Cresco Labs Inc

Hello, everyone, and welcome to Cresco Labs' second quarter 2022 earnings conference call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on the telephone keypad. And I hand over to your host, Megan Kulik, Senior Vice President of Investor Relations, to begin. Megan, please go ahead.

Thank you. Good morning, and welcome to Cresco Labs' second quarter 2022 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bechtel, Chief Financial Officer Dennis Oles, and Chief Commercial Officer Greg Butler, who will be available for the Q&A. Prior to this call, we issued our second quarter earnings press release, which has been filed on CDAR and is available on our investor relations website. These preliminary results for the second 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 in MD&A for the quarter ended June 30th, 2022 on CDAR and EDGAR later this week. Certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian securities legislation, as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements may include estimates, projections, goals, forecasts, or assumptions that are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future-looking events, plans, or objectives which are inherently uncertain and are subject to a number of risks and uncertainties that may cause the company's actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes to applicable regulations. Additional information regarding the materials, factors, and assumptions forming the basis of our forward-looking statements and risk factors can be found in our earnings press release and Cresco Labs filing on CDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to 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 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, 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 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 GAAP financial measures presented in our financial statements. With that, I'll turn it over to Charlie.

Good morning, everyone. Thank you for joining us on the call today. In Q1, we announced the acquisition of ColumbiaCare, putting us on a path to build what we believe will be the largest engine of value creation in the industry. We've always prioritized breadth and depth in the most strategic markets paired with best-in-class execution across all verticals of the value chain. We believe the ColumbiaCare acquisition aligns with these priorities and will solidify our leadership position at a key time for our industry. We're matching leadership positions in the states of today with exposure and infrastructure in the states with the catalyst of tomorrow. We're combining the branded product portfolio that U.S. consumers choose more than any other into an operational footprint capable of reaching over 70% of all eligible U.S. consumers. We're matching the most productive per store retail operating model with one of the largest combined retail store platforms in the industry. We're creating an unmatched diversification and balance of revenue by geography and by channel. And we're combining the most productive wholesale platform in cannabis with verticality. which best positions us to compete as state markets continue to mature and evolve. In short, we're creating a company built for leadership. We're making progress towards closing the acquisition, checking off milestone after milestone. HSR review, the Columbia Care shareholder vote, and the approval of the Supreme Court of British Columbia have all been completed. The great working relationships our companies have built with state regulators has facilitated progress towards individual state approvals, And our asset divestiture process is on track. We have multiple bidders for each asset. We've executed LOIs for each, and we're working through the diligence process and moving towards definitive agreements, giving us confidence in receiving north of $300 million in gross proceeds from the process and a closing date projected around E-Rent. Turning to the quarter, we're pleased to report solid results in the face of an unprecedented macro environment. We generated $218 million in revenue, representing a 4% year-over-year growth. We've gained or held branded market share in every state, with the exception of California, where we purposefully reduced exposure last year. For BDSA, we've maintained our industry position as the number one wholesaler of branded cannabis, the number one branded product portfolio chosen by consumers, and the number one most productive per-store national retailer. Our adjusted gross margin was 53%, a roughly 200 basis point improvement year over year in a market where prices fell between 10 to 30% depending on the state. And our adjusted EBITDA margin was 23% of 150 basis points year over year in the face of unprecedented inflation. We recognize the challenges currently facing the cannabis industry and the tough macro backdrop. In this environment, we're managing that today while remaining focused on the big picture and the long game. We're holding a growing market share, driving efficiencies across the company to maintain margins, and we're preparing for the integration of ColumbiaCare to generate substantial future growth. Now let's again review our proven playbook of the three specific ways Cresco Labs is delivering long-term growth and shareholder value. One, developing the most strategic geographic footprint. Two, being the leading branded cannabis portfolio. and three operating the most productive strategic retail network. So number one, we're developing the most strategic market footprint. We believe our longstanding strategy of being in the states that matter and obtaining meaningful and material market share therein is the recipe for long-term success in any CPG category. Our current 10 state footprint includes $7 billion plus markets, in which we have the leading branded share position in the three robust and competitive markets of Illinois, Pennsylvania, and Massachusetts. We're executing our playbook to expand our market share in other states with opportunities for gain like Florida, Ohio, and Michigan. While we won't have access to the most significant driver of industry top-line growth this year, the state of New Jersey, we do have exposure through ColumbiaCare. In the interim, we know that strengthened market share and continued share growth is the sign of a best-in-class operator, and we look forward to bringing Cresco to the Garden State in 2023. Over the next three years, there are an additional six large markets expected to switch to adult use, New York, Pennsylvania, Ohio, Virginia, Florida, and Maryland. Given our combined footprint with ColumbiaCare, we will have exposure to all of them, and we'll have leading share positions in several. This is arguably the highest value footprint in cannabis, 180 million Americans, all 10 of the 10 highest projected 2025 revenue states, and exposure to the largest growth drivers. The acquisition will more than double our retail footprint, give us number one branded or retail share position in five markets, and optimizes our operational footprint across markets. It is this level of strategic breadth with the depth that ensures growth, diversifies geographic and channel revenue, and creates an industry leader. Number two, we maintained our position as the number one branded product portfolio for BDSA. Again, in Q2, our net wholesale revenue was an industry-best $95 million. Also, again, Cresco Labs has the industry's number one portfolio of branded products chosen by U.S. cannabis consumers. number one portfolio of branded concentrates, number two portfolio of branded vapes, and a top five portfolio of branded edibles. We held a good share of branded products sequentially during the quarter in every market except California, where we saw a 20 basis point sequential decline. Over the last few quarters, wholesale has been a more challenging business with price compression impacting wholesale more than retail and vertically integrated operators giving preferential treatment to their own brand, even if they have lower velocity. Despite this, in both Illinois and Pennsylvania, customers once again spent more money on Cresco Labs' branded product than any other company as we maintained our number one position in both markets and held share. For the first time, we've also taken the number one branded share position in Massachusetts for BDSA, making this our third billion dollar plus market with the number one market share. Last quarter, we talked about some of the challenges we had to overcome in Massachusetts, and we're starting to see the hard work that we put in pay off. as we've improved cultivation yield, THC percentages, sales processes, and generally aligned our newly acquired assets with Presco Lab standard operating procedures to grind out market share in this very competitive environment. This type of performance gives us tremendous confidence as we approach the integration of ColumbiaCare. When we get asked again and again, do brands matter? I simply answer, absolutely. When given a choice, consumers are choosing our brands more than any other, even though, for the most part, we have less-owned shelves. Despite the current move to verticality, with regulatory caps in most markets, the opening of 185 more dispensaries in Illinois, and 150 independent dispensaries set to start the New York Adult Use Program, gives us a preview of how the future structure of this industry will likely look. It will validate our underlying thesis that cannabis is CPG, and will show the strength we're creating through our branded product sales and distribution capabilities. Number three, operating the most productive retail network in the most strategic markets. Q2 retail revenue was $123 million with same store sales growing 6% year over year and 3% sequentially. Sunnyside continues to rank number one among the scale national operators with an average quarterly revenue of $2.5 million per store across our 50 stores. Our team is doing an excellent job of maximizing the value of every trip in the face of a weakening consumer dynamic. Through our sophisticated e-com platform, basket-building promotions, and in-store cross-selling programs, we've been able to engage with our shoppers to maximize sales per visit. In Illinois, for example, our top quartile of Sunnyside.shop customers made 17% more trips than a year ago. With the launch of new engagement projects like loyalty, text offerings, and suggested selling, we'll continue to build sales from our large community of shoppers. While sales growth has been decelerating due to price declines, what's most important is that new shoppers are entering this category every day. For example, during Lollapalooza in Chicago, our River North City stores saw a record number of first-time shoppers, and overall units were up nearly 30% over last year's festival weekend. While pricing dynamics are muting this impact in the immediate term, this data point during the highest inflationary period in over 40 years is incredibly important for underwriting the durability of cannabis and the future potential of the overall thesis. Our retail sales growth hasn't reached its potential due to some delays in opening new retail stores in Florida and Pennsylvania. We've taken the steps to resolve these issues and replenish the growth pipeline. You'll see openings later this quarter. with more in Q4 and then Q1 of 2023. The ColumbiaCare acquisition will more than double our retail footprint, which paired with our industry best productivity and brand portfolio creates an ideal platform for growth. With the industry prioritizing vertical integration, we saw this trend coming and proactively secured a much wider retail footprint and balanced channel position to ensure that our incredibly popular products get the share of shelves they deserve. Before handing it over to Dennis, I want to thank the Cresco family for everything that they accomplished this quarter. They've done an incredible job of holding and gaining share in almost every market while managing through the macro headwinds, leading the industry's efforts for legislative progress at the federal level, and preparing the company to close and integrate one of the largest and most transformational M&A deals this industry has seen. In times like this, leaders lead, and I'm very fortunate to be a part of this team full of leaders. With that, I'll turn it over to Dennis to discuss Q2 results.