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spk07: Good morning, everyone, and thank you for participating in today's conference call to discuss ColumbiaCare's financial results for the fourth quarter and full year ended December 31st, 2021. This call is being recorded for replay purposes. A replay of the audio webcast will be available in the investor section of the company's website approximately two hours after the completion of the call and will be archived for 30 days. I would now like to turn the conference over to Lee Evans, Senior Vice President, Capital Markets for ColumbiaCare.
spk01: Thank you, Melissa. Good morning, and thank you for joining ColumbiaCare's fourth quarter and full year 2021 earnings conference call. With me today are Nicholas Vita, our Chief Executive Officer, David Hart, our Chief Operating Officer, Derek Watson, our Chief Financial Officer, and Jesse Shannon, our Chief Growth Officer. Earlier this morning, we issued a press release reporting our fourth quarter and full year 2021 results, which we also filed with the applicable Canadian Securities Regulatory Authorities on CDAR and the U.S. Securities and Exchange Commission on EDGAR. A copy of this release is available on the Investors section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans, and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risk Factors section of our annual information form, dated March 31, 2021, as filed with applicable regulatory authorities and posted on CDAR in our amended Form 10, filed with the SEC on February 15, 2022, on EDGAR. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law. Also, please note that on today's call, we refer to certain non-GAAP financial measures such as adjusted EBITDA, These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. ColumbiaCare considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. As this is our first call reporting under GAAP, for a final time on this call, we will also refer to certain non-IFRS financial measures such as combined adjusted EBITDA, These references are intended to assist analysts in assessing our results as our 2021 guidance was presented with reference to IFRS. These non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. A reconciliation of such non-IFRS financial measures to their nearest comparable IFRS measure is included in our press release issued earlier today. With that, I will turn the call over to Nicholas Vita to get us started. Nick?
spk10: Thank you, Leigh. And good morning, everyone. Our team is very pleased to be with you today to discuss our fourth quarter and full year results, as well as our outlook for the coming year. But first, allow me to comment on the exciting news that Columbia Care will be combining with Cresto Labs to become the undisputed leader in cannabis in North America. As was announced yesterday, Columbia Care will be combining with Cresto Labs, creating the new leader in North American cannabis. Together, Columbia Care and Cresto Labs will be the largest multi-state operator on a pro forma basis with over $1.4 billion in revenue. and leading positions in 17 states and the District of Columbia. The combined company will have over 130 retail locations, a more diversified revenue stream by market, full vertical integration in 16 states, and an industry-leading wholesale platform. The combined company's scale will enable us to leverage our investments, increase vertical integration, and reduce redundant operating costs more effectively. The share exchange will give Columbia shareholders approximately 35% ownership, the combined company on a fully diluted in the money basis. To summarize it succinctly, the combination of the best companies in the business enables us to accelerate our strategies for the growth and deliver the best outcomes for shareholders. Crestville and Columbia Care are aligned in our vision for the future of cannabis, and together we will be best positioned to continue our mission as a combined force. With Columbia Care's strategic footprint, national footprint, and the most attractive markets, especially those poised to transition to adult use, such as New Jersey and Virginia, alongside Cresco's success in execution and incredibly popular brands, we will together create the most important and investable company in cannabis. Getting to know Charlie Bechtel, the co-founder and CEO of Cresco, along with his team and the culture at Cresco, has given me a great deal of confidence in the ability to successfully integrate ColumbiaCare and maximize the value of the tremendous footprint we've assembled so that we can best serve our patients and consumers. I am now more excited than ever about the possibilities before us, and together with Cresco, we will accelerate the pace of profitable growth. Let me turn briefly to the fourth quarter and full year of 2021. Looking back on the past year, I am so proud of what we've been able to achieve. In 2021, we opened 12 new retail locations, inclusive of Medicine Man in Colorado, entered three new markets, West Virginia, Missouri, and Utah, upgraded 22 locations to the new cannabis branding, and expanded to 49 different product categories across our house of brands, such as Classics, 777, and Seed & Strain. Added more than 1 million square feet of additional growth capacity, including the largest cultivation facility on the East Coast in Riverhead on the North Fork of Long Island, New York. These achievements and up and others that David will discuss in more detail in just a few moments drove strong year-over-year financial results. On a GAAP basis, revenue rose from $179.5 million to over $460 million, an increase of 156%. On a combined IFRS basis, revenue rose 139% in line with our guidance. We extended our record of sequential growth every quarter of 2021, including 5% sequential growth in 4Q. We had strong bottom-line growth with combined adjusted EBITDA reaching a record $85 million, also in line with our guidance. Last quarter, I spoke about our four North Stars being the MSO in the best markets for the best margins, establishing a nationwide retail experience with cannabis, as well as a highly recognizable and sought-after national brand portfolio, continuing to build upon our unique and sustainable competitive advantages and leveraging data-driven decision-making to ensure customer loyalty and drive the highest returns on investments. We are relentlessly pursuing these initiatives and will continue to do so up to and through the combination with Cresco. The groundbreaking combination of the two companies will accelerate the pace of change, and it represents a clear inflection point in the growth opportunity for both companies. We believe the time for consolidation is now, allowing for the preservation and generation of cash flow today and creating the most strategic positioning ahead of federal legalization and greater capital markets access. We look forward to having all of you with us on this journey as we create the most important and investable company in cannabis. Now, I will turn the call over to our CFO, Derek Watson, to cover our financial results and outlook. Derek?
spk04: Thank you, Nick, and good morning, everyone. I'll provide a brief summary of the key financial results for the fourth quarter and the full year, discuss our outlook for 2022, and briefly address the exciting transaction with Cresco that we announced yesterday. As we've mentioned today in our preliminary earnings release last week, this is our first quarter and full year reporting under US GAAP after we became an SEC filer in mid-February. We hope to make this transition as transparent as possible, so to provide a reconciliation between our IFRS and US GAAP results, and we'll reference comparable IFRS results for the fourth quarter and full year, given that was the basis of our 2021 guidance. Also keep in mind that due to the close of our Ohio transaction effective July 1st, starting in Q3 of 21, we no longer report closely combined metrics. For the full year, therefore, the first six months do include combined metrics. And again, we've provided that reconciliation in our supplemental materials. So to begin with our results, revenue in the fourth quarter was 139 million, an increase of more than 5% sequentially quarter over quarter, and over 70% year-over-year when compared with Q4 of 2020. The sequential growth was driven primarily by sales increases in our Massachusetts, Florida, and Virginia markets, in our Colorado wholesale business where we had our first outdoor harvest, and contribution from the acquisition of Medicine Man in Colorado that joined the Columbia Care family effective November 1st. For the full year, we achieved $474 million in combined revenue, representing growth of 139% year-over-year and in line with our IFRS guidance. Adjusted gross profit for the fourth quarter declined sequentially by approximately $1 million to $64 million under IFRS, resulting in an adjusted gross margin of 46%, down from 49% in Q3, and bringing our full-year adjusted gross margin to 45.1%. The main driver of this sequential decline was softness in the Pennsylvania market and wholesale in particular. Reported operating expenses were $70 million in the fourth quarter, excluding a one-time impairment charge, compared to $62 million in the third quarter. And as a percentage of reported revenue, our operating expenses continue a downward trend, with our corporate-only operating expense now representing 11% of total revenue in Q4. Combined adjusted EBITDA for 2021 was $85.1 million, also in line with our guidance, bringing our full-year adjusted EBITDA margin to 18%. This adjusted EBITDA in Q4 was $27 million, or 20% of revenue, down 4 percentage points from Q3, and driven by the margin compression we've described, at 8 percentage points higher when compared to Q4 of 2020. The equivalent adjusted EBITDA margin under U.S. GAAP was 13%, and this will be the basis we use for our 2022 guidance and results going forward. Wholesale represented approximately 19% of revenue in Q4 compared to 20% in Q3, a change driven again by the decline in our Pennsylvania market. We had another quarter of positive cash flow from operations, helping bring our year-end cash balance to approximately $82 million. And subsequent to year-end, we also completed a private placement of $185 million in 9.5% senior notes due 2026. This financing is non-dilutive and provides us with continued flexibility as we invest in our growth initiatives. Capital expenditures in the fourth quarter were approximately $45 million compared to $41 million in the third quarter. And we continue to invest in our growth markets, including New Jersey, West Virginia, Virginia, New York, and in the expansion of other cultivation sites, including in Ohio and Pennsylvania. Turning to our outlook for 2022, again, we're issuing guidance in U.S. GAAP and guiding to 625 to 675 million in revenue and 120 to 135 million in adjusted EBITDA. This outlook assumes adult use begins in New Jersey in Q2 of 2022. but does not include any contribution from future acquisitions nor any changes in the regulatory environment in our other markets. As our competitors have already been reporting, we continue to see some headwinds from late 2021 extending into early 2022, including unfavorable pricing dynamics in certain markets such as Pennsylvania and California, macro pressures such as inflation impacting discretionary spending, and we no longer see income subsidies for consumers as we did during the height of the pandemic. With the combination of these factors, we foresee flat to negative top line growth in Q1 of 2022 versus the fourth quarter. However, we continue to focus on improving our gross margins through cultivation efficiencies and scale, even in markets where competition is increasing, and further improving our EBITDA margins by leveraging corporate overhead. We're anticipating positive catalysts in the year, including adult use sales in New Jersey, new store openings in Virginia and West Virginia, and organic growth in many of our existing markets like Florida and Ohio. Lastly, I'd like to quickly address the exciting transaction announced yesterday with Cresco. And as Nick has mentioned already, the combination of two of the largest MSOs will create the number one operator in the industry based on pro forma revenue and with a leading national footprint in both wholesale and retail. In looking at the strength of this combination, we anticipate significant value to be created through operating synergies, avoiding the duplication of longer-term capex in overlapping markets, and proceeds from the sale of assets and jurisdiction where there is some regulatory overlap. There's obviously a lot more to do here, but based on the anticipated timing of closing around the end of 2022, we'll be working with the Cresco team over the next nine-plus months to develop a thoughtful approach to this integration and how we execute against this post-closing of the transaction. And with that, let me turn the call over to David to cover more of our operational highlights. David?
spk12: Thank you, Derek, and good morning, everyone. I'd also like to take a look back at the key accomplishments of this past year, as well as discuss the current operational landscape. In addition to the highlights that Nick covered, we had transformative achievements in 2021, reflective of our priorities to continually optimize our efficiency from an operational perspective, especially when we saw ongoing pricing pressure in both wholesale and retail in Q4. Chief among these investments in 2021, beginning with cultivation manufacturing, are over the course of 2021, we added over 1 million square feet of incremental cultivation manufacturing capacity, the optimization of production planning, genetic selection, environmental controls, and plant management across the cultivation portfolio, which has driven a dramatic and favorable impact on gross margin improvement, as well as crop yield and potency. Being first to market with the introduction of wholesale flower sales in Virginia in September and in New York in October, the launch of the Classics whole flower brand in five markets in a single day in October, the largest single-day launch of a flower brand in the industry, which was made possible by the infrastructure and team that we have in place. The completion of the first harvest at our new Riverhead, New York, location in December, which is now producing flower for the New York medical program. The opening of our first manufacturing site in West Virginia, with three retail locations open to date and another expected to come online shortly before the end of this quarter. The addition of a manufacturing site in Missouri, which became operational in Q4, and a record indoor harvest in Colorado, where the results are indicative of the progress we're making in our overarching strategy. On to retail. We have maintained a continuous focus on driving labor productivity at the store level, despite the challenging hiring environment. The continued expansion and improvement in store-level dashboard systems to maximize efficiencies across our entire retail footprint. The conversion of 26 stores to the cannabis brand, including all 14 Florida locations, which were simultaneously converted on the same day. Approximately one-third of all ColumbiaCare retail locations are now under the cannabis brand, which was introduced in May of 2021. We also closed several meaningful acquisitions in 2021, including the Healing Center San Diego, Greenleaf Medical, Canascend in Ohio, Medicine Man in Colorado, and nearly 1 million square feet of cultivation and production capacity on Long Island, New York, all of which have served to deepen our footprint. These achievements are the result of the hard work of everyone in our manufacturing, distribution, and retail networks, and I'm incredibly proud of what they've accomplished. As we discussed in the third quarter call, we continue to operate in a challenging environment, from hiring to inflationary costs to aggressive discounting by competitors to regulatory delays. Our teams continue to work hard every day to drive the top and bottom line. As you look back at Q4 more specifically, on a revenue basis, our top five markets in alphabetic order were California, Colorado, Massachusetts, Ohio, and Pennsylvania. On an adjusted EBITDA basis, the top five markets alphabetically were Colorado, Maryland, Massachusetts, Pennsylvania, and Virginia. We opened the West Virginia and Missouri manufacturing sites, as I mentioned a moment ago, as well as the retail location in Richmond. We opened Virginia Beach in Q1 of 2022 and now has four locations opened in the state of Virginia. We ended the year with 79 retail locations open and another 20 under development. To date, we have 83 active retail locations and 16 in development. Looking forward to 2022, we remain highly focused on a number of key initiatives. Retail openings with 16 Canvas locations in the pipeline, including West Virginia, New Jersey, New York, and Virginia. Expansion of cultivation in our Riverhead, New York facility to scale with growing medical program and the advance of adult use. Further optimization of our cultivation facilities to maximize yield and quality. Maintain grams per square foot and THC levels for flour will be critical to offset price decline curves anticipated in many of our markets. Concentrated effort at driving efficiencies and our packing and distribution capabilities to match the significant performance improvements that we've achieved elsewhere in the value chain. further development of the FORGE application, enabling consumers to explore production options, order the products of their choice, and further inform our manufacturing distribution decision-making through data, and a continued expansion of our nationwide rollout of our exclusive product brands. Much of the CapEx spending Q4 was dedicated to cultivation in markets such as Ohio, West Virginia, New York, and Virginia. which we anticipate will demonstrate results in 2022, particularly in the second half. We continue to put money to work for growth opportunities. We are facing pricing pressure in some markets. We're also investing in incremental canopy to ensure that we can manage the costs. We have made progress in automating and standardizing across the markets, which sets us up nicely for 2022. With that, I would like to turn the call back to Nick for a few closing points before we open up for the Q&A. Nick?
spk10: Thank you, David. I want to close with a final note on the transaction that was announced yesterday and what it means for ColumbiaCare. The extraordinary strength of this partnership is undeniable. Together, ColumbiaCare and Cresco Labs will be the true leader of this industry by every measure, but most importantly, we're natural partners with complementary skills, cultures, and values. While we've been competitors since the very beginning, we've always had a mutual respect for how each other operates in this space. This partnership will establish the new leader in North American cannabis and the most important and impactful company in our industry by every measure. We will be positioned for balanced and sustainable growth by marrying Cresco Labs' number one wholesale portfolio and Columbia Care's robust retail network. There is a lot of work ahead of us to bring the transaction to a successful close, including divestitures, but I am confident in our ability to execute as we have in the past. I am inspired by what this partnership means for the future of Columbia Care and the cannabis industry as a whole. We have found partners that see the world through the same lens as us, and we have the opportunity to make a historic impact. We will continue to strive forward towards execution of our strategic priorities in 2022 and look forward to a new chapter for Columbia Care going forward thereafter. I am grateful to my team and everyone, including those of you on this phone, who have worked so hard to bring us to this point and cannot thank you enough. We're happy now to take your questions. Operator?
spk07: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Aaron Gray with Alliance Global Partners. Please proceed with your question.
spk06: Hi, Aaron. Hi Nick and team, good morning and thank you for the questions. So first question for me, I appreciate the color in terms of the margin impact and that coming from Pennsylvania. And obviously we've got some of the third party data, seeing some of the pressure there in the overall market as well as for legacy G-Leaks. So just wondering in terms of how do you think about the timing of that turning around? It looks like you're going to expect some continued margin pressure there. maybe changes you're making, you know, at the cultivation and when you might expect to see a turnaround in terms of your market share and the overall kind of price that you're seeing within Pennsylvania. Thank you.
spk10: Sure. David Hart, why don't I turn that over to you?
spk12: Sure. Thanks. So we are in the middle of the construction process for our Saxon facility in the state of Pennsylvania. I think everyone's aware that it is a large footprint. We've invested a fair amount of capital into that project. we are going to add incremental canopy over a phased approach as we bring product to market. So in addition to the incremental canopy and obviously I think the leveraging the fixed assets that are scheduled for 2022, we're also in the middle of introducing a number of our national brands into the state of Pennsylvania, which we've not yet done. So from our perspective, there is incremental supply that's going to be coming out of our facility in Pennsylvania over the course of 2022. We obviously want to be thoughtful about that. We continue to press the envelope with respect to the percentage of G-leaf product that's on our three stores' shelves. And so that continues to increase as we work to bring incremental genetics potency and quality from the Saxon facility into the marketplace. We continue to develop relationships across the market in Pennsylvania. There are obviously plenty of legacy relationships with the GLE's team, but we've done our best to bring some incremental relationships. And so from an operational perspective, if the timing issue with how much incremental canopy we're going to bring on during the course of 2022, we're going to be thoughtful about that as we look at the market. I think we highlighted in Q3, late Q3, and early Q4 that we had We had some production issues in the Saxon facility that have now been fully resolved. And so the quality and quantity of material coming out of that facility is back to historical levels. In fact, I think it's above, which is positive for gross margins. So we continue to watch very closely the Pennsylvania wholesale market. We see it both on the retail side in our stores and obviously what the GeneLeaf team is seeing in real time on the wholesale side. But we're taking a balanced approach to bringing that incremental canopy on. But there's no question that to the extent that there are price decline curves that present themselves in 2022 in Pennsylvania, having that incremental scale and leverage will allow us to be efficient with our production and hopefully offset from a gross margin perspective those price decline curves.
spk06: All right, great. Thank you very much for that call. That's helpful. And second question from you before I pass it along. So, you know, first quarter, you know, flat, you know, to down some. we look at the remainder of the year at the midpoint of guidance, you know, that implies about 170 million, you know, average, if you assume it's flat for the first quarter. So, you know, a pretty good amount of growth for the remainder of the year. You talked about pricing pressure continuing. You just want to know in terms of how much pricing pressure you have, you know, embedded within your model for the remainder of the year versus the growth opportunities that you see in terms of New Jersey starting the new stores in Virginia and and West Virginia. So I really just want to get a better call in terms of what pricing expectations you have embedded within the guidance. Thank you.
spk10: So let me turn that over to Derek, and then I'll hand it over to David. Yeah, thank you, Nick.
spk04: So we're looking at, obviously, 17 different markets around the country. There are different pricing pressures depending on the market. A number of our markets we have experienced increased average market size in Q4, and a lot of that In many cases, it's due to the cannabis rollout and people switching into our new retail banner and spending more in those stores. So, yes, there's pricing pressure, but between the segments that we're operating in, we are seeing some uplift in prices. And that's true for a lot of markets around the country as we move through 2022.
spk10: David, do you have any thoughts?
spk12: Yeah, I would also add, you know, we have been, we've gone through this digestive phase before with our CapEx, and that's obviously something we're in the middle of right now based on what we spent in totality in 2021. So you're talking about new canopy, you know, annualizing year over year in Virginia, New Jersey, New York, Ohio, obviously West Virginia, Florida, and improvements in yields across the board, but particularly in Colorado and California and Pennsylvania. and new manufacturing in Arizona, Florida, obviously West Virginia, and Ohio. So there's a fair amount of new assets and production coming out of our assets during the course of 2022 as a result of the investments we made in 2021. And so that is all of that material coming online and working its way through our supply chain and ultimately in the wholesale and retail market will provide incremental lift as well from just a total dollars perspective.
spk06: Okay, great. Thank you very much for the call, and I'll jump back into the queue.
spk07: Thank you. Our next question comes from the line of Vivian Azer with Cowan & Company. Please proceed with your question.
spk05: Hi, good morning. Thank you. I wanted to follow up on Erin's line of questioning on Pennsylvania. It's hard to belabor the point, but it clearly has been such a topical market throughout earnings season. This is a market where you and your competitors have been incredibly transparent about the amount of capacity that's coming online, so deflation shouldn't have been unexpected, I don't think. But I am curious, relative to your internal expectations, where did deflation trend, not just for the fourth quarter, but we're a week out from closing 1Q, so any incremental commentary on 1Q would be helpful, too. Thank you.
spk10: So I'll turn that over to David, and then I'll turn it over to Derek.
spk12: Sure. Morning, Vivian. So in Pennsylvania, we have tried to provide a fair amount of transparency. There's obviously... a lot of data that's out there through third-party resources to show where the trends are. We saw in Q3, early Q3, and then actually into Q4, we saw some price decline curves in Pennsylvania that I think were pretty breathtaking for a period of time. They have rebounded, particularly for I think what is now taking place in Pennsylvania, which we've seen in other markets, particularly markets like in Colorado or California where there's a segmentation of with respect to quality and potency. And so the price decline curves for, you know, call that B or C quality flour is pretty significant in Pennsylvania. And we don't anticipate that rebounding anytime soon. The market for high quality, high quality, high potency flour has rebounded in terms of the price per pound. And so that is, that's one data point that is, you know, constructive for the Pennsylvania market. There is clearly still demand for high-quality, high-quality flour. And so that is part of our thinking, part of our expectation for Pennsylvania. I think it just highlights what we're probably going to see, I think, in most of the markets on the East Coast, which wasn't probably present two years ago, is that genetic diversification and potency matter from a pricing perspective. And so you will see that categorization of flour and flour derivatives in most of these markets, including Pennsylvania. So That's one of the key factors that we're focused on, which is the productivity coming out of the facility in Pennsylvania. In addition, I do think that bringing in a number of new, not only just genetics, but new form factors and brands, namely our national brands into that Pennsylvania market, will help allow us to put incremental products on the shelf throughout the state. So to me, those are the factors that we control internally right now within Columbia Care and Legacy G-Leafs. for our expectations for Pennsylvania. But there's no question, it was a sizable part of our business and our expectation in the second half of 2021. And we have made, obviously, some forecasting assumptions for 2022 as it relates to Pennsylvania. I think, thankfully, we've got a number of markets that are expected to outpace the broader market in terms of growth opportunities organic to Columbia care, but also at the macro level within the state that are going to be tailwinds for us in the course of the year to help offset what we think will continue to be some, some constraints on the, on the, on the demand side for, um, you know, anything below a quality flower coming out of Pennsylvania. Sure. So it's, um,
spk04: It's one of those markets where obviously the industry is positioning for adult use coming on. So there's more cultivation coming online in Pennsylvania ahead of that. So not unexpected. I will just add to what David was saying, which is we've reported here that Pennsylvania is still one of our top five markets and still one of our top five markets, both revenue and adjusted EBITDA. So although there's some headwinds from Q4 of 2021, and including some of the cultivation challenges that David mentioned, it's still one of our top markets and remains in that top profile for us.
spk05: Understood, and thank you for that, Collar. Just to follow up on that, though, given the characterization of the drop-off at the end of 3Q, it seems like the price deflation perhaps started but certainly was more significant than you've anticipated. And I appreciate that you're bringing on more canopy in Pennsylvania to insulate gross margin and skew towards a higher quality profile with, you know, genetic diversification. All of that is clearly important. But I'm hopeful that you guys can articulate maybe a little bit more specifically, you know, how you guys change your market modeling in terms of, you know, the supply and demand imbalance. I get it. You know, there's optimism in the market around, you know, I don't share that optimism. So, you know, there's still a lot of capacity coming online. So how have you changed your market modeling assumptions?
spk10: Thanks. Look, Vivian, let me just add to that. I think, you know, piggybacking on, you know, trying to avoid being repetitive, but, like, this is a scale game, right? And so you have to have the most efficient manufacturing model with the best products, and you have to be able to convey products that actually sort of embrace the value proposition in the eyes of the consumer. And so when you think about the way we've changed our market modeling, we have assumed the price decline curve that we're not going to discuss today, but it is a price decline curve. And that is based on not only the impact of the macroeconomic environment, which is probably, in my opinion, the single most important factor that's hurting the wallet of the consumer, but also the competitive dynamics. there are always going to be additional players coming into every market. This is just the way every market is going to materialize over time, and I think the industry needs to get positioned for that eventuality. That is one of the driving factors behind our decision to combine with Cresco. Our Saxon facility is arguably the most skilled facility in the state of Pennsylvania. We will be able to produce products at a much lower rate and a much higher level of quality than most of our competitors, if not all of our competitors. When you add to that the idea of the value proposition, the form factors, the branding, that is the only way that someone can escape the commoditization of their products. And that is precisely what we are doing. And so not only have we changed our market model, we've actually adjusted our overall strategy and tactics to the way we approach Pennsylvania and the national market. So it's a very fair question, but I think that you have to sort of, like, this is something we've seen in Colorado, something we've seen in California. It doesn't surprise us at all. And it shouldn't surprise anybody on this phone, because this is going to happen in New York, this is going to happen in Virginia. And just the question is, what is the timeline? And so, you know, that is, I think, when you think about it from the standpoint of sort of the top down, like, that's what's driving a lot of our decisions right now. In addition to cost of capital and other things like that. But It is, you know, the specifics of how we do it and why we do it, I think, are proprietary. But the sort of the overall, the overarching sort of changes we've made continue to improve. And by the way, we have seen improvements in our pricing power in the wholesale market. And there's value to be had in having a fully integrated model that allows you to insulate yourself somewhat from a lot of those dynamics.
spk07: Thank you. Our next question comes from the line of Matt McGinley with Neiman Company. Please proceed with your question.
spk11: Thank you. Your 22 guidance implies that you expect around a six to seven point improvement in EBITDA rate this year. Would you expect that improvement to be weighted more to gross margin improvement or from G&A leverage? And on the flat to negative comment for top line in the first quarter, does that extend the margin rate as well or would the operating efficiencies that you've been speaking about enable you to grow that rate in the first quarter as well?
spk10: So let me turn it over to David and then I'll also ask Derek to weigh in.
spk12: Yeah, so it's a good question. It's a combination of both. There's clearly incremental scale and leverage that we're going to achieve from an OPEX perspective as we grow just the organic top line. So that is definitely a part of the story. We do expect to continue to see some improvements. And again, we've got a number of markets, but in aggregate, we expect to continue to see incremental throughput that's going to drive incremental gross margin improvement during the course of the year. But, Derek, I'll hand it over to you if you want to provide any sort of specificity. Sure.
spk04: Yeah, and well said. It is a combination. We've obviously got high top-line growth in 2022 as we're expanding in markets, and we've got new store openings. And it is a leverage. It is a scale benefit on the cultivation assets and the gross margin and the infrastructure that we've built in corporate expenses. So, yeah, very much hitting both aspects.
spk11: Agreed. And on the CapEx spend, you spent about 75% of your total dollars in the last two quarters of 2021. Do you expect to sustain CapEx at that level into this year? And how much of that spend would you expect to make on growth investments relative to some of the productivity enhancements that you invested in or put in place last year?
spk10: I'll start off at a very high level statement. So the CapEx curve will decline as the year goes forward. If you recall, when we raised the debt at the beginning of the year, That was really to position the three kind of primary transition markets, New York, New Jersey, and Virginia. We continue to invest in those markets, but that's in anticipation of sort of an adult use changeover. There will be small enhancements here and there, but the bulk of the capital is really going to sort of materially meaningful opportunities that are kind of near term. Let me turn that over to David and Derek again.
spk04: Yeah, so I echo that. And a lot of that, as Nick has mentioned, is on the evolution of the individual market. So when we're creating initial scale in a new market, and New York, Virginia, New Jersey being great examples of that, there's a lot of capex to just build that footprint. As the markets evolve, and we've talked about Colorado and Pennsylvania already, those investments are to improve efficiency and improve yields and That's obviously helping the gross margin in those more mature markets.
spk07: Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.
spk08: Good morning, everyone, and congrats on yesterday's news. Just was wondering on your potential future endeavors here on continuing to increase operating leverage and getting full economics from a lot of the facilities you guys have built out in the past. Is there any change on the back of yesterday's news, given that it is, you know, a nine-month-plus probably closing date on that deal with Cresco of things that you might take, you know, your foot off the accelerator on that you otherwise would have, considering there could be divestitures of some of these assets? And does that play in at all to your forecast for next year?
spk10: So I'm going to – let me take a very high-level approach to that. So Obviously, we're in a moment in time where we have to be very, very deliberate in how we think about the business and how we move forward. I think the safe assumption is to sort of look at the world through the lens of Columbia Care Standalone until the moment in time that Columbia Care is combined with Cresco. So we're going to keep our foot on the gas and push ourselves as hard as we can. But the lesson we learned from last year regarding our guidance is that we actually had to reduce guidance. I'm sure everyone on the phone remembers that. And that was not an easy process for us. And a lot of the feedback we heard from many of our institutional investors was, you're not getting credit for being a high growth player in this market. You're not getting the multiple you deserve. So don't put out expectations that are anything but more than achievable. And that's precisely what we've done. So we've taken a very, very conservative approach based on the portfolio we have. There are obviously headwinds in some markets and there are opportunities in others. But we're managing the headwinds, I think, effectively and intelligently. And we're taking advantage of the opportunities as aggressively as we can. So we are absolutely not taking our foot off the gas. We're pushing ourselves harder than ever to make sure that we continue to move forward and continue the momentum. And I would anticipate that carrying through the next year. But one of the things that I never want to have to do again is go back to the street and basically sort of eat my hat and apologize for having to reset expectations. So it was actually really driven by a very practical kind of messaging and credibility issue more than anything.
spk08: Got it. Okay, thanks. And then I just wanted to pivot now to New Jersey specifically. So you mentioned in the prepared remarks, you know, potentially a Q2 kickoff date. I know there's a meeting later today with the commission, but I'm just wondering if I can get a little more granularity on your expectations, just, you know, maybe in terms of materiality. for how the rollout's going to go. And, you know, not specific to anything ColumbiaCare, but just sort of more macro. It doesn't seem like there's a lot of stores that are going to be approved out of the gate. What's your expectation for, you know, where this state is by the end of the year, assuming everything goes along timelines in terms of just infrastructure to supply this market? Very large TAM, very large population, but just seems like what's built today for all the 12 or 10 operators is fairly modest relative to the opportunity sizes.
spk10: So from a very high-level perspective, one of the lessons we learned year after year after year is that the political process, the regulatory process, is highly complicated and unpredictable. It is the single least predictable element of our business. And so I'm sure you remember in the fourth quarter there was some expectations set that New Jersey would transition to adult use in the fourth quarter of 2021, more than it was the first quarter of 2022. We've always said that it's a second quarter 2022 issue, and I think that's a reasonable expectation. We may be proven to be wrong, but it was conservative at the time we sort of began to share it, and I think that conservatism has turned out to be appropriate. It is a massive market, and it is a very well-regulated market. I think it's an intelligently regulated market, but there are other – political and regulatory matters that will need to be addressed by the state before the program really takes off. And that's something that will take time. So, you know, I think that having an expectation for what New Jersey could mean for the industry is very, very realistic and appropriate. But I would always sort of, you know, whatever expectations are, I always kind of push it back a couple of quarters because I Things happen, and those things are always out of the industry's control because decisions are being made by policymakers. So I think that you'll see a very, very nice revenue ramp going into the end of this year. I think the second half of the year, you're going to begin to see the semblance of a foundation being set. And I do think you see the rollout of adult use, but it'll be slower than people expect. And I think there will be a lot of hurdles that the operators have to overcome just to get their facilities up and running. If you recall, one of the most complicated elements of this process has been to get the local municipalities to provide that letter of support. We've done that in two out of our three markets. The third market has expressed support. Now we're having an issue with the Department of Transportation. Who would have thought, right? So for us, we have done, in my opinion, everything right. The team has executed absolutely flawlessly on the ground. and done a great job. And our manufacturing capacity is coming along exactly as we'd hoped. It's not coming up. It didn't come online ahead of the curve too far, which is something I did not want to happen. But we've made those investments. We're very happy with them and the way things are turning out. But there definitely will be sort of speed bumps along the way. So I think it's going to be a great market and really beginning to show that trend line materialized towards the end of this year. But between now and then, and by the way, if I'm wrong, great. That means everyone has upside, especially us. But I think that's just a safe way to think about it.
spk07: Thank you. Our next question comes from the line of Kendrick Teig with ATB Capital Markets. Please proceed with your question.
spk03: Thank you, and good morning. Nick, one of the other markets that has been a bit of an outlier through this reporting season is Massachusetts. Can you speak to what do you think needs to change? Where is the rebalancing that's required, or what is the rebalancing that's required in Massachusetts And how material do you think that Boston is and remains to Massachusetts finally getting some wind in its sails and perhaps charting a slightly better course through the second half of this year, at least, if not the first?
spk10: So, candidly, I think Massachusetts has been one of the most impressive markets in our portfolio. And I'll give a high-level overview and then hand it over to David. We have increased market share. We have maintained profitability and pricing. We've shown extremely high levels of growth relative to competitors in spite of the fact you've seen a massive influx of the number of competitors, both on dispensary and cultivation side. It's been a great market for us. It continues to be a great market for us. And candidly, I think that the team has done an outstanding job of executing relative to the headwinds that they've been pushing up against. So the market will continue, as we've seen in every other market, as markets mature, you will see more and more competition come online. That competition will try to compete on price. They'll try to buy market share. That's not the game we play. The conversion to cannabis has been very successful. We continue to see strong growth out of our Boston facility. And as far as the CCC and kind of what's called local municipal political relations are concerned, we really have tried to do our level best to make sure that maintain and continually improve those relationships so that we can execute on the model without having to stumble on any unintended consequences with either the regulators locally or at the state level. So I actually think that the team has done an outstanding job, especially when you look at some of the incumbents and where the market was 12 months ago. There are people who have lost 50% or 60% of their revenue base based on the fact that they either didn't have the right supply chain, the right products, the right marketing, the right service, whatever it is. Um, meanwhile, we've continued to kind of chug ahead and, you know, Columbia care, if there's one thing we've always been very good at, it's being sort of steady Eddie, right? So, you know, we're, we're, we're more of the, the, the, the turtle than the hair, but we keep on making progress on a very kind of, uh, deliberate basis. So, but let me turn that over to David and see if David has any thoughts.
spk12: No, the only, I would, I would, I would just add briefly that, um, you know, we've, we've, we did invest in Massachusetts last year and the conversion, um, of our Lowell dispensary to the cannabis brand. We increased the number of point-of-sale stations, did a number of other things. We dramatically improved the size of the vault and some other things. So we probably experienced the greatest number of competitors in a 15-mile radius in any of our dispensaries took place in Lowell, and the store continued to perform and to take market share. So I think we've done a really good job. Location matters, team and obviously menu and portfolio selection matters. But we've done a great job at a blunting strategy for when competitors come online. And on the manufacturing side, we did invest in our cultivation manufacturing facility to add incremental post-harvest automation, which we've now fully scaled up. And as of this quarter, we're opportunistically buying biomass to run through our post-harvest production for incremental opportunities for pre-roll production in our stores and then obviously in the wholesale market. So continue to see great opportunities in Massachusetts on a relative basis, quarter over quarter. And as Nick mentioned, the profitability there has remained strong and resilient. So we're very happy with where we are in Massachusetts, and I think this summer is going to be where you see new records for us with respect to foot traffic and total revenues out of our Boston facility because we were not open in the peak months, if you will, of foot traffic last year. Obviously, we expected foot traffic in Boston, generally speaking, to be significantly higher than it was than it was last year or the year before with the pandemic. So continue to see good things out of Massachusetts for us on a relative basis.
spk03: That's right, Tyler. Thanks, James. And then just a quick final one, switching to the West Coast. Nick, can you provide some insight on the extent to which your relative positioning in the state perhaps buffered you to some extent from the pressures? And also a reminder on where you are in terms of capacity utilization sort of exiting the air in California.
spk10: Thank you. So, look, we, you know, it's funny. If you look back historically to 2021, we sort of, a lot of the pain we felt was self-imposed because we had thought Pennsylvania would be a dramatic sort of outperformer relative to expectations that turned out not to be true. And that's why we took Colorado and California offline to really reconstruct not only our organization, but our supply chain. The fact that we have a sort of, let's call it a closed loop circle in California, I think has helped us insulate ourselves somewhat from the pricing power. Now, if you recall back to when we made the acquisition of Project Cannabis, one of the things we were most excited about was the wholesale number and the wholesale opportunity. The issue we ran into was, and the reason why we took our supply chain as sort of what's called our manufacturing supply chain offline in 2021 in California, is that the product quality was great for 2018, 2019, but it was not competitive in 2022. And so we're beginning to see the improvements work through the system. We're beginning to see sort of the organization improve. But to be very candid, the California market needs a little bit of leadership. And when I say leadership, it means political leadership. It is a disaster. They can't get out of their own way under any circumstances. We've seen some of this happen, but you've got crime running rampant. It's ridiculous. Our view is that it is a phenomenally attractive market. We've always been contrarian. I actually think California is going to be one of the best. It has historically been the biggest market in the world. I think going forward, it'll be a very attractive market. The time to make the investments in a market is when everyone else is running away. It's when no one else sees the opportunity, but it's absolutely there. With the right products, with the right supply chain, with the right quality, you can actually insulate yourself to a large degree from the pricing pressures that people have seen, and frankly, from the competitive dynamic of the illicit market. Because the illicit market is fine, right? But it's not great. It is just very, very cheap. And if you look at what drives consumer sentiment, it's the cost and then it's the quality. And it's not a one-for-one correlation. So if we can get the quality up and be cost-competitive, And by the way, some of that is driven by changes from a taxation perspective. So when the city of San Diego eliminated its cultivation tax or when the state of California was thinking about eliminating its cultivation tax, that is very, very helpful to us. If we could simply make our products – if you stripped out the tax expense and you just look at sort of a one-for-one comparison, our products and I dare say many of the other organized operators in California – would be very, very competitive. But it's the taxation issue that's been problematic. And I think in Sacramento, they're beginning to realize it. You know, you can't tax your way out of success or towards success, I should say. So, you know, I think California is exactly the right time to be looking at it because, you know, I think we've kind of passed the trough. I think we're starting to see some stability. I think we've seen a lot of mom and pops and illicit operators actually, you know, give up because they simply cannot compete with the competitive dynamics that are coming up. And I think scale will actually turn out to be one of the most important things. And, you know, if you go way back in history of Columbia Care, one of the things we always hoped to do and hoped to be able to be was a structuring element in a disorganized marketplace. So, you know, whether it was Colorado or California, and particularly now you look at the combination between Columbia Care and Cresco, we're going to have the scale to actually add an element of structure to an otherwise inherently unstructured marketplace.
spk07: Thank you. Our next question comes from the line of Andrew Semple with Echelon Capital. Please proceed with your question.
spk02: Hi there, good morning and congrats on the transaction. Thank you. Just the first question here housekeeping item on the EBITDA guidance. You know, just hoping you can maybe provide or be able to quantify the impact of the transition to US GAAP reporting on the 2022 EBITDA outlook relative to what that EBITDA outlook would have been on an IFRS basis
spk10: So, Derek, why don't I turn that over to you? That sounds good.
spk04: So we've provided for transparency for 2021 the equivalent gap. So we've got an 18% EBITDA margin under IFRS and a 13% under U.S. GAAP. So that's indicative of the adjustments that you've made from one to another. There are a number of competitors in the industry that have already made that adjustment, I think, with similar spreads. And so that's not an unreasonable expectation to continue into 2022 and beyond.
spk02: Okay, understood. Thank you. Switching gears to Virginia, I just wanted to get an update on that market. Could you maybe speak to the timing of store openings? Could you give us an update on how patients are responding to dried flower products now in the markets? And could you comment on have there been any improvements to the patient onboarding bottleneck that was the issue for market growth over the past few months?
spk10: Absolutely. So, David, why don't you start off, and if there's anything I have to add, I can always piggyback.
spk12: Sure. So, with respect to store openings, we continue to try to thread the needle to make sure the locations we identify and ultimately commercialize are going to be viable for adult use when ultimately adult use comes. And so there have been some locations where, frankly, we just didn't think it was going to be a good fit from an adult use perspective to get the actual local municipality to opt in or opt out, however you want to define it. So we continue to be thoughtful about that. There has been an uptick in patient count in the state of Virginia. It's getting noticeably easier for patients to get registered and to become active patients in the program. I think, you know, there is a robust wholesale market that we're clearly the leader of as of right now. And so on a combined basis with GLEAF and Columbia Care, we've got a nice, healthy wholesale business to have our products on the shelves throughout the state. We've got good relationships with our competitors in the state. The stores that we have opened have been productive relatively quickly. So I think the two things that were material that needed to happen for the state of Virginia outside of adult use, obviously not coming this year, was to have flour introduced into the marketplace and for patient registration to become easier and have that timeline condensed as much as possible. And those things are happening. They're just not happening overnight. So we continue to see nice trends in the state of Virginia. It's obviously very meaningful for us, even in the absence of an adult use timeline that's this year. So we're going to continue to be thoughtful about where we place our stores. The expectation is that we can get most of them across the finish line during the course of 2022. But I will say that we're going to be hyper-focused on finding great locations above anything else. And if that takes a bit of time, so be it. This is from my vantage point. I want to make sure we've got really strong commercially viable locations for adult use when it does come. We don't have the regulations for adult use, so we're trying to make sure that we're just optimally positioned in those locations.
spk07: Thank you. Our next question comes from the line of Scott Fortune with Roth Capital Partners. Please proceed with your question.
spk09: Hey, good morning. This is Nick on for Scott. I was just looking for color on New York. You had a significant share of that market with your high-quality medical offering early on. I was wondering if you could just provide color on where you are now in terms of share and kind of how the pivot to a wellness-focused model in some of your locations has impacted your positioning there. Thank you.
spk10: Sure. Let me start off with a high-level comment. I'll turn it over to David. So we've actually had a significant increase in wholesale activity. So the dispensaries have performed well, but the wholesale activity is probably the single biggest beneficiary in New York State since we began offering flour. I would say the following. We have arguably one of the most efficient and high-quality supply chains for, let's call it medical, but now I would argue also adult-use-oriented products. Now, we don't have adult-use sales. We don't have adult-use products in New York. But those sort of what's called the wellness element of the product portfolio has been very well received and continues to improve in terms of market share and customer loyalty. But most importantly, customer loyalty, not just at the individual consumer, but on the wholesale side. But let me turn that over to David and see if David has any specifics that he'd like to share.
spk12: Yeah, no, Nick, I think you answered that. I don't think I have anything incremental to answer there.
spk09: Okay, great. That's it for me. Thank you, guys. I'll pass it on.
spk06: Thank you.
spk07: Thank you, ladies and gentlemen. That concludes our question and answer session. I'll turn the floor back to Mr. Vita for any final comments.
spk10: Great. Well, thank you, everybody, for your time today. We really appreciate it. I'm sure we'll be having multiple follow-up conversations. This is an incredibly important and exciting moment in the history of Columbia Care. in the history of Cresco, and frankly, in the history of the industry. You know, as we all talked today, many of the headwinds that we're seeing in markets, some of which are fairly standard when you see markets mature. Others are, you know, specifically consequences of the macroeconomic environment. And yet others are the result of political decisions and regulatory decisions that, you know, all of which have to be worked through in a collaborative way with sort of the the organizations and the entities and the people who we all answer to. But the fact of the matter is the fundamentals of the industry are incredibly exciting. We see a massive pipeline of markets transitioning from medical to adult use over the next several years. The element of scale will be a huge driver of efficiencies, both from a capital allocation and a cost of capital perspective. And we couldn't be more excited. So I forget who asked the question about whether or not we're putting our foot in the gas. I'd say we'd probably We filled the tank up with gas, and we're all in to make sure that this organization and the organization on a combined basis with Cresco winds up being not only a defining moment for both organizations, but really to change the way people think about cannabis in a very profoundly positive way. So thank you all for your time today. We appreciate it, and we look forward to speaking with you soon.
spk07: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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