Q3 2022 Cresco Labs Inc Earnings Call
Ladies and gentlemen, thank you for your patience. This call is due to start in a couple of minutes time.
[music].
Good day, and welcome to Costco Labs third quarter 2022 earnings Conference call.
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Ill turn the call over to Michael <unk> SVP of Investor Relations for Questcor Labs. Please go ahead.
Thank you good morning, and welcome to Cresta Labs third quarter 2022 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charles Bechtel, Chief Financial Officer, Dennis OLED, and Chief Commercial Officer, Greg Butler, who will be available in the Q&A. Prior to this call we issued our third quarter earnings press release, which has been.
Filed on SEDAR and is available on our Investor Relations website.
The preliminary results for the third quarter of 2022 are provided prior to the completion of all internal and external reviews, and therefore subject to adjustment 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 September 32022 on SEDAR and Edgar later this week.
Certain statements.
And that's made on today's call may contain forward looking information within the meaning of the applicable Canadian securities legislation as well as within the meaning of the Safe Harbor provisions in the United States Private Securities Litigation Reform Act of 1995.
These forward looking statements may include estimates projections goals forecasts or 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 events plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainty.
That may cause the company's actual results or performance to differ materially from forward looking statements, including economic conditions and changes in applicable regulations 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 Chriscoe labs file.
<unk> on SEDAR and with the Securities and Exchange Commission critical labs does not undertake any duty to publicly announce the results of any revisions to any of its forward looking statements or to update or supplement any information provided on today's call. Please note that all financial information on today's call is presented in U S dollars and all interim financial information is.
The audited in addition, during todays conference call critical 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 measures and reconciliation to the most directly.
Probable 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 be considered only in conjunction with the 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.
We're at an exciting time for the cannabis industry and approaching a clear inflection point with new insurance traditional industries and legislators all taking a greater interest in cannabis. The federal government officially recognize that the current scheduling is out of date and out of step with American values further affirmed and last Tuesday.
His election, when two new states, both part of our pro forma footprint voted to Paas, new adult use cannabis laws.
Hey, Chris go Labs, we're focused on creating a company built for leadership ahead of that inflection point, creating the muscle the institutional knowledge and the systems infrastructure to lead this emerging CPG category.
We're building the most strategic geographic footprint and asset base paired with excellence across CPG brand building and traditional retailer.
We're optimizing our assets, our margins and balance sheet to maximize shareholder value when federal reform occurs.
On November 4th we announced a meaningful step forward to closing the Columbia care acquisition by executing definitive agreements to divest assets in the state of Illinois, New York and Massachusetts. This is a significant hurdle cleared in our mission to combine critical labs, with Columbia care, which will expand our leadership position in today's premier.
<unk> markets and the growth states them tomorrow combine our industry, leading branded products portfolio across the footprint, reaching over 70% of eligible U S consumers.
Leverage our highly productive per store retail model across one of the largest retail networks in the industry and create diversification of revenue by geography and by channel in short, we're creating a company built to effectively compete today and for industry leadership long term.
Turning to the quarter. We're pleased to report solid results. Despite multiple industry headwinds, we generated $210 million in revenue per BDSI, we've maintained our industry position as the <unk>.
Number one wholesaler branded cannabis products the number one selling branded portfolio of products and one of the most efficient retailers.
This quarter, we took several actions to set us up for long term improvement, including the closing of underperforming facilities and the liquidation of related inventory, which had a short term negative impact on gross margin of about 340 basis points, which Dennis will talk about in detail.
As a result, our adjusted gross margin was 47% and our adjusted EBITDA margin was 20% I want to emphasize the actions. We took were proactive to align our cost structure and optimize our operations ahead of the Colombia carry clothing and in furtherance of our commitment to improved margin growth in the coming quarters.
Transitioning to the current U S macro backdrop simply put it's challenging.
But as I mentioned last quarter cannabis is proving to be durable across our stores shoppers continue to buy more cannabis with transaction and units both up 24 plus percent.
In this environment, we're balancing managing the today, while remaining focused on the big picture and the long game, we're building brands and improving our retail operations. We are preparing for the integration of Columbia care to generate substantial future growth.
And we are selectively deploying capital and strengthening our balance sheet to have the flexibility to respond to any regulatory structure. We see ahead.
Companies that can manage the current challenges most strategically and execute operationally, we'll slingshot forward when the wins inevitably shift and cannabis achieves its potential of being a major U S consumer products category of the future.
The playbook, we launched in 2020 is working and will continue to deliver long term growth and shareholder value.
But again review the three pillars of that playbook.
Number one we're developing the most strategic geographic footprint.
The Columbia care deal fits perfectly into our playbook and accomplishes all of our goals. It creates arguably the highest value footprint in cannabis access to 180 million Americans. All 10 of the 10 highest projected in 2025 revenue states and exposure to the largest industry growth drivers over the next few years.
The acquisition will more than double our retail footprint gives us the number one market share position in five markets and optimizes, our operational footprint across markets.
We're targeting the end of Q1 2023 based on our projected timelines to get on the necessary state level regulatory agendas close the divestitures and complete other standard clothing processes.
With the recently announced divestitures signed we can now concentrate on our deals in other states and other potentially redundant assets, which we could elect to divest to optimize our footprint and balance sheet.
We're still targeting about 300 million in total proceeds and will provide more detail on those as soon as we can.
Number two we maintained our position as the number one branded product portfolio per BD SA.
Again in Q3, our net wholesale revenue was an industry best $93 million, we have 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 three portfolio of branded Babes and a top five port.
Folio of branded edibles over.
Over the last few quarters, we've seen competitors prioritize their own products on their own shelves, which has had an outsized impact on us as the largest wholesaler. However, we've strengthened our capabilities in the face of this intensified Britta chaldee.
In ways that will serve us well as the industry matures.
Our house of brands approach enables us to reach more consumers and our <unk> brand has become the largest cannabis brand in the industry are high low brand offerings of leveraged different category elasticities to not only enable growth in the value segment with high supply being the largest value brand in the U S. But also launching premium.
Offerings consumers are willing to pay more for like the successful expansion of Florida Cal into new markets.
Brands that connect with customers and provide value will be the winners win new third party retailers open their doors as wholesale based market structures like New York, New Jersey, Maryland, Virginia, and Illinois launch and expand.
We're building the brands that command a high share of shelf and the growth markets of the future are built to reward strong brands and companies with branded distribution capabilities.
Number three operating a highly productive retail network in the most strategic markets Q.
Q3, retail revenue was $118 million up 11% year over year.
The year over year growth was achieved despite increased competition and pricing pressure in Pennsylvania.
Hurricane related store closures in Florida, and more vertically driven price competition in Illinois.
Hurricane related store closures in Florida, and more vertically driven price competition in Illinois.
We opened three new stores in Florida during the quarter with more planned in Q4, and a robust store opening plan in both Florida and Pennsylvania in 2023.
Along with our own internal store opening plan, the Columbia care acquisition will more than double our retail footprint, giving us one of the widest retail footprints in the industry and ensuring our products get the share of shelf they deserve as.
As we've always said, we're focused on providing the best value proposition to the consumer the evolution of this industry requires an ever improving retail experience, including better value to ensure that the growing legal dispensary network takes greater share of the total cannabis market to that end our team is doing an excellent job of Maxim.
Using the value of every trip for our customers utilizing customer purchasing data basket building programs to generate more sales per trip and establishing our loyalty program in Q4 will enable us to capture more than our fair share of retail revenues today and in the future.
Before handing it over to Dennis I want to thank the <unk> family for doing what they do in a challenging environment, where expense control efforts are requiring us to do more with less they continue to execute the base business at an incredibly high level, they've become known for while planning for the future of this company and preparing to close and integrate Colombia care.
With that I'll turn it over to Dennis to discuss Q3 results.
Thank you Charlie and good morning, everyone in Q3, our team generated over $210 million in revenue.
Retail revenue grew 11% year over year, driven by our ability to whole same store sales and the addition of new stores in Florida and Pennsylvania.
This shows the health and performance of our underlying base retail business, where we continue to perform better than our fair share in most markets.
While sequential revenue dip slightly driven mainly by pricing pressures with some increased competition and weather related store closures overall demand for our products remains strong with units sold at retail up 24% year over year on the wholesale side revenue was down about 7% year over year after adjusting for this strategic.
<unk> from third party distribution in California implemented in Q4 of 'twenty one.
Sequentially wholesale revenue was down two 7% primarily related to increased political innovation amongst peers, while independent retail stores in Illinois have yet to open.
Even with these challenges we held the number one share of branded product sales in Pennsylvania, Illinois, Massachusetts, and overall markets tracked by BDSI.
Looking ahead to Q4 without the benefit of new market growth contributors like New Jersey, We do expect a sequential decline in revenue due primarily to traditional seasonality and a continued focus on <unk> by several of our peers.
As we said after our Q2 call. This is temporary.
We'll see growth in both our wholesale and retail channels in 2023 with several new store openings in Florida towards the end of Q4 and in Q1 and new store openings in Pennsylvania in 2023, and the opening of new independent retail doors in our home state of Illinois.
Adding the expected close of the Columbia care deal at the end of Q1, we're well positioned to have a strong 2023 and beyond with access to all of the largest industry growth catalysts.
As Charlie mentioned earlier, we've been taking actions ahead of the Columbia care acquisition to optimize our asset base, including shutting down under utilized higher cost facilities over the last couple of quarters.
While winding down these facilities, we experienced greater underutilization charges and higher costs associated with the closings that is then allocated to the products still being produced during the period.
As those products sell through they carry a higher cost of goods sold.
We also refined our cost models in the quarter, which will give us more accurate real time cost information going forward.
This resulted in lowering the cost base of some of our inventory to net realizable value and other nonrecurring noncash costs expensed in the quarter.
All in these actions resulted in approximately a 340 basis point drag on gross margin in the quarter.
It's important to note that without these actions and the noncash impact on accounting our adjusted gross margin would have been closer to 51% instead of the 47% reported.
While these actions contributed to a temporary decline in gross margin. There was a right thing to do for the business in the long term.
Our long term operating target of 50% gross margin is unchanged.
In furtherance of our efforts to appropriately manage cost in the business adjusted SG&A expense decreased by $3 $6 million sequentially to $67 million or 32% of revenue.
We expect a further decline in SG&A dollars in the fourth quarter.
I want to highlight that the reduction in SG&A in the quarter was achieved despite a significant increase in lobbying and government affairs spending in the quarter as we leaned into the progress we are seeing in the D C and New York.
Again. This shows we are prioritizing our spend towards long term business priorities, including driving legislative change to benefit our shareholders.
We will continue to look at other ways to improve our long term competitiveness.
Rationalize our existing footprint and improve our overall profitability and cash generation.
Adjusted EBITDA for the third quarter was $42 million, representing a margin of 20%.
Excluding the measures I've already highlighted our adjusted EBITDA margin would've been approximately 23% in line with the second quarter.
Our near term goal is for adjusted EBITDA margins in the mid 20% range.
We are laser focused on cash generation that's showed in the quarter.
Cash from operations was $26 million up from the use of $7 million in Q2.
In the quarter working capital contributed positively to operating cash flow reversing the working capital drag we saw in the first half of the year.
Third quarter gross Capex was approximately $21 million, including $10 million for New York.
Year to date, our capital expenditures include nearly $35 million for the purchase of our New York Real estate and the initial site construction.
Looking forward, we expect our capital expenditures in Q4 to be approximately $15 million to $20 million.
We expect we are nearing the end of our substantial capex projects as the Columbia care acquisition effectively replaces most of our future capex requirements, leading to a significantly improved free cash flow in the future.
We ended the quarter with over $130 million of cash on the balance sheet and we are comfortable with our existing cash position the strategic financing available to us and the expectations for proceeds from the divested assets.
The recently announced <unk> transaction include $110 million in cash at close and we continue to work toward definitive agreements to sell the remaining assets required to close the Columbia care transaction as well as redundant assets in other markets.
Cash from these divestitures will be used to delever the combined company.
As we said in Q2, there has never been a better time in this industry when leadership scale and financial strength matter more.
While we are facing unique headwinds, we see unprecedented opportunities for growth from regulatory change on the horizon strong consumer demand untapped efficiencies in production and consolidation opportunities.
As we look towards 2023, and the completion of the Columbia care acquisition. We believe we are in a strong position to expand our leadership position improving top line growth profitability cash flow and shareholder returns.
I'll pass it back to Charlie for some closing comments.
Thank you Dennis the future is bright for our industry and Chris go labs, we're proactively managing through than a unique macro pressures of today, while making decisions for strength in the future the outlook for U S. Cannabis is stronger than ever as we're clearly seeing it develop into the next major consumer products category in the United States the <unk>.
<unk> is proving itself to be a new consumer staple and recession resistant we continue to see progress at the state level as long awaited regulatory catalyst in states like New Jersey, New York, and Illinois begin to unlock other new markets like Virginia, Maryland in Missouri launch newly approved adult use programs and election results in Pennsylvania increased.
The likelihood of future legislative change and the tides are changing in DC with the likelihood of a federal reform improving daily we've never been closer to achieving reform than we are right. Now we believe the midterm election results were favorable for action. This year and reinforces that now is the time to lean in and we.
We will keep leading these efforts on behalf of the industry because we understand it's the ultimate unlock value for our stakeholders and for the industry at large operators.
<unk> continued to prove themselves resilient, despite having one and a half hands tied behind our back with punitive tax provisions and limited access to capital I.
Imagine what we will accomplish when bolt hands, our free with that I'll open the call for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by the pound key.
When preparing to ask question. Please ensure your devices on mute locally.
Our first question today comes from Aaron Grey from Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the questions.
So first question for me wanted to talk a little bit about the vertical or the impact that you guys had in the quarter.
I just want to get more countries and how much room. You think there is to go you said there might be continued impact in the fourth quarter.
So kind of where you stand on that kind of continues on beyond 2022.
And then you know exactly in what markets Youre seeing that impact and you talked about Illinois, and I imagine another so if you're talking about the markets and then what levers you might have talked about third party stores in Illinois your own stores and.
So the markets impacted what numbers you might have and then what.
I have to go in terms of the impact of burnt economy. Thank you.
Sure Thanks, Eric and good morning.
You know I think where we're seeing sort of a vertical <unk>.
For us the most is in the states of Illinois and Pennsylvania.
Pretty pretty heavy NSO dominant states and again as we mentioned on our last call.
A lot of it has to do with you know if you've got new Jersey as a growth driver in your in your asset base than your existing markets. You can you can put more of your own brand across your own shelves.
And really drive greater margins in those markets that are experiencing price compression. So there's there's rational sort of thought behind this and for US we've always strive to.
B the second.
Most prominent how some brands on our on our peers shelves, that's going to continue to be the strategy and as additional independents open up as we open up more of our own stores in Pennsylvania, That's where we see the opportunity not only to combat the vertical any greater but also achieve greater growth.
Okay, Great really appreciate that color and then Charlie I know you guys.
The cameras round tables. So I just wanted to know what thoughts you might have post the election.
We will wait and see what I'm. After is lame duck session in terms of you know the safe banking how might be shaping up.
Might be hearing in terms of the process of that you know passing by the end of the year versus what you might have heard parts of the election. Thank you.
Yeah.
As I mentioned in the remarks, I think the mid term outcomes are favorable for us.
Achieving some reform this year and so felt good about it going into the midterms or is there is good momentum.
I think the the legislators that are involved in leading the effort have definitely.
Educated themselves further over the last couple of months and I think that's that's the that's the best scenario for our industry I think the more that you learn about this tomorrow that you understand the importance of of achieving some financial regulatory reform before the end of the year as social equity licensees.
Trying to get operations off the ground in states like Illinois, and New York, New Jersey et cetera.
Important access to capital as of as a as a main gatekeeper to being able to see success in those areas. So I think the likelihood of success. There as you know is higher than it was before the midterms and we've been optimistic for the last couple of months that we'll see some change so that hasn't we haven't deviated from that.
Yes.
Alright, great. Thanks, very much of the Covid I'll jump back in the queue.
Thanks Darren.
We now turn to Andrew Carter from Stifel GMP. Your line is open.
Hi, good morning, Thanks for taking my question.
Maybe just thinking about your footprint here.
Should we should we expect any.
Their footprint optimization actions.
You know any.
Facilities that you wanted to rightsize or or inventory that you need to still sell through.
In Q4 going forward.
In other words do you expect that 340 basis point headwind to unwind and benefit in Q4.
And then.
When.
Columbia closes.
How is this going to work with with your pro forma footprint.
Youre going to have all the assets that you want and none that you don't on day, one or do you think you'll still need some time months quarters to work through that.
Good morning, Andrew and thanks for the question. So you know.
I think.
One is for the actions that were taken already as Denis had mentioned on the call.
Primarily seen in Q3, and you won't see that impact in Q4 as far as continuing to evaluate and rationalize our footprint and the assets and I think that's something every company.
Should be doing.
That not even sector related I think with where we find ourselves with the macro environment and political issues at play and also with our industry. What does happen here between now and the end of December could have a material impact on what the next couple of years look like in this space. So it's something that I think we have an obligation.
<unk> to continue to do is make sure that we have an optimized asset base and that we're well prepared to be as competitive as we possibly can be going forward.
Thanks for that.
And just wondering if you could provide any any updated thoughts.
On creating a pro forma footprint, that's more heavily skewed.
Towards the West coast.
Are you are you thinking there may be a trend reversal with respect to the challenging environment there.
Is this more of a long term brand building strategy or is there something else here.
No I appreciate the question and I think I might have forgotten. The finished the last one I do think we will have the assets that we need upon closing to two to sort of meet our goals and our our obligations as far as the closed combined co as we look at sort of the waiting of the footprint I think you can look at there the combined footprint is.
In West Coast.
Leaning.
At the start but really you look at the growth markets. The reason that we did the deal you're getting the new Jersey, you're getting the Maryland's Youre optimizing New York you have.
<unk> got the big unlocks in the big growth drivers tend to be on the east coast. So.
The west coast assets that will be.
That'll be coming along with the deal actually help optimize the businesses that we already have in those states and will continue to rationalize and make sure that were as competitive as we can be in those markets and Greg additional color as I say I think just to answer your question on that.
We project forward, we don't see a lot of improvement necessarily in the industry trends in those markets, but to Charlie's point.
Our focus is how do we get margin and improve margin and the team at Columbia care have done a great job of starting that and we think through cultivation expertise that we're bringing in through improvements to quality of products and some of those states.
We can find ways to optimize that pretty heavy revenue base. They have in the west but drive margin. So that's really our focus over the next couple of quarters.
Thank you very much for that and I'll get back in the queue.
Our next question comes from Ian Bennett from Jefferies. Your line is open.
Good morning, Gents and alcohol, while I finish.
Wanted to ask about New York. So you recently began construction on your facility in Hudson Valley I, just want you to get your latest thoughts on the rollout in New York Bullishness scale, especially given the latest developments at the social equity bubble out on what's going on what they see and then how you're thinking about this new facility.
And the Columbia Cat facility co existing post Neal.
Okay.
Yeah, Thanks, Sean So yeah no.
Continue to learn more about New York.
The weeks and months go by hopefully, we'll learn even more about the the future regulations before the end of the year that's the expectation.
As it relates to sort of the combined asset base, where we're taking a very what I would tell you appropriate phased approach to the infrastructure that we're building there Columbia carrier has a great facility with a lot of cannot be potential already in their footprint and the facility that we're building out <unk> and fillers.
It's there to sort of complete the whole picture, it's mainly a manufacturing phase one is mainly a manufacturing operation with some indoor and we think that will make us really competitive when this market does get off the ground.
Recent updates there still have us, believing that a a a market will launch.
Round yearend with small and continue to grow through 2023.
And I think our footprint gives us the opportunity to bring the products that we make to market at the quality and consistency that that New York consumer is really going to demand. So.
We're still bullish on New York.
Great. Thanks, Charlie I, just have one follow up on California, which you may have sort of pushed upon already when Gregg said.
I think you're really seeing improvement Westbury spec.
Pure leaf.
Are you seeing that pricing may be about the box Columbia comments yesterday, it looks like <unk> stabilized that business national wall. So I just want to get to more California specific comments on the on the dynamics and how that's evolving that.
And I'm wondering if we do see stabilization into next year, where you start to lean into a bit more investment in California again.
Yeah. Thanks, Alex So yeah, I think the stabilization that has been mentioned by our peers is relatively.
Relatively accurate.
Turning to see stabilization out there, but we will still have to rationalize investments and the opportunities in California versus the incredible opportunities that we have in other places of that combined footprint again, when we're looking at.
The greatest return on invested capital.
Some of those those new additions to our footprint are going to require us to lean in pretty heavy to take the share positions that were accustomed to achieving and in states, where we get scale. So we're going to rationalize the footprint and.
And we'll see where that leads from there Greg.
The only thing I'd add to that is I think one to your point.
There is some I think if you look at the quarter over quarter trends. There is some stabilization of some of the price declines, particularly if you look year over year trends coming in my comment was more as we say to the west.
We're building our models around let's assume.
But we're not going to get it off top line growth because if you look at other states around.
California, Colorado, Oregon, and Washington, All while we are.
I'm pleased to see some stabilization in pricing there is still room for that pricing to go lower if all of a sudden supply demand becomes unbalanced in future quarters. So instead of assuming we're going to get market growth by relying on the industry to give us revenue ours is how do we improve the quality of those assets.
To drive margin as we go forward so any investment to your earlier question that we would make would be investments in our facilities to focus on quality.
But really to our next couple of quarters here as we as we get to a pro forma company. It is about driving better margin out of the facilities we have.
Great. Thanks, Jan is very helpful.
And so on.
Our next question comes from Vivien <unk> from Cowen Your line is open.
Hi, Good morning. My first one is I think quick Dennis you mentioned, the $3 6 million and SG&A savings.
In the quarter and suggested that there was further improvement to come in in <unk> can you dimensionalize that a little bit. Thank you.
Yeah. Thanks, Vivien so yes, we did recognize some additional savings in Q3 relative to Q2.
Just as we're rationalizing our footprint. We're also rationalizing all of our cost so a lot of the corporate costs that were looking at and we're preparing ourselves for an eventual.
The acquisition with Columbia care. So we're trying to get proactive in looking at every single dollar that we're spending at a corporate level and within the regions from an SG&A standpoint, So we do expect to see some sequential.
Drop in total SG&A costs from Q3 to Q4 and will continue to manage those cost effectively as we go forward post merger I think there's a lot of opportunities to continue to drive the SG&A leverage down even further and we will continue to.
Again challenge ourselves to look at every dollar that we spend.
Perfect. Thanks for that and then Charlie and Greg lots of focus on the top line Understandably Charlie I appreciate your optimism around growth in 'twenty three in particular, given all the new door opening.
I've had slated coupled with.
Coming online, but if we kind of looked at things on an underlying basis for some of your kind of core more established.
Do you think that we can see like solid topline growth on a same store sales basis out of a market like Illinois.
Or perhaps I know your wholesale weighted in Pennsylvania, but similar question for Pennsylvania.
Okay.
So same store sales growth in mature markets.
Needs to come from a couple of different areas whether that's.
And a greater demand increase whether it be from a from a from a consumer standpoint, <unk> ability to spend along with potentially lower prices, making it more affordable for the consumer to buy.
That said I think we've got great locations in both of our both of those markets, Illinois and Pennsylvania.
As more product comes into the market is more I'm, sorry, there's more doors open up and the market it could drive more demand in those markets and that's where we would expect to see potentially.
Same store sales increase, but I think that has to be balanced with where do these new doors opened so if we have a significant number of new doors opened around ours, we've seen negative impacts on some of our stores when a competitor opens up relatively across the street. So you know we're going to manage that to the best of our ability and I would say overall too from a.
From a growth perspective in these markets, particularly Illinois as those 185 doors start to open again, depending on where they open and when they open we will see some opportunities, but we'll also see some risk.
If the first handful or two of doors open up around our retail in theory that could have a greater impact on our retail revenue than it does on our wholesale revenue, but we do know looking long term the 185 doors and the future ones that will open after that of course provide more wholesale upside potential than retail revenue risk test.
Yes.
Understood. Thank you.
Thanks, Vivian as a reminder, any further questions. Please press star one on your telephone keypad now.
We now turn to Luke Hannan from Canaccord Genuity. Your line is open.
Thanks, Good morning, everyone I just wanted to ask on the Capex plans for next year. Charlie how are you thinking about you talked about you want to allocate capital based on where you think you can get the greatest return on invested capital broadly speaking and assuming the close of Columbia care takes place at the end of Q1, how are you thinking about allocating those.
Over the course of next year.
Sure I'll start it off and then I think Dennis will add some additional color.
We're going to again continue with our store rationalization exercise that where we are currently have underway and depending on.
When the transaction closes and also what happens in D. C. There's some factors that impact the way that we're thinking about our capex plans for next year, we love the footprint that Columbia care is bringing to the table, including the infrastructure they that does reduce cigna.
Significantly our sort of.
Our original Standalone Capex plans that we would have as a standalone company.
But we'll again prioritize return on invested capital and I could see either the opportunity for margin improvement or growth at the top line to be where we will deploy capital in 2023 of them.
Yes look in that just to build on that as Charlie noted most of our large capex projects will be completed this year early into next year. We when we look at New York The investments, we're making in New York in our facility in <unk> are nearing completion, there there will be a little bit of carryover into next year.
And then again at the combined footprint of our two companies.
Eliminates a lot of the Capex that we would need independently. So most of that again most of the large projects will be completed.
The Capex that we're looking at next year, it's really going to be around store openings around automation around improving our overall.
Efficiencies within our cultivation and manufacturing facilities that we have currently and then again, we will continue to rationalize the combined footprint as well.
Got it and Dennis maybe this one's for you what's the comfortable level of leverage that we should anticipate from the combined company going forward, assuming you're able to get the proceeds from the asset divestitures that you expect and so on.
Yes are you talking debt leverage are you talking about.
Leveraging from a margin perspective.
Net debt leverage.
Yeah as we've talked about previously we're going to use most of the proceeds that we're going to get from the divestitures to Delever. The company. So we expect that coming out of 2023, our net debt to equity ratio would be in about the one five range.
And again Thats consistent with what we've said in the past the the proceeds that we're getting from the divestitures are in line with our previous.
Expectations and what we've communicated.
So everything is going according to plan at this point.
Got it thank you very much.
You may now to Andrew Scott Fulltime from Roth Capital Partners. Your line is open.
Yeah. Good morning, and thanks for the question can you just provide a little color on the health of the consumer.
Obviously, we're seeing a little pressure there are challenges in kind of the product volumes are you driving and you are we seeing continuing trade down and consumption here, but just overall kind of expectation.
And kind of the consumer going forward and your product set two to match the consumer demand there.
Yes, we don't want to take this overall trends, we're seeing is more consumers are buying more cannabis.
Unit volume continues to grow.
Our thesis is the consumer.
One of the questions usually got it.
As a stable durable goods answer is we do we see this is now part of the routines consumers versus why unit volumes continue to remain strong.
And quite frankly consumers are able to now get candidates at a lower price than before as price compression is is hitting at the same time, we have a world of inflation. So it's a good value story for consumers your COO.
<unk> shipped down we are seeing it.
From a consumer's shifting down from.
More premium priced to value price, which is why youre seeing the growth of value. We're very pleased with the strength of our house of brands. That's why we built our good better best strategy to ensure that we have the right offerings. So when consumers are looking to shift down they have an offering that we can move to and that's why have you seen success on high supply, but from a overall.
Transaction I think the piece that remains unique to cannabis.
And we're watching closely is we do have the illicit market that sits right by the legal market, which also has a price substitute.
Hey, it's hard to find out if consumers are shifting ended up market and by the unit growth. We're seeing in our stores. We would say consumers are continuing to stay in the legal market, but obviously that remains.
The price the price substitute for us.
Okay I appreciate that color and then real quick on Massachusetts.
Got that.
The facility fully online here can you provide a little bit.
Mueller or margin improvement you expect now with the facilities in place.
And the offsetting obviously the price pressure thats gone messages as just kind of Paas understand.
Potential improvements here for you in Massachusetts.
Why don't I continue with that in mass our focus has been as you mentioned to improve the quality cultivation come out of our facilities.
We have started to see improvements, but that does take some time to cycle through and so we're starting to see some of our yields with higher potency, which will come to the market, which is so important just given the quality of product that's on the market and the prices being charged so that is a area of focus which we get into Q4, you'll see from us is.
<unk> improvements and quality on our flower side.
And then also continuing to really drive education across the market against our Crestwood liquid resin the market's still the heavy distillate market and our challenge and opportunity is to continue to drive awareness with store owners and shoppers around what makes a live resin superior to a desk, which as we continue.
To do that there is continued growth in the market for us to take share.
Got it I appreciate and ill jump back in the queue.
Thank you Thanks, Scott Greenstein.
We now turn to Glenn Mattson from Ladenburg. Your line is open.
Hi.
Are you taking the question just thinking about evenly adjusted gross margins being down a couple hundred basis points may be you.
Alluded to this already and I missed it but I'm thinking about kind of the more profitable markets out there like Florida and I'm wondering is there.
A little bit of pressure in that can you characterize the Florida market force. Thanks.
Yeah. Thanks, Glenn so as we've talked about the margin impacts that we saw the 340 basis points that we're talking about really relate to activities in California, and Arizona, where we again rationalized some of our footprints and got proactive in taking actions around.
As it relates to Florida again, just because of the vertical nature of that state those margins typically do run a bit higher than we see in other markets. So while there's a lot of price pressures.
In Florida is there aren't other markets, we're doing a lot of things to help offset some of that price pressure through automation and.
Expanding our portfolio of products and so forth. So our margins continue to be strong in Florida, and there's a little bit of price pressures, but again nothing material.
Thank you and could you give us any more color on the other asset sales in terms of the.
Maybe the first batch to this one.
<unk> was was that more low hanging fruit and the other ones are going to be a little harder to to get across the goal line or do you think there'll be more like a large one off transaction.
Just some color around how that process is going thanks.
Sorry, sorry.
Sorry, we chuckled in the room at the low hanging fruit I don't know that I would describe it as low hanging fruit.
Look M&A in this industry is is challenging it's been a challenging year to do it and I think what you see with that announcement as you see the strength of the <unk> on the Columbia care teams and being able to get this deal across the finish line.
It's nice to have those three states New York.
And Illinois taken care of and we're working on the remainder so we're happy with where we're at with them and we'll be providing updates on those as soon as we can.
Thanks for the color.
Alright, Thanks Lynn.
This concludes our Q&A and today's conference call, we'd like to thank you for your participation.
You may now disconnect your lines.
Uh huh.
Yeah.
Yeah.
[music].
Okay.