Categories Earnings Call Transcripts

CRESCO LABS INC-SUBORDINATE (CL) Q1 2023 Earnings Call Transcript

CL Earnings Call - Final Transcript

CRESCO LABS INC-SUBORDINATE (PNK : CL) Q1 2023 Earnings Call dated May. 24, 2023.

Corporate Participants:

Megan KulickSenior Vice President, Investor Relations

Charles BachtellChief Executive Officer and Co-Founder

Dennis OlisChief Financial Officer

Greg ButlerChief Transformation Officer

Analysts:

Aaron GreyAlliance Global Partners — Analyst

Scott FortuneRoth MKM — Analyst

Andrew PartheniouStifel — Analyst

Michael LaveryPiper Sandler — Analyst

Glenn MattsonLadenburg Thalmann — Analyst

Derek DleyCanaccord Genuity — Analyst

Presentation:

Operator

Good day, and welcome to Cresco Labs First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Megan Kulick, Investor Relations for Cresco Labs. Please go ahead.

Megan KulickSenior Vice President, Investor Relations

Thank you. Good morning, and welcome to Cresco Labs first quarter 2023 conference call. On the call today, we have Chief Executive Officer, Charles Bachtell, Chief Financial Officer, Dennis Olis; and Chief Transformation Officer, Greg Butler, who will be available for the Q&A.

Prior to this call, we issued our first quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the first quarter of 2023 are provided prior to completion of all internal and external reviews and therefore are subject to adjustments until the filing of the company’s quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the quarter ended March 31, 2023, on SEDAR and EDGAR later this week.

Certain statements made on today’s call may contain forward-looking information within the meaning of the applicable Canadian securities legislation as well as within the meaning of the safe harbor provisions of the United States Private 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 not representative of historical facts or information. Such forward-looking statements represent the company’s beliefs regarding future events, plans or objectives, which are inherently uncertain and 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 to 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 Cresco Labs filing on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the result of any revision to any of its forward-looking statements or to update or supplement any information provided on today’s call.

Please note that all financial information on today’s call is presented in U.S. dollars, and all interim financial information is unaudited. In addition, during today’s conference call, Cresco Labs will refer to certain non-GAAP financial measures such as adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to and should only be considered in conjunction with the GAAP financial measures presented in our financial statements.

With that, I’ll turn it over to Charlie.

Charles BachtellChief Executive Officer and Co-Founder

Good morning, everyone. Thank you for joining us on the call today. On our call in March, we highlighted our priorities for 2023 as we execute against our three-year plan. This is the year of the core and the year of cash. We’re leaning into our core, investing wisely and rationalizing and optimizing everything we do to generate profitable revenue expansion, drive healthy margins, create more cash and strengthen our balance sheet.

On today’s call, we’ll focus on the steps we’ve taken across our business to execute against this strategy. We’re pleased with our Q1 results. Cresco’s team generated $194 million of sales. Our revenue performance was solid across our footprint with some softening in Illinois that caused the sequential decline in revenue as well as much of the margin pressure.

Dennis will provide more detail on that. But overall, across our footprint, we performed well in wholesale, held fair share in retail and drove increased productivity across every facet of the business. In today’s environment, we are hyper focused on what we can control, stabilizing for today and optimizing for the future. Our relentless prioritization of providing the highest perceived value to the consumer is paying off and continues to give us the number one selling portfolio of branded cannabis products in the entire industry and an incredibly productive retail platform.

Our products reach the shelves of 1,600 dispensaries across our 10-state wholesale footprint, and we rang up almost 1.2 million orders at our Sunnyside dispensaries. Now I’ll review how we’re executing on our strategy using the three pillars of our three-year strategic plan, ensuring we have the most strategic footprint, broadening our wholesale brand leadership and driving retail productivity across a larger base.

Number one, we’re ensuring we have the most strategic geographic footprint. Over the years, we’ve designed our footprint to ensure we have access to the states with appropriate regulations and large consumer populations to execute against the thesis that cannabis is one of the largest consumer product goods of the future. As industry and state programs evolve, it’s important that we stay nimble and adaptable to maximize our opportunities and minimize our risk across the footprint. That’s the active component of creating and managing the most strategic footprint and the impetus behind the rationalization and optimization efforts you’ve seen from us in recent quarters and can expect from us going forward.

We are continuously evaluating and tweaking our practices to make incremental improvements at every touch point in the cultivation, manufacturing and retail process to address the nuances that develops as states mature. Our core markets are strong with scaled operations that create significant profit and cash flow from operations. We’re operating more efficiently, improving productivity in our supply chain and adding more automation in our facilities. We’re leaning into these markets to drive more growth and market share while bolstering enterprise profitability.

Looking across our footprint, we’re also preparing for significant growth catalysts in states like Pennsylvania, Ohio, Florida and New York, as those markets convert to adult use. We continue investing wisely in those markets to improve our productivity, expand our product offering and strategically open new doors.

BDSA estimates these four states alone will double in size over the next three years as adult-use programs come online, and we will be ready. At the same time, we’re deemphasizing markets that don’t have a pathway to scale and profitable growth.

On our last call, we talked about our decision to close underutilized and unprofitable facilities in California and Arizona, two of our lowest margin states. We recently completed the wind down process for these facilities, so those actions, along with many other changes we’re making across our organization to optimize and right-size our business will materially improve our margins starting at the end of Q2.

Number two, we maintained our position as the number one branded product portfolio in cannabis. Consumers continue to love our brands and products. According to BDSA, we continue to be the number one selling portfolio of branded cannabis products in the entire industry. With our prioritization of providing the highest perceived value to the consumer, we produced the number one portfolio of branded flower, number one portfolio of branded concentrates, number four portfolio of branded base and number four portfolio of branded edibles.

And then our strong core markets of Illinois, Pennsylvania and Massachusetts, we continue to hold the number one overall share position, and we’re happy to say we now have a top five market position in the very competitive Michigan market. We continue to drive growth in our brand portfolio through smart investments and new form factors and winning brand extensions. For example, in Massachusetts, we launched the popular Good News base, which grew our market-leading share in the state. In Pennsylvania, we launched [Indecipherable] addressing a specific form factor gap in the market. We’re extending our successful edibles brands with the launch of Chews in Florida, which already account for 10% of Sunnyside sales in the state, and we’re also introducing more flavors and effects such as Good News Vegas, which boasts elevated effects with caffeine [Phonetic].

Along with brand extensions, we’re taking steps to combat pricing pressure by premiumizing our portfolio and delighting shoppers at higher price points. We launched new FloraCal products in Illinois, Florida, Michigan and Massachusetts, which complement our value brand, high supply. Enthusiasts are happy to pay more for ultra-premium FloraCal flower, solventless concentrates and [Indecipherable] edibles because the value proposition of quality and price is appropriate. This high low strategy is helping us address more targeted consumer audiences and purchase occasions, driving higher baskets and ultimately gain more market share growth across our existing footprint. Finally, we’re making small investments in simple and efficient innovations that can be launched quickly with fast paybacks. We’re looking at proven segments such as pre-rolls and medicinals, which we already have the expertise and capabilities, but we’ve historically under-invested.

And number three, we’re also doubling down on our highly productive retail in the most strategic states. Our investments in retail are paying off. Despite new competitive doors opening, we continue to take more than our fair share in key markets because of our targeting, loyalty marketing and customer service. Even with new stores entering competitive markets like Illinois, we were able to outcompete and hold our absolute retail share.

In Q1, Sunnyside.shop, our proprietary e-commerce platform reached a significant milestone, registering $1 billion in sales since its launch in 2020. This is a testament to our focus on creating the best customer experience in cannabis, both online and in our stores. Currently, over 70% of our transactions originate via Sunnyside.shop, which gives us incredible insight into our customers’ buying behaviors while also creating more opportunities for basket building and highly effective targeted promotional strategies. Our newly launched loyalty program is another success story. It’s providing us with more valuable data while also giving us the opportunity to celebrate and reward our most loyal customers. In Q1, we signed up 100,000 customers, bringing the total to over 160,000 since it was launched at the end of last year.

Engaged shoppers on our platform spend 12% more than the average shopper. Expanding these platforms will help us continue to drive more from our existing shopper base. While it wasn’t in Q1, I do want to commend our team for the phenomenal job they did on 420, which set a record for single day trips, units sold and retail sales, up 14% from last year’s holiday. We’re pleased with the progress we’ve made so far in reducing our retail operating expenses to improve margins in an environment where pricing is under pressure, but volumes continue to grow. In fact, we’re handling customer transactions more efficiently than ever. During the quarter, we sold nearly 3.2 million units at retail, up 7% year-over-year and processed nearly 1.2 million transactions, up 3.5% year-over-year, all with 10% fewer retail employees.

Reflecting on the quarter, it’s clear we’re taking the necessary steps across the entire organization to improve margins and create a materially stronger company. We’ve rationalized and exited margin-dilutive operations in California and Arizona, while also investing wisely in cultivation, innovation and brand building. We leaned into our robust retail infrastructure to defend and expand our share against new competition even in the toughest markets. Cresco Labs is built for this uniquely challenging environment because we understand what we do best. We know what levers to pull. This is what we mean by focusing on our core, and you can expect to see more of this targeted prioritization as we charge ahead.

Before I pass the call over to Dennis to review the financials, I want to give a quick update on what’s happening in D.C. and with our pending Columbia Care transaction. While the industry was disappointed in the lack of movement on the Safe Banking Act and other federal reforms last year, it established the foundation for the progress we’re seeing so far in 2023. I was in D.C. earlier this month and attended the Senate Banking Committee hearing on the Safe Act. I cannot overstate the significance of this event. SAFE has passed the house seven times. This is the first time that SAFE has been the focus of the Senate hearing. While SAFE isn’t everything we need as an industry, this hearing is an incredibly important part of progressing toward reform. It’s important to remember that this is merely a moment in time on the journey of the cannabis industry, and we will continue to show up at the table as a trusted operator and stakeholder to push these discussions forward with federal legislators.

With regard to Columbia Care, we continue to collaborate closely with Columbia Care on the divestiture transactions required to obtain the regulatory approvals, which are conditions of closing. While we do not have an update to provide on the timing related to the outstanding divestiture transactions, we continue to work with Columbia Care to find a path forward that makes both strategic and financial sense. We must come out of any transaction a stronger company than we would be as a stand-alone company.

With that, I’ll now turn it over to Dennis to review our financial results.

Dennis OlisChief Financial Officer

Thank you, Charlie, and good morning, everyone. I’ll be reviewing the financial results from the quarter, then highlighting a few items from the balance sheet and discussing our capital position. As Charlie said, we are pleased with the results in the first quarter. We are navigating industry-wide pressures and taking steps across our organization to prioritize P&L strength and cash flow.

In the quarter, we generated $194 million in revenue, a 3% decline quarter-over-quarter. This decline was driven almost entirely by Illinois, where the total market was down 5.6% as Missouri launched its adult-use program putting significant pressure on border stores, resulting in lower overall revenue. The impact of Missouri and new store openings in close proximity to established stores resulted in more competition for both retailers and wholesalers in the state. Importantly, net of Illinois, we saw growth across the rest of our footprint. The dynamics in Illinois resulted in our retail operations being down 3% quarter-over-quarter and wholesale revenue being down 2% over the same period.

Overall, when we look at BDSA market share stats, we continue to perform incredibly well in branded market share, which accounts for all our branded products sold on our shelves and third-party retailers, a great proxy for how consumers are voting with their dollars on brand and product quality and how Cresco is competing in its markets. We also held market share in every state where share data is available.

Looking ahead to Q2, we expect total revenue to be flat compared to Q1 as our growth in retail sales attributed to new store openings in Florida and Pennsylvania is offset by new competitor store openings near our dispensaries in Illinois, Pennsylvania and Ohio, price compression and the impact of our most recent rationalization actions in California. Throughout the rest of the year, we will see some impact to revenue as we exit low-margin businesses and furtherance of our continued efforts to improve overall margins and cash flow. We expect modest market share gains for our branded portfolio as we execute on extending our winning brands in new states, premiumizing our portfolio and expanding in segments where we are under-indexed today.

Overall, adjusted gross profit in the quarter increased 120 basis points sequentially to 46%. Improvements in efficiencies across the platform were negatively impacted by the revenue mix by state. The sequential revenue decline in our high-margin data of Illinois was offset by higher revenue in lower margin states like Massachusetts, California and Michigan, which resulted in a margin drag of approximately 270 basis points. We are taking steps to bring margins up in sequential quarters as we strive for improved cash flow and continue to rationalize margin-dilutive operations.

As Charlie mentioned in his opening comments, last month, we reduced our footprint in California and entered into an agreement with KSS to distribute our products. This decision was in furtherance of our plan to reduce our fixed costs in markets where our overall margin is dilutive to the company. This change in California was effective as of mid-May and will begin to reflect the full cost benefits of this in Q3. Similarly, margin expansion from the improvements we’ve been making in automation, cultivation processes across many of our states, and expense reductions in other areas of the business will be recognized in the coming quarters as we sell through our higher cost capitalized inventory. It should be noted that our current period COGS reflects the cost of products manufactured in previous quarters, so the benefits derived from recent COGS actions will take a quarter or two before they’re recognized in our P&L.

Total adjusted SG&A declined slightly from Q4, inclusive of the openings of eight dispensaries in the quarter. These new stores accounted for $3 million in additional SG&A expense in the quarter. We’ve taken additional actions in Q1 and Q2 to streamline our operations, reduce cost in cultivation and production facilities and reduce our overall functional expenses at corporate. These additional steps, along with further significant cost actions planned will yield additional savings over the remainder of 2023 and 2024 when we expect to see the full benefits of these changes.

Adjusted EBITDA totaled $29 million, flat sequentially. Adjusted EBITDA margin of 15% was up modestly, but below our long-range target, primarily due to lower revenue in the high-margin state of Illinois. Looking ahead, we expect adjusted EBITDA margins to improve as the measures we took in Q1 and those planned in Q2 begin to flow through the P&L, improving both gross margins and SG&A. We continue to focus on improving our working capital management.

We held inventory flat for the fourth consecutive quarter, even with a purposeful buildup of inventory to support 420. We paid approximately $34 million in taxes in the quarter, making us current on our federal tax obligations through 2021 and state taxes through Q1 of 2023. Our remaining 2022 federal tax liability is approximately $50 million, for which we filed an extension in April of this year. Even with the large Q1 tax payment, we generated positive operating cash flow of $3 million in the quarter. As noted with adjusted EBITDA, we expect to see improvements in both operating and free cash flow, especially in the back half of the year as the steps we are taking today to reduce costs are fully recognized.

In Q1, we spent $21 million on capex, primarily from the addition of new stores in Florida and the development of our upstate New York facility, which is required to maintain regulatory compliance in the state. Q1 was the heaviest quarter of the year for investment, and we will see a dramatic reduction in our need for capex for the balance of the year. We ended the quarter with $90 million of cash on the balance sheet, and we feel good about our cash position.

Free cash flow improvement is our number one goal for 2023. The improvements we are making to our operations, continued cost management and significantly lower capex will improve our cost structure and margin profile. Beginning in Q2 and more so in the second half of the year, building to our goal of 50% gross margin and 20% plus EBITDA margin by the end of the year and set us up for a strong 2024.

With that, I’ll pass it back to Charlie for some closing comments.

Charles BachtellChief Executive Officer and Co-Founder

Thanks, Dennis. We’re seeing a lot of potential and optimism ahead. This industry is finally getting the attention it deserves from legislators, a federal bill being heard in the Senate and following what’s referred to as regular order. We saw Kentucky passing medical cannabis law, and we’re seeing more adult-use markets come online and broad acceptance of cannabis continues to grow. We’re working to improve every aspect of our business to take advantage of this positive momentum. We’re managing through the environment today to improve profitability, while at the same time, optimizing the company for the industry of tomorrow.

The long-term cannabis growth story remains unchanged. Cannabis is still positioned to be one of the largest consumer products categories in the U.S. and Cresco Labs is doing what needs to be done to secure long-lasting industry leadership. We are holding share in our largest, highest-margin markets while deemphasizing those markets that negatively impact margins. We’re reducing our corporate overhead and driving operating efficiencies throughout our entire organization to offset pricing pressures.

We’re investing in projects and innovation where we see the opportunity for short-term cash returns. We’re focusing on generating more free cash flow through better inventory and cash management to strengthen our balance sheet, and we’re continuing to lead the efforts on federal reform, which is the most important path towards unlocking the true potential and value of the cannabis industry.

With that, I’ll open the call for questions.

Questions and Answers:

Operator

Thank you [Operator Instructions] Our first question of today is from the line of Aaron Grey of Alliance Global Partners. Aaron, your line is open now, if you’d like to proceed.

Aaron GreyAlliance Global Partners — Analyst

Hi, thank you. Good morning and thank you for the questions. So, first question I have, I know you guys [Indecipherable] in terms of the updates for the divestitures for Columbia Care. But just, Charlie, given your commentary in terms of the path forward and you talked about both strategic and financial sense. I think we all understand the strategic. I just want to get more in terms of how you’re thinking about the financial sense. As you look for a path forward and the potential pro forma debt and how that plays a role, Columbia Care has some near-term and long-term debt coming due, neither is free cash flow positive today, but both of you are working towards that. So can you offer us some color in terms of what a pro forma structure would make that financial sense for you and potential paths towards that, either additional divestiture, debt restructurings, I think that would be very helpful. Thank you.

Charles BachtellChief Executive Officer and Co-Founder

Good morning, Aaron. Thanks for the question. When it comes to the commentary on strategic and financial sense, the way to look at it really is there’s a couple of things that are — now there are several things that are within our control, and there are several things that are outside of our control as it relates to the transaction. And of course, the divestitures and the resulting proceeds from those are a big component of — as we said from the very beginning, our ability to get the combined debt leverage ratio of combined Co in the right spot. So as the divestitures remain open and before we’re able to complete those, that’s a big driver of whether or not the deal can proceed with a structure that allows us to achieve the goals that we set out at the beginning. So, it really does come back to as these divestitures still remain to be closed. They’re a big driver of whether or not we can make the deal makes sense, and we’ll continue to update the public as we have more definitive information on those divestitures.

Aaron GreyAlliance Global Partners — Analyst

Okay. Great. Thanks very much for that detail. Second question for me is just in terms of the gross margins. You talked about being weighed down some by California. And I think you mentioned another market as well, I think it was about 200 basis points. The last quarter, the weighed down by some inventory, net realizable value adjustments as well. So, I just want to clarify, were there inventory adjustments again that weighed on it this quarter? Or were there new things that kind of weighed on the margins?

I think last quarter, excluding those nonrecurring, they would have been about 50%. So just wanted to get some further commentary in terms of what weighed on margins last quarter versus this quarter? And then how to think about that gross margin going forward? Thank you.

Dennis OlisChief Financial Officer

Thanks, Aaron. This is Dennis. Let me answer that question. There were no additional inventory charges in Q1. The impact of — to gross margins is really a reflection of the fact that a state mix accounted for about 270 basis points in the quarter. So, we did see a drop in Illinois revenue associated with the adult use move to in Missouri, which had an impact on both the wholesale business down near the border state, so that had an impact. And then if you look at where — and that’s again, one of our highest margin states. So, the fact that we lost some revenue in a high-margin state picked up some revenue in states like Michigan, California and other states with lower margins, that mix accounted for about 270 basis points in the quarter. California had a minimal impact in the quarter relative to sequential change from Q4 to Q1. We do expect to see some significant improvements in margins as the actions that we took in California and Arizona in Q4 and Q1 will roll through the P&L into Q2 and subsequent quarters.

Aaron GreyAlliance Global Partners — Analyst

Okay. Great. Thanks a lot for the color. I’ll go head jump back in the queue.

Charles BachtellChief Executive Officer and Co-Founder

Thanks, Aaron.

Operator

Our next question is from the line of Andrew Partheniou of Stifel GMP. Andrew, your line is now open. My apologies. It appears we’ve lost connection with Andrew. But our next question is from the line of Scott Fortune of Roth MKM. Scott, your line is now open, if you’d like to proceed.

Scott FortuneRoth MKM — Analyst

Yeah, good morning. Thanks for the question. Now that you’ve done the actions in Arizona and California, and that’s been taken. Can you provide the kind of the timing of the SG&A and seeing — improving the margin profile? I know you had mentioned before that late second quarter here, but we should really see the margin improvement come from the second half 2023. Just kind of update on the FDA improvement as we look forward here?

Charles BachtellChief Executive Officer and Co-Founder

Yeah thanks, Scott. So again, when we — the actions that we take — that we took in California and Arizona, we capitalize the cost as we incur them in the period and then we expense them into the P&L as those products shipped. So, the actions that we took in Q1 will start to have some impact in Q2 as those products that we built in Q1 shipped into the market in Q2 and Q3. So, we will see some benefit in our margin in Q2 as a result of that. But more so, we’ll see the full impact of those actions in the second half of the year. So those combined actions will account for about 150 basis point improvement from Q1 into the second half of the year.

Scott FortuneRoth MKM — Analyst

Got it. I appreciate the color. And then real quick, I know you mentioned Q1, your heaviest capex from that standpoint and — but just kind of step us through kind of the new store adds. I know you’re targeting Florida and Pennsylvania coming on board kind of your midyear. Can you provide this update on retail adds as you look at for 2023? And any other capacity expansions on the Board with capex from that standpoint?

Dennis OlisChief Financial Officer

Yeah, I’ll take that one again. So, the $21 million of capex that we incurred in Q1, 14 of that was associated with new store openings. The bulk of that being in Florida as we had eight stores that opened in the quarter. We had a couple of million dollars in Pennsylvania as well for new store openings that we opened in Q1. We’ll have, I think, a couple more that will open in Q2. The bulk of the capex expenditure though was from a facility standpoint was in New York. We continue to build out our facility in New York to be compliant with the state regulations. We expect to complete that buildout in late Q3, early Q4. So that did account for about $7 million or $8 million of capex expenditures in Q1. We are looking at some financing alternatives to offset some of the investments that we made in that facility to date.

Scott FortuneRoth MKM — Analyst

Any color for new store adds kind of going forward throughout the year?

Charles BachtellChief Executive Officer and Co-Founder

So, we are not altering that [Phonetic]. Just for this quarter coming up, we’ll have one new store on Kamella [Phonetic] line in the coming quarter.

Dennis OlisChief Financial Officer

And you will see a significant slowdown in store openings in… [Technical Issues]

Scott FortuneRoth MKM — Analyst

Appreciate it. I’ll jump back in the queue.

Charles BachtellChief Executive Officer and Co-Founder

Thank you, Scott.

Operator

Our next question is from the line of Andrew Partheniou of Stifel. Andrew, your line is now open, if you’d like to proceed.

Andrew PartheniouStifel — Analyst

Hi, good morning. Thanks for taking my questions. Sorry about earlier. I just wanted to first ask on the Columbia Care transaction. I was just wanted to — and kind of the way that you are looking at things, if we can look at all possible scenarios here and just assume that the Columbia Care transaction doesn’t close. I’m wondering if you can give a little bit of color on how you’re thinking about growth catalysts? Illinois stores are opening even if slowly, and they do have a long runway to go here. You also discussed growth this quarter in every market outside Illinois. So, wondering, is the thinking maybe to manage your cost controllables until Illinois growth comes back in a meaningful way? Or would you consider going back out in the M&A market and maybe acquire a smaller operator or a single-state operator in an attractive state?

Charles BachtellChief Executive Officer and Co-Founder

Yesh Andrew, thanks for the question. This is Charlie. I’ll start it off. You laid out some of the components that would be a part of the go-forward strategy as a stand-alone company for sure. If you look at Illinois, there’s still — there’s a doubling of total addressable market here in Illinois that should come in the next two to three years. As those new stores open, again, with our market share and our position here, we anticipate being able to capture a good percentage of the future growth that’s still left in the Illinois market, so excited there.

If you look at the rest of the footprint, you’ve got adult-use catalysts still ahead of us in Pennsylvania, appreciative of [Indecipherable] memo that was filed about the bipartisan bill that should be forthcoming there. So optimistic about that catalyst ahead of us in PA, again, where we have great market presence and share. Adult-use catalysts expected in Ohio, adult-use catalysts expected in Florida, New York actually launching and being a viable adult-use program and then share gains in other markets that we’re in that we still have room to grow. So, there’s plenty of growth left in the existing footprint. And then cannabis is one of the most dynamic industries in the country for a variety of reasons and we’ll continue to be very diligent in cost management during this period of time where we’re still sort of in this regulatory and banking limbo, but also continue to be observant and see if there are opportunities for us to make smart positive profitability revenue type opportunities that are out in the marketplace. Greg, have additional color?

Greg ButlerChief Transformation Officer

A couple of things. Good morning, Andrew. I think as Charlie mentioned, as we think of our kind of growth in the core plan, we see opportunities in addition what Charlie mentioned is seeking some of our existing products that are showing success in markets like Illinois, expanding those across other footprints. In the quarter, we talked about how we were pleased with Good News performance in new states. FloraCal continue to ramp out in new states, which gives us not only a unique proposition, but also a premium price point. And that’s one thing you’ll see for us as we go through the half of the year. The second is store growth, and that’s not only just new stores opening up in states like Illinois, but even stores where we have 100% distribution — sorry, 100% penetration, we don’t have 100% distribution in our core SKUs. And so, getting those retail doors that we already have a relationship with buying across our platform gives us an opportunity for new growth.

And then near in, there’s a couple of categories, and I think Dennis mentioned this, too, as we drive efficiencies in operations, we’re improving our yield per square foot in our biomass availability and our labor available, which means that we can start to produce SKUs that we have it like joints, right. If anyone follows the category joint is a very large segment in cannabis. It’s an area we haven’t played, but we can now as we increase biomass availability and labor and also smaller but categories like medicinal. So, all of those give us incremental growth opportunities on the wholesale side within our — that gives us future growth. And then in retail, for us, it’s — and you saw in the results, continuing to both upsell and cross-sell our shoppers into categories that they may not be buying and driving up frequency of their trips as well.

Andrew PartheniouStifel — Analyst

Appreciate that color. And maybe another one just on — I realize you’re or not prepared for — or you’re not providing any updates on timing of the divestitures. But maybe you could talk a little bit about the process to extend the outside date? It seems last time around, you announced an extension mutually agreed, of course, about one month before the outside date. I’m wondering how we should think about that here? If you can maybe talk about the steps or approvals necessary to obtain an extension so we can kind of follow that progress?

Charles BachtellChief Executive Officer and Co-Founder

Sure, this is Charlie. So, I think whether we extend or not is a board-level discussion and decision, and that will be mainly driven by progress that we see on the divestiture front in the weeks ahead. So, I don’t have much more to offer than that. It’s an active situation as we make more progress and get more information as it relates to the divestitures that will inform the decision on the extension, both process and timing.

Andrew PartheniouStifel — Analyst

Okay. Thanks for that.

Operator

Our next question today is from the line of Michael Lavery of Piper Sandler. Michael, your line is now open.

Michael LaveryPiper Sandler — Analyst

Thank you. Good morning.

Charles BachtellChief Executive Officer and Co-Founder

[Speech Overlap] Morning, Michael.

Michael LaveryPiper Sandler — Analyst

We covered the deal, a pretty good bit. But maybe just to put a bullet on it. Would it be right? You’ve obviously mentioned your attractive setup if it weren’t to go through. You’ve been very clear, you’re trying to make plan A work and make it work well. Is everything on the table? And by that, I just mean could you restructure the deal with a different equity component? Or I know the divestitures are a piece that you’re trying to figure out, but can you just give us a sense, given how difficult that seems like it’s proven to be of what flexibility there is? And is it just sort of close — kind of tweaked to the current structure or no deal? Or is there a range of other options in between?

Charles BachtellChief Executive Officer and Co-Founder

[Technical Issues] Michael, I appreciate the question. It really is — I think as both companies have reiterated there’s value in the underlying thesis and deal rationale. But the economics of it are such an important part of it as it always has been from the time that we announced the transaction itself, the divested assets being a source of — the proceeds from the divested assets being a source of capital that can be used to make sure that the combined co has the appropriate debt leverage ratio is a big part of executing the deal. So that ratio between cash availability and combined debt is where this gets to. So, I think the — again, the companies are having discussions and our creative organizations by nature. But it boils down to making sure that the proceeds from divestitures and potentially other financial mechanics that could go along with that debt, the ratio of cash availability and combined debt leverage are where kind of everything is.

Michael LaveryPiper Sandler — Analyst

Okay. Sounds good. And just on some of the margin outlook. You’ve been clear about the timing and how the California changes would play out. Can you just give a sense maybe overall, either, I guess, maybe the magnitude of that specifically? Or really, with some other puts and takes you’re trying to drive better product mix, there’s still some pricing headwinds. Do you just have a sense where you sit today, how we should be thinking about where the second half lands on a kind of an all-in — with all the moving parts back and forth for what kind of EBITDA margins you might be expecting?

Dennis OlisChief Financial Officer

Yeah, this is Dennis. Thanks for the question. From a forecast standpoint, again, we haven’t given any specifics, but we expect that with the actions that we’re taking in California and Arizona, all of the efficiencies we expect to experience in our production facilities across our platform. You combine that with some of the — again, some of the other actions we’re taking, both from a cost of goods sold and a SG&A perspective. We expect to be at the 50% margin range in the second half of the year, and that would get us to an EBITDA of 20% plus coming out in the second half of the year. So, a lot of actions that we’re taking to reduce our overall cost to offset some of the price pressures that we see in the marketplace today. And again, our thesis is — our plan is that we have a plan to get to a 50% gross margin and 20% plus adjusted EBITDA by the end of the year.

Michael LaveryPiper Sandler — Analyst

No, that’s great color. And obviously, a nice sequential recovery. So, thanks for that.

Operator

Our next question today is from the line of Glenn Mattson of Ladenburg Thalmann. Glenn, your line is now open.

Glenn MattsonLadenburg Thalmann — Analyst

Hi, sorry, just to clarify, would last point, Dennis, did you say 20% plus coming out of the second half, meaning like as you exit the year? Or is that kind of what you expect for the back half on average?

Dennis OlisChief Financial Officer

That’s what we expect for the back half of the year.

Glenn MattsonLadenburg Thalmann — Analyst

Okay. All right. Yeah, I guess I was just curious about Illinois a little bit more. But can you give us a sense of like when the new retail — when that fulcrum point hits where like the new retail benefits more than it’s detracting now?

Charles BachtellChief Executive Officer and Co-Founder

So, this is Charlie. I’ll start it, Michael, and then Greg will add more context. But I think there’s a couple of variables at play. It is definitely the quantity of the stores, but it’s also the location of the stores. I think stores that are closer to our existing locations will apply more pressure to our retail revenue than ones that open up further away. So that’s sort of part one of the equation. And then definitely the number and Greg, more color on sort of where you see that shift coming.

Greg ButlerChief Transformation Officer

I think from a modeling [Technical Issues], I think from a modeling perspective, we would say really the stores opening and getting to scale and put that into late Q3, Q4, you start to see the benefit of incremental new sell [Phonetic] doors. I think the big thing on Illinois, as we talked about is, right now, you haven’t seen that incremental revenue coming online as much from the new independent doors because it’s being offset by the Missouri challenges across our wholesale partners who have stores on that border. And that’s been driving a lot of our wholesale decline in the state. We look forward, I think that continues for a bit, but we will lap it. I don’t think it is a sustained negative drag on the State of Illinois, but it will have its impact in Q2, Q3. Net wholesale will come online, as we said later in the year and really scale into next year.

And on the retail front, as Charlie mentioned, really what’s driving the challenges in retail is you are seeing a little bit of trip as due to new stores opening in and around some of our core stores, particularly those stores that opened up in Q4 of last year that are now ramping up, and that’s put a little bit of pressure on some of our sunny-side locations. But ultimately, the biggest driver of retail decline in the quarter was more driven by price discounts. And that’s an Illinois price discounting trend that’s happening across retail, as more shoppers are starting to learn that retailers will offer different discounts and are starting to shop on discount. Because if you look at the fundamentals of our traffic, trips are showing pretty healthy trends, units are good. But its average price per unit that we’re charging is what’s really driving down total retail value. And that’s a pricing challenge across the state right now.

Glenn MattsonLadenburg Thalmann — Analyst

Okay. Great. Thanks for that color. Charlie, I was curious, could you chime in on your thoughts on New York given all the recent developments with the recent rigs coming out and just the governor kind of talking about the ability to begin finding landlords and things like that. It feels like maybe there’s a little bit different tone. Do you get the sense talking to people that they’re ready to get serious about making this a real market? Or is any sense of like how you think it might develop that kind of thing?

Charles BachtellChief Executive Officer and Co-Founder

Sure. I think your comment is fair. The — again, I caveat this with until the regs are final — final. It’s subject to change, but appreciative of the changes that were made from draft one, the draft two, so to speak, also encouraged by that legislation, making it on Albany I think the enforcement involving the landlords of retail locations that allow listed operators to operate out of them is useful tool in addressing the illicit market, which needs to be addressed in New York. It’s just for public health, public safety and viability of the licensed program, which is again a great social equity focused type program that the illicit market undermines. So yeah, I’m encouraged, cautiously encouraged we’ll see what final regs look like, and then we’ll have more color.

Glenn MattsonLadenburg Thalmann — Analyst

Great. Thanks, guys. Thanks, Michael [Phonetic].

Operator

[Operator Instructions] And our question is from the line of Derek Dley of Canaccord Genuity. Derek, your line is now open.

Derek DleyCanaccord Genuity — Analyst

Yeah, hi. Thanks. Just one more on the potential transaction. Can you just comment on where you are in the process for the remaining divestitures? Have you had interest submitted? Have you had it from multiple parties for the multiple assets? So where are we on that front?

Charles BachtellChief Executive Officer and Co-Founder

Yeah, thanks, Derek. The one transaction definitive agreement we did announce is still there. The others remaining are really Ohio and Florida. We’re — we’ve made good progress in Ohio. Florida has been challenging. Florida, again, as I mentioned earlier in the call, things that are within our control and outside of our control. Florida itself has had some significant changes over the last year that have made that asset, that license challenging, including the movement towards issuing new licenses. And so, it’s been a bit of a challenge, but that’s the update, the Com transaction, progress in Ohio, still challenges in Florida.

Derek DleyCanaccord Genuity — Analyst

Okay. Good. That’s helpful. And then maybe just on the comment on capex. So, I appreciate this was the heavy quarter for capex. I think previously, you guys had guided to somewhere in the neighborhood of, call it, $45 million to $50 million in capex for the year. Is that still the number that we should be thinking about?

Dennis OlisChief Financial Officer

Hi, thanks, Derek. The number that we gave of $45 million to $50 million is still accurate. The — that was assuming that we were going to do some type of financing agreement in New York. That is still our plan to do that. But absent that, I think that is an accurate figure to use.

Derek DleyCanaccord Genuity — Analyst

Okay. Great. And then just on the tax payments. Can you just remind us of the cadence of tax payments? Is there a double tax payment in Q2?

Dennis OlisChief Financial Officer

So, the tax payment that we made in Q1 of this year for about $32 million closed out our ’21 federal tax liability that we had. We are current, as I stated in my remarks, current on our — all of our state taxes through Q1 of 2023. We have made some payments of our — for our federal ’22 taxes. The remaining balance of 2022 taxes is about $50 million that we did file an extension for in April of this year.

Derek DleyCanaccord Genuity — Analyst

Okay. And then how long does that extension gives you?

Dennis OlisChief Financial Officer

Well, we would just file an extended return in the September, October time frame, which is normal for most corporations.

Derek DleyCanaccord Genuity — Analyst

Okay. okay, thank you very much.

Charles BachtellChief Executive Officer and Co-Founder

Thanks, Derek.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Earnings Preview: What to look for when Broadcom (AVGO) reports Q1 results

Broadcom, Inc. (NASDAQ: AVGO) will be releasing its first-quarter results next week. Over the years, the company constantly broadened its portfolio beyond semiconductors to areas like enterprise software solutions, a

Here’s a look at Lowe’s (LOW) expectations for the near term and ahead

Shares of Lowe’s Companies, Inc. (NYSE: LOW) were up over 1% on Friday. The stock has gained 19% over the past three months. The home improvement retailer saw sales and

TJX Companies (TJX) Q4 2024 profit jumps on strong revenue growth

The TJX Companies, Inc. (NYSE: TJX) has reported a double-digit increase in net income for the fourth quarter of 2024 when the fashion retailer's net sales grew 13%. Fourth-quarter sales

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top