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spk01: Hello and welcome to the Crisco Lab first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star key then one on your touch-tone phone. To withdraw your question, please press star followed by two. 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.
spk09: Good morning, and welcome to Cresco Labs' first quarter 2021 earnings conference call. I'm joined on the call today by Chief Executive Officer and Co-Founder, Charlie Bochtel, 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 first quarter earnings press release, which has been filed with CDAR and is available on our investor relations website at investors.crescolabs.com. We're pleased to announce the transition to U.S. GAAP from IFRS this quarter to ensure the consistency and transparency of our financial reporting and to further Cresco Labs' preparedness for an entrance into the U.S. capital markets. Accordingly, we have also provided the four previous quarters recast under U.S. GAAP in the earnings press release, and we plan to file our corresponding financial statements in MD&A for the three months ended March 31, 2021, on CDAR and EDGAR at the end of this week. Before we begin our remarks, I'd like to remind everyone 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 that 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 regarding 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' publicly available filings at cdar.com and scc.gov. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. Please note that all financial information on today's call is presented in U.S. dollars, and all references to GAAP are related to U.S. GAAP, unless otherwise noted, and all interim financial information is unaudited. In addition, during today's conference call, Cresco Labs will refer to certain non-GAAP financial measures, such as adjusted EBITDA, which do not have any standardized meaning prescribed by GAAP. We believe these non-GAAP 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 GAAP. These non-GAAP financial measures should not be considered superior to, a substitute for, an alternative to, and only should be considered in conjunction with the GAAP financial measures presented in our financial statements. With that, I'll turn the call over to CEO Charlie Bachtel. Charlie, please go ahead. Good morning, everyone, and thank you all for joining us today. I'll begin with a few highlights from the first quarter and discuss our year-to-date progress on the three specific ways Cresco Labs is delivering growth and shareholder value in 2021. After that, Dennis will provide additional details from our financial results, highlighting the changes related to our transition to GAAP this quarter, and discuss our strong capital position as we approach the midpoint of 2021. After that, we look forward to taking your questions. At this time last year, the world looked and felt a lot differently than it does today. Reflecting back on May of 2020, it's amazing to think that today a third of the U.S. is now fully vaccinated, travel restrictions are being lifted, and Wrigley Field is back to 60% capacity. For the cannabis industry, the change we've witnessed year over year has been extraordinary, with nine new states passing medical or adult use laws over the last 12 months and a growing excitement about cannabis' total addressable market. For Cresco Labs, I'm proud to say that the last year has been transformational. We've operationalized multiple organic growth projects and are nearing completion on several new ones. We've announced and closed acquisitions in strategic markets, and we have significantly expanded the presence of our brand across the country. Today, as an organization, we're in a similar phase of the growth cycle that we were in at this time last year, and what we achieved in 2020 is a sign of what's to come. On the call this morning, we'll cover all of the details from the first quarter, discussing the transition to GAAP and the removal of previously broken-out one-time costs to provide an apples-to-apples comparison to prior quarters. Before we dig into the quarter, what's always remained a constant part of the Cresco Labs story is having a clear and focused strategy of building the most strategic geographic footprint, obtaining material positions in each state, and emphasizing the middle two verticals of the value chain. By adapting a traditional CPG approach to cannabis, we've demonstrated our ability to reach and sustain the number one market share positions in two of the top five states. And in 2021, we're gearing up to repeat the success in more markets. To achieve this level of success in the largest and most lucrative markets, you have to lay the foundation for growth. And just as we've proven before, the fruits of that labor will come. In Q1, under GAAP, We delivered $178 million of revenue, $87 million of gross profit, $35 million of adjusted EBITDA, and $13 million of positive operating cash flow. We achieved these results primarily from our existing assets while making material investments in the business that have set us up to deliver consecutive quarters of substantial growth throughout the remainder of 2021 and years to come. While I'm very proud of our performance in Q1, as previously mentioned, this quarter was about building, staffing, and refining our operations across our footprint. On our Q4 call in March, we laid out three specific ways Cresco Labs will deliver growth and shareholder value in 2021. Our hope is that this framework provides a simple and straightforward view into our company's progress throughout the year. Number one, we're accelerating growth through organic investments and M&A in the most strategic markets. Last month, we officially entered Florida, our 10th state and another top five market that rewards execution with unmatched profitability. We now operate in all seven of our country's 10 most populated states that have cannabis programs. By dedicating our resources to this strategic footprint, we're doing so with the ultimate goal of achieving a top three share position in each market. We have solidified our top positions in Illinois and the pieces in place that add at least two more markets to that list in 2021 with Massachusetts and Ohio. In Massachusetts, we have two initiatives that will help us achieve our market share goal. First, we're nearing completion on the expansion of a Fall River cultivation facility, which will drive significant organic growth and operating leverage starting in the second half of the year. Second, with the expected closing of the Cultivate acquisition in Q4, we'll operate the maximum number of dispensaries, the maximum amount of canopy, and vault into a top three share position by year end, making it the third billion-dollar-plus market where we will achieve this top three status. In Ohio, we also have two initiatives to achieve our market goal. First, we close the acquisition of Verdant halfway through Q1, adding four retail stores to our operations. Second, our teams are working now to complete the build-out of extraction and manufacturing capabilities to bring our entire house of branded products and forms to a state where, to date, we've only produced and sold flour. Once again, with the maximum number of retail stores, the maximum amount of canopy, and already more than 80% penetration, Cresco Labs will be well-positioned to achieve another top three market share. A closing on the Boomer transaction in April represents our entrance into Florida, the third most populated state in the U.S., and another strategic acquisition that is true to our strategy. We've talked about the many distinct advantages the combined company has in Florida, and those have only become more evident as we've begun integration with the existing team. Success in Florida's forced vertical regulatory structure is dependent on an operator's ability to execute in all aspects of the value chain, from building cultivation capacity through servicing the retail customer, and that success is rewarded with profitability margins higher than in any other market. To grow our share over the coming 12 months, we'll significantly increase cultivation capacity, introduce new form factors like edibles, aim to at least double the current store count, and continue our track record of operational execution. Looking further ahead, construction of our cultivation facility in Michigan is nearing completion as we set our sights on operating a robust statewide wholesale platform in 2022. As a company, we thrive in highly competitive markets with large populations and lots of retail doors. Michigan's adult use market offers us an abundance of opportunity as we increase our wholesale strength in the Midwest. Consistent with our strategy, we've made substantial progress year-to-date investing in markets that matter, and we continue to find that the most opportunity lies within our strategic geographic footprint. Number two, we're increasing our leadership as the number one wholesaler of branded products in cannabis. Presco Labs' first quarter net wholesale revenue was $96 million, by far the most in the industry. During the quarter, we increased wholesale penetration as our brands reached a record 957 retail stores around the country. According to BDS and state data for Q1, in Illinois, we maintained the number one market share position, distributed to 100% of stores, had the best-selling brand overall, and the top two best-selling flower brands in the state with Cresco in high supply. According to headset data for Q1 in Pennsylvania, we maintained our number one market share position at 100% wholesale penetration, and Cresco was the number one best-selling brand overall. In California, while state sales grew 2% in Q1, Cresco Labs California revenue grew 10%, marking our fifth consecutive quarter of taking share in the largest, most competitive cannabis market in the world. Top-selling flower brands like Florical have opened doors for the whole portfolio, and our other own brands are resonating with California consumers. According to Q1 BDS data, our combined portfolio of owned flower brands ranked sixth in the state, Owned brand sales and vape increased 69% sequentially in Q1, and Cresco is now the eighth most popular live resin brand in the state. While our California distribution business may present a lower margin profile than our other more vertical operations, it provides us an enormous top-line opportunity, rich consumer insights, and is paving the way for more successful brand launches and innovation in our portfolio. California is the largest, most competitive cannabis market in the world and must be a part of any strategy that seeks long-term industry leadership. Across our footprint, we continue to focus our brand strategy on both the distinct needs of the current consumer and the needs of future adopters. Here are two recent examples of success in these categories. first at the recent 2021 emerald cup in california what is often considered our industry's version of the academy awards our cresco and flora cal brands took home prizes in the indoor flower live resin and hydrocarbon extraction categories the quality of our products rank among the very top in the country as these results demonstrate validation from the experienced knowledgeable high volume consumer base Second, we're addressing the needs of wellness-minded consumers and the quote-unquote canna-curious new entrants. In Q1, we launched Wonder Gummies and Wonder Mints to increase our share in low-dose effects-based edibles. The response from consumers is fantastic. The velocity and reorders are incredibly strong, and we're excited to bring this new brand across our footprint. We continue to show proficiency in the spectrum of consumer needs, and our house of brands is delivering on quality, consistency, and availability. Strong wholesale capabilities and execution are the key for long-term success in the cannabis industry, and no company has proven these capabilities more than Cresco Labs. We're very proud to deliver the most revenue from wholesale among operators in cannabis, but even more important is actually having the teams in place and the experience as an organization of executing wholesale operations in multiple competitive markets. I can't express how proud we are of what our teams have accomplished over the last year. Our cultivation and manufacturing teams produce premium, craft-quality flour and derivative products at immense scale. Our analytics and data science teams synthesize information at every point in the supply chain, driving a new level of planning and operating efficiency. Our sales teams focus on maximizing customer lifetime value with both multi-state retailers and independent operators. And our brand marketing teams lead the industry in the innovative, portfolio-based approach to building brand loyalty and trust. As we progress through the year, we will continue to distinguish ourselves as the number one wholesaler of branded products in cannabis to create near-term growth and long-term success. Number three, we're operating high-volume strategic retail stores. Q1 retail revenue was $83 million from 24 contributing stores, driven by both increasing same-store sales as well as new stores. Same-store sales grew 9% sequentially from the 19 stores open during the entirety of Q4 and 60% year-over-year for the 15 stores open in Q1 of 2020. Average quarterly revenue per store increased to $3.8 million for the 20 stores open during all of Q1, the highest among top MSOs. Behind the bright and welcoming facade, our Sunnyside platform is driven by precision assortment models, deliberate category management, selective promotional practices, and a dedicated operations team that continues to set the bar for cannabis retail. In Illinois, despite nine new stores opening around the state during the quarter, our Sunnyside stores held our Illinois retail market share, increasing the gap to our pro rata share. In Pennsylvania, our stores averaged more than 50% higher quarterly revenue than their pro rata share. And in Ohio, the Verdant stores combined for 11% sequential growth Q1 over Q4. We've proven our ability to open in the best locations, secure a breadth of products on our shelves, and deliver an excellent consumer experience while also maximizing throughput. While we're very pleased with our retail performance in Q1, there's even more to look forward to this year as we add stores in Florida and Massachusetts, make enhancements to Illinois locations, and open new retail in Pennsylvania. In summary... We're accelerating growth through organic investments and M&A in the most strategic markets. We're increasing our leadership as the number one wholesaler of branded products in cannabis, and we're generating outsized growth from new and existing retail stores. As I said at the beginning, in order to execute all of these growth initiatives that are still ahead of us in 2021, it has required a period of investing in the operating platform and building the foundation to support the growth. We've made the investments in Q4 and Q1, and now our expertise with integrating new assets and producing operating leverage will kick in. We remain dedicated to our thesis, and the steps we've taken so far this year have put us on a path to continue growing revenue, profitability, and shareholder value in 2021 and thereafter. I'll now pass the call to Dennis to provide detail on our financial results and to discuss our capital position. Thank you, Charlie, and good morning, everyone. Before digging into the numbers, we're pleased to make the conversion to U.S. GAAP this quarter and to continue preparing for the company for future capital opportunities in the U.S. All of us here today believe that federal regulatory change on cannabis is only a matter of time, and I can tell you Cresto Labs is now structurally prepared to take advantage of what awaits us in the U.S. markets. With the long game in mind, we're taking the opportunity at the outset of the year to transition to GAAP. remove the breakout of add-backs, and provide you with clarity on the transition. For the purpose of comparing Q1 on an apples-to-apples basis to prior quarters in the prior year, we provided a table in our earnings press release showing our operating results for the four quarters of 2020 recast under U.S. GAAP. All numbers and comparisons I reference today will be in U.S. GAAP at U.S. dollars unless otherwise specified. Turning to the numbers, revenue in the first quarter was $178.4 million, up 10% quarter over quarter and 169% year over year. In Q1, we consolidated 40 retail stores through the Burdette acquisition in Ohio halfway through the quarter on February 16th. We're happy with the top line performance this quarter on the underlying business, especially given that our focus in Q4 and Q1 was deliberately on building, staffing, and refining operations for our next phase of growth. Revenue mix in the first quarter was 54% wholesale and 46% retail. We're proud to say that $96 million of wholesale revenue, we remain the number one wholesaler of branded products and cannabis. Despite unexpectedly slow Illinois retail openings in January and February, the seven-store openings in the back half of March and 11 openings in April provided strong growth opportunities for our Illinois wholesale business and positive momentum for Q2. On the retail side, with same-store sales growing 9% sequentially and $3.8 million of average revenue per store in Q1, Sunnyside continues to be the most productive per-store retail platform among top MSOs. We also closed on the Bluma transaction on April 14th and look forward to reporting as a combined company starting in Q2. Gross profit in Q1 was $87 million, or 49% of revenue, compared to 46% in Q4. Again, a reminder that all of these comparisons to prior quarters are apples to apples on their gap. We expect gross margin to be above 50% in the subsequent three quarters of this year as we reach scale in states like Florida, Massachusetts, and Ohio. Similar to the cadence we saw in 2020, expansion costs are being absorbed in advance of revenue as we increase production capacity and infrastructure to support it. In Q1, we had $600,000 in tax charges for the fair value market of the inventory acquired from Verdant. In Q2, we expect that this will be a larger line item as we consolidate Bluma into our results. First quarter SG&A expense, excluding share-based compensation and one-time items, was $58 million, or 32% of revenue.
spk06: You can see on a gap basis, from Q1 to Q3 last year, we held SG&A expense flat, while revenue grew 131%.
spk09: Then, from Q3 to Q4, costs outpaced revenue for the period as we began to ramp operations for 2021 growth. In the second half of this year, we'll expect to see revenues significantly outpace expenses once again. Adjusted EBITDA for the first quarter was $35 million, a 17% increase from Q4 under GAAP. We've invested heavily in both CapEx and OpEx to build the operating platform and capacity that will drive our next leg of growth. Looking ahead, we expect substantial growth of EBITDA margins as the previously announced expansion projects bring supply to market and we integrate accretive acquisitions like Bluma and Cultivate. First quarter net CapEx was approximately $16 million. As a reminder, the expansion projects in Massachusetts, Ohio, and Michigan are already funded through sale leaseback transactions, but the cost of such lease is already reflected in our P&L. As we aim to go deeper in more states like Florida and New York, we'll keep you apprised of our expansion plans as we get closer to deploying capital. There is an abundance of high ROI opportunities within our footprint, and we will continue to keep our foot on the gas as we aim for top free share positions in each of our 10 markets. We exited Q1 with $256 million in cash on the balance sheet, putting us in a strong position to pursue both organic opportunities and additional accretive M&A to generate shareholder value. To summarize the impact on the bottom line going from Q4 under IFRS to Q1 under GAAP, we have approximately $3 million of additional COGS and SG&A related to the new treatment of leases and $13 million of relaunch, rebranding, COVID, and other costs that we're no longer breaking out. The conversion from IFRS also impacts how cultivation costs are expensed for facilities not yet at full utilization. Until a facility is producing at full capacity, we take a charge to the PML rather than burdening the ending inventory with additional fixed costs. This creates some variability in COGS leading up to full utilization of facilities. All that said, on an apples-to-apples basis, adjusted EBITDA grew sequentially in Q1, and the fundamentals of our business will continue improving over the coming quarters. Our efforts during Q1 have set the stage for strong growth in the remainder of 2021 and beyond. To give you a sense of our internal projections, we expect that by the end of the year, Crestle Labs' annualized revenue will be at a run rate of more than $1 billion, with gross profit margins north of 50% and an adjusted EBITDA margin of at least 30%. We have a valuable footprint with a diverse set of growth initiatives already underway, and we're laser-focused on gaining meaningful share in each of our 10 states. We look forward to updating you on our progress. Thank you for your time today, and now I'll hand the call back to Charlie for a few final remarks. Thanks, Dennis. To close, we're incredibly encouraged by the developments being made on cannabis within the states and at the federal level. As I've said many times before, this industry has been built on incremental steps that at one time may have seemed insignificant, but later turned out to be pivotal moments of progress. Cresco Labs continues to play a leading role in the education and advocation of a normalized and professionalized cannabis industry. and we've built our organization to succeed today and as the industry inevitably evolves in the U.S. We embrace the challenges of an ever-changing landscape in this eventual $100 billion-plus industry. We're playing the long game, and we're building this company to win. We have arguably the most valuable footprint in cannabis. We've demonstrably established leading positions in multiple billion-dollar-plus markets and have laid the foundation to achieve more top three market shares over the quarters to come. With a diverse set of growth initiatives already underway that are yet to contribute to the P&L, we're very bullish on the future. 2021 is going to be an exciting year for Crespo Labs and the industry, and I very much look forward to speaking to you again on our Q2 call. Thank you for your time today. I'll now ask the operator to open the line for questions.
spk01: Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it's star followed by two. Please note, when preparing to ask your question, there will be time for one question plus one follow-up question. Thank you. Our first question comes from Scott Fortune of Capital Partners. Your line is open. Please go ahead. apologies we have lost scott so i will move on to our next question from aaron gregory of alliance global partners your line is open please go ahead
spk09: Hi, good morning, guys, and thank you for the questions. So first one for me, most of them talk about the EBITDA margin, right? So you guys provided some guidance, you know, for the end of the year. Thanks for giving some guidance on that. So 30%, just want to think about, you know, as you kind of look forward in the business, you know, how do you think about, you know, the potential? you know, margin that you can get to as you look to 2022, you know, and beyond, especially as you think about maybe going into deeper into markets and also, you know, investing back into the business. You know, do you think there's a lot of opportunity, you know, beyond, you know, that 30% or are you guys playing more of a, you know, a top line game right now? And if you want to get to the 30%, but then beyond that, you want to focus on maybe investing more back into the business beyond just trying to get a profitability as much as possible. So any kind of guidance on that would be helpful. Thanks. Yeah, Aaron, thanks for the question. It's Charlie. I'll start and then kick to Dennis. You know, we're excited about the outlook, right? And we're putting the pieces in place to really develop that scale and depth in the footprint that we've created, right? You know our story. Our story is... pretty solidly focused on creating that most strategic geographic footprint possible and then getting that meaningful material position in those states. And what we've seen so far is that when we can create that meaningful material position in our states, the margin profiles are pretty phenomenal. So it's mid-last year to really prepare for 2021 is create depth in more states like Massachusetts, Michigan, Ohio, the acquisition in Florida, and the steps that we're taking there to really ramp up through the rest of this year and into 22. They do create, you know, excitement for us in what more margin profiles will look like exiting the year and going into 2022. But I think it's a valid question about from there, where does it go? We do like to invest back into the business. This footprint that we've created, it's very valuable. And we know that the long-term value is by creating scale in these states that really matter. Dennis?
spk06: Yeah, thanks, Aaron. Again, as we kind of laid out in the press release and the script, our results in EBITDA margins will continue to grow through the course of the year.
spk09: The scale that Charlie talked about, a lot of that comes up in the second half of the year, and we'll get the scale going into the Q4 and beyond. So there is opportunity to grow. Furthermore, if you look at our SG&A expenses and how we're investing there, we're investing for a billion-plus dollar company. And we're making those investments now, and we'll reap the benefits of those in the second half of the year and certainly into 2022. And we expect to get further leverage from those investments as well. Okay, great. Thanks for that color. And then second question for me is on Florida. Congrats on closing that. Just wondering if you'd give any incremental color, maybe in terms of quantifying some of the cultivation expansion initiatives and then timing that you have in the state. And then I believe Bluma had previously, you know, mentioned plans for four additional, you know, store openings in 2021. Charlie, I think you mentioned earlier you want to double that within the next 12 months. So just if you can clarify if you still have plans for maybe doubling within the next 12 months for four of those to be within... calendar year 2021 thanks yep no it's a great question and you know we're incredibly excited about that florida market as we explained uh you know in the prepared remarks it's a very unique structure down there and it rewards execution and it rewards execution with very unique profit margins so you know the way that we're approaching it is we knew coming in now granted we're about a month in um to the post-closing integration so plans are still in development but We wanted to take a fast, hit-the-ground-running approach to some incremental growth strategies while we continue to finalize what the larger-scale build-out will look like. But, you know, it's a meaningful state. We want to have, just like we do in all of our states, a top-three position down there, and we're going to invest in that state to create that outcome.
spk10: Great. Thanks, Jacqueline. I'll jump back in the queue. Thanks, Aaron.
spk01: Our next question comes from Vivian Aza of Cowan. Your line is open. Please go ahead. Hi.
spk03: Good morning.
spk09: Good morning.
spk03: So to piggyback, good morning. So to piggyback on Erin's question, you know, as we think about the guidance, and thank you for that, when you characterize your billion-dollar revenue run rate aspiration as well as the 30% adjusted EBITDA margin, are we meant to understand that as a fourth-quarter run rate, or is that something that you, you know, hope to hit kind of in December, but perhaps, you know, the blended... you know, margin or revenue, members of the fourth quarter might be shy of that expectation.
spk09: No, thanks, Vivian, for the question. And it's a good question. Just for clarification, it's a Q4 outcome for us that we're speaking to. You know, there's a high confidence factor there. We have the pieces to achieve it. So we're really excited about not only what the second half of this year looks like for us, but the acceleration that we have going into 2022 also.
spk03: Perfect. Thanks for that. And then Erin and I were clearly like-minded in our questions because my follow-up is also on Florida. But differently, in evaluating your weekly or Bluma's weekly market share, recognizing a lot of this was not while the business was under your control, it does look like there's a fair amount of momentum in concentrates just in terms of kind of the growth concentrates, obviously. picking up a fair amount of share per capita-wise in Florida. So can you just talk about kind of your capabilities there and what, if any, enhancements you'd like to make to deepen your penetration and concentration?
spk09: Certainly. I think I'll start this, and then I might ask Greg to provide some comments, too, because I think, really, what we've seen with Bluma so far is, without question, best-in-class execution when it comes to quality flour and really high-end artisanal concentrates. The live rosin that they're creating down there, I think, is best-in-class for an industry, not just Florida. So, they really created that platform already. What we're looking forward to doing as we ramp up expansions, not only on the cultivation and production side, but also with retail or at least the omnichannel approach to getting consumers their products, is broadening the breadth of the offerings down there. As we mentioned, the prepared remarks, getting edibles into that marketplace as soon as possible, and the other concentrate forms that we excel at, Lixify, Resin, et cetera, onto that platform as soon as we can while we build out a broader offering set. Greg? Yeah, one of the things we know with the portal market is just like every market, patients are looking for variety. And one of the benefits we have in our house of brands is we have lots of brands that service lots of different consumer needs. And so even though you're in the forced, vertical nature of the state, we believe that we can create stores that have one of the most robust offerings of different brands in different forms by leveraging what we've done in other states and taking it to our stores in that state, which we think In addition to the store growth that we're planning to achieve in Florida, we will also drive basket growth by having one of the most competitive assortments in the state.
spk03: Perfect.
spk01: Thank you for the call.
spk07: Thanks, Vivian.
spk01: Our next question comes from Camilla Leon of BTIG. Your line is open. Please go ahead.
spk02: Thanks. Good morning, guys, and congrats on the top of the momentum. It's really nice to see. You know, just keeping with the theme here on Florida, Charlie, I'm just curious if you could just articulate a little bit in greater detail around your capacity, your cultivation capacity, and what that supports from a storage perspective today and um and how uh you know what the timeline is on your expectations of expanding that capacity that cultivation capacity um around uh supplying a much larger store base and then have a follow-up please yeah absolutely so again a good question florida
spk09: We want to be, as we laid out over the last couple of years, very strategic in the way that we approach the state, and that doesn't change as we now find ourselves to be an operator within Florida. So, again, incrementally, the guidance so far with regard to additional store openings will be supported by production capacity plans that are already underway. So I can tell you the cement pad has already been poured into for the expansion that will be able to service a store count that's roughly double of what it is. And we'll start to see that as we get towards the end of this year here, where that actually reaches store shelves. But the larger scale expansion project is something that'll be relevant for 2022. and it's still in development. Dave Bluma, historically, has done a really good job of managing number of stores to production availability. That won't change with us. We talked about in the prepared remarks, with $3.8 million per store in a quarter, we like to have high volume, very efficient, very effective. retail outlets and that's something that'll continue on as as we uh as we implement the broader plan in Florida but the broader plan is is 2022 and beyond the incremental steps will be seen second half of 21. great that's helpful thank you and then my follow-up is on New York um I think you touched on it uh briefly with a pair of remarks I'm just curious
spk02: how you're thinking about CapEx allocation.
spk09: I don't believe you have cultivation in the state, but in preparation for adult use turning on, how do you think about the timeline there for your CapEx investment in preparation for that switch? You'll definitely see CapEx investment begin this year. We you know, we're thrilled at the development in New York and at a Belize market, you're probably looking at the second largest cannabis market in the world behind California. We're going to make sure that we're prepared to create that top three position that we're going to achieve in every state, but there's also still a lot of wood to chop on what the structure and the details of that program look like. As we're going to move forward with plans this year, it's also very important that We received that guidance on sort of how that's going to look and feel so we can develop the structure accordingly. Very excited about New Yorkville overall.
spk10: Great.
spk09: And just on that point, can you just tell us where you're at on cultivation or even land in that process?
spk02: Are you at a point where you've secured land and are waiting for guidance on how much canopy you can build out? Where are you in the phasing of just that very large project that could be very time-consuming?
spk09: Yeah, optionality is there for us. Again, there's no geographic restrictions, really, in New York. You basically have the whole state that's available to you. So there's a couple of options that we're looking at that we would have the ability to move forward on immediately. But again, guidance is important. You want to make sure that you build that out correctly. And as we've proven before, at getting buildings built and operationalized and product on shelves.
spk10: Definitely. Sounds good. Thanks very much.
spk09: You got it. Thank you for the question.
spk01: Our next question comes from Ken Rickside here of ATB Tango Markets. Your line is open. Please go ahead.
spk10: Thank you and good morning. Charlie, with respect to your top three targets, I'd like to better understand how do you think about defending your moat in the likes of Pennsylvania? What supports your conviction? What differentiates your offering? particularly in the context of, you know, the slew of transactions that are either, you know, recently announced close or closing from, you know, everybody from, you know, Verano through Trulieve, ColumbiaCare, and Terrascent. Can you just help us better understand your sort of thinking around your most in Pennsylvania as one example, and perhaps for some of you in other markets, we are already a number one or two player. That would be great.
spk09: Yeah, that's interesting. Thanks for the question. Look, Pennsylvania is receiving a lot of attention because it's an incredibly attractive market. We've known that for a while. We do appreciate and enjoy our number one market share there. We have no designs of giving up the position. Again, while number one is great, top three is the goal in every state that we're in. We just want to make sure that we are in a driver's seat position in all of our markets. So we don't really look at many of our states as moats or having moats or unique advantages in them. We approach all of our markets like we have to be a better competitor than our peer set. So we're going to make sure that we have the capacity available to meet the growing and very strong demand from the consumer base in the state. We're going to make sure that we produce the quality of products that the consumer wants. And then we're also going to make sure that we manage our footprints, both not on just the cultivation side but on the retail side, to make sure that we maintain our position in that state. And I think Greg also had some comments on it.
spk06: I think just to build on that, we believe that, you know, the strength of our brands, our products, our wholesale business does give us an advantage.
spk09: And even in the state today where you do have a lot of our competitors owning retail, we have 100% distribution in the state, which means if you have a good product that we believe patients and consumers want, we will get it on shelves.
spk10: That's fair. Thanks, James. And just one other quick one, switching gears to Illinois. Can you just refresh us on the new license expectations? I think certainly people are looking for kind of a June, July. Any additional color on that and how you think about that sort of impacting not only your sort of sell-to-end wholesale, but just broader market dynamics if those 75 licenses are finally issued here in the third quarter?
spk09: Yeah, we're very excited for the expansion of the dispensary licenses here in Illinois. And now it's not just the 75, it's the 75, it's another 110, and then another 35. I hate to comment on legislation before penance to paper on it, but we had success in the House here over the past couple of days, and the Senate and the support from the governor was issued yesterday. So we're looking to have that legislation that will provide the path forward for that completed here in a relatively short basis. And it's terrific. Needless to say, with our wholesale focus, a lot of growth opportunity is presented there with the expansion of doors in Illinois. So for us, very exciting. There's some other components to that bill, too, which are really important, which is the ability to move dispensary locations. There's other components that are great that will continue to drive growth in this Illinois market where, again, we, you know, number one market share. And here we do have a unique advantage with those three cultivation licenses. So we'll always be able to have that capacity to be able to service the demand in the state. So very excited about it. And hopefully it's a very, very near-term event. Great. Thanks so much. I'll get back to you. Thanks, Henry. Okay.
spk01: Our next question comes from Matt Skinley of . Your line is open. Please go ahead.
spk09: Thank you. My question is on the retail productivity. With the acquisitions in Ohio and Florida, will that impact the retail productivity into the second quarter? Is it reasonable to assume that those retail outlets sustain something around that 3.8 million productivity per unit? Does that slip with what might be the inclusion of these lower volume units? Good morning, Matt. Thanks for the question. I'm going to hand that over to Greg. Morning, Matt. You are correct. As we add more stores, what we tend to see is there is a ramp up of stores. So as we continue to open stores, there is a, on average, dilution to the productivity overall. So we always expect to see that. Now, what I would say is what continues to make us very encouraged is is we look at same-store sales for our stores. They continue to show very healthy growth rates, right? And so even though you will have the dilution due to just smaller store volumes at the beginning, those existing stores continue to grow across our states. Got it. And on the gross margin, what do you assume drives that gross margin north of 50% into the second quarter? Is that primarily the inclusion of Florida, or is that more productivity gains in plant capacity? And then, moreover, under GAAP with the asset base you have coming together, what do you think gross margin rate could normalize that for Cresco? That's Dennis. Yeah, thanks for the question, Matt. So growth margins will improve throughout the course of the year.
spk06: So again, we are bearing some of the costs of the sale leaseback expense and some of our expansions that we have in Michigan, Massachusetts, and Ohio.
spk09: So we're bearing the cost without the revenue. That will come up in the second half of the year. We also, as you noted, will have Florida Go Live, which will certainly help the mix and the volume that the gross margin percent and total for the company starting this quarter and moving through the rest of the year. But if you look at it in a big picture, and I would, in the states where we are, you know, fully utilized, in Illinois and Pennsylvania, for example, I'd put our gross margins up against anybody in the industry. As we continue to expand and increase capacity in Michigan, Massachusetts, Ohio, and in Florida, and get those facilities up to scale, we will expect margins to continue to improve. So we're optimistic about where margins will go. Like I said, we expect to have margins in excess of 50% for the balance of the year. Longer term, we'll continue to make the proper investments to improve automation and look to expand margins as we move forward as well. Thank you. Thank you, Matt.
spk01: Our next question comes from Pablo Zuanek of Cantor Fitzgerald. Your line is open. Please go ahead.
spk04: Yes, good morning. Look, Charly, maybe it's a very simplistic question, but just thinking of the wholesale business, you've got that 60% ramp, sequential growth in the third quarter, then flat in the fourth, and up 6% in the first, right? As we think of the rest of the year, You know, how does that play out, right? It seems to me in 2Q you don't have a lot of new capacity coming in, and it's more a 4Q story. Can you give some color there? It's a modeling question, but it seems that wholesale in organic terms, in terms of expansion that you're doing aside of acquisitions, you know, you won't have much growth and be like 4Q. Can you go through that? Thanks.
spk09: Sure, Pablo. I appreciate the question. You know, I think the growth, you saw we had 5% growth here on the wholesale side in Q1. You know, I'd say that growth could have been more had we had more doors open in Illinois in January, February, and the first half of March. So, there's also capacity in Illinois that we have optimization in Illinois that's underway that'll allow us to actually get more juice from the same squeeze. And that's the case across our platform and nationwide. So I think that's where the growth comes from in Q2 and Q3 before the additional capacity from Ohio, Massachusetts, and then later towards the end of the year, beginning of 2022 in Michigan, come online.
spk04: Got it. Thank you. And then just this is a bit of a general philosophical question, but I get the idea of wanting to be top three in key markets. But, you know, in those markets where you have caps, like Massachusetts, right, three stores, 100,000 square feet in terms of cultivation, you know, everyone gets to a cap eventually. And it's difficult to be a leader or a top three doesn't mean much because it's a fragmented market, right? So how do you think about that? Because at the end of the day in Pennsylvania, pretty much every one of the big guys will have, you know, 15 stores or more. Just go through that, because this whole idea, one thing is being number one in Florida with 50% market share, and another thing is being number one in Arizona with 10% retail share. How do you think about that? Thanks.
spk09: Yeah, I'd agree with you. And again, I think it's one of the reasons that we prioritize the middle two verticals in the value chain, right? Because I think where you see the caps, the majority of the caps are going to be on retail. But that's just on a per-business cap. That's not a total cap. So, I would envision, you know, in our theses, there will always be more and more retail owned by more and more independent non-verticals that come into these states. So the opportunity for that type of expansion and where, again, market leadership really matters is on the wholesale side more so than on the retail side. And, you know, there's just benefits to being top three in every market. You know, with the strength of our footprint, you know, having a presence in all seven of the top ten most populated states in the U.S. that have Canvas programs, if you have a top three presence in each of those states, you know, it would be pretty hard for anybody to argue that we're not leaders of the industry. So, executing in the states that we have, making sure that they're valuable states, Not only does that build strong margin profiles by scale, it also builds that brand equity. As additional states come on, we'll take a look at them. If they meet their criteria of a strategic state, we'll expand. But that's the strategy, that's the rationale for really focusing on not only the middle two verticals, but achieving that top three status in every state that we're in.
spk04: Right. And I'm going to squeeze one last one here. You know, other companies have talked about what they call the Schumer bill dropping this month or next. Do you have any views on that? And how would you characterize Cresco versus other MSOs in terms of your positioning when interstate trade arrives, whenever that happens? Thanks.
spk09: Sure. But technically, I think there was two more, Pablo. You know, I think we are – Of course, we're active on not only state legislative initiatives, but, of course, federal. I'm chairman of the National Cannabis Roundtable, so we're engaged in this. What I'll tell you is we're building the company to be successful today with this current dynamic that we've been operating in for the last six years. Inherently, in the way that we develop our business model, it prepares us to be successful long-term, with an open market interstate commerce federal legalization, right? That prioritization of building brands and distribution is akin to traditional CPG. That's why we built the company the way that we built it. It is a matter of when, not if. I don't know when that's going to happen, but I can tell you we have the company that's built to win today, and we have the company that's built to win in the future. Thank you. Thanks, Pablo.
spk01: Our next question comes from Michael Levery of Pippa Sander. Your line is open. Please go ahead.
spk08: Thank you. Good morning. I'll actually sort of tie two questions together instead of tacking on extras. But you mentioned the importance of insights from California in particular. I'm just curious what you're seeing and learning there and then the related follow-up just from the brand's perspective you mentioned. in so many states, how important that is and that you're seeing some equity building. How do those tie together and how do you see your brands developing in the space?
spk09: Thanks, Michael. Good morning. I'll take the first half and then Greg will comment on the second. California is a marketplace, no surprise, largest cannabis market in the world, also uber-competitive. It's a consumer base that is fairly well knowledgeable in cannabis, and it does hook and feel and act, from that perspective, like a more mature market. I won't claim that it is mature, it's still developing, but it acts like a more mature market. Consumer insights and how to operate not only brands that resonate with consumers but operate in a competitive market with lower margins is something that everybody needs to prepare for as you have a longer view in this industry and if you want to have a leadership position in it. So it's been insightful for us. We're investing there because of the dynamics of that state and what it provides for us now, even if it is a lower-margin business, especially on the distribution side. As it relates to brands, I'll hand it over to Greg. Good morning. You know, as we look at California and all of our markets and look at the industry as a whole, what you're seeing is that this industry has a wide – both consumers and patients that have very different needs, interests, and forms they're looking to consume. As we think of our house of brands, our portfolio brands, we're very much focused on trying to figure out what are the consumer occasions and needs that are most important, and then building the right value propositions in our brands to win against those. That's why we have a little bit of a different approach, which is we do believe this market is going to have many different brands for many different consumers versus one brand for all, and that's the thesis of our investment strategy.
spk08: Okay, great. Thanks so much. Thanks, Michael.
spk01: Our next question comes from Andrew Pathanu of Stifel GMP. Your line is open. Please go ahead.
spk05: Good morning. Thanks for taking my questions. Um, maybe I could start with, uh, just your acquisitions. You know, you, you have, um, a few to integrate this year. Um, you know, you, before them, you already had a strong, you know, cultivation, uh, knowledge, especially through floor cow, which now, as I understand white labels for, for some very strong brands like cookies, um, Now you have acquired Bluma, which also has a strong reputation for quality among your other acquisitions. Could you walk us through how you integrate your acquisitions and share best practices? What kind of pace that takes? And any other kind of color that you can share on how you think about integrating assets acquired could be helpful.
spk09: Andrew, thanks for the question. I think we could spend a long time sort of going through that. And it's fascinating. It is a strategic and competitive advantage to be able to integrate acquisitions. And we've developed practice in it. And it's also one of the areas, if you look at the spends in Q4 and Q1, where we have invested in building out that platform to be able to integrate these acquisitions that are coming online here already and through the remainder of the year. Because a successful integration is more important than the announcement of a transaction without question. So again, it's a great question. Best practices are developed by reasonable professionals with acumen in their subject matter coming together and developing what that next best practice is together. So, you know, not to be too philosophical, but it's having a roadmap, it's having an outline, but it's also having an open mind to really work together for the benefit of the org. And, again, Cresco Labs is built to be the most important company in cannabis. That type of culture, that type of approach flows through in our integration models as well.
spk05: Thanks for that. And just switching gears, talking about your West Coast presence in California in particular, last year we saw some record wildfires, and this year it seems that might be repeated. Could you discuss what did you see last year in terms of any impact or potential? you know, unexpected positive outcomes from these wildfires? And how do you see this year unfolding?
spk09: So, you know, I mean, it's tough to project. Last year we were fortunate and we didn't have material interruption from those fires, but it was close. And, you know, from the perspective of our Crestville family members that are out there, there was definitely concern, and we were fortunate not to have material negative impacts. But tough to project on what the rest of this year would look like. It is part of, you know, operating a business that, We also didn't expect a global pandemic last year either. So, you know, understanding how to manage through scenarios is part of operating an effective business, and it's something that we'll continue to address as needed. Okay, thanks for taking my questions. You got it. Thank you, Andrew.
spk01: Our next question comes from Graham Cranler of 8 Capital. Your line is open. Please go ahead.
spk02: Hi, good morning and thank you for taking my question. Just one question. I want to follow up. Greg, I think you mentioned earlier in the call with respect to the gross margin and outlook through the balance of the year that the mix of what's being sold in Florida is going to help to propel the gross margin to that 50% plus point. If I look at the update Bluma put out back from February, their gross margin was was at 41% for the month there. So just, I mean, that would imply to me that there's been significant increases in efficiencies over the past couple months. And Simon, I just want to confirm if that's the case or maybe get a bit more color in terms of what's changed since that last update on public record. Thanks.
spk09: You know, we might, Dennis, if you have more for Greg, Greg will jump in.
spk06: Yeah, thanks for the question, Graham. So in Florida, we talked about the impact that Florida would have on the overall gross margin of the company.
spk09: The fact that it is an integrated market where you cultivate and sell that product through your own stores just has an inherent higher margin to it, and it would be a positive impact. So when I talked about mix, I wasn't talking mix of products. I was talking about the mix of products. the Florida model into the greater Crestle Labs margin profile. Having said that, they continue to expand in their stores and rolled out some additional stores in Q1. So their margin profile, I think, is higher than what you've said, going into Q2 and beyond, and more in line with what you see in some of the other players on the Florida market. So again, that will be accretive to our overall margins for the balance of this year and going forward.
spk02: Okay, understood. Very helpful. That's it for me. Thank you very much. Thanks, Graham.
spk01: Our next question comes from Andrew Semple of Eklon Capital Markets. Your line is open. Please go ahead.
spk05: Thank you and good morning. Thanks for taking my questions.
spk08: Just a pair of questions on the guidance. The first one here, you're guiding towards EBITDA margins easing the year at 30%.
spk06: It is quite a bump from the 20% level we saw in Q1.
spk08: In your view, is that being driven primarily by the gross margin side or due to operating leverage? And how are those two factors going to influence EBITDA margins over the course of the year?
spk09: Good morning. I'm Dennis. Thanks for the question. So the improvement that we're seeing from our current EBITDA margin levels to where we expect to end the year at the 30 plus percent range is really a combination of improvement that we expect to see in gross margin. I kind of highlighted some of the improvements that we expect to see on that earlier in the call, but also some leverage that we're going to get on our SG&A spend. So we're making investments now to help market people and processes and branding our products that the percentage of revenue for this percentage of SG&A spent as percentage of revenue will decline in the second half of the year. So, again, we expect to get the leverage from the investments that we're making now in the second half of the year. And then, in addition to the revenue growth and the gross margin performance, that's how we feel comfortable going from our current levels to the 30-plus percent in Q4.
spk06: That's great, Colin. Thank you. And then just to follow up here on the sales guidance for the year, I just want to clarify whether Cultivate is being included in that exit run rate of over a billion dollars expected by the end of the year.
spk08: Thank you.
spk09: Yeah, I'll take that one again. This is Dennis. Yes, Cultivate, we are assuming in that assumption that Cultivate is rolled into our financials for the full quarter of Q4. Great. Thanks very much. Thank you.
spk01: Our next question comes from Glenn Mattson of Fenberg Salmon. Your line is open. Please go ahead.
spk06: Hi. Thanks for taking the question. I realize it's late in the call, so just one for me, but I wanted just to get a little more color on the Michigan market. So when you talk about, you know, you mentioned you want to be top three everywhere, obviously, but you kind of focused on... Massachusetts and Ohio as your next targets for that. You know, so just thinking about Michigan, it's highly fragmented. Maybe you're learning a lot from California that could translate to that market, but no one's really figured it out to a great degree yet. So maybe can you just give us a sense of, you know, what do you think you guys can accomplish in the medium term in Michigan? And that's it for me. Thanks.
spk09: Thanks, Glenn. And then to Greg. Thanks for the question, Glenn. In Michigan, you are absolutely correct. Highly fragmented. That's why we believe our wholesale approach is the right approach for Michigan. We are in the process of building up our capacity for the state. And so, through the back half of this year and the Q4, And in 2022, you'll see that come online. So our goal for the state is to really ensure that we're increasing our penetration across stores that exist with our wholesale brands. So we will be bringing our suite of portfolio into Michigan as we get into 2022 with a goal of taking meaningful share. And so that's our strategy for the state.
spk01: Our next question comes from Luke Hannon of Concord Generity. Your line is open. Please go ahead.
spk07: Yeah, thanks. Good morning. Dennis, I wanted to go back to an earlier point I think you mentioned on SG&A. You guys are expecting to see leverage in the back half of the year, and obviously that's going to come primarily from a larger revenue base. But I guess when you look at your SG&A line in general and your infrastructure and the people that you have in place, how many – Where would the incremental costs come from, I guess, if you feel you need to add any people or a cost into the system in order to drive that $1 billion in annual run rate revenues? Where would be the additional costs that we could see throughout the course of the year?
spk09: Yeah, thank you for that. So the cost will increase during the bounce. There's obviously integration costs. We've talked about the acquisitions that we have in Bluma and then Colt that will come on later in the year. So there will be some costs that we will look to get some synergies by integrating those companies in
spk06: family. We'll continue to make investments in people and processes, building a back-end operation to support a billion-plus dollar company and making sure that we've got the systems and processes in place for inventory tracking and automation and just even financial systems, for example. So we'll continue to make those investments. And then as we roll out retail stores in Florida, in Pennsylvania, in Massachusetts, there'll be some costs associated with hiring the staff and making sure that we've got the right people in place. But overall, I mean, we built the foundation. We're building the foundation in Q4 and Q1 investments.
spk09: to help us grow the company and be in a position where we can start to build those leverages and start to recognize synergies and efficiencies more quickly in the second half of the year and beyond.
spk07: Got it. Thanks for that. Charlie, maybe this one's for you. I think you had mentioned earlier in the call in Ohio that you're close to 80% wholesale penetration. Now, I think you've commented in the past that you plan to get to that 100% wholesale penetration in the back half of the year. I guess my question, the two-part question, the first is beyond just incremental cultivation coming online, how specifically do you close that gap? And then Beyond that, for those dispensaries where you already have, in which your products are already being sold, how do you expand, I guess we'll call it shelf penetration within those stores or velocity of those same products? What specific levers do you have within the Ohio market to drive up?
spk09: You know, it's a very valid question, and maybe we haven't been clear enough on this previously. It's really the extract and process and manufacture products in Ohio. To date, we did not receive our processing license at the same time we received our cultivation license. So to date, we've only been selling flower into the state of Ohio. So as we now build out, we received the processing license, we built out the lab. That'll come online here in second half of the year, we're actually bringing our full suite of product forms and our full house of brands to the Ohio market for the first time. That's how we'll go from the 80% to the desired 100% penetration and also take down more shelf space. We've only been playing on the flower shelf so far. We'll be bringing in those additional form factors and additional house of brands, grabbing the additional That really is how we're going to get more velocity on every one of those accounts we have relationships with today. We know there's just a tremendous opportunity for us to expand, not just beyond our current flower offering, but on all formats. So we think that's a great opportunity for us.
spk07: Got it. Appreciate the call. Thanks. Thanks, Luke.
spk01: There are no further questions in the queue.
spk09: Excellent. So if that's it for questions, just want to thank everybody for joining us on the call today. We look forward to speaking to you on our Q2 call. I hope everybody in the U.S. has a wonderful Memorial Day. All right. Thanks, everybody. Bye-bye.
spk01: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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