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spk00: Hello and welcome to the Cresco Labs 3rd Quarter 2021 Earnings Conference Call. My name is Hannah and I'll be your operator today. Before handing over to the team, I would like to remind you that there is an opportunity to ask questions. And if you do wish to ask a question on today's call, simply press Start followed by 1 on your telephone keypad. I will now hand over to Jake Graves to begin today's session.
spk12: Good morning and welcome to Cresco Labs 3rd Quarter 2021 Earnings Conference Call. On the call today, we have Chief Executive Officer and Co-Founder Charlie Bochtel. Chief Financial Officer Dennis Olis and Chief Commercial Officer Greg Butler, who will be available for Q&A. Prior to this call, we issued our third quarter earnings press release, which has been filed on CDAR and is available on our investor relations website. These preliminary results for the third quarter of 2021 are provided prior to the completion of all internal and external review and therefore are subject to adjustment until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements in MD&A for the three and nine months ended September 30th, 2021, on CDAR and AdGear next week. Certain statements made on today's call may contain forward-looking information within the meaning of applicable 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 Labs filings with CDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results 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, Cresco Labs will refer to certain non-GAAP financial measures, such as adjusted EBITDA and adjusted gross margin, 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 will turn the call over to Charlie.
spk17: Good morning, everybody, and thank you for joining us on the call today. Let me first wish a very happy Veterans Day to all members of military service past and present and their families, including my father. We sincerely thank you for your sacrifice, your bravery, and the example you set for us all. We're very pleased to share our Q3 results, as we followed up a strong first half of the year with an outstanding quarter of substantial margin expansion, integration of accretive M&A to drive market depth, and continued execution as the number one wholesaler of branded products in cannabis. The outlook for the industry and for our business has never looked better than it does today. As the US cannabis market is on track for over 40% growth this year, and Cresco Labs is set to outpace that growth once again. What has 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 number one market share positions in large markets, and we're poised to repeat that success in multiple key states. As a cultivator, we're generating quality, potency, and uniformity at an unprecedented scale. We're delivering the best portfolio of branded products suited to the needs of retail customers and end consumers. Our sophisticated supply planning and analytics show us how to tailor our operations at a localized level, and our highly efficient retail platform meets consumers where they want to be met, feeds back essential data, and supports our wholesale channel. I'd like to recognize the incredible team of leaders that make up the Cresco Labs family. This team is responsible for our organization having the number one or number two market share position in three different billion dollar plus markets, being the number one wholesaler of branded cannabis products in the industry, Curb EDSA having the number one best-selling brand of cannabis in the industry and generating the highest per-store revenue of any scaled national retailer. While these achievements help validate our thesis, they're only possible with an incredible team all working in harmony to execute the strategic playbook state by state by state. As cannabis markets inevitably evolve, our differentiated approach and ability to execute it positions us to outcompete in both the near and long term. Turning to the quarter, revenue in Q3 was $215 million, an increase of $6 million sequentially and 41% year over year. With $109 million net wholesale revenue, we remain the number one wholesaler of branded cannabis products in the industry. With $106 million of retail revenue from 37 contributing stores, Sunnyside remains the most effective and productive per-store retail platform among national retailers. Q3 adjusted gross margin increased to 54%, and adjusted EBITDA increased to $56 million, growing 24% sequentially. As we have conveyed, we're delivering the profitability and operating leverage forecasted from the investments made early in the year, and we're demonstrating responsible growth as we scale. Now let's review the three specific ways Cresco Labs is delivering growth and shareholder value in 2021. We remain committed to our plans laid out at the beginning of this year, and we continue to find that our differentiated strategy is working. Number one, executing our playbook in the most strategic markets through organic growth and accretive M&A. Through our 10-state footprint, Cresco Labs continues to address the vast majority of the U.S. cannabis market with an abundance of opportunities for high-return investments. As an organization dedicated to achieving success in the framework that exists today and winning this industry long-term, we continue to evaluate investment opportunities with both time horizons in mind. Ultimately, our goal is to achieve a top-three market share in the most strategic states, large populations, and appropriate regulations. In Massachusetts, we recently completed two initiatives that have propelled us into our third top three market share position in a billion-dollar-plus market. Integration of the Cultivate assets is well underway, and we could not be more impressed with the efficiency and sophistication of their operating team. We're also excited to report the initial harvests from our expanded Fall River cultivation facility have exceeded internal yield forecasts. Combined, we've created a platform to execute the same playbook we've used before to attain market leadership. Massachusetts is the largest adult use market in the Northeast and represents the most substantial near-term growth opportunity for Cresco Labs. The Pennsylvania market will provide an interesting case study in 22 as the state becomes more competitive, and we're already beginning to see which brands are up to the test. We've announced two important acquisitions to fortify our number one market share position in the state. We expect both the CurePen and Laurel Harvest acquisitions to close in Q4, collectively adding four new operational retail stores, licenses for five incremental stores, and 52,000 square feet of indoor cultivation space. The moves we're making in this state to increase our retail footprint and add cultivation puts us in the best position to remain the number one wholesaler as competition rises and really win when adult use is ultimately introduced. Between now and year end, we'll add retail for the first time in Maryland, reach full production of manufactured products in Ohio, and register our first sale of flour from new cultivation in Michigan. It's been an incredibly productive year investing in our strategic footprint, and as expected, we're seeing these investments pay off. Footprint is comprised of the most valuable states, seven of which are already over a billion-dollar run rate, and five of which are medical markets that are likely to introduce adult use in the near term. We're constantly analyzing state dynamics, tailoring our strategy to each market, evaluating the needs of stakeholders, and making responsible strategic investments for the benefit of shareholders. Number two, increasing our leadership as the number one wholesaler of branded cannabis products. Q3 net wholesale revenue is 109 million, the highest in the industry. Our brands reached nearly 1,100 retail stores around the country this quarter, up 5% from Q2 and 32% year over year. In five of our eight wholesale markets, our brands have more than 75% wholesale market penetration, and in three markets, we're over 95% penetration. According to BDSA, our brand, Cresco, was the number one most sold cannabis brand in the U.S. for the third consecutive quarter. In Illinois, we continue to hold the number one market share position with 100% wholesale penetration and best-selling portfolio of brands. We're incredibly proud of the Cresco Labs Illinois team who day in and day out are leading one of the country's largest cannabis markets with an unrelenting focus on continuous improvement and world-class execution. In Pennsylvania, during an environment when competition and supply have risen to meet demand, we continue to maintain our number one wholesale market share have the number one sold brand overall, and distribute to 100% of the stores in the state. We track wholesale velocity as a metric to determine how fast and how frequently a product sells once it's on shelf. BDSA reports that in Pennsylvania, seven of the top 10 highest velocity vape SKUs are Cresco products, and five of the top 10 highest velocity concentrate SKUs are Cresco products. This is how a premier wholesaler outcompetes for share of shelf. strong product assortment, executing the supply plan, and consistently delivering products that customers want. Everything we've gained from operating and competing in markets like California has sharpened us to achieve resilient and robust growth as markets evolve. Turning to California, we're pleased with our latest performance following the strategic shift announced last month. As we continue to implement localized strategies tailored to each market's dynamics, we're putting our full weight behind our rapidly growing own brand portfolio in California, driving expanded profitability margins for our overall business. This market has seen a wave of new supply, precipitating price competition across categories. While Florical is not immune to changing market prices, the brand is performing well, jumping three places in Q3 to the 12th best-selling California flower brand. Positioned as the best quality flower in its price tier, Florical is proving to be an exceptional lead horse for our wholesale portfolio. California is the largest and most competitive market in the country, and it has helped shape our strategy and capabilities as a cultivator and wholesaler across our footprint. We look forward to continuing to refine and grow our position in California in the quarters and years to come. Number three, operating high volume strategic retail stores. Q3 retail revenue was $106 million contributed from 37 stores. Average quarterly revenue per store was $3.1 million for the 33 stores open during the entirety of Q3, the highest per store revenue among top MSOs. Same store sales grew 25% for the 17 stores open during the entirety of Q3 2020. Strategic retail will continue to play an important role as we deliver both near-term ROI and build a platform for long-term sustainable leadership in the middle two verticals of the value chain. Many of our Sunnyside stores around the country continue to punch above their weight, delivering revenue in excess of respective state averages and outperforming their fair share of sales. In Florida, we're on track to hit our target of 16 stores open by the anniversary date of the Bluma acquisition. In PA, as discussed, organic store openings, in addition to the recent M&A, will support our top market positions. Lastly, next Monday, we're excited to have the grand opening of Sunnyside Wrigleyville, a flagship retail store located a little over 300 feet from the famed Wrigley Field marquee. This is a one-of-a-kind Sunnyside and will feature unique product activations, 21 points of sale, and plenty of space to serve customers on high-traffic days when baseball games, concerts, and large events are taking place next door. To think back on when the original Wrigleyville location opened for medical sales five years ago, it is incredible to see how far this industry and our organization has come and to see the outstanding execution from our retail team. Cannabis has always and will always have a unique and evolving set of challenges. Cresco Labs has earned its way to the top of this industry because it is deeply rooted in our nature to embrace challenges, engage in the problem-solving process, and find ways to turn them into opportunities. We've navigated difficult environments before, we will do it again, and we are ready for what comes next. Looking ahead, we're cognizant of macroeconomic forces that may come to impact consumer industries, inflation, expiring unemployment benefits, supply chain obstructions, et cetera. But Cresco Labs hasn't gotten where it is today by missing the forest for the trees. We know where this industry is heading, We've built the strategy to achieve success and will remain agile while tailoring our operations to the evolving dynamics. With that, I'll turn it over to Dennis.
spk19: Thank you, Charlie, and good morning, everyone. I'll begin by reviewing the financial results from the quarter, then highlight a few items from the balance sheet and discuss our capital position. Because of the proximity of the Cultivate transactions closed to quarter end, Our financials are expected to be filed next week on CDAR and EDGAR as we complete the final review of purchase accounting for Cultivate. Turning to our results, we're very pleased to report a strong Q3 during which we produced an $11 million increase to adjusted EBITDA during a quarter where revenue grew by $6 million. After a period of investing in our infrastructure, deepening operations within our footprint, and integrating new assets, we're delivering higher margins as forecasted and we're demonstrating responsible growth as we scale. Revenue in the third quarter was $215 million, an increase of $6 million quarter over quarter and $62 million year over year. Revenue growth was driven by continued execution in Illinois, new store openings in Florida, and a month of cultivating. This was offset in part by the beginning shift toward own brand distribution in California and muted market growth in Pennsylvania after an incredibly strong Q2. Q3 revenue mix was 51% wholesale and 49% retail. Our differentiated focus on the middle two verticals of the value chain once again resulted in the highest wholesale revenue in the industry at $109 million. Our Sunnyside retail platform generated $106 million of revenue from 37 stores, which continues to make us the most productive per store retailer among top MSOs. Looking ahead, Massachusetts will be a material driver of wholesale revenue growth as we reach full output in the newly expanded Fall River facility and integrate Cultivate's operations over the coming quarters. We expect to make the first harvest at our new Michigan facility over the coming weeks which will begin meaningfully contributing to sales in early 2022. Q4 California revenue will include some third-party sales from exited distribution agreements, so Q1 will be the first quarter fully reflecting the shift to predominantly owned brands. On the retail side, near-term growth drivers include new store openings in Florida, the additions of Curepen, Laurel Harvest, and Sunnyside Stores in Pennsylvania, as well as Blair Wellness Stores in Maryland. Given this initiative in both wholesale and retail, and with the expected closing of pending M&A, we reiterate expected Q4 revenue of between $235 to $245 million. Turning to gross profit, in Q3, we generated $117 million, or 54% of revenue, excluding the fair value of market of acquired inventory, a 9% increase quarter over quarter. As predicted, gross margins increased as we completed facility expansions in several states and the costs associated with those facilities were absorbed over a larger revenue base. We expect gross margins to be positively impacted over the coming quarters as we roll off lower margin sales in California, grow Florida operations, increase automation, and achieve greater scale in more of our markets. Third quarter SG&A expense, excluding share-based compensation and non-core items, was $65.7 million, or 30% of revenue, an improvement from 32% in Q2. The reduction in SG&A dollars is a result of completing major corporate infrastructure investments and the strongly executed integration plan with Bluma to drive out costs. The increased operating leverage in Q3 is even more impressive considering we absorbed Cultivate's SG&A for a full month. Looking ahead, as we execute our integration playbook for the next group of transactions, we expect SG&A as a percent of revenue to continue to improve in the fourth quarter and throughout 2022. Adjusted EBITDA for the third quarter was $56 million, a 24% increase from Q2 represent a margin of over 26%. Again, during the quarter when revenue grew by $6 million, we generated an $11 million boost to the bottom line. Contributions to profitability came from gross margin expansion, continued operating leverage improvement, and closing of accretive acquisitions. As we continue to deepen operations across more states, we reiterate expected Q4 adjusted EBITDA margins of 30%. During the quarter, in connection with our exit from third-party distribution agreements in California, we followed applicable accounting rules to evaluate goodwill and other intangibles associated with the Origin House transaction and took a non-cash impairment charge of approximately $290 million. The original transaction valuation was primarily ascribed to third-party distribution business and its customers And this charge reflects our strategic move toward focusing on more profitable owned brand sales. However, it's important to note a few substantial benefits we have realized from the acquisition in our overall business. The cultivation techniques acquired through Origin House lead our cultivation practices across all of our existing facilities nationwide and those forthcoming. We've leveraged the long-standing relationships developed by the continuum distribution team to get our own brand onto hundreds of shelves across the state, and the benefits will continue to grow as we expand the Florical brand across our footprint in the future. We are better positioned to compete in all of our markets because of the organizational capabilities acquired and those we've developed in the world's largest and most competitive cannabis market. We continue to invest in the organic expansion of our wholesale and retail channels. In the third quarter, CapEx was approximately $26 million, $4 million of which was funded through tenant improvement allowances. With $253 million in cash at the end of Q3, we put ourselves in a strong position to capitalize on the opportunities in front of us and deliver growth and shareholder value. Q3 was another outstanding quarter at Cresco Labs and a very strong start to the second half of the year. We replenished our balance sheet with non-dilutive capital, We closed a transformational acquisition in Massachusetts while announcing several new deals, and we made massive improvements in bottom line profitability as infrastructure investments began to bear fruit. Looking forward, we're excited about growing our Florida footprint with multiple new stores opening in our pipeline, launching a robust wholesale business in Michigan, operating additional capacity and opening more Sunnyside stores in Pennsylvania, gearing up for New York adult use, and executing our differentiated strategy to achieve more top market share positions in key states. 2022 is set to be another record year and we couldn't be more excited of what's to come. Thank you for your time today. I'll now ask the operator to open the line for questions.
spk03: Operator? You're with us here. We'll get the queue open. Operator, we're here. Ready? Hey, everybody. We got some technical difficulties. Bear with us. We'll get this fixed.
spk09: Sorry for the wait there, ladies and gentlemen. Our first question today comes from Andrew Perino of Quebec. Andrew, please go ahead. Your line is open.
spk02: Hi, good morning. Thanks for taking my questions and congrats on the strong quarter. You know, looking at your adjusted even the margins, it's pretty impressive what you've done from Q1 until now. You've reiterated Q4 guidance, which is basically a continuation of that strong margin expansion. I'm wondering if you can provide a little bit more color on the puts and takes there. You've got a lot of acquisitions contributing. Could you maybe talk about which acquisitions you feel could be the most margin accretive? At the same time, dive a little bit deeper into California. You know, the pivot, what exactly does that do to your margins? You've already, you know, adjusted your guidance for revenues accordingly. A little bit more color on that could be helpful. Thank you.
spk04: Sure, happy to provide that for you.
spk19: So when we look at adjusted EBITDA, we've seen improvements both in gross margin as a percentage of revenue as well as our managing our SG&A expenses. So some of the key drivers of that, certainly the move to Florida has been accretive for the company. The margins that we see in Florida are higher than the average margins across the board, so that has been a very accretive acquisition. We've gotten through most of the integration efforts with that acquisition. So we are seeing the benefits from an SG&A standpoint in addition to the margin uplift that we get from that. Same thing with Massachusetts. The cultivation deal closed in the quarter. We did have one month of SG&A costs in Q3 related to the Cultivate acquisition, but we've done quite a bit to increase its synergies between our facility and theirs. Some of the other key drivers. Expansion that we did in both in Ohio and in Massachusetts, we've talked about that in the first half of the year that we carried that cost without having revenue to offset that. Now as those two investments have started to bear fruit, we're starting to see an uplift in our margins associated with that. As it relates to California, we did see California had more of a drop in revenue in the third quarter than it really had an impact on margins. We'll start to see some of that margin improve in Q4 as we really focus on driving more profitable business across the portfolio and get away from some of the third party vendors that we have there that were less profitable than the overarching business. We will see some of that carry forward into Q4 and Q1 will be the first quarter where we have the full benefit of the strategy change in California. So we're excited about the growth that we saw from Q2 to Q3 in adjusted EBITDA. We expect that to carry into Q4. We expect to see our gross margins continue to improve sequentially from Q3 to Q4, and we'll continue to manage our estimated cost effectively.
spk02: Thanks for that additional color. And maybe thinking a little bit more about California there, Could you give a little bit more color on the reasoning behind the pivot there? And do you see any risk to your own brands? A little bit more color on that could be helpful.
spk04: Thanks, Andrew. This is Charlie.
spk17: So as far as the overall strategic decision there, precipitated by not only market dynamics, but the original strategy as it relates to California to really get our own brands out there. So you take those two together, sort of the original strategic initiative, along with, you know, listening to what the market is telling you and seeing how it's unfolding and making smart strategic decisions, including pivots, is something that we pride ourselves on. And as it relates to our own brands, so far we've seen positive response with our ability to capture additional shelf space for our own brands through this pivot. So, you know, excited about the opportunity ahead for us there, and also proud of the team for making the decisions that we've made to really improve the health of the revenue and the strength of the revenue that we're driving out of each of our states.
spk02: Thanks for that. Congrats on the great quarter, and I'll get back in the queue. Thank you.
spk09: Thank you. As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypads. Please note, questions will be kept to a maximum of one question per person. Our next question comes from Aaron Gray of Alliance Global Partners. Aaron, please go ahead. Your line is open.
spk16: Hi, good morning, and congrats on the margin improvement in the quarter. It's great to see. You know, Troy, I'd love to expand a little bit further on some of your commentary within Pennsylvania. You know, you mentioned it getting a little bit more competitive, you know, good velocity with your own brands. I'm just curious, as the market potentially gets more competitive, if things don't, you know, turn around on the overall sales, just curious in terms of as you guys as a net wholesaler, more people look to sell within their own stores, do you feel like it might get more competitive on the wholesale side? And then obviously with your move to add more retail, that helps kind of insulate you potentially from some pricing pressure. Just curious in terms of your view of potentially, you know, adding even more to the retail side to help insulate you guys from being too much exposed to the wholesale side if pressure continues in Pennsylvania. Thanks.
spk17: Yeah, good morning. Thanks for the question. So as it relates to PA, Yeah, I think you laid out some of the rationale in your question. And we're very proud of the position that we've been able to create there as the number one market share from the wholesale perspective in that state. And we've done it with only four of our own stores. And as we've talked about historically, we and others use retail to support wholesale initiatives. We utilize that in all the markets where we're vertical. So, yes, I think it was not only are we bullish on the future for Pennsylvania, even though there's, you know, increasing competition. Let's not forget, you know, it's a billion dollar plus medical market that still has adult use in its future. So proud of the execution, the market position we've been able to gain with a very light touch on retail in that state. We want to make sure that we have all of the assets. that we would like to have is that state continues to progress and not only open up for adult use, but definitely it strengthens our competitive position with having more retail in that state too. Greg, any additional color? Good. Okay. Yeah, we're really happy with the move that we're making in PA. Sets us up great for today and for long term.
spk16: All right, great. Thanks for the call. I'll jump back to the queue. Thanks, Erin.
spk09: Thank you. Our next question today comes from Vivian Azza of Cohen. Vivian, please go ahead. Your line is open.
spk13: Thank you. Good morning. Charlie, I was hoping to pivot back to California. Two-part question, please. Number one, you noted that the business was down sequentially. That makes sense as you do prioritize third-party brands, but could you speak to the revenue trends just for your own business quarter over quarter? And then number two, as you free up some margin or capture a little bit more margin with this pivot, do you envision having to redeploy some of that margin back into the discounting or promotional investments, just given some of the competitive activity you're seeing in the marketplace? Thanks.
spk03: There we go.
spk14: Hi, Vivian. It's Greg. So we want to give you more color on California. From an own brand perspective, as Charlie mentioned before, we're pleased with what we're seeing with our own brand. Roughly, we now, within our portfolio, have one of the top selling flower brands in the state. Our combined portfolio of Floracal and High Supply have been progressing very well in the state on a quarter-over-quarter basis and holding and taking share. We're also encouraged with what we've launched in Q3 on our newly-expanded House of Brands vape portfolio, where we're now offering the high-end under a newly-launched live resin product of Florical, which we're very excited about how it's going to move in the market as we get into Q4, and then also applying in the more value segment with our high-supply vape, which has had some very strong success going in stores. And then our innovation we brought to market under our Edibles portfolio with Sours, for example, under good news, has had a really strong start in the business. So from a quarter-over-quarter perspective, we're pleased with how the brands are performing and then also the lineup of how we've strengthened our own portfolio as we head into Q4.
spk19: And Vivian, from a margin perspective, our focus is on driving more profitable business, not just in California, but across the entire portfolio. so uh with uh the margin um the third party margin business was a small you know low single digit business for us we'll take some of that money we'll reinvest it in in branding our own products there but it won't be a material uplift and additional spend in in california great thank you thank you our next question comes from camillo lyon of
spk09: BTIG. Camilo, please go ahead. Your line is open.
spk08: Thanks. Good morning, everyone. Two questions. Just going back to the first one on Pennsylvania, going back to that topic, state. Clearly, there's been a plateauing of demand in that market. Yet it seems like by the data that we track, it seems like you saw an increase in that in the last month of the quarter. I'm just curious to know what happened this is a pretty sharp increase for you. And does this portend potential acceleration in demand as we head into 2022? And then the second question I have is on your cash balance, 253 million, very healthy. How would you prioritize the state that you'd plan to deploy that capital in? Is it more on expanding into existing states or are you looking aggressively to enter other East Coast markets that you're not currently in?
spk14: On Pennsylvania, what we're encouraged by when we saw going from Q3 to Q2 is the growth on our Cresco-owned products. You mentioned Cresco Liquid Live Vape has continued to grow and hold its position and share. And we're encouraged by that, especially as we get into Q4, as we continue to bring premium flower into the marketplace. So on the wholesale side, even though the market is roughly flat on a quarter-over-quarter basis, What we're encouraged by is both the strength of our existing portfolio and some of the new news that we're bringing into market under our flower side of our business to really help us not only solidify that share in the state, but also grow as we get into Q4. And so that's really our focus on how we ensure that we are holding and growing our business in the market.
spk17: And then on the second part of your question, Camilo, this is Charlie. You know, as far as where we're going to deploy capital, ER strategies remains the same, right? We're developing the most strategic footprint that we can, and we're driving to achieve that meaningful material market position. So very happy with the strength of the balance sheet, the cash on hand. It is going to be, you know, used to deploy in the states that we're primarily already in to increase capacity and breadth that we have in those markets to achieve that depth that we're always striving for.
spk08: Great. Thanks so much and good luck for the rest of the year.
spk09: Thank you. Our next question comes from Owen Bennett of Jefferies. Owen, please go ahead. Your line is open.
spk06: Hey, good morning. This is actually Derek calling in for Owen. Congrats on the quarter. I guess my question really actually revolves around the upsizing the credit facility. You're getting the 9.5%. on that, and it's lower than you were previously paying. But I'm just wondering, I guess, going long-term, what are the type of credit metrics that these lenders are looking at when determining these rates? And is it, you know, besides federal legalization or lack thereof? And, you know, I guess if there is a legalization or banking act or some legislation that's passed, do you expect that there's still going to be this type of cannabis industry risk premium on debt or Do you think that lenders are going to provide more type of market cost of debt going forward? That would be helpful. Thank you.
spk19: Yeah, thanks, Derek. This is Dennis. So as it relates to the current debt facility, we're very happy with the rate that we achieved, the 9.5% non-dilutive generation of cash for us. That's allowing us to make strategic investments in a number of states that Charlie just discussed. As far as the metrics that the bankers look for, it's really looking at the future of the business and where your growth opportunities are and the margin improvement abilities that you have as a company. So we feel very comfortable with the metrics that are being used and our ability to capitalize that. As you know, we just announced a $400 million facility with the option for another $100 million on top of that. So we feel like we are in a very strong position from a balance sheet to make some strategic acquisitions and to deploy our cash appropriately to generate shareholder value. As it relates to the banking changes and the potential impact on 280E and so forth, I do believe that there will still be a risk premium for cannabis companies, even post-reform. What that is is yet to be seen. I think the overall cost of capital will come down as capital markets open up to us, and the options that we'll have will continue to increase, but I do believe that there will be a slight premium still for the cannabis companies going forward.
spk06: Thanks. Appreciate it.
spk09: Thank you. Our next question comes from Matt McGinley of Needham. Matt, please go ahead. Your line is open.
spk18: Thank you. Dennis, you noted that the core G&A dollars were $65.7 million in the third quarter, which looks like it actually declined a little bit from the $66 million you reported in the second quarter, as you noted, despite having Cultivate G&A that would have added a little bit to that dollar base in the third quarter. Where did you realize savings in the third quarter were? And then you noted improvement in that rate into the fourth quarter, but how should dollar growth look from there? I mean, it's impressive that you basically kept that flat quarter to quarter, but I'm not sure what that would look like into the fourth quarter, given you will be growing the business pretty significantly.
spk19: Yeah, thanks for the question. So we did see an improvement in overall spend. That's really been driven by a maniacal focus on cost management, but also really reaping the benefits of the integration efforts that we had with Bluma. You know, we carried a full quarter cost in Q2. We've done quite a bit to drive some synergies across that business in Florida that's allowed us to actually reduce our overall spend. And again, just with some of the automation and some of the investments we've made in people and processes, we're starting to see the benefits of some of that, and we're able to reduce some of our third-party outside spend. As it relates to Q4 and going forward, We do expect the total absolute dollars to increase as we'll have another two months of cultivated expense in addition to some of the expense related to the acquisitions that we still have planned for Q4. Okay.
spk04: Thank you.
spk09: Thank you. Our next question comes from Pablo Zuanak of Cantor Fitzgerald. Pablo, please go ahead. Your line is open.
spk10: Charlie, two questions. One, in the case of Illinois, what's your outlook for the new store openings? And if we are stuck at 110 for all of 22, what does that tell you about the growth outlook? How does Illinois grow without new stores? That's one. And regarding New York, just an update. Did you start buying flour in the medical market? How is that doing in terms of sales? And just a reminder about your production plans in New York for the rec market. People are talking about breaking ground or being ready. We haven't heard much from Chris in that regard. Thank you.
spk17: Thanks, Pablo. As it relates to Illinois and an update on those next store openings, unfortunately, it's in the legal process. And I would conservatively say we're looking at back half of next year as to when we would start to see stores opening, of course. Again, when you're involved in litigation, that could be accelerated, it could be delayed. So I think we're just sort of reasonably and conservatively looking at second half of the year. And yeah, you know, growth between now and then is going to be driven by the same stores. Now keep in mind, some of the 110, I'm not even sure if all 110 are producing revenue at this point. I think it's 108. So you still have some opportunities from new stores and some that have just opened up in the last, you know, three to six months are still getting their feet underneath them. We'll continue to drive efficiencies. We'll continue to be able to get more juice from the same squeeze from our platform as we increase efficiencies and capabilities. So there's growth opportunities, but without question, the main catalyst comes from 185 new stores opening up, and we're very excited about when that's going to happen. Greg?
spk14: The two things I'd add is in advance of those doors opening, on the wholesale side, I think what you're seeing is the strength of our wholesale portfolio. And as we continue to strengthen that, that is what's going to help us continue to both take share, hold share, and grow our share of shelf. And you've seen it. Like Cresco right now is the number one brand sold across BDS. We've built nationally. We've built some of the largest concentrate brands. We are number one in many of our markets. And so I think through that, what you should hopefully have confidence in is that we are building a portfolio of really strong winning brands. So whether the market's growing or whether the market is slowing, we can take share with those brands. On the retail side, what we're encouraged about with our retail trends is we are still seeing trip growth and trips driving our store growth. And so as we look at the health of that market going forward, we are planning to ensure that we continue to drive trips into Sunnyside to drive overall revenue. And we've proven that with the sequential growth that we continue to drive out of our Sunnyside footprint, and that's how we'll drive growth in advance of the store's opening, which obviously will be another catalyst that will help sustain growth.
spk17: The second part of your question on New York, we have been able to get some flour into our stores and not a meaningful amount of course that'll that'll improve and increases more capacity comes online it's very limited right now and as far as our progress that we're making in that state site identified moving forward we've got enough information from the state to make us feel comfortable in in pursuing the design that we have which also includes some flexibility to account for any any adjustments uh per expectations that that actually get released i.e., as it relates to like canopy caps. And no, we're excited. We'll be ready for adult use as soon as that happens. And I think as others have commented, that's likely, you know, probably the beginning of 23. Got it.
spk10: Thank you.
spk09: Thank you. Our next question comes from Scott Fortune of Roth Capital Partners. Scott, please go ahead. Your line is open.
spk01: Yeah, good morning and thanks for the questions. Kind of following up on that, as you look up kind of your CapEx kind of expectations here, we know the guidance has stepped up in production, bringing online Massachusetts and Ohio. How should we look at kind of the production ramp as we look into 2022 and the CapEx dollars kind of spent for that going forward?
spk19: Yeah, this is Dennis. So from a CapEx perspective, You know, we will continue to make investments in Florida. Talking about New York, that will be a substantial investment that we'll make in 22. That'll bear fruit in 2023. We've got Michigan coming live at the very tail end of this quarter. Those are TI dollars that we've had available to us that are ramping down. But we're going to continue to use, to spend capital dollars as we roll out new retail stores, as we expand our footprint in Florida, as we build out the Laurel Harvest acquisition in Pennsylvania. So we will continue to go deeper in the states that we're in today to provide more availability of product, work on automation to help drive margins even better than where they're at today. And we'll be strategic in where we use those dollars and make sure that we get the appropriate returns.
spk04: Thanks for the color.
spk09: Thank you. Our next question comes from Derek Daly of Canaccord Genuity of Derek, please go ahead. Your line is open.
spk15: Yeah, thanks. So just following up on that last question, just curious, you know, which states within your current footprint are states where you think you can go, you know, materially deeper. Obviously, you've done a great job of adding assets in Pennsylvania and Massachusetts of late. And then secondly, just in terms of the leverage you're expecting to get on your EBITDA margins in Q4, you know, up about 400 basis points. How should we think about that in terms of the split between gross margin and SG&A leverage?
spk19: So again, this is Dennis. So from an investment standpoint in capital dollars, we'll continue to invest in the states that I just talked about in Florida and PA and other states. Well, we'll look to invest perhaps in Maryland. And again, just to go deeper in the states that we're already in, making sure that we're staying active and that we've got appropriate supply as demand comes up. At some point, we'll have to make some investments in Illinois, perhaps in advance of the additional stores going live. That'll probably be a late 2022 investment that will yield benefits in 2023. As it relates to EBITDA in Q4, We expect the improvements to come both on the gross margin perspective as, again, we continue to wean off some of the third party California business. And as we go bring some of the acquisitions that we've had in Massachusetts and expand in Florida, those opportunities bear more revenue that will help our overall margin performance on a gross margin perspective. From an EBITDA standpoint, while the total dollars will increase a little bit related to some of the acquisitions, as a percentage of revenue, we'll continue to see that percentage drop and will continue to be more efficient as the total spend as a percentage of revenue.
spk15: Okay. Thank you very much.
spk09: Thank you. Our next question comes from Kenrick Teig of ATB Capital Markets. Kenrick, please go ahead. Your line is open.
spk05: Thank you. Good morning. I wonder if you could speak to promotional intensity in quarter. How rational or irrational was that to your mind? And then how has that evolved through the fourth quarter? And how should we think about that evolution through 2022? And perhaps if you'd concentrate your comments around some of the states in which it's been grabbing more headlines. I'm thinking Florida, Pennsylvania, perhaps to a lesser extent, Illinois. Any insight there would be really valuable. Thank you.
spk14: Hey, good morning. So you're absolutely correct. We are seeing some increased price promotions in some of our markets like Florida and Pennsylvania. Our point of view on that is what we've built and what we're continuing to build in the state is what's going to help shield us from what's to come on pricing. And that's why we have built our brands to make sure that we are continuously driving up on the premium side and offering high quality that commands higher prices and also bringing in our value portfolio to ensure that we're insulated against deep discounts that need to happen on premium brands. So in our view, as we look across our market, it is managing our portfolio, whether that's through higher quality innovation or finding value that we can enter. that really is going to defend us around what's pricing to come. And we are encouraged by what we're seeing on Florida on how that's working for us. And we've got some exciting news in the months ahead that's going to continue to help strengthen our portfolio in Florida. And in Pennsylvania, as Charlie mentioned earlier, even with all the price activity that's happening, we've continued to hold a really material market share and drive incredible velocity on our Cresco brand without even owning the majority of retail in the state. And so that does show you that we are building a portfolio that enables us to compete and drive growth, even despite whether it's short-term price promotion activity that we're seeing right now or if that continues longer into the future. Thank you, and congrats on the quarter.
spk05: Thank you.
spk09: Thank you. Our next question comes from Andrew Semple of Eglin Capital Markets. Andrew, please go ahead. Your line is open.
spk07: Hi there. Good morning and congrats on the results. My question is on the wholesale business. Could you elaborate on some of the dynamics between pricing and volume within that segment for the quarter? And in addressing that, were there any regional differences between volume and pricing factors between Eastern and Midwest markets? compared to the Western business within your portfolio.
spk14: Hi, it's Greg. I'll take that one, too, because I think it's a continuation of our last conversation. So, let me start with your question on regional pricing. Clearly, in the West, in California, and we see this in all the syndicated datasets we have available, there was both significant price compression in this quarter, and there was also some light unit volume declines in this quarter too. And if you think back to Q2, we saw price compression, but we saw total revenue growth because unit volume was up. And so that deep price discounting in Western markets has intensified from a Q2 to Q3 perspective. Moving east, Really, the two call-outs we would say where we're seeing the most price promotion activity is the two markets we just discussed, Florida being one and then Pennsylvania being the other, where there has been an increase in price activity over the last couple of months. Our point of view, though, is the same as what we discussed before, which is we have to assume that we are going to either live in price promo activity or price compression comes in the future, and we have to be ready for that. And that's why we're building our brands, in our portfolio to make sure that we have the right portfolio that allows us to compete against price and premiumize to make sure we're both driving revenue and margin if pricing comes. And as Dennis mentioned before, the capital that we're investing in things like automation that will also help us become a more lean manufacturer and be able to continue to grow margins even in case of price compression. You know, we're seeing it. We're planning for it. We have to anticipate whether we see it next quarter or quarters ahead that it likely will come. And we're building our brand portfolio and our manufacturing footprint to make sure that we are very competitive and drive economics through it.
spk04: Thank you, Greg. Appreciate the color.
spk09: Thank you. That was our final question. I will now hand back to the Cresco Labs management team for any closing remarks.
spk17: Thank you very much for your time today. I want to thank the fantastic team here at Cresco Labs for incredible execution and commitment to being nimble in such a dynamic industry. And lastly, thank you to our veterans and happy Veterans Day. We look forward to talking to everybody with our Q4 results in the months ahead.
spk04: Thank you.
spk09: Thank you, ladies and gentlemen. This concludes today's call. Thank you all for joining. You may now disconnect your lines.
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