Cresco Labs Inc

Good day and welcome to Cresco Labs' fourth 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 and then the number one on your telephone keypad. To withdraw your question, please press star, then number two. Please note this event is being recorded. I'd now like to turn the call over to TJ Cole, Senior Vice President, Corporate Development and Investor Relations for Cresco Labs. Please go ahead, TJ.

Good morning and welcome to Cresco Labs' fourth quarter 2025 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bochtel, Chief Financial Officer Sharon Shuler, and 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 are provided prior to completion of all internal and external reviews, and therefore are subject to adjustment to the filing of the company's quarterly and annual financial statements. We plan to file our corresponding financial statements and MD&A for the quarter and year ended December 31st, 2025 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 most recent annual information form in NDNA filed with the securities regulators. This call also contains non-GAAP 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 interim financial information is unaudited.

With that, I'll turn the call over to Charlie. Good morning, everyone, and thank you for joining Presco Lab's Q4 and full-year earnings call. Over the past year, we've been executing against a clear long-term plan to improve margins, generate cash, optimize our footprint, and reinforce the balance sheet so we can invest strategically and position ourselves for growth. In Q4, we made measurable progress against that plan. We generated $162 million in revenue. We produced $84 million in adjusted gross profit, $40 million in adjusted EBITDA, and $27 million in operating cash flow. For the full year, we delivered $656 million in revenue, $157 million in adjusted EBITDA, and $73 million in operating cash flow, while materially strengthening our balance sheet and simplifying our operations. I want to sincerely thank our team for making measurable progress across our core financial priorities. They produce products that consumers want while making cultivation and manufacturing more efficient. They gave the customer the in-store experience that they need while prioritizing higher return channels, and they managed capital with discipline. Today, the team is staying the course, focused on meeting the needs of the customer while building the most productive and cash generating platform possible. Let me walk through how we're executing on that strategy. First and foremost, we are building a solid balance sheet with consistent cash generation. In 2025, we strengthened our financial position through concrete actions. We generated strong operating cash flow and refinanced our debt, extending maturities to 2030. These steps improved our capital structure, reduced near-term risk, and sharpened our operational focus. Tailoring and simplifying our footprint has been central to this effort. Exiting California was an intentional decision to reallocate capital and our internal resources toward markets where we have stronger returns. Our capital allocation framework is straightforward. We generate cash through tight execution. We deploy capital selectively when opportunities meet clear return and integration thresholds to protect and strengthen the balance sheet. All these actions enhanced our financial flexibility and positioned us to capitalize on attractive opportunities in 2026 and beyond. With internal cash flow as our primary source of capital, we're excited about inorganic investments that'll strengthen operating leverage and enhance market density while meeting our financial standards. Second, our focused footprint positions us to win with organic growth from our core markets and targeted expansion in markets where we see compelling returns. We're going deeper in core markets where we can leverage our existing infrastructure and small investments will have higher incremental returns. Throughout 2025 we've evaluated multiple investments against strict risk adjusted criteria. Well, most acquisitions did not meet our standards we've identified several attractive tuck in opportunities that have the potential to drive operating leverage. Our current pipeline for strategic acquisitions is as robust as we've seen and we're excited to share updates on those opportunities as they progress in Ohio we're applying a prudent density driven approach. There, our focus remains on increasing retail concentration to find more scaled efficiencies and margin expansion. Our border store strategy is proving particularly effective. Sunnyside Proctorville, located near the West Virginia border, is exceeding expectations and validating our site selection model. We're building on that success with two additional store openings scheduled for early this year. In Kentucky, our operations are coming together quickly. Our cultivation facility is operational with plants now in the building, shifting the market from the capital investment phase into the revenue generating phase as initial harvests come online. We're building responsibly as the broader medical program rolls out slowly, preparing to serve patients soon without overextending capital. Internationally, our Capital Light pilot in Germany has been a great success, with products selling out ahead of schedule. While our global strategy remains measured, this result validates both the strength of our brand portfolio and the portability of our operating model in a tightly regulated European environment. Across all of these initiatives, discipline is a key theme. Every expansion is evaluated against clear return thresholds, execution capability, and capital efficiency. By balancing organic growth within core markets with targeted acquisitions, we're building a platform that's positioned to expand margins over time. And lastly, our proven retail and wholesale capabilities will keep enabling us to outperform the market. Our wholesale business remains a core strength, with the number one branded market share in Illinois, Pennsylvania, and Massachusetts, and leading positions across our limited license markets, according to Headset. That leadership reflects cultivation consistency, portfolio quality, and our ability to reliably supply both our own stores and third-party partners with high-velocity brands. It's further reinforced by our retail execution, where we hold the number one share in Illinois and rank among the leading operators in Ohio and Pennsylvania. We're building on that scale advantage through deliberate differentiation. For example, we're introducing Sunnyside exclusives, including our new Sunnyside house brand called Louder. Designed for champion shoppers who purchase regularly, Louder reduces price comparability and creates compelling reasons to choose Sunnyside beyond convenience. The in-store experience is another key differentiator. We continue refining operations and removing friction across the customer journey to ensure orders are fulfilled quickly, reliably, and with expert care. Our 4.9 average Google rating across the network reflects our consistency, an achievement that's difficult to sustain in large, high volume retail environments. And I can't thank the team enough for working so hard to achieve this incredible feedback from our customers. Together, our leading brand share, retail density, Smart pricing strategies and shopper innovations equip Cresco to continue to gain and defend share in competitive environments without sacrificing margin. We win where we operate. This year, we strengthened our balance sheet, expanded our footprint strategically, maintained leadership positions across key markets, and improved profitability metrics. I'm pleased to share that today, Cresco is more focused, more efficient, and structurally stronger than it was a year ago. With that, I'll turn it over to Sharon to walk you through our Q4 financial performance in more detail.

Thank you, Charlie, and good morning, everyone. In Q4, we continued to optimize mix and channel strategy across the organization, which resulted in improved profitability despite modest revenue softening. We reported $162 million in revenue and expanded margin across our major profitability metrics. We prioritized first party retail shelves and higher margin channels over lower margin third party wholesale volume. As a result, wholesale revenue declined approximately 6% quarter over quarter, while retail revenue remained essentially flat, reflecting continued store productivity and improved basket quality across key markets. We improved cultivation efficiencies and shifted mix towards higher margin products and channels. which drove adjusted gross margin expansion to 52.2% from 48.8 in Q3. In Q3, we discussed selling through high-cost flour as new production ramped. In Q4, improved yields, mix optimization, and channeled prioritization translated into margin improvements. Additionally, gross margin in the quarter benefited from certain favorable discrete items, which may not repeat to the same extent going forward. We maintain tight cost controls while supporting incremental store additions and growth initiatives, resulting in adjusted SG&A of $49 million or 30.5% of revenue. While dollars increased modestly from Q3, overhead growth remains controlled relative to the size of the operation. As part of our strong accounts receivable management, we also were able to reduce bad debt reserves during the quarter, which contributed to favorable expense leverage. By expanding gross margin and maintaining expense controls, we delivered adjusted EBITDA of $40 million, representing 25% of revenue, up from 24.1 in Q3. This underscores the operating leverage in the business as mixed improvements and cost control drove sequential margin expansion despite modest revenue deceleration. We continued to convert earnings into cash, generating $27 million in operating cash flow in Q4 and $73 million for the full year. After 9 million in capital expenditures during the quarter, we ended the year with 94 million in cash and no near-term maturities, reinforcing our financial flexibility. In the first quarter, we will see the impact of Michigan's excise tax changes and our exit from California, along with the effects of normal seasonality and ongoing price compression and competition in our core markets. As a result, we expect a high single-digit sequential decline in revenue with the majority of impact driven by Michigan and California. While cultivation efficiencies continue to improve structurally, we expect seasonal mix shifts and ongoing competitive pricing to result in gross margin normalization from Q4's elevated levels. We are maintaining strong expense management as we support incremental store contribution and growth initiatives. As a result, we expect SG&A to remain generally consistent with recent run rates, but we will not see a repeat of prior period benefits, such as the reduction in bad debt reserves. Importantly, we do not see Q1 as a change in direction. The operational improvements we have implemented remain intact, and we expect performance to build from Q1 levels as the year unfolds. With that, I'll turn it back to Charlie for closing remarks.

Thank you, Sharon. Reflecting on the quarter and year, the most important takeaway is sustained progress. We're executing against a clear improvement plan. We're strengthening margins, generating cash, reinforcing the balance sheet, and sharpening our footprint around markets where we have structural advantages. We're building a company designed to win where we operate and to expand thoughtfully into additional states and international markets when the opportunities are accretive and aligned with our return thresholds. We're not chasing growth for growth's sake. Adult use conversions in core states, strategic acquisitions, and building density in markets where we already lead all create a pathway for high return growth and long-term value creation for our stakeholders. At the same time, federal reform momentum is real. The rescheduling executive order is hugely consequential and, when implemented, will change the entire industry's economic landscape. That said, while reform represents real upside, that upside must be layered over a strong financial and operational foundation. We have more work ahead, but the trajectory is clear. We're confident in our direction and in our ability to continue strengthening business quarter by quarter, regardless of the federal reform timeline. Thank you for your continued interest in Cresco Labs, and thank you to all the stakeholders, especially the Cresco Labs team that continue to drive us forward. And with that, I'll open up the call for questions.

Thank you very much. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Aaron Gray from AGP. Your line is open, Aaron. Please go ahead.

Hi, good morning, and thank you very much for the questions here. Charles, you gave some good color in terms of the M&A opportunities, talking about, you know, the pipeline being as robust as you've seen. You know, I'd love to get some additional detail in terms of, you know, maybe some of the dynamics that are leading to, you know, that pipeline being so robust. Is it some of the maybe distressed assets they see in the marketplace? Maybe some of the operators and owners, you know, becoming more reasonable in the multiples they're asking for? Because I know the private markets have been a little bit elevated as of late. so any more color in terms of maybe some of the dynamics that you're seeing that are leading to that more robust pipeline? Thanks.

Hey, good morning, Aaron. Thanks for the question. Uh, you know, you, you actually hit on, um, several of them. I think the rationale or the reason for the pipeline being as robust as it is, is it's dynamic. Um, there's several, uh, reasons for it. I think we're seeing, um, Operators that have been in the industry for a while that are realizing that they may be better suited to look at an exit and look at some sort of an M&A opportunity. I think we're seeing the limited availability and the cost of capital weighing on that scenario too. And I would also say there's more regulatory clarity on optionality from a structural standpoint, et cetera, that could lead to the viability of M&A transactions being structured. So when you look at all the factors that are there, it puts Cresco in a really good position based on the work that we've put in over the last couple of years to really prepare ourselves, fortify the foundation, to be acquisitive. And as we've said before, too, we're going to make sure that we're very patient, that we're very strategic, and that we allocate capital as efficiently as we can for that long-term success. So excited. Looking forward to sharing more in the near future.

Okay, great. Appreciate that color. Second question for me, I just want to talk about some of the retail and wholesale dynamics. You talked about there being a bit of a shift from third party to first party, selling one to your own stores. I want to talk a little bit more in terms of what's driving that decision. Obviously, it led to some higher margins in the quarter, but some of the offset might be obviously kind of some of the brand building and larger sales opportunities. So maybe can you talk about those dynamics? And then if at all, that M&A strategy and kind of bolt on that you referenced might become a natural unlock for some more brand distribution as well. Thank you.

Yeah, I'll start and then Greg has some insights here too. But you're right. And as the industry matures, I think as these especially the larger operators mature too, our approach to the market continues to get refined. And operational execution is a big part of it. We know what we can do. We know what we can produce, not only on the production side of the business, but at a retail level, the customer experience, being able to operate a very high-volume higher margin business, especially supported by owned brands, you're just seeing the continued development and maturity of a strategic model that lends itself to greater concentration. I think, as you mentioned, also the M&A and the strategic alliance structures that can be put in place in these markets will also lend itself to greater densification for a term, on how we approach these markets. But it's a natural evolution, especially, I think, from the operators that have been in the industry for a while on how to make your revenue as durable as you can and defensible. So we're really pleased and encouraged by what the team has been able to do. Craig, additional?

Good morning, Aaron. Only a couple things I'd like to add to that. One is, if you look at a retail platform, we now have over half a million people engaged in our loyalty programs and growing. And that 75% of our sales is going through a digital gateway. That, to us, gives us unbelievable data on pricing, price elasticity, velocities, what SKUs are turning. So you mentioned first-party growth. for sure we saw that in our financials, but it's actually driven by a much more rigorous analytical approach to how we're thinking about not only assortment, but pricing that we're able to do now through just the rich data that's coming in. And that gives us skew elasticity, store trading zone pricing. So we're getting a lot more competitive on how we think about bespoke promotions versus blanket always on. And that is driving more of what you're seeing and our percent of assortment in our stores, but also how we are dealing with continued pricing challenges, but finding ways to maximize margins through mix. And I think to Charlie's point, as you look to other retailers, there are some phenomenal retailers out there that are probably asking themselves, what do they want to do? Do they want to partner with someone, or do they want to potentially get left behind? And they've got unbelievable operations. And so I think another push on this is we tend to always look at distressed operators. We see a lot of operators that are not distressed, but are thinking about how do they find a partnership with a partner that can help them derive better results for their business, and then clearly also partner for any sort of longer-term foundational change here that happens in the industry.

Okay, great. Thanks for the call, both Charlie and Greg. I'll go ahead and jump back in the queue.

Thanks, Aaron.

Our next question comes from Frederico Gomez from ATB Cormac Capital Markets. With eyes open, please go ahead.

Thank you. Good morning. Thanks for the questions. First question is just on Germany. You mentioned the success, I guess, that you're seeing there in terms of that initial experiment or I guess a pilot launch. Could you talk more about that, whether you expect to launch new products there in time soon or or maybe enter that market in a more meaningful way. Thank you.

Thanks, Frederico. So very encouraged by our initial approach. And as we mentioned, it's a light touch. It's a limited, low-risk approach to exploring what international markets can look like for us. The pilot so far has been really successful. products selling out ahead of time and ahead of expectations is a great result to achieve. We made the decision to continue to reinvest the profits that we've been able to gain from this pilot so far, so we're increasing the size of it. But I do want to confirm that that's a measured approach. We are definitely still in the test and learn phase, and it's a low-risk approach to this exploration of what we think is going to be a very robust market internationally as a whole. But it's going to play out over time, and we're going to take a measured approach.

Perfect. Thanks for that. And then my second question, just on the pricing outlook, I mean, we keep talking about price compression, and I think that's something that's expected to continue. But I wonder if you've seen any um you know reduction or normalization and prices across different states and specifically if you would expect you know maybe a price relief if and when we see the intoxicating handband becoming effective maybe uh november this year thank you great i'll start um

So we are starting to see some stabilization in markets. It is the continued natural evolution of it. As it relates to the hemp impact, without question, we do think intoxicating hemp has had an impact on several of the main markets that we're in. In the event that that does diminish going forward, we do see that sort of ancillary benefit of a broadened and grown consumer base that now has had the ability and the opportunity to get to understand cannabinoids better. And that will naturally, at some capture rate, come over to the regulated licensed cannabis market in the event that that happens. But specifically, Greg, you want to add more context?

No, I think what we would add to this is as we look at X and Q4 and we look at the first half of this year, Pricing is probably a little bit better than we anticipated, so still seeing some slight price reduction, as you mentioned, but better than we assumed. I think we are going to, as we look to the second half of this year, there's a couple of major factors that we're watching closely that I think could help us see even better price improvement. One is, as we talked about M&A and retail, retail consolidation does help. As you get away from aggressive price promos around key selling weekends, fighting to win traffic over new stores. If that starts to slow down, that helps relieve some of the top-line pressure to retail. I think in wholesale, you're going to see from us, I think you're seeing from others, is really focusing on mix and how do you find and push forward higher-velocity premium SKUs, which we're now getting an unbelievable amount of data on price elasticities and what actually moves our products other partner products that are in our stores through our own leading wholesale network. And you'll see more of that of how we start to flex our muscle on price promos and skew mix. And then I do think hemp, anything that happens on hemp here towards the second half of the year will help. We do know that hemp does compete for the same occasions or cannabis plays too. So it is a lower price substitute. So relief on hemp availability would of relief, not only some of the pressure we're seeing with consumers who might be supplementing their purchases with a hemp product that would come back to our stores, but also slow down just the amount of hemp that seems to be flowing through the market that's causing some price noise.

Thank you very much for the call. I'll be back in a few.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Bill Kirk from Roth Capital Partners. Your line is open, Bill. Please go ahead.

Yeah, good morning. This is Nick on for Bill. Thanks for taking the questions. First for me on New York, the state's seeing strong dispensary growth up to around 600 locations now at about a $2 billion annual run rate. Just wondering how that's translated into wholesale growth for you and what your current penetration is there. And if you could just unpack that write-down a little bit more, that would be helpful. Thank you.

Sure. Thanks, Nick. Those go kind of hand in hand. For us, we still evaluate New York and further investment in New York against the other opportunities that we see out there in the space and that are in the pipeline. Still to date, New York struggles as we look at not only that comparison today, but the long-term durability. Structurally, New York has challenges. For us, furthering our penetration into New York, especially from a wholesale standpoint, is muted. And we don't expect, unless there's further investment from us, that that would change. And currently, that explains the impairment charge that we took. While we continue to evaluate the business viability, and especially when it comes to the additional capital allocation to New York, just the realities of the accounting requirements lead to us taking that impairment this year, which we thought was not only a requirement, but the best solution to just deal with it. While again, we will continue to evaluate New York. To your point, it's a very large market. We expect that it'll continue to be a very large market, but just because the market is large doesn't mean that it is actually a good structural model for the operators within it. We've seen that in several other very large markets like California and Michigan too.

Understood. I appreciate that caller. Second for me, just on sunnyside.shop, can you unpack the success there? What differentiates it from other platforms? And just what are the differences in consumer spending on the platform versus in-store? Any caller there would be helpful. Thank you.

Certainly, I'll give it to Greg directly.

Yeah, so I think one of the biggest things for us on Sunnyside is that it's really providing value to our shoppers. It's not just a loyalty program that you're earning something on every purchase, but you're getting unique offers. You're getting a personalized experience in cases. You're finding out about new product launches through our site. And so we're rewarding our shoppers through an elevated experience on Sunnyside. I think the fact that we also start our relationship with them digitally. For most of our purchases, they start online, they come online as a pickup. That's enabling us to collect a lot of information and create that relationship with our shoppers, which then enables us to scale that through different pieces of communication. From an overall business perspective, though, the site for us gives us an incredible tool that if you think about a product launch, radically reduces our cost of acquisition because we're able to launch on our site and get it out there without spending significant amount of media to drive awareness. It enables us to tailor custom price promotions and how we think about that. So from a business, it's wonderful that we're able to delight our shoppers, but it's also enabling us to make really smart business decisions on margins and how to protect margins and launch different SKUs and push different SKUs on the site.

That's it for me. I appreciate the caller. I'll pass it on.

Thank you. We currently have no further questions at this time, so I'd like to hand back to Charlie for some closing remarks.

I want to thank everybody for joining the call today, and we will talk to you again here after Q1 pretty soon. Thank you.

This concludes today's call. We thank everyone for joining. You may now disconnect from the call.