Cresco Labs Inc

Q1 2023 Earnings Conference Call


spk01: Good day and welcome to Cresco Labs first quarter 2023 earnings conference call. All participants will be in a 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 opportunity to ask questions. To ask a question you may press the star key and one on your touchtone phone. To withdraw your question please press the star key then two. Please note this event is being recorded. I would now like to turn the call over to Megan Kulick, investor relations for Cresco Labs. Please go ahead.
spk03: Thank you. Good morning and welcome to Cresco Labs first quarter 2023 conference call. On the call today we have chief executive officer Charles Bechtel, chief financial officer Dennis Olas and chief transformation 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 2023 are provided prior to 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 NDNA for the quarter ended March 31st, 2023 on Seder 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 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 differ materially from such forward looking statements including economic conditions and changes to 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 filing on Seder and with the securities and exchange commission. Cresco Labs does not undertake any duty to publicly announce the result of any revision 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-gap 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-gap 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.
spk08: Good morning, everyone. Thank you for joining us on the call today. On our call in March, we highlighted our priorities for 2023 as we execute against our three-year plan. This is the year of the core and the year of cash. We're leaning into our core, investing wisely and rationalizing and optimizing everything we do to generate profitable revenue expansion, drive healthy margins, create more cash and strengthen our balance sheet. On today's call, we'll focus on the steps we're taking across our business to execute against this strategy. We're pleased with our Q1 results. Cresco's team generated $194 million of sales. Our revenue performance was solid across our footprint with some softening in Illinois that caused the sequential decline in revenue as well as much of the margin pressure. Dennis will provide more detail on that, but overall, across our footprint, we performed well in wholesale, held fair share in retail, and drove increased productivity across every facet of the business. In today's environment, we are hyper focused on what we can control, stabilizing for today and optimizing for the future. Our relentless prioritization of providing the highest perceived value to the consumer is paying off and continues to give us the number one selling portfolio of branded cannabis products in the entire industry and an incredibly productive retail platform. Our products reached the shelves of 1,600 dispensaries across our 10-state wholesale footprint, and we rang up almost 1.2 million orders at our Sunnyside dispensaries. Now I'll review how we're executing on our strategy using the three pillars of our three-year strategic plan, ensuring we have the most strategic footprint, broadening our wholesale brand leadership, and driving retail productivity across a larger base. Number one, we're ensuring we have the most strategic geographic footprint. Over the years, we've designed our footprint to ensure we have access to the states with appropriate regulations and large consumer populations to execute against the thesis that cannabis is one of the largest consumer product goods of the future. As industry and state programs evolve, it's important that we stay nimble and adaptable to maximize our opportunities and minimize our risk across the footprint. That's the active component of creating and managing the most strategic footprint and the impetus behind the rationalization and optimization efforts you've seen from us in recent quarters and can expect from us going forward. We are continuously evaluating and tweaking our practices to make incremental improvements at every touch point in the cultivation, manufacturing, and retail process to address the nuances that develops as states mature. Our core markets are strong with scaled operations that create significant profit and cash flow from operations. We're operating more efficiently, improving productivity in our supply chain, and adding more automation in our facilities. We're leaning into these markets to drive more growth and market share while bolstering enterprise profitability. Looking across our footprint, we're also preparing for significant growth catalysts in states like Pennsylvania, Ohio, Florida, and New York as those markets convert to adult use. We continue investing widely in those markets to improve our productivity, expand our product offering, and strategically open new doors. BDSA estimates these four states alone will double in size over the next three years as adult use programs come online and we will be ready. At the same time, we're de-emphasizing markets that don't have a pathway to scale and profitable growth. On our last call, we talked about our decision to close underutilized and unprofitable facilities in California and Arizona, two of our lowest margin states. We recently completed the wind down process for these facilities, so those actions, along with many other changes we're making across our organization to optimize and right size our business, will materially improve our margins starting at the end of Q2. Number two, we maintained our position as the number one branded product portfolio in cannabis. Consumers continue to love our brands and products. According to BDSA, we continue to be the number one selling portfolio of branded cannabis products in the entire industry. With our prioritization of providing the highest perceived value to the consumer, we produce the number one portfolio of branded flour, number one portfolio of branded concentrates, number four portfolio of branded vapes, and number four portfolio of branded edibles. And in our strong core markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position, and we're happy to say we now have a top five market position in the very competitive Michigan market. We continue to drive growth in our brand portfolio through smart investments and new form factors and winning brand extensions. For example, in Massachusetts, we launched the popular Good News Bates, which grew our market leading share in the state. In Pennsylvania, we launched Trokeys, addressing a specific form factor gap in the market. We're extending our successful edibles brands with the launch of Chews in Florida, which already account for 10% of Sunnyside sales in the state. And we're also introducing more flavors and effects such as Good News Vegas, which boasts elevated effects with caffeine. Along with brand extensions, we're taking steps to combat pricing pressure by premiumizing our portfolio and delighting shoppers at higher price points. We launched new Florical products in Illinois, Florida, Michigan, and Massachusetts, which complement our value brand, High Supply. Enthusiasts are happy to pay more for ultra premium Florical flour, solventless concentrates, and live rods and edibles because the value proposition of quality and price is appropriate. This high-low strategy is helping us address more targeted consumer audiences and purchase occasions, striving higher baskets, and ultimately gain more market share growth across our existing footprint. Finally, we're making small investments in simple and efficient innovations that can be launched quickly with fast paybacks. We're looking at proven segments such as pre-rolls and medicinals, which we already have the expertise and capabilities, but we've historically under-indexed. And number three, we're also doubling down on our highly productive retail in the most strategic states. Our investments in retail are paying off. Despite new competitive doors opening, we continue to take more than our fair share in key markets because of our targeting, loyalty marketing, and customer service. Even with new stores entering competitive markets like Illinois, we were able to out-compete and hold our absolute retail share. In Q1,, our proprietary e-commerce platform, reached a significant milestone, registering $1 billion in sales since its launch in 2020. This is a testament to our focus on creating the best customer experience in cannabis, both online and in our stores. Currently, over 70% of our transactions originate via, which gives us incredible insight into our customers' buying behaviors, while also creating more opportunities for basket building and highly effective targeted promotional strategies. Our newly launched loyalty program is another success story. It's providing us with more valuable data, while also giving us the opportunity to celebrate and reward our most loyal customers. In Q1, we signed up 100,000 customers, bringing the total to over 160,000 since it was launched at the end of last year. Engaged shoppers on our platform spend 12% more than the average shopper. Expanding these platforms will help us continue to drive more from our existing shopper base. While it wasn't in Q1, I do want to commend our team for the phenomenal job they did on 420, which set a record for single-day trips, unit sold, and retail sales of 14% from last year's holiday. We're pleased with the progress we've made so far in reducing our retail operating expenses to improve margins in an environment where pricing is under pressure, but volumes continue to grow. In fact, we're handling customer transactions more efficiently than ever. During the quarter, we sold nearly 3.2 million units at retail, up 7% year over year, and processed nearly 1.2 million transactions, up .5% year over year, all with 10% fewer retail employees. Reflecting on the quarter, it's clear we're taking the necessary steps across the entire organization to improve margins and create a materially stronger company. We rationalized and exited margin dilutive operations in California and Arizona, while also investing widely in cultivation, innovation, and brand building. We leaned into our robust retail infrastructure to defend and expand our share against new competition, even in the toughest markets. Cresco Labs is built for this uniquely challenging environment because we understand what we do best. We know what levers to pull. This is what we mean by focusing on our core, and you can expect to see more of this targeted prioritization as we charge ahead. Before I pass the call over to Dennis to review the financials, I want to give a quick update on what's happening in DC and with our pending ColumbiaCare transaction. While the industry was disappointed in the lack of movement on the SAFE Banking Act and other federal reforms last year, it established the foundation for the progress we're seeing so far in 2023. I was in DC earlier this month and attended the Senate Banking Committee's hearing on the SAFE Act. I cannot overstate the significance of this event. SAFE has passed the House seven times. This is the first time that SAFE has been the focus of a Senate hearing. While SAFE isn't everything we need as an industry, this hearing is an incredibly important part of progressing toward reform. It's important to remember that this is merely a moment in time on the journey of the cannabis industry, and we will continue to show up at that table as a trusted operator and stakeholder to push these discussions forward with federal legislators. With regard to ColumbiaCare, we continue to collaborate closely with ColumbiaCare on the divestiture transactions required to obtain the regulatory approvals, which are conditions of closing. While we do not have enough data to provide on the timing related to the outstanding divestiture transactions, we continue to work with ColumbiaCare to find a path forward that makes both strategic and financial sense. We must come out of any transaction a stronger company than we would be as a standalone company. With that, I'll now turn it over to Dennis to review our financial results.
spk10: Thank you, Charlie, and good morning, everyone. I'll be reviewing the financial results from the quarter, then highlighting a few items from the balance sheet and discussing our capital position. As Charlie said, we are pleased with the results in the first quarter. We are navigating industry-wide pressures and taking steps across our organization to prioritize P&L strength and cash flow. In the quarter, we generated $194 million in revenue, a 3% decline quarter over quarter. This decline was driven almost entirely by Illinois, where the total market was down .6% as Missouri launched its adult use program, putting significant pressure on border stores, resulting in lower overall revenue. The impact of Missouri and new store openings in close proximity to established stores resulted in more competition for both retailers and wholesalers in the state. Importantly, net of Illinois, we saw growth across the rest of our footprint. The dynamics in Illinois resulted in our retail operations being down 3% quarter over quarter and wholesale revenue being down 2% over the same period. Overall, when we look at BDSA market share stats, we continue to perform incredibly well in branded market share, which accounts for all our branded products sold on our shelves and third-party retailers, a great proxy for how consumers are voting with their dollars on brand and product quality and how Cresco is competing in its markets. We also help market share in every state where shared data is available. Looking ahead to Q2, we expect total revenue to be flat compared to Q1 as our growth in retail sales attributed to new store openings in Florida and Pennsylvania is offset by new competitor store openings near our dispensaries in Illinois, Pennsylvania, and Ohio, price compression and the impact of our most recent rationalization actions in California. Throughout the rest of the year, we will see some impact of revenue as we exit low margin businesses and furtherance of our continued efforts to improve overall margins and cash flow. We expect modest market share gains for our branded portfolio as we execute on extending our winning brands in new states, previewing our portfolio and expanding in segments where we are under indexed today. Overall, adjusted gross profit in the quarter increased 120 basis points sequentially to 46%. Improvements in efficiencies across the platform were negatively impacted by the revenue mixed by state. The sequential revenue decline in our high margin state of Illinois was offset by higher revenue and lower margin states like Massachusetts, California, and Michigan, which resulted in a margin drive of approximately 270 basis points. We are taking steps to bring margins up in sequential quarters as we strive for improved cash flow and continue to rationalize margin dilutive operations. As Charlie mentioned in his opening comments, last month we reduced our footprint in California and entered into an agreement with KSS to distribute our products. This decision was in furtherance of our plan to reduce our fixed costs in markets where our overall margin is dilutive to the company. This change in California was effective as of mid-May and will begin to reflect the full cost benefits of this in Q3. Similarly, margin expansion from the improvements we've been making in automation, cultivation processes across many of our states, and expense reductions in other areas of the business will be recognized in the coming quarters as we sell through our higher cost capitalized inventory. It should be noted that our current period COGS reflects the cost of products manufactured in previous quarters, so the benefits derived from recent cost actions will take a quarter or two before they're recognized in our P&L. Total adjusted SG&A declined slightly from Q4, inclusive of the openings of eight dispensaries in the quarter. These new stores accounted for $3 million in additional SG&A expense in the quarter. We've taken additional actions in Q1 and Q2 to streamline our operations, reduce costs in cultivation and production facilities, and reduce our overall functional expenses at corporate. These additional steps, along with further significant cost actions planned, will yield additional savings over the remainder of 2023 and 2024 when we expect to see the full benefits of these changes. Adjusted EBITDA totaled $29 million flat sequentially. Adjusted EBITDA margin of 15% was up modestly, but below our long-range target, primarily due to lower revenue in the high margin state of Illinois. Looking ahead, we expect adjusted EBITDA margins to improve as the measures we took in Q1 and those planned in Q2 begin to flow through the P&L, improving both gross margins and SG&A. We continue to focus on improving our working capital management. We held inventory flat for the fourth consecutive quarter, even with a purposeful buildup of inventory to support 420. We paid approximately $34 million in taxes in the quarter, making us current on our federal tax obligations through 2021 and state taxes through Q1 of 2023. Our remaining 2022 federal tax liability is approximately $50 million, for which we filed an extension in April of this year. Even with the large Q1 tax payment, we generated positive operating cash flow of $3 million in the quarter. As noted with adjusted EBITDA, we expect to see improvements in both operating and free cash flow, especially in the back half of the year, as the steps we're taking today to reduce costs are fully recognized. In Q1, we spent $21 million on capex, primarily from the addition of new stores in Florida and the development of our upstate New York facility, which is required to maintain regulatory compliance in the state. Q1 was the heaviest quarter of the year for investment, and we will see a dramatic reduction in our need for capex for the balance of the year. We entered the quarter with $90 million of cash on the balance sheet, and we feel good about our cash position. Free cash flow improvement is our number one goal for 2023. The improvements we are making to our operations, continued cost management, and significantly lower capex will improve our cost structure and margin profile. Beginning in Q2, and more so in the second half of the year, building to our goal of 50% gross margin and 20 plus percent EBITDA margin by the end of the year and set us up for a strong 2024. With that, I'll pass it back to Charlie for some closing comments.
spk08: Thanks, Dennis. We're seeing a lot of potential and optimism ahead. This industry is finally getting the attention it deserves from legislators, a federal bill being heard in the Senate and following what's referred to as regular order. We saw Kentucky pass a medical cannabis law, and we're seeing more adult use markets come online and broad acceptance of cannabis continues to grow. We're working to improve every aspect of our business to take advantage of this positive momentum. We're managing through the environment today to improve profitability, while at the same time optimizing the company for the industry of tomorrow. The long term cannabis growth story remains unchanged. Cannabis is still positioned to be one of the largest consumer products categories in the US. And Cresco Labs is doing what needs to be done to secure long lasting industry leadership. We are holding share in our largest highest margin markets while de-emphasizing those markets that negatively impact margins. We're reducing our corporate overhead and driving operating efficiencies throughout our entire organization to offset pricing pressures. We're investing in projects and innovation where we see the opportunity for short term cash returns. We're focusing on generating more free cash flow through better inventory and cash management to strengthen our balance sheet. And we're continuing to lead the efforts on federal reform, which is the most important path towards unlocking the true potential and value of the cannabis industry. With that, I'll open the call for questions.
spk01: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind and would like to withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question of today is from the line of Aaron Gray of Alliance Global Partners. Aaron, your line is open now if you'd like to proceed.
spk06: Hi, thank you. Good morning and thank you for the questions. So first question, you know, I have, I know you guys have been disclosing a ton in terms of the updates for the Vest-Ferge for ColumbiaCare, but just Charlie, given your commentary in terms of the path forward, and you talked about both strategic and financial sense, I think we all understand the strategic. Just want to get more in terms of how you're thinking about the financial sense. As you look for a path forward and the potential pro forma debt and how that plays a role, ColumbiaCare, you know, has some near term and long term debt coming due, you know, neither is free cash or positive today, but both of you are working towards that. So if you offer some color in terms of what a pro forma structure would make that financial sense for you and potential paths towards that, either, you know, additional divestitures, you know, debt restructurings, I think that'd be very helpful. Thank you.
spk08: Very good morning, Aaron. Thanks for the question. You know, when it comes to the commentary on strategic and financial sense, you know, the way to look at it really is there's a couple things that are, there's several things that are within our control and there's several things that are outside of our control as it relates to the transaction. And of course, the divestitures and the resulting proceeds from those are a big component of, as we said from the very beginning, our ability to get the combined debt leverage ratio of CombineCo in the right spot. So as the divestitures remain open and before we're able to complete those, that's a big driver of whether or not the deal can proceed with a structure that allows us to achieve the goals that we set out at the beginning. So it really, it really does come back to as these divestitures still remain to be closed, they're a big driver of whether or not we can make the deal make sense and we'll continue to update the public as we have more definitive information on those divestitures.
spk06: Okay, great. Thanks very much for that detail. A second question for me is just in terms of the gross margins. You talked about them being weighed down some by California and I think you mentioned another market as well. I think it was about 200 base points. The last quarter, you know, the way down by some, you know, some inventory net realizable value adjustments as well. So just want to clarify, were there inventory adjustments again that weighed on this quarter or were there new things that kind of weighed on the margins? I think last quarter excluding those non-recurring, they would have been about 50%. So just wanted to get some further commentary in terms of what weighed on margins last quarter versus this quarter and then how to think about that gross margin going forward. Thank you.
spk10: Thanks Aaron. This is Dennis. Let me answer that question. There were no additional inventory charges in Q1. The impact of the gross margins is really a reflection of the fact that a state mix accounted for about 270 basis points in the quarter. So we did see a drop in Illinois revenue associated with the adult use move to in Missouri, which had an impact on both the wholesale business down near the border states. So that had an impact. And then if you look at where, and that's again, one of our highest margin states. So the fact that we lost some revenue in a high margin state, picked up some revenue in states like Michigan, California and other states with lower margins, that makes account for about 270 basis points in the quarter. California had a minimal impact in the quarter relative to sequential change from Q4 to Q1. We do expect to see some significant improvements in margins as the actions that we took in California and Arizona in Q4 and Q1 will roll through the P&L into Q2 in subsequent quarters.
spk06: Okay, great. Thanks so much for the call. I'll go ahead and jump back into the queue.
spk08: Thanks Aaron.
spk01: Our next question is from the line of Andrew Parth now of Cypher GMP. Andrew, your line is now open. My apologies, it appears we've lost connection with Andrew, but our next question is from the line of Scott Fortune of Roth MKM. Scott, your line is now open if you'd like to proceed.
spk04: Yeah, good morning and thanks for the questions here. Now that you've done the actions in Arizona and California and that's been taken, can you provide the kind of timing of the FG&A and improving the margin profile? So I know you mentioned before that late second quarter here, but we should really see the margin improvement come from the second half 2023, just kind of update on the FG&A improvement as we look forward here.
spk10: Yeah, thanks Scott. So again, the actions that we took in California and Arizona, we capitalize the costs as we incur them in the period and then we expense them into the P&L as those products shipped. So the actions that we took in Q1 will start to have some impact in Q2 as those products that we built in Q1 ship into the market in Q2 and Q3. So we will see some benefit in our margin in Q2 as a result of that, but more so we'll see the full impact of those actions in the second half of the year. So those combined actions will account for about 150 basis point improvement from Q1 into the second half of the year.
spk04: Scott, I appreciate the color. And then real quick, I know you mentioned Q1 your heaviest capex from that standpoint, but just kind of step us through kind of a new store ad. I know you're targeting Florida and Missy or Florida and Pennsylvania coming on board kind of here mid year. Can you provide this update on retail ads as you look out for 2023 and any other capacity expansions on the board with capex from that time?
spk10: Yeah, I'll take that one again. So the 21 million dollars of capex that we incurred in Q1, 14 of that was associated with new store openings, the bulk of that being in Florida, as we had eight stores that opened in the quarter. The had a couple million dollars in Pennsylvania as well for new store openings that we opened in Q1. We'll have a couple more that will open in Q2. The bulk of the capex expenditure, though, was from a facility standpoint was in New York. We continue to build out our facility in New York to be compliant with the state regulations. We expect to complete that build out in late Q3, early Q4. So that did account for about seven or eight million dollars of capex expenditures in Q1. We are looking at some financing alternatives to offset some of the investments that we need in that facility today.
spk04: Any other for new store ads kind of going forward throughout the year?
spk09: Sorry. I'll take that, Dennis. Just for this quarter coming up, we'll have one new store on the line in the coming quarter.
spk10: And you will see a significant slowdown in store opening.
spk04: I appreciate it. I'll jump back in the queue.
spk08: Thank you, Scott.
spk01: Our next question is from the line of Andrew Pathel. Andrew, your line is now open if you'd like to proceed.
spk00: Hi, good morning. Thanks for taking my questions. Sorry about earlier. Just wanted to first ask on the Columbia Care transaction. You know, I would just wanted to and kind of the way that you're looking at things, you know, if we can look at all possible scenarios here, and just assume that the Columbia Care transaction doesn't close. I'm wondering if you can give a little bit of color on how you're thinking about growth catalysts. Illinois stores are opening, even if slowly, and they do have a long runway to go here. You also discussed growth this quarter in every market outside Illinois. So wondering is the thinking maybe to manage your cost controllables until Illinois growth comes back in a meaningful way, or would you consider going back out in the M&A market and maybe acquire a smaller operator or a single state operator in an attractive state?
spk08: Yeah, no, Andrew. Thanks for the question. Charlie, I'll start it off. You know, you laid out some of the components that would be a part of the go forward strategy as a standalone company for sure. You know, if you look at Illinois, there's still there's a doubling of total addressable market here in Illinois that should come in the next two to three years. As those new stores open again with our market share in our position here, we anticipate being able to capture a good percentage of the future growth that's still left in the Illinois market. So excited there. If you look at the rest of the footprint, you've got adult use catalysts still ahead of us in Pennsylvania, appreciative of Senator Laughlin and Streets memo that was filed about the bipartisan bill that should be forthcoming there. So optimistic about that catalyst ahead of us in PA again, where we have great market presence and share adult use catalysts expected in Ohio, adult use catalysts expected in Florida, New York actually launching and being a viable adult use program. And then share gains in other markets that we're in that we still have room to grow. So there's plenty of growth left in the existing footprint. And then, you know, cannabis is, you know, one of the most dynamic industries in the country for a variety of reasons and will continue to be very diligent in cost management during this period of time where we're still sort of in this regulatory and banking limbo, but also continue to be observant and see if there are opportunities for us to make smart, you know, positive profitability revenue type opportunities. That are out in the marketplace. Greg, additional color?
spk09: A couple things. Good morning. I think Charlie mentioned as we think of our kind of growth from the core plan, easy opportunities. In addition to what Charlie mentioned is seeking some of our existing products are showing success in markets like Illinois, expanding those across other footprints. In the quarter, we talked about how we were pleased with good news performance in new states, FloraCal continue to ramp out in new states, which gives us not only a unique proposition, but also a premium price point. And that's one thing you'll see for us is because of the fact of the year. The second is store growth, and that's not only just new stores opening up in states like Illinois, but even stores where we have 100% distribution. Sorry, 100% penetration. We don't have 100% distribution in our core, our core skews. And so getting those retail doors that we already have a relationship with buying across our platform gives us an opportunity for new growth. And then near in, there's a couple categories, and I think Dennis mentioned this too, as we drive efficiencies and operations, we're improving our yield per square foot and our biomass availability and our labor available, which means that we can start to produce skews that we haven't, like joints. Right. And as anyone follows this category, joints is a very large segment in cannabis. It's an area we haven't played, but we can now as we increase biomass availability and labor, and also smaller, but categories like medicinal. So all of those give us incremental growth opportunities on the wholesale side within our, that gives us future growth and then retail for us. It's a new sun, the results continuing to both upsell and cross sell our shoppers into categories that they may not be buying and driving up frequencies, their trips as well.
spk00: Appreciate that color. And maybe another one just on, I realize you're not, you're not prepared for, or you're not providing any updates on timing of the divestitures, but maybe you could talk a little bit about the process to extend the outside date. It seems last time around, you announced an extension mutually agreed, of course, about one month before the outside date. I'm wondering how we should think about that here. You know, if you can maybe talk about the steps or approvals necessary to, to obtain an extension so we can kind of follow that progress.
spk08: So, you know, I think whether whether we extend or not is is a, is a board level discussion and decision, and that'll be mainly driven by progress that we see on the divestiture front in the weeks ahead. So I don't have much more to offer than that. It's, it's an active situation. As we, as we make more progress and get more information as it relates to the divestitures, that'll inform the decision on the extension, both process and timing.
spk00: Okay, thanks for that.
spk01: Our next question today is from the line of Michael Lavery of Piper Sandler. Michael, your line is now open.
spk05: Thank you. Good morning. We covered. The deal pretty good fit, but maybe just to put a bow on it. Would it be right? You've obviously mentioned your attractive set up. If it weren't to go through, you've been very clear. You're trying to make plan a work and make it work. Well, is everything on the table? And by that, I just mean, could you restructure the deal with a different equity component or, you know, I know that divestitures are a piece that you're trying to figure out. But can you just give us a sense, given how difficult that seems like it's proven to be of what flexibility there is? And is it just sort of close, you know, kind of tweaks to the current structure or no deal? Or is there a range of other options in between?
spk08: Michael, I appreciate the question. It really is. I think as both companies have reiterated, there's value in the underlying thesis and deal rationale. But the economics of it are such an important part of it as it always has been from the time that we announced the transaction itself. The divested assets being a source of the proceeds from the divested assets being a source of capital that can be used to make sure that the combined co has the appropriate that leverage ratios is a big part of executing the deal. So is that that ratio between cash availability and combined debt is is where this this gets to. So, you know, I think the again, the companies are are are are having discussions and and in our creative organizations by nature. But it it boils down to making sure that the proceeds from divestitures and potentially other financial mechanics that could go along with that debt, that ratio of cash availability and and combined debt leverage are are where kind of everything is.
spk05: Okay, sounds good. And just on some of the margin outlook, you've been clear about the timing and how the California changes would play out. Can you just give a sense maybe. Overall, either, I guess, maybe the magnitude of that specifically or really with some other puts and takes, you're trying to drive better product mix. There's still some some pricing headwinds. Do you just have a sense where you sit today? How we should be thinking about where the second half lands on a kind of an all in with with all the moving parts back and forth for what kind of EBITDA margins you might be expecting.
spk10: Yeah, this is Dennis. Thanks for the question from a forecast standpoint. Again, we haven't given any specifics, but we expect that with the actions that were taken in California and Arizona, all of the efficiencies we expect to experience in our production facilities across our platform. You combine that with some of the again, some of the other actions we're taking both from a cost of goods sold and a SG&A perspective. We expect to be at the 50% margin range, but in the second half of the year. And that would get us to an EBITDA of 20 plus percent coming out in the second half of the year. So a lot of actions that we're taking to reduce our overall cost to offset some of the price pressures that we see in the marketplace today. And again, our thesis is our plan is that we have a plan to get to a 50% gross margin and 20 plus percent adjusted EBITDA by the end of the year.
spk05: No, that's that's great color and obviously a nice quintile recovery. So thanks for that.
spk01: Our next question today is from the line of Glenn Mattson of Leidenberg-Farman. Ben, your line is now open.
spk02: Hi, sorry, just to clarify the last point, Dennis, you say 20 plus percent coming out of the second half, meaning like as you exit the year or is that what kind of what you expect for the for the back half on average?
spk10: That's what we expect for the back half of the year.
spk02: OK, all right. Yeah, I guess I was just curious about Illinois a little bit more. Can you give us a sense of like when the new retail, you know, when that fulcrum point hits where like the new retail benefits more than it's detracting now?
spk08: So this is Charlie. I'll start at Michael and then Greg will add more context, but I think there's a couple variables at play. It is definitely the quantity of the stores, but it's also the location of the stores. I think stores that are closer to our existing locations will apply more pressure to our retail revenue than ones that open up further away. So that's that's sort of part one of the equation and then definitely the number and Greg more color on sort of where you see that shift coming.
spk09: I think from a modeling morning, Glenn, I think from a modeling perspective, we would say really stores opening and getting to scale. And you put that into late Q3, Q4, you start to see the benefit of incremental new cell doors. I think the big thing on Illinois we talked about is right now you haven't seen that incremental revenue coming online as much from the new independent doors because it's being offset by Missouri challenges across our wholesale partners who have stores on that border. And that's been driving a lot of our wholesale decline in the state. We look forward. I think that continues for a bit. We will lap it. I don't think it is a sustained negative drag on the state of Illinois, but it will have its impact in Q2, Q3. Net wholesale will come online, as we said, later in the year, really scale into next year. And on the retail front, as Charlie mentioned, really what's driving the challenges retail is you are seeing a little bit of trip loss due to new stores opening in and around some of our core stores, particularly those stores that opened up in Q4 last year that are now ramping up. And that's put a little bit of pressure on some of our sunny side locations. But ultimately, the biggest driver of retail decline in the quarter was more driven by price discounts. And that's a Illinois price discounting trend that's happening across retail as more shoppers are starting to learn that retailers will offer different discounts and are starting to shop on discount. Because if you look at the fundamentals of our traffic, trips are showing pretty healthy trends. Units are good, but its average price per unit that we're charging is what's really driving down total retail value. And that's a pricing challenge across the state right now.
spk02: Okay, great. Thanks for that color. Charlie, I was curious, could you chime in on your thoughts on New York given all the recent developments with the recent regs coming out and just the governor kind of talking about the ability to begin finding landlords and things like that. Do you get the sense talking to people that they're ready to get serious about making this a real market or is, you know, in any sense of like how you think it might develop that kind of thing?
spk08: Sure, I think your comment is fair. Again, I caveat this with until the regs are final final, it's subject to change, but appreciative of the changes that were made from draft one to draft two, so to speak, also encouraged by that legislation making it out of Albany. I think the enforcement involving the landlords of retail locations that allow illicit operators to operate out of them is a useful tool in addressing the illicit market, which needs to be addressed in New York. It's just for public health, public safety, and viability of the licensed program, which is, again, a great social equity focused type program that the illicit market undermines. So, yeah, I encouraged cautiously encouraged. We'll see what final regs look like and then we'll have more color.
spk02: Great. Thanks, guys.
spk08: Thanks, Michael.
spk01: As a reminder, if you'd like to ask a further question today, please dial star one on your telephone keypad now, and our next question is from the line of Derek Tlaie of Canaccord Genuity. Derek, your line is now open.
spk07: Yeah, thanks guys. Just one more on the potential transaction. Can you just comment on where you are in the process for the remaining divesters? Have you had interest submitted? Have you had it from multiple parties for the multiple assets? So where are we on that front?
spk08: Yeah, thanks, Eric. The one transaction definitive agreement we did announce is still there. The others remaining are really Ohio and Florida. We've made good progress in Ohio. Florida has been challenging Florida. As I mentioned earlier in the call, things that are within our control and outside of our control, Florida itself has had some significant changes over the last year that have made that asset, that license, challenging, including the movement towards issuing new licenses. And so it's been a bit of a challenge, but that's the update. The Combs transaction progress in Ohio is still challenges in Florida.
spk07: Okay, good. That's helpful. And then maybe just on the comment on CapEx. So appreciate this was the heavy quarter for CapEx. I think previously you guys have guided to somewhere in the neighborhood of call it 45 to 50 million in CapEx for the year. Is that is that still the number that we should be thinking about?
spk10: Thanks, Eric. The number that we gave of 45 to 50 is still accurate. That was assuming that we were going to do some type of financing agreement in New York. That is still our plan to do that. But absent that, I think that is an accurate figure to use.
spk07: Okay, great. And then just on on the tax payments, can you just remind us the cadence of tax payments? Is there a double tax payment in Q2?
spk10: So the tax payment that we made in Q1 of the share for about 32 million dollars closed out our 21 federal tax liability that we had. We are current, as I stated in my remarks, current on our all of our state taxes through Q1 of 2023. We have made some payments for our federal 22 taxes. The remaining balance of 2022 taxes is about 50 million dollars that we did file an extension for in April of this year.
spk07: Okay, and how long does that extension give you?
spk10: Well, we would just file an extended return in the September, October timeframe, which is normal for most corporations.
spk07: Okay. Okay. Thank you very much.
spk08: Thanks, Derek.
spk01: Thank you. And we have no further questions in the queue today. So this concludes the Cresco Labs first quarter 2023 earnings call. Thank you all for joining. You may now disconnect your lines.

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