for around $3000 a pound on a wholesale basis.
I now expect the company to conservatively hit an annual run rate of at least $60 million in EBITDA next year and that is while only using approximately 40% of their ultimate capacity.
There is a whole lot more to the conversation including a focus on unit level economics and expectations for state and federal reform. Glass House is breaking away on the back of just incredible operational efficiency and a relentless focus on cultivation excellence.
I hope you enjoy the conversation:
Here is the Spotify link for audio only: