Cresco Labs Inc

Good day and welcome to the Cresco Labs fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 touchtone phone. To withdraw your question, please press star followed by two. Please note this event is being recorded. I would now like to turn the call over to Megan Kulik, Senior Vice President of Investor Relations for Cresco Labs. Please go ahead, Megan.

Thank you. Good morning, and welcome to Cresco Labs' fourth 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 Transformation Officer Greg Butler, who will be available for the Q&A. Prior to this call, we issued our fourth quarter earnings press release, which has been filed on SEDAR and is available on our investor relations website. These preliminary results for the fourth quarter and full year 2022 are provided prior to completion of all internal and external reviews and therefore subject to adjustments until the filing of the company's financial statements and MD&A for the quarter and year ending December 31st, 2022 on SEDAR 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 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 subject to a number of risks and uncertainties that may cause the company's actual results or performance to materially differ from such forward-looking statements, including economic conditions and changes in applicable regulation. Additional information on 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 filing on SADAR 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 call, Cresco Labs refer to certain non-GAAP financial measures, such as adjusted revenue, 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 only be considered 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. On today's call, we're going to provide a brief overview of 2022, add some context and perspective that's critical to have during unique times like these, review how we're seeing 2023 take shape, and the strategies we've developed to create the strongest Cresco Labs possible. As you know, 2022 is a tough year. We had inflationary pressures that hadn't been seen in generations, supply chain issues from a global pandemic magnified by geopolitical tension and war, and set all kinds of records that no one likes to see, like the most expensive price per gallon for gasoline in the US ever. From our frontline position in DC, we were reasonably optimistic that some type of federal cannabis reform would be achieved by year end. And that didn't happen. That combined with the headwinds of increased competition, price compression, and stress consumer wallets created a challenging year for cannabis operators and investors. And unfortunately, we think that continues into 2023. But times like these are when objectivity and perspective are very important. Despite the challenges in 2022, Presco's team generated $843 million in sales, our highest total ever, despite rationalizing out low margin revenue from prior years. Our continued relentless focus on providing the highest perceived value to the consumer has led us to being the number one selling portfolio of branded cannabis products in the entire industry for the second year in a row. We produced 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. We earned shelf space in approximately 1,600 dispensaries across our 10-state wholesale footprint and rang up more than 4.6 million orders at our Sunnyside dispensaries. We drove operating efficiencies that allowed us to maintain margins during a period of price compression. This team also volunteered over 11,000 hours for community organizations over the year and assisted thousands of people through the cannabis conviction expungement process. I want to thank the entire Cresco Labs team for their hard work over the past year. It was not an easy one, but our core values were on display all over the place, and you got everything that this year was willing to give. We all have to realize that the tough year of 2022 does nothing to change the long-term thesis and opportunity that is cannabis. This industry is going to be one of the largest consumer products categories in the United States and in the world, full stop. Nothing about 2022 changes this. Last year, the limited regulated market reached over $25 billion in sales, employed approximately a half a million Americans, produced almost $4 billion in state tax revenue, And the current estimated regulated plus illicit cannabis market in the US already exceeds the size of the US beer industry. We made tremendous progress in educating our federal legislators through our end of year efforts, which is a fundamental step in obtaining common sense reform ahead. None of the current challenges we face change these facts. What periods like this do is they force the separation of the wheat from the chaff. That's a healthy thing and something we welcome. Dynamic and challenging times require operators to be equally dynamic and turn those challenges into opportunities. The great thing is we're built for this. We'll lead through this period by continuing to improve our operations and operating efficiency, strengthen our balance sheet, and prioritizing cash generation. Cresco Labs has the scale and the expertise to succeed. We're executing against the major controllable objectives of our three-year plan, ensuring we have the most strategic footprint, broadening our wholesale brand leadership, and driving retail productivity across a larger base. Again, 2023 is not likely to get any easier, which is why our priorities are clear. We're laser focused on our core, core capabilities, core markets, core products, and core brands. We're leaning into that core, investing wisely, and rationalizing and optimizing everything to improve profitability generate more cash, and strengthen our balance sheet health. Simply put, we understand the assignment. Now to review the three pillars of our strategic plan and how we're executing this year. Number one, we're ensuring we have the most strategic geographic footprint. As we look to optimize our footprint to drive profitability and long-term industry leadership, we're prioritizing having exposure to the growth states of tomorrow along with scale diversification and profitability across our current markets. We believe that the pending ColumbiaCare acquisition acts in furtherance of achieving these goals. We continue to work through our two remaining material divestitures in Ohio and Florida and are making progress with both. The capital market conditions have undoubtedly changed since we originally started this process, but we continue to see interest in these assets and in the cannabis industry from investors that have a longer time horizon and recognize the asymmetrical payoff potential given today's valuation. Between the ongoing divestitures and the operational and balance sheet improvements going on at both companies today, we see the path forward that will position the combined company with a solid capital structure, strong liquidity position, and profitable operations. Across our own organization, we're taking substantial steps to improve our positioning. Rationalizing and optimizing have been at the forefront of our approach since late 21 when we announced our strategic shift away from third-party distribution in California. We continue to evaluate every state and take actions that prioritize the core and de-emphasize underperforming or underutilized areas of our business. Yesterday, we internally announced further steps to eliminate underutilized facilities and unprofitable products in California, focusing on our more advanced and cost competitive Florical facility. In Arizona, where we are underscaled, we've shut down our margin dilutive greenhouse operations. While these two actions will have a modest top line impact this year, We encourage shareholders to gauge our performance this year based on improvements in profitability, which we expect to start in Q2 and grow through the year as the impact from the decisions flow through our P&L. At the same time, we're doubling down on our successful operations. Year-to-date, we've opened eight new stores between Florida and Pennsylvania, two states where we have significant economies of scale and strong margins. All in, since we took control of the Florida operations less than two years ago, we've added 20 new stores in the state and will continue to opportunistically add to this footprint in 2023. In Pennsylvania, where we historically have been under retailed relative to our peers, we'll be opening our remaining four doors through the spring and summer, which has the double benefit of driving retail growth and improving our competitiveness in the wholesale market. While we execute these operational and retail initiatives, we continue to reorganize our teams to re-increase the speed of decision making, reduce redundancies, and drive overall efficiencies. Dennis will discuss it in more detail, but these investments are a good example of our capital deployment strategy for the year. We're focused on wise investments that have fast payback periods and act in furtherance of our goal to drive profitability, cash generation, and enhance competitiveness and lead the industry. Number two, we maintained our position as the number one branded product portfolio per BDSA. In 2023, our plan is to double down on this core portfolio, focusing on the capabilities, the products, and the brands that have made us the market share leader in Illinois, Pennsylvania, and Massachusetts. Innovation and new products contributed a material amount to our revenue in 2022, and we plan to build on that success this year. We're focused on operationalizing some of the key innovations we started last year. The pipeline includes several higher potency and higher yield strains, manufactured products like lozenges, infused pre-rolls, live rosin premium gummies, and the liquid live rosin carts that have proven so popular in Pennsylvania and Illinois. Consistent with our investment philosophy, the capital needed to support these launches and more markets has a short payback period and a high certainty of success. After two straight years of having the number one house of brands, We've proven that consumers love our products and brands. The steps we're taking this year to bring more of those proven products to market will give us stronger margins and pricing flexibility to continue to take shelf space in new stores as they open and be the preferred compliment to any vertically integrated retailer's house brand. Number three, we're also doubling down on our highly productive retail in the most strategic states. As we open new stores, we continue to achieve operating leverage across our footprint. For example, we recently rolled out our new and improved Sunnyside loyalty program in Illinois, Florida, Massachusetts, and Ohio. The loyalty program complements our custom-built e-commerce platform, sunnyside.shop, which we believe is the most customer-friendly retail platform in the industry. The two combined are a rich source of data for understanding and exploring consumer behavior and improving retail efficiency. In 2022, approximately 75% of our Sunnyside sales come through sunnyside.shop. Those sales follow the 80-20 rule, where nearly 80% of sales come from the top 20% of customers, giving us incredible insight into the behavior of our highest value customers. We're using that data, combined with custom emails, text prompts, and offers to drive smarter promotional activity and cement those high-value shoppers to the Sunnyside brand. The feedback loop between our scaled data set and decision-making is accelerating, leading to better store management, more efficient staffing, improved menu curation, and more targeted innovation and product planning on the production side of the business too. As we open new stores and competitors enter our markets, it's imperative that we flex our muscles as a highly skilled, scaled retailer to improve customer experience and four-wall economics to maintain profitability, market share, and out-compete. As 2023 shapes up to be another challenging year, we're confident that our scale and organizational expertise lays a strong foundation. That, combined with our ability and willingness to make the tough decisions, will position Cresco Labs and its shareholders to reap the tremendous rewards in the long-term growth of the cannabis industry. In 2023, we're doubling down on our successful core, and we're setting the stage for a much stronger company going forward. Now I'll turn it over to Dennis to review our financial results.