Cresco Labs Inc

Good day and welcome to the Cresco Labs fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star then one on your touch phone. To withdraw your question, please press the hashtag. Please note this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Good morning and welcome to Cresco Labs' fourth quarter 2020 earnings conference call. I'm joined today by our Chief Executive Officer and Co-Founder, Charlie Bachtel, our Chief Financial Officer, Dennis Olis, and our Chief Commercial Officer, Greg Butler, who will be available for Q&A. Prior to this call, we issued our fourth quarter and full year 2020 earnings press release. This document has been filed with CDAR and is available on our investor relations website at investors.crestvilleabs.com. We plan to file our corresponding financial statements and MD&A for the three and 12 months ended December 31st, 2020 on CDAR subsequent to this call. Before we begin our remarks, I'd like to remind everybody that certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian securities legislation, as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include estimates, projections, goals, forecasts, or assumptions which are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans, or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations. Additional information about the material factors and assumptions forming the basis for our forward-looking statements and risk factors can be found under Risk Factors in Cresco Labs Public Available Filings at www.cdar.com. Cresco Labs does not undertake any duty to publicly announce the result of any revision to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco Labs will refer to some non-IFRS financial measures, such as adjusted EBITDA and operational gross profit, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Please also note that all financial information on today's call is presented in U.S. dollars, unless otherwise noted, and all interim financial information is unaudited. With that, I'll now turn the call over to CEO Charlie Bochtel. Charlie, please go ahead.

Good morning, everyone, and thank you for joining us on today's call. We hope you and your families remain healthy and well. For those on the call today who have participated in U.S. cannabis for a long time as an investor, a patient, an employee, or a business owner, your support and effort helped build this sector into the fastest growing industry in the U.S., employing over 330,000 people with over $17.5 billion in sales during 2020. To the many new investors and stakeholders on the call today joining us for the first time, welcome. I'll begin our call this morning with some highlights from the fourth quarter and full year and review the five specific ways Cresco Labs delivered growth and shareholder value in 2020. I'll also provide a preview of our growth drivers in 2021 and discuss some of our most recent announcements. Dennis will then cover our financial results and capital position in more detail. After that, we look forward to answering your questions. In a year marked by unprecedented challenges, 2020 was remarkably validating for U.S. cannabis as the industry was designated as an essential business alongside pharmacies and grocery stores. And for Cresco Labs, 2020 was a remarkable year of execution and growth. At the outset, I want to spotlight that our results could not have been achieved without the outsized contributions from the entire Cresco Labs family, and I couldn't be more proud of what we accomplished together. In validation of our own thesis, we are winning this industry by building the most strategic geographic footprint, establishing meaningful material positions in each of those markets, and prioritizing the middle two verticals of the value chain, branded products and the wholesale distribution of those branded products. Our record performance in 2020 proves the value of our differentiated strategy and demonstrates our best-in-class ability to execute it. We are telling a unique story of strategic breadth with depth and execution. The investments we made, the hard work devoted by our team, and our unwavering focus on the stated strategy led to outstanding results. Revenue in 2020 was $476 million, a year-over-year increase of 271%, the largest growth among Tier 1 MSOs. We generated $116 million of adjusted EBITDA, over 15 times more than 2019. With $274 million in 2020 net wholesale revenue, the highest among any operator, Cresco Labs is the number one wholesaler of branded cannabis products, period. Our retail revenue of $202 million for the year was up 316% from 2019. With $69 million in Q4 from 19 stores, our Sunnyside retail platform generated average revenue per store of $3.6 million, the highest among Tier 1 MSOs. After delivering three consecutive quarters of more than 40% sequential top-line growth, in Q4 we substantiated this growth and generated another quarter of record revenue at $162 million, record operational gross profit margin of 55%, and record adjusted EBITDA of $50 million. With all of the challenges that 2020 presented and the results that Cresco Labs produced, it would be hard to say that anyone managed the year better than this team. Last year, we introduced the framework for the five specific ways Cresco Labs would deliver growth and shareholder value in 2020. We dedicated ourselves to this strategy of creating strategic breadth with depth and execution. First, we invested our resources in the most strategic markets. Including Florida, Cresco Labs will have meaningful operations in all seven of the top ten most populated states in the country that have cannabis programs. We also now have operations in seven different markets with greater than a billion-dollar annualized run rate. With the recently announced Cultivate acquisition, we will have a top three market share position in three of these billion-dollar-plus markets. And in 2020, we proved that we're investing in the right states, as markets in our footprint grew 55%, outpacing all remaining markets, which saw 34% growth. In Illinois and Pennsylvania during 2020, we completed the largest scaling of operations in our company's history. In Q4, we achieved our highest ever market share of both states. This is proof that when we invest in a market, we take share. We've established the most strategic footprint in cannabis and developed a proven playbook to gain leading market positions. Second, we are the number one wholesaler of branded cannabis products, period. 2020 net wholesale revenue was $274 million, by a meaningful amount, the most in the industry. In Q4, per BDS Analytics, our brand, Cresco, was the number one sold cannabis brand in the country, while our other brands, like High Supply, were among the fastest-growing. During the quarter, we increased wholesale penetration by 12% sequentially and distributed our industry-leading house of brands to a record 929 stores in nine states. We also continue to bring innovation to market through recent launches, including the Wonder brand, Good News gummies, high-supply live cartridges, and Mindy's chocolate. While others prioritized new retail stores in 2020, Presco Labs was laser-focused on building expertise and executing in the middle two verticals of the value chain to achieve big market shares in the states that matter most, expertise that will continue to create competitive advantages for years to come. Third, our retail platform outperformed. 2020 retail revenue was $202 million, an increase of $154 million, or 316% from 2019. Q4 same-store sales grew 166% year-over-year on a basis of 15 stores. Our average revenue per store for the 19 stores open during the entirety of Q4 was $3.6 million, by far the highest among Tier 1 MSOs. While Cresco Labs remains dedicated to the middle two verticals of the value chain, our Sunnyside platform, supported by our team's execution of an omnichannel capabilities, produced massive same-store sales growth, attracted more customers, grew transaction sizes, and earned an outsized share of the market. We opened one new Sunnyside location during the fourth quarter in Naperville, Illinois, on December 23rd. making Cresco Labs the first and still only operator to open all of our eligible stores in the state, another example of how we're strategically developing high-volume retail outlets and executing on all of our opportunities in limited-license states. Fourth, we took share in California. In 2020, while California state sales increased 25%, Cresco Labs' California revenue more than doubled since integrating Origin House and Q1. In the world's most competitive cannabis market, our brands continued to be received exceptionally well. Our brand, Florical, was a top 10 flower brand in California during Q4, and partner brand, King's Garden, improved to third on the list. Cresco's liquid live resin continues to grow and is on the verge of a top 10 in the vape category, and King's Garden Shatter was number one in its category. There's no better test for an operator's ability to execute in wholesale than competing in California. Quarter after quarter after quarter, we cook share in this state in 2020. Over the long term, to build a truly national cannabis company, winning in California is a prerequisite, and we look forward to growing our share in 2021. Fifth, we generated substantial operating leverage as we scaled. SG&A as a percentage of revenue went from 48.6% in 2019 to 31.3% in 2020. To put it another way, while our SG&A expense was $23 million higher in Q4 2020 than in 2019, revenue grew $121 million over the same period. This is how you create long-term growth and sustainable profitability. Make the investments in people and processes to support growth, then execute the strategy and scale efficiently. The U.S. cannabis industry saw massive growth in 2020, and Cresco Labs consistently outpaced it. As for the framework we laid out at the beginning of the year, we executed. We delivered on what we set out to do, resulting in the largest year-over-year growth, top and bottom line, among Tier 1 MSOs, the most wholesale revenue in the industry, and the highest-performing retail platform. Strategic breadth, depth, and execution. In 2021, it's rinse and repeat, and as we deploy our playbook in more states, we will drive substantial growth from those markets. Now, here are the three ways Cresco Labs will deliver growth and shareholder value in 2021. First, executing our playbook in the most strategic markets through organic growth and accretive M&A. Our goal is ultimately to achieve top three market positioning in all 10 of our strategic states. Just as we did in Illinois and Pennsylvania in 2020, we're executing our playbook to go deeper in more markets. We've seen the power of executing this strategy already. As a reminder, we grew revenue 96% in the second half of 2020 versus the first half. In 2021, cultivation and manufacturing expansion projects are underway in Massachusetts, Ohio, and Michigan. That will allow us to drive robust wholesale growth in the second half of the year. We've also recently announced three phenomenal acquisitions in Florida, Ohio, and Massachusetts. Through our enhanced M&A framework, We've deliberately canvassed opportunities across the sector and found accretive assets with premium cultivation, differentiated retail, and strong management teams that will further our vision of becoming the most important company in cannabis. Through the Bluma transaction, we gain access to the key market of Florida. With Bluma's ultra-premium flower cultivation and highly productive retail stores, we'll enter the state with competitive advantages that'll drive top-line growth and market share gains. will also immediately benefit from the unique margin profile achieved in Florida's forced vertical operating environment. That will be new to our P&L. With an expected close in Q2, we look forward to entering Florida and amplifying operations this year to establish a material market position in the southeast. In February, we closed on the Verdant acquisition and adding four retail stores, all which reside in dense population centers of Ohio, the seventh largest state in the country. As we increase our processing and manufacturing operations, Ohio will represent another opportunity to achieve 100% wholesale penetration in the back half of the year. Finally, last week we announced the definitive agreement to acquire Cultivate, a longtime operator in Massachusetts. Combined operations upon closing will include nearly 100,000 square feet of active canopy, three adult use retail locations, and three medical retail locations, the maximum allowed for cultivation and retail in the state. This transaction will vault Cresco Labs into a top three position in Massachusetts, the Northeast's largest adult use market. Again, the third such billion-dollar-plus market where we will have a top three share. Upon closing the transaction expected in Q4, Cresco Labs will operate the maximum number of retail stores in four of our six states with retail limits. At the precipice of a transformational moment in U.S. cannabis, Now is the time to further our leadership in the country's most important markets. Second, increasing our leadership is the number one wholesaler of branded cannabis products. In 2021, our brands will reach more shelves across the country, will generate greater wholesale velocity, and will increase supply in key states like Massachusetts, Ohio, and Michigan. Automation and process improvements will not only increase capacity and throughput from our existing facilities, but will further enhance the quality and consistency of products for the benefit of consumers. We'll roll out new brands along our innovation pipeline as we continue to match our offerings with consumer needs. And to us, being the best wholesale operator means going beyond having the single best-selling cannabis brand in the country. In 2021, you'll see us continue developing our portfolio of leading brands to serve all segments of customers, occasions, and form factors to take share across categories. Third, operating high-volume strategic retail stores. In 2021, we'll continue to refine our retail model to drive performance that exceeds pro forma share and state averages. This year, we could potentially see the return of tourism and increased foot traffic, which may challenge some operators' ability to manage throughput. We look forward to the test as we continue improving our four-wall economics and executing a superior omnichannel approach to retail at Sunnyside. Our record-setting results in 2020 clearly prove the value of our differentiated strategy and our best-in-class ability to execute it. We're winning this industry by building the most strategic geographic footprint, establishing top three positions in each of those markets, and prioritizing the middle two verticals of the value chain. In 2021, it's rinse and repeat, and we'll execute our playbook to meet the needs of our stakeholders while driving growth and shareholder value. At the risk of being repetitive, strategic breaths, depth, and execution. I'll now pass the call to Dennis, our CFO, to provide highlights from our financial results and to discuss our capital position. Thank you, Charlie, and good morning, everyone.