Q1 2024 Cresco Labs Inc Earnings Call

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Good day and welcome to the cross crew loves first quarter 'twenty 'twenty for our next conference call all participants will be in listen only mode.

Operator: Good day, and welcome to the Cresco Labs first quarter 2024 earnings conference call. All participants will be in 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 will be an opportunity to ask questions. To ask a question, you may press the star key, then one on your touch-tone phone. To withdraw your question, please press 2, then 2. Please note this event is being recorded. I would now like to turn the call over to TJ Koh, Senior Vice President, Corporate Development, and Investor Relations, of Cresco Labs. TJ, please go ahead.

Should you need assistance, please signal a conference specialist.

Our key followed by zero after today's presentation, there will be opportunity to ask questions to ask a question you May press. The Star Key then one on your touch tone phone.

To control your question. Please press two.

Two please.

Please note this event is being recorded.

Speaker Change: Now I'd like to turn the call over to T. J code Senior Vice President corporate development and Investor relations of credit collapse.

Speaker Change: P. J, let me go ahead.

TJ Koh: Thank you. Good morning.

Speaker Change: Thank you good morning, and welcome to Crystal Labs first quarter 2024 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charles <unk>, Chief Financial Officer, Dennis <unk>, and President, Greg Butler, who will be available for Q&A.

TJ Koh: Welcome to Cresco Labs' first quarter 2024 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder Charles Bachtell, Chief Financial Officer Dennis Olis, and President Greg Butler, who will be available for Q&A. Prior to this call, we issued our first quarter earnings press release, which has been filed on CDAR and is available on our investor relations website. These preliminary results for the first quarter of 2024 are provided prior to completion of all internal and external reviews and therefore are subject to adjustment until the filing of the company's quarterly financial statements.

Speaker Change: Prior to this call we issued our first quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website.

Speaker Change: These preliminary results for the first quarter 2024 are provided prior to the completion of all internal and external reviews, and therefore are subject to adjustment until the filing of the company's quarterly financial statements.

TJ Koh: We plan to file our corresponding financial statements in MD&A for the quarter ended March 31st, 2024 on CDAR and EDGAR later this week. Before we begin, I want to remind you that statements made on today's call may contain forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described in our earnings press release and in the MD&A filed with the securities regulators. This call also contains non-GAAP measures, also outlined in our earnings press release and an MD&A filed with the securities regulators. Please also note that all financial information on today's call is presented in U.S. dollars, and all interim financial information is unaudited. With that, I'll turn the call over to Charlie.

Speaker Change: We plan to file our corresponding financial statements and MD&A for the quarter ended March 31, 2024 on SEDAR and Edgar later this week.

Before we begin I want to remind you that statements made on today's call may contain forward looking information actual results may differ materially the risks uncertainties and other factors that could influence actual results are described in our earnings press release and in the MD&A filed with the securities regulators.

Speaker Change: This call also contains non-GAAP measures also outlined in our earnings press release and in the MD&A filed with the Securities regulators. Please also note that all financial information on today's call is presented in U S dollars and all interim financial information is unaudited.

Speaker Change: With that I'll turn the call over to Charlie.

Charles Bachtell: Good morning, everyone, and thank you for joining us on the call today. This is a historic time for the industry with the anticipated reclassification of cannabis as a Schedule III substance. We see this as the first federal reform domino to fall that will likely have substantial impacts on cannabis reform in the future. It'll open the door to more research, impact legislative opinion, and is a significant step toward eliminating the crushing tax penalties imposed on the cannabis industry.

Charlie: Good morning, everyone and thank you for joining us on the call today.

It is a historic time for the industry with the anticipated reclassification of candidates to a schedule III substance. We see this as the first federal reform Domino to fall that will likely have substantial impact on cannabis reform in the future. It will open the door to more research impact legislative opinion and is a significant step toward eliminating the crushing.

Charlie: Tax penalties imposed on the cannabis industry.

Charles Bachtell: We're excited about what the potential shift could mean for cannabis stakeholders and Cresco shareholders, especially in combination with all of the hard work by the team to improve profitability over the last year. Our Q1 results demonstrate our business's growing momentum and continued focus on our core and profitability. Year over year, we generated a 580 basis point improvement in gross profit margin, proving that our efforts to restructure and prioritize investments across our core markets continue to drive outsized returns.

Charlie: We're excited about what the potential shift could mean for the candidate stakeholders and critical shareholders, especially in combination with all of the hard work by the team to improve profitability over the last year.

Charlie: Our Q1 results demonstrate our business is growing momentum and continued focus on our core and profitability.

Speaker Change: Year over year, we generated a 580 basis point improvement in gross profit margin proving that our efforts to restructure and prioritize investments across our core markets continue to drive outsized returns our team removed approximately $65 million in annualized adjusted SG&A compared to the prior year, while growing more candidates selling more.

Charles Bachtell: Our team removed approximately $65 million in annualized adjusted SG&A compared to the prior year while growing more cannabis, selling more units, handling more retail transactions, launching fresh innovations, and building new technologies. We delivered $53 million in adjusted EBITDA, up $24 million year over year, and net income before taxes of $16 million.

Speaker Change: Units handling more retail transactions launching fresh innovation and building new technologies.

Speaker Change: We delivered $53 million and adjusted EBITDA up $24 million year over year, and net income before taxes of $16 million and finally, we generated $36 million in operating cash flow of $33 million more than a year ago.

Charles Bachtell: And finally, we generated $36 million in operating cash flow, $33 million more than a year ago, further strengthening our balance sheet position and giving us greater firepower to redeploy towards strategic growth opportunities. Cresco Labs is stronger, leaner, and more productive than ever. And we're using this energy to fuel our business and take full advantage of the major state and federal catalysts ahead of us. Now, I'm going to share more on how we're executing to create the strongest and most valuable Cresco labs for the years to come.

Speaker Change: Further strengthening our balance sheet position, and giving us greater firepower to redeploy toward strategic growth opportunities.

Speaker Change: Let's go labs is stronger leaner and more productive than ever and we're using this energy to fuel our business and take full advantage of the major state and federal catalysts ahead of us.

Speaker Change: Now I'm going to share more on how we're executing to create the strongest and most valuable critical labs for the years to come.

Speaker Change: Number one we're ensuring we have the most strategic footprint.

Charles Bachtell: Number one, we're ensuring we have the most strategic footprint. In 2024, we're throwing our full weight behind the imminent and potential adult use catalysts coming within our existing footprint. This means strategically building on our leading positions in Ohio, Pennsylvania, and Florida. In our nearest term catalyst, Ohio, our teams are ready for the adult use rollout, which as of Monday's exciting news is set to formally kick off in June.

Speaker Change: 2024, we're throwing our full weight behind the imminent and potential adult use catalysts coming within our existing footprint. This means strategically building on our leading positions in Ohio, Pennsylvania, and Florida, and our nearest term catalyst, Ohio. Our teams are ready for the adult use rollout, which as of Monday is exciting news is set to formally kickoff.

Speaker Change: In June.

Charles Bachtell: We have been making strategic improvements to our dispensaries to ensure we can handle the increased traffic with the same level of service that has made our dispensaries some of the most productive in the state. At the same time, we continue to make cost-effective upgrades to our production facility to maximize yields and product throughput. Over the past year in Florida, we've made strategic investments towards efficiency gains at our Indian town facility, upgrades that are paying dividends and having a ripple effect across the entire value chain. In Q1, nearly every KPI is up, including yields, potency, customer growth, and ticket growth.

Speaker Change: We have been making strategic improvements to our dispensaries to ensure we can handle the increased traffic with the same level of service that has made our dispense read some of the most productive in the states at the same time, we continue to make cost effective upgrades to our production facility to maximize yields and product throughput.

Speaker Change: Over the past year in Florida, we've made strategic investments towards efficiency gains at our Indian town facility upgrades that are paying dividends and having a ripple effect across the entire value chain and.

Speaker Change: In Q1, nearly every kpis up including yield potency customer growth and ticket growth.

Charles Bachtell: With an over 100% increase in quarterly revenue and nearly doubling our market share versus a year ago, we're winning in all areas through best-in-class vertical integration. Our retail operating model was on full display for 420, with our Florida stores managing record-breaking traffic and patient throughput, designed to scale to scale as we shift into adult use in Pennsylvania. We're well positioned to maximize the potential adult use opportunity with the number one brand in market share and leading retail coverage.

Speaker Change: With an over 100% increase in quarterly revenue and nearly doubling our market share versus a year ago, we're winning in all areas through best in class vertical integration. Our retail operating model was on full display for <unk> hundred 20, with our Florida stores managing record breaking traffic and patient throughput designed to scale up as we shipped into adult use.

Speaker Change: Pennsylvania.

Speaker Change: We are well positioned to maximize the potential adult use opportunity with the number one brand in market share and leading retail coverage in Q1, we launched our high dose troche format further establishing our leading portfolio of brands. We're also making strategic investments to expand both our facility network and store footprint to support the.

Charles Bachtell: In Q1, we launched our High Dose Trophies format, further establishing our leading portfolio of brands. We're also making strategic investments to expand both our facility network and store footprint to support the anticipated market conversion. Ohio, Florida, and Pennsylvania represent the three largest state growth catalysts in the industry.

Speaker Change: Mid market conversion.

Speaker Change: Ohio, Florida, and Pennsylvania represent the three largest state growth catalyst in the industry, we're taking meaningful steps and making smart investments to ensure we capture outsized share and generate significant operating leverage and free cash flow in these markets. While also closely evaluating recently launched adult use markets like New Jersey and Maryland.

Charles Bachtell: We're taking meaningful steps and making smart investments to ensure we capture outsized share and generate significant operating leverage and free cash flow in these markets, while also closely evaluating recently launched adult use markets like New Jersey and Maryland. Thanks to our focus on operating cash flow, we can strategically take on new adult use markets at the right time and invest in accretive opportunities and incremental growth catalysts in the coming years. Number two, we remain the leader in branded wholesale products.

Speaker Change: Thanks to our focus on operating cash flow, we can strategically take on new adult use markets at the right time and invest in accretive opportunities in.

Speaker Change: And incremental growth catalyst in the coming years.

Speaker Change: Number two we remain the leader in branded wholesale products are.

Charles Bachtell: Our house of brands continues to deliver on its promise of high quality and high value products for every consumer occasion. We continue to hold the number one overall share position in Illinois, Pennsylvania, and Massachusetts, and per BDSA, we have top portfolio positions nationally in branded flour, concentrates, vapes, and edibles. We're constantly evaluating our portfolio to ensure we're delivering best in class brand performance. One example is our revamped approach to the pre-roll category.

Speaker Change: Our house of brands continued to deliver on its promise of high quality and high value products for every consumer occasion.

Speaker Change: We continue to hold the number one overall share position in Illinois, Pennsylvania, and Massachusetts and per <unk>, we have top portfolio positions nationally and branded flower concentrates vapes and edibles.

Speaker Change: Constantly evaluating our portfolio to ensure we're delivering best in class brand performance.

Speaker Change: One example is our revamped approach to the pre roll category.

Charles Bachtell: In Illinois, we've already driven an 800 basis point improvement in our pre-roll market share year over year. We're building capabilities to address any gaps in our offerings and using automation and leading capabilities to deliver high quality, profitable products. This mindset extends beyond our product portfolio, with the entire Cresco team sharing in the relentless pursuit of improvement across every step of the value chain. Our brand strength also facilitates winning relationships with non-MSO or independent dispensaries, which we'll continue leaning into this year.

Speaker Change: Illinois, we've already driven an 800 basis point improvement in our pre roll market share year over year, we're building capabilities to address any gaps in our offerings and using automation and leading capabilities to deliver high quality profitable products. This mindset extended beyond our product portfolio with the entire Costco team sharing and the relentless pursuit of it.

Speaker Change: Prudent across every step of the value chain.

Speaker Change: Our brand strength also facilitates winning relationships with non MSL or independent dispensaries, which we'll continue leaning into this year across the three markets, where we hold number one share positions. We saw on average year over year revenue growth of approximately 25% from independents in Q1.

Charles Bachtell: Across the three markets where we hold number-one share positions, we saw an average year-over-year revenue growth of approximately 25% from independence in Q1. This is a clear sign that when dispensaries are prioritizing product velocity and gross profit impact, Cresco Labs products deliver unparalleled value. And number three, we're building a highly productive retail portfolio in the most strategic states. We reached some exciting retail milestones in Q1. Notably, we've increased our retail fair share year over year across every market.

Speaker Change: This is a clear sign that when dispensaries are prioritizing product velocity and gross profit impact Costco labs products deliver unparalleled value.

Speaker Change: And number three we're building a highly productive retail portfolio in the most strategic states.

Speaker Change: We reached a exciting retail milestones in Q1, notably we've increased our retail fair share year over year across every market in Illinois, and Ohio are stores that reached two times that day's average stores. The monthly sales in Florida. According to state provided data we've doubled our market share position year over year. These are impressive feats across highly.

Charles Bachtell: In Illinois and Ohio, our stores have reached two times the state's average monthly sales. In Florida, according to state-provided data, we've doubled our market share position year over year. These are impressive speeds across highly competitive and MSO-concentrated markets that showcase our ability to leverage verticality, optimize our assortment to reflect consumer trends, and ultimately drive more revenue into higher-profitable goods. In Q1, we increased trip frequency by 3% and grams sold per ticket by 11% compared to the prior year. For our most valuable customers, we increased trip frequency by over 10% during that same period.

Speaker Change: <unk> NSO concentrated markets that showcase our ability to leverage <unk> optimize our assortment to reflect consumer trends and ultimately drive more revenue into higher profitable goods in.

In Q1, we increased trip frequency by 3% and Gram sold per ticket by 11% compared to the prior year for our most valuable customers. We increased trip frequency by over 10% during that same period. This growth is possible because of the many things that we do differently and retail that makes sunnyside uniquely sunny side or.

Charles Bachtell: This growth is possible because of the many things that we do differently in retail that make Sunnyside uniquely Sunnyside. Our investment in tech capabilities is allowing our team to accomplish incredible things. We had a remarkable 420 this year where our teams managed 19,000 online orders, a single day record of 25 orders per minute. On a day when consumers buy a lot of cannabis, our technology enabled them to buy even more. Our e-commerce platform, sunnyside.shop, drives consumer behavior, leading them to build baskets that were $20 higher on average when compared to both in-store shopping and other online ordering tools. This considerable bump isn't unique to 420.

Speaker Change: Investment in tech capabilities, allowing our team to accomplish incredible things we had a remarkable for 'twenty. This year, where our teams managed 19000 online orders a single day record of 25 orders per minute on.

Speaker Change: On a day when consumers buy a lot of candidates are technology enabled them to buy even more our ecommerce platform Sunnyside dot shop drives consumer behavior, leading them to build baskets that were $20 higher on average when compared to both in store shopping and other online ordering tools.

Speaker Change: Considerable bump isn't unique to 420, our capabilities and data driven understanding of our consumers creates a clear differentiated advantage.

Charles Bachtell: Our capabilities and data-driven understanding of our consumers creates a clear differentiated advantage. Our retail footprint is built on a foundation of technologies and repeatable operating procedures that we've continuously advanced over the last three years. It consistently outperforms fair share with a highly efficient cost structure that gets better every quarter. In closing, last year was about building a rock-solid foundation, and this year is about leveraging that strength to take full advantage of the many transformational catalysts and growth on the horizon.

Speaker Change: Our retail footprint is built on a base of technologies and repeatable operating procedures that we've continuously advanced over the last three years consistently outperforms their share with a highly efficient cost structure gets better every quarter.

Speaker Change: In closing last year was about building a rock solid foundation and this year is about leveraging that strength to take full advantage of the many transformational catalysts and growth on the horizon.

Charles Bachtell: I'm so proud of how the Cresco team has taken all of the learnings from the year of the core, internalized them as part of our DNA, and continues to work towards generating significant free cash flow and profitability. With that, I'll turn it over to Dennis to provide more details on our Q1 performance.

Speaker Change: So proud of how the Costco team has taken all of the learnings from the year of the core internalize them as part of our DNA and continues to work towards generating significant free cash flow and profitability with that I'll turn it over to Dennis to provide more details on our Q1 performance.

Dennis M. Olis: Thank you, Charlie. Good morning, everyone.

Dennis: Thank you Charlie and good morning, everyone. Our continued focus on efficient capital allocation and targeted cost savings initiatives led to significant improvements that have carried over into 2024.

Dennis M. Olis: Our continued focus on efficient capital allocation and targeted cost savings initiatives led to significant improvements that have carried over into 2024. These efforts culminated in another strong quarter of improved profitability, cash generation, and the strengthening of our balance sheet, all in the face of over 11% price compression across our footprint. In the quarter, we generated $184 million in revenue, essentially flat year over year, adjusted for purposeful reduction. Our team has done a fantastic job of finding and removing costs at every stage of our cultivation, production, and distribution supply chain.

Dennis: These efforts culminated in another strong quarter of improved profitability cash generation and a strengthening of our balance sheet all in the face of over 11% price compression across our footprint.

Dennis: In the quarter, we generated $184 million in revenue essentially flat year over year adjusted for purposeful reductions.

Dennis: Our team has done a fantastic job of finding and removing costs at every stage of our cultivation production and distribution supply chain.

Dennis M. Olis: This has led to an increase in adjusted gross profit, bringing our operating gross margin to 51.5%, a 580 basis point increase from Q1 2023. As planned, the steps we took last year have continued to bear fruit. Year-over-year adjusted SG&A declined by $16.1 million to $51.7 million.

This has led to an increase in adjusted gross profit, bringing our operating gross margins at 51, 5% a 580 basis point increase from Q1 2023.

Dennis: As planned the steps we took last year have continued to bear fruit.

Dennis: Year over year, adjusted SG&A declined by $16 1 million to $51 $7 million.

Dennis M. Olis: That's 28% of revenue improved from 35% in Q1 of 2023. This is even more impressive when you account for the seven dispensaries we added over the same period. We believe we have room for additional operating leverage as well, and we're starting to realize those benefits as we capitalize on the adult use conversion.

Speaker Change: That's 28% of revenue improved from 35% in Q1 of 2023.

Speaker Change: This is even more impressive when you account for the seven dispensaries, we added over the same period.

Speaker Change: We believe we have room for additional operating leverage as well.

Speaker Change: And we're starting to realize those benefits as we capitalize on adult use conversions.

Speaker Change: Our Q1, adjusted EBITDA was $53 million or 29% of revenue up 82% year over year.

Dennis M. Olis: Our Q1 adjusted EBITDA was $53 million, or 29% of revenue, up 82% year over year. Going forward, operating leverage will be the main driver of adjusted EBITDA margin improvement. Our cost structure can support significantly higher revenues in states like Ohio, Pennsylvania, and Florida, and we are expecting much of that gross profit growth to drop to the bottom line. For Q1, we generated $36 million in operating cash flow and $33 million of positive free cash flow, more than 10x higher than the prior year.

Speaker Change: Going forward operating leverage will be the main driver of adjusted EBITDA margin improvement.

Speaker Change: Our cost structure can support significantly higher revenues in states, like Ohio, Pennsylvania, and Florida, and we are expecting much of that gross profit growth to drop to the bottom line.

Speaker Change: For Q1, we generated $36 million in operating cash flow and $33 million of positive free cash flow over <unk> higher than the prior year.

Dennis M. Olis: Our unrelenting focus on cash generation is not only reflected in our cash flow statement but also in our balance sheet, where in Q1, we recognized a sequential reduction in inventory of $9 million while reducing our AP and accrued expenses by $17 million. We've shortened our cash conversion cycle time by 8% since last year through improved accounts receivable collections and inventory management. We spent $3.8 million in CapEx during Q1, focused on cultivation improvements in Ohio and improvements to our manufacturing in Florida and Massachusetts.

Our unrelenting focus on cash generation is not only reflected in our cash flow statement, but also our balance sheet, where in Q1, we recognized a sequential reduction in inventory of $9 million.

Speaker Change: While reducing our AP and accrued expenses by $17 million.

Speaker Change: We've shortened our cash conversion cycle time by 8% since last year through improved accounts receivable collections and inventory management.

Speaker Change: We spent $3 $8 million in Capex during Q1 focused on cultivation improvements in Ohio and improvements to our manufacturing in Florida, and Massachusetts, we expect to spend $50 million to $70 million for the full year inclusive of our upgrades to our Ohio cultivation and production facility as well as expansion in Pennsylvania.

Dennis M. Olis: We expect to spend 50 to $70 million for the full year, inclusive of our upgrades to our Ohio cultivation and production facility, as well as expansion in Pennsylvania and Florida in advance of adult use. Looking ahead through 2024, we are maintaining the expectations we set on our Q4 call, where we expect Q2 and Q3 revenue to be relatively flat compared to Q1. We are taking a measured approach to an earlier than expected start date for adult use in Ohio and expect growth to be stronger in the fourth quarter as the program gets off the ground.

Speaker Change: And Florida and advance of adult use.

Speaker Change: Looking ahead through 2024, we are maintaining the expectations. We set on our Q4 call, where we expect Q2 and Q3 revenue to be relatively flat compared to Q1.

Speaker Change: We are taking a measured approach to earlier than expected start date for adult use in Ohio, and expect growth to be stronger in the fourth quarter as the program gets off the ground.

Dennis M. Olis: 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 50% and believe that is achievable throughout 2024. As we've stated previously, we will experience fluctuations from quarter to quarter due to continued price pressures, revenue composition by state, and portfolio MIPS. However, for the full year, operating cash flow will be significantly higher than last year. We plan to make our interest payments in Q2 and Q4, which will lower cash flow in those quarters.

Speaker Change: We expect the adult use convergence in Ohio, Florida, and Pennsylvania to provide meaningful year over year growth in both 2025 and 2026.

Speaker Change: We're targeting to keep gross margins around 50% and believe that is achievable throughout 2024.

Speaker Change: As we've stated previously we will experience fluctuations from quarter to quarter due to continued price pressures revenue composition by state and portfolio mix.

Speaker Change: For the full year operating cash flow will be significantly higher than last year.

Speaker Change: We plan to make our interest payments in Q2, and Q4, which will lower cash flow in those quarters.

Speaker Change: Regarding our tax position, we are in the process of filing protective claims for 2020 through 2022 to allow us to file amended returns at a later date.

Dennis M. Olis: Regarding our tax position, we are in the process of filing protective claims for 2020 through 2022 to allow us to file amended returns at a later date. We are exploring options to amend our tax position for the 2023 tax year, and we'll provide more color on our Q2 earnings call in advance of our extended filing date. Should we amend our position on 280E, it would have an approximate $70 million impact on our cash flow for the full year of 2024.

Speaker Change: We are exploring options to amend our tax position for the 2023 tax year, and we will provide more color on our Q2 earnings call in advance of our extended filing date.

Speaker Change: Should we amend our position on <unk>. It would have an approximate $70 million impact on our cash flow for the full year of 2024.

2024 is off to a great start we are carrying forward the efficiency gains we made last year converting that improved cash structure and the free cash flow that only has room to grow.

Dennis M. Olis: 2024 is off to a great start. We are caring for the efficiency gains we made last year, converting that improved cash structure into free cash flow that only has room to grow. With that, I'll pass this on to Charlie.

Speaker Change: With that I'll pass it back to Charlie.

Speaker Change: We are optimistic about the momentum behind cannabis reform and the development of a responsible respectable and robust industry.

Charles Bachtell: We're optimistic about the momentum behind cannabis reform and the development of a responsible, respectable, and robust industry. Eliminating 280E and the heavy tax burden weighing on all cannabis companies will unlock access to capital and create new opportunities for innovation and expansion. In the interim, we continue to run the business as efficiently as possible while accelerating our core by investing in the largest, highest-margin markets, maximizing the upcoming Adult Use Catalyst, driving operating efficiencies, continuing to capitalize on consumers' love for our brands, expanding 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. With that, I'll open the call for questions.

Charlie: Eliminating $2 <unk> in the heavy tax burden weighing on all cannabis companies will unlock access to capital and create new opportunities for innovation and expansion.

Charlie: In the interim we continue to run the business as efficiently as possible while accelerating our core.

By investing in the largest highest margin markets Max.

Max: Maximizing upcoming adult use catalysts.

Max: Driving operating efficiencies continuing to capitalize on consumers' love for our brands.

Max: Expanding retail and investing in innovation to provide the consumer with the best candidates experience possible and generating more free cash flow to strengthen our balance sheet.

Speaker Change: With that I'll open the call for questions.

Speaker Change: Thank you if you like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind with Westar, followed by Chi Wen, preferring to ask your questions. Please make sure your July she's on mute locally.

Operator: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please make sure your device is unmuted locally. And our first question comes from Aaron Grey from Alliance Global.

Speaker Change: And our first question comes from Aaron Grey from Alliance Global partners.

Speaker Change: Okay.

Speaker Change: Hi, good morning, and thank you for the questions here.

Aaron Thomas Grey: Hi, good morning, and thank you for the questions here. So, first question for me, you want to talk about Ohio, you got some encouraging news earlier this week with the start. You mentioned some things in your prepared remarks about how you guys are ready to go. Just want some more specifics there. You spoke about retail and getting set there. I imagine that's more POSs at the door.

Aaron Thomas Grey: So first question for me I wanted to talk on Ohio.

Aaron Thomas Grey: By some encouraging news earlier this week with the start you mentioned some things in your prepared remarks, how you guys are ready to go just wanted some more specifics there.

Aaron Thomas Grey: Both the retail and getting set there I imagine that.

Speaker Change: No more.

Speaker Change: POS is out the door, but could you speak to it from an inventory perspective, how well positioned are you guys and do you believe the industry is to make sure. The stores are well inventoried just given the short timeframe from when we knew adult use would be starting just being confirmed this week for next month and then also just in terms of some of the Capex investments for Ohio, How should we think about the timing.

Charles Bachtell: But could you speak to it from an inventory perspective? How well-positioned are you guys, and do you believe the industry is to make sure the stores are well-stocked, just given the short time frame from when we knew adult use would be starting, just being confirmed this week for next month? And then also, just in terms of some of the CapEx investments for Ohio, how should we think about the timing and expansion for when that could come online to help with the adult use market? Thanks.

Speaker Change: And expansion from when that can come online to help with the adult use market. Thanks.

Speaker Change: Hey, good morning Erinn.

Charles Bachtell: So yeah, really excited about the update coming out in Ohio earlier this week. It is, it's one of those things. It's great.

Speaker Change: So we are really excited about the update coming out of Ohio earlier.

Speaker Change: Earlier this week.

Erinn: It's one of the things Thats, great. It's great news to see any adult use transition move ahead of schedule, but to your to your point to your question that comes with its own potential.

Charles Bachtell: It's great news to see any adult use transition move ahead of schedule, but to your point and to your question, that comes with its own potential challenges too. So we've been working on your preparedness, like everybody in the market. We have been investing in the stores to make sure that they can handle the increased volume that adult use is going to bring, but moving the date up of the expected launch by a few months will inevitably come with the potential for supply shortages.

Speaker Change: Challenges too so we've been working on au preparedness like everybody in the market.

Speaker Change: Have been investing in the stores to make sure that they can handle the increased volume that adult use is going to bring.

Speaker Change: But moving the date up of <unk>.

Speaker Change: <unk> did launch a few months will.

Inevitably come with potential for supply shortages I think when the when the law was passed through the ballot initiative last November at that point in Q4, very beginning Q1 people are developing their capex and supply plans for that launch date. So it's the good news of moving up the launch date, but anticipating that there could be some supply short.

Charles Bachtell: I think when the law was passed through the ballot initiative last November, at that point in Q4, the very beginning of Q1, people were developing their CapEx and supply plans for that launch date. So it's the good news of moving up the launch date, but anticipating that there could be some supply shortages in the state.

As in the state.

Speaker Change: And then.

Dennis M. Olis: And then, Aaron, this is Dennis. So, a couple things from an inventory perspective. We will see a slight increase in our inventory balance. We've done a great job of managing our overall balance over the last couple quarters. I do expect that to increase slightly in Q2 and beyond as we start to build up some inventory in advance of AU in Ohio. As far as the CapEx goes at the Ohio site, most of that investment has been made already.

Dennis: This is Dennis so a couple of things from an inventory perspective, we will see a slight increase in our inventory balance we've done a great job of managing our overall balanced last couple of quarters I do expect that to increase slightly in Q2 and beyond as we start to build up some inventory in advance of au in Ohio as far as the Capex goes at the Ohio site most of that inverse.

Dennis: <unk> has been made already others, a little bit of investment capex required for some of the stores to expand the stores to allow for au volume that's going to go through those stores, but the bulk of the inventory the capex investment has already been made.

Dennis M. Olis: There is a little bit of investment in CapEx required for some of the stores to expand the stores to allow for AU volume that's going to go through those stores, but the bulk of the inventory or the CapEx investment has already been made.

Speaker Change: Okay, Great I appreciate that color there and then just again if I could on your prepared remarks in terms of the operating cash flow specifically tax.

Dennis M. Olis: Okay. Great. I appreciate that color there. And then just, again, on your prepared remarks in terms of the operating cash flow, specifically tax, I appreciate some of the color you mentioned as you guys evaluate your position, but could you just clarify for the quarter? You mentioned interest payments in 2Q and 4Q. So as of today, did you guys have any type of tax payable buildup, or are you guys still awaiting until you get further clarification from your lawyers in terms of how you're going to evaluate 280E treatment now before you decide whether or not to make the payments for this year?

Speaker Change: Some of the color you mentioned as you guys, you know value or position, but could you just clarify from a corner you mentioned interest payment in <unk>. So as of today did you guys have any type of tax payable buildup or are you guys still are waiting until you get further clarity.

Speaker Change: In terms of how youre going to evaluate each treatment now before you.

Speaker Change: We have an entertainment coming for this year.

Speaker Change: Yeah, our tax position hasn't changed we did file an extended returns. So we will payout the planning right now to pay the taxes and.

Dennis M. Olis: Yeah, our tax position hasn't changed. We did file an extended return, so we will pay the planning right now to pay the taxes in late Q3 for 2023. That's something that we're currently evaluating, looking at our tax position and the appropriateness of 280E for 2023, so we'll come back to you in Q2 with those answers. In terms of payments of taxes in the quarter, really nothing significant in the quarter, some catch-up for some NCI payments. We did make a Q2 payment to close out our 2022 federal tax year.

Speaker Change: Late Q3.

Speaker Change: That would for 2023 Thats something that were currently evaluating looking at our tax position.

Speaker Change: Appropriate dose of <unk> for 2023, So we'll come back to you in Q2 of those answers in terms of payments of taxes in the quarter.

Speaker Change: Really.

Speaker Change: Nothing significant in the quarter some catch up for some NCI payments, we will make a we did make a Q2 payments.

Speaker Change: To close out our 2022 federal taxes.

Speaker Change: Okay, Great that's helpful color and I'm going to jump back in the queue.

Aaron Thomas Grey: Okay, great. That's all for color, and I'll go ahead and jump back in the queue.

Karen: Thanks, Karen.

Speaker Change: And our next question comes from Federico Goldfish from ATB capital markets.

Frederico Yokota Choucair Gomes: And our next question comes from Frederico Gomes from ATB Capital Markets.

Unknown Executive: Hi, Good morning, Thank you for taking my questions Congrats on the quarter.

Frederico Yokota Choucair Gomes: Hi, good morning, and thank you for taking my questions. Congratulations on the quarter. The first question is about Florida.

Unknown Executive: First question is on Florida, obviously, you have been performing really well they're strong.

Charles Bachtell: Obviously, you have been performing really well there, with strong gains in volume share. So can you speak to that in terms of how much more you can extract from your current footprint and maybe provide a bit more color on your expansion plans in the state ahead of the vote coming in November? How much do you expect to invest there before you have a result from the election? Or are airplanes more likely to wait for that? Are we going to be investing ahead of that? So any color there? Thank you.

Unknown Executive: Gains in volume share. So just can you speak to that in terms of how much more can you extract from your current.

Unknown Executive: Footprint, then and maybe provide a bit more color on your expansion plans and to stay ahead of that.

Unknown Executive: Bolt.

Speaker Change: In November how much are you.

Speaker Change: Are you expecting best there.

Speaker Change: Before you have the results.

Speaker Change: The election or.

Speaker Change: Airplanes do wait for data are going to be investing ahead of that so any color there. Thank you.

Sure Good morning, Brett.

Charles Bachtell: Sure. Good morning, Fred.

Speaker Change: So yes, we are.

Charles Bachtell: So yeah, we're, we're cautiously optimistic about Florida. You know, we're part of the initiative down there to help ensure that that ballot initiative is successful. The great thing for us when we look at Florida is that it's an execution game, right?

Speaker Change: Cautiously optimistic about Florida, we're part of the initiative down there to two.

To help ensure that that ballot initiative is successful.

Speaker Change: The great thing for us when we look at Florida is.

Charles Bachtell: With that forced vertical integration structure that you have down there, it really rewards organizations that execute because you have to be able to grow it. You have to be able to manufacture products. You have to be able to open retail stores. You have to be able to service consumers. You can't rely on third parties at all down there.

Speaker Change: It's an execution game right with that forced vertical integration structure that you have down there it really rewards organizations that execute because you have to be able to grow. It you have to be able to manufacture products you have to be able to open retail stores you have to be able to service consumers you can't rely on third parties at all down there so with us being able.

Charles Bachtell: So, with us being able to prove that we can execute operationally down in Florida, in the medical structure, it's really encouraging for us to move forward with a more incremental growth and expansion strategy that will be appropriate for a medical program ongoing or adult use, should that be successful come November. So, that's sort of how the outline of our CapEx and growth strategy is in Florida, is we've got an incremental opportunity to take advantage of the execution that we've shown we can follow through with in the medical-only market, and that will also benefit us as adult use comes online post-November, which will, of course, launch phase two of our expansion plan in the event that that's successful. But yeah, we really like the way that the team is performing down there, and congratulations to them for a great last few quarters.

Speaker Change: To prove that we can execute operationally down in Florida.

Speaker Change: In the medical structure, it's really encouraging for us to move forward with a more incremental growth and expansion strategy.

Speaker Change: That will be appropriate for a medical program ongoing or adult use should that be successful come November. So that's that's sort of how the outline of our our capex and growth strategy is in Florida is we've got an incremental opportunity to.

Speaker Change: To take advantage of the execution that we've shown we can we can.

Speaker Change: Followed through with and the medical only market and that will also benefit us as his adult use comes online post November which will of course launch of phase two of our expansion plan.

Speaker Change: In the event that that successful, but yes, we really like the way that the team is performing down there and.

Speaker Change: Congratulations to them for a great last few quarters.

Speaker Change: Great. Thank you and then my second question is just you mentioned.

Charles Bachtell: Great, thank you. And then my second question is just, you mentioned potentially entering new states, Maryland and New Jersey, as two of those states that you might be looking at. So, how are you seeing the M&A pipeline at this point in terms of valuations and opportunities to enter those markets? And, you know, how soon something like that could happen?

Potentially entering new States, Maryland, New Jersey.

Speaker Change: Two of those states that you might be looking at so how do you think the M&A pipeline at this point in terms of valuations and opportunities to enter those markets.

Speaker Change: How soon something like that could happen.

Speaker Change: Sure. So Fortunately we've got.

Charles Bachtell: Sure. So, you know, fortunately, we've got these phenomenal growth catalysts in the footprint already. So priority one is making sure that we're prepared. The teams are prepared.

Phenomenal growth catalysts in the footprint already.

Speaker Change: Priority one is making sure that we're prepared the teams are prepared.

Charles Bachtell: We're prepared as an organization to execute on those opportunities that are already within the footprint. It gives us an opportunity to be very strategic and opportunistic when we're evaluating anything that comes, whether it's New Jersey, Maryland, or other good states that have good structures and provide, you know, stable economics. So we're going to be selective. We're going to make sure that we're smart in the way that we approach any new state because we've got phenomenal opportunities in the footprint already.

Speaker Change: We're prepared as an organization to execute on those opportunities that are already within the footprint. It gives us an opportunity to be very strategic.

Speaker Change: Opportunistic.

Speaker Change: We're evaluating.

Speaker Change: Anything that comes in whether it's new Jersey, Maryland, or or other good states that have good structures and provide stable economics, so we're going to be selective.

Speaker Change: We're going to make sure that we were smart in the way that we approach any new state because we've got phenomenal.

Speaker Change: Opportunity in the footprint already.

Speaker Change:

Speaker Change: Elisa.

Speaker Change: I think back to your original question two if I got the info.

Speaker Change: <unk> investment putting investment into states, like Florida, where independent or whether it's medical or I'll use Florida will continue to be a growth story for us and so before even entering a new state continuing to capitalize on the growth that we can do in states like Florida, We will see in Ohio, and setting ourselves up for Pennsylvania.

Speaker Change: Priority one.

Speaker Change: Perfect. Thank you very much.

Speaker Change: And our next question comes from Luke Hannan from Canaccord Genuity.

Speaker Change: Thanks, and good morning, everyone.

Charles Bachtell: [inaudible]

Speaker Change: I think I heard you correctly there in mentioning that price compression was roughly 11% across your footprint. During the quarter can you share or was it more pronounced in certain states versus others. During the quarter and then what are you seeing so far quarter to date, just not necessarily from a price compression perspective, but also from a consumer behavior perspective perspective spin.

Speaker Change: Typically how responsive consumers are to <unk>.

Speaker Change: Rice being a factor for driving purchase or perhaps other tactics as well.

Gregory Butler: Sure Greg I can answer that good morning, Youre, absolutely correct as we see pricing. If you look at two years ago, we saw price declines continue.

Frederico Yokota Choucair Gomes: Perfect. Thank you very much.

Charles Bachtell: No doubt about it, I think, you know, back to your original question, too, as we focus investment, putting investment in states like Florida, where, independent of whether it's the state of medical or adult use, Florida will continue to be a growth story for us. And so before even entering a new state, continuing to capitalize on the growth that we can do in states like Florida, as we will see in Ohio, and setting ourselves up for Pennsylvania is priority one.

Luke Hannan: And our next question comes from Luke Hannan from Kanapur in January.

Gregory Butler: <unk> down 20% over the last year pricing declines have.

Gregory Butler: I have been down about 11%.

Luke Hannan: Thanks. Good morning, everyone.

Gregory Butler: Much slowing slope as we see Q1 across most of our markets.

Gregory Butler: There is signs of stabilization.

Gregory Butler: There is a couple of markets, where we're seeing some slight continuation of decline we have other markets like Florida, where you're actually seeing some improvement in the trend so.

Gregory Butler: So as we go into Q1 and Q2 I think we'll see that trend continue Ohio will likely be one that's going to be interesting to watch right. Now we're seeing some positive pricing as you always see before an adult use conversion you will also see prices move up and it'll use conversion, but then settle back down.

Luke Hannan: I think I heard you correctly there in mentioning that price compression was roughly 11% across your footprint during the quarter. Can you share? Was it more pronounced in certain states versus others during the quarter? And then what are you seeing so far, quarter to date, just not necessarily from a price compression perspective but also from a consumer behavior perspective, specifically how responsive consumers are to price being a factor for driving purchase or perhaps other tactics as well?

Gregory Butler: The market continues to stabilize the supply comes online. So I think overall, what we're seeing in our market is.

Gregory Butler: And pricing is stabilizing we're not minus declining trend, but watch, Ohio, I think we will see it go up and then come back down.

Speaker Change: Got it that makes sense and then Charlie maybe this one's for you you've seen multiple markets now that have gone from medical to recreational markets over the last few years, both within your footprint.

Speaker Change: Beyond it so when it comes to both Ohio in the near term and then perhaps Florida and Pennsylvania longer term, what's in terms of your approach or your strategy to these conversions has changed I guess after watching those.

Speaker Change: Past conversions take place beyond just of course investing in capacity or expanding your product assortment.

Speaker Change: Yeah, no. It's a great question because we have we've we've we've been through a few of them we've seen even more over the last few years and they do follow similar.

Speaker Change: Similar paths and you want to learn from your experiences.

Speaker Change: <unk> being ready for it operationally.

Speaker Change: One of the things I'm excited about as we look at what's going on in Ohio, our team's ability to prepare the Ohio team for what they are about to see is just different than it has been in other markets that we've been a part of it was a matter of first impression for us. So I'm excited for the team to be a part of <unk>.

Speaker Change: Launch in EU conversion and I'm really excited to see how they handle it because theyre going to be much better prepared than we have been in prior examples.

Speaker Change: But that's why I also cautioned the.

Speaker Change: The excitement about the accelerated launch timeline and Ohio internally, we kind of referred to it as the excitement about when you're when you're traveling in your flight arrived 45 minutes early but then you sit on the tarmac for 30 minutes because of the gate isn't ready and I would expect that to be a bit of the case in Ohio.

It's going to be supply constrained theres going to be some learning curves for other operators that haven't been part of conversions before so you build that into your your your operational plans as well. So I think look we're just excited about being being ready for these conversions and these catalysts that are in our footprint and we're more prepared than ever to take them.

Speaker Change: Most advantage of them as possible and I think Greg got some additional info and then the only thing we add as we look at forecast everything we see and the conversion is that you will see some massive unit growth and volume.

Speaker Change: And it stabilizes, you'll also see pricing as it talks to just a couple of minutes ago, but pricing improvements and then.

Speaker Change: Usually walks it back so making sure that your operating leverage stays efficient during this growth period, because we always see is stabilization posted a couple of months after.

Speaker Change: And then the opportunity for us to get in.

Speaker Change: Convergent has created tremendous excitement for shoppers to get into the stores and really getting them signed up on our loyalty platforms. Our platforms to build a stickier relationship is the other priority for us.

Speaker Change: Great that makes sense last one from me and then I'll pass it along Dennis I think I heard you correctly in that you said you had filed protective claims or <unk>.

Speaker Change: The claims for the 2020 to 2022 returns and then you've quantified the potential tailwind for operating cash flow in the year from should you change your stance here or there should be a favorable ruling rather when it comes to your 2023 return, but can you quantify what would be the cash flow tailwind for the 2000 22022.

Speaker Change: Turns.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Thanks for the question.

Speaker Change: We will file we will be filing protective claims for 2008 to 2022, we're building up the position paper to support that position.

Speaker Change: As far as the impact going back a couple of years, we've said, it's roughly $70 million a year. So the potential opportunity is roughly $210 million. If we were to go back and look at years 2020 through 2022.

Speaker Change: Great. Thank you very much.

Speaker Change: Alright.

Gregory Butler: I'm sure Greg's going to answer that. Good morning.

Speaker Change: Our next question comes from Papa John's.

Speaker Change: And at this stage.

Gregory Butler: Good morning. You're absolutely correct. As we see pricing, if you look at two years ago, we saw pricing declines continue down 20%. Over the last year, pricing declines have been down about 11%. That's been a much slower slope.

Charlie: Thank you and good morning, everyone Charlie.

Gregory Butler: As we see in Q1 across most of our markets, there are signs of stabilization. There are a couple of markets where we're seeing some slight continuations of climb. We have other markets like Florida, where we're actually seeing some improvement in the trend. So as we go into Q1 and Q2, I think we'll see that trend continue. Ohio will likely be one that's gonna be interesting to watch.

Gregory Butler: Right now, we're seeing some positive pricing, as you always see before in adult use conversion. You also see prices move up in adult use conversion, but then settle back down as the market continues to stabilize as the supply comes online. So I think overall what we're seeing in our market is that pricing is stabilizing. We're not on that minus declining trend. But watch Ohio; I think we'll see it go up and then come back down.

Speaker Change: How you also let's first maybe I was chairman of the National kind of is on the table.

Speaker Change: What's your view on the fact that the proposed Jeff ruling is not yet on <unk> website.

Luke Hannan: Got it. That makes sense. And then, Charlie, maybe this one's for you.

Speaker Change: Because who is going through a different process.

Speaker Change: This is a 93 or 94 rulings out of those still under review from various agencies.

You see the dividend process or do you see that.

Speaker Change: Doj has no incentive to the OMB, yet and that's why it's on the dashboard.

Speaker Change: Thanks.

Speaker Change: Sure Good morning Pablo.

Charles Bachtell: You've seen multiple markets now that have gone from medical to recreational markets over the last few years, both within your footprint and then beyond it. So, when it comes to both Ohio in the near term and then perhaps Florida and Pennsylvania longer term, what, in terms of your approach, your strategy for these conversions has changed, I guess, after watching those past conversions take place? Beyond just investing in capacity or expanding your product differentiation, of course.

Speaker Change: What I would say here as it relates to rescheduling is is I think all of us will be best served.

By being.

Speaker Change: Patient until the notice of proposed rulemaking is actually be.

Speaker Change: <unk> published and.

Speaker Change: That's going to happen in the near future and I think it will answer a lot of a lot of questions.

Speaker Change: On timeline on next steps.

Speaker Change: And should address.

Speaker Change: Any of the kind of speculation or concern or discussions that we're having about process and procedure to date. So I would just say, let's let's wait until the notice of proposed rulemaking is issued and I think that will answer a lot of questions for us.

Charles Bachtell: Yeah, no, it's a great question. Because we have, you know, we've, we've been through a few of them, we've seen even more over the last few years, and they do follow similar, similar paths. And, you want to learn from your experiences. So, you know, being ready for it operationally is one of the things I'm excited about, as we look at what's going on in Ohio, our team's ability to prepare the Ohio team for what they're about to see is just different than it has been.

Speaker Change: Alright. Thank you and then just just to follow up on Ohio, I hear you on the on the nice surprise. If you don't think some happening earlier than expected but.

Charles Bachtell: And in other markets that we've been a part of, it was a matter of first impressions for us. So, you know, I'm excited for the team to be a part of an AU launch and AU conversion, and I'm really excited to see how they handle it, because they're going to be much better prepared than we have been in prior examples. So you build that into your, your, your operational plans as well.

Speaker Change: Sure.

Speaker Change: I thought.

Speaker Change: Ohio was very particularly in the sense of when you were given.

Speaker Change: License for cultivation Jewish opposed to fully be whatever license you would give them for so long as people who have shown.

Speaker Change: The state was actually more prepared in terms of capacity.

Speaker Change: Right, but I guess.

Speaker Change: Was the wrong information, but again.

Speaker Change: The way the plan works.

People were supposed to be on whatever the word gave them forward. So if you can give us some thoughts on that and then related to that issue.

Speaker Change: If you can comment in terms of your own capacity expansion plans sort of addition, there or are we talking about doubling tripling your capacity to serve the market. If you were not ready for it.

Speaker Change: And the last one and I'm sorry, it's so many.

Speaker Change: Do you have do we have line of sight in terms of how many stores. This state will have by the end of 2025 I feel some people 350 stores and any thoughts on that thank you.

Speaker Change: Sure and just to clarify I don't think anybody is necessarily unprepared to meet the obligations to move forward that would have been set forth by the state again, there's been a there's been a fully functioning and fairly mature medical program in place for a while it's just look the any expansion upon that above and beyond.

Charles Bachtell: So I think, look, we're just excited about being ready for these conversions and these catalysts that are in our footprint, and we're more prepared than ever to take the most advantage of them as possible. I think Greg got some additional info.

Gregory Butler: I think the only thing we add as we look at forecasts, everything we see in a conversion is that you will see some massive unit growth in volume, and then it stabilizes. You also see pricing, as we talked just a couple of minutes ago about pricing improvements, and then it usually walks it back. So making sure that your operating leverage stays efficient during this growth period because we always see a stabilization post a couple months after, and then the opportunity for us to get in, conversions create tremendous excitement for shoppers to get into stores, and really getting them signed up on our loyalty platforms or platforms to build that sticky relationship is the other priority for us.

Speaker Change: This law was only passed in November.

Speaker Change: So the ability for anybody to to build and I think it's fair to say that in November of 2023, not many cannabis companies are building on spec that a law would change so.

Speaker Change: I think the ability to service the significant increase in expected volume in the state of Ohio, just realistically the capex and the expansion plans needed to go from medical to adult use and the doubling tripling whatever it may be.

Speaker Change: It's going to take more time then.

Speaker Change: Nine to 10 months.

Speaker Change: But.

Speaker Change: What was the next part of that question sorry Pablo.

Speaker Change #100: Once you find your own capacity.

Speaker Change #100: Willing tripling quadrupling just sure.

Speaker Change #101: And then last one if I may again.

Speaker Change #100: Do you have do we have any.

Speaker Change #102: Do you have how many stores the stages trying to license I'm hearing 350, but I don't think that's right.

Speaker Change #100: Total.

Speaker Change #103: Sure so as it relates to our production we have.

Speaker Change #103: Been doing incremental capex investments there to get more juice from the squeeze.

Speaker Change #103: I would say again, taking a phased approach to capital allocation to that market.

Speaker Change #103: Larger potential expansion plans and again this is similar to our understanding of the market as a whole.

Speaker Change #103: Really wanted to see how the.

Speaker Change #103: You launch process and the approval process at the state level.

Speaker Change #103: Ceded again, we're all very happy that it looks like a good guy all around where it moved forward faster than expectations, but there was quite a bit of risk when that when that ballot initiative was actually approved in the November election cycle there was opposition.

Speaker Change #103: In the legislature and there were expected.

Speaker Change #103: Significant opposition to pushback to the law. So again I think that that is going to impact the further expansion plans for everybody.

Speaker Change #103: And then as far as the total number of dispensaries that could be expected by the end of 'twenty five.

Speaker Change #104: Yes, we think the dispensary amount doubled.

Speaker Change #104: Year over year to where we're at now compared to where we were at a year ago I know theres additional opportunities for.

Speaker Change #104: There is additional opportunities for licenses to become operational.

Speaker Change #104: But I don't know the total number by the end of 2025, it would be pure speculation at this point.

Speaker Change #104: Thank you. Thank you.

Speaker Change #104: Our next question comes from Scott Fortune from Roth.

Speaker Change #104: Cam.

Speaker Change #104: Okay.

Speaker Change #105: Hey, Good morning. This is Nick on for Scott Congrats on the quarter here first one for me just on the product mix, we have a leading portfolio in concentrates and you're near the top in several other categories.

Luke Hannan: Great. That makes sense.

Nick: Curious what you're seeing from the consumer in terms of preference of these categories of all has there been any discernible shifts in category management.

Speaker Change #107: Product mix will evolve over the course of the year here. Thank you.

Speaker Change #108: Greg will take that Scott.

Gregory Butler: We're very proud of where we are sitting with our our portfolio as you mentioned our brand tend to be at the top of every state we operate in I think in trends in our portfolio of what we're seeing and this is pretty.

Speaker Change #109: Consistent with what we're seeing across categories. As you are continuing to the bifurcation between value brands and premium higher priced brands. If you look in our business.

Speaker Change #109: Supply continues to be a growth driver for us, which we're pleased but we're also seeing growth.

Speaker Change #109: Higher level brands unique like floor tile or <unk>, which we have a partnership with in states.

Speaker Change #109: That are continue to drive and earn a significant price premium. So I think one thing we're seeing is that the consumer.

Speaker Change #109: As smart they will seek out value for <unk>.

Speaker Change #110: Product, but they are willing to pay a premium for products. They think are differentiated and worth the price, which is encouraging for us of the typical consumer good industry regarding high level shifts between categories between flower and concentrates edibles daves.

Speaker Change #110: Not a ton of movement, we're seeing at the macro level within our portfolio as we talked about earlier in our remarks.

Speaker Change #110: Pre rolls for US we've gone back to the pre roll segment, we're very pleased with how we're continuing to perform in that segment within there is much more room for us to grow in this segment both in the value and the premium.

Speaker Change #110: So overall.

Speaker Change #110: Happy with where we are but I think from a big big macro shift perspective, not much really expect to change as we look out three to four quarters.

Speaker Change #111: Great I appreciate that color and then second one for me just on the wholesale side you've been a leader there the industry has been talking about partnerships with social equity and maybe other license holders just curious how you view that model and the potential economics of these partnerships and just your sense on how you plan to drive wholesale growth with these new space in our centers coming online here.

Speaker Change #111: Thank you.

Speaker Change #112: Why don't we continue with this and then Charlie will add to it as we go.

Speaker Change #113: We look to new states, obviously, some of the social equity licenses in dispensaries in the independent dispensaries are very important very important for the industry because it will help drive growth.

Speaker Change #113: In communities that are underserved today with where the current legacy operators sit with their stores.

Speaker Change #113: But they also provide competitive opportunities where theyre not a vertical channel. So for US we look at that as a huge opportunity as we know we have some of the best products with some of the highest velocities.

Speaker Change #113: And so getting into those shelves of letting the best brand win is an opportunity that we think we're best positioned for cross sell.

Speaker Change #113: As we think of brands and partnerships, we do have a number of <unk>.

Speaker Change #114: Hands that we partner with through licensing agreements.

Speaker Change #114: We think about that is state by state, but it also is part of a broader equation, which is are we creating the best possible products for the consumer.

Speaker Change #114: And so if we can do that with our own brands, we certainly will and if there's partners out there that we think offer something that's distinctive to our portfolio is margin accretive to our portfolio and delights consumer it's something we will certainly be open to do and to continue to expand.

Speaker Change #114: Because we think that there is ample room for us to continue to grow.

Different products in forms that are that are really focused on meeting consumer needs.

Speaker Change #115: Yes, the only thing I would add is just talking about partnership at the broadest level not just at the brand level.

Speaker Change #115: I do think whether its social equity licensees or any other types of new licensees or independent licensees theres an opportunity there to create win win win scenarios.

Speaker Change #115: The sector.

Speaker Change #115: It has its challenges to operators, whether it's access to capital cost of capital.

Speaker Change #115: Developing capabilities and I think we're at a stage in the development of the sector, where the experienced operator life critical labs has a lot to offer and contribute to create win win win scenarios for those newer smaller operators for us as an organization and for the state programs. These state programs.

Speaker Change #116: Once all of these licensed operators up and running and being successful and I think there is in the broadest sense of the term partnership theres opportunities there for us to be contributors and beneficiaries.

Speaker Change #117: Great Thats it from me I appreciate the color.

Speaker Change #118: Thank you.

Speaker Change #119: As a reminder to ask a question. Please press star followed by one on your telephone keypad.

Speaker Change #120: And our next question comes from Gerald Pascarelli from Wedbush Securities.

Speaker Change #119: Yeah.

Gerald Pascarelli: Great. Thanks, very much for your question I just have one on SG&A.

Speaker Change #122: Understanding that you've kind of been progressing on improving this line item really since the back half of the year I think it still came in a little better than expected this quarter and it sounds like from your prepared remarks that it's going to sustain so.

Speaker Change #123: Would love some more color just on the drivers behind the lower levels of SG&A. This quarter and then from a cadence perspective, not looking for guidance or anything but is it fair to assume that this will continue to improve sequentially as we progress throughout the year. Thank you.

Dennis: Yes, Hi, Gerald Thanks for the question. This is Dennis so from an SG&A perspective, we've done a lot of work we started it last year. When we were talking about the year, the core and really trying to run our a lot of our corporate operations as efficiently as we could and looking for opportunities to get synergies across the businesses and across the functions.

Luke Hannan: Last one for me and then I'll pass it along. Dennis, I think I heard you correctly in that you said you'd filed protected claims for the 2020 to 2022 returns, and then you quantified the potential tailwind for operating cash flow in the year from should you change your stance, or there should be a favorable ruling rather when it comes to your 2023 return. But can you quantify what the cash flow tailwind for the 2020 to 2022 return would be?

Dennis M. Olis: Yeah, we're thankful for the question. We will file we will be filing protected claims for 20 to 2022. You know, we're building up the position paper to support that position. As far as the impact going back a couple years, you know, we've said it's roughly $70 million a year. So the potential opportunity is roughly $210 million if we were to go back and look at the years 2020 through 2022. Great. Thank

Luke Hannan: Great. Thank you very much.

Pablo Zuanig: Our next question comes from Pablo Zuanig from Zuanig & Associates.

Pablo Zuanig: Thank you. Good morning, everyone.

Charles Bachtell: Charlie, I was going to ask you in Ohio also, but first maybe as chairman of the National Ground Cannabis Roundtable. What's your view on the fact that the proposed draft ruling is not yet on the OMB website? Is it because it's going through a different process? Because there are like 93 or 94 rulings that are still under review from various agencies. Is it a different process, or is it that the DOJ has not sent it to the OMB yet? And that's why it's not on the dashboard? Thanks.

Dennis: So what you saw really started last year in the second half of the year was that concerted effort to really look for opportunities to become more efficient we've done that we're continuing to examine everything. So what you saw in Q1 was really a continuation of actions that we took in late Q4 and in early Q1.

Dennis: So again were.

Happy with where we're at today, we'll continue to look at every opportunity to reduce costs.

Speaker Change #124: It makes sense and again, the fact that we're still able to perform at the levels. We are as a credit to the entire organization.

Speaker Change #124: When I look forward at SG&A expense.

Speaker Change #124: There is opportunities to continue to look.

Speaker Change #124: Look for some synergies there will be some increases as we add some new stores that we're going to be adding.

Speaker Change #124: Throughout the portfolio in advance of au, there's going to be some head count that we're going to have to add in our retail stores in Ohio.

Speaker Change #124: To handle the volume that we're going to see so we're going to try to offset those growth up those growth.

Speaker Change #124: Catalysts with additional savings opportunities and look to be relatively flat through the balance of the year.

Speaker Change #125: Perfect. Thanks, very much for the color I appreciate it.

Speaker Change #126: Thanks Gerald.

Speaker Change #126: And that was our final question, so I'll hand back over to Charlie for final remarks.

Pablo Zuanig: Sure. Good morning, Pablo.

Charlie: Just wanted to thank everybody for joining the call today and again extend a giant thank you to the broader <unk> team.

Charles Bachtell: What I would say here as it relates to rescheduling is that I think all of us would be best served by being patient until the notice of a proposed rulemaking is actually published. And, you know, I think that's going to happen in the near future. And I think it'll answer a lot of questions on the timeline for next steps and should address any of the kind of speculation or concern or discussion that we're having about process and procedure to date. So I would I would just say, let's. Let's wait till the notice of proposed rulemaking is issued, and I think that'll answer a lot of questions for us. Right?

Pablo Zuanig: You know, things are happening earlier than expected. But I had heard, or I thought that Ohio was very particular in the sense that when you were given a license for cultivation, you were supposed to fully bill for whatever license you were given. So from other people, I heard that the state was actually more prepared in terms of capacity ahead of REC. But I guess that was the wrong information. But again, I thought the way the plan worked was that, you know, people were supposed to bill for whatever they were given.

Charles Bachtell: So if you can give some thoughts on that, and then related to that, if you can comment on your own capacity expansion plans or additions there, are we talking about doubling, or tripling your capacity to serve the market if you are not ready for it? And the last one, I'm sorry, so many, you know, do you have a line of sight in terms of how many stores the state will have by the end of 2025? I've heard from some people 350 stores. Any thoughts on that? Thank you.

Charles Bachtell: Sure. And just to clarify, I don't think anybody is necessarily unprepared to meet the obligations to move forward that would have been set forth by the state. Again, there's been a fully functioning and fairly mature medical program in place for a while. It's just, look, any expansion upon that, above and beyond it, this law was only passed in November. So the ability for anybody to build, and I think it's fair to say that in November of 2023, not many cannabis companies are building on spec that a law would change.

Charles Bachtell: So I think the ability to service the significant increase in expected volume in the state of Ohio, just realistically, the CapEx and the expansion plans needed to go from medical to adult use and the doubling, tripling, whatever it may be, it's going to take more time than, you know, nine to 10 months. But what was the next part of that question? Sorry, Pablo.

Pablo Zuanig: And yeah, the last one, I want to find your own capacity, you know, are you doubling, tripling, quadrupling, just so you have a sense. And then last one, if I may, again, do you have, do we have an idea of how many stores the state is going to license? I'm hearing 350, but I don't think that's right. Thanks in total. Sure, but as it relates to our production,

Charles Bachtell: Sure. As it relates to our production, we've been doing incremental CapEx investments there to get more juice from the squeeze. I would say, again, taking a phased approach to capital allocation to that market and larger potential expansion plans. And again, this is similar to our understanding of the market as a whole. Really wanted to see how the AU launch process and the approval process at the state level proceeded. Again, we're all very happy that it looks like a good thing all around, where it moved forward faster than expectations.

Nick: Great. That's it for me. I appreciate the time.

Charles Bachtell: But there was quite a bit of risk when that ballot initiative was actually approved in the November election cycle. There was opposition in the legislature, and there was expected to be significant opposition and pushback to the law. So, again, I think that that is going to impact the further expansion plans for everybody. And then, as far as the total number of dispensaries that could be expected by the end of 2025, I think the dispensary amount has doubled year over year to where we're at now compared to where we were at a year ago. I know there's additional opportunities for licenses to become operational, but I don't know the total number by the end of 2025. It would be pure speculation at this point.

Gerald Pascarelli: As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. And our next question comes from Gerald Pascarelli from Red Bush Security.

Charlie: As we saw here with announcements in the quarter and momentum at a federal level the impact that we're having on the industry is immense.

Scott Thomas Fortune: Our next question comes from Scott Fortune of Rod MKM.

Gerald Pascarelli: Great, thanks very much for the question. I just have one on SG&A.

Nick: Hey, good morning. This is Nick.

Gerald Pascarelli: Understanding that you've kind of been progressing on improving this line item really since the back half of the year, I think it still came in a little better than expected this quarter and sounds like from your prepared remarks that it's going to sustain. So, I would love some more color just on the drivers behind the lower levels of SG&A this quarter. And then from a cadence perspective, not looking for guidance or anything, but is it fair to assume that this will continue to improve sequentially as we progress throughout the year? Thank you.

Nick: I'm for Scott. Congratulations on the quarter here. First one for me, just on the product mix, you have a leading portfolio and concentrates, and you're here at the top in several other categories. Just curious what you've seen from the consumer in terms of preferences for these categories overall, have there been any discernible shifts in category demand, and just how do you think product mix will evolve over the course of the year here? Thank you.

Dennis M. Olis: Yeah, hi Gerald, thanks for the question. This is Dennis.

Gregory Butler: Greg will take that, consistent with what we're seeing across categories, you are continuing to see a bifurcation between value brands and premium, higher-priced brands. If you look at our business, high supply continues to be a growth driver for us, which we're pleased at. But then we're also seeing growth at the higher level, brands that have something unique, like FloraCal or Khalifa Kush, which we have a partnership with, in states that are continuing to drive and earn a significant price premium.

Dennis M. Olis: So from an SG&A perspective, you know, we've done a lot of work; we started it last year when we were talking about the year the core and really trying to run a lot of our corporate operations as efficiently as we could and looking for opportunities to get synergies across the businesses and across the function. So what you saw really started last year; the second half of the year was that concerted effort to really look for opportunities to become more efficient.

Gregory Butler: So I think one thing we're seeing is that the consumer is smart. They will seek out value for the right product, but they are willing to pay a premium for products they think are differentiated and worth the price, which is encouraging for us. That's a typical consumer good industry. Regarding high-level shifts between categories, between flower and concentrates, edibles, and vapes, not a ton of movement we're seeing at the macro level, you know, within our portfolio, as we talked about earlier in our pre-rolls for us.

Dennis M. Olis: We've done that, and we're continuing to examine everything. So what you saw in Q1 was really a continuation of actions that we took in late Q4 and in early Q1. So again, we're happy with where we are today. We'll continue to look at every opportunity to reduce costs where it makes sense. And again, the fact that we're still able to perform at the levels we are is a credit to the entire organization.

Gregory Butler: We've gotten back in the pre-roll segment. We're very pleased with how we're continuing to perform in that segment. We think there's much more room for us to grow in the segment, both in the value and the premium component. So overall, happy with where we are. But I think from a big, big macro shift perspective, not much we expect to change as we look out three or four quarters.

Dennis M. Olis: When I look forward at SG&A expense, where there's opportunities to continue to look for some synergies, there will be some increases as we add some new stores that we're going to be adding throughout the portfolio in advance of AU. There's going to be some headcount that we're going to have to add in our retail stores in Ohio to handle the volume that we're going to see. So we're going to try to offset those growth catalysts with additional savings opportunities and look to be relatively flat through the balance of the year. Perfect.

Nick: And then, second one for me, just on the wholesale side, you've been a leader there. The industry has been talking about partnerships with social equity and maybe other license holders. Just curious how you view that model and the potential economics of these partnerships and just your sense of how you plan to drive wholesale growth with these new states and dispensaries coming online here. Thank you.

Gerald Pascarelli: Perfect. Thanks very much for the call. I appreciate it.

Charles Bachtell: I just want to thank everybody for joining the call today and again extend a giant thank you to the broader Cresco team. As we saw here with the announcements in the quarter and momentum at a federal level, the impact that we're having on the industry is immense. And you're firing on all cylinders, and it's shown in the results.

Gregory Butler: Yeah, why don't I continue with this, and then Charlie will add to it as we go. As we look to new states, obviously, some of these social equity licenses and dispensaries and independent dispensaries are very important, very important for the industry because they'll help drive growth in communities that are underserved today, with where the current legacy operators sit with their stores. But they also provide competitive opportunities where they're not a vertical channel.

Operator: And that was our final question, so I'll hand it back over to Charlie for his final remarks.

Charlie: And your firing on all cylinders and it's showing in the results. So thank you Chris good team.

Gregory Butler: So for us, we look at that as a huge opportunity. We know we have some of the best products with some of the highest velocities. And so getting into those shelves and letting the best brand win is an opportunity that we think we're best positioned for at Cresco. As for brands and partnerships, we do have a number of brands that we partner with through licensing agreements. How we think about that is state by state, but it also is part of a broader equation, which is, are we creating the best possible product for the consumer?

Gregory Butler: And so, if we can do that with our own brands, we certainly will. And if there are partners out there that we think offer something that's distinctive to our portfolio, is margin accretive to our portfolio, and delights a consumer, it's something we'll certainly be open to do and to continue to expand because we think that there's ample room for us to continue to grow different products and forms that are really focused on meeting consumer needs. Yeah, when we

Charles Bachtell: Yeah, the only thing I would add is just talking about partnership at the broadest level, not just at the brand level. You know, I do think, whether it's social equity licensees or any other types of new licensees or independent licensees, there's an opportunity there to create win-win-win scenarios.

Gregory Butler: You know, the sector has its challenges for operators, whether it's access to capital, cost of capital, and developing capabilities. And I think we're at a stage in the development of the sector where experienced operators like Cresco Labs have a lot to offer and contribute to create win-win-win scenarios for those newer, smaller operators, for us as an organization, and for the state programs. You know, these state programs want all of these licensed operators up and running and successful. And I think, in the broadest sense of the term partnership, there are opportunities there for us to be contributors and beneficiaries.

Charles Bachtell: So, thank you, Cresco team. Thank you everybody for joining the call today, and we'll talk to you next quarter. Bye bye.

Speaker Change #127: Thank you everybody for joining the call today, and we'll talk to you next quarter Bye bye.

Operator: And this concludes today's call. Thank you for joining us. You may now disconnect your line.

Speaker Change #128: And this concludes today's call. Thank you for joining you may now disconnect your lines.

Speaker Change #128: Yeah.

[music].

Speaker Change #128: Okay.

Speaker Change #128: [music].

Speaker Change #128: Okay.

Yeah.