Cresco Labs Inc

Good day and welcome to Cresco Labs second quarter 2026 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 touch tone phone. To withdraw your question, please press the star key, then one again. 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 Cresco Labs. Please go ahead.

Thank you. Good morning. Welcome to Cresco Labs second quarter 2026 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bachtell, Chief Financial Officer Sharon Schuler, 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 on 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 adjustment until the filing of the company's quarterly financial statements. We filed our corresponding financial statements and MD&A for the quarter ended June 30th, 2026 on CDAR and EDGAR earlier this morning. 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 risk, uncertainties, and other factors that could influence actual results are described in our earnings press release and in the most recent annual information form and 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 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. Thank you for joining Cresco Labs' second quarter 2026 earnings call. Last quarter, we said that Q1 was the baseline for our 2026 growth, and we would build from there. Q2 delivered ahead of those expectations. We generated $173 million in revenue, up 15% sequentially. We produced $89 million in adjusted gross profit at a 52% margin, $40 million in adjusted EBITDA at a 23% margin, up 20% sequentially showing operating leverage, and we generated $15 million in operating cash flow. These results reflect new dispensaries, market stabilizations, and our continued operating discipline that converts growth into profitability in cash. Before I go further, I want to thank the Cresco team. Quarters like this don't happen by accident. They're the result of a highly focused team that's executing remarkably across wholesale and retail while knocking every new store opening and integration out of the park. This morning I'll walk through the quarter by touching on three themes. First, executing on our multi-pronged growth strategy. Second, winning where we operate. And third, unlocking equity value through federal reform. First, our growth strategy. Our growth strategy runs along two planes. Where we already lead, we go deeper. Where we're not operating yet, we find compelling inroads. And in both cases, we have organic execution and disciplined M&A in our toolbox. Pennsylvania is a clear example of reinforcing our position as the industry's consolidator of choice through strategic M&A. In Q2, we completed our first quarter operating nine acquired dispensaries under a managed service agreement that allowed us to begin establishing our operating standards and capture revenue ahead of close, which is pending state approval. The transaction has been immediately accretive. Without rebranding a single dispensary, we've increased the store's gross profit dollars by 11% compared to pre-acquisition baselines. This means the largest value unlock is still ahead of us as we introduce the Sunnyside brand and deploy our complete operating playbook after we close and take ownership. The Pennsylvania story is replicable because integration and operating capabilities are at the center of our consolidation approach. We do not merely tack acquired stores onto our platform. Our operating playbook lets us measurably improve them. We hold the number one branded share in markets like Pennsylvania, Illinois, and Massachusetts, and Sunnyside stores generate over 30% more revenue than state averages. So when we apply our brands and operating playbook, we're not only capturing internal margin, we're also selling more to more loyal customers at Better Economics. That's why assets are worth more inside of our platform. We're also leaning into organic opportunities to build positions in tomorrow's markets at today's entry costs. In Kentucky, our operations have shifted from build out into revenue generation. Our first branded products hit dispensary shelves in late June, and the first Sunnyside dispensary is on track to open in the fourth quarter. Above all, our growth strategy remains disciplined. Every opportunity is evaluated against clear thresholds, accretive economics, low integration risk, and markets with structural advantages. Second, we win where we operate. For Cresco, winning means leading product categories where brands matter most and running the most productive retail in our markets, all while rising above competitive and pricing pressures. In the second quarter, we are winning in core markets. Pennsylvania, another clear example with depth and execution compounding. We currently hold a record setting lead over our competition with the number one branded share in the state at 16%. When our latest acquisition closes, Sunnyside will also be the number one retail banner in Pennsylvania. While Pennsylvania demonstrates winning when we buy, Ohio demonstrates winning when we build. Sunnyside had the number two retail share position in the state, and our newest dispensary has consistently performed better than our peers. This is by design. We followed a careful site selection process, we opened doors quickly, and we started scaling from day one. On the cultivation side, our SOPs and innovative growing approach are enabling us to get more leverage out of the assets we already own. More supply at lower cost without sacrificing the quality that our brands are built on. In Illinois, competition intensified again this quarter as increasing vertical integration continues shifting the state's retail landscape. And still, we hold the number one position in flour, concentrates, and edibles. And we've held our revenue per gram of flour roughly even as the broader market compresses. Sunnyside remains the number one retailer in the state and our stores continue generating per store revenues well above the state average. That same discipline is also paying off in Massachusetts where a year focused on operational improvements is now showing in the numbers. Net wholesale revenue grew 27% year over year and we hold the number one brand portfolio in the state led by our position in flour. Execution is the through line that connects every one of those markets. From the grow rooms to the dispensary shelves, our teams keep getting more out of the assets we already own, better yields, better products, more productive stores, stronger brands. This is what allows us to hold share in competitive markets and expand strategically, all while protecting margin. In closing, for the last part of my prepared remarks, I want to step back from the quarter and touch on how we are thinking about equity value creation as the federal landscape changes. For years, the cannabis industry has grappled with the significant disconnect between the quality of businesses it's built and the value the market assigns to them. That gap is structural. Federal illegality, punitive taxation, and restricted access to capital and investors have all obscured the sophistication this industry has already achieved. Now, for the first time, those structures are finally changing. Rescheduling is the first true federal reform this industry has ever achieved. Rescheduling is the first true federal reform this industry has ever achieved. Its significance for patience and cultural legitimacy cannot be overstated, and it directly improves the underlying economics of this business. Removing 280E means eliminating the unfair tax burden that's weighed on this industry's income statements from the beginning. Net income improves, balance sheets strengthen, and operators can reinvest more of every dollar they earn. That is how the industry truly matures into America's next great growth sector. We share our shareholders' excitement and optimism as doors open to U.S. cannabis listings on U.S. exchanges. Rescheduling has changed the listing analysis. Companies in our sector are starting to complete that process. At Cresco, we're already executing on everything within our control, and when federal regulations allow, we will be ready to go. At the same time, we're also having conversations with leading banks and capital markets partners. As the broader cannabis environment normalizes, the opportunity set widens, whether that's through an uplifting, improving our cost of capital, or funding growth through M&A. We're making sure we're ready to move on whichever approach creates the most value for shareholders. Before handing it over to Sharon, I want to first share that she has decided to step down from her role as CFO. I want to personally thank her for building the financial infrastructure and discipline that positions us to pursue the opportunities I just described. We're grateful for her contributions and wish her well. We started our search for a new CFO for this next chapter, and we're working closely with Sharon to ensure a smooth transition. With that, I'll let Sharon walk you through the Q2 financial performance in more detail.

Thank you, Charlie, and good morning, everyone. Before I go deeper on the numbers, I want to thank the Cresco team. I'm proud of what we've built together. The company is more focused, more financially disciplined, and better positioned operationally and from a capital markets readiness standpoint. I'm looking forward to working together on a seamless transition that sets Cresco up for success in this next phase, and I'm excited about my own next chapter and the opportunities ahead. Turning to the numbers, as we outlined last quarter, Q1 established the baseline for the year, and as expected, our growth initiatives began showing up in our financials in Q2. We reported $173 million in revenue, up 15% sequentially. That growth was driven by the contribution of the nine Pennsylvania dispensaries operating under our management service agreement. Our new Sunnyside locations in Ohio anticipated a seasonal recovery and stabilization in Michigan after the new state tax was implemented. Importantly, the business also grew organically up 4% sequentially. Retail revenue was 121 million of 19 million or 18% sequentially and net wholesale revenue was 52 million up 3 million or 7% sequentially. And excluding California, we've been able to grow wholesale revenue organically year over year by 4%, a testament to our teams in what is an increasingly vertical and competitive environment. Adjusted gross profit was 89 million or 52% of revenue, above the high end of the range we got it to and up over 100 basis points year over year. Sequentially, the improvement was driven by wholesale products margins, led by the margin recovery in Massachusetts and Ohio, where better yields and quality are translating into improved unit economics. We also saw favorable costs in the quarter, and we would not expect to repeat to the same extent going forward. Partially offsetting that was a mixed shift towards lower margin volume in Michigan and a retail rate in Pennsylvania reflecting increased promotional activity in the nine stores pending acquisition. This sell-through of acquired inventory is a normal temporary part of any integration as we position those stores to carry our standard assortment going forward. Adjusted SG&A was $55 million or 32% of revenue compared to $51 million and 34% of revenue in Q1. The increase reflects the new Pennsylvania stores, our new Ohio locations, and continued investment in our Kentucky launch, exactly the growth spend we outlined. Productivity gains across the base business and corporate functions, including our continued deployment of AI and automation, offset a meaningful portion of growth-related costs. Adjusted EBITDA was $40 million, or 23% of revenue, in line with the margin we guided to and up $7 million sequentially. Importantly, adjusted EBITDA grew 20% faster than revenue growth sequentially as we saw some operating leverage. Turning to cash flow. We generated $15 million in operating cash flow in the quarter compared to a use of $6 million in Q1, consistent with the seasonal pattern we described last quarter. We invested $9 million in capital expenditures, primarily cultivation upgrades in Ohio, Pennsylvania, and Massachusetts, and ended the quarter with $67 million in cash and restricted cash. Looking ahead to the third quarter, we expect net revenue to be roughly in line with Q2. as we continue ramping the acquired store network and begin generating revenue from Kentucky, offsetting continued price compression and competition. We expect gross margin in the high 40s to 50% as we work through some higher cost inventory in the second half. We expect adjusted SG&A to be essentially flat in dollar terms as productivity gains and cost discipline absorbs the cost of continued expansion and adjusted EBITDA margins of approximately 20%. With that, I'll turn it back to Charlie for closing remarks.

Thank you, Sharon. Let me close by pulling the quarter together. In Q2, we delivered growth ahead of the expectations we set and converted that growth into profit in cash. We demonstrated in Pennsylvania and Ohio that we can buy, we can build, and we can integrate at scale. And the federal landscape has moved further in the past 12 months than it has in history. The way we see it, our shareholders win with Cresco for two reasons. The first is the business itself. exceptional talent executing on a disciplined strategy, escalating growth initiatives, expanding operating leverage, and a cost structure that combines both to generate cash. The second is the environment around the business. Reform that strengthens net income and balance sheets industry-wide and access to cheaper capital and new investors. Each of these forces shores up the other. Stronger cash generation strengthens the balance sheet. A stronger balance sheet lowers our cost of capital. and a lower cost of capital funds more growth. Cresco has the operating platform, the balance sheet and now a federal backdrop moving in our favor. And we're converting all three in a long-term value for shareholders. Again, thank you to the entire Cresco team for your execution this quarter and to our shareholders for your continued support. With that, we'll open the call for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Aaron Gray with Alliance Global Partners. Your line is open. Please go ahead.

Hi. Thank you for the questions. And first and foremost, Sharon, I just want to say best of luck to your future endeavors. It's been great working with you. You know, maybe, you know, in that line, I'll have the first question for you on the gross margin. Maybe some of the drivers that led to the expansion in 2Q. I know you've been looking for kind of similar kind of high 40s to 50s. They just got it for 3Q. So maybe what led to some of the higher gross margin and is some of that going to be maybe not reoccurring in 3Q or how should we think about that margin evolution relative to the guy they just provided? Thank you.

Well, thanks, Aaron. Appreciate the comments. Thanks for the question. So yeah, Q2 was a good quarter. We sold through some higher margin products, specifically in Ohio and some other states. We did see some, as I mentioned in my remarks, some one-time benefits that flowed through that we don't expect to see repeated. And then when you think about how that's going to transact into the back half, we know we have some higher cost inventory that we need to still work through. Some of that is actually tied to some of the facility upgrades we were making. So, you know, with some of the rooms being shut down for a period, that creates some higher costs. So, we factored that into our guidance in the back half, and that's why we're, you know, expecting that 48 to 50 trend.

Okay, great. Thanks. That's helpful. I want to ask a question on hemp, you know, with the pending. Hemp Restrictions on intoxicating coming in November. What are your thoughts on the potential lift that could have on the legal market? And do you believe that it could be meaningful as we come into 2027? Thank you.

Good morning, Aaron. So it's hard for us to quantify exactly the uplift, but I do think it's safe to say that what hemp has Thank you for joining us. hard to quantify because they don't track sales or revenue or product throughput. But we do have that case study so far of a situation like Ohio where not only the regulations are in place, but enforcement is seen and we've seen 30% year-over-year growth in that state and we're definitely seeing it come through the regulated channel. So optimistic that a lift is there, hard to quantify exactly how much.

Okay, great. Appreciate the color. I'll go under the mic in the queue. Thanks, Aaron.

Your next question comes from the line of Bill Kirk with Roth Capital Partners. Your line is open. Please go ahead.

Yeah, good morning. This is Nick on for Bill. Thanks for taking the questions and congrats on the quarter. First for me, just on Pennsylvania, you mentioned the 11% gross profit dollar lift from the acquired location. Just wondering what the drivers of that jump were and how much room is left to kind of further improve. It feels like a notable jump in a state that's seen some discounting pressure over the past 12 months. So any color there would be helpful. Thank you.

Sure. And, you know, we're excited about the results of the acquisitions in Pennsylvania. to begin testament to the strength of the team, really strong management, proven operating models. And you're seeing really the first phase of it. And we're really excited about what phase two is going to look like when we fully convert those stores over to our brand and true full implementation operating model. So really, this just goes to the strength of Cresco and the team's ability to really optimize operations. We've got a lot of experience, we've got proven concepts, and we validate that when assets come into the Cresco platform, we make them better.

Great. And then second for me, just on the international side, you mentioned in the past selling out of trial product ahead of schedule. I was just looking for an update on how shipments have trended over the past few months, what you've learned about selling internationally, and just any other puts and takes would be helpful. Thank you.

Sure. You know, again, encouraged by our initial experiences overseas and what we've learned to date. We've learned that our brands are transportable. and that in any market that we go into, there's a recognition of the capabilities that we've developed. As we've always said, this is a light touch. This was exploratory and it's a test and learn type situation. So that has continued and it just makes us, it continues to make us optimistic as the opportunities over there continue to develop. And just like they were in the United States, it's not a straight line. Nothing over there is automatic either. And you really need to have the capability set that will allow you to make the adjustments as the markets continue to evolve and adjust themselves. So optimistic about the future potential there. And again, the Cresco capability set being competitive in Europe as it is in the U.S. Great.

That's it for me. I'll pass it on. Congrats again.

Thank you.

Your next question comes from the line of Frederico Gomez with ATB Carmark. Your line is open. Please go ahead.

Hi, morning. Thanks for taking my questions and congrats on the great quarter here. I want to ask about taxes. Could you maybe provide an update on your license application in that market? And what would be the strategy here to participate there? Thank you.

Yeah, certainly, you know, unfortunate to be awarded a license and then have it taken away. It's not a common occurrence, but an unfortunate event here in the Texas rollout. You know, we're taking the actions, appropriate actions to recover that license. We like the opportunity that Texas presents. It's an incredibly large state. And again, one of those states where the hemp experiment has shown the demand in the potential total addressable market of that state. So we'll continue to evaluate. The opportunities are in front of us to make sure that we get a license there. Optimistic that that will happen. And then we'll approach it just like we've approached every other new market, which again, a lot of experience in helping to launch and develop markets successfully and obtain leading market shares in those markets.

Thank you, appreciate that. Second question, I want to ask about the equity value creation path that you mentioned in your presentation and looking at your presentation that you guys uploaded in your website, which is great, by the way. Appreciate that. We are at the brink of rescheduling here, and I guess this is crucial for that re-rating opportunity that you guys are mentioning. So how do you think that multiple re-rating will play out in terms of How fast do you think that valuations rise to that level and how do you think about M&A in that environment? Valuations for the broader industry rise with rescheduling. What's the best strategy here? Maybe be more aggressive on M&A early or how do you think that's going to play out? Thank you.

Sure. I appreciate the question. all of the elements of it, hard to quantify, hard to forecast as we've seen historically in this space. But I think in general, as you're seeing, Cresco's acquisitive. We know that we can create growth both organically and through M&A, and we see greater access to greater investor bases in capital through US capital markets. as a really important and meaningful catalyst to continue to execute the strategy. So we find encouragement all along. How fast it'll occur, I think there's a lot of investor education that has to happen. The cannabis story has been around for a while. It has gone through multiple cycles over the last eight to 10 years. And so for us to now have this potentially broad access to traditional capital markets in the US, we have to put that hat back on. We have to understand that the cannabis story needs to be reintroduced to a lot of investors, both that have seen it before and that never had an opportunity or the ability to look at it. So we're going to embrace the mission. and we're going to be a leader in the educational efforts to bring the new investors along and how that translate to both base business and the growth engine that M&A is going to be for us. We're very encouraged and we're going to enjoy the opportunity. Greg, you want to add?

Sure, and good morning, Rodrigo. I would just add to what Charlie was saying. I think what's exciting about that opportunity you're outlining is we believe in our footprint. we have some of the highest torque potential given that we aren't in a lot of the states that are driving future growth which means the potential for us to enter whether it's New Jersey or Connecticut or continuing to build out our facilities in Florida where we made the choice not to build out advanced adult use versus focusing on Pennsylvania that with greater access and cheaper capital there's a lot of things that we can do to invest behind where we are proving we win in states we operate and take that into more states that we don't have access today. So we're very encouraged that with both access capital and cheaper capital, there's a lot of areas that we can invest in our business to continue to grow, which gives us an advantage.

Thank you very much.

Your next question comes from the line of Kendrick Tai with Canaccord Genuity. Your line is open, please go ahead.

Thank you and good morning. Charlie, with respect to Pennsylvania, could you speak to sort of apples to apples, what the biggest differentiators are in terms of your capability and footprint that has allowed you to weather the storm? Certainly, the majority of your competitors have called out the very harsh reality of Pennsylvania, given the delays in the transition to adult use. So any insight you can provide there, we appreciate it.

Sure, Kendrick. I wish I had maybe a unique answer, but it comes back to we tend to win where we operate. And we've been in Pennsylvania since the beginning. We helped launch that program there. We've always had a leading market share in that program and in that market. And so it really is the team on the ground there on both sides of the aisle for us on the cultivation and production side. and on the retail side are phenomenal and they're very experienced and they've been most have been with us since the beginning. They know how the market works. We continue to see Pennsylvania as a growth driver for us. It has been for years. And so when opportunities come up that we find can be accretive for us, even if they may not be for others, that's one of the unique opportunities that we see at Cresco is the sort of the capability skill set. and the strength of the operating teams allow us to take advantage of opportunities when we see them. And so it's that execution on both sides of the aisle produces great results. Happy to see it. Really excited for that team.

Great. Thanks. I'm sorry. I just points in your referencing or using the terminology both sides of the aisle. Any update or thoughts around the long-standing standoff within the Pennsylvania legislature. Any further thoughts there? I mean, it's a case of hurry up and wait now for years, given that it's a hung legislature. Anything further you could add there?

Sure. Politics, right? And I've said it many times on calls before, you know, sometimes good policy doesn't make good politics. It's It's a meaningful issue and anytime cannabis rises to that level of a meaningful issue, whether that's at the state level or at the federal level, it sort of starts to lose its identity and it just becomes a political piece. and that's what we're seeing here. It's what we've seen for the last couple of years. I will say recent conversations that we're having with members of the legislature again on both sides of the aisle as you see the government affairs lingo tends to transfer in the way that we think about a lot of things at Cresco are positive and supportive and it really is a matter of how not if. So we're encouraged. We think as you're seeing were successful in Pennsylvania as a medical program and we're going to be successful in Pennsylvania as an adult use program too. When that happens, hard to forecast, but I do think it's a matter of how and when, not if.

Thank you, Charlie. If I could squeeze in just a quick final one here on enforcement. We've seen a step up in a number of key states, obviously Ohio following the hemp ban, a marked step up in enforcement action, but we're also seeing a and a number of other states stepping up enforcement action on either illicit and or hemp related. Can you speak to what you're seeing on the ground and how material those changes are and how you expect those enforcement actions to ramp in the context of the sort of the new world we're getting into?

Yeah, I think with all the focus that the and many more. And I think that's what we're going to see. And I think that's what we're going to see. And I think that's what we're going to see. And I think that's what we're going to see. as it always is the case the states lead they're faster they move faster than the federal government but you're seeing it on both at the state level and at the federal level and look what I can say is it is very encouraging for professional operators that are regulatory focused compliance focused and can execute at a professional level they're going to see the benefit of this and look it's incredibly hard in any industry to compete against Thank you.

This concludes the Q&A session. I will now turn the call back to Charlie Bottle for closing remarks.

Thanks, everybody, for joining the call today. Again, really just want to extend a giant thank you to the Cresco team for the exceptional quarter and again for shareholders for the continued support. We look forward to talking to you about our Q3 results later this year. Thanks, everybody.

This concludes today's call. Thank you for attending. You may now disconnect.