Cresco Labs Inc

Good day and welcome to the Crest Crow Labs first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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 two. Star 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 of Cresco Labs. T.J., please go ahead.

Thank you. Good morning and welcome to Cresco Labs' first quarter 2024 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder, Charles Bachtel, Chief Financial Officer, Dennis Hollis, and President Greg Butler, who will be available for 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 2024 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 statements. We plan to file our corresponding financial statements in MD&A for the quarter ended March 31st, 2024 on CDAR and EDGAR later this week. Before we begin, I want to remind you that statements made on today's call may contain forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described in our earnings press release and in the MD&A filed with the securities regulators. This call also contains non-GAAP measures also outlined in our earnings press release and in the MD&A filed with the securities regulators. Please also note that all financial information on today's call is presented in U.S. dollars, and all interim financial information is unaudited.

With that, I'll turn the call over to Charlie. Good morning everyone, and thank you for joining us on the call today. It is a historic time for the industry with the anticipated reclassification of cannabis to a Schedule 3 substance. We see this as the first federal reform domino to fall that will likely have substantial impacts on cannabis reform in the future. It'll open the door to more research, impact legislative opinion, and is a significant step toward eliminating the crushing tax penalties imposed on the cannabis industry. We're excited about what the potential shift could mean for the cannabis stakeholders and Cresco shareholders, especially in combination with all of the hard work by the team to improve profitability over the last year. Our Q1 results demonstrate our business's growing momentum and continued focus on our core and profitability. Year over year, we generated a 580 basis point improvement in gross profit margin, proving that our efforts to restructure and prioritize investments across our core markets continue to drive outsized returns. Our team removed approximately 65 million dollars in annualized adjusted SG&A compared to the prior year, while growing more cannabis, selling more units, handling more retail transactions, launching fresh innovations, and building new technologies. We delivered 53 million dollars in adjusted EBITDA, up 24 million dollars year-over-year, and net income before taxes of 16 million. And finally, we generated 36 million dollars in operating cash flow, 33 million more than a year ago, further strengthening our balance sheet position and giving us greater firepower to redeploy towards strategic growth opportunities. Cresco Labs is stronger, leaner, and more productive than ever, and we're using this energy to fuel our business and take full advantage of the major state and federal catalysts ahead of us. Now I'm going to share more on how we're executing to create the strongest and most valuable Cresco Labs for the years to come. Number one, we're ensuring we have the most strategic footprint. In 2024, we're throwing our full weight behind the imminent and potential adult use catalysts coming within our existing footprint. This means strategically building on our leading positions in Ohio, Pennsylvania, and Florida. In our newest term catalyst, Ohio, our teams are ready for the adult use rollout, which as of Monday's exciting news, is set to formally kick off in June. We have been making strategic improvements to our dispensaries to ensure we can handle the increased traffic with the same level of service that has made our dispensaries some of the most productive in the state. At the same time, we continue to make cost-effective upgrades to our production facility to maximize yields and product throughput. Over the past year in Florida, we've made strategic investments towards efficiency gains at our Indian Town facility, upgrades that are paying dividends and having a ripple effect across the entire value chain. In Q1, nearly every KPI is up, including yields, potency, customer growth, and ticket growth. With an over 100% increase in quarterly revenue and nearly doubling our market share versus a year ago, we're winning in all areas through best-in-class vertical integration. Our retail operating model was on full display for 420 with our Florida stores managing record-breaking traffic and patient throughput, designed to scale up as we shift into adult use. In Pennsylvania, we're well positioned to maximize the potential adult use opportunity with the number one branded market share and leading retail coverage. In Q1, we launched our high-dose trochees format, further establishing our leading portfolio of brands. We're also making strategic investments to expand both our facility network and store footprint to support the anticipated market conversion. Ohio, Florida, and Pennsylvania represent the three largest state growth catalysts in the industry. We're taking meaningful steps and making smart investments to ensure we capture outsized share and generate significant operating leverage and free cash flow in these markets while also closely evaluating recently launched adult use markets like New Jersey and Maryland. Thanks to our focus on operating cash flow, we can strategically take on new adult use markets at the right time and invest in accretive opportunities and incremental growth catalysts in the coming years. Number two, we remain the leader in branded wholesale products. Our House of Brands continues to deliver on its promise of high quality and high value products for every consumer occasion. We continue to hold the number one overall share position in Illinois, Pennsylvania, and Massachusetts, and per BDSA, we have top portfolio positions nationally in branded flour, concentrates, vapes, and edibles. We're constantly evaluating our portfolio to ensure we're delivering best-in-class brand performance. One example is our revamped approach to the pre-roll category. In Illinois, we've already driven an 800 basis point improvement in our pre-roll market share year over year. We're building capabilities to address any gaps in our offerings and using automation and leading capabilities to deliver high-quality, profitable products. This mindset extends beyond our product portfolio, with the entire Cresco team sharing in the relentless pursuit of improvement across every step of the value chain. Our brand strength also facilitates winning relationships with non-MSO or independent dispensaries, which will continue leaning into this year. Across the three markets where we hold number one share positions, we saw an average year-over-year revenue growth of approximately 25% from independents in Q1. This is a clear sign that when dispensaries are prioritizing product velocity and gross profit impact, Cresco Labs products deliver unparalleled value. And number three, we're building a highly productive retail portfolio in the most strategic states. We reached some exciting retail milestones in Q1. Notably, we've increased our retail fair share year-over-year across every market. In Illinois and Ohio, our stores have reached two times the state's average store's monthly sales. In Florida, according to state-provided data, we've doubled our market share position year-over-year. These are impressive speeds across highly competitive and MSO concentrated markets, that showcase our ability to leverage verticality, optimize our assortment to reflect consumer trends, and ultimately drive more revenue into higher profitable goods. In Q1, we increased trip frequency by 3% and grams sold per ticket by 11% compared to the prior year. For our most valuable customers, we increased trip frequency by over 10% during that same period. This growth is possible because of the many things that we do differently in retail that make Sunnyside uniquely Sunnyside. Our investment in tech capabilities is allowing our team to accomplish incredible things. We had a remarkable 420 this year, where our teams managed 19,000 online orders, a single-day record of 25 orders per minute. On a day when consumers buy a lot of cannabis, our technology enabled them to buy even more. Our e-commerce platform, sunnyside.shop, drives consumer behavior, leading them to build baskets that were $20 higher on average when compared to both in-store shopping and other online ordering tools. This considerable bump isn't unique to 420 our capabilities and data driven understanding of our consumers creates a clear differentiated advantage. Our retail footprint is built on a base of technologies and repeatable operating procedures that we've continuously advanced over the last 3 years. It consistently outperforms fair share with a highly efficient cost structure. It gets better every quarter. In closing, last year was about building a rock-solid foundation, and this year is about leveraging that strength to take full advantage of the many transformational catalysts and growth on the horizon. I'm so proud of how the CRESCO team has taken all of the learnings from the Year of the Core, internalized them as part of our DNA, and continues to work towards generating significant free cash flow and profitability. With that, I'll turn it over to Dennis to provide more details on our Q1 performance.

Thank you, Charlie. Good morning, everyone. Our continued focus on efficient capital allocation and targeted cost savings initiatives led to significant improvements that have carried over into 2024. These efforts culminated in another strong quarter of improved profitability, cash generation, and a strengthening of our balance sheet, all in the face of over 11% price compression across our footprint. In the quarter, we generated $184 million in revenue, essentially flat year over year, adjusted for purposeful reductions. Our team has done a fantastic job of finding and removing costs at every stage of our cultivation, production, and distribution supply chain. This has led to an increase in adjusted gross profit, bringing our operating gross margin to 51.5%, a 580 basis point increase from Q1 2023. As planned, steps we took last year have continued to bear fruit. Year-over-year adjusted SG&A declined by $16.1 million to $51.7 million. That's 28% of revenue improved from 35% in Q1 of 2023. This is even more impressive when you account for the seven dispensaries we added over the same period. We believe we have room for additional operating leverage as well, And we're starting to realize those benefits as we capitalize on adult use conversions. Our Q1 adjusted EBITDA was $53 million, or 29% of revenue, up 82% year over year. Going forward, operating leverage will be the main driver of adjusted EBITDA margin improvement. Our cost structure can support significantly higher revenues in states like Ohio, Pennsylvania and Florida, and we are expecting much of that gross profit growth to drop to the bottom line. For Q1, we generated $36 million in operating cash flow and $33 million of positive free cash flow, over 10x higher than the prior year. Our unrelenting focus on cash generation is not only reflected in our cash flow statement, but also our balance sheet, where in Q1, we recognized a sequential reduction in inventory of $9 million while reducing our AP and accrued expenses by $17 million. We've shortened our cash conversion cycle time by 8% since last year through improved accounts receivable collections and inventory management. We spent $3.8 million in CapEx during Q1 focused on cultivation improvements in Ohio and improvements to our manufacturing in Florida and Massachusetts. We expect to spend 50 to 70 million dollars for the full year inclusive of our upgrades to our Ohio cultivation and production facility as well as expansion in Pennsylvania and Florida in advance of adult use. Looking ahead through 2024, we are maintaining the expectations we set on our Q4 call where we expect Q2 and Q3 revenue to be relatively flat compared to Q1. We are taking a measured approach to earlier than expected start date for adult use in Ohio and expect growth to be stronger in the fourth quarter as the program gets off the ground. We expect the adult use conversions in Ohio, Florida, and Pennsylvania to provide meaningful year-over-year growth in both 2025 and 2026. We are targeting to keep gross margins around 50% and believe that is achievable throughout 2024. As we've stated previously, we will experience fluctuations from quarter to quarter due to continued price pressures, revenue composition by state, and portfolio mix. For the full year, operating cash flow will be significantly higher than last year. We plan to make our interest payments in Q2 and Q4, which will lower cash flow in those quarters. Regarding our tax position, we are in the process of filing protective claims for 2020 through 2022 to allow us to file amended returns at a later date. We are exploring options to amend our tax position for the 2023 tax year and will provide more color on our Q2 earnings call in advance of our extended filing date. Should we amend our position on 280E, it would have an approximate $70 million impact on our cash flow for the full year of 2024. 2024 is off to a great start. We are caring for the efficiency gains we made last year, converting that improved cash structure into free cash flow that only has room to grow. With that, I'll pass it back to Charlie.

We're optimistic about the momentum behind cannabis reform and the development of a responsible, respectable, and robust industry. Eliminating 280E and the heavy tax burden weighing on all cannabis companies will unlock access to capital and create new opportunities for innovation and expansion. In the interim, we continue to run the business as efficiently as possible while accelerating our core by investing in the largest, highest margin markets, maximizing upcoming adult use catalysts, driving operating efficiencies, continuing to capitalize on consumers' love for our brands, expanding retail and investing in innovation to provide the consumer with the best cannabis experience possible, and generating more free cash flow to strengthen our balance sheet. With that, I'll open the call for questions.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please make sure your device is unmuted locally. And our first question comes from Aaron Gray from Alliance Global Partners.

Hi, good morning, and thank you for the questions here. So first question for me, you know, I want to talk on Ohio. You know, got some encouraging news earlier this week with the start. You mentioned some things in your prepared remarks, how you guys are ready to go. Just wanted some more specifics there. You spoke to retail and getting set there. I imagine that's... you know, more POS is out the door, but could you speak to it from an inventory perspective? How well positioned are you guys and do you believe the industry is to make sure the stores are well inventoried, just given the short timeframe from when we knew adult use would be starting, just being confirmed this week for next month? And then also, just in terms of some of the CapEx investments for Ohio, how should we think about the timing and expansion from when that could come online to help with the adult use market? Thanks.

Good morning, Aaron. So yeah, really excited about the update coming out of Ohio earlier this week. It's one of those things that's great. It's great news to see any adult use transition move ahead of schedule. But to your point and to your question, that comes with its own potential challenges too. So we've been working on AU preparedness like everybody in the market. We have been investing in the stores to make sure that they can handle the increased volume that adult use is going to bring. But moving the date up of expected launch a few months will inevitably come with potential for supply shortages. I think when the law was passed through the ballot initiative last November, At that point in Q4, very beginning of Q1, people are developing their CapEx and supply plans for that launch date. So it's the good news of moving up the launch date, but anticipating that there could be some supply shortages in the state.

And then, Aaron, this is Dennis. So a couple things from an inventory perspective. We will see a slight increase in our inventory balance. We've done a great job of managing our overall balance the last couple quarters. I do expect that to increase slightly in the Q2 and beyond as we start to build up some inventory in advance of AU in Ohio. As far as the CapEx goes at the Ohio site, most of that investment has been made already. There's a little bit of investment CapEx required for some of the stores to expand the stores to allow for AU volume that's going to go through those stores. But the bulk of the inventory or the CapEx investment has already been made.

Okay, great. I appreciate that color there. And then just, again, if I could, on your prepared remarks in terms of the operating cash flow, specifically tax, I appreciate some of the color you mentioned as you guys, you know, evaluate your position. But could you just, you know, clarify for the quarter, you mentioned interest payments in 2Q and 4Q. So as of today, did you guys have any type of tax payable, you know, buildup? Or are you guys still awaiting until you get, you know, further clarity, you know, from your lawyers in terms of how you're going to, you know, evaluate, you know, 280E treatment now before you, you know, decide where you have to make the payments? payments for this year, thanks.

Yeah, our tax position hasn't changed. We did file an extended return, so we will pay the planning right now to pay the taxes in late Q3. That would, for 2023, that's something that we're currently evaluating, looking at our tax position and the appropriateness of 280E for 2023. So we'll come back to you in Q2 with those answers. In terms of payments of taxes in the quarter, Really, nothing significant in the quarter, some catch-up for some NCI payments. We will make a – we did make a Q2 payment for some – to close out our 2022 federal taxes.

Okay, great. That's all for Colin. I'll go ahead and jump back in the queue.

Thanks, Aaron.

And our next question comes from Frederico Gomes from ATB Capital Markets.

Hi, good morning. Thank you for taking my questions. Congrats on the quarter. First question is on Florida. Obviously, you have been performing really well there, strong gains in volume share. Can you speak to that in terms of how much more can you extract from your current footprint and maybe provide a bit more color on your extension plans in the state ahead of the vote coming in November? How much do you expect to invest there? before you have a result from the election or airplanes to wait for that or going to be investing ahead of that. So any call is there. Thank you.

Sure. Good morning, Fred. So yeah, we're cautiously optimistic about Florida. We're part of the initiative down there to help ensure that that ballot initiative is successful. The great thing for us when we look at Florida is it's an execution game, right? With that forced vertical integration structure that you have down there, it really rewards organizations that execute because you have to be able to grow it. You have to be able to manufacture products. You have to be able to open retail stores. You have to be able to service consumers. You can't rely on third parties at all down there. So with us being able to prove that we can execute operationally down in Florida in the medical structure, it's really encouraging for us to move forward with a more incremental growth and expansion strategy that will be appropriate for a medical program ongoing or adult use should that be successful come November. So that's sort of how the outline of our CAPEX and growth strategy is in Florida is we've got an incremental opportunity to take advantage of the execution that we've shown we can we can follow through with in the medical-only market, and that will also benefit us as adult use comes online post-November, which will, of course, launch a phase two of our expansion plan in the event that that's successful. But yeah, we really like the way that the team is performing down there, and congratulations to them for a great last few quarters.

Great. Thank you. And then my second question is just, you mentioned, you know, potentially entering new states, Maryland, New Jersey, as two of those states that you might be looking at. So how are you seeing the M&A pipeline at this point, you know, in terms of valuations and opportunities to enter those markets and, you know, how soon something like that could happen?

Sure. So, you know, fortunately we've got, these phenomenal growth catalysts in the footprint already. So priority one is making sure that we're prepared. The teams are prepared. We're prepared as an organization to execute on those opportunities that are already within the footprint. It gives us an opportunity to be very strategic and opportunistic when we're evaluating, you know, anything that comes, whether it's New Jersey, Maryland, or, or other, good states that have good structures and provide, you know, stable economics. So we're going to be selective. We're going to make sure that we, we, we're smart in the way that we approach any new state because we've got phenomenal opportunity in the footprint already. Anything else that we.

No, I think, you know, back to your original question too, is like, as we focus investment, putting investment in states like Florida, where independent on whether it stays medical or adult use, Florida will continue to be a growth story for us. And so before even entering a new state, continuing to capitalize on the growth that we can do in states like Florida, we will see in Ohio and setting ourselves up for Pennsylvania is priority one.

Perfect. Thank you very much.

And our next question comes from Luke Hanen from Canaccord January.

Thanks. Good morning, everyone. I think I heard you correctly there in mentioning that price compression was roughly 11% across your footprint during the quarter. Can you share, was it more pronounced in certain states versus others during the quarter? And then what are you seeing so far quarter to date? Just not necessarily from a price compression perspective, but also from a consumer behavior perspective, specifically how responsive consumers are to price being a factor for driving purchase or perhaps other tactics as well.

Sure, Greg's going to answer that.

Good morning. You're absolutely correct. As we see pricing, if you look at two years ago, we saw pricing declines continue down 20%. Over the last year, pricing declines have been down about 11%. That's been a much slowing slope. As we see Q1 across most of our markets, there's signs of stabilization. There is a couple of markets where you're seeing some slight continuation of decline. We have other markets like Florida we're actually seeing some improvement in the trend. So as we go into Q1 and Q2, I think we'll see that trend continue. Ohio will likely be one that's going to be interesting to watch. Right now we're seeing some positive pricing, as you always see before in adult use conversion. You also see prices move up in adult use conversion, but then settle back down as the market continues to stabilize as the supply comes online. So I think overall what we're seeing in our market is Pricing is stabilizing. We're not on that minus declining trend, but watch Ohio. I think we'll see it go up and then come back down.

Got it. That makes sense. And then, Charlie, maybe this one's for you. You've seen multiple markets now that have gone from medical to recreational markets over the last few years, both within your footprint and then beyond it. So when it comes to both Ohio in the near term and then perhaps Florida and Pennsylvania longer term, What in terms of your approach, your strategy to these conversions has changed, I guess, after watching those the past conversions take place beyond just, of course, investing in capacity or expanding your product assortment?

Yeah, no, it's a great question because we have, you know, we've we've we've been through a few of them, we've seen even more over the last few years, and they do follow similar similar paths, and you want to learn from your experiences. So, you know, being ready for it operationally, that's one of the things I'm excited about as we look at what's going on in Ohio. Our team's ability to prepare the Ohio team for what they're about to see is just different than it has been in other markets that we've been a part of, and it was a matter of first impression for us. So I'm excited for the team to be a part of an AU launch, an AU conversion, and I'm really excited to see how they handle it because they're going to be much better prepared than we have been in prior examples. But that's why I also cautioned the excitement about the accelerated launch timeline in Ohio. Internally, we kind of referred to it as the excitement about when you're when you're traveling and your flight arrives 45 minutes early, but then you sit on the tarmac for 30 minutes because the gate isn't ready. And I would expect that to be a bit of the case in Ohio. It's going to be supply constraint. There's going to be some learning curves for other operators that haven't been part of conversions before. So you build that into your operational plans as well. So I think, look, we're just excited about being ready for these conversions and these catalysts that are in our footprint, and we're more prepared than ever to take the most advantage of them as possible. I think Greg got some additional info.

I think the only thing we add as we look at forecasts, everything we see in a conversion is that you will see some massive unit growth in volume, and then it stabilizes. You also see pricing, as we talked just a couple of minutes ago, about pricing improvements, and then usually walks it back. So making sure that your operating leverage stays efficient during this growth period because we always see a stabilization post a couple months after. And then the opportunity for us to get in conversions create tremendous excitement for shoppers to get into stores and really getting them signed up on our loyalty platforms and our platforms to build that sticky relationship is the other priority for us.

Great. That makes sense. Last one for me, and then I'll pass it along. Dennis, I think I heard you correctly in that you said you had filed protected claims for the 2020 to 2022 returns, and then you quantified the potential tailwind for operating cash flow in the year from should you change your stance or there should be a favorable ruling rather when it comes to your 2023 return. But can you quantify what would be the cash flow tailwind for the 2020 to 2022 returns?

Yeah, thanks for the question. We will be filing protected claims for 2022. We're building up the position paper to support that position. As far as the impact going back a couple years, we've said it's roughly $70 million a year, so the potential opportunity is roughly $210 million if we were to go back and look at years 2020 through 2022. Great. Thank you very much.

Our next question comes from Pablo Zuanick from Zuanick and Associations.

Thank you. Good morning, everyone. Charlie, I was going to ask you a high also, but first maybe as chairman of the National Cannabis Roundtable, what's your view on the fact that the proposed draft ruling is not yet on the OMB website? Is it because it's going through a different process? because it's like 93 or 94 rulings that are still under review from various agencies. Is it a different process or is it that the DOJ has not sent it to the OMB yet? And that's why it's not on the dashboard. Thanks.

Sure. Good morning, Pablo. What I would say here as it relates to rescheduling is I think all of us would be best served by being – patient until the notice of a proposed rulemaking is actually published. And, you know, I think that's going to happen in the near future. And I think it'll answer a lot of questions on timeline, on next steps, and should address any of the kind of speculation or concern or discussions that we're having about process and procedure to date. So I would just say let's let's wait until the notice of proposed rulemaking is issued, and I think that'll answer a lot of questions for us.

Right, thank you. And then just to follow up on Ohio, I hear you on the nice surprise that things are happening earlier than expected, but I had heard or I thought that Ohio was very particular in the sense that when you were given a license for cultivation, you were supposed to fully bill whatever license you were given for it. So from other people, I had heard that the state was actually more prepared in terms of capacity ahead of rec. But I guess that was the wrong information. But again, I thought the way the plan worked was that people were supposed to build whatever they were given for it. So if you can give some thoughts on that. And then related to that, If you can comment in terms of your own capacity expansion plans or addition there, are we talking about doubling, tripling your capacity to serve the market if you were not ready for it? And the last one, and I'm sorry, it's so many. Do we have line of sight in terms of how many stores the state will have by the end of 2025? I've heard from some people 350 stores. Any thoughts on that? Thank you.

Sure. And just to clarify, I don't think anybody is necessarily unprepared to meet the obligations to move forward that would have been set forth by the state. Again, there's been a fully functioning and fairly mature medical program in place for a while. It's just look the any expansion upon that above and beyond it. This law was only passed in November. So the ability for anybody to to build and I think it's fair to say that in November of 2023, not many cannabis companies are building on spec. that a law would change. So I think the ability to service the significant increase in expected volume in the state of Ohio, just realistically, the capex and the expansion plans needed to go from medical to adult use and the doubling, tripling, whatever it may be, it's going to take more time than nine to 10 months. But what was the next part of that question? Sorry, Pablo.

Yeah, the last one, you want to find your own capacity, you know, are you doubling, tripling, quadrupling, just to give you a sense. And then last one, if I may again, do we have an idea of how many stores the state is going to license? I'm hearing 350, but I don't think that's right. Thanks, in total.

Sure. So as it relates to our production, we've been doing incremental CapEx investments there to get more juice from the squeeze. I would say, again, taking a phased approach to capital allocation to that market. larger potential expansion plans. And again, this is similar to our understanding of the market as a whole. Really wanted to see how the AU launch process and the approval process at the state level proceeded. Again, we're all very happy that it looks like a good guy all around, where it moved forward faster than expectations. but there was quite a bit of risk when that ballot initiative was actually approved in the November election cycle. There was opposition in the legislature and there were expected significant opposition and pushback to the law. So again, I think that that is going to impact the further expansion plans for everybody. And then as far as the total number of dispensaries that could be expected by the end of 25, We think the dispensary amount doubled year over year to where we're at now compared to where we were at a year ago. I know there's additional opportunities for licenses to become operational, but I don't know the total number by the end of 2025. It would be pure speculation at this point.

Thank you. Thank you.

Our next question comes from Scott Fortune from Roth MKM.

Hey, good morning. This is Nick on for Scott. Congrats on the quarter here. First one for me, just on the product mix, you have a leading portfolio in concentrates and you're near the top in several other categories. Just curious what you've seen from the consumer in terms of preference as these categories evolve. Has there been any discernible shifts in category demand and just how you think product mix will evolve over the course of the year here? Thank you.

Greg will take that.

Hey, Scott. We're very proud of where we're sitting with our portfolio. As you mentioned, our brands tend to be at the top of every state we operate in. I think in trends, in our portfolio, what we're seeing, and this is pretty consistent with what we're seeing across categories, is you are continuing to see a bifurcation between value brands and premium, higher-priced brands. If you look in our business, iSupply continues to be a growth driver for us, which we're pleased at. But then we're also seeing growth at the higher level, brands that have something unique like Florical or Khalifa Kush, which we have a partnership with, in states that are continuing to drive and earn a significant price premium. So I think one thing we're seeing is that the consumer is smart. They will seek out value for the right product, but they are willing to pay a premium for products they think are differentiated and worth the price, which is encouraging for us as a typical consumer good industry. Regarding high-level shifts between categories, between flour and concentrates, edibles and vapes, not a ton of movement we're seeing at the macro level. Within our portfolio, as we talked about earlier in our remarks, pre-rolls for us, we've gotten back in the pre-roll segment. We're very pleased with how we're continuing to perform in that segment. We think there's much more room for us to grow in the segment, both in the value and the premium. So overall, happy with where we are, but I think from a big, big macro shift perspective, not much we expect to change as we look out three to four quarters.

Great. I appreciate that, Tyler. And then second one for me, just on the wholesale side, you've been a leader there. The industry has been talking about partnerships with social equity and maybe other license holders. Just curious how you view that model and the potential economics of these partnerships and just your sense on how you plan to drive wholesale growth with these new states and dispensaries coming online here. Thank you.

Yeah, why don't I continue with this and then Charlie will add to it as we go. As we look to new states, obviously some of these social equity licenses and dispensaries and the independent dispensaries are very important, very important for the industry. because they'll help drive growth in communities that are underserved today, where the current legacy operators sit with their stores. But they also provide competitive opportunities where they're not a vertical channel. So for us, we look at that as a huge opportunity. We know we have some of the best products with some of the highest velocities. And so getting into those shelves and letting the best brand win is an opportunity that we think we're best positioned for at Cresco. As we think of brands and partnerships, we do have a number of brands that we partner with through licensing agreements. How we think about that is state by state, but it also is part of a broader equation, which is, are we creating the best possible product for the consumer? And so if we can do that with our own brands, we certainly will. And if there's partners out there that we think offers something that's distinctive to our portfolio, is margin accretive to our portfolio, and delights consumer, it's something we'll certainly be open to do and to continue to expand because we think that there's ample room for us to continue to grow different products and forms that are really focused on meeting consumer needs.

Yeah, only thing I would add is just talking about partnership at the broadest level, not just at the brand level. I do think whether it's social equity licensees or any other types of new licensees or independent licensees, there's an opportunity there to create win-win-win scenarios. You know, the sector has its challenges to operators, whether it's access to capital, cost to capital, developing capabilities. And I think we're at a stage in the development of the sector where the experienced operator like Ocresco Labs has a lot to offer and contribute to create win-win-win scenarios for those newer, smaller operators, for us as an organization, and for the state programs. You know, these state programs want all of these licensed operators up and running and being successful. And I think there's, in the broadest sense of the term, partnership. There's opportunities there for us to be contributors and beneficiaries.

Great. That's it for me. I appreciate the call.

Thank you.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. And our next question comes from Gerald Bussarelli from Red Bush Security.

Great. Thanks very much for the question. I just have one on SG&A. Understanding that you've kind of been progressing on improving this line item really since the back half of the year, I think it still came in a little better than expected this quarter and sounds like from your prepared remarks that it's going to sustain. I would love some more color just on the drivers behind the lower levels of SG&A this quarter. And then from a cadence perspective, not looking for guidance or anything, but is it fair to assume that this will continue to improve sequentially as we progress throughout the year? Thank you.

Yeah. Hi, Gerald. Thanks for the question. This is Dennis. So from an SG&A perspective, we've done a lot of work. We started it last year when we were talking about the year of the core and really trying to run our a lot of our corporate operations as efficiently as we could and looking for opportunities to get synergies across the businesses and across the functions. So what you saw really started last year in the second half of the year was that concerted effort to really look for opportunities to become more efficient. We've done that. We're continuing to examine everything. So what you saw in Q1 was really a continuation of actions that we took in late Q4 and in early Q1. So again, we're, you know, happy with where we're at today. We'll continue to look at every opportunity to reduce costs where it makes sense. And again, the fact that we're still able to perform at the levels we are is a credit to the entire organization. When I look forward at SG&A expense, where there's opportunities to continue to look for some synergies, there will be some increases as we add some new stores that we're going to be adding throughout the portfolio in advance of AU. There's going to be some headcount that we're going to have to add in our retail stores in Ohio to handle the volume that we're going to see. So we're going to try to offset those growth catalysts with additional savings opportunities and look to be relatively flat through the balance of the year.

Perfect. Thanks very much for the call. I appreciate it.

Thanks, Gerald.

And that was our final question, so I'll hand back over to Charlie for final remarks.

I just want to thank everybody for joining the call today and, again, extend a giant thank you to the broader Cresco team. As we saw here with announcements in the quarter and momentum at a federal level, the impact that we're having on the industry is immense. and you're firing on all cylinders, and it's showing in the results. So thank you, Cresco team. Thank you, everybody, for joining the call today, and we'll talk to you next quarter. Bye-bye.

And this concludes today's call. Thank you for joining. You may now disconnect your lines.