Cresco Labs Inc

Hello everyone and welcome to the QRISCO Labs first quarter 2022 earnings conference call. My name is Victoria and I will be calling into your call today. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you wish to withdraw your question, please press star 2. When preparing to ask your question, please ensure that your line is unmuted locally. I'll now pass over to your host, Megan Kulik, to begin. Please go ahead.

Thank you. Good morning and welcome to Cresco Labs first quarter 2022 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bechtel, Chief Financial Officer Dennis Olis, and Chief Commercial Officer Greg Butler, who will be available for the Q&A. Prior to this call, we issued our first quarter earnings press release, which has been filed on CDAR and is available on our investor relations website. These preliminary results for the first quarter of 2022 are provided prior to the completion of all internal and external reviews and therefore are subject to adjustments until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the three months ended March 31, 2022 on CDAR and EDGAR later this week. Certain statements made on today's call may contain forward-looking information within the meaning of the 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 of our forward-looking statements and risk factors can be found in our earnings press release and in Cresco Labs' filings with CDAR and 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 note that all financial information on today's call is presented in US 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, adjusted gross profit, 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 of 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 turn the call over to Charlie.

Good morning, everybody, and thank you for joining us on the call today. We've got a bit to cover, so we'll jump right into it. While Q1 was a slower quarter for a young industry that's been conditioned to expect incredible growth without much impact from traditional seasonal trends, We understand that an emerging industry's growth trajectory is rarely linear, especially in a highly regulated industry with a fragmented state-by-state structure, conflicting federal and state laws, and the addition of some general macro pressures affecting everyone. Our team continues to drive toward the macro thesis of cannabis becoming a core U.S. consumer product industry, and we're dedicated to executing a focused, disciplined strategy for long-term industry leadership. We're building the most strategic geographic footprint for We're obtaining material positions in each state, and we're proficient in all verticals of the value chain while emphasizing branded products and distribution to drive the greatest long-term value. In Q1, we showed the resilience and strength that resulted from this focus strategy. We produced $214 million in revenue, representing a 20% year-over-year growth. Our adjusted gross margin was 53%, a roughly 350 basis point improvement year-over-year. Adjusted EBITDA margin was 24%, up 400 basis points year over year. And we maintained our position as the number one wholesaler of branded cannabis products in the industry, as well as having the highest per store revenue of any scaled national retailer. We continue to compete incredibly well, holding or gaining branded share in the majority of our markets. With our markets down an average of 4.5% sequentially, our revenue was only down 2%. As was the case in Q4, our incredible Cresco family team members took everything that this quarter was willing to give. Now let's again review our proven playbook of the three specific ways Cresco Labs is delivering long-term growth and shareholder value that we introduced in 2020. Number one, developing the most strategic geographic footprint through organic growth and accretive M&A. Two, being the leading wholesaler of branded cannabis products. And three, operating high-volume strategic retail stores. Number one, We are developing the most strategic market footprint through organic growth and accretive M&A. The acquisition of ColumbiaCare is the most efficient way for Cresco Labs to achieve material positions in the most strategic markets in the industry. While we love the value that our current footprint provides, the addition of ColumbiaCare's market access makes Cresco Labs unrivaled. ColumbiaCare will add eight additional markets to the Cresco Labs footprint, including the high priority states of New Jersey and Virginia. And it provides depth, vertical integration, or the opportunity for asset optimization across the entire portfolio. Combined, our pro forma footprint covers 180 million Americans, or 55% of the total US population, and 70% of the addressable cannabis market. Our pro forma footprint is expected to be a $31 billion total addressable market by 2025, according to BDSA, including all 10 of the industry's top 10 revenue states. We expect to have the number one branded and or retail share position in five markets, Illinois, Pennsylvania, Colorado, Virginia, and Massachusetts, as well as eight states, each contributing over $100 million in annual revenue in 2023. Again, this level of depth and breadth in the industry's largest markets is unrivaled. It provides diversification that helps insulate us from market to market volatility, and we believe it'll provide us with the economies of scale leading to superior margins, meaningful brand equity, and long-term competitive moats. On Columbia Care's call on Monday, they talked about the strong performance they saw in the first month of adult use sales in New Jersey. This is just the first of many adult use catalysts in our portfolio. On a pro forma basis, we have leading positions in Pennsylvania, Ohio, Maryland, and Virginia, four markets that are likely to go adult use in the relatively near term. These four, along with New York and Florida, represent some of the biggest industry catalysts in coming years, and Cresco Labs has exposure to all of them. While any form of federal banking and tax reform will be material, the demand from the cannabis consumer and progress with state accessibility continue to be the bellwether for the cannabis thesis. We're making significant progress on the closing of the transaction on our previously communicated timeline of around year end. On Monday, we accomplished our first major milestone as the transaction cleared the federal HSR review. The next milestone, ColumbiaCare's shareholder vote, will occur this summer. On the state level, we've been working closely with regulators to ensure a smooth progression towards deal approval. As most know, the reputations of Cresco Labs and ColumbiaCare have foundations rooted in regulatory compliance and working with regulators to build the most responsible, respectable, and robust industry possible. The regulatory process is reasonable, manageable, and we do not expect it to be an issue for our closing timeline. In the few states where we will have divestiture requirements, namely Illinois, Massachusetts, Ohio, New York, Florida, and Maryland, we've started the sales process and have been very pleased with the progress thus far. Our official RFP process was launched last week. Based on the initial expression of interest, we're confident that this will be a smooth and successful process. The acquisition of ColumbiaCare is a major step in building the most strategic footprint and long-term industry leadership. While the closing and integration planning is hard work, and we're all enthusiastic for the post-closing look of Cresco Labs, our team has not taken their eye off the ball and continues to execute operationally and compete well in all of our markets. Number two, we maintained our leadership as the number one wholesaler of branded products in the cannabis industry. Q1 net wholesale revenue was an industry-best $95 million. For the quarter, Cresco products were the top portfolio of branded cannabis products, according to BDSA. We were the industry's number one seller of branded flour, number one seller of branded concentrates, number two seller of branded vapes, and a top five seller of branded edibles. We reference BDSA because we think it's the best source for branded sales, similar to how traditional CPG would quote Nielsen or IRI data. Internally, we're focused on growing branded share as that demonstrates our ability to create a differentiated product that consumers love. In Illinois, we maintained our position as the number one seller of branded cannabis in the state. We're incredibly proud of the Illinois team and their unrelenting focus on continuously improving operations and leading this market with world-class execution. This team launched Florical premium artisanal flower and concentrates just in time for the 420 holiday to an incredible reception and sold out shelves. The Florical launch is a good example of several key points of our operational execution, as it shows, one, our ability to take a successful brand from one state, Florical is now the number four flower brand in California, across our footprint. Number two, our ability to successfully introduce a premium price product during a period of general price compression, thereby stretching and broadening the price index of available product categories and widening the delta between each. Three, our ability to produce premium products, a term that is way too easily thrown around in this industry. And four, the importance of having an intelligent brand and product portfolio architecture, including a variety of differentiated value propositions to meet the consumers where the consumers want to be met. In Pennsylvania, we're also the number one seller of branded cannabis products per BDSA. Our continually improving flower offerings have lifted us to the number two share position in the state for flower in the quarter. We continue to lead the vape and concentrate categories. While we're proud of our current performance, we are incredibly excited to see what happens when we launch our Florical flower and concentrates in Pennsylvania later this year. In Massachusetts, where we saw the most headwind in the quarter but remain number two in branded share, We're working through our integration process, aligning Cultivate on all our systems and aligning our production across cultivation facilities. Even with the mentioned headwinds, we continue to compete well and have effectively closed the gap between us and the number one branded share position. At the end of the day, we focus on creating branded products that consumers love and getting them on a shelves as close to the consumer as possible. The ColumbiaCare acquisition will allow us to get these products in front of more consumers in more states, expanding brand equity and driving wholesale growth for years to come. Number three, we're operating the most productive retail stores in the most strategic markets. Q1 retail revenue was $119 million, with same-store sales growing 9% year-over-year. Sunnyside continues to rank number one among the scaled national operators. with an average quarterly revenue per store of $2.5 million. In Florida, we finished our manufacturing kitchen and brought edibles to our stores for the first time mid-quarter. This is a huge unlock for us as we look to be able to provide the full selection of Cresco Labs products to patients in Florida. In addition to flour, we now have launched vapes under the high supply and good news brands, sunny side chews, and remedy tinctures. Over the course of the year, we expect new store openings in Pennsylvania and Florida, with store openings weighted towards the back half of the year. Core to the success of Sunnyside is better assortment, throughput, location, and experience. Strategic retail will continue to play an important role in the success of our business. It generates near-term ROI and supports long-term sustainable wholesale success. We look forward to adding new stores to our retail footprint as part of the ColumbiaCare transaction, as it makes Cresco Labs the most well-rounded, formidable competitor possible and sets us up perfectly for our long-term vision. In summary, Cresco Labs continues to execute on our established strategy of creating the most strategic geographic footprint possible with material market shares in each state by being the number one wholesaler of branded cannabis products and operating the highest volume strategic retail. The strategy remains constant, and the ColumbiaCare acquisition simply fits these stated priorities hand in glove. With that, I'll turn it over to Dennis to discuss Q1 results.