Q3 2021 Cresco Labs Inc Earnings Call
Hello, and welcome T D Kraska lapsed third quarter 2021 earnings conference call. My name is Han and I'll be your operator today.
Before handing over to the team I would like to remind you that is an opportunity to ask questions and if you do wish to ask a question stays cool simply press star followed by one or you would have a keypad I will now hand over to Jay grades to begin today's session.
Good morning, and welcome to <unk> Lab's third quarter 2021 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charlie Box Hill, Chief Financial Officer, Dennis <unk>, and Chief Commercial Officer, Greg Butler, who will be available for Q&A.
Prior to this call we issued our third quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the third quarter of 2021 are provided prior to the completion of all internal and external review and therefore are subject to adjustment until the filing of the company's quarterly financial statements, we plan to file our corresponding financial.
And MD&A for the three and nine months ended September 32021 on SEDAR and Edgar next week.
Statements made on today's call may contain forward looking information within the meaning of applicable securities legislation as well as within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 90 to 95. These forward looking statements may include estimates projections goals forecasts or assumptions that are based on current expectations.
Theyre not representative of historical facts or information such forward looking statements represent the company's beliefs regarding future events plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward looking statements, including economic conditions and changes in applicable Reg.
<unk>.
Additional information regarding the material factors and assumptions, forming the basis for forward looking statements and risk factors can be found in our earnings press release, and then Chris collapse filings with SEDAR and with the Securities and Exchange Commission Trustco.
Chris collapsed does not undertake any duty to publicly announce the results of any revisions to any of its forward looking statements or to update or supplement any information provided on today's call. Please.
Please also note that all financial information on today's call is presented in U S dollars and all in term financial information is unaudited. In addition, during todays conference call Cresta labs will refer to certain non-GAAP financial measures such as adjusted EBITDA and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP.
Please refer to our earnings press release for the calculation of these measures and reconciliations to most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to and should only be considered in conjunction with the GAAP financial measures presented in our financial statements.
With that I will turn the call over to Charlie.
Good morning, everybody and thank you for joining us on the call today, let.
Let me first wish a very happy veterans day to all members of the military service past and present and their families, including my father, we sincerely. Thank you for your sacrifice your bravery in the example, you set for us all.
We're very pleased to share our Q3 results as we followed up a strong first half of the year with an outstanding quarter of substantial margin expansion integration of accretive M&A to drive market depth and continued execution as the number one wholesaler of branded products in cannabis.
The outlook for the industry and for our business has never looked better than it does today as the U S. Cannabis market is on track for over 40% growth. This year and critical labs is set to outpace that growth once again.
What has always remained a constant part of the critical lab story is having a clear and focused strategy of building the most strategic geographic footprint.
Material positions in each state and emphasizing the middle two vertical through the value chain.
Tapping a traditional CPG approach to candidates, we've demonstrated our ability to reach and sustain number one market share positions in large markets and we're poised to repeat that success in multiple key states.
As a cultivator regenerating quality potency and uniformity at an unprecedented scale, we're delivering the best portfolio of branded products suited to the needs of retail customers and end consumers are sophisticated supply planning and analytics show us how to tailor our operations at a localized level and our highly efficient.
<unk> retail platform meet consumers, where they want to be met feedback essential data and supports our wholesale channel.
Like to recognize the incredible team of leaders that make up the critical labs family.
This team is responsible for our organization, having the number one or number two market share position in three different billion dollar plus markets being the number one wholesale ever branded cannabis products in the industry for Bds, a having the number one best selling brand of candidates in the industry and generating the highest per store revenue of any scaled national.
Taylor, while these achievements helped validate our thesis there are only possible with an incredible team all working in harmony to execute the strategic playbook state by state by state as cannabis markets inevitably evolve our differentiated approach and ability to execute it positions us to out compete in.
And both the near and long term.
Turning to the quarter revenue in Q3 was $215 million, an increase of $6 million sequentially and 41% year over year with $109 million net wholesale revenue. We remain the number one wholesaler branded cannabis products in the industry with $106 million of retail revenue from 37 contributing stores.
Sunnyside remains the most effective and productive first store retail platform among national retailers Q3, adjusted gross margin increased to 54% and adjusted EBITDA increased to $56 million growing 24% sequentially as.
As we have conveyed we're delivering the profitability and operating leverage forecasted from the investments made early in the year and we're demonstrating responsible growth as we scale.
Now, let's review the three specific ways critical lab is delivering growth and shareholder value in 2021.
We remain committed to our plans laid out at the beginning of this year and we continue to find that our differentiated strategy is working.
Number one executing our playbook and the most strategic markets through organic growth and accretive M&A.
Through our 10 state footprint critical labs continues to address the vast majority of the U S cannabis market with an abundance of opportunities for high return investments as an organization dedicated to achieving success in the framework that exists today and the winning this industry long term, we continue to evaluate investment opportunities with both time horizons.
In mind.
Ultimately our goal is to achieve a top three market share in the most strategic stage large populations and appropriate regulations.
In Massachusetts, we recently completed two initiatives that have propelled us into our third top three market share position and a 1 billion dollar plus market integration of the cultivate assets is well underway and we could not be more impressed with the efficiency and sophistication of their operating team. We're also excited to report the initial harvest from our <unk>.
Banded fault river cultivation facility have exceeded internal yield forecasts.
Combined we have created a platform to execute the same playbook that we've used before to attain market leadership, Massachusetts as the largest adult use market in the northeast and represents the most substantial near term growth opportunity for Crespo lapped.
The Pennsylvania market will provide an interesting case study in 22 has the state becomes more competitive and we're already beginning to see which brands are up to the test we have announced two important acquisitions to fortify our number one market share position in this state we expect both the <unk> and loyal harvest acquisitions to close in Q4.
Collectively, adding four new operational retail stores licenses for five incremental stores and 52000 square feet of indoor cultivation space. The moves we're making in this state to increase our retail footprint and add cultivation puts us in the best position to remain the number one wholesaler as competition rises and re.
When when adult use is ultimately introduced.
Between now and year end will add retail for the first time in Maryland reached full production of manufacturing products in Ohio and register our first sale of flower from new cultivation in Michigan.
Been an incredibly productive year investing in our strategic footprint and as expected. We're seeing these investments pay off footprint is.
Comprised of the most valuable states seven of which are already over $1 billion run rate and five of which are medical markets that are likely to introduce adult use in the near term.
We're constantly analyzing state dynamics tailoring, our strategy to each market evaluating the needs of stakeholders and making responsible strategic investments for the benefit of shareholders.
Number two increasing our leadership as the number one wholesaler branded cannabis products Q3, net wholesale revenue was 109 million the highest in the industry. Our brands reached nearly 1100 retail stores around the country. This quarter up 5% from Q2, and 32% year over year and five of our eight wholesale markets.
Our brands have more than 75% wholesale market penetration and in three markets, where over 95% penetration. According to BD assay. Our brand Crespo was the number one most sold cannabis brand in the U S for the third consecutive quarter.
In Illinois, we continue to hold the number one market share position with 100% wholesale penetration and best selling portfolio of brands.
We're incredibly proud of the critical labs, Illinois team, who day in and day out are leading one of the country's largest cannabis market with an unrelenting focus on continuous improvement and world class execution.
In Pennsylvania during an environment when competition and supply have risen to meet demand. We continue to maintain our number one wholesale market share have the number one sold brand overall and distribute to 100% of the stores in the state we track wholesale velocity as a metric to determine how fast and how frequently are product sales once it's on the shelf.
BDSI reports that in Pennsylvania, seven of the top 10 highest velocity vape skus are critical products and five of the top 10 highest velocity concentrated skus are critical products. This is how our premier wholesaler out compete for share of shelf strong product assortment executing the supply plan and consistently.
Delivering products that customers want.
Everything we've gained from operating and competing in markets like California has sharpened us to achieve resilient and robust growth as markets evolve.
Turning to California, we are pleased with our latest performance following the strategic shift announced last month as we continue to implement localized strategies tailored to each market dynamics were putting our full weight behind our rapidly growing owned brand portfolio in California, driving expanded profitability margins for our overall business.
This market has seen a wave of new supply precipitating price competition across categories, while Florida Cal is not immune to changing market prices. The brand is performing well jumping three places in Q3 to the <unk> best selling, California flower brand positioned as the best quality flower in its priced here.
Florida Cal is proving to be an exceptional lead horse for our wholesale portfolio, California is the largest and most competitive market in the country and it has helped to shape, our strategy and capabilities as a cultivator and wholesaler across our footprint, we look forward to continuing to refine and grow our position in California in the quarters and years to come.
Number three.
Operating high volume strategic retail stores.
Q3 retail revenue was $106 million contributed from 37 stores average quarterly revenue per store was $3 $1 million for the 33 stores opened during the entirety of Q3, the highest per store revenue among top msos.
Same store sales grew 25% for the 17 stores opened during the entirety of Q3 2020.
Strategic retail will continue to play an important role as we deliver both near term ROI and build a platform for long term sustainable leadership in the middle two verticals of the value chain many of our Sunnyside stores around the country continue to punch above their weight delivering revenue in excess of respective state averages and outperforming their fair share.
We have sales in Florida, we're on track to hit our target of 16 stores opened by the anniversary date of the Bloom acquisition NPA as discussed organic store openings. In addition to the recent M&A will support our top market position.
Lastly, next Monday, we're excited to have the Grand opening of Sunnyside rig Liebelt flagship retail store located a little over 300 feet from the famed Wrigley field Mark key. This is a one of a kind Sunnyside and will feature unique product activations 21 points of sale and plenty of space to serve.
<unk> on high traffic days when baseball games concerts, and large events are taking place next door.
To think back on when the original rig we build location opened for medical sales five years ago. It is incredible to see how far this industry and our organization has come in to see the outstanding execution from our retail team.
Cannabis has always and will always have a unique and evolving set of challenges critical labs has earned its way to the top of this industry because it is deeply rooted in our nature to embrace challenges engage in the problem solving process and find ways to turn them into opportunities we've navigated difficult.
Bolt environments before we will do it again and we are ready for what comes next looking ahead. We are cognizant of macroeconomic forces that may come to impact consumer industries inflation expiring unemployment benefits supply chain obstructions et cetera, but critical labs hasn't gotten where it is today by missing the forest for the trees.
We know where this industry is heading we built this strategy to achieve success and will remain agile while tailoring our operations to the evolving dynamics with that I'll turn it over to Dennis.
Thank you Charlie and good morning, everyone I'll begin by reviewing the financial results from the quarter, then highlight a few items from the balance sheet and discuss our capital position.
Because of the proximity of the cultivate transactions close to quarter end. Our financials are expected to be filed next week on SEDAR and Edgar as we complete the final review of purchase accounting for cultivate.
Turning to our results. We're very pleased to report a strong Q3 during which we produced an $11 million increase to adjusted EBITDA during a quarter, where revenue grew by $6 million.
After a period of investing in our infrastructure deepening operations within our footprint and integrating new assets, we're delivering higher margins as forecasted and were demonstrating responsible growth as we scale.
Revenue in the third quarter was $215 million, an increase of $6 million quarter over quarter and $62 million year over year.
Revenue growth was driven by continued execution in Illinois, new store openings in Florida, and a month of cultivate.
This was offset in part by the beginning shift toward owned brand distribution in California, and muted market growth in Pennsylvania after an incredibly strong Q2.
Q3 revenue mix was 51% wholesale and 49% retail our differentiated focus on the middle two verticals of the value chain. Once again resulted in the highest wholesale revenue in the industry at $109 million.
Our Sunnyside retail platform generated $106 million of revenue from 37 stores, which continues to make us the most productive per store retailer among top msos.
Looking ahead, Massachusetts will be a material driver of wholesale revenue growth as we reach full output in the newly expanded fall river facility and integrate cultivates operations over the coming quarters.
We expect to make the first harvest at our new Michigan facility over the coming weeks, which will begin meaningfully contributing to sales in early 2022.
Q4, California revenue will include some third party sales from exited distribution agreements. So Q1 will be the first quarter fully reflecting the shift to predominantly owned brands.
On the retail side near term growth drivers include new store openings in Florida, the additions of cure pen oral harvest and Sunnyside stores in Pennsylvania, as well as Blair wellness stores in Maryland.
Given this initiative in both wholesale and retail and with the expected closing of pending M&A.
Reiterate as expected Q4 revenue of between $235 million to $245 million.
Turning to gross profit in Q3, we generated $117 million or 54% of revenue excluding the fair value of a markup of acquired inventory, a 9% increase quarter over quarter.
As predicted gross margins increased as we completed facility expansions in several states and the cost associated with those facilities were absorbed over a larger revenue base.
We expect gross margins to be positively impacted over the coming quarters as we roll off lower margin sales in California grow, Florida operations increase automation and achieve greater scale and more of our markets.
Third quarter SG&A expense, excluding share based compensation and noncore items was $65 7 million or 30% of revenue an improvement from 32% in Q2.
The reduction in SG&A dollars as a result of completing major corporate infrastructure investments and strongly executed integration plan with bloom to drive out costs.
The increased operating leverage in Q3 is even more impressive considering we absorbed cultivate SG&A for a full month.
Looking ahead as we execute our integration playbook for the next group of transactions, we expect SG&A as a percent of revenue to continue to improve in the fourth quarter and throughout 2022.
Adjusted EBITDA for the third quarter was $56 million, a 24% increase from Q2 represent a margin of over 26%.
Again during the quarter, one revenue grew by $6 million, we generated an $11 million boosted the bottom line contributions.
Contribution to profitability came from gross margin expansion continued operating leverage improvement and closing of accretive acquisitions.
As we continued to deepen operations across more states, we reiterate expected Q4, adjusted EBITDA margins of 30%.
During the quarter in connection with our exit from third party distribution agreements in California, We followed applicable accounting rules to evaluate goodwill and other intangibles associated with the origin House transaction and took a noncash impairment charge of approximately $290 million.
The original transaction valuation was primarily ascribed to third party distribution business and its customers and this charge reflects our strategic move toward focusing on more profitable owned brand sales.
However, it's important to note a few substantial benefits we have realized from the acquisition and our overall business.
The cultivation team in techniques acquired two origin house lead our cultivation practices across all of our existing facilities nationwide and those forthcoming.
We've leveraged the long standing relationships developed by the continuum distribution team to get our own brand onto one hundreds of shelves across the state and the benefits will continue to grow as we expand the floor Cal brand across our footprint in the future.
We are better positioned to compete in all of our markets because of the organizational capabilities acquired and those we've developed in the world's largest and most competitive cannabis market.
We continue to invest in the organic expansion of our wholesale and retail channels in the third quarter Capex was approximately $26 million 4 million of which was funded through tenant improvement allowances with $253 million in cash at the end of Q3, we've put ourselves in a strong position to capitalize on the opportunities in front of us.
And to deliver growth and shareholder value.
Q3 was another outstanding quarter at Crystal Labs, and a very strong start to the second half of the year, we replenished our balance sheet with non dilutive capital we closed a transformational acquisition in Massachusetts, while announcing several new deals and we made massive improvements in bottom line profitability as infrastructure and invest.
<unk> began to bear fruit.
Looking forward, we're excited about growing our Florida footprint with multiple new stores opening in our pipeline launching a robust wholesale business in Michigan operating additional capacity and opening more Sunnyside stores in Pennsylvania gearing up for New York adult use and executing our differentiated strategy to achieve.
<unk> more top market share positions in key states.
2022 is set to be another record year, and we couldnt be more excited of what's to come. Thank.
Thank you for your time today I'll now ask the operator to open the line for questions.
Okay.
Operator.
Okay.
Okay.
With us here.
Get the queue open.
Okay.
Operator, we are here.
Already.
Hey, everybody, we've got some technical difficulties will bear with US we will get this fixed.
Sorry for the weight that ladies and gentlemen, our first question today comes from Angie <unk> of Keybanc. Andrew. Please go ahead. Your line is open.
Okay.
Okay.
Hi, good morning, Thanks for taking my questions and congrats on the strong quarter.
Okay.
You know looking at your adjusted EBIT margins.
It's pretty impressive what you've done from Q1 until now.
You've conferred.
You've reiterated Q4 guidance, which.
It's basically a continuation of of that strong margin expansion.
I'm wondering if you can.
Provide a little bit more color on the puts and takes.
There you've got a lot of acquisitions contributing.
Could you maybe talk about.
Which acquisitions you feel could be the most margin accretive.
At the same time.
Dive a little bit deeper into California.
The pivot.
What exactly does that does that do to your margins.
You've already adjusted your guidance for revenues Accordingly.
Little bit more color on that could be helpful. Thank you.
Sure happy to provide that for you. So when we look at adjusted EBITDA, We've seen improvements both in gross margin as a percentage of revenue as well as our managing our SG&A expenses. So some of the key drivers of that certainly the moved to Florida has been <unk>.
Creative for the for the company.
The margins that we see in Florida are higher than the average margins across the board. So that has been a very accretive acquisition, we've gotten through most of the integration efforts with that acquisitions that we are seeing the benefits from an SG&A standpoint. In addition to the margin uplift that we get from that safely with Massachusetts and cultivation deal closed in the quarter. We did have one.
One month of SG&A costs in.
Q3 related to the cultivate acquisition, but we've done quite a bit too to increase.
It's synergies between our facility and there is.
Some of the other key drivers.
The in the <unk>.
Expansion that we did in and both be in Ohio added, Massachusetts, we've talked about that in the first half of the year that we carry that cost without having revenue to offset that now as those two investments have started to bear fruit, we're starting to see an uplift in our margins associated with that.
As it relates to California, we did see California had more of a drop in revenue in the third quarter. Then it really had an impact on margins will start to see some of that margin improve in.
In Q4, as we really focus on driving more profitable business across the portfolio and get away from some of the third party vendors that we have there that were less profitable than the overarching business, where you'll see some of that carry forward into Q4, and Q1 will be the first quarter, where we had the full benefit of.
On the strategy changed in California. So we're excited about the growth that we saw from Q2 to Q3 and adjusted EBITDA, We expect that to carry into Q4 or we expect to see our gross margins continue to improve sequentially from Q3 to Q4 and will continue to manage our SG&A cost effectively.
Thanks for that additional color and maybe.
Thinking a little bit more about California there.
Could you give a little bit more color on.
The reasoning behind the pivot there and you know do you see any any risk.
To your own brands.
A little bit more color on that could be helpful.
Yeah. Thanks, David This is Charlie.
So as far as the overall strategic decision there was.
It was precipitated by not only market dynamics, but the original strategy as it relates to California to really.
Our own brands out there. So you take those two together sort of the original strategic initiative along with you.
Listening to what the market is telling you in seeing how it's unfolding in and making smart strategic decisions, including pivot is something that we pride ourselves on.
And as it relates to our own brands. So far we've seen positive response.
With our ability to capture additional shelf space for our own brands.
Through this pivot so.
Excited about the opportunity ahead for US there and also proud of the team for making the decisions that we've made to really improve the health of the revenue and the strength of the revenue that were driving out of each of our states.
Thanks for that congrats on the great quarter, and I'll get back in the queue.
Thank you. Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one no telephone keypads. Please night questions will be kept to a maximum of one question per person.
Our next question comes from Aaron Bright of Alliance Global Partners. Aaron. Please go ahead. Your line is open.
Hi, good morning, and congrats on the margin improvement in the quarter, it's great to see.
I'm not sure I'd love to expand a little bit further out some of your commentary within Pennsylvania, you know you mentioned it getting a little bit more competitive.
Good velocity with your own brands I'm, just curious as the market potentially gets more competitive if things don't turn around.
On the overall sales just curious in terms of as you guys are a net wholesaler more people to look to sell it in their own stores do you feel like it might get more competitive on the wholesale side and then obviously with your move to add more retail that helps kind of insulate you potentially from some pricing pressure just curious in terms of your view of potentially adding even more to the retail side.
Insulate you guys from being too much exposed to the wholesale side of pressure continues in Pennsylvania.
Okay.
Yes sure.
Good morning, Thanks for the question so yeah as it relates to P. A.
Yes, I think you laid out some of the rationale in your question and we're very proud of the position that we've been able to create there as the number one.
Market share from them from the wholesale perspective in that state and we've done it with only four of our own stores and as we've talked about historically, we and others use retail two.
To support wholesale initiatives.
We utilize that and in all the markets, where we're vertical so yes, I think it was not only are we bullish on the future for Pennsylvania, even though there is increasing competition, let's not forget you know its $1 billion plus medical market that still has adult use and its future.
So proud of the execution the the market position, we've been able to gain with the with a very light touch on retail in that state.
We want to make sure that we have all of the assets that we would like to have is that state continues to progress and not only open up for adult use but definitely it strengthens our competitive position with having more retail in that state too and then Greg any additional color good okay. Yeah.
We're really happy with the move that we're making in P. A sets us up great for today and for long term.
Okay.
Yeah.
Alright, great. Thanks for the call I'll jump back in the queue.
Thank you. Thank you our next question today.
It comes from Vivien <unk> of Cowen Vivian. Please go ahead. Your line is open.
Thank you good morning, Kelly I was hoping to pivot back to California. Two part question. Please number one you noted that the business was down sequentially that makes senses EG prioritize third party brands, but could you speak to the revenue trends just for your own business quarter over quarter, and then number two as you free up some margin or perhaps.
We're a little bit more margin with the pay that you envision having to redeploy some of that margin back in cats discounting or promotional investments just given some of the competitive activity you're seeing in the marketplace.
Area.
I've been at Stryker, So want to give you more color on California.
Own brand perspective, as Charlie mentioned before we're pleased with what we're seeing with our own brands.
Roughly we now within our portfolio has the top one of the top selling flower brand in the state our combined portfolio of foretell in high supply.
<unk> had been progressing very well in the state on a quarter over quarter basis.
And holding and taking share. We're also encouraged with what we've launched in Q3 on our newly expand house of brands a portfolio, where we're now offering at the high end under our newly launched live resin product the floor Kal, which we're very excited about how it's going to move in the market as we get into Q4, and then also playing in the more value segment with their high supply.
<unk> said, some very strong success going in stores and then our innovation, we brought to market under our edibles portfolio with Sours for example, under good news has had a really strong start.
So from a quarter over quarter perspective, we're pleased with other brands are performing and then also the lineup with how we've strengthened our own portfolio as we head into Q4.
Okay.
And Vivien from up from a margin perspective, no, arguing our focus is on driving more profitable business not just in California, but across the entire portfolio. So without the margin. The third party margin business was a small low single digit business for us well.
Some of that money will reinvested in branding our old products, there, but it won't be a material uplift in additional spend in California.
California.
Okay.
Great. Thank you.
Yes.
Yeah.
Thank you. Our next question comes from Camilo Lyon of BT I E. Can we now. Please go ahead. Your line is open.
Thanks, Good morning, everyone.
Two questions just going back to the first one on on Pennsylvania going back to that topic state.
Clearly, there's been a plateauing of demand in that market.
Yet it seems like by the data that we track. It seems like you saw an increase in that in the last month of the quarter I'm just curious to know what happened.
There's a pretty sharp increase for you and does this portend a potential acceleration in demand as we head into 2022 and then the second question I have is on your cash balance.
253 million very healthy.
How would you prioritize the state that you'd plan to deploy that capital in is it more on expanding into existing dates or are you looking aggressively to enter.
Other east coast markets that you're not currently in.
Yeah.
Good morning, so on Pennsylvania.
We're encouraged by what we saw going from Q3 to Q2 is the growth on our critical products and I think you mentioned you know chriscoe liquid life. APE is now is not as continue to grown and hold its position and share and we're encouraged by that especially as we get into Q4 as we continue to bring premium flower in the marketplace. So on the wholesale side.
<unk>, even though the market is roughly flat on a quarter over quarter basis, we were encouraged by both the strength of our existing portfolio and some of the new news that we're bringing into market under a flower side of our business to really help us not only solidify that share in the state, but also grow as we get into Q4.
So that's really our focus on how we ensure that we're holding and growing our business in the market.
Yeah.
And then on the second part of your question Camilo. This is Charlie.
As far as where we're going to deploy capital PR strategy remains the same right. We're developing the most strategic footprint that we can and where we are.
We're driving to achieve that meaningful material market position, so very happy with the strength of the balance sheet and the cash on hand, it is going to be used to deploy in the states that were primarily already in to increase capacity and breadth that we have in those markets to achieve that depth that we're always driving for.
Yes.
Great. Thanks, so much and good luck for the rest of the year.
Thank you. Our next question comes from Owen Bennett of Jefferies. Please go ahead. Your line is open.
Okay.
Hey, Good morning, this is actually Derek calling in for Alan Congrats on the quarter.
I guess my question really actually revolves around b.
And upsizing the credit facility Youre getting the 95%.
So on that on that and it's lower than you were previously paying but I'm just wondering I guess going long term.
What are the type of credit metrics that the lenders are looking at when determining these rates and is it besides federal legalization or lack thereof and.
I guess, if there is a legalization of banking at Theres. Some legislation. That's passed do you expect that theres still going to be this type of cannabis industry risk premium on that or do you think that lenders are going to provide more type of a market cost of debt going forward.
That'd be helpful. Thank you.
Yeah. Thanks, Derrick this is Dennis so as it relates to the current debt facility. You know, we're very happy with the the rate that we achieved the nine 5% non dilutive.
Generation of cash for us, that's allowing us to make strategic investments in a number of states that Charlie just discussed.
As far as the metrics that the bankers look for it's really looking at the future of the business and where your growth opportunities are and the margin improvement abilities that you have as a company. So we feel very comfortable with the the metrics that are being used in our ability to capitalize that as you know we had that we just announced a $400 million facility.
With the option for another $100 million on top of that so we feel like we are at a very strong position from a balance sheet should make some strategic acquisitions and to use our deploy our cash appropriately to generate shareholder value as it relates to the banking changes and the potential impact on <unk> and so forth.
I do believe that there will still be a risk premium for cannabis companies, even even post reform.
You know what that is yet to be seen I think the overall cost of capital will come down as capital markets open up to us and the options that we'll have we'll continue to increase but I do believe that there will be a slight premium still for the cannabis companies going forward.
Okay.
Thanks appreciate it.
Okay.
Thank you. Our next question comes from Matt Mcginley of need in Ma'am. Please go ahead. Your line is open.
Thank you Dennis you noted that the core G&A dollars were $65 7 million in the third quarter, which looks like it actually declined a little bit from the $66 million reported in the second quarter. As you noted despite that despite having cultivate G&A that would've added a little bit to that seller base in the third quarter.
Have you realized savings in the third quarter and then you noted improvement in that rate in the fourth quarter, but how should dollar growth look from there.
I mean, it's impressive that you basically kept that flat quarter to quarter, but I'm not sure what that would look like into the fourth quarter, given you will be growing that business pretty significantly.
Yes. Thanks for the question. So we did see an improvement in overall spend that's really been driven by a maniacal focus on cost management, but also really reaping the benefits of the integration efforts that we had with bloomer.
We carried a full quarter cost in Q2, we've done quite a bit to drive some synergies across that business in Florida, that's allowed us to actually reduce our overall spend.
And again, just with some of the automation and some of the investments we've made in people and processes. We're starting to see the benefits of some of that and we're able to reduce some of our third party outside spend.
As it relates to Q4 and going forward, we do expect the total absolute dollars to increases we will have another two months of cultivate expense. In addition to some of the expense related to the acquisitions that we still have plan for Q4.
Yeah.
Okay. Thank you.
Thank you. Our next question comes from Pablo <unk> of.
<unk> of Cantor Fitzgerald. Please go ahead your line is open.
Charlie two questions one in the case of Illinois, you know, what's your outlook for the new store openings I mean, if we're stuck at 110 for all of 'twenty two what does it tell you about the growth outlook, how does Illinois grow without new stores, that's one and regarding New York just an update did you started buying flower in the medical market.
He is doing in terms of sales.
And just a reminder, about your production plans in New York for the rig market that people are talking about breaking ground or being ready we haven't heard much from Chris without regard. Thank you.
Thanks Pablo.
As it relates to Illinois, and an update on those next store openings. Yes. Unfortunately, it is in the it's in the legal process.
And I would conservatively say, we're looking at back half of next year.
As to when we would start to see stores opening of course again, when you're when you're involved in litigation that could be that could be accelerated it could be delayed. So I think we're just sort of reasonably and conservatively looking at second half of the year.
And yet growth between now and then it's going to be driven by the same stores now keep in mind some of the 110.
I'm not even sure at all hundred and are producing revenue at this point I think it's 108, but.
So you still have some.
Opportunities from new stores and some that have just opened up in the last.
Three to six months are still getting their feet underneath them. We will continue to drive efficiencies will continue to be able to get more juice from the same squeezed from our platform as we increase efficiencies and capabilities. So there's growth opportunities, but without question. The main catalyst comes from 185, new stores opening up and we're very excited about when that's going to have.
And.
Greg's condition color.
The two things I'd add is in advance of those stores opening on the wholesale side I think what youre seeing is the strength of our wholesale portfolio and as we continue to strengthen that that is what is going to help us continue to both take share or hold share and grow our share of shelf.
And you've seen it like Chris go right now is the number one brand sold across Bds rebuild nationally nationally we built with them the largest.
Concentrate brands, we were number one in many of our markets.
And so I think through that where you should hopefully have confidence is that we are building a portfolio of really strong winning brands. So whether the market is growing or whether the market.
It is slowly we can take share with those brands on the retail side.
We're encouraged about with our retail trends.
We are still saying seeing trip growth in trips driving our store growth.
And so as we look at the health of that market going forward. We are we are planning to ensure that we continue to drive trips into sunny side to drive overall revenue when we've proven that with the sequential growth that we've continue to drive out of our Sunnyside footprint and that's that's how we'll drive growth in advance of the stores.
Turning which obviously will be another catalyst that will help sustain growth.
Right.
The second part of your question in New York.
We have been able to get some flower into our stores and are not a meaningful amount of course that'll that'll improve and increase as more capacity comes online it's very limited right now.
And as far as our progress that we're making in that state site identified moving forward.
Got enough information from the state to make us feel comfortable in in pursuing the design that we have which also include some flexibility to account for any any adjustments per expectations that actually get released.
I E as it relates like canopy caps.
And nowhere, we're excited we'll be ready for adult use as soon as that happens and I think as others have commented that's likely.
Probably the beginning of 'twenty three.
Got it thank you.
Thank you. Our next question comes from Scott Fortune of Roth Capital Partners. Please go ahead. Your line is open.
Yes, good morning, and thanks for the questions kind of following up on that as you look at kind of your capex kind of expectations here. We know the guidance has stepped up and production, bringing online, Massachusetts, and Ohio, How should we look at kind of the production ramp as we look into 2022 and the Capex dollars.
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Yeah.
Yes. This is Dennis so from a capex perspective.
We will continue to make investments in and Florida, Charlie get done talking about New York that will be at a substantial investment that we'll make in 'twenty two that will gear fruit in 2023, we've.
We've got Michigan coming live at the very tail end of this quarter. Those are ti dollars that we've had available to us that are ramping down.
But we're going to continue to use to spend capital dollars.
As we rollout new retail stores as we expand our footprint in Florida as we build out the Loral harvest acquisition in Pennsylvania. So we will continue to go deeper in the states that we're in today to provide.
More availability of product work on automation to help drive margins.
Better than where they are at today.
And we'll be strategic in where we use those dollars and make sure that we get the appropriate returns.
Yeah.
Okay. Thanks for the color.
Okay.
Thank you. Our next question comes from Macdevitt Daily of Canaccord Genuity of Derek. Please go ahead. Your line is open.
Yeah. Thanks, So just following up on that last question, just curious which states within your current footprint or states, where you think you can go.
Materially deeper obviously, you've done a great job of adding assets in Pennsylvania, and Massachusetts of late and then secondly, just in terms of debt the leverage youre expecting to get on your EBIT margins in Q4 up about 400 basis points.
How should we think about that in terms of the split between gross margin and SG&A leverage.
Okay.
Okay.
So again this is Dennis so from a from an investment standpoint, and capital dollars will continue to invest in and states that I, just talked about and in Florida and.
Yeah P a M.
In other states, we'll look to invest perhaps in Maryland, and again just to go deeper in the states that were already and making sure that we're staying.
Active and that we've got appropriate supply as demand comes up at some point, we'll have to make some investments in Illinois, perhaps in advance of the additional stores going live that'll probably be a late 2022 investment.
That will yield benefits in 2023.
As it relates to EBITDA in Q4, we expect it to the improvements to come both on the gross margin perspective as again, we continue to wean off some of the third party.
Our California business and as it as we go break some of the acquisitions that we've had and in Massachusetts and expanded Florida those as those opportunities are there.
They're more revenue that will help our margin overall margin performance on a gross margin perspective from an EBITDA standpoint, while the total dollars will improve or increase a little bit related to some of the acquisitions as a percentage of revenue will continue to see that.
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Percentage drop and will continue to be more efficient as the total spend as a percentage of revenue.
Okay. Thank you very much.
Thank you. Our next question comes from Kenrick Tiger ATB capital market. Henrik. Please go ahead. Your line is open.
Thank you good morning, I Wonder if you could speak to promotional intensity in cold chain rational irrational laws that coal mine and then how has that evolved through the fourth quarter and how should we think about that evolution through 2022, and perhaps if you concentrate your comments around some of the states in which that it's been grabbing.
Headline I'm thinking, Florida, Pennsylvania.
Perhaps to a lesser extent, Illinois any insight there would be really valuable. Thank you.
Hey, good morning, So you're absolutely correct, we are seeing.
Some increased price promotions.
In some of our markets like Florida and Pennsylvania.
Our point of view on that is what we built and what were continuing to build in the states is what's going to help shield us from what's to come on pricing and that's why we've built our brands to make sure that we are continuously driving up on the premium side and offering high quality that command higher prices and also bringing our value portfolio to ensure the rins.
Related against deep discounts need to happen on premium brands.
So in our view as we've as we look across our market. It is managing our portfolio whether that through higher quality innovation. We're finding value that we can enter that really is going to defend defend us around what's pricing to come and we are we are encouraged by what we're seeing on Florida on how thats working for us and we've got some.
I'm exciting news in the months ahead, that's going to continue to help strengthen our portfolio in Florida and in Pennsylvania, and as Charlie mentioned earlier.
Even with all the price activity that's happening we've continued to hold.
Really material market share and drive incredible.
The velocity on our cross co brand without even owning the majority of retail in the state.
And so that does show you that we are building a portfolio that enables us to compete and drive growth even despite whether it's short term price promotion activity that we're seeing right now, whereas that continues longer into the future.
Thank you and congrats on the corner.
Thank you. Thank you. Our next question comes from Andrew Semple of Ekman capital markets. Andrew. Please go ahead. Your line is open.
Are there good morning, and congrats on the results.
My question is on the wholesale business could you elaborate on some of the dynamics between pricing and volume within that segments for the quarter.
In addressing that.
Are there any regional.
Differences between volume and pricing factors between eastern and Midwest markets.
The western.
[noise] business within your portfolio.
Hi, it's Greg I'll take that one too because I think it's a continuation of our last conversation so.
Let me start with your question on regional pricing.
Clearly in the West in California, and we see this in a more of a syndicated datasets. We've available there was both significant price compression in this quarter and there was also some light unit volume declines this quarter too and if you think back to Q2, we saw price compression, but we saw total revenue growth because unit volume was up.
And so that deep price discounting in western markets.
Has intensified from Q2 to Q3 perspective.
Moving east.
Really the two callouts, we would say where we're seeing the most price promotion activity is the two markets. We just discussed Florida being one and then Pennsylvania being the other.
Where there has been an increase in price activity over the last couple of months our point of view, though is the same as what we discussed before which is we have to assume that we are going to either live in price promo activity or price compression comes in the future and we have to be ready for that and that's why we're building our brands.
And our portfolio to make sure that we have the right portfolio that allows us to compete against price and premium is to make sure. We're both driving revenue and margin the pricing comes in as Dennis mentioned before the capital that we're investing in things like automation that will also help us become a more lean manufacturer.
And be able to continue to grow margins, even in face of price compression. So.
We're seeing it we're planning for it.
We have to anticipate whether we see it next quarter or quarters ahead that it could.
Likely will come and we're building our brand portfolio and are on our manufacturing footprint to make sure that we are very competitive and drive.
Economic threat.
Thank you Greg I appreciate the color.
Okay.
Thank you that was our final question I will now hand back to the question of Labs management team for any closing remarks.
Okay.
Very good. Thank you. Thank you very much for your time today I want to thank the fantastic team here at Crestwood labs for incredible execution and commitment to being nimble in such a dynamic industry and lastly, thank you to our veterans and happy Veterans day, we look forward to talking to everybody.
With our Q4 results in the months ahead. Thank you.
Yeah.
Thank you ladies and gentlemen. This concludes today's call. Thank you all for joining you may now disconnect your lines.
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