Cresco Labs Inc

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.

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.

You can see on a gap basis, from Q1 to Q3 last year, we held SG&A expense flat, while revenue grew 131%.