Q2 2022 Cresco Labs Inc Earnings Call
Hello, everyone and welcome to <unk> second quarter 2022 earnings Conference call. My name is Johnny and I will be coordinating the call. Today, you will have the opportunity to ask your question.
Dentation, if you'd like to register your question. Please press star followed by one on your telephone keypad.
I know that your highest making kulik senior Vice president of Investor Relations to begin Meghan. Please go ahead.
Thank you good morning, and welcome to Chriscoe Labs second quarter 2022 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charles Bechtel, Chief Financial Officer, Dennis oldest and Chief Commercial Officer, Greg Butler, who will be available for the Q&A. Prior to this call we issued our second quarter earnings press release, which has been fine.
On SEDAR and is available on our Investor Relations website. These preliminary results for the second quarter of 2022 are provided prior to the completion of all internal and external reviews, and therefore are subject to adjustments until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the quarter ended June 30th.
2022 on SEDAR and Edgar later this week certain statements made on today's call may contain forward looking information within the meaning of applicable Canadian securities legislation as well as within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
These forward looking statements may include estimates projections goals forecast are assumptions that are based on current expectations and are not representative of historical facts or information such forward looking statements represent the company's beliefs regarding future looking events plans or objectives, which are inherently.
Uncertain and are subject to a number of risks and uncertainties that may cause the company's actual results or performance to differ materially from such forward looking statements, including economic conditions and changes to applicable regulations additional information regarding the material factors and assumptions, forming the basis of our forward looking statements and risk factor.
<unk> can be found in our earnings press release, and Chriscoe lapse filings on SEDAR and with the Securities and Exchange Commission Chriscoe Labs does not undertake any duty to publicly announce the results of any revisions 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 all interim financial information is unaudited. In addition, during todays conference call Chriscoe labs will refer to certain non-GAAP financial measures such as adjusted EBITDA adjusted gross profit 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 men.
<unk> and our reconciliation to the 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 GAAP financial measures presented in our financial statements with that I'll turn it.
Over to Charlie.
Good morning, everyone and thank you for joining us on the call today.
In Q1, we announced the acquisition of Columbia care, putting us on a path to build what we believe will be the largest engine of value creation in the industry.
We've always prioritized the breadth and depth in the most strategic markets paired with best in class execution across all verticals of the value chain.
We believe the Columbia, you care acquisition aligns with these priorities, we will solidify our leadership position at a key time for our industry.
We're matching leadership positions in the states of today with exposure in infrastructure in the states with the catalyst of tomorrow.
Combining the branded product portfolio that U S consumers choose more than any other into an operational footprint capable of reaching over 70% of all eligible U S. Consumers. We're matching the most productive per store retail operating model with one of the largest combined retail store platforms in the industry.
We're creating an unmatched diversification and balance of revenue by geography and by channel It.
And we're combining the most productive wholesale platform and candidates with vertical <unk>, which best positions us to compete and state markets continue to mature and evolve in short, we're creating a company built for leadership.
We're making progress towards closing the acquisition checking off milestone after milestone HSR review, the Columbia care shareholder vote, and the approval of the Supreme Court of British Columbia have all been completed.
Great working relationships are companies are built with state regulators is facilitated progress towards individuals state approvals and our asset divestiture process is on track.
We have multiple bidders for each asset we've executed LOI for each and were working through the diligence process and moving towards a definitive agreements, giving us confidence in receiving north of $300 million in gross proceeds from the process and a closing date projected around Europe .
Turning to the quarter. We're pleased to report solid results in the face of an unprecedented macro environment.
We generated $218 million in revenue, representing 4% year over year growth gained or held branded market share in every state with the exception of California, where we purposefully reduced exposure last year for.
For BDSI and we maintained our industry position as the number one wholesaler branded cannabis the number one branded product portfolio chosen by consumers and the number one most productive per store national retailer.
Our adjusted gross margin was 53% roughly 200 basis point improvement year over year in a market where prices fell between 10% to 30% depending on the state and our adjusted EBIT margin was 23% up 150 basis points year over year in the face of unprecedented inflation.
We recognize the challenges currently facing the cannabis industry and the tough macro backdrop.
This environment, we're managing that today, while remaining focused on the big picture and the long game.
Holding and growing market share and driving efficiencies across the company to maintain margins and we're preparing for the integration of Columbia adhere to generate substantial future growth.
Now, let's again review our proven playbook of the three specific ways critical lessons delivering long term growth and shareholder value.
One developing the most strategic geographic footprint to being the leading branded candidate portfolio and three operating the most productive strategic retail network.
So number one we're developing the most strategic market footprint, we believe our long standing strategy of being in the states that matter and obtaining meaningful and material market share. There is the recipe for long term success and any CPG category.
Our current Penn State footprint includes a $7 billion plus markets in which we have the leading branded share positions in the three robust and competitive markets in Illinois, Pennsylvania, and Massachusetts were executing our playbook to expand our market share in other states with opportunities for game, like Florida, Ohio and Michigan.
While we won't have access to the most significant driver of industry topline growth. This year. The state of New Jersey, we do have exposure through Columbia cure in the interim we know that strength and market share and continued share growth is a sign of a best in class operator, and we look forward to bringing <unk> to the garden state in 2023 over the next three years.
Or is there an additional six large markets expected to switch to adult use New York, Pennsylvania, Ohio, Virginia, Florida and mirror.
Given our combined footprint with Columbia care, we will have exposure to all of them and we will have leading share positions. In several this is arguably the highest value footprint in cannabis 180 million Americans. All 10 of the 10 highest projected 2025 revenue states and exposure to the largest growth drivers the acquisition one more.
And then double our retail footprint give us the number one brand in our retail share position in five markets and Optimizes, our operational footprint across markets. It is this level of strategic breadth with the depth that ensures growth diversify the geographic and channel revenue and creates an industry leader.
Number two we maintained our position as the number one branded product portfolio for BDSI.
Again in Q2, our net wholesale revenue was an industry best $95 million also again critical labs as the industry's number one portfolio of branded products chosen by U S cannabis consumers, including the number one portfolio of branded flower number one portfolio of branded concentrates number two portfolio of branded base.
The top five portfolio of branded Edibles, we held or grew share of branded products sequentially. During the quarter in every market, except California, where we saw a 20 basis point sequential decline.
Over the last few quarters wholesale has been a more challenging business with price compression impacting wholesale more than retail and vertically integrated operators, giving preferential treatment to their own brand, even if they have lower velocity. Despite this in both Illinois, and Pennsylvania customers. Once again spent more money on critical lab's branded product than any other company.
As we maintained our number one position in both markets and held share for the first time. We've also taken the number one branded share position in Massachusetts for BSA, making this our third billion dollar plus market with a number one market share.
Last quarter, we talked about some of the challenges we had to overcome in Massachusetts, and we're starting to see the hard work that we've put in pay off as we've improved cultivation yield THC percentages sales processes and generally I am aligned our newly acquired assets with critical lab standard operating procedures to grind out market share in this very competitive environment. This time.
Our performance gives us tremendous confidence as we approach the integration of Columbia care.
When we get asked again and again new brands matter.
Simply answer absolutely when given a choice consumers are choosing our brands more than any other even though for the most part we have less Owen shelves. Despite the current move to <unk> with regulatory caps in most markets. The opening of 185 more dispensaries in Illinois, and the 150 independent dispensaries set to start in New York.
<unk> program gives us a preview of how the future structure of this industry will likely look it will validate our underlying thesis that candidate is CPG and will show the strength, we are creating through our branded product sales and distribution capabilities.
Number three creating the most productive retail network in the most strategic markets Q2 retail revenue was $123 million with same store sales growing 6% year over year and 3% sequentially.
Sunnyside continues to rank number one among the scaled national operators with an average quarterly revenue of $2 $5 million per store across our 50 stores.
Our team is doing an excellent job of maximizing the value of every trip in the face of a weakening consumer dynamic.
Sophisticated E com platform basket building promotions and in store cross selling program, we've been able to engage with our shoppers to maximize sales per visit.
Illinois for example, our top quartile of Sunnyside Dot shop customers made 17% more trips than a year ago with the launch of new engagement projects like loyalty test offerings and suggested selling we will continue to build sales from our large community of shoppers while sales growth has been decelerating due to price declines.
Most important is that new shoppers are entering this category every day for example, doing during Lollapalooza in Chicago, Our River North City stores saw a record number of first time shoppers and overall units were up nearly 30% over last year's festival weekend, while pricing dynamics are muting this impact in the immediate term.
This data point during the highest inflationary period and over 40 years is incredibly important for underwriting the durability of candidates and the future potential of the overall thesis our retail sales growth hasnt reached its potential due to some delays in opening new retail stores in Florida, and Pennsylvania repaying the steps to resolve these issues and replenish the.
Growth pipeline Youll see openings later this quarter with more in Q4 and into Q1 of 2023.
The Columbia care acquisition will more than double our retail footprint, which paired with our industry best productivity and brand portfolio creates an ideal platform for growth.
With the industry prioritizing vertical integration, we saw this trend coming and proactively secured a much wider retail footprint and balanced channel position to ensure that our incredibly popular products get the share of shelf they deserve.
Before handing it over to Dennis I want to thank the critical family for everything that they accomplished this quarter they've done an incredible job of holding and gaining share in almost every market, while managing through the macro headwinds leading the industry's efforts for legislative progress at the federal level and preparing the company to close and integrate one of them.
The largest and most transformational M&A deal. This industry had seen in times like this leaders lead and I'm very fortunate to be a part of this team full of leaders with that I'll turn it over to Dennis to discuss Q2 results.
Thank you Charlie and good morning, everyone I'll be reviewing the financial results from the quarter, then highlighting a few items from our balance sheet and discussing our capital position.
As Charlie mentioned, we're happy to report that our team generated $218 million in revenue in Q2.
This reflects sequential revenue growth up 2%, resulting from same store growth of 3% and flat wholesale revenue in the face of industry wide pricing pressure.
Year over year revenue growth of 4% was muted by our decision to exit third party distribution in California at the end of Q3 of 2021.
Here again, we've demonstrated that we're not afraid to make the tough decisions to add shareholder value and position the company for long term sustainable profitable growth.
Our retail performance was particularly strong growing 22% year over year, driven by same store sales growth of 6% and the addition of new stores in Florida and Pennsylvania.
This shows the healthy performance of our underlying base business, but also highlights the importance of the organic incremental assets. We expect to see later in the year and into 'twenty three.
The retail team continues to demonstrate the power of prioritizing the needs of the consumer and developing repeatable and scalable systems to best address them and the results show.
On the wholesale side, the strength of our branded product portfolio and gains in the market share allowed us to counter significant pricing pressures and produced a flat sequential wholesale performance.
Net wholesale revenue fell 12% year over year, but when adjusted for the strategic shift in California distribution wholesale revenue was flat compared to Q2 of 2021.
Given this overall trend we're proud of the team for maintaining the wholesale revenue in the quarter and actually taking share.
While we expect to maintain branded share positions in our markets further price compression delays in new independent store openings and msos shift towards more Britta chaldee will likely disproportionately impact wholesale revenue compared to total market sales and create softness to our overall top line in the back half of the year.
But this is temporary.
With several new store openings in Florida through Q4, and Q1 are incremental store openings in <unk> in Q1 of 'twenty, three and incremental independent retail doors opening in our home state of Illinois in 2023, we will see organic growth return to the wholesale channel and top line growth overall.
Adding the expected close of Columbia care deal around the end of the year, we're well positioned to have an incredible 2023 and beyond despite the significant price compression in the most recent quarters. Our team was able to expand adjusted gross margins by 200 basis points year over year to 53%.
We saw deterioration in the competitive environment in California last year and took the difficult but necessary steps to scale down our distribution business there.
That decision combined with improvements in yields reaching scale in more markets and our entrance into Florida contributed to our gross margin expansion.
Our ability to recognize industry trends early and proactively respond to the changing market dynamics enabled us to maintain or grow margins in a difficult macro environment.
Looking ahead, our goal is unchanged to maintain gross margins above 50%.
We expect to continue to offset price compression and maintain margins as we realize improvements from the investments, we're making today in automation and processing and packaging as well as increases in operational productivity driven by our incredible leadership team.
Adjusted SG&A expense, which excludes share based compensation and noncore items saw a small increase of $1 $3 billion to $71 million or 32% of revenue.
The increase in SG&A was the staff the additional dispensaries opened in Q1 and marketing spend associated with $4 20.
We expect SG&A to be flat to slightly down in the second half as we appropriately manage our expense plan to address the near term macro environment, while continuing to direct resources toward our long term company priorities, including the integration of Columbia cure and expanding retail operations.
We remain good stewards of expense management, while maintaining our leadership position in social and regulatory reform in the cannabis space. This is what leading companies do it.
Adjusted EBITDA for the second quarter was $51 million represent a margin of 23% relatively flat compared to Q1.
Our goal is to maintain adjusted EBITDA margins at the current level through cost controls and operational efficiencies in the face of market pressures over the next two quarters.
Cash used in operations was $7 million in the quarter, we made tax payments and distributions of $67 million relating to 2021 and Q1 'twenty two extension payments.
Of this amount $43 million was tax payments to non controlling redeemable unit holders and other members and flowed through cash flows from financing activities.
In addition, Q2 included second quarter estimated tax payments of $6 $3 million and tax distributions of $15 million.
Overall, we paid $89 million in taxes during the quarter.
It can be really good when <unk> goes away second.
Second quarter gross Capex was approximately $14 million, we expect our capital expenditures for the remainder of 2020 to be approximately $35 million as we continue to optimize and rationalize our national footprint.
One of the many benefits from Columbia care acquisition as the positive impact we expect it to have on our need this year and in the future for Capex to drive future growth.
We are comfortable with our existing cash position.
The strategic financing available to us and the expectations for proceeds from the divested assets.
In closing there has never been a time in this industry when leadership scale and financial strength matter more.
We are facing unprecedented headwinds from inflation taxation cost of capital, but also unprecedented opportunities for growth from regulatory changes on the horizon strong consumer demand on tap efficiency in production and consolidation opportunities.
We are in a strong position today and that position will only strengthen once we complete the Columbia care acquisition and now I'll pass it back to Charlie for some closing comments.
Thank you Dennis.
Credibly excited about what lies ahead for critical labs and for this industry wide.
While we all need to manage through the very unique macro pressures of today. It is important that we continue to look down the field the outlook for U S. Cannabis is stronger than ever as candidates remains the next major consumer products category in the United States. The industry is proving itself to be durable topline market performances.
<unk> in the face of the worst inflation of 40 years, the number of cannabis consumers and units sold is up we continue to see progress at the state level as long awaited regulatory catalyst in states like New Jersey, and Illinois, we begin to unlock the startup of adult use in New York will happen in the coming quarters in Virginia in Q1 of 2024 and step.
Function changes in a handful of other very large and influential states is expected in the next two years operators.
We continue to prove themselves resilient, while we're subject to draconian tax provisions and can access the traditional institutional capital pool that is truly <unk>.
Right on the sidelines and ready to jump in when they can.
I'll reiterate what I mentioned in our Q1 call we've never been closer to achieving federal reform on cannabis than we are right now today since our Q1 call. The Senate majority leader officially filed that cannabis specific bill in the Senate held its first committee hearing regarding cannabis legalization ever.
Again it reinforces now is the time to lean in we are we'll keep leading these efforts on behalf of the industry because we understand it's the ultimate unlock and it takes leaders to drive this change.
Closing the macro and industry headwinds, we are managing make us so proud of our crestwood team with our operational and strategic initiatives underway. We will continue to keep our heads down execute on the business and put the pieces in place for long term leadership and achieve our vision of being the most important company in cannabis with that.
I'll open the call for questions.
Thank you.
Ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw. Your question. Please press star followed by two men preparing to ask two questions. Please ensure you're on mute locally.
<unk> Star followed by one on your telephone keypad.
Our first question comes from Aaron Grey of Alliance Global Partners. Your line is now open. Please proceed.
Hi, good morning, and thank you for the questions and nice quarter, especially given the relative macro backdrop.
So Charlie I wanted to talk a little bit about the brands.
<unk> moved into number one position in Massachusetts.
Third there want to talk about how youre seeing the relative pricing kind of overall for some of these markets, where we're seeing pricing pressure how comfortable you guys are with your own portfolio and then secondly, how youre liking the current mix between premium mainstream and value products, because we've seen a number of your peers.
Introduce some more value products announced in the recent months, so how youre looking at relative pricing and then mix between the different pricing tiers. So you can continue your sex your success in terms of the wholesale thank you.
Yeah, Erin thanks for thanks for the question.
This goes back to something that we've talked about all along right the importance of brand.
And.
And especially in a in a price compressed environment, where margin pressure exists brand architecture is very important being able to meet the consumer where they want to be met so the good better best strategy.
It's why we originally even developed a house of brands approach that we developed from the very beginning so again I feel like our portfolio is is doing the work that it was built to do and as long as we continue to offer the highest perceived value to the consumer at each of these category levels will continue to be effective as it relates to the <unk>.
Pacific markets, maybe Greg do you want to add some color sure I think your first question is on pricing, we do expect to see price compression continues in the back half of this year as supply in many of these markets like Pennsylvania, Illinois, Massachusetts continues to come online in putting some price compression there I think to Charlie's point, what we are encouraged by in our portfolio.
Is.
We were one of the first to get out into the value segment, and we've been able to take material market share with high supply across our markets. We're pleased with that but we were also able to bring <unk> to market and in Illinois at the premium price point and its success in this market and ability to take share as another example of the right quality product still can come.
Higher prices in a market. So our plans for <unk> continue to expand that into different markets. So we are encouraged with the strength of our brands the quality of our products and our ability to fight price either by offering higher quality products or finding ways to drive greater margin of our value brands.
Great. Thanks for that really appreciate that color and then second question for me just as we look at mature markets Southern California, you guys. Obviously exited some with third party distribution last year, but still have some exposure there and then will be taken on exposure to Colorado with the pending.
Columbia Care acquisition, just wanted to get your take in terms of how youre looking at markets, such as California, and Colorado, where you are seeing pricing pressure there obviously at lower levels, so more difficult to be profitable. So how do you view markets like that Charlie talked about kind of the long term no brandon importance of markets such as that but in the near term and obviously more difficult to generate properly.
So wanted to get your take into how your view on those today. Thank you.
Yes, certainly.
Youre right.
Those markets sort of at this stage they're in in their maturity.
It's important to be in those markets as markets markets are you talking about the largest and second largest.
Cannabis markets in the world, but you want to be President you Wanna be relevant, but you need to make sure that youre not.
Exposed to allow that those markets to negatively impact the rest of the body.
And as it relates to our increased exposure in California through the Columbia care deal. It's it's really more of an optimized footprint and allows us to Alberta, Calgary, there and same in Colorado with the footprint that we'll be acquiring through Columbia care. It has the largest retail footprint in the state. So really vertical it he is going to be important also helps with with our ability to control.
Our brand presence and positioning on shelf, so we'll manage through it but both markets are important for the exposure to the consumer base and for brand equity that can be built.
Yeah.
Alright, great. Thanks, very much for the color I'll jump back in the queue.
Thanks Darren.
Thank you. Our next question comes from Andrew Bond of Jefferies. Andrew Your line is now open.
Hi, Good morning, all Andrew Bottomline for Owen Bennett, Thank you for taking our questions.
So just wanted to go over your retail strategy a bit retail sales growing nicely. Despite some of the pressures you mentioned and I. Appreciate the metrics you gave around same store sales, but just based on the relatively flat retail sales mix crescas growth doesn't seem to be driven by kind of an increase in vertical shelf space.
Correct me, if I'm wrong like a lot of other competitors. So can you talk more specifically about about that and what's working in your stores, maybe some of the retail tools or strategies that you are looking forward to implementing.
As you are eventually integrate those Colombia care stores post acquisition. Thank you.
Sure. Thanks for the question so the.
From a retail strategy standpoint, we continue to.
<unk> try and address the needs of the consumer.
Stakeholder focused organization, we do this across our entire platform right. So understanding what the consumer that's coming into the store once whether that's a an expedited experience with an online ordering system or that in store personal touch that that helped shepherd them through the decision making process. So strategically we want to hire or we want to operate high volume.
Retail with great locations, it's something that as we've talked about in prior calls it's a muscle that we've built over the years.
We have become a fairly effective retailer as noted from our revenue per store metrics.
It's something that we'll continue to drive, especially as the industry goes through these periods of time, where vertical it becomes more important.
And owning your shelves becomes more important we're excited to incorporate.
The assets come with Columbia care, and get that more balanced channel position to allow us to compete the best that we can compete in a market by market approach and Gregg as far as the tools you Wanna comment on tools I think the big thing you'll see from US is we believe that our traffic will be.
It'd be driven by the best assortment possible and so I think one of the questions. You asked is our use of <unk> in our own stores. Historically, we've always tried to maximize the assortment of our brands and partner brands and then we'll continue to do that to what makes sense to help drive foot traffic and delight our shoppers.
From a tool perspective, what we've really built in Sunnyside, that's helping us drive not only our retail business for our wholesale business is insights and the shopper behavior and understanding what they're looking for or what price points and what forms and a lot of those insights are being used to fuel, how we think about innovation and capabilities.
Across our platform when you've seen the successes as we launch brands as Neil just capture some pretty good market share.
Our capabilities, then suddenly slide our folks in the back half of this year and what you're going to see from US is programs like loyalty, where we're going to help not only collect information about how our shoppers shop, but also drive loyalty into our stores, but also other ways to grow our basket through.
Technologies like suggestive selling add ons and so our focus really is about how do we get the most value out of every shopper coming through our doors in the back half while collecting data that enables us to really start to customize not only messaging pricing offers but innovation to those shoppers.
Great very helpful detail, Thanks, guys and for my second question, maybe just following up on your comments on floor of Cowen expansion to New States, obviously been a highly successful brand for you in California, and now just recently rolling out into into Illinois, and <unk> can.
Can you remind us which states have already launched for a cow is it is it just illinois, so far and then.
Whats performance been there relative to your expectations and what additional states are you planning to launch the brand in the balance of the year. Thank you.
Why don't I take that.
As you said, we've been I've been very pleased with not only the progress of floor account in California, and a very tough market dynamic we've launched in Illinois, So far.
It hit our expectations in fact over delivered our expectations on not only how the product was going to be received by customers, but its ability to command a premium price during.
This current macro economic conditions and pricing condition. So it shows that quality products can get.
Our premium price from shoppers next up for us as we think about floor tiles opportunity.
Looking at markets, like Pennsylvania, Michigan, and Massachusetts, all would be kind of next in our lines as we continue to roll that success across our footprint.
Great very helpful. Thank you I'll jump back in the queue.
Thank you.
Thank you Andrew next question comes from Pablo <unk> of Cantor Fitzgerald Pablo Your line is now open. Please go ahead.
Thank you good morning, Charlie two questions related to capacity, so maybe remind us.
Where are you at in New York in terms of current capacity expansion plans I mean, there's always new 150 licensees open their stores would you be ready to supply them and then the second question related to the same topic. Just a reminder, over the next 12 months, where can we see a new capacity eating and driving in your wholesale business or we don't really.
Any new capacity in a major way coming in over the next 12 months. Thank you.
Thanks, Pablo So where we stand in New York is moving forward with with again, both us and Columbia care, having assets in the state were moving forward with the construction and Capex plans as it relates to our property, but with an eye towards what the combined.
<unk> of assets.
Look like and how best to optimize it.
Depending on when that market is Colombia care currently has a fairly large scale production in the space and the state already and depending on when adult use kicks off there from.
From the downstream production manufacturing capabilities will have.
Again, it'll be a varying degrees depending on when the adult use really launches in that state, but by mid year next year, we will have full production capabilities on the processing side too.
As it relates to capacity in other markets additional capacity.
We're again prioritizing the Columbia care acquisitions, so additional capacity will come online in various states based on combined footprint as opposed to ongoing capex projects under crisco.
Okay. Thank you and one last one.
And not to Nitpick I think in the past when you talked about gross proceeds from the divestitures you had talked about 300 million to 400 million. Due there you said $300 million I think that's understandable willing to go in context, but can you clarify that or am I misreading the comments. Thanks.
No I think we were just confirming that it would be north of 300 million it'll be somewhere in that range.
The original range of three to four.
Okay. Thank you.
Thank you.
It's from Derek delay of Canaccord Genuity.
Your line is open. Please go ahead.
Yes. Thanks.
Everybody just on the Colombia carry transaction, obviously, you've made a lot of headway in terms of securing approvals can you just talk about whats left you need state by state approval do you need to be made municipality approval and in some cases in some states whats left there.
Yeah. Thanks Derrick.
I would say just overall again reiterating the regulatory approval processes.
Going well.
Really proud of the team because it's a lot of work Youre talking about all 17 states that are that have some sort of approval or ownership transfer process that we have to manage so it definitely is a big project and the teams. The combined teams on the Columbia carrying the Costco side are doing an incredible job of managing it.
But you're right depending on the state they varying degrees of difficulty in sophistication and what the processes.
We've made great progress.
As we mentioned.
I think Nick mentioned on his call about half the states or burden almost to completion point in the other states. The divestiture related states are of course going to be sort of the.
The ones that we.
We will continue to work on through the divestiture transactions and.
Whether it's state level or municipal level. It does depend on the state, but progress is as far along in under any of the circumstances.
An area that we're confident in being able to manage thoroughly so feeling good about it.
Okay. Good.
And then just switching gears, a little bit just to the to.
Your dispensary side.
In terms of your new store openings or even what <unk> seen in the past you mentioned here.
Sunnyside stores, adding $2 5 million in revenue per store can you comment on what the returns on that looks like like for example, what are the typical payback periods youre seeing or maybe compare that payback periods, you're seeing now versus what you saw two years ago. When you were opening stores.
Sure Greg I'll take this one yes.
Good morning, Derik I think from a general perspective, but we've talked about in the past and this is pretty consistent with what our peers have look for is one we have an internal rate of return that we look at that somewhere in the three year range two to three years.
We don't overly share that but I would say from where these assets and kind of has continued to perform we're not seeing any sort of change in that payback period, we were able to generate revenue.
Profit out of those stores that are holding to those standards.
Okay, great. Thank you very much.
Thanks Derek.
Our next question comes from Vivien <unk> of Cowen. Your line is now open. Please go ahead.
Hi, Thanks.
Charlie I recognize it's an incredibly dynamic backdrop in your crystal ball, its probably not perfectly clear, but as you observe the current market dynamics, how has your thinking around the hierarchy of priority states on a pro forma basis changed if at all for 2023.
Thanks, Vivian so as far as the prioritization for states in 2023 has changed I think again, if I if I went back in time regulatory.
Approvals or sort of the unlocks from a regulatory approval standpoint.
Probably the largest impact.
On how the positioning evolves over time again, I think if I went back a year and a half ago I would've expected some of the 185 stores to be opened in Illinois, I think originally.
We were anticipating New York starting in in <unk>.
End of Q3, beginning of Q4 in 'twenty, two maybe Jan one I don't know if that's a.
The beginning of 2023 is still realistic we'll see we're looking for some good updates from New York here.
In the near future.
But that's sort of how we've.
I would say regulatory change has probably the largest impact on the way that we think about states and then the ability for sort of a vertical play.
Now and through the rest of this year is definitely.
It's something that.
It's taken into consideration as we're looking at sort of how to approach states. So again, feeling really good about the Columbia care transaction and the benefit that that gives us from a balanced approach both from a geographic diversity standpoint, and from a channel diversity standpoint, we think balance at this stage of the industry is very important.
Yeah, absolutely certainly I can appreciate the frustration around New York, maybe first half of 'twenty.
But just to double click on your comment on Illinois as my follow up question I know, it's very early days, but certainly you guys were involved in.
This has involved with the social equity participants in license winners. So how are you thinking about them.
Customers are those conversations starting albeit very early days.
No. It certainly does those conversations again have been ongoing we've been.
A partner to the initiative from the very beginning.
With the passing of the legislation and of course, the when the original.
We'll announce them and of recipients was made so it's been a.
It's been tough too.
To have our partners, we put in a position that they have been put in over the past couple of years with the delays, but we think that there's a tremendous opportunity for them to be good partners of ours in the coming years and for us to them now I don't I don't know if.
All 185 are going to stay where they're at I think youre going to see some.
Additional.
Entities make some acquisitions and some of those licenses and again theres puts and takes and pros and cons to that but I think the interest in the Illinois market is there the opportunity in the Illinois market is there and so we're really excited to see that unfold and again be a good partner to to those groups coming into the state.
Understood. Thank you.
Thanks Vivian.
Our next question comes from Andrew <unk> of Stifel. Andrew Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my questions and congrats on the good quarter here.
You mentioned receiving over $300 million for the divested assets, which I think was previously discussed to fund capex and paid down debt.
Understanding that you may not be comfortable putting a capex number.
Out there for after 2022.
But maybe you could talk about leverage and how you see your balance sheet.
It does and ideal leverage ratio or debt to EBITDA look like and how should we think about raising capital when cost of equity is higher in constant that is rising in this inflationary environment.
Thanks, Andrew.
Dennis take them.
Thanks, Andrew as we've talked about on previous calls the amount of Capex that we'll need to spend for the balance of this year will come down considerably.
As we look at the benefits of the Columbia care acquisition I look at our combined footprint we.
We had previously talked about a number of about $100 million.
That number will drop to about $60 to $65 million for the full year for Crestwood labs.
As it relates to proceeds from the divestitures, we will continue to the plan is to pay down some of the existing debt.
And have a leverage ratio in the one and a half range as we exit 2023.
That'll be a combined reduction in the overall debt balance that we have as a company.
With the proceeds again won't be able to have some money in our pocket. So that we don't anticipate.
Having to do any type of raised there won't be any type of equity raise in the foreseeable future. So we feel that we'll be in a really good strong cash position to pay down our debt increase our balance sheet and improve our leverage overall.
Thanks for that color and thank.
Thinking about this quarter and our near term here could you talk a little bit about what the promotional trend was co rotor quarter.
It's impressive that you increased.
Your gross margin.
In a seasonally higher promotional period.
Q3, arguably if you think about seasonality it could be a little bit less promotional so could we see further improvements here.
Or is the trend of price compression kind of negate any kind of seasonality factors in.
And if our price compression does the gate.
Where are you seeing the most impact in your portfolio.
Okay.
So why don't we take this I think as we mentioned earlier in the call. We do we are planning and expecting to see price compression continue across many of our markets. That's been the case for the first half of this year and there's nothing to suggest as we get into Q3, that's going to slow down and so we've planned for that we think that's going to probably see itself intensify.
The most in markets like Pennsylvania, where.
We will continue to see supply come online putting pricing pressure in that market.
We don't expect Massachusetts to give up on price promotions and so we're planning for that and we'll see as Florida, Florida.
Pretty aggressive price promotion coming into the year slowed a little bit in the market, but that can do that could continue as we get into the back half of the year. So those are the markets, we see intensification for us because we're planning for that.
How are we managing costs in those markets to make sure that we can respond with price. If we have to ensure we're holding margin and so proactively planning for how prices might come down, which we've been doing and then starting to manage our cost base to support margin growth. Even if that happens is where we're focused and hopefully we will be surprise.
Here, the pricing doesn't hit us hard in the back half of the year, but we are taking all the actions now to make sure. If it does that our margins stay strong.
Yeah.
Thanks for that I'll get back in the queue.
Thanks, Andrew.
Thank you. Our next question comes from Kevin Tyler of ATB capital markets can Rick Your line is now open.
Thank you good morning, and congrats on the quarter.
Surely in Illinois can we speak too we've seen each of the last number of months a sequential decline in the average basket and Illinois can you speak to even directionally not just higher average basket was trained in the science, but also perhaps just the the gap relative to the average basket and how you would see that.
And the in the sort of evolving in the back half apologies.
Thanks, Gary I'll start and then Greg will add some more color to it too, but I think what we're seeing in Illinois from from sort of the gradual slide here in basket size is not unique to Illinois. I think this is a this is a dynamic that exists when you have the the macro headwinds in the macro pressures that we're seeing.
When you have gas cost wet gas costs youre going to see.
Different behaviors in consumers, whether that's less frequency and shopping or whether that's trading down in categories. So again, it's one of the things that a comprehensive portfolio strategy and then in stores sort of activities in basket building tool.
Tools, we're using to try and counter but I don't know that I would limit it to Illinois and beg any additional color I think specifically kind of earlier on in Illinois, What we've seen and this is why we are we've highlighted the back half of the year could look tough from a growth perspective, and some of these markets is.
Each of these seasonal lift that we expect to see in a quarter for the first half of the year have not been hitting as high as expected and so.
So that is showing you that it is there is price compression for sure happening, which is impacting baskets, but theres also slowdown in foot traffic and I think if you look at from a retail perspective, whether it's our retails are others.
Most many of us expected to see seasonal lifts of foot traffic as we got to the summer months, we're seeing a little bit of that but nowhere near what we've expected to see.
So that reduction in traffic with a bit of price compression is definitely putting some pressure on top line revenue and to Charlie's point that is not a illinois specific that's across markets youre starting to see that that growth.
Congressional growth our focus has always been delighting, our shoppers and so as we get into the second half of the year, we're planning for a potential scenario where foot traffic continues to be pressured.
So finding ways to increase the value of every shopper transaction, whether that's going to add an extra item to the basket, whether that's more selective on how we're thinking about price promos is how we're going to manage through it.
How we think we're going to continue to hold our above fair share in many of our markets as we get into the second half of the year.
Alright, it's helpful. Thank you and just switching quickly to Massachusetts.
Obviously nice to see the the move there and youre sort of.
Thinking of a number one position and say can you just speak to that what are the key fixes that you needed to make to the Massachusetts business and how sticky do you think those will prove.
And how sticky and.
By definition, then do you think you'll <unk>.
<unk> will be in the market again, as we look through the back end of this year into next.
And Matthew, Massachusetts, Massachusetts fixes sticky or is there is there some noise in that movement in quarter.
So.
I think again, just taking a realistic look at Massachusetts, we integrated a fairly large acquisition there at the at the very beginning of the year. So.
It's one thing to close the transaction and it's another to fully integrate and I think what youre seeing from US is the benefits of the work and the discipline and the integration process bearing fruit.
And improvements as we've as we mentioned on the call from a yield perspective from a quality perspective of products coming out it really goes back to the fundamentals of.
Offering the highest perceived value to the consumer it's always a good strategy right. So I think thats the execution of the traditional playbook are bearing fruit and very happy to see a Greg anything you want to add I think the big thing that I'd add for that is as we've looked at our share and then your questions on stickiness, absolutely we believe it stick.
<unk>.
We gave up some share in Q1 to Q2, because we were moving through some inventory that we had to with the integration.
We were selling heavy Q4 Q1, we did not have in Q2, so the growth youre seeing in Q2 to become the number one is our go forward portfolio coming into the market and so on the vape side, we've seen some nice growth. The team has done a tremendous job of getting out there in explaining what makes our product superior with liquid live resin and takes.
Some share and then as we get into the back half of the year as we've mentioned on previous calls.
We expect to see improvements in our flower quality higher potency more strained diversity, which is going to give us an opportunity to go take some share on flower as well even amongst the continued price compression that exist.
In flower in the market so what youre seeing in Q2 as the beginning of getting the right house of brands into the market and our view on that is we're going to continue to grow from there.
Okay.
Thanks, so much ill get back in queue.
Our next question comes from Matt Mcginley of Needham <unk> Co. Your line is now open. Please go ahead.
Great. Thanks for the detail in the back half outlook in your prepared remarks, I just want to make sure I have the moving pieces right. It sounded like you thought you would have some retail dollar growth from unit addition, but you might see some decline in wholesale given price compression and then Dennis said that the G&A dollars would go down a little bit, but you were targeting EBITDA rate to be.
At around 23%. So I think that implies the gross margin will probably be flat or down a little is that is that about the right shape of what youre expecting in the back half.
For the question, Matt So yeah, you're spot on so we do we will continue to manage our SG&A costs as we have for the last several quarters. It's been relatively flat. We will continue to manage that we do expect to see a slight decline in the second half from our current levels on the SG&A front.
We are as we've talked about several times on this call. There has been price compression will put some pressure on our gross margins, we're looking to offset that through our automation and improved yields and productivity at those sites, but we do expect there to perhaps be some pressure on gross margins, which would allow us to keep our adjusted EBITDA margins relatively flat.
Sequentially.
Okay great.
A question on the cash flow and yard house, Yeah that 69 $69 million in cash flow, our cash outflow I think that was it related to cultivate earn outs this quarter, but.
I think Dennis you had some of that was tax related I'm not sure. If I missed some of those together, but I know you have some other earn outs with Laura harvest related expense reopening. The overall, what do you expect the cash payments will be through year end and how should we think about the timing of those payments given.
I think some of those were tied to Dilip. Please specific deliverables around store openings that you probably have good visibility into.
Yes.
Yes, so from a from a cash flow perspective, as we talked about there was $89 million of taxes that were paid out in the quarter.
Due to the structure of the company that is does show up on two separate lines, but there was a huge tax payout.
As it relates to this quarter and again, we have 280 to think for a big portion of that if.
If we look at.
Some of the earn outs that you talked about those work.
There were some cash component to that but there was a larger component to that that was related to equity that had been provided as part of those transactions. So there the cash disbursements was fairly low as it relates to the.
The earn outs in the quarter.
If we look at our cash position going forward, we feel really good about where we're at from a cash perspective, our ability to generate cash from our existing business.
The tax payment the large tax payment is primarily behind us and I feel pretty good about our position going forward.
Thank you.
Thank you Matt.
Our next question comes from Scott Fortune of Roth Capital Partners Sculpt. Your line is open. Please proceed.
Good morning, and thanks for the questions here.
It's a little bit on the operational improvements improving yield production from that side.
Jumping in engraving in Massachusetts could you just wont continue kind of you can call out for there.
To need for production inefficiencies as you look at your footprint kind of in the different states and then how.
You look at that opportunity as you bring on the Colombia assets.
And production.
And efficiencies for move outs since going forward just a little further on.
Continuing efficiencies to offset the pricing question that you are saying.
Yeah. Thanks, Scott.
The.
<unk> for further efficiency I think are great great across the sector.
Historically.
The ability to to benefit and create the scale and inefficiencies from automation is limited in this space. That's starting to that's starting the lesson I think from the the barriers or the inability to create that efficiency is starting to lessen.
We are developing the scale in our markets and our underlying markets that.
Can afford us the ability to utilize automation to create greater efficiencies in.
And the benefits that flow from them and I think just as we continue to focus on continuous improvements from an operational perspective with their center of excellence. These are the types of things again, the playbook in cannabis.
For each operator.
It needs to continually evolve and get better at least that's what we prioritized throughout the organization as this this idea of continuous improvement. So it's something that Youll youll see from US as we go forward. It's absolutely one of the benefits of the Columbia care deal and why we're so excited about is the opportunity to rationalize the dual sets of assets that we have in.
These various states, we can really create optimization in 2023 and on that neither one of our companies could do on our own now.
Now that's not only from an operational perspective that but thats, even from a back of the house and SG&A perspective, too so the synergies and the optimization that are going to flow from the Columbia care deal are pretty profound very excited about it.
Yeah.
I appreciate the color and then real quick last question for me is providing a little color on expectations.
Illinois.
Retail store rollout timing, obviously expect them all to come on board, how should we look at that <unk>.
These retail stores is kind of getting licenses in coming on board and looking at second half more primarily into 2023.
Sure you know as it relates to the stores opening in Illinois, Yes, I think it's going to be a gradual turn on when it comes to the 185.
License opportunities, there's certain certain groups of course are going to be better prepared to move forward than others and so that's why we think we'll see some before the end of the year here a nominal amount, but I think youll see some get opened before the end of the year I think youll see a gradual build throughout 2023 into the back half of 2000.
<unk> 23, and then some into 2024.
Yeah.
I think just being realistic about the preparedness and the capabilities of the <unk>.
The large pool of recipients it varies.
It's one of the things that again it makes us excited about New York I mean, New York is a state is underwriting and investing in that program at a level that no state has ever done before so when you when you kind of compare those two scenarios 150 stores that are going to open in New York now very high level of confidence that those are going to get their doors open that.
Theres going to be shelves that need product on them. So excite excited for both states but.
We're going to make sure that we do what we can to.
Fist and get doors open in both.
Thanks, Charlie I appreciate the color I'll jump back in the queue.
Thanks Scott.
Thank you and our final question today comes from Michael Lavery of Piper Sandler Michael Your line is open. Please go ahead.
Thank you good morning.
Just wanted to come back to the margins and you called out a few of the drivers.
Hum.
Puts and takes but the discontinuation of the California third party distribution. It sounds like it was pretty big offset to a lot of the headwinds can you quantify how significant that was.
Yeah, we haven't provided any specifics on our margins in California, We made the decision which was a tough decision to make but to to exit the third party distribution business in California, because it was a challenging business to be in and it did have a was dilutive to our overall margins the impact of that certainly in the.
California market helped improve the margins in California pretty dramatically, but when you look at the overall impact across the company it.
It did have a smaller effect a it's still a positive effect that in part is what has allowed us to show some margin improvement sequentially.
But again, we understand that there are pretty significant price compression factors that are.
Offsetting some of the gains we're making into other areas and all the things combined are what gives us confidence that we can maintain gross margins over 50% of the foreseeable future.
When you called out the yields and better scale and entering Florida as other positives wood wood on the total company basis, the margin mix benefit from the discontinuation in California have been a bigger driver or are they all about comparable I guess, just trying to understand where it ranks kind of in the.
The hierarchy of things.
Yes, I mean, yes, somewhat comparable today, but as we continue to scale up in Florida.
Again, the vertical market their neighbors you to have much larger margins than our overall profile. So.
We expect to see that opportunity in Florida, we will have a bigger impact on us going forward, but again theres other headwinds that we're facing that that will put pressure on margins.
Okay. That's helpful. And then just on the Columbia care deal.
Just touched on some of the efficiencies and cost synergies from the revenue side.
Are you under represented in those stores or is there sort of ways. We should expect revenue synergies to give a lift as well.
<unk>.
If you're underrepresented now you can sort of improve just to get a distribution boost after it closes is there any how much of that should we be expecting.
Yeah. This is Dennis so there will be an uplift in that certainly as we look to markets like California, where we don't have stores and we don't have that distribution ability to have the stores to put our product into so there will be some improvements in terms of their overall position on our shelves.
Our product on their shelves in their stores that is certainly an opportunity that will give us some uplift once that deal closes.
Okay.
Okay.
Okay. Thanks, so much.
Thank you Michael.
Okay.
At this time, we currently have no further questions and therefore this concludes today's call. Thank you all for joining you may now disconnect your lines.
Okay.
Yes.
Okay.
Yes.
Okay.
Uh huh.