Cresco Labs Inc. Q1 2023 Earnings Call
Speaker 1: I.
Speaker 1: What.
Speaker 1: thankfood.
Speaker 2: Good day and welcome to Questco Labs' first quarter, 2023 Earnings Conference School. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be opportunity to ask questions. To ask your question, you may press the star key, then one on your touch-tone phone.
Speaker 2: To withdraw your question, please press the star key then 2.
Speaker 2: Please note this event is being recorded.
Speaker 2: I would now like to turn the call over to Megan Culek, investor relations for Questco Labs. Please go ahead. Please take turns now.
Speaker 3: Thank you. Good morning and welcome to Cresco Labs' first quarter, 2023 conference call. On the call today, we have Chief Executive Officer Charles Bechtel, Chief Financial Officer Dennis Olas and Chief Transformation Officer Greg Butler who will be available for the Q&A. Prior to this call, we issued our first quarter earnings press release, which has been filed in Cedar and is available on our
Speaker 3: 2023, on Saider and Edgar later this week.
Speaker 3: Certain statements 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 of the United States Private Security's litigation reform act of 1995. These forward-looking statements may include estimates, projections, goals, forecasts, or assumptions that are based on current expectations and not representative of historical facts.
Speaker 3: 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 Cresco Labs filing on CDAR and with the Circularies and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the result of any revision to any of its forward-looking statements or to update or supplement any information that may be of interest to the public.
Speaker 3: which do not have any standardized meanings prescribed by GAP. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with GAP. These non- GAAP financial measures should not be considered superior to...
Speaker 3: as a substitute for as an alternative to and should only be considered in conjunction with the GAAP financial measures presented in our financial statements. With that, I'll turn it over to Charlie.
Speaker 4: Good morning, everyone. Thank you for joining us on the call today.
Speaker 4: On our call in March, we highlighted our priorities for 2023 as we execute against our three-year plan.
Speaker 4: This is the year of the core and the year of cash. We're leaning into our core, investing wisely, and rationalizing and optimizing everything we do to generate profitable revenue expansion, drive healthy margins, create more cash, and strengthen our balance sheet.
Speaker 4: On today's call, we'll focus on the steps we're taking across our business to execute against this strategy.
Speaker 4: We're pleased with our Q1 results. Press goes team generated $194 million of sales. Our revenue performance was solid across our footprint with some softening in Illinois that caused the sequential decline in revenue as well as much of the margin pressure.
Speaker 4: Dennis will provide more detail on that, but overall, across our footprint, we performed well in wholesale, held fair share in retail, and drove increased productivity across every facet of the business.
Speaker 4: and today's environment.
Speaker 4: We are hyper focused on what we can control, stabilizing for today and optimizing for the future.
Speaker 4: Our relentless prioritization of providing the highest perceived value to the consumer is paying off and continues to give us the number one selling portfolio of branded cannabis products in the entire industry and an incredibly productive retail platform.
Speaker 4: Our products reach the shelves of 1,600 dispensaries across our 10-state wholesale footprint, and we range up almost 1.2 million orders at our sunny side dispensaries.
Speaker 4: Now I'll review how we're executing on our strategy using the three pillars of our three-year strategic plan. Ensuring we have the most strategic footprint, broadening our wholesale brand leadership, and driving retail productivity across a larger base. Number one.
Speaker 4: We're ensuring we have the most strategic geographic footprint.
Speaker 4: Over the years, we've designed our footprint to ensure we have access to the states with appropriate regulations and large consumer populations to execute against the thesis that cannabis is one of the largest consumer product goods of the future.
Speaker 4: As industry and state programs evolve, it's important that we stay nimble and adaptable to maximize our opportunities and minimize our risk across a footprint. That's the active component of creating and managing the most strategic footprint and the impetus behind the rationalization and optimization efforts you've seen from us in recent quarters.
Speaker 4: and can expect from us going forward. We are continuously evaluating and tweaking our practices to make incremental improvements at every touch point in the cultivation, manufacturing, and retail process to address the nuances that develop the state's mature.
Speaker 4: Our core markets are strong with scaled operations that create significant profit and cash flow from operations.
Speaker 4: We're operating more efficiently, improving productivity in our supply chain, and adding more automation in our facilities. We're leaning into these markets to drive more growth and market share while both during enterprise profitability.
Speaker 4: Looking across our footprint, we're also preparing for significant growth catalysts in states like Pennsylvania, Ohio, Florida, and New York as those markets convert to adult use.
Speaker 4: We continue investing wisely in those markets to improve our productivity, expand our product offering, and strategically open new doors.
Speaker 4: BDSA estimates these four states alone will double in size over the next three years as adult use programs come online and we will be ready. At the same time, we're the emphasizing markets that don't have a pathway to scale and profitable growth.
Speaker 4: On our last call, we talked about our decision to close underutilize the nonprofitable facilities in California and Arizona to of our lowest margin states.
Speaker 4: We recently completed the line down process for these facilities. So those actions along with many other changes we're making across our organization to optimize and write size our business will materially improve our margin starting at the end of Q2.
Speaker 4: Number two, we maintained our position as the number one branded product portfolio in cannabis. Consumers continue to love our brands and products. According to BDSA, we continue to be the number one selling portfolio of branded cannabis products in the entire industry.
Speaker 4: With our prioritization of providing the highest perceived value to the consumer, we produce the number one portfolio of branded flour, number one portfolio of branded concentrates, number four portfolio of branded vapes, and number four portfolio of branded edibles.
Speaker 4: And in our strong core markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position, and we're happy to say we now have a top five market position in the very competitive Michigan market.
Speaker 5: extensions.
Speaker 4: For example in Massachusetts we launched the popular Good News base which grew our market leading share in the state. In Pennsylvania we launched Trokeys addressing a specific form factor gap in the market. We're extending our successful edibles brands with the launch of Chews in Florida which already account for 10% of sunny side sales in the state.
Speaker 4: And we're also introducing more flavors and effects, such as good news vaguettes, which both elevated effects with caffeine.
Speaker 4: Along with brand extensions, we're taking steps to combat pricing pressure by premiumizing our portfolio and delighting shoppers at higher price points. We launch new fluorocal products in Illinois, Florida, Michigan, and Massachusetts, which complement our value brand high supply.
Speaker 4: because the value proposition of quality and price is appropriate. This high load strategy is helping us address more targeted consumer audiences of purchase occasions, striving higher baskets, and ultimately gain more market share of growth across our existing footprint.
Speaker 4: Finally, we're making small investments in simple and efficient innovations that can be launched quickly with fast paybacks. We're looking at proven segments such as pre-rolls and medicinals, which we already have the expertise and capabilities, but we've historically under-indexed.
Speaker 4: And number three, we're also doubling down on our highly productive retail in the most strategic states.
Speaker 4: And number three, we're also doubling down on our highly productive retail in the most strategic space. Our investments in retail are paying off.
Speaker 4: Despite new competitive doors opening, we continue to take more than our fair share in key markets because of our targeting, loyalty marketing, and customer service.
Speaker 6: Even with new stores entering competitive markets like Illinois, we were able to outcompete and hold our absolute retail share.
Speaker 7: In Q1, Sunnyside.shop, our proprietary ecommerce platform reached a significant milestone, registering $1 billion in sales since its launch in 2020.
Speaker 8: This is a testament to our focus on creating the best customer experience in cannabis, both online and in our stores.
Speaker 9: Currently, over 70% of our transactions originate via Sunnyside.shop, which gives us incredible insight into our customers' buying behaviors, while also creating more opportunities for basket building and highly effective targeted promotional strategies.
Speaker 10: Our newly launched loyalty program is another success story. It's providing us with more valuable data, while also giving us the opportunity to celebrate and reward our most loyal customers. In Q1, we signed up 100,000 customers, bringing the total to over 160,000 since it was launched at the end of last year. Engaged shoppers on our platform spend 12% more than the average shopper.
Speaker 11: Expanding these platforms will help us continue to drive more from our existing shopper base.
Speaker 12: While it wasn't in Q1, I do want to commend our team for the phenomenal job they did on 420, which set a record for single day trips, unit sold, and retail sales of 14% from last year's holiday. We'll please with the progress we've made so far in reducing our retail operating expenses to improve margins in an environment where pricing is under pressure, but volumes continue to grow.
Speaker 13: In fact, we're handling customer transactions more efficiently than ever. During the quarter, we sold nearly 3.2 million units at retail, up 7% year-over-year, and processed nearly 1.2 million transactions, up 3.5% year-over-year, all with 10% fewer retail employees. Thank you.
Speaker 14: Reflecting on the quarter, it's clear we're taking the necessary steps across the entire organization to improve margins and create a materially stronger company.
Speaker 15: We rationalized and exited margin dilutive operations in California and Arizona, while also investing widely in cultivation, innovation, and brand building.
Speaker 16: We leaned into our robust retail infrastructure to defend and expand our share against new competition even in the toughest markets.
Speaker 17: Cresco Labs has built for this uniquely challenging environment because we understand what we do best.
Speaker 18: We know what levers to pull. This is what we mean by focusing on our core, and you can expect to see more of this targeted prioritization as we charge ahead.
Speaker 19: Before I pass the call over to Dennis to review the financials, I want to go for a quick update on what's happening in DC and with our pending Columbia Care Transaction.
Speaker 20: While the industry was disappointed in the lack of movement on the Safe Banking Act and other federal reforms last year, it established the foundation for the progress we're seeing so far in 2023.
Speaker 21: I was in D.C. earlier this month and attended the Senate Banking Committee's hearing on the SAFE Act. I cannot overstate the significance of this event.
Speaker 22: SAFE has passed the House seven times. This is the first time that SAFE has been the focus of a Senate hearing. While SAFE isn't everything we need as an industry, this hearing is an incredibly important part of progressing toward reform.
Speaker 23: It's important to remember that this is merely a moment in time on the journey of the cannabis industry, and we will continue to show up at that table as a trusted operator and stakeholder to push these discussions forward with federal legislators. With regard to Columbia Care, we continue to collaborate closely with Columbia Care on the divestiture transactions required to obtain the regulatory approvals, which are conditions of closing.
Speaker 24: to Dennis to review our financial results. Thank you Charlie and good morning everyone. I'll be reviewing the financial results from the quarter then highlighting a few items from the balance sheet and discussing our capital position.
Speaker 25: As Charlie said, we are pleased with the results in the first quarter. We are navigating industry-wide pressures and taking steps across our organization to prioritize P&L strength and cash flow.
Speaker 26: In the quarter, we generated $194 million in revenue, a 3% decline quarter over quarter.
Speaker 27: This decline was driven almost entirely by Illinois, where the total market was down 5.6% as Missouri launched its adult use program putting significant pressure on border stores resulting in lower overall revenue.
Speaker 28: The impact of Missouri and new store openings in close proximity to established stores resulted in more competition for both retailers and wholesalers in the state.
Speaker 29: Importantly, net of Illinois, we saw growth across the rest of our footprint. The dynamics in Illinois resulted in our retail operations being down 3% quarter over quarter and wholesale revenue being down 2% over the same period.
Speaker 30: Overall, when we look at BDSA market share stats, we continue to perform incredibly well in branded market share, which accounts for all our branded products sold on our shelves and third party retailers. A great proxy for how consumers are voting with their dollars on brand and product quality and how Cresco is competing in its markets.
Speaker 31: We also help market share in every state where shared data is available.
Speaker 32: Looking ahead to Q2, we expect total revenue to be flat compared to Q1 as our growth in retail sales attributed to new store openings in Florida and Pennsylvania is offset by new competitor store openings near our dispensaries in Illinois, Pennsylvania, and Ohio.
price depression, and the impact of our most recent rationalization actions in California. Throughout the rest of the year, we will see some impact to revenue as we exit low margin businesses in furtherance of our continued efforts to improve overall margins and cash flow.
We expect modest market share gains for our branded portfolio as we execute on extending our winning brands in new states.
Pre-remising our portfolio and expanding in segments where we are under index today.
Overall, a just a gross profit in the quarter increased 120 basis points equentially to 46%.
Improvements and efficiencies across the platform were negatively impacted by the revenue mix by state. What will happen to you?
The sequential revenue decline in our high margin state of Illinois was offset by higher revenue in lower margin states like Massachusetts, California, and Michigan.
which resulted in a margin drive of approximately 270 basis points.
We are taking steps to bring margins up in sequential quarters as we strive for improved cash flow and continue to rationalize margin dilutive operations.
As Charlie mentioned in his opening comments, last month we reduced our footprint in California and entered into an agreement with KSS to distribute our products.
This decision was in furtherance of our plan to reduce our fixed costs in markets where our overall margin is dilutive to the company.
This change in California was effective as of mid-May and will begin to reflect the full cost benefits of this in Q3. Similarly, margin expansion from the improvements we've been making in automation, cultivation processes across many of our states, and expense reductions in other areas of the business will be recognized in the coming quarters as we sell through our higher cost capital.
of the openings of eight dispensaries in the quarter.
These new stores accounted for $3 million in additional SG&A expense in the quarter.
We've taken additional actions in Q1 and Q2 to streamline our operations, reduce cost and cultivation and production facilities, and reduce our overall functional expenses at corporate.
These additional steps, along with further significant cost actions planned, will yield additional savings over the remainder of 2023 and 2024 when we expect to see the full benefits of these changes.
Adjusted EBITDA totaled $29 million.
flat sequentially.
Adjusted EBITDA margin of 15% was up modestly but below our long-range target, primarily due to lower revenue in the high-margin state of Illinois. Looking ahead, we expect adjusted EBITDA margins to improve as the measures we took in Q1 and those planned in Q2 begin to flow through the P&L, improving both gross margins and SG&A. We continue to focus on improving our working capital management.
We held inventory flat for the fourth consecutive quarter, even with a purposeful buildup of inventory to support 420. We paid approximately $34 million in taxes in the quarter, making us current on our federal tax obligations through 2021, and state taxes through Q1 of 2023.
Our remaining 2022 federal tax liability is approximately $50 million for which we filed an extension in April of this year.
Even with the large Q1 tax payment, we generated positive operating cash flow of $3 million in the quarter. As noted with adjusted EBITDA, we expect to see improvements in both operating and free cash flow, especially in the back half of the year, as the steps we are taking today to reduce costs are fully recognized.
In Q1, we spent $21 million on CAPEX, primarily from the addition of new stores in Florida and the development of our upstate New York facility, which is required to maintain regulatory compliance in the state. Q1 was the heaviest quarter of the year for investment, and we will see a dramatic reduction in our need for CAPEX for the balance of the year.
We ended the quarter with $90 million of cash on the balance sheet and we feel good about our cash position. Brief cash flow improvement is our number one goal for 2023.
The improvements we are making to our operations, continued cost management, and significantly lower CAPx will improve our cost structure and margin profile. Beginning in Q2 and more so in the second half of the year, building to our goal of 50% gross margin and 20% plus EBITDA margin by the end of the year.
bill being heard in the Senate and following what's referred to as regular order. We saw Kentucky pass a medical cannabis law and we're seeing more adult use markets come online and broad acceptance of cannabis continues to grow.
We're working to improve every aspect of our business to take advantage of this positive momentum. We're managing through the environment today to improve profitability while at the same time optimizing the company for the industry of tomorrow.
super product categories in the US. And Presco allows us doing what needs to be done to secure long lasting industry leadership.
We are holding share in our largest highest margin markets while the emphasizing those markets that negatively impact margins.
We're reducing our corporate overhead and driving operating efficiencies throughout our entire organization to offset pricing pressures.
We're investing in projects and innovation where we see the opportunity for short-term cash returns. We're investing in projects and innovation where we see the opportunity for short-term
We're focusing on generating more free cash flow through better inventory and cash management to strengthen our balance sheet. And we're continuing to lead the efforts on federal reform, which is the most important path towards unlocking the true potential and value of the cannabis industry.
With that, I'll open the callporfor questionsthank you. If you would like to ask a question, please press star followed by one on your' telephone keepipad. Now, if you change your mind, I would like to withdraw your question. Please P Star, follow advby two.
and when preparing to ask your question please ensure that your phone is unmuted locally. Our first question of today is from the line of Aaron Gray of Alliance Global Partners. Aaron your line is open now if you'd like to proceed.
All right, thank you. Good morning and thank you for the questions. So first question, you know, I have, I know you guys didn't disclose a ton on terms of the updates for the VESFERS for ColumbiaCare, but just, Charlie, given your commentary in terms of the path forward and you talked about both strategic and financial sense, I think we all understand the strategic. I just want to get more into the higher thinking about the financial sense.
As you look for a path forward and the potential pro forma debt and how that plays a role, Columbia Care has some near term and long term debt coming due. Neither is free cash flow positive today, but both of you are working towards that. So if you offer some color in terms of what a pro forma structure would make that financial sense for you.
and potential paths towards that, either additional divestitures, debra structuring. I think that'd be very helpful. Thank you.
Very good morning, Aaron. Thanks for the question. When it comes to the commentary on strategic and financial sense, the way to look at it really is there's a couple things that are, there's several things that are within our control and there's several things that are outside of our control as it relates to the transaction. And of course, the divestitures.
And the resulting proceeds from those are a big component of, as we said from the very beginning, our ability to get the combined debt leverage ratio of combined co in the right spot. So, as the divestitures remain.
Open and before we're able to complete those, that's a big driver of whether or not the deal can proceed with a structure that allows us to achieve the goal that we set out at the beginning. So it really does come back to, as these divestitures still remain to be closed, they're a big driver of whether or not we can make the deal make sense and we'll continue to.
another market as well, I think it was about 200 base points. The last quarter, the way down by some inventory, net realizable value adjustments as well. So I just want to clarify, were there inventory adjustments again that weighed on this quarter, or were there new things that kind of weighed on the margins? I think last quarter, excluding those non-recurring, they would have been about 50%.
Just wanted to get some further commentary in terms of what weighed on margins last quarter versus this quarter, and then how to think about that gross margin going forward. Thank you. Thanks Aaron, this is Dennis. Let me answer that question. There were no additional inventory charges in Q1.
The impact of the gross margins is really a reflection of the fact that state mix accounted for about 270 basis points in the quarter. So we did see a drop in Illinois revenue associated with the adult use move in Missouri which had an impact on both the wholesale.
business down near the border states, so that had an impact. And then if you look at where, and that's again, one of our highest margin states. So the fact that we lost some revenue in a high margin state, picked up some revenue in states like Michigan, California, and other states with lower margins, that mix accounted for about 270 basis points in the quarter.
California had a minimal impact in the quarter relative to sequential change from Q4 to Q1. We do expect to see some significant improvements in margins as the actions that we took in California and Arizona in Q4 and Q1 will roll through the P&L into Q2 in subsequent quarters.
Thanks so much for the call, and I'll go ahead and jump back in the queue.
Thanks Aaron. Our next question is from the line of Andrew Pathner of Syphall GNP. Andrew your line is now open. My apologies it appears we've lost connection with Andrew but our next question is from the line of Scott Fortune of Ruff MKM.
Scott, your line is now open if you'd like to proceed. Yeah, good morning. Thanks for the questions here. Now that you've done the actions in Arizona and California and that's been taken, can you provide the kind of timing of the SCNA and improving the margin profile?
Thanks, Scott. So again, the actions that we took in California and Arizona, we capitalize the cost as we incur them in the period, and then we expense them into the P&L as those products shipped. So the actions that we took in Q1 will start to have some impact in Q2 as those products that we built in Q1 ship into the end of the month.
the second half of the year. I appreciate the color. Real quick, I know you mentioned Q1, your heaviest capex from that standpoint. Just kind of step us through the new store ads. I know you targeting for the mid.
Yeah, I'll take that one again. So the 21 million dollars of capex that we incurred in Q1.
14 of that was associated with new store openings, the bulk of that being in Florida as we had eight stores that opened in the quarter. The had a couple million dollars in Pennsylvania as well for new store openings that we opened in Q1. We'll have a couple more that will open in Q2. The bulk of the CapEx expenditure though was
from a facility standpoint was in New York. We continue to build out our facility in New York to be compliant with the state regulations. We expect to complete that build out in late Q3, early Q4. So that did account for about seven or eight million dollars of CapEx expenditures in Q1. We are looking at some financing alternatives to offset some of the investments that we need in that facility today.
Any color for new store ads going forward throughout the year?
for new store ads kind of going forward throughout the year? Sorry.
So, I'll take that, Des. Just for this quarter coming up, we'll have one new store on Compound Line in the coming quarter. Alright, let's talk about On tor127, we're going to talk aboutGirl Finance during this
And you will see a significant slowdown in store opening.
I appreciate it. I'll jump back in the queue.
I appreciate it. I'll jump back in the queue. Thank you, Scott.
Our next question is from the line of Andrew Pathnow of Stifel. Andrew, your line is now open if you'd like to proceed. Hi, good morning. Thanks for taking my questions. Sorry about earlier. Just wanted to first ask on the Columbia Care transaction...
I would just wanted to, and kind of the way that you are looking at things, if we can look at all possible scenarios here and just assume that the Columbia Care transaction doesn't close. I don't know.
I'm wondering if you can give a little bit of color on how you're thinking about growth catalysts.
We also discuss growth this quarter in every market, outside Illinois.
So, wondering is the thinking maybe to manage your cost controllables until Illinois growth comes back in a meaningful way, or would you consider going back out in the M&A market and maybe acquire a smaller operator or a single state operator in an attractive state?
Yeah, no, Andrew, thanks for the question. This is Charlie, I'll start it off. You know, you laid out some of the components that would be a part of the go-forward strategy as a standalone company for sure. You know, if you look at Illinois, there's still, there's a doubling of total addressable market here in Illinois that should...
catalyst still ahead of us in Pennsylvania, appreciative of Senator Laughlin and Street's memo that was filed about the bipartisan bill that should be forthcoming there. So optimistic about that catalyst ahead of us in PA, again, where we have great market presence and share. Adult use catalysts expected in Ohio, adult use catalyst expected in Florida, New York actually launching.
country for a variety of reasons. And we'll continue to be very diligent in cost management during this period of time where we're still sort of in this regulatory and banking limbo, but also continue to be observant and see if there are opportunities for us to make smart, you know, positive profitability revenue type opportunities.
quarter we talked about how we were pleased with good news performance in new states, FloraCal continued to ramp out in new states which gives us not only a unique proposition but also a premium price point and that's one thing you'll see for us as we go through the year. The second is store growth.
And that's not only just new stores opening up in states like Illinois, but even stores where we have 100% penetration, we don't have 100% distribution in our core SKUs. And so getting those retail stores that we already have a relationship with,
buying across our platform gives us an opportunity for new growth. And then near in, there's a couple categories, and I think Dennis mentioned this too, as we drive efficiencies into operations, we're improving our yield per square foot and our biomass availability and our labor availability, which means that we can start to produce skews that we haven't, like joints. Right, and as anyone follows this category, joints is a very large segment in cannabis.
It's an area we haven't played, but we can now, as we increase bio-mossibility and labor, and also smaller, but categories like medicinal.
So all of those give us incremental growth opportunities on the wholesale side within our, that gives us future growth. And then retail for us, it's a new son, the results, continuing to both upsell and cross sell our shoppers.
into categories that they may not be buying and driving up frequencies of their trips as well. I appreciate that color.
And maybe another one, just on, I realize you're not prepared for, or you're not providing any updates on timing of the divestitures, but maybe you could talk a little bit about the process to extend the outside date. It seems last time around you announced an extension, mutually agreed of course.
all of that progress? Sure, this is Charlie. So I think whether we extend or not is a board level discussion and decision, and that'll be mainly driven by progress that we see on the divestiture front in the weeks ahead.
So I don't have much more to offer than that. It's an active situation as we make more progress and get more information as it relates to the divestors, that will inform the decision on the extension both process and timing.
No good, thanks for that. Our next question today is from the line of Michael Lavery of PIPE of Sandler. Michael, your line is now open.
No good, thanks for that. Our next question today is from the line of Michael Lavery of PIPA Sandler. Michael, your line is now open. Thank you, good morning.
We covered the deal a pretty good bit, but maybe just to put a bow on it, would it be right? You've obviously mentioned your attractive set up. If it weren't to go through, you've been very clear you're trying to make Plan A work and make it work well.
Is everything on the table? And by that, I just mean, could you restructure the deal with a different equity component? Or I know that divestitures are a piece that you're trying to figure out, but can you just give us a sense, given how difficult that seems like it's proven to be, of what flexibility there is? And is it just sort of close to the table?
you know, kind of tweaks to the current structure or no deal or is there a range of other options in between? Michael, I appreciate the question. It really is, I think
As both companies have reiterated, there's value in the underlying thesis in Deal Rationale. But the economics of it are such an important part of it. As it always has been, from the time that we announced the transaction itself, the divested assets.
being a source of the proceeds from the devastated assets being a source of capital that can be used to make sure that the combined co has the appropriate that leverage ratio is a big part of executing the deal. So that ratio between cash availability and combined debt is where this gets to.
So, you know, I think the again the companies are having discussions and are creative organizations by nature. But it boils down to making sure that the proceeds from divestitures and potentially other financial mechanics that could go along with that debt.
That ratio of cash availability and combined debt leverage are where kind of everything is. That ratio of cash availability and combined debt leverage are where kind of everything is.
Okay, sounds good. And just on some of the margin outlook, you've been clear about the timing and how the California changes would play out. Can you just give us a sense maybe?
Overall, either, I guess, maybe the magnitude of that specifically, or really with some other puts and takes, you're trying to drive better product mix. There still is some pricing headwinds. Do you just have a sense where you sit today? How we should be thinking about where the second half lands on a kind of an all in with all the moving parts back and forth?
in our production facilities across our platform. You combine that with some of the, again, some of the other actions we're taking both from a cost of goods sold and a SG&A perspective. We expect to be at the 50% margin range in the second half of the year.
that would get us to an EBITDA of 20 plus percent coming out in the second half of the year. So a lot of actions that we're taking to reduce our overall cost to offset some of the price pressures that we see in the marketplace today and again our thesis is our plan is that we have a plan to get to a 50 percent gross margin and 20 plus percent adjusted EBITDA by the end of the year.
No, that's great color and obviously a nice quench of recovery. So thanks for that. Our next question today is from the line of Glenn Matson of Leidenberg-Vahlman. Glenn, your line is now open.
Hi, sorry, just to clarify, last point Dennis, did you say 20 plus percent coming out of the second half, meaning like as you exit the year, or is that kind of what you expect for the back half on average?
Hi, sorry just to clarify then would the last point Dennis you say 20 plus percent coming out of the second half meaning like as you exit the year or is that what kind of what you expect for the for the back half. On average, that's what we expect for the back half of the year.
benefits more than it's detracting now.
So, this is Charlie, I'll start at Michael and then Greg will add more context, but I think there's a couple of variables at play. It is definitely the quantity of the stores, but it's also the location of the stores and stores that are closer to our existing locations. We'll apply more pressure to our retail revenue than ones that open up further away.
So that's sort of part one of the equation and then definitely the number and Greg, more color on sort of where you see that shift coming. I think from a modeling and a morning cloud, I think from a modeling perspective, we would say really the store is opening and getting to scale. Put that into late Q3, Q4. You start to see the benefit of incremental nuke.
I think the big thing on Illinois, as we talked about, is right now you haven't seen that incremental revenue coming online as much from the new independent doors because it's being offset by Missouri challenges across our wholesale partners who have stores.
on that border, and that's been driving a lot of our wholesale decline in the state. We look forward, I think that continues for a bit, but we will lap it. I don't think it is a sustained negative drag on the state of Illinois, but it will have its impact in Q2, Q3. So, I think that's wholesale.
will come online as we said later in the year and really scale into next year. Now on the retail front as Charlie mentioned, really what's driving the challenges in retail is you are seeing a little bit of trip off due to new stores opening in and around some of our core stores, particularly those stores that opened up in Q4 last year that are now ramping up and that's put a little bit of price.
retailers will offer different discounts and are starting to shop on discount because if you look at the fundamentals of our traffic
Trips are showing pretty healthy trends. Units are good, but it's average price per unit that we're charging is what's really driving down total retail value. And that's a pricing challenge across the state right now.
Thanks for that, Cutler. Charlie, I was curious, could you chime in on your thoughts on New York, given all the recent developments with the COVID-19 pandemic, and how you think it's going to affect the
with the recent regs coming out and just the governor kind of talking about the ability to begin finding landlords and things like that. It feels like maybe there's a little bit different tone. Do you get the sense talking to people that they're ready to get serious about making this a real market? Or is, you know, in any sense of like how you think it might develop, that kind of thing? Sure, I think your, your, your comments are really important.
involving the landlords of retail locations that allow illicit operators to operate out of them is a useful tool in addressing the illicit market, which needs to be addressed in New York. It's just for public health, public safety, and viability of the licensed program, which is a great social equity focused type program.
that the elicit market undermines. So yeah, I encouraged, cautiously encouraged, we'll see what final regs look like, and then we'll have more color.
So yeah, I encouraged, cautiously encouraged, we'll see what final regs look like, and then we'll have more color. Great, thanks guys.
Thanks Michael. As a reminder if you'd like to ask a further question today please dial star 1 on your telephone keypad now and our next question is from the line of Derek Toulay of Canaccord Tunuity. Derek your line is now open.
Thanks, guys. Just one more on the potential transaction. Can you just comment on where you are in the process for the remaining divestitures? Have you had interest submitted? Have you had it for multiple parties for the multiple assets? Where are we on that front? Thanks, Eric. The one transaction definitive account.
year that have made that asset, that license, challenging, including the movement towards issuing new licenses. So it's been a bit of a challenge, but that's the update, the CoMPS transaction, progress in Ohio to build challenges in Florida.
Okay, good. That's helpful. And then maybe just on the comment on CapEx, so appreciate this was a heavy quarter for CapEx. I think previously you guys have guided to somewhere in the neighborhood of call it 45 to 50 million in CapEx for the year. Is that still the number that we should be thinking about?
Thanks, Derek. The number that we gave of 45 to 50 is still accurate. That was 40.
Assuming that we were going to do some type of financing agreement in New York, that is still our plan to do that. But absent that, I think that is an accurate figure to use. Okay, great. And then just on the tax payments, can you just remind us the cadence of tax payments? Is there a double tax payment in New York?
of our state taxes through Q1 of 2023. We have made some payments for our federal 22 taxes. The remaining balance of 2022 taxes is about 50 million dollars that we did file an extension for in April of this year. Okay and how long did that extension give you?
Well, we would just file an extended return in the September-October timeframe, which is normal for most corporations.
Well, we would just file an extended return in the September-October timeframe, which is normal for most corporations. Okay.
an extended return in the September-October timeframe which is normal for most corporations. Okay. Okay. Thank you very much.
Thanks, Derek. Thank you, and we have no further questions in the queue today. So this concludes the Cresco Labs first quarter 2023 earnings call. Thank you all for joining me now disconnect your lines.