Q4 2021 Cresco Labs Inc Earnings Call
Okay.
[music].
Hello, everyone and thank you for joining the Costco lapped fourth quarter 2021 earnings conference call. My name is Jennifer and I'll be the operator for today. If you would like to ask a question for the Q&A portion of today's call. Please press star followed by one if you change your mind at all funded by Chi and.
In addition to the Quest management team co founder and CEO of Columbia Cat Nicholas feature will be on the line to the live Q&A.
We should now begin thank you.
Thank you good morning, and welcome to Chriscoe Labs fourth quarter and full year 2021 earnings conference call.
During today's call. We will also discuss the company's proposed acquisition of Columbia care, which was announced this morning.
Our call today, we have chief Executive Officer, and co founder, Charlie Bechtel, 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 fourth quarter and full year 2021 earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These unaudited preliminary results for fourth quarter and full year 2021 are provided prior to the completion of all internal and external review and therefore are subject to adjustments until the.
The filing of the company's annual financial statements, we plan to file our corresponding financial statements and MD&A for the three and 12 months ended December 31, 2021 on SEDAR and Edgar later this week along with our earnings release, a press release and Investor presentation regarding the proposed acquisition of Columbia care are available.
On our Investor Relations website.
Certain statements made on today's call may contain forward looking information within the meaning of applicable Canadian securities legislation as well as forward looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. The forward looking information and statements may include estimates projections goals for.
Our cast are assumptions that are based on current expectations and are not representative of historical facts or information such forward looking information and 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 changes in applicable worker regulations, the possibility that the expected synergies and value creation from the proposed acquisition will not be realized or will not be realized within the expected time period. The rest of the businesses will not be integrated successfully.
<unk> from the acquisition, making it more difficult to maintain business and operational relationships and the possibility that the acquisition does not close including but not limited to due to the failure to satisfy the closing conditions, including the receipt of requisite regulatory approvals.
Additional information regarding the material factors and assumptions, forming the basis of our forward looking statements and risk factors can be found in our earnings press release.
And in <unk> filings with SEDAR and the Securities and Exchange Commission Chriscoe Labs does not undertake any duty to publicly announce the results of any revision to its forward looking statements or to update or supplement any information provided on today's call. Please note that all financial information on today's call is presented in U S dollars.
And interim financial information is unaudited. In addition to todays conference call Chriscoe 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 calculation of these measures and a reconciliation to the.
Most director directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to or 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'll turn it over to <unk>.
Charlie.
Good morning, everybody and thank you for joining us on today's call.
Very exciting morning, we're pleased to share our Q4 and full year 2021 results as well as our truly transformative news the proposed acquisition of Columbia care.
Q4 marks the completion of a fantastic year for critical labs, we produced $822 million in annual revenue, representing 73% year over year growth and we maintained our position as the number one wholesaler branded cannabis products as well as having the highest per store revenue of any scaled national retailer.
While Q4 came in below our expectations, which Dennis will discuss in greater detail. We believe these results were more market driven than operational in fact, we competed extremely well during the quarter holding or gaining market share in seven of the 10 states in which we operate in other words, we took everything that our markets were willing to give in Q.
For a giant thank you goes out to the entire <unk> family for accomplishing what it did and the headwinds in the quarter.
Operationally critical labs continues to execute regardless of the macro environment with a clear and focused strategy building. The most strategic geographic footprint and obtaining market leadership positions as a cultivator, we're generating quality potency and consistency at an unprecedented scale as a wholesaler.
We're delivering the best selling portfolio of branded products driving traffic for our retail customers and delighting end consumers.
And as a retailer our highly efficient retail platform meets consumers, where they want to be met feedback with central data and supports our wholesale channel.
The combination of these efforts has afforded chriscoe labs, the ability to go deeper than any other operator in the markets that matter.
This brings me to our other incredibly exciting news. This morning, the proposed acquisition of Columbia Cure.
This acquisition will combine an amazing footprint with proven brand operational and competitive excellence to create a new leader in cannabis on a pro forma basis. After planned divestitures. The combined company will be the largest cannabis company in the world by revenue the number one wholesaler of branded cannabis products.
And we will have the largest nationwide retail network outside of Florida and number two overall.
That is before we start sharing our brand portfolio cultivation, and retail operating procedures or integrated into a unified data analytics and R&D team.
Put simply we believe the combined footprint and operational capabilities will lead to so much more than either company could achieve individually the whole will be more than the sum of its parts now.
Now, let's review three specific ways the acquisition of Columbia care is synergistic and will lead to attractive sustainable financial performance superior market access proven capabilities in wholesale and retail and balanced economics.
<unk> superior market access.
The proposed acquisition of Columbia care adds eight new markets to critical labs, including the high priority States of New Jersey, and Virginia and provides depth vertical integration, where the opportunity for asset optimization and nine more.
Combined our footprint will encompass 17 states and Washington D C covering 180 million Americans or 55% of the total U S population and over 70% of the addressable cannabis market. Our pro forma footprint is expected to be a $31 billion total addressable market by 2025 According to BD.
Let's see.
The combined company will have a presence in every important cannabis market, including the industries mature influential markets today's material markets and Tomorrow's high growth markets critical labs will have operations in all 10 of the industry's top 10 revenue states in 2025 for BDSI and importantly, we.
We aren't just talking about breadth, we're talking about depth.
Currently the combined companies have the number one share position in four markets, Illinois, Pennsylvania, Colorado, and Virginia and critical Labs is number two in Massachusetts.
On closing of the acquisition, we believe we have a pathway to top three positions in New Jersey, New York, and Florida, which would give us material market positions and seven of Bds as top 10 markets by revenue in 2025, this level of depth and breadth in the largest markets is unrivaled and we believe it will provide us.
With not only economies of scale, leading to superior margins, but also meaningful brand equity and long term competitive moat.
The acquisition is expected to expand Chriscoe labs growth tailwind for the foreseeable future looking at the expected adult use catalysts in the next few years, we will add one of the operational vertical licenses in New Jersey two of the four licenses in Virginia.
We will have optionality with two of the 10 licenses in New York.
Additionally, we anticipate expanding on our number one share position in Pennsylvania with the addition of three retail stores optimizing our maxed out footprint in Ohio, and doubling our existing retail network in Florida. We believe critical labs is well positioned to capitalize on every meaningful adult use catalyst for the foreseeable future driving growth well above it.
Industry average.
The transaction isn't just about new states. It also improves our depth in existing states for example, Colombia care will add cultivation and retail in Maryland, allowing us to get fully vertical and improve margins ahead of adult use conversion. Additionally, it adds retail in California, once again, increasing our effectiveness through the benefits of vertical integration.
And will that highly productive retail and Arizona, where we have been under scaled the acquisition would effectively address three markets that are currently operating below our average gross margin and will give us vertical production and retail operations in every market except Michigan.
We're looking at the optimal way to to round out our footprint with material positions in the most important markets. We believe Columbia care is the most synergistic fit they've assembled a fantastic footprint full of high quality assets with established infrastructures and experienced operating teams. The acquisition is expected to address all of our material.
Potential gaps in the few overlaps where we have to divest our licenses and assets are in highly sought after valuable states, where we should be able to generate significant proceeds from the sales to fund future capex and or de lever the organization.
Number two proven capabilities in wholesale and retail being leveraged across a wider footprint in 2021 on a much smaller state footprint than some of our peers critical labs was the number one seller of branded cannabis. According to independently published data from BD SA running through some of the stats we are.
The number one company in the branded flower category number one company in the Vape category number one company in the concentrates category and they are a top five position in the edibles category collectively fresco labs has the number one selling portfolio of cannabis products in the industry.
The ability to leverage our cultivation production and brand performance across a much wider footprint is expected to lead to long term sustainable growth and market share gain.
Over a longer term, having our products, which have proven their popularity and will now be available to 70 plus percent of the addressable market is what we believe will turn our tiered brand portfolio a high supply Chris go in Florida Kal into the Miller High life, Coca Cola and Johnnie Walker Blue label of the cannabis industry, we're creating.
Mainstream brands that command significant share of shelf have personal and cultural relevance and are easily accessible to the majority of the addressable market.
The opportunity isn't just with our product brands, but also with our Sunnyside retail banner throughout 2021 critical labs has had the most productive stores of any scaled M. S. O. We consistently take above fair share of market sales.
Illinois for instance, we index at over one five times, our fair share. This is largely a function of our product assortment retail experience and throughput we have a history of increasing productivity at acquired retail with our Rodin acquisition in Ohio, We saw 57% improvement in the nine months post systems integration and rebranding.
The Sunnyside and have seen similar results in productivity improvement with other acquired stores.
This is an opportunity for us to expand our operating procedures and Sunnyside banner across an additional 80 plus stores and eight new states, creating the second largest cannabis retailer in the industry and the largest retail footprint outside of Florida.
We are a CPG focused company and adding additional retail furthers our ability to connect directly with consumers and build our brand equity. We believe the combination of trustco and Columbia care will accelerate our mission to be the undisputed leader in cannabis CPG in a way that no other potential M&A could.
Number three balancing economic drivers and driving sustainable financial results.
The combination is expected to significantly diversify our economic drivers, giving us a more balanced state revenue mix, along with an increased percentage of revenue from retail in 2023 with this combined platform. We expect to have eight markets generating over $100 million each in annual revenue.
This breadth of contributing states significantly de risks our revenue profile, making us the most diversified operator in the industry and capable of managing the dynamic nature of state by state operations.
The higher percentage of retail revenue will give us more consistent timing of sales and should provide us with greater predictability and forecasting revenue, while the future still favors the middle two vertical through the value chain. The benefits of channel balance are particularly important during this building period.
I've already touched on how increased scale and vertical integration will improve margins and enhance the opportunity to drive long term synergies cost savings and profitability from the lowest hanging fruit like public market cost to longer term synergies like HR data analytics finance and other shared services, there's an opportunity for meaningful.
Cost reduction to provide consumers with more affordable cannabis, bringing more consumers into the regulated markets. Likewise, we see an opportunity to have material savings on duplicative capex projects and realize value from the sale of redundant licenses and assets to pay down debt positively impacting the free cash flow profile.
Looking ahead, we're cognizant of the risks inherent in a deal of this size, but feel confident in our team. We built strong muscles here integrating five companies over 600 employees across 24 sites in 2020 one.
That is bringing infrastructure operating procedures reporting data and decision making onto a standard platform all while maintaining strong cost control and after getting to know Nick and some of the Columbia care team. We look forward to repeating this with Columbia care, bringing the best from both organizations to the forefront.
Again this acquisition will combine two of the leading msos pairing an amazing footprint with proven operational brand and competitive excellence to create a true leader in cannabis because it also combines the highest revenue cannabis company in the world that is also the industry's leader on matters of social.
Packed the most popular brand portfolio in the industry and the most strategic geographic footprint, representing influence size and growth and the most productive retailer and the largest nationwide retail store network outside of Florida.
All tuned to addressing the needs of our stakeholders more opportunities for our collective team members better and more affordable cannabis for consumers responsible candidates for regulators and our communities and increase cash flow for our shareholders with that I'll turn it over to Dennis to discuss Q4 results.
Thank you Charlie and good morning, everyone I'll begin by reviewing the financial results from the quarter, then highlight a few items from our balance sheet and discuss our capital position.
I'll close with a quick touch on the deal terms and expected timeline before passing it back to Charlie for closing remarks.
Turning to our results our fourth quarter revenue was $218 million.
As already noted by several of our peers the quarter saw some unique and unexpected market events that resulted in lower than expected revenue.
In October we made a strategic decision to significantly reduce our third party distribution business in California that fundamentally changed our business in that state.
At the same time the market experienced a 6% sequential decline in demand coupled with an approximate 25% drop in the weighted average cost per pound.
These events created a challenging quarter for all operators in the state and impacted pricing as we sold through our remaining third party inventory.
Setting aside, California, the rest of our platform had 6% sequential growth outpacing the overall market.
In Massachusetts, we saw a softening in demand in December that the market had not previously seen.
With our recently closed acquisition and the state we anticipated a substantial portion of the quarterly revenue coming in the last two weeks of the quarter as it had historically.
Those sales didn't materialize because the market couldn't support that volume in December .
But again, we competed incredibly well we held or grew share in the majority of our markets, including the market's just mentioned and we achieved the number two market share in Massachusetts for the quarter.
As Charlie stated previously we got everything from our markets that they were willing to give us in Q4.
Q4 revenue mix was 46% wholesale and 54% retail.
Retail performance was particularly strong up almost 10% sequentially and over 60% year over year.
Driven by store growth in Massachusetts, Florida, and Pennsylvania at the end of the quarter.
Same store sales improved 28% year over year.
Overall wholesale revenue declined 7% sequentially materially stemming from our exit of third party brand distribution in California.
Excluding California wholesale was up 2% sequentially.
For the full year wholesale revenue was up 12%.
Across the rest of our footprint, we had some notable wins during the quarter and.
In Pennsylvania, we took market share in the back of improving flower quality as enhancements we made in the operating procedures early in the year started to play out.
In California, Oracle was the number five selling flower brand in the state during Q4 and has moved up to number four in January .
Going forward in California, we won't see the same headwind in 2022 as we have substantially sold through our third party inventory that we held at the end of Q3.
In Massachusetts, we're making good progress on the integration of cultivate and the alignment of our brand portfolio.
Fourth quarter gross margin, excluding the fair value of markup of acquired inventory was $118 million or 54, 4% an improvement from 54, 2% in Q3, our fifth quarter in a row of improvements in gross margin.
Over the course of the year, we've seen in over 800 basis point improvement driven by achieving operational scale and more markets.
The strategic decision to shift away from third party brands in California.
And our entry into the vertically integrated high margin, Florida market.
Looking ahead, our goal is to maintain gross margins above 50%.
We will continue to see improvements from the investments we are making today in automation for processing and packaging along with increased cultivation yields. However, this will in part be offset by price compression.
While inflation is making other consumer goods more expensive, we have the opportunity to provide more value to our consumers convert more people from the illicit market and unlock industry growth.
As a leader in this industry. It is on us to continue to optimize our operations through automation and scale to drive down costs and provide a quality consistent and affordable product to our consumers.
Fourth quarter SG&A expense, excluding share based compensation and non core items was $65 6 million or 30% of revenue.
We held SG&A dollars constant for the past three quarters, despite adding 22 dispensaries integrating for new acquisitions, and adding over 1000 employees.
While we will continue to make investments in our people processes and systems. This year, we expect to see continued leverage in our SG&A expense relative to sales for the full year.
Adjusted EBITDA for the fourth quarter was $57 million, representing a margin of 26%.
While this did not hit our 30% goal we maintain the improvement in margin. We delivered in Q3 as we continued to demonstrate our prudent cost management and ability to create operating leverage in the face of increased market pressures.
We generated $37 million in operating cash flow during Q4.
Even adjusting for changes in working capital we've seen significant improvement in operating cash flow over the course of the year and improvement in our conversion of adjusted EBITDA to operating cash flow.
Put another way we've continued to improve at converting a dollar in revenue to a dollar of cash flow that we can turn around and invest in the business.
This will be a key focus for us in 2022.
Fourth quarter gross Capex was approximately $17 million, bringing our full year gross capex to $94 million, we finished the quarter with $226 million in cash our net debt to EBITDA ratio is one seven times within our targeted range and we feel good about our capital position today.
Looking ahead on the retail side, we have new dispensary openings planned in Florida, and Pennsylvania throughout the year to expand access to our products and drive share gains.
In Florida, we just announced the launch of disposable babies and gummies for the first time, a key unlock as we look to give patients that better value proposition and selection when deciding which dispensary to visit on.
On the wholesale side, we will be rolling out our <unk> brand across multiple markets throughout the year to play at the ultra premium category in flower vape and concentrates.
Our approach to tiered pricing has allowed us to meet consumers, where they want to shop, while maintaining margins.
Having said that the start of the year has seen a tough macro environment.
Based on Bds, a data our markets are down mid single digits compared to the first two months of Q4 in the face of higher inflation stretching the consumer wallet staffing and consumer access to issues due to omicron and traditional seasonality.
As such and consistent with what you've heard from other Msos, we expect growth to be relatively muted to flat in the first half of 2022.
Notwithstanding we will continue to keep our head down keep executing on the business and keep putting the pieces in place to ensure the successful integration of Columbia cure and achieve industry leadership for years to come.
Now turning to the Columbia care announcement. This acquisition is accretive based on 2023 sales and expected adjusted EBITDA projections.
We believe and so does the Columbia <unk> Board and management that there is greater opportunity for multiple expansion and upside for our shareholders together as a combined company has better growth prospects more scale, greater economic diversification and lower risk.
We intend to Delever, the combined company's capital positions by allocating a portion of the proceeds from the required divestitures to repay existing debt.
The areas, where we will likely divest assets happen to be the most sought after and valuable markets and canvas.
Illinois, Ohio, Massachusetts, and Florida.
More to come on this in the coming quarters.
Over the next couple of months, we will be working closely with the various regulators and should be in a better position to update you on the expected closing timeline by our Q1 conference call, but expect it to be around year end or Q1 of 2023.
I'll pass it back to Charlie for some closing comments.
Thank you Dennis.
Our teams are incredibly excited about what lies ahead for trustco labs in Colombia care shareholders. This is the convergence of two companies with a shared vision for what a normalized in professionalized cannabis industry should look like we're pairing the best consumer brands with the most strategic deepest and highest growth footprint.
That combined with proven operating expertise should drive growth and increase shareholder value for years to come while critical labs achieves its vision to being the most important and impactful company in cannabis.
With that I'll open the call for questions.
Thank you and as a reminder, if you would like to ask a question. Please press star followed by one and you kind of think keypad. If you do change your mind it staff.
Our first question today comes from of Jefferies.
And then your line is now open. Please go ahead with your question.
Good morning, all and congrats on the deal and a couple of questions. Please first of all I just wanted to.
I'll get your thinking around how you are thinking around that combined brand portfolio and which specific bonds.
Columbia Cabot still any specific gaps in your portfolio and then the follow up will be could you just comment on any states, where you may have to make some divestments that with this deal to go through.
Good morning, all and thanks for the questions.
Yes, so as it relates to the combined brand portfolio I think that's one of those the things that we're going to be working on and develop.
Between now and the closing of the transaction they've got some good brands over there that may fit very nicely in our portfolio or vice versa.
States matter and the state consumer profile matter. So one of the things that we'll be working on as we go forward.
And as it relates to state Divesture, yes, there is.
There's going to be some states.
We talked about in our prepared remarks.
Because of of licensing caps that will need to evaluate divestitures, we think it's a great opportunity for us too.
Optimize operations in those states and then clearly proceeds from any divestitures can be very productive and future capex needs and also de levering. The business. So we think it's a great opportunity I'd also mentioned in those states.
As Dennis mentioned, our are very sought after and valuable states. So it's a it's a great thing we'll be working on over the next nine plus months here.
Okay, great. Thanks, again, congrats again.
Thanks Alan.
Thank you Camilo Lyon of B T. I G. You have next question. Please go ahead.
Thank you and good morning, everyone and Charlie and I Congrats on the transaction.
I too wanted to follow up on the thinking around <unk>.
Particular state divestitures.
Specifically, New York, Charlie I think you just got approval for your facility.
And Colombia care has has and up and running greenhouse.
So could you help us think about what way you're leaning in terms of which which portion of the assets youre going to keep versus sell.
Would you build up that facility that you just secured for <unk>.
Or will you divest that portion of the business.
And then just from a.
High level perspective kind of the rough math that we're kind of ballpark in terms of the potential gains that youll make on selling the overlapping licenses and the best ensures that you spoke of.
Of getting too.
A range of.
$250 million to $400 million is that around where youre thinking.
Based on some of the work that you've done already in terms of the overlapping nature of the of the.
The states. Thank you.
Sure Good morning, Camillo and Ed I'll start this off and then I'll also invite Nick to chime in on this too.
New York is one of the more interesting states because we do have overlap there.
That would give us two of the 10 and we both have.
Certain stages of development and production facilities, we both have retail footprints. So I think that's going to be a project and a process, where we think about the optimization. There's a lot more that goes into that analysis, then just square footage or building type. It's also.
Logistics, there's all kinds of factors that play in what area what location of the state we would want to commit to and then also.
To your point that the end divesture value as it relates to that but I would ask Nick if you'd like to contribute its out there too.
Thanks, Charlie.
You know camilo one of the things that I've been I've been so impressed by as we've gone through this process.
Discovery process of understanding what are those organizations is that we.
We really do have a say.
A laser focus on driving shareholder value.
You know as we as we looked out in the landscape in the future and we've thought about things like deleveraging use of proceeds asset sales. We're in a very fortunate position because every one of the markets that we might consider a divestiture are incredibly sought after so these are not kind of afterthought markets. These are primary mortgage.
Other operators that don't have exposure to them must have in order to compete effectively and frankly in order to be considered a market participant the viable market for us with disciplined so I think that that amount of that sort of reality of what we're looking at makes this a very unique moment in time for us to jointly looked at the landscape.
How we optimize shareholder value and frankly, how we prioritize which assets are sold.
There is there's no pride of authorship, meaning.
We are we are both incredibly impressed by one another's teams and organizations.
For those colleagues who are listening to this call I would just say.
Whatever the decision might lead to it will be done in a very thoughtful and deliberate way so that the integrity and the purpose and the mission of what you all have built.
Mains intact going forward.
And in the process. So I think our shareholders will really be the beneficiaries in fact their debt holders are likely to be beneficiaries as well so.
The I don't think we need to talk about sort of expectations for pricing yet other than the fact that these are arguably the most attractive markets in the U S market, which is obviously the market that people need to be in to be considered.
Market leaders.
Understood and if I could just ask more of a.
More broader question with respect to the integration.
How are you considering.
The team that will be charged with integrating.
Pretty heavy lift.
In all fairness right. This is an incredibly exciting transaction, but definitely one that doesn't come without its share of work. So maybe if you could just help provide some clarity in terms of how the responsibility of running the day to day operations will unfold.
As it relates as it compares to those that will be charged with making sure that the integration unfolds to the level that everybody wanted to habitat.
Okay.
Sure.
Unfortunately for US this as I mentioned in my remarks. This is a muscle that we've developed over the past couple of years, but definitely over the last 12 months.
We closed on five different M&A transactions fully integrated those organizations and you know when we were when we integrate acquisitions its full integration right. So it's it's the it's the transferring of the bringing on of every element of that onto our platform. So Fortunately we've developed capabilities here. We've developed teams we've developed experience but.
Not to be shortsighted viewpoint. This is big and so this is going to be something that we focus on getting right. Because it's very important for all the reasons that have been discussed so far. So we will also include third party.
Specials and resources to make sure that we can manage through the bandwidth while we lead it.
Sure Charlie.
Sure.
So one thing to keep in mind is that Charlie and I are both co founders of our organizations and so you're talking to the people who had a vision for a the way a company develops from the very beginning that has basically been continuous and have had I've had a very high degree of continuity since day one.
That fundamental kind of connected tissue I think is what has allowed crestwood and Colombia, you care to make acquisitions and successfully integrate them.
Obviously through the due diligence process thought through a lot have begun thinking through a lot of issues, but just to reiterate what Charlie said.
The human capital element and the cultural element, which often leads are the two sort of most significant risk factors weren't integrating a business are actually the two areas that I think we're most well.
We're most important when we thought about combining in the first place meaning if.
If we didn't have cultures that fit so well together, whereas the organizational design would be a much more complicated process than if we didnt have the skills on either side to recognize what our relative strengths and weaknesses were then again I think we would run into probably more more problems but.
The benefit here is that the both of these organizations I think have really done a good job of finding a way to build the tunnel.
Manage that process and we'll be doing it on a parallel path and we'll be doing it together once we close takes place.
It sounds great and good luck and thanks very much for the answers.
Thanks Camilo.
Our next question online comes from Disney in Asia of Cowen. Please go ahead with your and your line is now open. Thank you.
Thank you good morning.
Charlie you know obviously, the wholesale backdrop was challenging in the quarter, but your business model had been focused on that channel as a longer term way to establish a true CPG like portfolio in a geographically focused way so with the pivot to the bigger retail mix with this proposed transaction can you comment on your medium term outlook for wholesale pricing broadly.
Beyond the softness in the first half of 'twenty two that was discussed during the prepared remarks, because to US just deal would suggest that you expect continued volatility minimum and more probably sustained downward pricing pressure. So I was hoping you could quantify that but I have a follow up.
Okay.
Good morning, Vivien Thanks for the question.
As we articulated we one of the things that we really liked about this deal is more balanced economics that we're going to get through the organization and that was both.
As it relates to states, where we'll have a more diversified revenue profile from the states that contribute to our overall P&L, which we love right less concentration in two or three big states, but as we mentioned in eight states contributing over $100 million in revenue in 2023. So that's great. The other thing too is more channel balance and.
As we've always talked about our thesis our core thesis always has been still remains the future of this is in the middle two vertical through the value chain, right and Thats brands and distribution of brands on as many shelves as possible, but in the interim balanced sort of approach and <unk> are key during this building phase so we like the <unk>.
<unk> that this larger profile gives us plus again as you've seen we've developed some strength in.
And becoming a retailer over the last couple of years too and I know Greg has some additional thoughts here.
Just to build and I'm wondering if there's been I think to your question. We do expect to see continued pressure on pricing in wholesale does something we were planning for I think we're seeing it across our markets but.
Because we planned for it. It's also why we have a very strong has the brands that enables us to play a different price points and so weird to see for US focus is how do we ensure that we are competing at the low price points as price drives down, but also educating consumers on quality and value to ensure that our higher price points of our premium brands.
That we are continuing to delight and own a superior pricing perspective so.
And the combination with Colombia carry was only gonna help strengthen our total portfolio of brands.
Understood that's helpful and just a quick.
Follow up on capital allocation. So I definitely hear you on the cost savings around duplicative capex on cultivation, but did I understand correctly that you intend to rebrand Columbia Carrefour retail doors to Sunnyside.
A little surprising.
Even that Columbia care, Jeff made notable investments to harmonize their own retail banners.
Yeah.
This is Charlie I'll take this one I think that's similar to them.
The brand rationalization question earlier, I think we'll do the same thing there on the retail side of course, we love the Sunnyside brand.
We think its very effective but we'll be looking at this over the next nine plus months from now until closing and even after to really develop a thoughtful strategy on a state by state basis as it relates to the branding of the retail flags.
Understood. Thank you.
Thank you.
Our next question online comes from Kenreck Tiger of Alta Corp capital connect your.
Your line is open. Please go ahead, thank you very much.
Thank you and good morning.
And congrats on the deal are great to see in the rest of the team and the Nic and the team as well just coming back to New York Quickie. If we could you know we've spoken and I appreciate the potential surfacing of value here from divestitures, but there's also some real dislocation risk. If you can't quickly get to agreement on what the footprint needs to be or will be such that you can continue.
You're building it and maintain that pace of build between now and let's call. It end of year early next year as we head into adult use in New York. How are you thinking about you know avoiding any dislocation risk in New York. How confident are you that you can and will be as as ready as either you would've been standalone given the noise that some of the.
See I could potentially correct in that equation.
Good morning, Ken.
A valid question I think New York in particular, because it's.
Those facilities are still in sort of production and build phase and there will be a debate of likely divestiture of one of them I think both organizations are going to proceed doing what we need to do to make sure that those facilities are functional and operational in time to meet the adult use.
Market, but keep in mind everything that we do in furtherance of that we think also creates value.
For the divestiture. So it's one of those where I think we will proceed.
But it's not a not sort of a lost or sunk costs in that respect, it's something that's creating more value as we look to divest of certain asset.
I appreciate that Charlie and then maybe just switching to Florida briefly one of your comments there was a path to a top three position in New York, New York, New Jersey, and Florida, just focusing on Florida.
What are you and the team believes that the combined entity will give you in Florida that perhaps neither of you had a path to stand alone given our realized very different footprint than most states.
What's the secret sauce here on a combined basis that you believe gets you to that top three because Florida, certainly proven a more challenging market for the.
The majority of players and it was expected so any additional color that'd be great. Thank you.
Sure you know what.
Greg you want to start with this one sure. Good morning, I think is your question on Florida, What's so exciting about this opportunity is it is going to give us access to more doors in the state of which only accelerates our plans we have we've been on.
Our cultivation and quality cultivation. We haven't stated is going to ensure that we are bringing into the stores.
The flower quality manufactured goods, which is only going to help us increase our baskets average baskets across our legacy stores and then new stores and so it does really give us an incredible footprint and one of the best Assortments of quality brands in the state, which if you combine those two it's the thesis on why we think that'll give us that guide us to.
A top three position.
Thanks, So much Greg I'll get back to you.
Yes.
Thanks, Ken.
Matt Mcginley of Needham you have the next question. Please go ahead.
Thank you. So I can appreciate that you might not have all the answers on potential divestitures, but in a few states. It would seem like Columbia care and Costco would be going down a parallel path in terms of spending capex on assets that you might not hold onto so can you discuss how this announcement would impact your combined capex plans in the end of this year.
Good morning, Matt Dennis is going to handle that.
Thanks, Matt for the question. So you've obviously been in discussions quite a bit with the Columbia care team, we understand what their capital plans were for the coming year.
In addition to our plan. So there are there is an opportunity to reduce some capital spend in markets that we plan to divest in between the different companies and we're managing that effectively I think that is one of the synergies.
That we will recognize not only in reducing the capped plans, but also capital avoidance in some of these larger sites, where we may have had to make some large investments in Florida to build out our cultivation and then Colombia cares assets will help us.
Get that capacity and that biomass that we need without making a large investment.
Got it.
Dennis on the gross margin side, the operational efficiencies would've had it been quite high in the fourth quarter to offset the gross margin pressure from price decline.
The wholesale market weakness that you saw was there something unique about the production efficiency gains that you were able to achieve in the fourth quarter and how much of the margin benefit.
Gross margin in the quarter do you did you get from restructuring of all California distribution business.
Yeah, certainly the restructuring of the California getting out of the third party distribution business was a benefit in Q4 relative to Q3 now. We also did have some hangover inventory that we had to dispose of in the quarter. So that did put some additional pressures on on that and <unk> in California.
In the quarter that won't carry forward.
But it's a combination of that and.
The additional increase that we saw in Florida, So which has got a significantly higher margins and then overall so we're pleased with the.
Margin performance that we had in the quarter, we think theres opportunities to to build on that to offset some of the pricing pressures that we know is going to come in the in the markets going forward.
Okay. Thank you.
Thank you Matt.
The next question comes from Aaron Grey of Alliance Global.
Please go ahead Erin.
Hi, good morning, and congratulations on the deal.
So first question for me on California, So it's been an important market for critical historically as well as for legacy Columbia care.
Commented on pricing pressure. So so curious as to how you look at retail obviously now youll get some retail from the announced acquisition of Columbia care I'm, just curious beyond that.
Would you also look to get deeper on the retail side within California to potentially offset and get more vertical.
Some of the pricing pressure seen in the state or just would love to see your overall views in terms of retail now within California beyond just to come back here enough acquisition. Thank you.
Good morning, Erinn this Charlie so yes.
As we looked at sort of what will be.
Absorbing and gaining in California, we really like the idea of the retail platform. So I guess our operations in that state I would consider very complementary.
And one thing that we have learned.
And that we do prioritize is getting vertical the value of getting vertical in every state that we're in so again it takes us from being just a wholesaler in California to now being vertical I think it adds strength and stability in a market, where we do have a sort of a soft spot there. So it definitely enhances our California operations and Greg do you have it.
<unk> color I think from a step one perspective.
The great opportunity for US is we know we have some some great brands in California floor call. For example is just a top five brand in the markets of being able to take our brands and bring those into stores is a huge opportunity.
I always look at retail are cautiously too we know that in the last second half of last year and cultivation licenses grew 10 retail.
So that tells us there's a lot more supply coming online, which means price pressure is going to continue to come down which means some of these retailers might be looking to exit that business is theyre looking at their own pricing and what they have to do to compete which gives us an opportunity to potentially pick up some complementary assets in phase II, but phase one is our winning brands.
Into stores is a really exciting new step for us and then we'll take it from there.
Okay, great. Thank you very much and then second question for me is you guys are now getting more vertical and in the different markets amid the pricing pressure just thoughts in terms of.
Can you talk about the brand rationalization, but also selling products within your own stores, obviously creates more margin opportunity. So how do you kind of juxtapose the buyer in terms of having the different brands. So you can kind of have different product offerings for the consumer while still being within your own portfolio to capture that margin and maybe if you might have some target mix.
What you'd like to have in terms of your own products, you know that you're seeing within your stores versus third party brands further states, where you're going to have the wholesale opportunity. Thank you.
So.
It's a question we tend to get on these calls our view is we always want to have the best assortment in our stores as possible. So that does mean, we do have a bias towards their own brands, but we also want to ensure that we're bringing in third party brands as well to really delight shoppers.
Historically, our average of owned brands two brands is anywhere between 40% plus I don't see that changing drastically as we continue.
Our focus is clearly to your point, we do tend to make we do make a significantly better margins with our own brands, but as we think of trips and what drives customers to our stores assortment matters and so our focus will always be having that right mix of owned brands dot owned brands to maximize margin, but also an assortment that.
It really drives customers into our stores and that will that's been the key to our success today and will be the continued focus for us going forward.
Okay.
Okay. Thanks, very much for the call and I'll jump back in the queue.
Thanks Aaron.
The next question on the line comes from populate Giovanni <unk> of Cantor Fitzgerald. Please go ahead. Thank you.
Yeah, good morning, and congratulations to both everyone.
Nick just one question I mean.
Over the last two or three weeks.
And Mr. Shaky deals waiting to see lobbing Senate, the oldest right, Florida for safe banking reform and other things.
And I understand there's been a lot of other bodies also lobbying for before them on.
Some people to believe that safe could actually happen this year.
So if you went to the C and youll, albeit in a lot of people are thinking that say it could happen. This year I'm surprised you wouldn't be doing this deal right now I would have waited if say if he's going to happen. Because obviously you would have had more more opportunities on the beef side.
So any thoughts on that did you see or maybe you have something different there that your interpretation was that saved one happened for a while so it's better to do consolidate right now on the loose merger. Thanks Nick.
Sure. So I would bifurcate those two those two elements move into different categories. I do think that there will be movement.
And I think it'll be driven by Congress not by the executive branch.
I think there has been significant.
Amount of support expressed from Republicans as well as the Democrats and so I don't have any idea of the timing frankly, I've I've always been wrong when it comes to political prognostication, but it is it is going to happen.
But I would I would actually turn the perspective, a little bit on its side relative to the way you positioned I think and by the way we've talked about this with you.
At the board level.
And we talked about this as a management team and you talked about this with Costco. The reality is that the company is the leading companies in the sector generally trade in parity with one another we have always traded at a multiple discount and I think that there is no no no no sort of harm as they're bidding the fact, but one of the theories and one of the pieces that we've always sort of believed and deeply is that.
Once say passes assuming or something like it passes and assuming that it gives institutional investors the ability to invest in cannabis there wouldn't be looking for scale, they're going to be looking at for credibility, they're going to be looking for best in class.
Cross go independent of Columbia care in Colombia Independent Cross go I think he has built a have built the best platforms in the sector.
Just in terms of those three criteria, because remember, whether you're a strategic investor or an institutional investor your priorities are different than if you're a sort of a sort of an overnight best or if youre just looking at things in a in a very narrow window you have to look at it on a multiyear basis and so for us to attract the type of institutional capital that will drive multiple expansion that will drive strategic conversations.
That will actually be available to the market leaders once federal approval happens.
This is the best way to position for that moment in time.
And so our view is that you know.
Is there a scenario that someone could come up with that would you sort of.
Some somehow result in I E.
It's a bump in multiple to each company individually, yes, but I think that together on a combined basis the market leader we will.
As we've seen historically will trade at a premium multiple and so one of the one of the elements of the thought process behind this combination is to achieve that multiple re rating in the most durable manner possible. So there was no other combination that we could find that no. Other pathways that we could see that would allow us to position ourselves for that moment in time and I would argue you want to have the.
Trucks, and the combination sort of fully baked in by the time you reach that point in time.
So that the investment thesis for institutional capital is not only well understood, but also de risked because the integration is likely to be either in process or were done at that point.
I I actually think that you couldn't ask for a better moment in time for this kind of combination specifically because of because we're starting to see real bipartisan and bicameral support for this type of legislative change.
Charlie I don't know if you have anything to add to that.
I think that was well articulated.
No. That's really helpful. Charlie just one quick follow up so you said likely divestiture and the gifts from New York.
And I.
So, Florida, obviously based on part of his centrally.
You can sell that paper license, but you're going to keep the stores and the continuation rates at least in some states you have 100% visibility in terms of our divestitures in the kitchen, a New York trade without you. It's not so clear right. There may be ashamed license sham licensees that are allowed to cultivate that maybe a native American tribes that are allowed to start quickly.
Waiting on selling kind of abuse. So there isn't a uneven the caps on cultivation for the incumbents are still in my opinion.
My understanding is still being debated so there's still a scenario where you would keep bushway facilities, what am I wrong about that.
I think it's a fair recognition there why I put the word likely in front of it because these are dynamic situations in those conversations while preliminarily have been started with the regulators of course to notify them as soon as we could about this deal those are conversations.
<unk> and structures and developments that will happen again or during the period of time between now.
Now in closing because youre right.
Anything is possible as it relates to regulatory requirements over the next nine months.
Okay, and one last one John if I can.
If you look at the Columbia brand portfolio.
You know, which brands from the Columbia portfolio, you would be like excite than rushing to start selling nationally through your network.
Okay.
Greg you want to handle that.
I think as we work the portfolio, where you know one of the reasons, we have become the number one wholesaler brands is because of our portfolio approach of good better best and play across segments.
That's why we've seen such success in brands like Crisco.
On their portfolio I think the way to answer that is we will look at that over the next couple of months as we continue to evaluate by state, where theyre tuck ins or opportunities, where our portfolio isn't reaching opportunities. So.
So I'm not prepared.
Any brand at this point I think all of them will be investigated as we go and it will probably be a unique by unique state assessment to see where we had this opportunities in that portfolio mix.
Okay. Thank you.
Okay.
Okay.
Okay.
Thank you Pablo.
Our final question today comes from Scott Fortune of Roth Capital Partners. Please go ahead. Thank you.
Yes, good morning, and thanks for the questions. You mentioned you gained share in P. E on improved cultivation and how do you look at the cultivation synergies efficiencies now on the operating side improving opportunities in the key state to offset the pricing pressures just kind of give us your thoughts around the.
Operation leverage on the population side with this merger and the synergies and efficiencies improvements that you guys can garner from that going forward here.
Sure. Thanks for the question Scott I think.
At a high level and maybe the direct answer on this is again different organizations brought different things. So this combination right and I think from the production and retail capabilities that we've established.
We get to now bring that across the footprint.
The infrastructure that Columbia carriers, bringing into steel very excited about those synergies those improvements those sort of internal catalysts that we can create by getting our S O PS and our capabilities across this big big infrastructure and big footprint. So we're very excited about it is it's definitely one of the main drivers of value that youll see.
From this combination.
Got it and then one more real quick just focusing on the California market and what you're seeing currently there. Obviously is the pricing side, we had a lot of supply coming on board.
How do you look at the California market is seeing any trends to stabilize in pricing here.
Look up between 22 and kind of expectations.
A lot of M&A consolidation going on the California market, how can we view that going forward here.
Yeah.
Okay.
Hey, So I think in California, as we as we look at it.
The commonly maybe forward because I think it's really interesting for us to take a look at the last half of the back half of last year is that cultivation licenses grew two ex retail doors in the state right and so that really is what's driving the volume of supply that's pushing price pressure in California.
Because of that happening in the back half of last year.
Look to this year, we don't see in the near term any sort of relief on price compression because of the volume of supply that's coming into the market.
And I think that's going to be the continued story for California for the rest of the year. So what that means for US is it puts greater emphasis on the need for us to bring our portfolio into the market. It means we have to be able to compete with brands like high supply on the low price value equation, but it also means that we continue to educate consumers on what.
What makes our more premium brands like Florida, Cal special to give them a reason as to why they're going to pay a premium relative to California prices for a brand like that in the market.
So I think the key takeaway for California. In 2022 is it's going to be a continued year of price compression I think youre absolutely correct. We will see some retail doors, probably shut down or look to be sold so youll see some consolidation and youre going to see probably a calling of brands around.
Selection of brands that can either justify the premium pricing through great quality or are able to compete with margin at the lower price points to take the value shopper and I think that's going to be the that's how we're looking at the story for California for this year and how we're positioning the business to compete.
Yes.
I appreciate the color thanks, guys.
Yeah.
Thank you Scott I would now like to hand back over to Charlie for closing remarks.
Yes, I want to thank everybody for the time this morning, and again very exciting deal very exciting news and we look forward to providing some more information on our next quarter's call have a great day everybody.
Sure.
Thank you very much for joining US today you may now disconnect. Your lines have a good rest of your day. Thank you.
Uh huh.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.