Cresco Labs Inc

Good day and welcome to the Cresco Labs 2021 second quarter 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 questions. To ask a question, you may press star followed by one on your telephone keypad, and 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' second quarter 2021 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder, Charlie Bochtel, Chief Financial Officer, Dennis Oles, and Chief Commercial Officer, Greg Butler, who will be available for Q&A. Prior to this call, we issued our second quarter earnings press release, which has been filed on CDAR and is available on our investor relations website. We plan to file our corresponding financial statements and MD&A for the three and six months ended June 30th, 2021 on CDAR and EDGAR later today. 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. These 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 in our earnings press release and in Cresco Lab's filings on CDAR and with the Securities and Exchange Commission. Cresco Lab 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 also note that all financial information on today's call is presented in U.S. dollars and all interim financial information is unaudited. In addition, during today's conference call, Presco Labs will refer to some non-GAAP financial measures, such as adjusted EBITDA, which do not have any standardized meaning prescribed by GAAP. 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, as a substitute for, or as an alternative to, and should only be considered in conjunction with the GAAP financial measures presented in our financial statements. With that, I'll now turn the call over to Charlie.

Hi, everyone, and thank you all for joining us this morning. We're once again very pleased to share our results with you today and discuss what an outstanding quarter this was for our organization. Early in the second quarter, as the weather warmed up, COVID restrictions lifted, and tourism returned to cities around the country, we saw consumer demand reach all-time highs in numerous cannabis markets around the country. Between strong demand growth, continued progression of state legalization efforts, and renewed potential for federal reform, we believe the outlook for the U.S. cannabis sector has never been brighter than it is today. As for Cresco, we love the trajectory we're on. We've demonstrated the ability to reach and sustain top market share positions in multiple billion-dollar-plus markets, and we're gearing up to repeat that success. We've fortified the balance sheet with substantial non-dilutive capital to create more growth for shareholders. We continue to advance this industry with thought leadership and engagement in the legislative process. We're winning awards for product quality. Our social equity team is developing and incubating license winners. Our brands are dominating categories in numerous states, and this is just the beginning. Revenue in Q2 was $210 million, an increase of 18% sequentially and 123% year over year. We've demonstrated industry leadership on both sides of the field. With $109 million of net wholesale revenue, we remain the number one wholesaler of branded cannabis products in the industry. With $101 million of retail revenue from 33 stores, Sunnyside remains the most effective and productive per-store retail platform among scaled national retailers. Q2 gross margin adjusted for the fair value markup of acquired inventory increased to 51%, and adjusted EBITDA increased to $46 million, growing 30% sequentially. In Q1, we mentioned that we were optimizing operations across the footprint. While we consolidated newly acquired Florida assets midway through April, approximately 86% of our sequential topline improvement was driven from organic growth in existing states. We're very proud of the performance in Q2, but we're even more excited to begin seeing the contributions from our 2020-2021 growth initiatives that are still to come later this year. We invested in infrastructure, operationalized new assets, and deployed our playbook across the footprint. Once again, we're hitting our stride as we enter the next phase of growth. On previous calls, we've discussed the three specific ways Cresco Labs is delivering growth and shareholder value. This framework provides a simple, straightforward view into the logic behind our strategy. Before discussing the how, it's important to first reiterate the why. First, we're investing in the most important U.S. markets to build meaningful material market share positions and create the most valuable footprint in cannabis. We've established operations in 10 of the most strategic markets in the U.S., and now we're focused on achieving top three market share positions in each state. In doing so, we generate scalable capabilities, increase operating leverage, and create leading brands in the largest, most influential states through quality, consistency, and availability. Second, we're increasing our leadership in wholesale because we believe strong capabilities in the middle verticals of the value chain is key for long-term success. We've demonstrated the unique ability to build cultivation capacity, bring brands to market, and distribute to 100% of retail stores. As more and more non-vertical, independent retailers enter this industry, this proven playbook will continue to be a formula for success today and as regulatory structures inevitably evolve. Third, we're operating high-volume retail stores to better understand consumer preferences, complement our wholesale operations, and drive profitability. Maximizing retail opportunities in limited licensed states will continue to serve as an important aspect of our plan to drive near-term value creation. Using the fundamentals of established consumer industries, we've created our strategy to achieve growth and shareholder value in 2021 while simultaneously building the platform for long-term leadership in cannabis. Now let's review the three specific ways Cresco Labs is executing in 2021. Number one, accelerating growth through organic investments in M&A in the most important markets. In April, our entrance into Florida marked a significant milestone for our company, and we're thrilled to welcome the entire Bluma team to the Cresco family. We're off to a phenomenal start in the market, with pro forma Florida revenue growing 33% in Q2 over Q1. Integration is moving quickly and has already yielded numerous operational improvements, increased cultivation output, and facilitated valuable knowledge sharing between the two companies. Over the coming quarters, we'll begin to roll out additional form factors like edibles, more brands from the Cresco Labs portfolio, expand cultivation capacity, and double the current store count. As an organization, we've become proficient in closing and seamlessly integrating new assets through M&A. This ability creates tangible shareholder value and makes us all the more excited for our upcoming acquisitions. Massachusetts represents a substantial growth opportunity in the back half of this year and into 2022 as we complete the two initiatives that will propel us to our top three market share goal. First, we're nearing the initial harvest from the expansion of our Fall River cultivation facility, which will drive meaningful impact on our operating leverage in Q4. Second, upon the closing of the cultivation transaction, we'll operate the maximum number of dispensaries, double our cultivation footprint, and become the premier wholesaler for the state's more than 170 retail outlets. In Ohio, we're seeing outstanding performance from the four new Sunnyside stores, and the team is working to bring product to market from our new extraction and manufacturing capabilities that will introduce our full suite of offerings to the state for the first time. Once again, the maximum number of retail stores, a robust wholesale portfolio, and already more than 80% penetration, Cresco Labs will be positioned to accelerate growth in Q4 on our way to earning another top three market share. To round out the cultivation expansion projects we initiated last year, we're looking forward to the first harvest in our Michigan facility around year-end. With more than $450 million of quarterly state sales, we're excited to deploy our proven playbook, led with CPG fundamentals, to Michigan's massive, fast-growing adult-use market and build a commanding market share position. We've made incredible progress year-to-date investing in our strategic footprint. We're constantly analyzing state dynamics, evaluating the needs of stakeholders, impacting where the puck is going, and making responsible strategic investments for the benefit of our shareholders. With upside driven by regulatory change in Illinois and New York and encouraging adult use discussions happening in Ohio, Maryland, Pennsylvania, and Florida, now is the time to execute our playbook and establish the foundation for multi-year growth in the country's most important markets. Number two, increasing our leadership as the number one wholesaler of branded cannabis products. Q2 net wholesale revenue grew 14% sequentially to $109 million, by far the most in the industry. During the quarter, our brands reached more than 1,000 retail stores around the country for the first time. We continue to bring innovation to market through recent launches under the Good News and Wonder Wellness brands. Illinois was a standout market in Q2, with state sales rising 19% sequentially, supported by 11 store openings in April and robust consumer demand growth. We continue to execute our wholesale strategy at the highest level with the number one share position in the state. For BDSA data, Cresco is the number one best-selling brand in the state. We have the top two best-selling flower brands with Cresco and High Supply. the number one edibles portfolio with Mindy's Good News and Wonder Wellness, and the number one concentrate brand with Cresco. We've held our leading market share steady since Q3 of last year and still have the largest potential future cultivation capacity of any operator in the state. With 185 new retail licenses forthcoming, this is exactly why we believe in the prioritization of wholesale over owned retail, and we could not be in a better position to capture growth in Illinois next year and beyond. Across our footprint, we're relentlessly focused on the pillars of successful brand building, knowing what the consumer needs, quality, consistency, and availability. Our Michigan team deserves a shout-out here. At the 2021 Hash Bash Cup held last month, our Cresco brand took home first and second place in the vape category, first and second place in concentrates. and Mindy's are in second place in the edibles category. This is a perfect example of how the quality of Presco Labs' products stacks up in even the most competitive markets, and this bodes well for our launch of premium flour in Michigan in 2022. In California, over the last 12 months, we've successfully competed to grow our share of the market, sharpened our wholesale expertise, and established a meaningful presence in the world's largest and most influential cannabis market. We've leveraged top-performing partner brands to open doors for our own brand portfolio, and over time, demand for our own brands has steadily grown. Our high-low flower portfolio strategy with Florical and High Supply delivered year-over-year growth of 173%, while shelf penetration and repeat purchasing across key accounts has continued to increase. In Vape, we grew 71% year-over-year, and Cresco is now the eighth best-selling live resin cart in the marketplace, according to BDSA. Recognizing our key competitive advantage in the cultivation and processing of premium flour, we will continue to strategically manage our California operations to both capitalize on the enormous top-line opportunity while reducing costs and increasing profitability. Strong wholesale capabilities are critical for future success in the cannabis industry, and with the top-selling brand portfolio in multiple states, no company has proven these capabilities more than Cresco Labs. Number three, operating high volume strategic retail stores. Q2 revenue was $101 million, 22% growth quarter over quarter. Same store sales grew 14% sequentially for the 20 stores open during the entirety of Q1 and 58% year over year for the 16 stores open in Q2 of 2020. Average quarterly revenue per store increased to $3.9 million for the 24 stores open during all of Q2, the highest per store revenue among top MSOs. While we're very pleased with our retail performance in the first half of the year, there's even more to look forward to as we add stores in Florida, Massachusetts, and Pennsylvania and make enhancements to Illinois locations. In a perfect example of how our retail teams are executing, the four Verdant stores, all of which had been open for two-plus years, increased revenue on a pro forma basis by 12% sequentially in Q2 after we took control, outpacing the market by 30%. We've developed a repeatable model on how to attract more consumers, deliver an unparalleled shopping experience, and earn outsized share of the market. The model will continue to deploy this year as we grow Sunnyside. In summary, we continue to validate our thesis that you win this industry by building the most strategic geographic footprint, establishing material positions in each of those markets. And vertical integration is key in the near term, but the greatest opportunity for creating long-term shareholder value is in branded products and the wholesale distribution of those branded products. We have market leadership positions in multiple billion-dollar markets, We're the number one wholesaler of branded cannabis products in the industry, and we have the most productive per-store retail operations of any scale national operator. As an organization, as shareholders, as employees, as community members, and as advocates, we are all fierce believers in what the future holds for this industry. Using the fundamentals of established consumer industries, we've created our strategy to achieve long-term success, and we are executing. With that, I'll now pass the call to Dennis.