Cresco Labs Inc

Good day and welcome to Cresco Labs' fourth 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 touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the call over to T.J. Cole, Senior Vice President, Corporate Development and Investor Relations for Cresco Labs. Please go ahead.

Thank you. Good morning. Welcome to Cresco Labs' fourth quarter 2023 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bachtel, Chief Financial Officer Dennis Ullis, and our recently appointed President 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 CDAR and is available on our investor relations website. These preliminary results for the fourth quarter and full year 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 annual financial statements. We plan to file our corresponding financial statements and MD&A for the quarter and year ended December 31st, 2023 on CDAR and EDGAR. 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 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 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 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' filings on CDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. Please also 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, adjusted gross margin, and adjusted SG&A, We should not have any standardized median 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 the call over to Charlie. Good morning, everyone, and thank you for joining us on the call today. We've been talking about our Year of the Core strategy since last March, where we're rationalizing and optimizing everything we do to make Cresco Labs the strongest company possible, winning within our core markets, core stores, core brands, and core products. This strategy was a decisive reset designed to focus the business, strengthen the balance sheet, and ensure preparedness for future growth. We started seeing the results of the strategy in Q3 with improving margins, profitability, and cashflow. I'm proud to share that our Q4 results capped off the year with not only strong bottom line growth, but also margin expansion, nearly doubling our adjusted EBITDA and achieving positive free cashflow for the year. We've set a new standard for ourselves and we're using these wins to fuel our business and capitalize on the many growth catalysts ahead. I can't say enough about the Cresco team. who took this focus on the core, embraced it, made it part of our DNA, and built a stronger, leaner, and more productive Cresco Labs. In Q4, our financials demonstrated accelerating momentum that'll propel us for the quarters to come. Year over year, we generated $11 million more in adjusted gross profit on less revenue, significantly improving our gross margin. Our team removed over $54 million in annualized adjusted SG&A compared to the prior year, while driving scale, increasing unit production and retail transactions, and also improving the quality of our products, customer experience, and operations. We delivered $55 million in adjusted EBITDA of $25 million year-over-year, leading to an adjusted EBITDA margin of 29%. And finally, we generated three times more operating cash flow for the full year. 2023's improved cash flow is a direct result of our year-of-the-course strategy, supported by best-in-class technology, processes, and this engaged team that enabled us to do more with less. Now I'm going to share more on how we're executing to create the strongest and most valuable Cresco Labs for the quarters and years to come. Number one, we're ensuring we have the most strategic footprint. In 2023, we took a hard look at our footprint to ensure we're making the most of each market's long-term cash flow potential. This meant rationalizing areas of margin dilution in our footprint and doubling down in our core markets. While this led to some short-term top line decline, it drove significant bottom line improvement and allows us to redeploy resources and capital to our proven markets, driving high returns on investment, increased competitiveness, and maximize adult use unlocks anticipated in these states. In 2023, we added 16 stores across Florida and Pennsylvania. competitive markets where we've been able to increase market share, widen product distribution, and improve operating leverage. Turning to 2024, all eyes are on Ohio's adult use program, where we built a rock solid foundation as one of the leading operators in the state. With our five dispensaries driving over two times their fair share of revenue and a 70,000 square foot cultivation and processing facility, we've completed the bulk of our capital investment. We continue to make intelligent upgrades to our Ohio infrastructure, leaning on the successful playbooks from our other adult use conversions. We're also closely watching Pennsylvania and Florida's adult use timelines, making investments ahead of those anticipated conversions, which VDSA expects will represent a combined $4 billion opportunity. We're very well positioned to capitalize on the three largest near-term state growth catalysts in the industry. Number two, we remain the leader in branded wholesale products. The Cresco team is constantly honing our brand building capabilities, evidenced by the sustained success of our House of Brands, where we're differentiating our products from the competition and giving the consumers what they really want. Per BDSA, we're an industry leader across every product category with top four portfolio positions in branded flour, concentrates, vapes, and edibles. And once again, in the markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position. We continue to deliver best in class brand performance because we know what levers to pull. Consumers want high quality and potency, but they're also seeking unique genetics and terpene profiles to fit specific uses. In 2023, we launched hundreds of new strains across our core markets. By 2025, through our in-house breeding program, we plan for half of the products on our wholesale menus to be comprised of exclusive Cresco genetics, further distinguishing our offerings. We're also putting in the work to continuously enhance our cultivation and automation capabilities, which in the second half of the year resulted in 2.2 million more grams of flour produced on 9% less canopy, a 10% increase in grams per square foot. Even more impressive, we did this without sacrificing quality as we also saw our average potency increase over the same time period. These capabilities are on full display when you look at our performance in Florida. Since last year, we've more than doubled our flour sales. In the second half of 2023, we increased yields by more than 16% and increased total units packed out by an astonishing 67%. These efficiencies were all achieved while keeping headcount and COGS flat, leading to improved gross margin and EBITDA margin expansion. We continue to push for higher output without sacrificing quality as we work to meet the ever-growing demand and take full advantage of our retail footprint in the state. Our house of brands achieved its leadership status through superior product quality relentless approach to continuously improving production capabilities, and sophisticated market planning, which will allow us to continue winning with independence as new stores open in our existing footprint and as we expand into new markets. And number three, we built a highly productive retail portfolio in the most strategic states. I'm proud to say that we continue to grow retail revenue and fair share, all while reducing costs and generating greater profit. Year over year, we grew retail sales 3% to $119 million in Q4 and saw retail fair share increase in every market. We keep expanding our lead by getting existing customers in our doors more frequently and using data-driven price, promotion, and assortment strategies to drive significantly higher basket sizes. During the same period, we decreased total retail SG&A per quarter by almost 11%, while seeing an 18% increase in the number of transactions across our network. that is an incredible per store efficiency improvement thanks in part to in-house technology like our new inventory management processes as well as a shift to more data-driven staffing models lastly our proprietary e-commerce and loyalty platforms sunnyside.shop have brought us closer to our customers than ever before with over 275 000 sunnyside reward members and nearly 80 percent of all transactions being placed online our online adoption allows us to target customers tailor experiences, and customize offerings that build baskets while delighting shoppers. A retail footprint consistently outperforms fair share with a highly efficient cost structure that is getting better every quarter. It'll continue to be a core growth driver as we open new doors and seize on the adult use conversion opportunities in front of us. In closing, 2023 was a critical year for the entire industry, and we used the time wisely to build up our core through disciplined capital allocation, exceptional cultivation and manufacturing capabilities, and a highly efficient retail infrastructure. I'm proud to see our strategy bear fruit and establish a new baseline for Cresco Labs. You can expect to see more of the same from us in 2024, getting more from our core, fortifying our strengths, investing in key capabilities and growth catalysts, and prioritizing bottom line growth, profitability, and cash flow. With that, I'll turn it over to Dennis to provide more details on our Q4 performance.