Cresco Labs Inc

Good day and welcome to Cresco Labs' third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on your touch-tone phone. To withdraw your question, please press the pound key. Please note this event is being recorded. I would now like to turn the call over to Megan Kulick, SVP of Investor Relations for Cresco Labs. Please go ahead.

Thank you. Good morning and welcome to Cresco Labs' third 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 in the Q&A. Prior to this call, we issued our third quarter earnings press release, which has been filed on SADAR and is available on our Investor Relations website. The preliminary results for the third quarter of 2022 are provided prior to the completion of all internal and external reviews, and therefore are subject to adjustment until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the quarter ended September 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 the applicable Canadian securities legislation, as well as within the meaning of safe harbor provisions in 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 the company's actual results or performance to differ materially from 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 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 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 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 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 be considered only in conjunction with the GAAP financial measures presented in our financial statements. With that, I'll turn it over to Charlie.

Good morning, everyone, and thank you for joining us on the call today. We're at an exciting time for the cannabis industry and approaching a clear inflection point with new entrants, traditional industries, and legislators all taking a greater interest in cannabis. The federal government officially recognized that the current scheduling is out of date and out of step with American values. Further affirmed in last Tuesday's election, when two new states, both part of our pro forma footprint, voted to pass new adult use cannabis laws. At Cresco Labs, we're focused on creating a company built for leadership ahead of that inflection point, creating the muscles, the institutional knowledge, and the systems infrastructure to lead this emerging CPG category. We're building the most strategic geographic footprint and asset base paired with excellence across CPG brand building and traditional retailing. We're optimizing our assets, our margins and balance sheet to maximize shareholder value when federal reform occurs. On November 4th, we announced a meaningful step forward to closing the Columbia Care Acquisition by executing definitive agreements to divest assets in the states of Illinois, New York, and Massachusetts. This is a significant hurdle cleared in our mission to combine Cresco Labs with Columbia Care, which will expand our leadership position in today's premier cannabis markets and the growth states of tomorrow, combine our industry-leading branded products portfolio across a footprint reaching over 70% of eligible U.S. consumers, leverage our highly productive per-store retail model across one of the largest retail networks in the industry, and create diversification of revenue by geography and by channel. In short, we're creating a company built to effectively compete today and for industry leadership long term. Turning to the quarter, we're pleased to report solid results despite multiple industry headwinds. We generated $210 million in revenue. Per BDSA, we've maintained our industry position as the number one wholesaler of branded cannabis products, the number one selling branded portfolio products, and one of the most efficient retailers. This quarter, we took several actions to set us up for long-term improvement, including the closing of underperforming facilities and the liquidation of related inventory, which had a short-term negative impact on gross margin of about 340 basis points, which Dennis will talk about in detail. As a result, our adjusted gross margin was 47% and our adjusted EBITDA margin was 20%. I want to emphasize the actions we took were proactive to align our cost structure and optimize our operations ahead of the ColumbiaCare closing, and in furtherance of our commitment to improved margin growth in the coming quarters. Transitioning to the current US macro backdrop, simply put, it's challenging. But as I mentioned last quarter, cannabis is proving to be durable. Across our stores, shoppers continue to buy more cannabis with transaction and units both up 24 plus percent. In this environment, We're balancing managing the today while remaining focused on the big picture and the long game. We're building brands and improving our retail operations. We're preparing for the integration of ColumbiaCare to generate substantial future growth. And we are selectively deploying capital and strengthening our balance sheet to have the flexibility to respond to any regulatory structure we see ahead. Companies that can manage the current challenges most strategically and execute operationally will slingshot forward when the winds inevitably shift and cannabis achieves its potential of being a major U.S. consumer products category of the future. The playbook we launched in 2020 is working and will continue to deliver long term growth and shareholder value. Let's again review the three pillars of that playbook. Number one, We're developing the most strategic geographic footprint. The Columbia Care Deal fits perfectly into our playbook and accomplishes all of our goals. It creates arguably the highest value footprint in cannabis, access to 180 million Americans, all 10 of the 10 highest projected 2025 revenue states, and exposure to the largest industry growth drivers of the next few years. The acquisition will more than double our retail footprint, gives us the number one market share position in five markets, and optimizes our operational footprint across markets. We're targeting the end of Q1 2023 based on our projected timelines to get on the necessary state-level regulatory agendas, close the divestitures, and complete other standard closing processes. With the recently announced divestitures signed, We can now concentrate on our deals in other states and other potentially redundant assets, which we could elect to divest to optimize our footprint and balance sheet. We're still targeting about 300 million in total proceeds, and we'll provide more detail on those as soon as we can. Number two, we maintained our position as the number one branded product portfolio per BDSA. Again, in Q3, our net wholesale revenue was an industry-best $93 million. we had the industry's number one portfolio of branded products chosen by US cannabis consumers, including the number one portfolio of branded flour, number one portfolio of branded concentrates, number three portfolio of branded vapes, and a top five portfolio of branded edibles. Over the last few quarters, we've seen competitors prioritize their own products on their own shelves, which has had an outsized impact on us as the largest wholesaler. However, We've strengthened our capabilities in the face of this intensified verticality in ways that will serve us well as the industry matures. Our house of brands approach enables us to reach more consumers, and our Cresco brand has become the largest cannabis brand in the industry. Our high-low brand offerings have leveraged different category elasticities to not only enable growth in the value segment, with high supply being the largest value brand in the U.S., but also launching premium offerings consumers are willing to pay more for, like the successful expansion of Florical into new markets. Brands that connect with customers and provide value will be the winners when new third-party retailers open their doors as wholesale-based market structures like New York, New Jersey, Maryland, Virginia, and Illinois launch and expand. We're building the brands that command a high share of shelf, the growth markets of the future are built to reward strong brands and companies with branded distribution capabilities number three operating a highly productive retail network in the most strategic markets q3 retail revenue was 118 million dollars up 11 year-over-year the year-over-year growth was achieved despite increased competition and pricing pressure in pennsylvania Hurricane related store closures in Florida and more vertically driven price competition in Illinois. We opened three new stores in Florida during the quarter with more planned in Q4 and a robust store opening plan in both Florida and Pennsylvania in 2023. Along with our own internal store opening plan, the ColumbiaCare acquisition will more than double our retail footprint, giving us one of the widest retail footprints in the industry and ensuring our products get the share of shelf they deserve. As we've always said, we're focused on providing the best value proposition to the consumer. The evolution of this industry requires an ever-improving retail experience, including better value, to ensure that the growing legal dispensary network takes greater share of the total cannabis market. To that end, our team is doing an excellent job of maximizing the value of every trip for our customers, utilizing customer purchasing data, basket-building programs to generate more sales per trip, and establishing our loyalty program in Q4 will enable us to capture more than our fair share of retail revenues today and in the future. Before handing it over to Dennis, I want to thank the Cresco family for doing what they do in a challenging environment where expense control efforts are requiring us to do more with less. They continue to execute the base business at an incredibly high level they've become known for while planning for the future of this company and preparing to close and integrate ColumbiaCare. With that, I'll turn it over to Dennis to discuss Q3 results.