Cresco Labs Inc

Good day and welcome to Cresco Labs third 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, then one on your touch tone 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 Kulik, Senior Vice President of Investor Relations for Cresco Labs. Please go ahead.

Thank you. Good morning, and welcome to Cresco Labs' third 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 Commercial Officer Greg Butler, who will be available for the Q&A. Prior to this call, we issued our third quarter earnings press release, which has been filed in CDAR and is available on our Investor Relations websites. These preliminary results for the third quarter of 2023 are provided prior to completion of all internal and external reviews and therefore are subject to adjustment until the filing of the company's quarterly financial statement. We plan to file our corresponding financial statements and MD&A for the quarter ended September 30th, 2023 on Cedar and Edgar later today. 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 are not representative of historical facts or information. Such forward-looking statements represent the company's belief 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 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 Lab's filings on CDAR, and with the Securities and Exchange Commission. Cresto 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, Cresto 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 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. I'm pleased to share our Q3 results, which reflect our focus and execution against the things that will make Cresco Labs the strongest company possible, winning within our core markets and with our core stores, core brands, and core products. As mentioned at the start of the year, by making 2023 the year of the core, we would create strength and value via growth of the bottom line. The resulting margin and profitability gains enable us to succeed in the current industry dynamics, prepare us for the growth catalyst existing within our current state footprint, and allow us to capitalize on future opportunities as they continue to avail themselves. The results discussed today are the product of our incredible Cresco Labs team. I want to extend a very large thank you to the team for their thoughtful and disciplined execution of our year of the core. To better illustrate the impact of this year's strategic plan, I'll be comparing several of this quarter's financial metrics to our Q1 results. On roughly the same revenue base, our Q3 results reflect the value and leverage created by prioritizing our core. Kicking us off, in Q3 we generated $191 million of revenue. While off slightly from Q1, we saw retail growth and strong performance in our core markets offset the purposeful attrition from strategically divested and rationalized assets here to date. We generated adjusted gross profit of $96 million and adjusted gross margin of 51%, an almost 500 basis points increase from Q1. With adjusted SG&A expenses of $57 million in Q3, We reduced this number $10 million from Q1 by unlocking efficiencies and leverage throughout the business. Adjusted EBITDA in Q3 came in at $49 million and 26% of revenue. This is $20 million and over 1,000 basis points higher than our adjusted EBITDA from Q1. And finally, our operating cash flow of $41 million in the quarter is up $37 million from Q1, Again, all of these metrics on roughly the same revenue base. To summarize, our disciplined year of the core strategic growth plan is resulting in outsized gains to our bottom line. We're leaner and more productive. By growing revenue from our core states to effectively balance strategic rationalizations, we've held revenue roughly flat while eliminating over $40 million in annualized operating costs. The resulting improved cash flows and operating leverage prepare us to effectively compete today, execute the upcoming growth catalysts existing within our underlying business, and be opportunistic as new market opportunities present themselves going forward. Again, credit to our incredible team as we continue to lead this emerging industry forward while building the strongest and most valuable Cresco Labs possible. Now I'm going to share an update on how we're executing on the three pillars of our three-year strategic plan, which again includes ensuring we have the most strategic footprint, broadening our branded product leadership, and driving retail productivity across a larger base. So number one, we're ensuring that we have the most strategic geographic footprint. Throughout this year, we've taken the tough but necessary steps to impartially evaluate each of our state's long-term cash flow potential. Again, we're doubling down on our strongest core markets and implementing targeted strategies to optimize or rationalize any areas of margin dilution in our footprint. The core of our footprint is comprised of states where we have material share and generate significant cash flow, many with significant adult use on locks ahead, namely Ohio, Florida, and Pennsylvania. We continue to drive margin improvement in these states by investing in our processes, procedures, facilities, and technologies. These focused efforts have led around a 200 basis point improvement in gross margin from our core compared to Q1 of 2023, even with the ongoing price compression in many of these markets. Of course, margin improvements weren't limited to our core states. Over the last couple of quarters, we've scaled back and restructured our California operations, sold our subscale Maryland processing operation, and subsequent to the quarter's end, we divested our remaining Arizona assets for approximately $7 million in cash. We're seeing the benefits of the targeted actions we're taking, and we'll continue to refine and improve so that we're positioned to compete in today's challenging environment while also planning for the future growth of our organization and industry. Number two, we held our leadership position in branded wholesale products. As with any consumer products category, long-term value is created with brands. and we continue to build our industry-leading brand portfolio. When it comes to brand building, we excel at introducing smart innovations, creating consistent quality products, and meeting the consumers where they are, demonstrated by the sustained strength of our house of brands. We continue to lean into our core brands and products by making smart, cost-effective investments that drive long-term share growth and profitability. For BDSA, we have the number one portfolio of both branded flour and branded concentrates in the industry, as well as the number four portfolio of branded vapes and branded edibles. And once again, in the markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position. I'd like to spotlight the work of our teams in Michigan and Florida, who drove meaningful share gains into ultra competitive markets thanks to their persistent focus on improving quality to further bolster our portfolio's reputation in each state. Time and again, we've proven our ability to compete without first mover advantage in highly competitive markets. Combining this with our many number one market share positions and brand building expertise perfectly positions us to be a long-term winner in this developing cannabis CPG category. And number three, we're building a highly productive retail portfolio in the most strategic states. Our retail platform continues to grow thanks to our efficient internal processes, proprietary technology, and unmatched customer experience, with 70 total stores generating almost $120 million in revenue this quarter. We've proven our ability to grow and defend retail market share, and our platform is only getting stronger as we continue driving margin improvements. We're particularly proud of our continued success in Illinois, where we were able to outcompete and essentially hold our total market share, even with 19 new competitive doors opening in the quarter, resulting in an index to fair share of nearly 1.9 times, up from 1.7 in Q2. We saw similar results in Ohio, where our fair share reached almost two times the average. In Pennsylvania, we've opened three new doors this year, growing our absolute retail share by 140 basis points since Q1 and maintaining our above-average fair share. In Florida, we opened 12 new doors this year, bringing our total to 33 stores that continue to drive share gains in the state. We've established ourselves as a highly productive retailer with stores that consistently outperform fair share with continuously improving cost structures. The investments we've made in technology and processes are driving down costs, and our targeted approach to marketing means every dollar spent is generating measurable ROI. Plus, our retail strategy is a competitive advantage that we can efficiently transfer and replicate. It will continue to pay dividends as regulations change, and we can respond quickly by adding new stores that follow a winning, well-tested blueprint. Our third quarter results are a direct reflection of the actions we've taken in the first half of the year to invest wisely in our core through smart innovation, brand building, productive retail infrastructure, and to rationalize and exit margin-dilutive operations. The industry is evolving and consolidating, creating openings for companies with strong cash flow generation. 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 Q3 performance.