CRLBF - Cresco Labs Inc.

Operator: Good day, and welcome to Cresco Labs Inc. Fourth Quarter 2025 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. Please note this event is being recorded. I would now like to turn the call over to T.J. Cole, Senior Vice President, Corporate Development and Investor Relations for Cresco Labs Inc. Please go ahead, T.J. And welcome to Cresco Labs Inc.'s Fourth Quarter 2025 Earnings Conference Call.
T.J. Cole: On the call today, we have Chief Executive Officer and Co-Founder, Charles Bachtell; Chief Financial Officer, Sharon Schuler; and President, Greg Butler, who will be available for the Q&A. Prior to this call, we issued our fourth quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the fourth quarter are provided prior to completion of all internal and external reviews and therefore are subject to adjustment to the filing of the company's quarterly and annual financial statements. We plan to file our corresponding financial statements and MD&A for the quarter and year ended 12/31/2025 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 most recent Annual Information Form and MD&A filed with securities regulators. 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. With that, I will turn the call over to Charles. Good morning, everyone, and thank you for joining Cresco Labs Inc.'s Q4 and full year earnings call. Over the past year, we have been executing against a clear long-term plan to improve margins, generate cash, optimize our footprint, and reinforce the balance sheet so we can invest strategically and position ourselves for growth. In Q4, we made measurable progress against that plan. We generated $162,000,000 in revenue, we produced $84,000,000 in adjusted gross profit, $40,000,000 in adjusted EBITDA, and $27,000,000 in operating cash flow. For the full year, we delivered $656,000,000 in revenue, $157,000,000 in adjusted EBITDA, and $73,000,000 in operating cash flow, while materially strengthening our balance sheet and simplifying our operations. I want to sincerely thank our team for making measurable progress across core financial priorities. They produce products that consumers want while making cultivation and manufacturing more efficient, give the customer the in-store experience that they need while prioritizing higher-return channels, and they manage capital with discipline. Today, the team is staying the course, focused on meeting the needs of the customer while building the most productive and cash-generating platform possible. Let me walk through how we are executing on that strategy. First and foremost, we are building a solid balance sheet with consistent cash generation. In 2025, we strengthened our financial position through concrete actions. We generated strong operating cash flow and refinanced our debt, extending maturities to 2030. These steps improved our capital structure, reduced near-term risk, and sharpened our operational focus. Tailoring and simplifying our footprint has been central to this effort. Exiting California was an intentional decision to reallocate capital and our internal resources toward markets where we have stronger returns. Our capital allocation framework is straightforward. We generate cash through tight execution. We deploy capital selectively when opportunities meet clear return and integration thresholds to protect and strengthen the balance sheet. All these actions enhanced our financial flexibility and positioned us to capitalize on attractive opportunities in 2026 and beyond. With internal cash flow as our primary source of capital, we are excited about inorganic investments that will strengthen operating leverage and enhance market density while meeting our financial standards. Second, our focused footprint positions us to win with organic growth in core markets and targeted expansion in markets where we see compelling returns. We are going deeper in core markets where we can leverage our existing infrastructure, and small investments will have higher incremental returns. Throughout 2025, we have evaluated multiple investments against strict risk-adjusted criteria. While most acquisitions did not meet our standards, we have identified several attractive tuck-in opportunities that have the potential to drive operating leverage. Our current pipeline for strategic acquisitions is as robust as we have seen, and we are excited to share updates on those opportunities as they progress. In Ohio, we are applying a prudent, density-driven approach. There, our focus remains on increasing retail concentration to find more scaled efficiencies and margin expansion. Our border store strategy is proving particularly effective. Sunnyside Procterville, located near the West Virginia border, is exceeding expectations and validating our site selection model. We are building on that success with two additional store openings scheduled for early this year. In Kentucky, our operations are coming together quickly. Our cultivation facility is operational with plants now in the building, shifting the market from the capital investment phase into the revenue-generating phase as initial harvests come online. We are building responsibly as the broader medical program rolls out slowly, preparing to serve patients soon without overextending capital. Internationally, our capital-light pilot in Germany has been a great success, with products selling out ahead of schedule. While our global strategy remains measured, this result validates both the strength of our brand portfolio and the portability of our operating model in a tightly regulated European environment. Across all of these initiatives, discipline is a key theme. Every expansion is evaluated against clear return thresholds, execution capability, and capital efficiency. By balancing organic growth within core markets with targeted acquisitions, we are building a platform that is positioned to expand margins over time. And lastly, our proven retail and wholesale capabilities will keep enabling us to outperform the market. Our wholesale business remains a core strength: the number one branded market share in Illinois, Pennsylvania, and Massachusetts, and leading positions across our limited-license markets according to Headset. That leadership reflects cultivation consistency, portfolio quality, and our ability to reliably supply both our own stores and third-party partners with high-velocity brands. It is further reinforced by our retail execution, where we hold the number one share in Illinois and rank among the leading operators in Ohio and Pennsylvania. We are building on that scale advantage through deliberate differentiation. For example, we are introducing Sunnyside exclusives, including our new Sunnyside house brand called Louder. Designed for champion shoppers who purchase regularly, Louder reduces price comparability and creates compelling reasons to choose Sunnyside beyond convenience. The in-store experience is another key differentiator. We continue refining operations and removing friction across the customer journey to ensure orders are fulfilled quickly, reliably, and with expert care. Our 4.9 average Google rating across the network reflects our consistency, an achievement that is difficult to sustain in large high-volume retail environments, and I cannot thank the team enough for working so hard to achieve this incredible feedback from customers. Together, our leading brand share, retail density, smart pricing strategies, and shopper innovations equip Cresco Labs Inc. to continue to gain and defend share in competitive environments without sacrificing margin. We win where we operate. This year, we strengthened our balance sheet, expanded our footprint strategically, maintained leadership positions across key markets, and improved profitability metrics. I am pleased to share that today, Cresco Labs Inc. is more focused, more efficient, and structurally stronger than it was a year ago. With that, I will turn it over to Sharon to walk you through our Q4 financial performance in more detail.
Sharon Schuler: Thank you, Charlie, and good morning, everyone. In Q4, we continued to optimize mix and channel strategy across the organization, resulting in improved profitability despite modest revenue softening. We reported $162,000,000 in revenue and expanded margin across our major profitability metrics. We prioritized first-party retail shelves and higher-margin channels over lower-margin third-party wholesale volumes. As a result, wholesale revenue declined approximately 6% quarter over quarter while retail revenue remained essentially flat, reflecting continued store productivity and improved basket quality across key markets. We improved cultivation efficiencies and shifted mix towards higher-margin products and channels, which drove adjusted gross margin expansion to 52.2%, up from 48.8% in Q3. In Q3, we discussed selling through high-cost flower as new production ramped. In Q4, improved yields, mix optimization, and channel prioritization translated into margin improvements. Additionally, gross margin in the quarter benefited from certain favorable discrete items, which may not repeat to the same extent going forward. We maintained tight cost controls while supporting incremental store additions and growth initiatives, resulting in adjusted SG&A of $49,000,000, or 30.5% of revenue. While dollars increased modestly from Q3, overhead growth remained controlled relative to the size of the operation. As part of our strong accounts receivable management, we also were able to reduce bad debt reserves during the quarter, which contributed to favorable expense leverage. By expanding gross margin and maintaining expense controls, we delivered adjusted EBITDA of $40,000,000, representing 25.0% of revenue, up from 24.1% in Q3. This underscores the operating leverage in the business as mix improvements and cost control drove sequential margin expansion despite modest revenue deceleration. We continued to convert earnings into cash, generating $27,000,000 in operating cash flow in Q4 and $73,000,000 for the full year. After $9,000,000 in capital expenditures during the quarter, we ended the year with $94,000,000 in cash and no near-term maturities, reinforcing our financial flexibility. In the first quarter, we will see the impact of Michigan's excise tax changes and our exit from California, along with the effects of normal seasonality and ongoing price compression and competition in our core markets. As a result, we expect a high single-digit sequential decline in revenue with the majority of impact driven by Michigan and California. While cultivation efficiencies continue to improve structurally, we expect seasonal mix shifts and ongoing competitive pricing to result in gross margin normalization from Q4's elevated levels. We are maintaining strong expense management as we support incremental store contribution and growth initiatives. As a result, we expect SG&A to remain generally consistent with recent run rates, so we will not see a repeat of prior period benefits such as the reduction in bad debt reserves. Importantly, we do not see Q1 as a change in direction. The operational improvements we have implemented remain intact, and we expect performance to build from Q1 levels as the year unfolds. With that, I will turn it back to Charlie for closing remarks.
Charles Bachtell: Thank you, Sharon. Reflecting on the quarter and year, the most important takeaway is sustained progress executing against a clear improvement plan. We are strengthening margins, generating cash, reinforcing the balance sheet, and sharpening our footprint around markets where we have structural advantages. We are building a company designed to win where we operate and expand thoughtfully into additional states and international markets when the opportunities are accretive and aligned with our return thresholds. We are not chasing growth for growth's sake. Adult-use conversions in core states, strategic acquisitions, and building density in markets where we already lead all create a pathway for high-return growth and long-term value creation for our stakeholders. At the same time, federal reform momentum is real. Rescheduling executive order is hugely consequential, and when implemented, will change the entire industry's economic landscape. That said, while reform represents real upside, that upside must be layered over a strong financial and operational foundation. We have more work ahead, but the trajectory is clear. We are confident in our direction and in our ability to continue strengthening the business quarter by quarter regardless of the federal reform timeline. Thank you for your continued interest in Cresco Labs Inc., and thank you to all the stakeholders, especially the Cresco Labs Inc. team that continue to drive us forward. We will now open for questions.
Operator: Thank you very much. Our first question comes from Aaron Grey from AGP. Your line is open, Aaron. Please go ahead.
Aaron Grey: Hi, good morning, and thank you very much for the questions here. Charlie, you gave some good color in terms of the M&A opportunity, talking about the pipeline being as robust as you have seen. I will get some additional detail in terms of maybe some of the dynamics that are leading to that pipeline being so robust. Is it some of the maybe distressed assets that you see in the marketplace? Maybe some of the operators and owners becoming more reasonable in the multiples they are for? Because I know the private markets had been a little bit elevated as of late. So any more color in terms of maybe some of the dynamics that you are seeing that are leading to that more robust pipeline? Thanks.
Charles Bachtell: Hey. Good morning, Aaron. Thanks for the question. You actually hit on several of them. I think the rationale or the reason for the pipeline being as robust as it is is dynamic. There are several reasons for it. I think we are seeing operators that have been in the industry for a while that are realizing that they may be better suited to look at an exit and look at some sort of an M&A opportunity. I think we are seeing the limited availability and the cost of capital weighing on that scenario too. And I would also say there is more regulatory clarity on optionality from a structural standpoint, etc., that could lead to the viability of M&A transactions being structured. So when you look at all the factors that are there, it puts Cresco Labs Inc. in a really good position based on the work that we have put in over the last couple of years to really prepare ourselves, fortify the foundation to be acquisitive. And as we have said before too, we are going to make sure that we are very patient, that we are very strategic, and that we allocate capital as efficiently as we can for that long-term success. So excited. Looking forward to sharing more in the near future.
Aaron Grey: Okay. Great. Appreciate that color. Second question for me, I just want to talk about some of the retail and wholesale dynamics. You talked about there being a bit of a shift from third party to first party, selling to your own stores. So I want to talk a little bit more in terms of what is driving that decision. Obviously, it led to some higher margins in the quarter, but some of the offset might be some of the branding and brand building and larger sales opportunities. So maybe you could talk about those dynamics? And then if at all, that M&A strategy and kind of bolt-on that you referenced might become a natural unlock for some more brand distribution as well. Thank you.
Charles Bachtell: Yeah. I will start, and then Greg has some insights here too. You are right. And as the industry matures, I think as these—especially the larger operators—mature too, our approach to the market continues to get refined. Operational execution is a big part of it. We know what we can do. We know what we can produce, not only on the production side of the business, but at a retail level, the customer experience, being able to operate a very high-volume, higher-margin business, especially supported by owned brands. You are just seeing the continued development and maturity of a strategic model that lends itself to a greater concentration. I think as you mentioned also, the M&A and the strategic alliance structures that can be put in place in these markets will also lend itself to greater densification for a term on how we approach these markets. But it is a natural evolution from the operators that have been in the industry for a while on how to make your revenue as durable as you can and defensible. So we are really pleased and encouraged by what the team has been able to do. Greg, additional?
Greg Butler: Good morning, Aaron. Only a couple of things to add to that. One is, if you look at our retail platform, we now have over half a million people engaged in our loyalty programs and growing. Seventy-five percent of our sales is going through a digital gateway. That, to us, gives us unbelievable data on pricing, price elasticity, velocity, what SKUs are turning. So you mentioned first-party growth. For sure, we saw that in our financials, but it is actually driven by a much more rigorous analytical approach to how we are thinking about not only assortment but pricing that we are able to do now through just the rich data that is coming in. And that gives us fewer cities, store trading zone pricing, we are getting a lot more competitive on how we think about bespoke promotions versus blanket always-on. And that is driving more of what you are seeing in our percent of assortment or source, but also how we are dealing with continued pricing challenges but finding ways to maximize margin through mix. And I think, to Charlie's point, as you look to other retailers, there are some phenomenal retailers out there that are probably asking themselves what do they want to do. Do they want to partner with someone or do they want to potentially get left behind? And they have unbelievable operations. So I think another push on this is we tend to always look at distressed operators. We see a lot of operators that are not distressed that are thinking about how they find a partnership with a partner that can help them drive better results for their business and then clearly also partner for any sort of longer-term foundational change here that happens in the industry.
Aaron Grey: Okay. Great. Thanks for the color, both Charlie and Greg. I will go ahead and jump back in the queue.
Charles Bachtell: Thanks, Aaron.
Operator: Our next question comes from Frederico Gomes from ATB Cormark Capital Markets. Your line is open. Please go ahead.
Frederico Gomes: Thank you. Good morning. Thanks for the questions. First question is just on Germany. You mentioned the success, I guess, that you are seeing there in terms of that initial, you know, experiment or, I guess, a pilot launch. Could you talk more about that, whether you expect to launch new products there anytime soon or maybe enter that market in a more meaningful way? Thank you.
Charles Bachtell: Yeah. Thanks, Frederico. So very encouraged by our initial approach. And as we mentioned, it is a light touch. It is a limited, low-risk approach to exploring what international markets can look like for us. The pilot so far has been really successful. Products selling out ahead of time and ahead of expectations is a great result to achieve. We made the decision to continue to reinvest the profits that we have been able to gain from this pilot so far. So we are increasing the size of it, but I do want to confirm that that is a measured approach. We are definitely still in the test-and-learn phase, and it is a low-risk approach to this exploration of what we think is going to be a very robust market internationally as a whole. But it is going to play out over time, and we are going to take a measured approach.
Frederico Gomes: Perfect. Thanks for that. And then my second question, just on the pricing outlook. I mean, we keep talking about price compression, and that is something that is expected to continue. But I wonder if you have seen any reduction or normalization in prices across different states? And specifically, if you would expect maybe a price relief if and when we see the intoxicating hemp ban becoming effective maybe November this year. Thank you.
Charles Bachtell: Great. I will start. We are starting to see some stabilization in markets. It is the continued natural evolution of it. As it relates to the hemp impact, without question, we do think intoxicating hemp has had an impact on several of the main markets that we are in. In the event that that does diminish going forward, we do see that sort of ancillary benefit of a broadened and grown consumer base that now has had the ability and the opportunity to get to understand cannabinoids better, and that will naturally, at some capture rate, come over to the regulated, licensed cannabis market in the event that that happens. But specifically, Greg, you want to add more context?
Greg Butler: No. The only thing we would add to this is as we look at pricing in Q4 and we look at the first half of this year, pricing is probably a little bit better than even we anticipated. So still seeing some slight price reduction as you mentioned, but better than we assumed. I think as we look to the second half this year, there are a couple of major factors that we are watching closely that I think help us see even better price improvement. One is, as we talked M&A and retail, retail consolidation does help. As you get away from aggressive price promos around key selling weekends, fighting to win traffic over new stores, if that starts to slow down, that helps relieve some of the top-line pressure to retail. I think in wholesale you are going to see from us—I think you are seeing from others—really focusing on mix and how do you find and push forward higher-velocity premium SKUs, which we are now getting an unbelievable amount of data on price elasticities and what actually moves our products and other partner products that are in our stores through our own leading wholesale network. And you will see more of that—how we start to flex our muscle on price promos and SKU mix. And then I do think hemp—anything that happens on hemp here towards the second half of the year—will help. We do know that hemp does compete for the same occasions where cannabis plays too. So it is a lower-price substitute. So relief on hemp availability would relieve not only some of the pressure we are seeing with consumers who might be supplementing their purchases with a hemp product—that would come back to our stores—but also slow down just the amount of hemp that seems to be flowing through the market that is causing some price noise.
Frederico Gomes: Thank you very much for the color. I will hop back in queue.
Operator: Our next question comes from Bill Kirk from ROTH Capital Partners. Your line is open, Bill. Please go ahead.
Nicholas Anderson: Yeah. Good morning. This is Nick on for Bill. Thanks for taking the questions. First for me on New York, the state is seeing strong dispensary growth, up to around 600 locations now at about a $2,000,000,000 annual run rate. Wondering how that translates into wholesale growth for you and what your current penetration is there. If you could just unpack that write-down a little bit more, that would be helpful. Thank you.
Charles Bachtell: Sure. Thanks, Nick. Those go kind of hand in hand. For us, we still evaluate New York and further investment in New York against the other opportunities that we see out there in the space and that are in the pipeline. And still to date, New York struggles as we look at not only that comparison today, but the long-term durability. Structurally, New York has challenges. And so for us, furthering our penetration into New York, especially from a wholesale standpoint, is muted, and we do not expect—unless there is further investment from us—that that would change. And currently, that explains the impairment charge that we took, while we continue to evaluate the business viability and especially when it comes to the additional capital allocation to New York. It is just the reality that the accounting requirements lead to us taking that impairment this year, which we thought was not only a requirement but the best solution to just deal with it while, again, we will continue to evaluate New York. To your point, it is a very large market. We expect that it will continue to be a very large market. But just because the market is large does not mean that it is actually a good structural model for the operators within it. We have seen that in several other very large markets like California and Michigan too.
Nicholas Anderson: Understood. I appreciate that color. Second for me, just on Sunnyside.shop, can you unpack the success there? What differentiates it from other platforms? And just what are the differences in consumer spending on the platform versus in-store? Any color there would be helpful. Thank you.
Charles Bachtell: Certainly. I will give it to Greg directly.
Greg Butler: Yeah. So I think one of the biggest things for us on the Sunnyside site is that it is really providing value to our shoppers. It is not just a loyalty program that you are earning something on every purchase, but you are getting unique offers, you are getting a personalized experience, and in cases you are finding out about new product launches through our site. And so we are rewarding our shoppers through an elevated experience on Sunnyside. I think the fact that we also start our relationship with them digitally—most of our purchases start online; they come online as a pickup—that is enabling us to collect a lot of information and create that relationship with our shoppers, which then enables us to scale that through different pieces of communication. From an overall business perspective, though, the site for us gives us an incredible tool that, if you think about our product launch, it radically reduces our cost of acquisition because we are able to launch on our site and get it out there without spending a significant amount of media to drive awareness. It enables us to tailor custom price promotions and how we think about that. So from a business perspective, it is wonderful that we are able to delight our shoppers, but it is also enabling us to make really smart business decisions on margins and how to protect margins and launch different SKUs and push different SKUs on-site.
Nicholas Anderson: Got it. That is it for me. I appreciate the color. I will pass it on.
Operator: Thank you. We currently have no further questions at this time, so I would like to hand back to Charlie for some closing remarks.
Charles Bachtell: Yes. I want to thank everybody for joining the call today. And we will talk to you again here after Q1 pretty soon. Thank you.
Operator: This concludes today's call. We thank everyone for joining. You may now disconnect from the call.