Cresco Labs Inc

growth, and strategic positioning for the transformational catalysts ahead. In the quarter, we generated $184 million in revenue at a 52% adjusted gross profit margin and a 29% adjusted EBITDA margin. Year over year, we generated a 565 basis point improvement on our adjusted gross profit margin and removed approximately $34 million in annualized adjusted SG&A spend. Our consistent focus on margin expansion enabled us to deliver $54 million in adjusted EBITDA, up $13 million year over year. And finally, we generated $54 million in operating cash flow year to date, which is $32 million more than the first half of last year. This, combined with our revised tax strategy that Dennis will cover later in the call, will allow us to continue to strengthen our balance sheet and enable strategic capital deployment to support future growth. Cresco Labs is creating the financial profile and perfecting the playbook we need to win. Our branded product and retail portfolio performance are evidence of our differentiated capabilities. We consistently outperform our markets maintaining leading share positions in the largest markets like Illinois, Pennsylvania, and Massachusetts, and gaining share in some of the most competitive markets like Florida. Our unique skill set and financial discipline have enabled us to drive scale and improve margins as we look towards new markets to replicate our winning strategy. Now I'm going to share more on the three pillars we're executing against 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. We're strengthening our positions in Ohio, Pennsylvania, and Florida, the three largest likely near-term catalysts in our industry that'll drive significant growth in the years to come. Adult use sales officially launched earlier this week in Ohio, and it's been energizing to be a part of another major milestone for cannabis. The seventh most populated state in the country will be another example of a responsible, respectable, and robust legal cannabis program. I want to thank Ohio's Division of Cannabis Control for working so hard to design a program that's going to bring incredible value to their state and opportunities for their residents. I also can't say enough about the CRESCO team, who manages all the complexities of this conversion with grace and expertise. We're already seeing some of the impact from recent cultivation upgrades we've made in Ohio, including a 26% increase in yield per square foot and a 23% increase in average potency as we drive full utilization of our canopy. This will allow us to meet the increased adult use demand while still maintaining our existing supply to serve medical patients and wholesale customers. Our next project is to expand Sunnyside's reach by opening our three additional dispensaries in Ohio. Kudos to our real estate team who have already identified sites that will complement our existing leading retail portfolio in the state. In Pennsylvania, there's a lot of momentum behind bipartisan adult use legislation, and we see a path to legalization as lawmakers reconvene this fall. In the meantime, we're deepening our number one position in the state through smart capital allocation. In addition to the upgrades to cultivation we talked about last quarter, we just expanded our dispensary operations by acquiring two existing locations and the ability to open one additional dispensary. With a nominal impact in Q2, this is an incremental non-material investment that will have a high ROI. we see a clear pathway to unlock strategic value as we convert these stores to the Sunnyside platform, optimize operations, and ramp up on potential adult use legalization. In Florida, we've more than doubled revenue year over year as we continue flexing every muscle to improve edible and vape throughput, increase potency, and maximize cultivation yields. We're currently executing an expansion plan to support the growing demand for our products under the state's medical program with additional plans that we can turn on if the adult use is legalized in November. We're focused on making smart investments in these markets where our strong retail and wholesale capabilities could add value quickly. Over the last few quarters, we've used the capital efficient approach to add more Sunnyside dispensaries and increase cultivation capacity. We're preparing to scale up strategically so that we're capturing maximum share while generating high returns on our investments, regardless of where each of these state adult use regulations land. Number two, We remain the leader in branded wholesale products. We continue perfecting our branded product playbook, enabling us to beat out competitors and hold the number one overall share position in Illinois, Pennsylvania, and Massachusetts. For BDSA, we also have top portfolio positions nationally in branded flour, concentrates, vapes, and edibles. As we discussed last quarter, continuous improvement in portfolio evaluation are foundational to that playbook. For instance, to maintain the strong growth we've seen in the pre-roll category, we've been diligently testing new processes and technology to increase productivity and margins. The early results are promising with a 10X increase in throughput. This is a good example of how we're leveraging our scale to test new processes in one state before rolling them out across our footprint to capture the benefits of large buying power. We're also creating tailored wholesale plans to adapt to continued retail fragmentation across the industry. In markets like Massachusetts, we're exercising discipline and finding the right retail partners to invest in, going deeper with our highest value accounts, while reducing exposure to non-performing accounts to preserve top line while also protecting margin. In markets like Illinois, we're getting our products on every new shelf and expanding our points of distribution, while keeping our menu depth and introducing new innovations in forms, flavors, and strains. Our focus on providing innovative products at the highest quality while constantly finding efficiencies in our cost structure continues to deliver one of the strongest cannabis portfolios in the industry. And number three, we're building a highly productive retail portfolio in the most strategic states. In Q2, we increased our index to fair share across our markets, with Sunnyside performing 36% better than comparable dispensaries. In fact, we're outperforming average fair share in almost all of our markets, with our fair share in Florida consistently making gains and growing more competitive every quarter. We're more than twice as productive in some of our most important states, and we're expecting even more fair share improvement across our footprint in the quarters ahead. Last quarter, we talked about how our tech capabilities contribute to our market-winning results, but in-store optimization is another important lever we pull. We continue to refine our assortment and display of accessories and non-cannabis products, ensuring we're meeting consumer trends while maximizing every inch of our dispensaries. Over the last year, we've increased non-cannabis revenue in our stores by 9%. We're also constantly evolving our approach to customer engagement. We're complementing the e-commerce tactics covered last quarter with a unique push marketing strategy. We're leveraging the Sunnyside.shop platform, customer segmentation, and purchase history to create targeted high ROI campaigns. In trialing this method, customers we've targeted are making more repeat purchases and have increased average monthly spending by 20%. We have a proven track record of generating above average retail productivity across our markets thanks to repeatable operating procedures, a proprietary tech stack, and the team's collective dedication to continuous improvement. These capabilities will continue to be invaluable as we ramp up additional dispensaries to meet Sunnyside standards in the months ahead. In closing, our strategy is simple. Win in strategic markets with a brand portfolio consumers love and best-in-class retail operations. And we'll continue making smart investments to strategically target new growth markets where these established capabilities will help us generate premium returns. With that, I'll turn it over to Dennis to provide more details on our Q2 performance.

Thank you, Charlie, and good morning, everyone. We continue to demonstrate that the changes we've made in the last year in our improved profitability are sustainable. The increased cash flow we're generating, along with the normalized taxes, will allow us to strengthen our balance sheet, increase our footprint, and invest in strategic growth opportunities to drive our results in the years to come. In the quarter, we generated $184 million in revenue while generating more gross profit. Our operations team continued to impress, finding incremental improvements to lower cost of goods and increased gross profit, even in an environment that is inflationary for cost and deflationary for cannabis pricing. We increased absolute adjusted gross profit to $97 million, an adjusted gross margin of 52%. That represents a 565 basis point improvement year over year. We've continued to maintain strong cost controls across the organization with adjusted SG&A as a percentage of revenue at 29%, a 229 basis point improvement from last year. We had a small increase sequentially in absolute adjusted SG&A to support and maximize the opportunity of the adult use conversion in Ohio and the two additional stores acquired in Pennsylvania. Q2 adjusted EBITDA was $54 million, or 29% of revenue, up 33% year-over-year. This is our third consecutive quarter generating over $50 million of adjusted EBITDA. This consistency demonstrates the sustainability of the actions we took last year. Our Ohio going adult use and the potential conversions in Florida and Pennsylvania, we can support much higher revenue and generate significant operating leverage on our current cost structure. In Q2, we generated $18 million in operating cash flow and $11 million in positive free cash flow as we paid our semiannual interest payments. At $54 million for the first six months of the year, we generated more than double the amount of cash we did in the same period last year. We're going to put this cash to use by strengthening the balance sheet, investing in our core growth states, and pursuing strategic growth opportunities. We spent $6 million on CapEx during Q2. We expect to spend between $40 to $60 million for the full year, inclusive of upgrades already made to our Ohio cultivation and production facility, as well as expansion in Pennsylvania and Florida in advance of potential adult use. 2024 has developed much as we expected, and we are maintaining the expectations we set on our Q4 call and reiterated in Q1. We expect Q3 revenue to be relatively flat compared to Q2 with the late start of adult use in Ohio and limited initial incremental supply and new form factors. We expect it to start contributing growth in Q4. We're looking forward to Ohio's adult use conversion and anticipated conversions in Florida and Pennsylvania to generate significant year-over-year growth in both 2025 and 2026. Strategically, we are targeting to keep gross margins around 50% as we believe that's an appropriate operating structure for our business. Having said that, there can't be quarterly variability driven by price pressures, revenue composition by state, and portfolio mix. We expect to maintain SG&A as a percentage of revenue consistent with Q2. As we've talked about previously and delivered through the first half of the year, operating cash flow will be significantly higher than last year. On a quarterly basis, like in Q2, Q4 will have lower cash flow because of our semi-annual interest payments. Regarding taxes, we intend to file as a normal business for 2023 and beyond. This new position will result in estimated tax savings of $65 million in 2024, directly impacting our cash flow and bolstering our balance sheet. For the time being, a corresponding uncertain tax position, a UTP, relating to these tax savings will be recorded on the balance sheet. We have worked closely with our expert advisors to be incredibly thoughtful in how we design this approach. We're comfortable with our read on Section 280E and its implications. As a result of the new tax position and our corporate structure, a step up to fair market value in the company's tax receivable agreement liability has been recorded in our financial statements. Most of the assets being stepped up to fair market value will be amortized over 15 years, effectively decreasing our annual tax expense by a corresponding amount over that period, creating a net neutral impact. This one-time charge is reflected in the other expense line in our income statement this quarter. Our 2024 results so far show how our focus on the core and prioritization of free cash flow are laying the groundwork for profitable growth for years to come. With that, I'll pass it back to Charlie.

There are exciting and meaningful legislative shifts on the horizon, and the public has never been louder with their support for cannabis. We've reached a tipping point with almost half of all states in the country representing more than half the country's population, having legalized cannabis for adult use and more adopting common sense regulations every day. Still, while we're encouraged by plans for rescheduling and adult use conversions, we're putting our energy and resources into building a growth business that's designed for sustainable success regardless of what happens legislatively. We continue to prove out our strategy in every state we operate in, maintaining and gaining share in some of the country's largest and most competitive markets. We're leaning into our improved operating cash flow and profitability to seize on our business's momentum. This means making smart, high ROI investments in our core markets, reinforcing the capabilities and infrastructure needed to win in states with adult use potential, and exploring accretive incremental M&A and new business opportunities. A big thank you and congratulations to the CRESCO team on producing a great quarter.