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.

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. Our first quarter revenue was $214 million, up 20% year over year. As already noted by several of our peers, the quarter was impacted by macro pressures that stressed the consumer wallet and seasonality. While we saw a sequential decline of 2%, we outpaced our markets, which saw a 4.5% sequential drop from the prior quarter. Adjusting for Massachusetts alone, the remaining portfolio achieved 2% growth in the quarter. Q1 revenue mix was 44% wholesale and 56% retail. Retail performance was particularly strong, growing 44% year-over-year driven by same-store sales increasing 9% and store growth in Florida and Pennsylvania. Retail was up 2.3% sequentially. Net wholesale revenue was flat year-over-year with growth across almost all of our markets, offset by meaningful but strategic attrition in California associated with our shift away from third-party brand distribution. Wholesale revenue declined 6% sequentially. The main driver was softness in the Massachusetts market driven by a mix of factors. The overall Massachusetts market was down 7% with lower price per pound, especially on lower THC products. This had a disproportionate impact on us as the harvest from our new capacity in late Q4 and Q1 had lower than normal potency, which relegated that product to the most price competitive category. additionally in q1 we transitioned the cultivate operations to align with our operational systems cultivation methodologies and brand manufacturing which caused some short-term disruptions these issues are now behind us but again as charlie stated we maintained our number two branded share position in the state and effectively closed the delta between us and the number one share spot not bad for the first quarter becoming an integrated business Looking at the second quarter and the rest of 2022, while we have started to see some signs of improvement in March and April trends, we believe it is too soon to call a turn beyond just typical seasonality. As such, for now, we are maintaining our cautious outlook for relatively flat commuted growth in Q2. First quarter adjusted gross profit, excluding the fair value markup of acquired inventory, was $113 million, with adjusted gross margin of 53%, down from 54% in Q4 as a result of lower revenue and pricing pressure, particularly in Massachusetts and California. Over the last 12 months, we've seen a 350 basis point improvement driven by achieving operational scale in war markets, the strategic decision to shift away from third-party branded distribution in California, and our entry into the vertically integrated high-margin Florida markets. Looking ahead, our goal is to maintain gross margins above 50%. We will continue to see improvements from the investments we are making today in organizational structure, automation for processing and packaging, and increased cultivation yields to offset the likelihood of further price compression. First quarter SG&A expense excluding share-based compensation and non-core items was $69 million or 32% of revenue. The increase in SG&A was primarily due to the addition of four new dispensaries, fully integrating the Laurel Harvest and CurePen acquisitions, merit-based compensation increases, and adding new employees during the quarter as we make investments for future growth. We will continue to make investments in our people, processes, and systems this year as we build the industry's leading company for the long term. Adjusted EBITDA for the quarter was $51 million, representing a margin of 24%. The decline of a couple hundred basis points sequentially was a result of lower gross margin and the additional SG&A expense. We have room for operating leverage, especially on the wholesale side of our business, as we exit a seasonally slower part of the year. Cash used in operation was $3 million. This was primarily driven by the accumulation of $20 million of inventory sequentially. We took proactive purchasing actions to reduce the impact of global supply chain challenges and inflation. We fully expect these investments in working capital to reverse in the coming quarters, and the proactive purchasing should lead to lower input costs and higher operating cash flow throughout the rest of the year. We also built up Floritel inventory in Illinois in Q1 to prepare for its incredibly successful 420 launch date. First quarter gross CapEx was approximately $33 million, including a $23 million cash purchase of property in New York. We remain very excited for the positive impact that ColumbiaCare acquisition will have to lessen our needs for CapEx to drive future growth. We are also evaluating our footprint and exploring how to maximize value from potentially redundant assets as we continue to optimize our national footprint. We expect to generate enough cash over the remainder of 2022 and have access to strategic and efficient sources of capital to fund our capital needs. We are developing a leading CPG company, making the investments in facilities, people, and processes that will allow us to lead this industry long-term and generate value for our shareholders. And with that, I'll pass it back to Charlie for some closing remarks.

Thank you, Dennis. I'm incredibly excited about what lies ahead for Cresco Labs. While the inflationary pressures are real and are impacting many aspects of the consumer goods markets, it emphasizes the need for cannabis operators to get better, more efficient, and offer more value to the consumer. Cannabis has a unique catalyst that most consumer categories do not have, a robust shadow market sitting alongside us, an illicit U.S. cannabis market that's conservatively estimated to be in excess of $100 billion annually. There are two main things that we can do to help convert these cannabis consumers to this burgeoning regulated cannabis market that is already exceeding $25 billion in annual sales, employing over 400,000 people in the U S and generating billions of dollars in annual tax revenues. One, create the scale operational proficiencies and strategic initiatives that will allow you to offer products with a higher perceived value to the consumer. And two, Engage to drive reform at a regulatory level. As stated throughout our prepared remarks today, Cresco Labs is focused every day to execute on doing both. From my perspective as the CEO of Cresco Labs and as the chairman of the National Cannabis Roundtable, we have never been closer to achieving some form of federal regulatory reform than we are right now. While nothing in politics is a given, it does reinforce that now is the time to lean in. The ultimate unlock for this industry is normalized banking and taxation. All of the other phenomenal benefits of rocket ship job creation, entrepreneurial opportunities, social equity and justice initiatives, and total economic impact start with normalized banking and taxation. On the strategic initiative front, our ColumbiaCare acquisition pairs the best consumer brands with a broad, deep, and strategic footprint, along with scale and revenue diversification that is unmatched. and allows us to offer more differentiated products with the highest perceived value to more customers across the country. In closing, the market volatility and industry headwinds we faced over the past few months have made it even more clear to us that this was the right strategic move for our business and for the industry. With our operational and strategic initiatives underway, we'll continue to keep our heads down, execute on the business, and put the pieces in place for long-term leadership and achieve our vision of being the most important company in cannabis. With that, I'll open the call for questions.

Thank you. We will now start our Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you wish to withdraw your question, please press star two. When preparing to ask your question, please ensure that your line is unmuted locally. And our first question comes from Owen Bennett at Jefferies. Please go ahead. Your line is open.

Morning, guys. Hope all well. Just first question on the Flora cart launching to Illinois. Just curious, well, a few questions around this. Curious in terms of how much of a premium that's being priced relative to the broad market. Also interested to hear if it's cannibalizing the rest of your portfolio or sourcing from competitive brands. And then any data around trial levels, how much you're seeing in terms of repeat purchases. And then finally, kind of plans for further rollouts. You mentioned PA. Would it be fair to assume you may target states where we're seeing increased pricing pressures? Sorry, a few questions around that there.

Morning, Owen. I may ask for a couple of repeats on the questions. But yeah, from a premium level, And this is Charlie, by the way. At a premium level, we were excited to, as I mentioned, be able to introduce a new product into a very competitive marketplace at a premium price point that is at the top of the scale in Illinois and have the reception be as strong as the reception was. And not only in sales, but in sort of public feedback. As all know, the cannabis consumer is fairly vocal. And they share their opinions on social media fairly regularly. And it was just great to see the reception that the product got. And what it did is it validated this thesis that the perceived value that the consumer is looking for is really what drives their behavior. So if the quality is there, they'll pay for it. They will pay for the quality that you're offering. It was very exciting. So again, top price point in Illinois. It is something that I'll let Greg talk more about the specific other impacts, as you mentioned, I think cannibalization and then likely next states that will be deploying and launching the product into, Greg.

Good morning, Owen. Just to know a couple of stats we're seeing, I would say it's still relatively early from our launch of Lurical, which really was in advance of 4-20. But to Charlie's point, we are seeing some encouraging stats in the weekly and Things like, I think your question was cannibalization. How we look at that is outlets buying that bought on the first purchase grew as we got into the second week. So I think outlets buying is plus 20%. So more accounts continue to buy. We're seeing more placements continue to grow. So as those accounts are buying, they're buying one more unit as each week goes on. And then also, most important metric, floor count revenue for outlets buying. That's increasing as well in the double digits each week over week. So customer accounts are buying it or continue to support it. And I think your question was a repeat purchasing. And then I think the part C of your question on floor account is also cannibalization off of core business. As it sits right now, we're not seeing that materially of any sort of slowdown on either Presco or high supply. And once we get the latest BDSA data, what we're hoping to see is it actually helps us continue to strengthen our share position in Illinois and see where that source of volume is coming from outside of our own portfolio.

Okay, awesome, Frank. And then it was just the next question you mentioned, the launch in PA. Would it be fair to assume you're perhaps targeting states where we're seeing increased pricing pressures right now so you can bring in that premium product?

Absolutely. I think if you look at our target of where we would like to go next, what we've publicly stated is Michigan. We think there's a big opportunity for us to bring Florical products into Michigan. We think there's a big opportunity in Massachusetts. There's an opportunity in Pennsylvania and there's also an opportunity in Florida as we think of kind of the next markets to roll while we're also strengthening its position in California, which is also quite pleasing, right? We're expanding

outside of california but even in california flora cal remains one of the top four flower brands in the state so we're able to kind of hold our our core while expanding okay awesome and then just one quick follow-up on the same store sales increase nice increase there i was just wondering any color on what states are perhaps driving this and any particular drivers you could call out i mean is it greater footfall higher basket size anything in particular um

Overall, we don't tend to give too much of our state-specific information, but what I'll tell you is from a growth on same-source sales, it's a little bit more on the trip side. Baskets continue to stay relatively whole for Q1, and so from an average basket size, we see some material growth, but really trip growth is what is driving that from an overall revenue perspective.

Okay, great. Thanks, guys. Very helpful.

Thanks, Owen.

Thank you so much, Owen, for your question. Our next question comes from Camilo Lyon at BTIG. Please go ahead.

Thank you. Good morning, everyone. I have a couple of questions. The first one we have is just an update on the divestitures process and specifically how you're thinking about which assets to proceed with in New York if there's some sort of... evolution in the thought process there as it relates to your assets, your capex in that market, or the ColumbiaCare assets? That's my first question.

All right. Good morning, Camilla. We'll start with your first question. You know, we haven't, and we're not going to provide very specific details on the specific assets included. The states themselves, of course, have been identified. But there's some opportunity for optimization as the process continues to unfold on the very specific assets in those states that would be included, could be based on with buyer requests, opportunities to optimize the proceeds depending on the mix. So we're not going to give too much specifics there, but the process in general itself is going really well. And we're very pleased with inbound interest, pleased with the team's performance and putting everything together and the structure of it. And also, of course, definitely the conversations with regulators. Everything's going really well.

That's great to hear that process is unfolding as you described. Is it fair to assume that when the launch in New York happens for adult use that you will be ready in whichever asset you end up deciding to go forward with?

Yes, we'll have product ready for New York when adult use launches.

And is this the general range that I think we outlined upon the announcement of the deal for proceeds of $300 million to $400 million? Is that still a good range to stick with?

Yeah, we don't see risk to it. And again, we're going to encourage the buyers to make their offers. And we're liking the inbound interest and hoping to create a competitive environment. But yeah, we don't see risk to it.

That's great to hear. And then Charlie, my last question. Charlie, for you, maybe you could help us understand or think about the gross margin evolution throughout the rest of the year. You know, Q4, Q1 were challenged quarters, high levels of promotion, maybe some slowdown on demand. But there certainly seems to be, as you guys also noted, an improvement in demand here in March and April, which I think is actually continued in May from some of the data that we see. Have we hit the nadir on gross margins for the year? And should we see an expansion of gross margins going forward? Kind of holding at the level that you performed at in in q1. What's the right way to think about that progression this year?

Thank you You know I'll start and then Dennis feel free to jump in but you know as we've historically done We sort of we want to make sure that we're maintaining gross margins above 50% And and again the strategies that we've deployed including, you know the launch of premium products the continued focus on creating more scale more verticality where possible and um, including the market structures that allow for more verticality, i.e. Florida, uh, you know, we, we think those are opportunities for us to, uh, maintain, uh, a strong gross margin and the durability of it. While we continue though, to anticipate, uh, further competitiveness in the markets, um, including pricing pressure, macro influence of inflation, all of that. So Dennis, anything more to add?

Yeah, I think, uh, Just building on what Charlie said, we're taking actions now to try to combat some of the inflationary costs associated with parts that we're putting into our products. But again, we feel comfortable with the 50% plus margin target that we gave over the long haul and that we'll be able to maintain that through the balance of the year.

Thanks, guys. Good luck for the rest of the year.

Thanks, Camilo.

Thank you so much for your question, Camilo. Our next question comes from Derek Delay at Cancall Generacy. Please go ahead. Your line is open.

Yeah, hi, thanks. Hey, guys, just a question on CapEx for the remainder of the year. Can you just give us some guidance on what you expect for CapEx and where the bulk of these investments are going to take place?

Good morning, Derek. I'm going to answer.

Patrick Corbett- For Derek yeah when we look at CAC capex you know there certainly is a as we rationalize the combined footprint of the two companies, there will be a. Patrick Corbett- smaller need for capex as we go into 2022 we made significant investments over the last year or so in a number of states in Michigan Florida. Ohio. So a lot of the large CapEx expenditures absent New York have been made previously. So we'll continue to make investments as needed to improve cultivation, add to automation. We've got a number of stores that will be opening in Florida and Pennsylvania during the course of the year. So there will be continued CapEx needs. I think last quarter we threw out a number of about $100 million for the course of the year. I think that number will come down as we do the evaluation and the needs between the two combined companies going forward.

Okay, that's helpful. And then in terms of your own brand sales through your existing stores, were you still in that sort of 40% plus range that I think you guys quoted last quarter?

Yeah, it's 40%, give or take, depending on the market.

Okay. And then just last one for me, just in terms of California. You know, we've been hearing that, you know, obviously there's been a challenging pricing environment, more supply coming online, supply exceeding, you know, cultivation supply coming online, exceeding that of store growth, but also hearing that we're seeing some stabilization recently in the pricing environment. Can you, can you comment on that? And have you seen any, you know, that would imply that some stores are likely to close down. Have you seen any of that take place so far?

So, look, as we've talked previously, I think California is going through a process, right? And it's something that we've seen in other markets with maybe comparable regulatory structures that have played out over the years. Just, you know, earlier, Colorado, Washington, Oregon, et cetera, boom-bust sort of thing, and then a rebuild and sort of the who's left standing thing.

um we've seen increases in greater support come in after the fact i'm not sure that we're ready to call california being there yet and uh and i'm sure greg has some additional details i think building my last point from charlie which is calling california you know it's look at q1 here the average price points in the market did continue to decline sequentially uh down about a buck on average from about um nine dollars uh programmed about eight point 30 cents a gram by Q1. So prices continue to decline. I think the one concern about California, too, is in some of our other markets where we see price compression but unit growth, in California you're seeing both. You're seeing prices come down, but also unit growth also declined, which means there is a combination of total revenue is down because the price per units are down, but also consumer demand purchases in the tract market also continues to be down. And that is probably related to more macro issues driving the total market. California, as we closed Q1, still had some tough macro headwinds against it. We were very pleased as we talked about how we were able to continue to grow our share across our segments in the state. But from a macro perspective, Derek, I think we need more time to see how this flushes out. I don't think anyone's prepared to call a quote-unquote bottom in the market yet.

And so is the unit growth decline solely related to macro challenges, or is the gray market or illicit market taking incremental share?

There's no perfect way to get that information, but I would tell you if consumer wallets are shrinking and there is tough household income pressures, surely that is both a question of whether that's consuming less or buying from other markets. would be a driver. But the net takeaway being in the tracked market, legal tracked market, unit volume continues to decline. Okay, that makes sense.

Thank you very much. Thanks, Derek.

Thank you so much for your question. Our next question comes from Andrew Pricio at Stifel. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking my question. Maybe continuing on discussing margin and trying to get a little bit more color on seasonal trends. Could you give us a sense of the level of impact from systemic pricing pressure, like you mentioned in Massachusetts on pricing versus seasonal promotional trends, which in Q1, maybe you could give some color whether higher promotion or lower promotion versus Q4. Is it also fair to say that Q2 is typically a higher promotional period versus Q1? And assuming the systemic pricing pressure remains the same, and you alluded to flat sales in Q2, should we expect continued margin pressure in Q2?

Good morning, Andrew. Thanks for the questions. Let's start on that one.

Yeah, I can start and then pass it along to Greg. We don't give specific guidance on margin, but if we look going forward into Q2, some of the dynamics that we saw in Q1 around pricing and some of the inflationary pressures that we saw, those will continue into Q2. Now, there'll be some mixed variants across different state lines. that will help offset part of that, and some of the automation and efficiencies within our facilities will help offset some of those pressures. So we feel pretty comfortable that what you saw in Q1 will be repeatable into Q2 at a macro level. There may be some pluses or minus variations from that, but we feel pretty comfortable with that level.

Especially as you go state by state. It could vary state to state.

Yeah, as we see Massachusetts start to get a little bit more increase sales in Q2 and we see Florida pick up as we add some more stores to our Florida operations and added our edibles and kitchens products into those stores, we should see higher margins that come out of Florida and Massachusetts compared to our average gross margins. That, again, will offset some of the pressures that we see in inflation and price pressures.

I think the second part of your question was, Price promotion activity, and you are right, historically Q3 particularly is one of the biggest quarters in the market on seasonality and size. Just there's more trading days, better trading days within the quarter. Historically, we've also seen increased pricing activity in the quarter, but I think what we're seeing this year is just pricing activity across all quarters. So I don't, we're not predicting necessarily it's going to intensify due to price activity in the quarter, What we're watching very closely is we expect each month to get a little bit stronger. That's just how the market tends to trend. And in order for our industry to continue to show the double-digit growth that everyone wants or high single-digit growth that everyone wants, these weeks have to get bigger and bigger. So not only do they have to improve because we expect that, but they have to get bigger than they were a year ago. And so I think when everyone asks us about just looking at the future, you know, we do expect to see things improve, but we need to continue to see this market accelerate in order to show year over year growth. And as we stand right now, we are seeing improvement, but we are cautiously optimistic on if that improvement is accelerating into the back half. We haven't seen it necessarily accelerating as we've gotten into April.

Appreciate that color. And on organic performance, could you provide your sequential same-store sales growth? And if you could discuss if you benefited or were impacted by the vape recall in Pennsylvania, how are those trends looking like thus far in Q2, especially in Pennsylvania with the vape recall?

Thanks for the question.

On the vape recall situation, Pennsylvania continues to be a strong market for us. We did see some growth from Q4 over to Q1. Some of that could have been the vape recall. I would remind just that that particular recall had an impact on some suppliers, not all suppliers, so it wasn't that the entire market lost its entire supply. what we are encouraged about is more is the performance of our products in Pennsylvania. I think what we are encouraged to see is on our vape products in particular, we continue to have a leading market share in the state, even though we don't have a leading number of doors position. So it does tell you how strong those products perform within our stores, but particularly within our partner stores. And so that for us continues to be an encouraging spot from it, from our stores, My same-store-sale perspective, as Dennis mentioned earlier, we don't tend to give state-specific call-outs for that. But what I will tell you in Pennsylvania, from a store perspective, is right now most of our growth is continuing to come from growth in our existing stores and also growth in some of the new stores like Ambler that we brought on at the beginning of the year. All of our new stores that we'll be bringing online will happen in the back half of this year, early next year. and that will be the incremental growth on our retail business in the state.

Yeah, and then just to build on to that, when you look at organic growth, the impact of the acquisitions that we had in Laurel Harvest and CurePen, both of those deals closed in December. There were three stores with CurePen and only one store with Laurel Harvest that was open at that time. So the impact from Q4 to Q1 is pretty minimal.

Thanks for that. I'll get back in the queue. Thanks, Andrew.

Thank you so much for your question. Our next question comes from Kenric Tai at ATB Capital Markets. Please go ahead. Your line is open.

Thank you and good morning. Charlie, I wonder if you could provide some insight on just how in the context of California market dynamics you're pivoting away from third party to own brand. How valuable was it however you choose to define value in the California market given that backdrop? just trying to see, you know, not only how valuable it was, but also, you know, how, how it's set, uh, in the market and sacked with, uh, you know, with, with the end customers.

Sorry. Uh, good morning, Kendrick. Can you repeat the back half of the question? So in California and our move away from third party, um, take it from there.

Yeah, sure. Sorry, Charlie. How valuable to you was it? How are you choosing to define value in the context of that market, whether it was strategically or from a margin perspective? And then the second one is, how is that decision sitting or settling in the market? In other words, you know, is it resonating? Has there been pushback? You know, what is the read-through from sort of that first full quarter, for want of a better way to characterize it, of the pivot?

Yeah. Got it. No, you know, I think the pivot, the value from the pivot is, you know, significant in multiple ways, right? It allowed us to optimize the business out there, both from a margin perspective and also focus 100% of our attention on driving our own brands. And I think you've seen the sort of improvement in Florical's positioning and some of our other brands out there, too, by having that increased focus on it. So from a P&L perspective, of course, I think it helped us manage California more effectively. As far as feedback from the market, at this point, we've created that stabilization and the change, the shift has been absorbed. So again, I think it lends credence to the strategic nature of the decision that it was the right thing to do. I'm glad that we did it. And now we move forward as this version of Cresco in California. Greg, anything else to add?

No, I think the only add to that, Henrik, would be what you were commenting on. Have we learned, has our business changed anything from our decision to remove some of the partners? What I would say is what we talked about in the last call was we did expect to see some sort of distribution dip as some accounts that historically had bought our partner brands may not buy it because they don't have those brands in their portfolio. As we got into Q1 of this year, what we're encouraged by is we're able to pick up some of those doors again with our own brands. So we're starting to backfill volume we had on partner brands. As we talked before, we're a bit hollow revenue with brands on our portfolio that give us a much better margin profile. So we're encouraged to see that.

That's really useful, Carla. Thanks, James. And just switching to Massachusetts quickly, challenging in the fourth quarter, you know, While there was some progress certainly in the first quarter, it's still challenging. How much of that is or were issues within your control? How much of that is just how tough that Massachusetts market was even relative to sort of what was just broad weakness in the overall cannabis market? Any just additional insight there on how to think through not just how you performed in Massachusetts in quarter, but your confidence around, you know, your business in that market as we sort of move through the year with the integration increasingly in the ready mirror.

Yeah, Kenry, this is Charlie. I'll start. And then I think Greg has some additional color. But, yeah, Massachusetts, we would identify as somewhat unique in the pressures that we've seen there over the last two quarters. Again, you're talking about a market that had double-digit growth, sequential growth, Q1 to Q2, Q2 to Q3, that just then went totally flat, and now we saw it down from Q4 to Q1. Similar to any of the other markets that are getting more competitive, you're seeing basically kind of a teeter-totter approach to when additional capacity comes online versus when additional doors come online. So the long-term outlook for Massachusetts, we still think, of course, has upsides. um, doors opening and more highly populated Boston Metro areas, et cetera. But, um, you know, we're, we're also reassured by the fact that as these markets get more competitive, um, we're competing well. So, you know, maintaining that number two share effectively closing the gap between us and number one means that we competed better in that market than our peers. And, and so that's what we want to keep focusing on. Uh, all these markets are, you know, at some stage and in some way going to become more effective or more competitive as they grow. So we like the way that we're competing. Greg?

I'm going to add to that and say, as Charlie mentioned, we're pleased with Massachusetts in this quarter is we were able to grow share overall in the state, particularly in vapes. I think if you look at our vape portfolio, we have a strong vape portfolio and we were able to bring that into the market and continue to grow points of distribution on vape, where we took a pretty nice jump in our share position. Your second question, was there anything in the integration side that maybe gave us hiccups? You know, there always is, and we'll own that. I think if you look at two areas in particular, which were just tough for us as we integrated, one is on our edible side, just making sure that we've got the right now two facilities talking to each other. We did have some stockouts on that as we went, which you'll see in our share data had an impact on our share. But we're continuing to close that. And the second piece, too, is As we continue to expand the state, the first harvest coming out of any expansion cultivation room are always a little bit tougher. We wish we had a little bit higher potencies coming out of those first harvests. I think we had at parity potencies, which in the market like Massachusetts, it has a lot of lower potency biomass available. You know, that's not a competitive position, but we're starting to see our next round of harvest coming out and we're very encouraged by what we're seeing. which means we expect to see not only growth in our vape share, we expect to get our edibles business back on with some of that supply hiccup, but then also really go after and take share in flour. Great. Thanks so much.

I'll get back in queue.

Thanks, Kendrick.

Thank you, Kendrick, for your question. Our next question comes from Aaron Gray at Alliance Global Partners. Please go ahead. Your line is open.

Good morning, and thank you for the questions. So first question for me, I just want to touch on Pennsylvania, still doing well there on a relative basis with their guys' market share. So as you guys continue to roll out stores, it gives you an opportunity to expand that market share. I just want to think about how you look to maybe how much of your own product you aim to have within your own stores as you look to open up additional stores for the remainder of the year versus third-party brands, especially in a market where you are seeing some pricing pressure made a market that started to slow down a bit in growth. Thank you. Good morning, Aaron. Greg will take that.

Hey, good morning. You know, our view doesn't change overall of what we tend to give as a guidance on how much of our own brand assortments we want in our own stores. We have to realize we are in a partnership market. We sell into our competitors on the wholesale side and their partners as well. And so as much as we list in our own brands mean we're buying less from our other partner brands, which means they buy less from us. And that's just the reality of reciprocity agreements within our industry. So we try to make sure that our assortment is the best of our brands, but also picking up the best of what our partners are offering us. And so we don't, we tend not to look at growing that percentage of our own shelves that are, that are just our own business across the states, particularly like Pennsylvania. From a new store opening, what we're encouraged about is on the retail side, we do have a number of new stores that we have not opened yet, and we'll be opening late in the back half of this year, early next year, getting those ramped up. That will give us incremental growth, but it also gives us not only more points of distribution to sell our own brands, but also more points of distribution to bring our partner brands into our portfolio as well, which helps us on our wholesale side in the state.

Okay, thanks a lot. That's helpful. And the second question for me on Illinois, a market where you're a market share leader in, just in terms of additional retail licenses coming online, I know it's something that's been delayed for a while, just any additional outlook or color you might have there from conversations, and then how you think about your current cultivation in the state and obviously what the three cultivation licenses are. It seems like right now you're kind of holding off on additional CapEx and State. Just remind us how you're thinking about in terms of the timing of additional retail licenses being awarded. Thank you.

Sure, Aaron, I'll take that. I might take it in reverse order. Yeah, we have capacity in Illinois, right? So we have the ability to absorb additional retail coming online, and we eagerly await it. Now, as it relates to the timing of it, There's been, you know, I don't want to be overly optimistic, but there's some encouraging things coming out over the last 24 hours and also an anticipated hearing date coming up that might result in the lifting of the stay on the issuing of those 185 lottery winners. There is also movement to have that next lottery for an additional 50. So, again, there's... new news there, but I also don't want to lean too hard into it, hoping that that can get cleared up in 2022, so new stores opening in 2023. I think it's unlikely that we see new stores in the state in 2022. All right, great.

Thanks so much for the call. I'll jump back in the queue. Thanks, Aaron.

Thank you, Aaron, for your question. Our next question comes from Vivian Azza at Cowan & Co. Please go ahead. Your line is open.

Great. Thanks so much for taking the questions. This is Harrison DeVos on for Vivian. Just going back on a comment that you made, Greg, you said that baskets have been holding in relatively steady in the context of a challenging consumer environment where wallets are shrinking. What would you say are the biggest drivers of that basket holding in?

Yeah, I think one of the The area where you're going to see this come to fruition as we get into the next couple quarters here may not be on average basket size. I actually think average basket size could go up, but frequency of trips could go down. And what I mean by that is you may actually see each trip customer shifting to bigger formats, looking for deals at stores, increasing how much they buy on an individual trip basis. but start seeing the frequency in which they're shopping start to pull apart. And I think that's where tight wallets are going to come into our market, where we have a pretty high frequency of visits of our customers and patients. And I think where the current macroeconomics will play out in consumer dynamics is you will see less trips coming into the store. And you actually might see that then average basket size

increase as they're trying to find better value for the trip or stocking up in one trip and then minimizing the frequency in which they're visiting interesting okay appreciate the color and then just just a quick clarifier on california how many doors are you are you distributing into now just given the dynamics and i think last quarter um dennis i think you or maybe it was you greg that talked about the potential you know, acquisition strategy for potential complimentary assets. So is that still part of the strategy going forward? And then again, if you could just clarify on the door account. Thank you.

Yep. Let me grab that one as well and hit on it. From a door perspective, we did about 497 doors in Q1 of 2022. And that was versus what we talked about last earnings call, which is about 450 doors approximately. So we did, back to my earlier statement, we did see a nice growth in doors after we had to lose some of our partner brands and lose some of those customers. We were able to re-bring them back into our own brand portfolio. So from an overall door perspective, continuing to hunt and continue to feel encouraged that we've been able to take share of our own profitable brands in that market. From an overall M&A, and I'm pretty sure that was me who mentioned I'm looking at Dennis here. I don't think it's Dennis. How we think about M&A and taking it across our footprint is things like we have with FloorCal, bringing really incredible capabilities in a solid, strong brand with a story that can resonate across our markets. across the platform. And if we were to look at any M&A in that state or other state, what we're really trying to find is capabilities that are accretive to our portfolio. And so that's kind of the core asset that we look for of how do we take that across our operations.

Great. Thanks very much. I'll pass it on.

Great. We're going to try to get a couple more questions in here. We know we're at the hour mark, but we'll get a couple more questions in.

Perfect. Thank you. Our next question comes from Matt McGinley at Needham & Co. Please go ahead. Your line is open.

Thank you. Would the overall revenue growth have been up 2% if not for Massachusetts, or was that comment that you made specific to the CPG segment And I think your overall message in the prepared remarks was that Massachusetts would improve into the second quarter, but it also sounded like you're still in the process of aligning your inventory composition to what the market wants and that those issues could still carry into the second quarter. So I guess what's the message into the second quarter relative to the first specific to Massachusetts?

Yeah, so when we talked about the two percent growth absent Massachusetts, that was in its entirety, wholesale and retail. So, without that, we would have grown two percent sequentially. From a cultivation standpoint, as Greg noted earlier, some of the improvements that we are seeing in subsequent harvest, we will see some of the benefit in Q2 and subsequent quarters in the second half of the year.

Yeah. And integration-wise, I think we're in a better place. Again, we've got a quarter under our belt now, five months under our belt of the integration. So in a much better place now.

Yeah. And on the GNA, how much of that increase in GNA dollars compared to last quarter is related to the retail growth relative to the inflation that you noted? And would the impact of those merit-based increases boost the GNA dollar rate from the 69 million bucks from here? Or is that more of a one-time step up so the dollars would likely increase? you know, hover closer to that number in subsequent quarters.

Yeah, from an SG&A standpoint, a big piece of the growth from Q4 to Q1 was related to increased retail as we opened additional stores and we had a full quarter of the Laurel Harvest and Cure Pen facilities in our books. As it relates to merit, what you saw in the first quarter will carry forward through the balance of the year. Those increases went into effect January 1, so we did see the full quarter impact of merits.

Okay. Thank you very much.

Thanks, Matt.

Perfect. Thank you, Matt, for your question. Our final question comes from Scott Fortune at Roth Capital Partners. Please go ahead.

Good morning and thanks for all the detail. Just real quick kind of follow up shift on Florida. The goal to be a top three position there in the state and recent product launches. Congratulations that and how combined into using additional stores and you look at the premium product rollout to the stores. How are you looking at additional verticality and capacity in the state as we look at that going forward here?

First part of the question, Greg.

Yep, so overall, I think if you look at our performance in Florida, historically coming into the quarter, we have been predominantly focused just on flower and what's exciting about what we're able to bring to market in Q1 is starting to not only expand our flower offerings, also expand our manufactured goods. And that's really helping us in Florida. grow our baskets where we were losing patients from our stores who were going to buy things like edibles at other retailers. And now we're looking forward to keeping all of those patients and delighting them with our products in our own stores. That's going to continue through the course of this year. We're bringing innovation to market. We're very pleased with how Chews are performing this day. We've got some other interesting innovation that's on tap that will launch as we go in the quarter. So that really will be focused on driving basket growth within our existing stores. As it comes to new stores, in Q1, we were able to open three new stores. And then as we look at the back half of this year, we're going to ramp that up of new store openings, pushing back into towards Q4.

Thanks for the call. I appreciate it. All right. Thank you, Scott.

Thank you so much, Scott. This concludes our Q&A session. I'd now like to pass back over Thank you, Charlie, for any final remarks.

Just a quick thank you for everybody for joining the call today, and we look forward to delivering our Q2 results later this year. Hope everybody has a great rest of the week. Bye-bye.

Thank you, everybody. This concludes today's call. You may now disconnect.