Cresco Labs Inc

Good day and welcome to QuestcoLab's second quarter 2025 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 the star key followed by two. Please note this event is being recorded. I would now like to turn the call over to TJ Cole, Senior Vice President, Corporate Development and Investor Relations for QuestcoLabs. Please go ahead.

Thank you. Good morning and welcome to QuestcoLab's second quarter 2025 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bachtell, Chief Financial Officer Sharon Schuller, and President 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 in CDAR and is available on our Investor Relations website. These preliminary results for the second quarter are provided prior to completion of all internal and external reviews and therefore are subject to adjustments over filing of our company's quarterly financial statements. We plan to file our corresponding financial statements and NDNA for the quarter into June 30th, 2025 on CDAR and EDIR later today. Before we begin, I want to remind you that statements made in today's call may contain forward-looking information, actual results made different material. The risks, uncertainties, and other factors that could influence actual results are described in our earnings press release and in the most recent annual information form in NDNA filed with the securities regulators. This call also contains non-GAP measures also outlined in our earnings press release and in the NDNA filed with the securities regulators. Please also note that all financial information on today's call is presented in U.S. dollars and all internal financial information is unaudited. With that, I'll turn the call over to Charlie.

Good morning, everybody, and thank you for joining us on our Q2 earnings call. We're pleased to be here and share the strategic steps we're taking at position Cresco Labs for this next phase of the cannabis industry where consolidation is inevitable and the winning operators have the balance sheet cash flow and capabilities to capitalize on the moment. Q2 is the steady and productive quarter for Cresco. Operationally, we maintained our momentum and defended our retail and wholesale market shares in what remains an incredibly competitive environment. Strategically, we made critical decisions to reinforce our balance sheet, free up capital, and home in on new paths to growth. In Q2, we delivered $164 million in revenue in line with guidance and consistent with Q1 levels, reflecting our ability to counteract price compression through increased unit volumes in both retail and wholesale segments. We generated $83 million in adjusted gross profit and $41 million in adjusted EBITDA as we continue to stack efficiency gains. Our second quarter cash flow from operations was $9 million. The cannabis sector is approaching an inflection point. The operating and regulatory environments are pushing many operators to downsize significantly, particularly those lacking scale or carrying excessive debt. This means we're seeing a growing number of distressed assets, receiverships, and consolidation opportunities across the industry. We've been talking about this likely outcome for several quarters and the trend will only accelerate from here. We see this as an incredible opportunity for Cresco. We remain committed to profitability and cash flow, but Q2 and Q3 also mark a step change in preparing Cresco Labs to be the partner of choice for industry consolidation. This shift is proving even more important as competition in our core footprint increases and we set our sights on new expansion markets. Now I'll walk through how we're thinking about this next phase. First and foremost, our number one priority continues to be maintaining a solid balance sheet with a strong cash position. To that end, I'm thrilled to announce we've signed a letter of commitment to refinance our debt and we'll be closing on around August 13th. We've opted to refinance $325 million of our debt while paying down the remaining $35 million. This pushes our maturity date out to August of 2030. We're proud that we secured such favorable terms because they're a direct result of the discipline we've infused in every part of our business over the past two years. We streamlined operations, made difficult calls like tightening credit sales, and embedded a cash flow first mindset in every part of the organization. Beyond refinancing, we're continuing to strengthen our balance sheet and improve cash flow through ongoing AR management and restructuring initiatives. One of these initiatives is our plan to exit the California market. While we're grateful for everything our California team has given Cresco Labs, including the Floracal brand and our quality at scale approach to cultivation. But the state's structural challenges have made it too difficult to generate sustainable profits. Stepping away will strengthen our margin profile, unlock resources that can be funneled into new growth, and bring our footprint in line with our long term strategic direction. Second, our focused footprint uniquely positions us to win with organic growth from our core markets and growth potential from target expansion markets. Everything we're doing is aimed at building the most productive, profitable, and cash generating footprint possible. One that can seamlessly integrate new states and assets. As previously stated, we will be opportunistic while being patient and disciplined in our capital allocation, prioritizing high return organic growth and M&A opportunities. We have ample organic growth opportunities materializing in the quarters ahead. For example, in Ohio, we're on track to open three new dispensaries before the end of Q126. The first of which opens in early fall, building on our number one retail share and number three branded product share in the state. In Kentucky is the first mover. We're making great progress on our cultivation build out. This quarter we executed an MSA with a Kentucky processing partner. It's an exciting milestone that will enable us to bring our full suite of branded products to patients. We're on track to have our first product in market in early 2026. In Pennsylvania, we're building on the strength of our number one branded share and fourth largest retail footprint ahead of adult use conversion in this $2 billion market. We opened our 18th dispensary in the state in May and we recently turned out our Mount Joy cultivation facility. With this added capacity, we're positioned to lead on pricing, drive volume growth and capture additional market share, regardless of the adult use timeline. With organic growth in hand, we've been waiting patiently for the right opportunities to take on capital efficient M&A. As expected, we're seeing more distressed assets for sale across the target markets, such as New Jersey and Maryland. We're one of the few operators without overlapping operations and license cap constraints in these markets, giving us a competitive and compelling long term growth story. Importantly, we know that once we acquire assets, we accelerate their performance. Take Pennsylvania, where we acquire a small dispensary group in 2024. We added them to our loyalty program and we increased shelf space for our house of brands. Together, this drove a 77% increase in year over year quarterly sales and over 200% increase in year over year EBITDA, a testament to the Cresco consolidation playbook in action. And lastly, our proven retail and wholesale capabilities will keep enabling us to outperform the market. Our operational strength across every part of the supply chain is a key differentiator that allows us to outperform in nearly every market we operate in. And our execution is getting tighter at every turn. We've maintained number one market share positions in Illinois and Pennsylvania, along with top five market shares in all of our limited license wholesale markets. We rely on a disciplined consumer focused approach to both wholesale and retail paired with exceptional execution across cultivation, manufacturing and production. In wholesale, as we previously mentioned on our Q4 call, we are ramping up production of premium flour and manufactured products in our Kinkakee, Illinois and Mountjoy, Pennsylvania facilities. This added cultivation capacity now gives us depth in the ability to flex up when the market calls for it, meeting the growing demand that price compression encourages. In retail, Sunnyside continues to outperform in an extremely competitive and fluid retail landscape by establishing customer loyalty, increasing basket sizes and delivering stronger unit sales year over year. Our dispensaries generate approximately 20% more revenue per store than state averages, a testament to our operational strength and careful attention to shopper experience. Competition is fierce in licensed captive markets where operators have identical store counts, yet our ability to consistently outperform peers underscores the strength of our retail model. According to hoodie data, we hold the number one retail share in both Illinois and Ohio, where store counts are tightly regulated. We're also gaining share in markets where we have smaller footprints. In Florida, we're sixth in market share while ranking only eighth in store counts. We're leaning into our expertise and repeatedly proving that we can win in both growth and margin constrained environments. In closing, Cresco is ready for cannabis's next chapter. In Q2, we delivered solid performance in line with guidance, maintained our market share in a highly competitive environment, continued to drive cash flow through operational discipline and signed a commitment letter to refinance our debt, which reduces the total facility size by 10% and extends the maturity date to 2030. This milestone reinforces our balance sheet, preserves our equity value, and creates financial flexibility for the years to come, giving us an even stronger foundation to execute against both near term priorities and long term growth opportunities. We've been playing the long game to create scalable, stable growth. With our debt refinancing behind us, we're on the offense, executing on organic initiatives while building a targeted pipeline of M&A opportunities in profitable strategic markets. That strategy is supported by a meaningful white space in our footprint with several high priority states still untapped, giving us a long runway for expansion. With that, I'll turn it over to Sharon to walk you through our Q2 performance in more detail.

Thank you, Charlie, and good morning, everyone. As Charlie mentioned, this was a steady quarter operationally. We remained focused on cash flow over top line growth in our decision making. As a result, we reported 164 million in revenue, representing a 1% sequential decline from Q1. This modest decrease is primarily due to continued price compression in our Illinois retail operations. Wholesale revenue was flat as we stayed disciplined in our AR strategy, prioritizing credit worthy accounts and forgoing sales that carried repayment risk. We delivered strong margin and cost performance this quarter, supported in part by a couple of saveable items that reflected great execution, but are not expected to repeat going forward. Adjusted gross margin came in just shy of 51%, of 124 basis points, essentially. We benefited from selling through lower cost of good product in Illinois, driven by stronger yields in prior quarters. On the cost side, our team continued to execute well and made progress across multiple areas. Notably, we recovered approximately 1 million in previously reserved bad debt, which contributed to the 3 million sequential reduction in adjusted SG&A, bringing the total to 50 million. Our accounts receivable balance is down 23% since the start of the year, a clear sign of our policy around credit risk and that much higher yields of connectivity we've created between sales and finance teams. Across the business, we continue identifying and capturing small operational efficiencies. In addition, strong execution this quarter led to a few unique wins that, while not expected to reoccur, contributed meaningfully to our bottom line. Together, these factors supported 41 million in adjusted EBITDA, representing 25% of revenue. In Q2, we generated 9 million in operating cash flow and invested 13 million in capital expenditures. We ended the quarter with a cash balance of 147 million. As Charlie mentioned, the most significant milestone is we've signed a commitment letter to refinance our debt. We replaced our prior loan with a new 325 million senior secured term loan, maturing in 2030 at a .5% interest rate. This refinancing provides enhanced financial flexibility with favorable terms, including the option to prepay up to 125 million. And it comes at a time when access to capital in the U.S. Canada sector remains highly constrained. In an environment marked by tightening credit and over 2 billion in industry debt maturities on the horizon, our ability to secure long term financing without equity dilution reinforces the strength of our business model and balance sheet. Completing this refinancing allows us to shift fully onto offense and take advantage of the consolidation opportunities ahead. You can expect us to take a balanced approach, investing in smart caffex, pursuing a creative M&A, and continuing to drive operational efficiencies and disciplined growth, all while maintaining a strong balance sheet. Looking ahead to Q3, we expect revenue to remain roughly in line with Q2. Increased cultivation capacity in Illinois will help offset price compression across several of our markets. Further out, new dispensary openings in Ohio and expanded production in Pennsylvania are expected to provide additional tailwinds for revenue growth. As the additional cultivation capacity we brought online in the first half ramps up, they will support our efforts to defend growth margin in a challenging price environment. However, in the near term, we expect some margin drag in Q3 and Q4 as we sell through initial harvest, which typically come with lower yields and lower utilization. Our focus remains on optimizing output from our fixed asset base to preserve as much gross profit as possible. On the expense side, our commitment to continuous improvement is driving real results. We're consistently capturing small efficiencies that compound over time and help fund strategic investments for growth. We're excited to enter the back half of 2025 and push into 2026 with more flexibility as we find new growth while keeping focus on profitability and cash generation. With that, I'll pass it back to Charlie.

Thank you, Sharon. The cannabis industry is entering a new phase defined by consolidation and rationalization. We anticipated this shift where many operators are being forced to scale back or exit and more M&A opportunities exist than ever. With our proven operating model, focused and productive footprint, and clean capital structure, we're built for this moment and we're well positioned to be the company of choice as this industry consolidates. I want to thank the Cresco Labs team for their passion and continued commitment to grind, drive cash flow, and capturing high margin growth. Thank you for your time today. We look forward to sharing our continued progress in the quarters ahead.

Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can withdraw yourself from the queue by pressing star and then two. Our first question today comes from Aaron Gray with AGP. Aaron, please go ahead.

Good morning and thank you very much for the questions. Congrats first and foremost on the debt refinancing. I know you guys put a lot of work into that. So you've done well in terms of optimizing the portfolio as demonstrated by the healthy margins with the rationalized footprint. And with the debt refinancing now, you know, behind you, you're better positioned to capitalize on growth opportunities as you outlined, you know, getting more on the offensive. Just maybe some more color in terms of, you know, the M&A opportunities that you've mentioned. You made it clear that you're going to be prudent and strategic in that. So without tipping the hat too much, maybe some color in terms of, you know, where you're seeing some of those attractive opportunities today. Whether you're seeing it more so in terms of deepening within some of the existing markets. We don't have the ceiling, as you mentioned. Or if they're in new markets that you're not currently in right now. So any color that you're seeing that will be helpful. Thank you.

Thanks. Good morning, Aaron. You know, look, our footprint, we've discussed it over the past few calls. Our footprint has some great white space opportunities for us to get into markets that we are not in. That most, if not all of our peers are already in. And you can look at Maryland, you can look at New Jersey, you can look at Connecticut. There's just some really good opportunities for us to expand the footprint into states that have good regulatory structures that also create good economic profiles. And so we've worked real hard to put ourselves in a position to have the resources to be acquisitive. While at the same time, definitely challenging ourselves to be patient and disciplined as we evaluate those with the sort of the recent, more recent struggle that some of our colleagues in the industry have had. That's, it is increasing the number of assets that are going to be available in some of those markets and we look forward to evaluating them and making some good strategic decisions.

Thanks. Appreciate that color there, Charlie. Second question for me, just in terms of broader for the category, you know, volumes remain healthy pricing pressure continues to offset that, you know, not flowing through to sales. Are you sort of seeing any signs of stabilization or maybe acceleration in the pricing pressure? And you do, do you see any risk of that worsening, you know, as operators have debt coming due and may not have the same ability to successfully refinance? So, you know, any color commentary and you're seeing on volumes and how you're expecting pricing pressure moving forward. Thank you.

Yeah, we think pricing pressure is a reality of the industry that we're in, especially as we also have competitions in a state by state. So whether or not there's a more aggressive priced state nearby that becomes an alternative for a consumer or As you look at THC based on products, there's competition that's come into this industry that's enhanced and and really increased the pricing pressure. We're operating the organization in a way that is preparing ourselves to be competitive. In the event that that continues, we're not banking on there being a change there. So we're taking the steps that we need to on the cost side of our business to make sure that we can stay competitive and maintain those market shares and that productivity. We definitely also again look at it on a state by state basis. So there's there's differences as you look across markets. Greg, any additional color?

No, I said answer one of your questions, Aaron. Good morning. We are, prices are still seeing declines. I would say the rate of decline though has started to flatten in most of our core markets. So we're down for a record year over year, but from a rate perspective that has slowed down. So maybe that's one encouraging thing. You're not on this negative slope. The second thing that we're seeing is yes, there's price compression, but a lot of retailers, including ourselves, have been able to pull out price compression because we've been able to keep our baskets, larger baskets at a lower price per unit and overall holding pricing. Now that comes a little bit at the expense of trips because people are loading up on products and they're having them home, so we're seeing less trips. So really that strategy can continue to work for us as long as these lower prices bring shoppers into the stores. And as you mentioned, consumption is up. So people are consuming more cannabis than we've seen before. But really the future outlook is at these lower prices, can this help entice more shoppers to come in? And if we're successful at doing that, to Charlie's earlier comments, we'll be able to really hold at these lower prices.

That's really helpful, Carter. I appreciate that. I'll go ahead and jump back to the queue.

Thanks, Aaron.

Thank you. Our next question comes from Brianna Cunnington with ATB Capital Markets. Please go ahead.

Hi, this is Brennan for Federico. Thanks for taking our questions and congrats on the results of quarter. Just looking at the margins, good to see some sequential improvements there. But you mentioned a margin drag as expected in the second half of the year. And it sounds like this may be temporary. So could you provide some additional color on this?

I'm sure there's a Charlie. I'll start it off and then hand it to Sharon for some more detail. But yeah, we're proud of the team for finding really operational execution based good guys in Q2. It's nice to see. It's great execution. But as we had mentioned in the back half of the year, one of the impacts of the strategic decisions we made to bring on more capacity in markets like Illinois and Pennsylvania is that we've got this additional capacity now that the initial yields that come out of any facility are not optimized. That cost comes in Q3 and Q4 as we sell through the product before it tends to normalize in the future quarters. Any additional color there, Sharon? Yeah,

I mean, just to kind of elaborate on that. I mean, as we sell through that product, right, it'll be a bit of a drag on some of the margin going forward. You know, obviously, we'll continue to look for operational efficiencies to try to counter that. But it's just a reality we'll be facing in the back half.

Okay, understood. And then regarding the Florida market share improvements. Yes, we've been seeing that in the weekly state data. So good job on that. But looking at the underpinning drivers behind those improvements, could you provide a little bit more color on that? And if there's the potential for further improvements in the near-sharm?

Sure, Greg will lead this.

Hey, good morning. So we are really pleased with what we're seeing in Florida. Really what helped us drive that is the quality of the products that our teams are able to get out of our facility in the state. And we are now, even with a full outdoor greenhouse facility, we are holding some great quality products that are very competitive in that market, competing against indoor products and high quality products in the state. So it's a big recognition for the hard work that our team is doing in that state, which has gotten us where we are. And we think, you know, we're looking at our Q2 yields, we are encouraged by what we're seeing in Q2. So it'll help us in the Q3. And we think that we are putting ourselves in that state in a very competitive assortment position. And because it is a full vertical state, obviously, it is based on the quality that our teams can bring to market, is what drives the assortment in our stores. And that quality is continuing to show momentum.

Great. Thank you for that color. I'll hop back into Q.

Thank

you. Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing start followed by the number one on your telephone keypad. Our next question comes from Pablo Zwanik with Zwanik Associates. Pablo, please go ahead.

Good morning, everyone. This is Rahul on for Pablo. We have two questions. First, I know you touched on this just a little bit, but with the potential for adult use sales in Pennsylvania, can you talk about any changes you've made in that state in terms of cultivation capacity, product assortment, expansions, or store relocations and refurbishing? And the second question would be of all the states where you sell wholesale, which are the two states where you have had to cut back on wholesaling due to worsening credit quality among third party retailers?

Absolutely. So as we look at the potential for AU and TA, I will try to hit on them in the order that you asked them, but changes in capacity we addressed. We brought on a secondary facility that we've had and that we did not need the production out of until recently. So we've turned that on in 1H and that'll be fully utilized as we enter the back half of the year here. Assortment strategy, we've constantly, and I'd say in general across the footprint, always focused on innovation and bringing products to market that the consumer wants. So it's no different in Pennsylvania. Fair to note, though, that without an AU law being passed yet, there's still the same restrictions that apply to the product types that are available in the medical program there. From a store location standpoint, I can tell you that the as far as the new openings, new store openings, I'd say we've been focused on the potential for adult use in Pennsylvania for the last 18 months, 24 months. So new stores that we've brought online organically over that period of time have always had a focus on what would be not only useful in a medical program, but also in an adult use scenario. Greg, anything else there?

No, I would say what we're just seeing is in Pennsylvania, you have a lot of players and operators ramping up their production ahead of adult use. You are seeing a competitive, more competitive medical market. But as Charlie mentioned, with our supply coming online, it'll give us an opportunity to continue to lean in on what pricing is today with the inventory to back it up to really be competitive and move products in the state.

Second question was states where we have significant wholesale presence and whether or not we've had to turn off.

Why don't I continue with that? Really comes as a two-state major for us. We're watching Massachusetts, as you might expect, any state that has a significant penetration of MSOs and independents increases your risk. Massachusetts continues to be a tough market from an AR perspective. I don't know why you're seeing other operators start to pull out of the state. But we have really, and kudos to our team, brought that state in line and resegmented all of our customers to make sure that we're putting products in customer stores that are good payers. But we are also seeing it in states like Illinois, where you had some increased activity, whether it's due to financial struggles or some major outlets in the state. But that has also our decisions to not sell to those customers may have impacted revenue, but we think it's the right thing to do. Got it. Thank you.

Thank you. Our next question comes from Jesse Pitluck with Cormark. Jesse, please go ahead.

Hey, good morning. Just a single question for me. Having just gone through the debt refinancing process, can you speak to how lenders are reviewing the UTEP liability and getting comfortable with it?

Sure, Sharon, you want to hit this one? Yeah,

I mean, so it's obviously something that we've had to include, right, when we're looking at our different ratios with the lenders. But I think there's also a comfort there that we're, you know, our balance is not as high as some of our competitors. We also have been, you know, very clear about what that number would look like over time. So I think in the end, it was something that they all were very comfortable with, knowing where we were on our position and feeling very strongly that that would be one we handled.

Thank you. Thank you. Thanks, Jesse.

Thank you. At this time, we have no further questions until we'll hand the call back to Charlie for closing comments.

Great. Just again, really want to thank the broader Cresco team for the execution in the quarter, especially the team that was front and center on getting the refinance across the finish line. It really does put us in a great position for the go-forward here. Like I said on the prepared remarks, we're built for this. Thanks, everybody, for joining the call today, and we'll talk to you next quarter. Bye bye.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your line.