Cresco Labs Inc

Good day and welcome to Cresco Labs second quarter 2023 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 and then one on your touch tone phone. To withdraw your question, please press 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. Thank you.

Good morning, and welcome to Cresco Labs' second quarter 2023 earnings conference call. On today's call, we have Chief Executive Officer and Co-Founder Charles Bechtel, Chief Financial Officer Dennis Oles, and Chief Transformation 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 2023 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 statements and MD&A for the quarter ended June 30th, 2023 on CDAR and EDGAR later today. 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 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 the company's actual results to perform 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' 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 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. All interim financial information is unaudited. In addition, on today's conference call, Cresco Labs will refer to certain non-GAAP financial measures, such as adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted SG&A, 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 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. As we introduced in Q1, we've dubbed 2023 the year of the core because we're laser-focused on the things that make Cresco the strongest company possible, our core markets, core stores, core brands, and core products. By rationalizing and optimizing everything we do, we're strengthening our business for today's environment, while best positioning ourselves for the future, as reflected in our very solid Q2 results we're going to discuss today. In the quarter, we generated $198 million of revenue, up 2% sequentially, by prioritizing our core strengths. With our focus on driving scale and efficiencies across the entire organization, we've been accomplishing more with less, leading to an $11 million sequential improvement in adjusted EBITDA, a 38% sequential growth. We're pleased to share that this quarter showed growth in our top line, our gross margin, adjusted EBITDA, and operating cash flow. These results are just starting to reflect the decisions we made and conveyed earlier this year to support our Year of the Core priorities. We understood the assignment, and we're executing against it with much more to come. It's important for us to start with the decision to terminate the ColumbiaCare transaction, which aligns with our objectives for the Year of the Core. While we still believe in the fundamentals of the deal, we always knew that we must come out of any transaction as a stronger combined company than we would be as a standalone company. And the changes in the industry and broader macro environment made it impossible to get the value we needed from divestitures to make the economics work. On the flip side, these same dynamics are what create plentiful opportunities for targeted and capital efficient growth ahead. The disciplined prioritization of our strong core is the best way to position ourselves to exploit these incredible opportunities in the coming quarters. Now I'm going to share an update on how we're executing on 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. Our objectives for the year of the core are clear. With constantly shifting regulatory and competitive landscapes, we must be as dynamic as our industry and environment. We're continuously evaluating our markets to ensure a footprint that maximizes stability, bottom line growth, free cash flow, and competitive positioning. To that end, we've taken a critical look at our operations in the few states that are below our margin targets, namely California and Maryland. Last quarter, we told you that we rationalized underutilized facilities in California. And we're focusing on FloraCal distributed through a third party as our go forward strategy in the state. Thanks to these actions, we eliminated most of our fixed costs in the state, improved productivity in the remaining facilities, and now run a much leaner platform for our brands to compete. We also sold our standalone processing facility in Maryland, as it didn't provide us with a pathway to verticality in the state. While we'll forego a small amount of revenue, we were able to eliminate the fixed costs in that state, creating a net positive bottom line impact. Our focus on the core wasn't limited to these states. We also further evolved our organizational structure in every market to align with our core priorities. Our structure continues to get leaner and more agile so that we can quickly pivot alongside market conditions and react even faster to feedback from consumers. As just one example, our commercial team in Illinois is now leaner than it was before adult use began in 2019, and yet the team is generating 10x the revenue and has maintained our number one market share in the state. This is only possible because we're constantly evaluating and adapting our org design processes and technology to drive efficiencies. Every change we make to our footprint is designed to meet the moment while also planning for the future of our organization and industry. Our core markets are driving improved profitability and cash flow. This positions us well to fund the growth opportunities existing within our footprint from anticipated adult use catalysts, as well as the expansion opportunities that lay ahead. Number two, we held our leadership position in branded wholesale products. Long term, we believe this industry will look a lot like beer, wine, alcohol, and other CPG categories that rely on brand building to capture and retain loyal customers. Our specialty is developing brands that are beloved by consumers across markets, so we are focused on doubling down on our core brands and products. According to BDSA, we have the number one portfolios of both branded flour and branded concentrates, the number three portfolio of branded vapes, and number four portfolio of branded edibles. In our core markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position. We continue flexing our brand building muscles to launch smart innovations that premiumize the portfolio and extend our core brands and products all while reducing our unit costs. Specifically, we're looking at proven segments like pre-rolls where we already have the expertise and capabilities, but we've historically under indexed. A good example of these strategies coming together is the launch of Florical infused pre-rolls and high supply infused shake in Illinois. The market response to these new form factors has been phenomenal. Plus, we're taking what was traditionally the low-value byproduct of our high-end flour and turning it into new revenue streams. As another example, last quarter we talked about launching trochees in Pennsylvania to address a core form gap in that market. The demand for this product has already exceeded our initial expectations, and we're building on the momentum by introducing sweet trochees in Pennsylvania this fall. We have a proven track record of building our brands to meet market conditions, and we're leaning into that expertise to get even more out of our core brands and products. When we look at our streamlined footprint, our brands are still holding strong number one share positions in three of our markets, and we have targeted strategies in place to continue to grow our share across our footprint, especially as we look at the anticipated adult use conversions in Pennsylvania, Ohio, and Florida. Number three, we're driving efficiencies from highly productive retail in the most strategic states. Our investment in retail continues to pay off, We saw last quarter's boost in productivity continue in our core markets and stores in Q2, even in the face of new competition. We're particularly proud of our continued success in Illinois, where we were able to out-compete and essentially hold our total market share, even with 15 new competitive doors opening in the quarter. On average, across our core markets, we're indexing at 1.4 times our fair share. This strength points to our phenomenal customer experience bolstered by our proprietary e-commerce platform and loyalty program, which saw over 35% growth during the quarter. In fact, we find that when shoppers engage with these tools, they spend 26% more than the average shopper. Our customers also appreciate that we're handling their transactions more efficiently than ever. During the quarter, we handled 11% more customers and units sold at Sunnyside year over year, all with a 20% leaner retail workforce. We're able to move faster by continuously finding incremental efficiencies in our employee training, customer throughput process, and proprietary inventory management software. Consumers love the retail experience at Sunnyside. What's more, between our revenue generating technologies and our proprietary internal processes, we have a blueprint that's repeatable and transferable. We will leverage this foundation as we continue to expand our retail footprint quickly and successfully where it aligns with our core priorities. In closing, our second quarter results reflect the early impact of the steps we've taken across the entire organization to improve margins and materially strengthen the company. By rationalizing and exiting margin-dilutive operations, investing wisely in innovation and brand building, and continuously improving our robust retail infrastructure, we were able to significantly improve our profitability in the quarter, with more to come in the second half. The current industry climate and capital availability will create exciting opportunities in the months ahead. And we believe a stronger, leaner Cresco Labs sets us up for continued growth from our core and to take advantage of the many capital efficient opportunities for expansion that we see on the horizon. With that, I'll turn it over to Dennis to provide more details on our Q2 performance.