Q2 2023 Cresco Labs Inc Earnings Call

Speaker 1: Good day and welcome to Cresco Labs' second quarter, 2023, earnings conference pool. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist oppressing the star key followed by zero. After stage presentation, there will be an opportunity to ask questions.

Speaker 1: To ask a question, you may press the star key and then one on your touch, tone, phone. To withdraw your question, please press two. Please note, this event is being reported. I would now like to turn the call over to Megan Keelick, Senior Vice President of Investor Relations for Cresco Labs. Please go ahead.

Speaker 2: Thank you. Good morning and welcome to Cresco Labs 2nd quarter 2023 earnings conference call. On today's call we have Chief Executive Officer and co-founder Charles Beck-Tel, Chief Financial Officer Dennis O.S., and Chief Chance Formation Officer Greg Butler, who will be available for the Q&A. Prior to this call, we issued our 2nd quarter earnings press release, which has been filed on Cedar and is a V...

Speaker 2: reviews and therefore are subject to adjustment until the filing of the company's quarterly financial statements. We plan to file our corresponding statements and MDNA for the quarter ended June 30, 2023 on Cedar and Edgar later today. Certain statements made on today's call may contain forward-looking information within the meeting of applicable Canadian securities legislation, as well as within the meeting of safe harbor provisions of the United States.

Speaker 2: 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 this company's beliefs regarding future events, plans, or objectives which are inherently

Speaker 2: 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 Cedar and with the Securities and Exchange Commission. Cresco 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.

Speaker 2: Please note that all financial information on today's call is presented in US dollars. All interim financial information is unaudited. In addition, on today's conference call, Cresco Labs refer to certain non- GAAP financial measures, such as adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted SGNA.

Speaker 2: which do not have any standardized meaning prescribed by GAP. Please refer to our earnings press release for the calculation of these measures and a 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 as a substitute for or as an alternative to.

Speaker 3: everyone and thank you for joining us on the call today. As we introduced in Q1, we've dubbed 2023 the Year of the Core because we're laser focused on the things that make Cresco the strongest company possible. Our core markets, core stores, core brands and core products.

Speaker 3: By rationalizing and optimizing everything we do, we're strengthening our business for today's environment while best positioning ourselves for the future. As reflected in our very solid Q2 results, we're going to discuss today.

Speaker 3: In the quarter, we generated $198 million of revenue, up 2% sequentially by prioritizing our core strengths. With our focus on driving scale and efficiencies across the entire organization, we've been accomplishing more with less, leading to an $11 million sequential improvement and adjusted EBITDA.

Speaker 3: 38% sequential growth. We're pleased to share that this quarter showed growth in our top line, our gross margin, adjusted EBITAP, and operating cash flow.

Speaker 3: These results are just starting to reflect the decisions we made and conveyed earlier this year to support our year of the core priorities. We understood the assignment and we're executing against it with much more to come.

Speaker 3: It's important for us to start with the decision to terminate the Columbia Care Transaction, which aligns with our objectives for the year of the Corps. While we still believe in the fundamentals of the deal, we always knew that we must come out of any transaction as a stronger combined company than we would be as a standalone company.

Speaker 3: and the changes in the industry in broader macro environment made it impossible to get the value we needed from type-estitures to make the economics work. On the flip side, these same dynamics are what create plentiful opportunities for targeted and capital-efficient growth ahead. The disciplined prioritization.

Speaker 3: of our strong core is the best way to position ourselves to exploit these incredible opportunities in the coming quarters.

Speaker 3: Now I'm going to share an update on how we're executing on 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.

Speaker 4: Number one.

Speaker 3: We're ensuring we have the most strategic geographic footprint. Our objectives for the year of the Corps are clear. With constantly shifting regulatory and competitive landscapes, we must be as dynamic as our industry and environment. We're continuously evaluating our markets to ensure a footprint that maximizes stability, bottom line growth.

Speaker 3: free cash flow and competitive positioning. To that end, we've taken a critical look at our operations in the few states that are below our margin targets, namely California and Maryland. Last quarter, we told you that we rationalized underutilized facilities in California, and we're focusing on FloraCal, distributed through a third party as our Go Forward strategy in the state.

Speaker 3: run a much leaner platform for our brands to compete.

Speaker 3: We also sold our standalone processing facility in Maryland, and it didn't provide us with a pathway to verticality in the state. While we'll forego a small amount of revenue, we were able to eliminate the fixed cost in that state, creating a net positive bottom line impact.

Speaker 3: Our focus on the core wasn't limited to these states. We also further evolved our organizational structure in every market to align with our core priorities.

Speaker 3: Our structure continues to get leaner and more agile so that we can quickly pivot alongside market conditions and react even faster to feed back from consumers. As just one example, our commercial team in Illinois is now leaner than it was before adult use began in 2019. And yet the team is generating 10X, the revenue and has maintained our number one market share in the state.

Speaker 3: This is only possible because we're constantly evaluating and adapting our org design, processes, and technology to drive efficiencies.

Speaker 3: Every change we make to our footprint is designed to meet the moment while also planning for the future of our organization and industry. Our core markets are driving improved profitability and cash flow. This positions us well to fund the growth opportunities existing within our footprint from anticipated adult use catalyst.

Speaker 3: as well as the expansion opportunities that lay ahead. Number two, we held our leadership position in branded wholesale products.

Speaker 3: Long-term, we believe this industry will look a lot like beer, wine, alcohol, and other CPG categories that rely on brand-building to capture and retain loyal customers.

Speaker 3: Our specialty is developing brands that are beloved by consumers across markets. So we are focused on doubling down on our core brands and products.

Speaker 3: According to BDSA, we have the number one portfolio of both branded flower and branded concentrates. The number three portfolio of branded vapes.

Speaker 3: and number four portfolio of branded edibles. In our core markets of Illinois, Pennsylvania, and Massachusetts, we continue to hold the number one overall share position. We continue flexing our brand-building muscles to launch smart innovations that premiumize the portfolio and extend our core brands and products all while reducing our unit costs.

Speaker 3: Specifically, we're looking at proven segments like pre-rolls, where we already have the expertise and capabilities, but we've historically under-indexed.

Speaker 3: A good example of these strategies coming together is the launch of fluorical infused pre-rolls and high supply infused shake in Illinois. The marker response to these new form factors has been phenomenal.

Speaker 3: Plus, we're taking what was traditionally the low value byproduct of our high end flower and turning it into new revenue streams.

Speaker 3: As another example, last quarter, we talked about launching trokeys in Pennsylvania to address a core form gap in that market.

Speaker 3: We have a proven track record of building our brands to meet market conditions, and we're leaning into that expertise to get even more out of our core brands and products. When we look at our streamlined footprint, our brands are still holding strong number one share positions in three of our markets, and we have targeted strategies in place to continue to grow our share across our footprint, especially as we look at the anticipated adult use conversions in Pennsylvania, Ohio, and Florida. Number three, we're driving efficiencies from highly productive retail in the most strategic states. Our investment in retail continues to pay off.

Speaker 3: We saw last quarter's boots and productivity continuing our core markets and stores in Q2, even in the face of new competition. We're particularly proud of our continued success in Illinois where we were able to out compete and essentially hold our total market share even with 15 new competitive doors opening in the quarter. On average, across our core markets, we're indexing at 1.4 times our fair share.

Speaker 3: This strength points to our phenomenal customer experience, both by our proprietary e-commerce platform and loyalty program, which saw over 35% growth during the quarter. In fact, we find that when shoppers engage with these tools, they spend 26% more than the average shopper.

Speaker 3: Our customers also appreciate that we're handling their transactions more efficiently than ever. During the quarter, we handled 11% more customers and units sold at Sunnyside year-over-year, all with a 20% leaner retail workforce. We're able to move faster by continuously finding incremental efficiencies in our employee training,

Speaker 3: customer throughput process, and proprietary inventory management software.

Speaker 3: Consumers love the retail experience at Sunnyside. What's more, between our revenue generating technologies and our proprietary internal processes, we have a blueprint that's repeatable and transferable.

Speaker 3: We will leverage this foundation as we continue to expand our retail footprint quickly and successfully where it aligns with our core priorities.

Speaker 3: In closing, our second quarter results reflect the early impact of the steps we've taken across the entire organization to improve margins and materially strengthen the company.

Speaker 3: By rationalizing and exiting margin delutive operations, investing wisely in innovation and brand building, and continuously improving our robust retail infrastructure, we were able to significantly improve our profitability in the quarter with more to come in the second half.

Speaker 3: The current industry climate and capital availability will create exciting opportunities in the months ahead. And we believe a stronger, leaner, cresco labs sets us up for continued growth from our core and to take advantage of the many capital efficient opportunities for expansion that we see on the horizon.

Speaker 3: With that, I'll turn it over to Dennis to provide more details on our Q2 performance. Thank you, Charlie. Good morning, everyone. I'll be reviewing the financial results from the quarter than highlighting a few items from the balance sheet and discussing our capital position.

Speaker 3: As Charlie said, we are pleased with our results in the second quarter. We are navigating industry-wide pressures and we've taken steps across our organization to prioritize P&L strength and cash flow and those efforts are beginning to show on our results.

Speaker 3: In the quarter, we generated $198 million in revenue, a 2% increase quarter over quarter from the same state footprint.

Speaker 3: The increase was driven by 4% sequential revenue growth in our retail operations.

Speaker 3: where we improve both our absolute share and fair share in most markets.

Speaker 3: Polesele revenue was essentially flat from Q1. An impressive result as our brand performance offset the increased vertical utilization by our MSO customers and the impact of Missouri's adult use on retailers along the Illinois at Missouri border. The improvements in efficiencies across the platform and our decision to exit margin delutive operations.

Speaker 3: drove improved gross margin this quarter. Overall, adjusted gross margin in the quarter increased 100 basis points sequentially to 47%. We expect continued improvement in gross margin in the second half as we sell through legacy higher priced inventory and realize the full benefit of the cost savings initiatives taken in the first half.

Speaker 3: and Q2 to streamline our operations and reduce our overall expenses at corporate. This sequential decline is particularly impressive as it includes the cost of opening five dispensaries in the quarter.

Speaker 3: Again, these actions should continue to drag improving margin in the second half as you realize the full benefit of the changes.

Speaker 3: We generated $40 million of adjusted EBITDA, up 38% from $29 million in Q1. Adjusted EBITDA margin was up 540 basis points to 20% in the quarter. As I have already highlighted, we expect continued improvement in adjusted EBITDA margin throughout the second half of the year as we execute on the year of the court.

Speaker 3: We generated $18 million in operating cash flow in the quarter, which is inclusive of $14 million in one-time cash costs related to the shutdown of California operations, severance payments, and Columbia Care transaction-related fees. We continue to focus on improving our working capital management.

Speaker 3: We reduced inventory by $12 million and continue to drive additional working capital initiatives to improve operating cash flow.

Speaker 3: These actions, along with the cost-admixed initiatives we've already discussed, should drive higher operating cash flow in the second half when compared to the $21 million we generated in the first half, even after required tax payments.

Speaker 3: In the first half of the year, we spent $38 million in CAPEX that expects this number to drop substantially in the second half, with a full year plan of around $50 million. We ended the quarter with $75 million of cash on the balance sheet and we feel good about this cash position. Looking ahead to the second half of 2023.

Speaker 3: That said, these same decisions will drive improvements in gross margin and adjusted eva-to margins in the second half of the year. Improvements in working capital, substantially lower CAPX, and continued improvements in margins will also drive higher free cash flow in the second half of the year. Before I turn to fact, the Charlie for Closing Commons, the base perspective filed today is simply replacing the former perspective that recently expired. The company has no plans to raise funds under the prospectus in the near term.

Speaker 3: That said, these same decisions will drive improvements in gross margin and adjusted EBITDA margins in the second half of the year. Improvements in working capital, substantially lower capex, and continued improvements in margins will also drive higher free cash flow in the second half of the year. Before I turn it back to Charlie for closing comments, the base prospectus filed today is simply replacing the former prospectus that recently expired. The company has no plans to raise funds under the prospectus in the near term. With that, I'll pass it back to Charlie.

Speaker 3: but real progress requires action and we need to see congressional action in the months ahead. As we wait for change at a federal level, we're working to improve every aspect of the business to best position ourselves in the interim. We're managing through the environment of today to improve profitability while at the same time optimizing the company for the industry of tomorrow. These changes are never easy, but I want to thank the amazing Cresco Labs team for stepping up to do more with less as we navigate through the dynamic nature of this emerging industry.

Speaker 3: The long-term cannabis growth story remains unchanged. Cannabis is still positioned to be one of the largest consumer products categories in the US. And Kresco Labs is doing what needs to be done to secure long-lasting industry leadership and build shareholder value.

Speaker 3: We are leaning into our core by investing in our largest highest margin markets while emphasizing those markets that negatively impact margin.

Speaker 3: driving operating efficiencies throughout our entire organization, investing in brand and retail innovation to provide the consumer with the best cannabis experience possible.

Speaker 3: and we're generating more free cash flow to strengthen our balance sheet.

Speaker 3: With that, I'll open up the call for questions.

Speaker 1: Thank you. If you would like to ask a question, you may do so by pressing start followed by one on your telephone keypad.

Speaker 1: To revoke your question, please press start followed by 2. And when preparing for your question, please ensure your phone is unmuted locally.

Speaker 1: Our first question is from Aaron Gray from Alliance Global Partners. Aaron your line is now open. Please go ahead.

Speaker 3: Good morning, thank you for the questions and nice to see the margin improvement quarter of a quarter there. Troy, the first question for me is, I want to take a high level view, you know, for a Crest Glee guys. Whole sales always been, you know, stand out for you. Seems like it stabilized quarter over quarter.

Speaker 3: in terms of the climate you had seen prior. So, are you feeling like some of the impacts you guys had of verticalization and others introducing value brands is now behind you at least, you know, the pain that you guys had felt because you guys were the leading wholesale or ahead of that. And then also just looking at some other markets, I don't know if you've exited some, you know, such as California, we're looking to go out to that light, but when you look at Michigan, or you're not vertical, you point.

Speaker 3: and other science team ramp builders will find a way to replicate that, to be strong at wholesale, without having to be vertical. Thank you.

Speaker 3: Yeah, good morning here and thanks for the questions. Uh, 1st, 1st question as far as has that sort of the impact of increased verticalization. Been, I guess, normalized at this point we would, we would still say no, I think you're you're going to continue to see. Vertical operators continue to prioritize.

Speaker 3: more of their own shelf for their own brands again in this current environment for the sector where price compression is still around, margins continue to get challenged. That's a very useful tool in helping to support margins. So I think we need to plan at least for continued pressure to be there.

Speaker 3: to all of those new more likely than not independent doors that open as these markets continue to expand. On the second question, wholesale performance in Michigan, yeah no we're pleased right and we're not vertical there. While I will tell you it is a it's a more challenging

Speaker 3: Go to market strategy when you don't have the the tool to benefit the lever to pull on that is owned shelves. Your product has to speak for itself and I think that's a testament. To the quality of the team there and the uniqueness of sort of what they do to bring differentiated.

Speaker 3: Quality products to market and meeting the consumer where the consumer wants to be met, right? It's that perceived value quotient that we're executing well against in that state. Greg, you want to add anything?

Speaker 3: The only thing I'd say is just back to your question on wholesale performance to the, at your just building 1 more point on Charlie's. We also have to look at the impact of. Cross state versus out of state purposes and how that will impact our markets in some of our states and that's another drag on the wholesale performance.

Speaker 5: Okay, great. Thanks, Bakkola. I appreciate it. Second question for me, I just want to turn more specifically to Florida.

Speaker 5: strong data from the weekly data that we get from the state. I know you opened some stores as well, but even on a per store basis, it looks strong. So, could you speak to what you think is driving that performance and how you look at the promotional environment in the state as it remains very competitive from some of the larger players there. So, how you're looking at the overall landscape of Florida and how you look.

Speaker 6: able to do in Florida. This quarter we opened three more stores and that really is our strategy for the state which is getting our footprint up in the right markets where we can drive material value and then also from our back end of our operations really bringing best-in-class products to our stores.

Speaker 6: and we've been pleased with some of the innovation that we brought into Florida, which has helped us win. From a price promotion perspective, you're absolutely correct, prices still are tough. There's a lot of price promos happening every week in the state, and our view on that is the way that we can compete really is twofold. One is bring superior products to our stores.

Speaker 6: then be able to drive down our costs and drive up efficiencies in our farm out there to really help us compete on pricing when we have to. But we don't see a material slowdown on price promotions in the second half of the year.

Speaker 5: Okay, great. Thanks very much for the call. I'll jump back to the queue.

Speaker 7: Thanks.

Speaker 1: Thanks Erin. Our next question comes from Andrew Barfinew from Stiffle. Your line is now open please go ahead.

Speaker 8: Thanks, good morning.

Congrats on the great quarter here. I wanted to talk a little bit about taxes if we could please. Could you give a little bit of color on on tax payments and Q2. And,

You know, how should should we be thinking about taxes in the second half? You did call out, you know better free cash flow in the second half and as well

Maybe more at a high level, could you talk a little bit about minority distribution?

Could you talk a little bit about that line item in the financing section of your cash flows and any initiatives you're looking at to improve on that going forward?

Good morning Andrew that answer the question and Dennis will handle that.

As we go into the second half of the year, as we talked about in the last earnings call, there is a, with the extension of our 22 tax return that will be filed in October . We will make that payment of about 50Million dollars in Q4 as it relates to 2022 taxes. Otherwise we're current in year on all of our state taxes. And we'll continue to do so throughout the course of the second half of the year. As it relates to the NCI distributions. The primary, the largest component of the NCI distributions is really a fact of federal tax payment in here that we make to our up see holders.

bit about how you see the landscape of decision making, how you prioritize capital allocation, whether it's you know capex, reducing debt, M&A or anything else as well with each one of these buckets.

How are you thinking about paying for that, whether it's cash shares, any further sale lease backs or mortgages that you could put levers on? Thanks.

Andrew, Charlie, I'll take that or I'll start that.

So, on future capital allocation, as we mentioned in the prepared remarks. Like, the same thing that made that challenge the Columbia care transaction is the same thing that creates opportunity for some pretty capital efficient growth. In quarters ahead, so we're observant. Focusing on the core.

We're making sure we're as strong and we're supporting these core markets that do drive the vast majority of our revenue and potential profitability. But in doing so, that is, of course, to make sure that we're as strong as possible. To execute on growth initiatives going forward as far as where sort of capital sources can come from. We do have.

Unencumbered properties if we need to we're evaluating some mortgages. No intentions of of doing any equity raises at this point and. For the right for the right M and a transactions that can. You know, solidly improve.

Thanks, and I'll get back in the queue. Thanks, Andrew. Thanks, Andrew. Our next question is from Scott Fortune from Roth MKM. Scott, your line is now open. Please go ahead. Yeah, good morning, and thanks for the question. I just want to focus a little bit on your cash flow generation and kind of your expectations there through cost initiatives, but more importantly, inventory. Just focus on the inventory, where you're at, kind of with the focus on the core, what are the inventory levels.

That we kind of expect to get to with turns or days or additional inventory management to continue to improve cash to the house. We look at that kind of going through the 2nd, half here. Thanks Scott. We'll have Dennis. Yeah, thanks for the question Scott from a inventory standpoint. I'll start with that. We've historically run at about 150Million dollars or so.

We took it down to 130 some in Q1 end of the quarter with about a hundred just over 120 million dollars in inventory at the end of the year. So we're proud of the fact that our inventory turns We continue to manage that very very closely and and and watch that we would expect that to Shrink a little bit as we go into Q3 based on some of the actions that we took at the very

for the full year.

That's inclusive of the tax payment that we'll be making in October . So we are continuing to generate cash. And some of the actions that we've taken in Q1 and Q2 are having a benefit not only on the P&L, but on our cash flow as well.

Great. Now, I'll follow up on that. Can you provide more additional color on the cost side of things, kind of the issues you put in and kind of drive that cost savings into the cash flow? How do you see the cash flow kind of improvement coming from this kind of impact that a little bit?

Yeah, Scott, the really what drove the P&L savings is therefore the cash. Savings is really focusing on the on the core really and really focusing the business on. Margin accretive businesses, and really looking at the margins loot of businesses and really trying to minimize or eliminate the impact of those margins.

Most of those were corporate expenses that we took at the end of Q2. So there will be some carry forward that will get the full benefit of a full quarter in Q3 and Q4 for some of those actions. So we do expect our cost structure to continue to reap the benefits of the actions that we took in the first half in the second half of the year.

I appreciate the color and I'll jump back in the queue. Thanks, Scott.

Thanks Scott. Our next question comes from Luke Hannon from Canaccord Genuisiy. Luke your line is now open please go ahead.

Thanks good morning. My 1st question here is on loyalty specifically you called out. I believe it was in Illinois the strength of of spend and engagement that you're seeing from those customers that you have enrolled in your loyalty program. I'm just curious to know. 1, what is the overall penetration maybe in terms of the percentage of customers or transactions? What have you of your loyalty?

Morning, Luke, Greg will take that. So we're really pleased with what we're seeing in our loyalty program. Just some background as you know. We built really a custom solution for the primary reason for that.

Is that it gives us an opportunity to do a little bit more than what some of the off the shelf Solutions give us today. From a business performance perspective As we look at loyalty, loyalty recently rolled out over the last couple of months. I'm starting to gain steam. I think Megan will get you specifically the penetration numbers.

through add-ons and trials, and then also reward those customers that we believe to the best of our ability are driving the majority of their wallet at a Sunnyside location. And because of that, and as Dennis has mentioned the financials, our ability to drive smarter price discounts to really help with margins in our stores.

Has been quite impressive in the 1st half of this year and we think that's going to continue to improve in the 2nd half. Okay, that's helpful and then my follow up here we've there's already been a little bit of discussion on so far during the call and Dennis I appreciate your commentary to the improvement that you're able to recognize there and in Q2 despite the, I believe.

suggests maybe on an absolute dollars basis, we should see a more meaningful improvement in Q3 and perhaps Q4 than what we saw in Q2. Is that fair? Anything that potentially I'm misunderstanding there.

I'm just curious, what kind of shifts are you seeing in consumer trends with respect to product tier selection and how you might be looking at their good, better path strategy and how you're thinking about adapting to that sort of shifting consumer trends? Thank you. Thanks, Federico. Greg, do you want to handle that one? Good morning, Federico. Thanks for the question. From a wholesale perspective, from our vantage point, we have great insights not only on our wholesale sales but also on from our retail sales. I think at the macro level, we have great insights on our retail sales.

You're not seeing a lot of shifts between flowers, share of the market, either whole flower, pre-roll, edibles and others. The biggest trends that we've seen the first half of this year, and likely the trends are going to be in the second half of the year. One is really the shift to both value and then premium.

Value brands ours included are some of the biggest Growers in our portfolio, but others have launched value brands I think that shoppers who are looking to find a better absolute price per unit are seeking value brands But we're also seeing that when you have differentiated products like what we've done with FloraCal

it usually means that you're supplementing maybe a value flower purchase to help you afford a more premium either vape product or a premium flower product. I think the other thing we're seeing in our data, which will likely continue in the second half, is innovation. Innovation is key. You've seen us launch in this quarter some innovation on our pre-roll business for both FloraCal and HiSupply. Very pleased with the results that we're seeing on that and their ability to drive adoption and also with our recent launch of Trokeys in Pennsylvania. We've been able to start to drive some considerable incremental sales in our wholesale business there as well. So if I look to the second half this year, the big trend that we are watching is...

This kind of continued value to premium opportunities that exist across the portfolio, the role of innovation, which is going to continue to play a big role. But I also think the last 1. Is as more independent stores open up, you need for a partner to come in and help them understand what assortment is going to drive incremental margin in their stores and velocity matters. And really helping them how to think through how velocity and dollar per vault space.

is going to help their total economics. And so as we think of our sales team and our position as leading wholesaler, being able to partner with these independents to help them drive smarter decisions on assortment and really focus on leading brands and the best velocities is a key focus for us. Thank you for that.

pressure that's either persisting in most places or maybe moderating, but I guess could you just give a sense broadly of the pricing landscape a little bit with your efficiency and cost savings in mind as far as just what you anticipate in terms of how you try to plan for how you adjust and focus on the core? Do you expect prices to improve? Are you going to need that or at least stabilization? So maybe a little bit of just the pricing environment from your standpoint and also how you think about that in terms of how you adjust your footprint or plan for at least the rest of the year.

through new forms, whether that's things like Infused Pre-Rules, whether that's the successful launch of FloraCal Ross and Gummies, we see an opportunity in the future of where we can both compete with value brands at the lowest cost, highest quality offering, but also supplement that with really interesting innovation where we can drive premiumization. And so all those things combined is how we really focus on driving the best overall value of wholesale in a tough pricing environment. No, that's helpful, extra color. And then just where you had touched on the importance of branding, at least at some point down the road, it's a new space and it's got regulations and things that create barriers to brand building.

As far as just understanding consumer insights, are you able to do kind of, you know, traditional CPG market research and in terms of understanding what it is the consumer is looking for in certain brands? Do they associate them with brands? There certainly has been evidence of consumers shopping on just THC bang for the buck, but it seems like it's starting to be more than that. Is there work you've been able to do to kind of understand?

And I think this thesis is proving out particularly markets like Illinois. Shoppers have choice and the fact that certain brands both continue. Having dominant share shows you that there is loyalty to brands just like. And I think that's exciting times because that is meaning that you can really start to drive better economics of delighting.

educate consumers that are not looking to just shop on biggest bang for buck, but I also think there's lots of evidence that shows

Lots of brands have tried low dosage forms that just haven't really taken off. And I think that is because there is a consumer segment out there that really just does want the best value per potency. I don't think that's going to change. Now how we think about insights is one of the things that is both the challenge but also probably the biggest opportunity.

into how shoppers are thinking about brands. We can look at consumer adoption, whether that's a new format, drove a lot of trial, but we didn't see a lot of repeat purchase. And that insight is incredibly helpful for us as we start to understand are these brands working, are these forms working.

Thanks, Michael. Our next question comes from Pablo Zunac from Zunac and Associates. Pablo, your line is now open. Please go ahead. Thank you. Charlie, you mentioned the reform front at the beginning of the conference call. I will ask you a couple of questions there. But first, maybe Greg can give some color on the wholesale side of things. Sales were flat sequentially, but can you give color in what states? You might have been up or down sequentially in wholesale specifically. And then what assumptions are you making in terms of total store count in Illinois by end of the year and end of 24? I mean, obviously that we.

De-prioritize and reduce their footprint like California were obviously a sequential. Decline for us, as we mentioned earlier remarks to. Um, in states like Pennsylvania, where we've seen increased verticality and price compression. That has obviously trade some headwinds for us in this quarter.

From a wholesale perspective, and then we've seen some really strong performance that is states like Michigan and Massachusetts where we continue to ramp up our portfolio of leading brands. And so combining all of that is how you're getting to the flat market, which. As you go to the 2nd, half of the year, we don't see a major change in that California will still be tough because the actions we're taking there.

And we also still see Pennsylvania and Illinois and other MSO heavy markets likely are going to be tough from a wholesale perspective because of the continued vertical position.

Any comments on your assumptions before counting?

Any comments on your assumptions?

Yeah, I think Pablo as we look, you know, we've been a little bit off on our thoughts on how stores We're going to open for the first half of the year versus where they've materialized We expected to see more stores. We didn't see the growth in stores that we looked at We don't publicly give information on an actual store account number

But our view is we do not see material store ramp ups in the 2nd, half of the year. A lot of that is due to. Either stores inability to get capital to open. And also stores that do open and what we're seeing is their average purchase sizes are a lot less than we expected. And a lot of that is to do with their capital positions and their ability to purchase.

Yeah, the only thing I would add to that too, is in a recent conversation that that was flushed out a little bit further of it's likely that the stores that opened in 2023 were the stores that had the capital to be able to open. And therefore the stores that didn't have the capital to open and are looking to divest and sell. We don't expect those will all of a sudden start to open in 24 unless the sale goes through.

So yeah, a ramp down next year. Right, thank you, that's a good caller. Well, Charlie, and in terms of reform front, I know that it's difficult to predict, right? But in terms of say specifically, this notion that potentially, you know,

safe harbor language for the US exchanges to allow, you know, NSO to at least that that that type of wording could be added to save, you know, you see that as likely and is there pushback from Democrats or Republicans on that or is there actually support for that among Republicans? How would you characterize that those conversations?

in terms of, you know, exchanges, safe harbor language for exchanges in SAFE? You know, I think it's the way that I would characterize it.

Is that at a certain point in the life of any proposed legislation, the, the, the sort of the policy components of it and how legislators feel about it. Starts to take a back seat to what what will allow the bill to pass. And so it is, it's sort of how I would answer this question is.

There is support, there's an understanding of the need for safe harbor language all the way up through the US exchanges and how that is an important component of The unlock of access to capital for existing incumbents and of course, for new entrepreneurs to enter the space.

It all comes back to do the legislators think that will add votes or take boats away and it really does end with the legislators. They do the legislators leading this initiative want. Safe to pass, so it's going to be their their call on what they think they can have in there that will allow the bill to move forward.

to sort of make sure that they have the resources that they need in order to make the decision that they're going to make. And that's the role we're playing in it.

Right, thank you. And in terms of, you know, rescheduling, I know there's a little of angles to that conversation, but specifically in terms of medical rescheduling, one concern out there of mine and other people is that it kind of warms good enough, right? You move medical cannabis to schedule three or four.

and then the FDA puts stricter rules, pharmacy sale, there's interstate trade. I mean, can you talk about whether you can have some leverage or influence in terms of what the regulatory framework around medical cannabis being rescheduled would look like, or really not much to say or not much influence in that regard.

I think we're going to we're going to continue to engage and put ourselves in position to be a trusted resource again for whether it's legislators or regulators. That are going to be tasked with making those decisions. Same same playbook, same playbook. We run at a state level, same playbook. We run at a federal level.

You know, I think the concerns over sort of the, the, the, the risks. Of what a schedule 3 would create, I think, you know, just personal perspective on it. I think are exaggerated. I think you've got 40 states now at this point. That have.

their structure of either a medical or an adult use program that they are comfortable with, that they passed laws to allow for, and they've done that while cannabis is at a schedule 1 in the CSA. So I don't see that changing once a schedule 3 or higher or lower depending on how you...

but you're going to see the states be very engaged too, because again, there's, you know, half a 1Million people. And currently employed by the regulatory structures that currently exist, there's about 4Billion dollars in state tax revenue on an annual basis that gets generated from the structures that currently exist.

you're going to have that stakeholder group in the room on how this looks going forward as well.

Thank you very much.

Thank you very much. Thanks Pablo.

Thanks Pablo, our next question comes from Chad Britnell from Needham. Chad your line is now open please go ahead.

Thanks, this is Trevor now on for Matt McGinley. My first question is around revenue expectations in the back half. If the asset base will be largely the same, why are you assuming revenue pressure compared to the first half and are those pressures something that you're seeing at present or is that just providing some conservatism in the guide?

Thanks Chad, this is Charlie. I'll start and then Dennis will jump in. I think it's a bit of a mix while the state footprint could look the same. I think, as we've talked about prioritizing the core, focusing on the core, we're going to continue to lean into the core markets and de-emphasize positions in markets that are considered drags.

which also could include divesting assets in those states. So all of that goes into our modeling for the second half of the year. Yeah, just to build on that more specifically, the reduction we talked about a high single digit drop from first half to second half the total revenue.

The bulk of that is coming from the actions that we took in in California. To get out of the, to move to a 3rd party distribution business and then exiting the, the Maryland operation in its entirety. So that that has a bulk of the impact that we talked a little bit about the. The

MSO and verticality that we see in certain states that will have a little bit of an impact and then there's always. The seasonality impact that hits us in Q4. so for those reasons, we are expecting a high single digit drop in revenue from 1st, half to 2nd, half of the year. Great thanks and quickly my 2nd question is around the margin improvement that you noticed for that you noted for the balance of the year.

Do you still expect to be at a 50 percent gross margin in the back half? And if so, what do you think the primary drivers will be on either a state basis or from certain types of initiatives?

Yeah, we don't give any specific on a state basis, but, you know, despite the fact that we do expect to see a high signal digit drop in revenue, we do expect our both our gross margin and EBITDA, adjusted EBITDA margins. To improve sequentially from the 1st, half of the 2nd, half of the year that's being driven by the fact that we are being.

diligent and in our investments, we are the actions that we took in the first half of the year to move away from dilutive operations and focusing more on accretive businesses will have an impact on our margins and then the actions that we took from at the corporate level that we did in Q1 but more importantly at the end of Q2 that will get the full benefit of those in the second half of the year.

Thank you.

Thank you, Chad.

Thanks Chad, we have no further questions registered at this time so with that we can conclude today's call. Thank you for your participation, you may now disconnect your lines….