Cresco Labs Inc

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.

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.

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.