Q4 2023 Cresco Labs Inc Earnings Call
Hello, everyone and thank you for standing by the Cresta Labs fourth quarter 2023 earnings conference call will be beginning shortly thank you for your patience.
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Good day and welcome to Cosco lapse for schools that 'twenty, two 'twenty three adding conference call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the call over to T. J code Senior Vice President corporate development and Investor Relations for Crestwood Ops. Please go ahead.
Thank you good morning, and welcome to <unk> fourth quarter 2023 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charles <unk>, Chief Financial Officer, Dennis <unk>, and our recently appointed President, Greg Butler, who will be available for the Q&A prior.
Prior to this call we issued our fourth quarter earnings press release, which has been filed on SEDAR.
We are well on our Investor Relations website.
These preliminary results for the fourth quarter and full year 2023 are provided prior to completion of all internal and external reviews, and therefore are subject to adjustment until the filing of the company's annual financial statements.
We plan to file our corresponding financial statements and MD&A for the quarter and year ended December 31, 2023 on SEDAR and Edgar.
Certain statements made on today's call may contain forward looking information within the meaning of applicable Canadian securities legislation as well as within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
These forward looking statements may include estimates projections goals forecasts or assumptions that are based on current expectations and are not representative of historical facts or information.
Such forward looking statements represent the companys belief regarding future events plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause the company's actual results or performance to differ materially from such forward looking statements, including economic conditions and changes 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 critical apps filings on SEDAR and with the Securities and Exchange Commission.
<unk> 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 also note that all financial information on today's call is presented in U S dollars and all interim financial information is unaudited.
In addition, during todays conference call crystallize, we'll refer to certain non-GAAP financial measures such as adjusted EBITDA adjusted gross profit adjusted gross margin and adjusted SG&A, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated.
Ladies and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to and should only be considered in conjunction with the GAAP financial measures presented in our financial statements.
With that I'll turn the call over to Charlie.
Good morning, everyone and thank you for joining us on the call today.
We've been talking about our year of the core strategy since last March where we're rationalizing and optimizing everything we do to make critical lab, the strongest company possible winning within our core markets core stores core brands and core products.
This strategy with a decisive reset designed to focus the business strengthen the balance sheet and ensure preparedness for future growth.
We started seeing the results of this strategy in Q3 with improving margins profitability and cash flow.
To share that our Q4 results capped off the year with not only strong bottom line growth, but also margin expansion nearly doubling our adjusted EBITDA and achieving positive free cash flow for the year, we set a new standard for ourselves and we're using these wind to fuel our business and capitalize on the many growth catalysts ahead.
Can't say enough about the <unk> team, who took this focus on the core embraced it made it part of our DNA and built a stronger leaner and more productive critical labs.
In Q4, our financials demonstrated accelerating momentum that will propel us for the quarters to come.
Year over year, we generated $11 million more in adjusted gross profit on less revenue significantly improving our gross margin.
Our team removed over $54 million in annualized adjusted SG&A compared to the prior year, while driving scale, increasing unit production in retail transactions and also improving the quality of our products customer experience and operations.
We delivered $55 million and adjusted EBITDA up $25 million year over year, leading to an adjusted EBITDA margin of 29% and finally, we generated three times more operating cash flow for the full year.
2023, and improved cash flow as a direct result of our year of the core strategy supported by best in class technology processes and has engaged team that enabled us to do more with less.
Now I'm going to share more on how we're executing to create the strongest and most valuable critical labs for the quarters and years to come.
Number one we're ensuring we have the most strategic footprint in 2023, we took a hard look at our footprint to ensure we're making the most of each market's long term cash flow potential.
This meant rationalizing areas of margin dilution in their footprint and doubling down in our core markets. While this led to some short term topline decline it drove significant bottom line improvement and allows us to redeploy resources in capital to our proven markets driving high returns on investment increased competitiveness and maximize adult use.
<unk> is anticipated in these states.
Care, all while reducing cost and generating greater profit.
Year over year, we grew retail sales, 3% to $119 million in Q4 and saw retail fair share increase in every market.
We keep expanding our lead by getting existing customers in our doors more frequently and using data driven price promotion and assortment strategies to drive significantly higher basket sizes during.
During the same period, we decreased total retail SG&A per quarter by almost 11%, while seeing an 18% increase in the number of transactions across our network that is an incredible per store efficiency improvement. Thanks in part to in house technology, like our new inventory management processes as well as the shift to more data driven staffing models.
Lastly, our proprietary e-commerce and loyalty platforms, Sunnyside Dot shop, and brought us closer to our customers than ever before with over 275000, Sunnyside reward members and nearly 80% of all transactions being placed online.
Online adoption allows us to target customers tailor experiences and customized offerings that build baskets, while delighting shoppers.
Our retail footprint consistently outperforms fair share with a highly efficient cost structure that are getting better every quarter.
It will continue to be a core growth driver as we opened new doors and seize on the adult use conversion opportunities in front of us.
<unk> 2023 was a critical year for the entire industry and we use the time wisely to build up our core through disciplined capital allocation exceptional cultivation and manufacturing capabilities and a highly efficient retail infrastructure I'm proud to see our strategy bear fruit and establish a new baseline for Crestwood labs.
You can expect to see more of the same from us in 2020 for getting more from our core fortifying our strengths investing in key capabilities and growth catalyst and prioritizing bottomline growth profitability and cash flow.
With that I'll turn it over to Dennis to provide more details on our Q4 performance.
Thank you Charlie and good morning, everyone. In 2023, we set out to improve cash flow and profitability and Q4 with a culmination of efficient capital allocation strategies and targeted cost savings initiatives.
I'm pleased to share that thanks to these efforts we improved margins across every area of our business nearly doubled adjusted EBITDA and significantly improved operating cash flow.
In the quarter, we generated $188 million in revenue.
This impressive performance is a testament to the entire Chriscoe team, who leaned into our production commercial and retail strength to offset over 20% year over year price compression in our markets.
With every product being sold at a lower price. This year. It has been imperative for us to develop efficiency throughout our business. We've done an exemplary job lowering our cost of goods through increases in yield and new automation that has driven greater output on the same asset base.
This has led to an $11 million increase in adjusted gross profit, bringing our gross margin to 53% and 850 basis point increase from Q4 of 2022.
The efficiency gains have extended well beyond the cost of goods sold increasing profitability, both at corporate and at retail year.
Year over year, adjusted SG&A declined by $13 $5 million per quarter, which equates to up $54 million on an annualized basis.
Our Q4 total adjusted SG&A was reduced to $54 $5 million or 29% of revenue.
Our Q4, adjusted EBITDA was $55 million or 29% of revenue up 85% year over year.
This was a direct result of our better gross margin performance record efficiency improvements across retail cultivation and manufacturing and a company wide focus on the year of the court.
For the full year, we generated $59 million in operating cash flow and $6 million of positive free cash flow.
We spent $4 $8 million of Capex during Q4, bringing the total year to date to $55 million.
The investments in 2023 were primarily in new stores in Florida, and Pennsylvania, and incremental improvements to cultivation and production facilities in Massachusetts, Ohio, Florida and Illinois.
Our capex spend this year was keenly focused on improving profitability and operating leverage in our core and comes with a high return on invested capital and a quick payback.
In 2020 for our Capex plan is directed at maximizing the upcoming adult use catalyst in Ohio, Pennsylvania and Florida.
As Charlie mentioned, we are built out in Ohio, and a plan for a small investment to increase yields and throughput in our other facilities in stores and.
In Pennsylvania, we are looking to make similar investments and we continue to prepare our second cultivation facility in the state. So it's ready to turn on for adult use.
Lastly, in Florida, we plan to make significant investments ahead of adult use with a focus on expanding our cultivation facility, which will unlock the full potential of our retail footprint. Both in today's medical environment as well as in the future of adult use scenario.
Looking ahead, we expect Q1 total revenue to be down in the low single digits, driven by pricing pressure and increased competition in the direct vicinity of our retail locations.
This will be partially offset by growth in Florida and Pennsylvania.
We expect Q2 and Q3 to be relatively flat compared to Q1 with the company returning to growth in the fourth quarter driven by the anticipated conversion to adult use in Ohio.
We expect the adult use conversions in Ohio, Florida, and Pennsylvania to provide meaningful year over year growth in both 2025 and 2026.
We are targeting to keep gross margins around approximately 50% in the face of price compression by continuing to drive efficiencies and lower cost of goods.
Absolute SG&A expense should be roughly flat sequentially throughout 2024.
Cash flow should see significant improvement year over year as we get.
With our very focused Capex plan in 2024 built around setting ourselves up for adult use conversions and the significant improvements in operating cash flow. We expect 2020 for it to be a record year for operating and free cash flow.
In addition, while we have continued to pay our federal and state taxes on a timely basis, we are actively assessing our tax position and evaluating options for our current and past tax filings.
This has the potential to have a material impact on our already strong cash performance, we expect in 2024.
We feel great about where we are and what we're able to accomplish in 2023, and we're setting ourselves up to continue on this path and achieve record cash flow again this year.
There's a lot of opportunity ahead and everything we're doing now is focused on improving efficiency and cash flow. So that we're positioned to reinvest in our business with higher paybacks and better returns.
And with that I'll pass it back to Charlie.
There's a saying most people overestimate what they can achieve in a year and underestimate what they can achieve in 10 years.
This is what <unk> team can achieve in just one year I can't wait to see the next task.
Tim and I are continuing to spend a lot of time in DC meeting with members of Congress.
And we are encouraged by the conversations around rescheduling and safer banking.
But we're not waiting on federal reform, we're capitalizing on the incremental changes happening today adult use conversions are coming with some of our highest revenue and most profitable markets and we're uniquely positioned to capture outsized market growth from day one.
In Pennsylvania in addition to having one of the largest and most productive retail footprints. We are the number one producer of branded products with over 16% market share with additional capacity ready to turn up.
While we continue to improve our leading position with strategic investments upgrading our facilities and retail footprint, which will grow from five to eight stores in the state upon the launch of the adult use program.
And in Florida, We will continue to make capex investments as we expand our market share.
Your expansion plan is currently underway, which has already enabled us to capture 4% market share and we will continue to increase cultivation capacity to supply medical patients and in anticipation of an adult use program.
With over 70% of Americans in favor of full cannabis legalization. This is just the starting point of what will be a long list of tailwind for this industry.
And we will be ready for it everything we did in 2023 was designed to prepare us to take advantage of the monumental opportunities ahead investing.
We're investing in our largest highest margin markets maximizing our upcoming adult use catalyst driving operating efficiencies capitalizing on our brand and winning with independents, expanding our retail and investing in innovation to provide the consumer with the best cannabis experience possible and generating more free cash flow to strengthen our balance sheet.
With that I'll open the call for questions.
As a reminder, if you would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad. If you changed your mind I would like to be remain for Nicky. Please press star and then paint once.
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Our first question comes from the line of Aaron Grey with Alliance Global partners.
Please go ahead.
Hi, good morning, and thank you very much for the questions.
First one for me just in terms of the gross margin improvement and that's too that that uptick there to 52% in the quarter you spoke to some of the leverage there.
Can you speak a little bit more on the go forward.
You spoke to a range of around 50% going forward.
So just as you think about the efficiencies automation, maybe pricing strategy, and then geographic and format mix.
How do we think about holdup puts and takes that went into the improvement this quarter and then how much more of a lever you have going into 2024 and.
And maybe just putting into a boat to some of the pricing pressure that you mentioned that you anticipate so.
How do you think about making sure all those levers will build to offset the anticipated pricing pressure that you expect thanks.
Hey, good morning, and thanks for the question So I think.
The result is we as we discussed they reflect.
A truly disciplined approach.
To operating the business focusing on the markets that provide sort of the best economic structures as well as operational structures and then a ton of credit goes to the team that has developed these capabilities throughout the organization.
That drive efficiencies both in the production side of the business the retail side of the business headquarters in corporate side of the business that.
Really result from Chriscoe being a stronger leaner meaner company coming out of <unk> 23 in entering into 24. So as we look at 'twenty four and continue to see sort of.
Where we have opportunities for further improvement along with the risks associated with continued price compression that's going to be an ongoing.
Management.
The dynamics of this industry and again theres. So many components that feed into it but I can just tell you the team the skill sets and the tools and the resources and the approaches that have been developed over the last nine to 12 months to allow us to manage that most effectively it's just it's a different.
It's a different level so excited about our ability to manage that as we go forward in 'twenty four and beyond.
And Aaron This is Denis let me just add onto that a lot of the actions that we took in the first half of the year that relates to Cogs.
Capitalize those costs are those cost reductions are just starting to flow into the P&L in the fourth quarter and beyond. So that's why you saw part of the improvement in a step function improvement from Q2 to Q3 to Q4.
We also saw a very favorable mix across our geographic locations with Florida and.
And in Pennsylvania for example, at our high margin States for US. So we do expect as I said in my notes prepared remarks to continue to see gross margins in the 50% range for the balance of the year with the efficiency future efficiency gains offsetting some of the price compression that we've been talking about.
Okay.
Okay, Great really appreciate that color there and then just in terms of the wholesale opportunities that you guys have.
The screen, maybe more so for Illinois, and then New York You know how do you think about the potential for a wholesale growth you're going to have some third party stores opening in those states.
Illinois, It seems like the total market hasn't grown as much as we might have anticipated from some of those new store openings, so a little bit more cannibalization and grown the overall pie. So how are you looking at those third party wholesale opportunities and the ability to think maybe.
See some growth in that segment line per se.
Okay.
Yes.
Start so from a wholesale opportunity in especially in those states, Illinois, and New York, We see.
Very bullish on the long term potential associated with growth in these in these markets, but like you said it requires third party independent stores to open up.
And for them to be productive.
And over the last couple of years, that's been a challenge in Illinois and also in and of course, what we're seeing in New York, but what I would tell you is our capabilities are there to be able to lean into that.
And help develop it and Thats what were really focused on in Illinois, and in New York too but.
We need to do it in a very efficient disciplined way.
Especially when they're not our stores, but we're also working on strategies that will help get those stores to not only open but be as productive as we want them to be we.
We can help with that too you know Greg additional color to add on to that is what we're pleased with is in Illinois, We continue to hold above our fair share of our own stores right. So as the market continues to be fairly concentrated by a couple of retailers Sunnyside continues to perform incredibly well in the marks Charlie.
Ed as we take a longer view and we see more independent operators open those doors get their business running sort of trapped tracking shoppers, we see a huge potential for our brands in.
In those stores in the quarters to come.
Yeah.
Okay, great. Thanks for the kind of go in Japan because of the Q.
Yeah.
Thanks, Eric.
The next question comes from Federico Diamonds with ACB capture market.
Please go ahead.
Hi, Good morning, Thank you for taking my question.
First question is just on Pennsylvania.
Mentioned.
Some additional investments Youre planning, there or capacity that you could provide a little bit more color on maybe what youre seeing in that market in terms of the supply and demand dynamic the pace of price compression happening there.
Whether you see improvement this year from a pricing standpoint, or some of the other factors impacting your strategy there. Thank you.
Hey, good morning. Thanks, Thanks for the call. This is Charlie I'll start it off Youll, Pennsylvania, just continues to be a really strong market.
In its current form and.
We're very excited and optimistic about the potential for that adult use conversion.
But in its current performance is strong very productive market.
Compared to other states I think we've seen a.
A bit more of a stabilization in that state in recent months.
We continue though to expect further price compression, especially as as we see and as we've seen historically.
In anticipation of adult use launches there is the potential for increasing capacity to prepare for it from operators in the marketplace and that's something that we would expect to see in Pennsylvania is that.
Effort progresses.
But.
Again, a state where we have the leading market share we compete really well in it and on both sides of the aisle on the retail side and on the wholesale side.
Greg any additional color on <unk> other than just the fact that the peer is a.
Fairly concentrated retail market.
With the bedroom Msos control in most of the channel and I think what we're most excited about as we look at.
It is Charlie's point, we might see some price compression as supply comes on in the medical market, but the growth catalyst that is Pennsylvania as an adult use market.
It's pretty exciting from a financial perspective, as we look out over the next couple of years and our leading market position in Illinois puts us in a really nice place to really take advantage of that catalysts ahead of us so.
Maybe some price compression here in the next couple of quarters as supply comes on but a really nice growth story for the years to come.
Thank you for that and then my second question just on the revenue guide.
You mentioned the slight declining in Q1 and maintenance were roughly flat.
Q3, I'm curious if you could just unpack that a little bit in terms of between wholesale and retail here do you anticipate any one of bills.
Performing a little better in terms of Peru or know how how should we think about your sales mix here. Thank you.
Yeah. Thanks for the question. So as we look into next year as we've talked about the first quarter, we will see a slight.
Single digit decline from Q4 to Q1, and then be flat on Q2, and Q3 and then we will see a bump up in Ohio in Q4.
In terms of the split between retail and wholesale I think youll see retail continued to perform strongly across all the different markets. We're seeing a lot of good growth in Florida.
Im in Pennsylvania, Illinois will will continue to perform well, but the wholesale market will.
Kind of flattened out over the course of the year.
And just to add to that as you think of next couple of quarters.
With Ohio being the first adult use retail for us is quite strong in the states. So we think retail is going to come out of the gates really strong and in the adult use market. So it will it will accelerate and then in Pennsylvania, where we have our stores. We think those stores will continue to grow and as of course, Florida looks at adult use some.
Time down the road here.
Given that that is a vertical market retail will from a longer term perspective represent a higher percentage of our revenue as independent wholesale opportunities continue to expand.
Thank you very much I'll hop back in the queue. Thanks.
The next question comes from really Kennon with Canaccord. Please go ahead Blake.
Yeah. Thanks, Good morning, Dennis you had mentioned in your in your prepared remarks that you were actively assessing your tax position that is something that we've heard from other peers within the space can you give us a sense of how far along are you in that process and maybe when we might expect to.
Get more of an update from you guys on that.
Yes, I mean, we're constantly reviewing our tax position and we have been for some time so.
With the new news that has come out we'll continue to evaluate it and I'm not going to make any any.
Predictions on when we're going to come to a conclusion on that but we're evaluating whether that applies to us and we will do what we think is in the best interest of our company and our shareholders.
Okay, and then when it comes to the operating cash flow for this quarter correct me, if I'm wrong, but that does include a $50 million tax payments correct.
So in the fourth quarter, there was a $36 million tax payment. There was also a $21 million interest payment that we pay semiannual to satisfy our long term debt.
Got it okay.
Okay, and then on the commentary that you are looking to have half of your product menu B <unk> Jim.
Genetics crest constraints can you give us a sense of one where that level is as of today and this might be getting too far into the details, but what are the I guess the order of.
<unk>, what's the difference in unit economics between selling.
Third party strain through that platform versus selling your own stream.
So this is Charlie it wouldn't have a perfect answer for you on the percentage that's exclusive genetics currently either our exclusive genetics in the in the footprint, but I would say.
The new genetic launches that we've done throughout the year are creating the opportunity for us to get that diversity and exclusive crosses and mixes.
In the years to come in 'twenty, five in particular and going forward unit economic wise it's.
Aye.
Of course depend on the specific strains in products that are made from them as we go forward, but it's more of a general diversity and uniqueness component that goes along with it now definitely unique strains that are.
I'll kick the coverage and are truly unique and more at the higher price point Youll see a unit economic improvement, but otherwise it really is more of a demand standpoint, and what the consumer is looking for that we're really excited about and being able to offer unique products.
And have that make up more than half of our offerings. In years ahead, so really really excited about that program.
Got it thank you very much.
Okay.
Okay.
Our next question comes from Scott <unk> with Wolfe and Cam.
Scott. Please go ahead.
Yeah. Good morning. This is Nick on for Scott Congrats on the quarter first one from me just on the product mix I know, it's different by state, but can you just give us a general sense of what you saw from the consumer on the quarter, just any discernible shifts in spending behavior and maybe how that impacted your mix between your good better and best categories. Thank you.
Hey, good morning, Greg going to start us off with this one sure good morning.
Not too much.
<unk> changed from Q3 Q4 are the key themes that we see.
Is the value brands the value segment continues to be strong and growing.
Our high supply brand does very well in that category and we're pleased to see it continue taking material share of that segments of value then.
From a topline perspective between flower edibles vapes pretty much holding consistent as you would expect.
We're pretty excited that we are starting as we committed to getting into the pre roll segment. It's a segment that has been not a focus for us in the past now a focus for us and we're very pleased to see how our brands are performing and that segment of flower and we would expect to see our business continue to perform there as the next couple of quarters commitment.
Great I appreciate that color and then second one for me just on Florida, 33 stores now and you saw solid market share capture in the year, you mentioned, adding on the cultivation side I'm just curious how you view your retail footprint and just the capital allocation strategy there going forward.
Okay.
Yes, I'll take that get into Florida.
Florida has been a great growth story for US Q1 is going to look even stronger as we look at some of the data from <unk> coming out.
We're really pleased the team out in Florida has done a wonderful job of bringing on capacity and quality into the marketplace.
From a store count right now we have the right number of stores to the current footprint. We have in the state, but we are actively looking at how do we expand that footprint and advance for adult use which may lead to store expansion at that time, but for right now our current count.
Is driving really nice economics for us.
Alright, that's it for me I'll pass along.
Our next question comes from Todd Cohen with <unk> capital.
Please go ahead.
Yeah.
Hey, good morning. Thanks for the question first one just on the on the guidance here.
Specifically on the sales guidance for 2024, just curious if you could kind of unpack what assumptions, you're making about consumer behavior throughout year and specifically on price compression you mentioned it was about 20% across your portfolio in 2024.
What's kind of baked into the guidance or rather 2023, it was 20% what's baked into the guidance for 2024.
Yeah I'll start this is Dennis thanks for the question. So as we said the guidance for 2020 for is to have.
Down a little bit in Q1, and then flatten in the second and third quarter.
And again as we've talked about what that'll be.
Some of the growth in retail will be offset by some of the price compressions and sort of work that we see on the wholesale side.
Greg if you want to kind of build on that as we build our plans.
We are planning for price compression across our core markets.
I will say Q1, as we get into this year.
Is showing not growth, but showing that that trend line, maybe stabilizing a bit which is encouraging. However, as we have written our plans we've assumed that there will be price compression, whether that's due to.
Increased retailer competition in the markets like Illinois, whether thats adult use supply coming online early in going into a limited medical market like Ohio and Pennsylvania.
Florida, there are different catalysts that might continue to push supply into the market, bringing our pricing.
Where we are confident in our plan is.
If we're wrong in our price compression numbers that will be a good guy for us because we built our cost structure for the year to assume that we will see continued price compression, which means we're finding ways to take costs out of our business at a faster rate than price.
And we feel good about kind of what we were able to show and to start showing in Q3, what we showed in Q4.
And where that's going to play out for the rest of the year.
Okay, Great color. Thanks, and then as my follow up.
<unk> heard some of your peers talking about the opportunity to enter into these JV partnerships with social equity licensees as a way to find additional growth and then get additional exposure in markets like Illinois, where it might already be at the license cat, that's something Chrysler was looking into in a serious way and if so how would you think about the size and nature of that.
That opportunity.
Okay.
We're in a position to share too much on any furniture deals, but I would say is we.
We have historically had relationships with.
The joint venture partners in some of our retail doors in the past.
It's worked very well for us.
So it's something that we're actively exploring and we know that we can do really well if that's the path that we would choose to go down.
Great. Thank you.
Okay.
We have no further questions I'll turn the call back to the management team for any closing comments.
Now I would just again want to thank the the broader chriscoe team here for the for the way that they embraced the year the core in 'twenty, three and really incorporated into our DNA going forward.
Excited about the years ahead. Thank you for joining us on the call today, and we'll talk to you in a couple of months.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
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Yeah.
Yeah.