Cresco Labs Earnings release

What I said last Q

I’ll add another “Boy howdy” right here!

Pluses:

• Sales increased +63% or USD 59 million QoQ
• Gross margin improved from 36% to 52% this Q.  Their GM% was a concern relative to their peers, but this is quite the improvement.
• Despite increase in sales SGA only increased $4 million

Minuses: And I am nitpicking a little here

• 280e taxes really take a bite out of US operators… NPBT was $18 million and after tax is $5 million
• Net income attributable to controlling interest is -$7 million out of the positive net income of $5 million. So, NCI hold $12 million in net income from these statements.
• They need to renegotiate a $89 million loan by July 2021.  This should not be a problem if they continue to generate the EBITDA that they have.

This Q:

Let us look at how the Origin House purchase fared in F2020:

I am going to have to have a chat with a CFO about this proforma stuff.  OH closed Jan 8, 2020.  Eight days into the year yet proforma is considerably different from actual.

For $426 million OH contributed $88.7 million in sales (19% of CL F2020) and a loss of $31 million.  In Q4, sales were $27 million with a loss of $5.9 million. We will lose this sight line next Q as it is a new fiscal.

Any of our readers know how much Molly and I dislike the practice of releasing a presser and doing earnings call off same.  Well, here is something that was not in the presser:

Provision for Lawsuit

This was buried in SGA expenses, they are kind enough to provide a YTD table in notes to financials. I have backed this out of EBITDA.  They have too.  But some of their items in Adj EBITDA have no line tracking back to Income Statement of Cash Flow statement.

From earnings call:

Matt McGinley

Great. And on the adjustments to, or the add backs, I should say to gross margin and G&A, they really surged in the fourth quarter. I thing $18 million added back to G&A and $10 million related to gross margin with rebranding and expansion costs. Can you walk us through what that $18 million was in the fourth quarter and given the announced M&A you had in the first quarter, does that remain elevated into this year, or is that costs that may have been pulled forward into the fourth quarter?

Dennis Olis

Yeah. Thanks for the question. So, from an add back standpoint, as it relates to — to start with the gross margin and cost of goods sold impact the $9 million or so, the bulk of that is the final cleanups associated with Origin House. And that’s a legacy of rebranding the products, cleaning up some excess inventory and so forth. Those costs will go away — are gone. So, we will no longer carry those costs going into 2021. And this is a final cleanup of a lot of the acquisition and integration costs associated with Origin House. So, going forward, that won’t exist.

From the $18 million that you noted back in — down in SG&A, a large component of that — and you’ll see that in our filings that come out later today or tomorrow is associated with a deal that we consummated with a former executive of the company to a settlement that had — the negotiations had begun last quarter, we resolved at this quarter. So, we did take a significant    expense for that in Q4. Outside of that — so that’s again another one-time cost.

There is a small amount of COVID cost in there that will not carryforward into 2021. And then the rest of it is very small dollars associated with acquisition costs, a little bit of severance costs and the like. So, when you look at both the rebranding costs, which we carried in — we just want it to be consistent and carrying that forward through the full year of 2020, those costs will not carry into 2021. When you look at the $18 million of SG&A, the bulk of that will not carryforward. Those are one-time cost and will not carry into 2021 as well.

So, it looks like that $13.6 million was backed out from the lawsuit.  I did that too. But my Adj EBITDA is a considerably lower $30 million versus $50 million they reported. 

Their Adjusted EBITDA

The highlighted items total $33.4 million.  If I back out the $13.6 loss provision there is a $20 million difference.  I really do not know if expansion, relaunch and rebranding costs (for a growing CPG company) really is what I would deem as non-reoccurring.  Heck, it was $21 million for the year…reoccurring.  I’ll let the reader figure out what they think should be added back, but my calculation is the same way I do the entire peer base.

This is just to highlight to NOT take Adj EBITDA from the company at face value. Figure out what the adjustments were and if they “qualify” in your mind for exclusion.

This is a good item to mark and see if Management explanation holds in Q1F2021 around GM.

Pluses

• Sales increase +6% ok but not great for a holiday quarter.
• Self owned retail was +14% QoQ
• Inventory increased and should be sufficient to fund sales growth.

Minuses:

• Wholesale cannabis sales were flat QoQ. This is a “wholesale” company.
• SGA increased $8 million QoQ

The MDA does not discuss changes QoQ.  You get YoY comparisons and that is it. Makes it tough for investors to analyze operations.

Income Statement Drivers & Breakeven: Trend

Sales Split and Deltas:

Footprint:

• Illinois: Cultivation 3, Dispensaries 10 (-1 QoQ from last MDA)

• Penn: Cultivation 1, Dispensaries 3
• Ohio: Cultivation 1, Dispensaries 1

• Cali: Cultivation 3 Processing 1, Distribution 2
• Arizona: Cultivation 2, Dispensaries 1
• Maryland: Cultivation 1
• NY: Cultivation 1, Dispensaries 4
• Mass: Cultivation 1, Dispensaries 1

• 26 Nicotine vape stores in Canada

Total

• Cultivation 3
• Processing & Distribution 3
• Dispensary 20 (-1 for Q)

Their sales have increased $9 million to $162 million, a dramatic slowing in growth from +63% and +42% in Q3 and Q2, respectively.  The entirety of the increase was in in self owned retail stores.   

Wholesale and Retail sales mix changed to 56-44 from 59-41 last Q. 

Same store sales versus new stores would be a welcome metric, as would CL brands sold as a % of retail sales.  The metric I created shows per store revenue for the Q at $3.6 million a +12% increase QoQ. Illinois sales are likely the reason, as Illinois has been growing cannabis sales tremendously this year.

From Last Q: Inventory grew from $100 million to $108 million QoQ after a rise the previous Q of $19 million.  Something to keep an eye on.

This Q: Inventory increased another $29 million to $136 million.

Annualized Sales per Property, Plant and Equipment and Goodwill + Intangibles

This is our attempt to try and compare the organic growth companies (eg. TRUL and LHS) with the companies that are going organic plus “roll up” route.  The idea is that when a company purchases another company and instead of getting lots of PPE they are instead paying G/I to get a head start in the market.  That head start should manifest itself in Sales and GM, not necessarily immediately (retail stores yes, a cultivator may take time to launch) but eventually. 

This Q they improved on the metric to $0.77 revenue per dollar of combined PPE and G/I from $0.74.  Second highest in the group.  So, the acquisitions and PPE investment have been sales accretive.  

BTW… I really like this metric as it focuses on operating efficiency.  Before you can get to positive Net Income to focus on ROI, Sales and GM must materialize.  This is a pre cursor to those events, assuming Opex is kept in check.

USA Retail Revenue: Peer & Trend

Retail wise Cresco is the fourth largest in the above peer set and show consistent growth over the period under review.   Nice trend line across the industry.

USA Wholesale Revenue: Peer & Trend

Wholesale wise Cresco is the largest in the above peer set but plateaued last Q.  With the inventory load we are seeing an increase in this might be in the chamber.

Income Statement Drivers & Breakeven: Peer

Cresco has the 4th highest sales in US trailing CURA ,GTII and Trulieve.

Organic sales growth was not great in Q4, outside Trulieve +28%.

Gross Margin: USA Peer & Trend

Gross Margin decreased by $6 million to $73 million and from 52% of sales to 45%.  Narrative in the CC was that was all inventory clean up.  We will see if this rebounds next Q. If add back the $9 million GM is 51%.

Bio Asset growth went backwards QoQ on the balance sheet in value and projected yield of 21,400 KGs is +2% QoQ. As Unrealized gains on Income Statement increased by $20 million… that tracks to increased inventory increase.

Gross Margin Annualized per PPE and Goodwill and Intangibles

As per the Annualized Sales version of this graph we are seeing how effective at GM generation the peer set has been. 

Cresco is generating $0.35 of annualized GM for each $1 they have spent on PPE and G/I a slide from last Q of $0.38.  We will see if the one time charge has this bounce back next Q.  

CL is in 3^rd place in the peer group.

This metric is becoming a favorite of mine, more so than the Sales metric above, as it shows efficiency of operations versus just the ability to increase sales.

Gross Margin: USA Peer

Cresco only exceeds MMEN in this peer group.  They have more wholesale mix than their peers, so it is understandable. They are projecting a 60-40 split wholesale – retail in F2021.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Note: I moved impairment credit, and lawsuit provision to Other Expenses to maintain the peer group protocol.

Selling expenses increased by $3.9 million to $8.1 million for the Q and increased to 5% as a % of sales.   This expenses has doubled since Q1F20.

Administration expenses increased by $0.9 million to $37 million and decreased 1% as % of sales to 23%. Notable changes:

• Salaries and related increased by $0.9 million to $22.3 million

Combined SGA is $45 million a QoQ increase of $4.8 million.  We will see if they can restart the trend line downwards n Q1F21.

SBC increased $2.9 million to $5.7 million and represents 4% of sales.

Depreciation of $5.6 million rounds off Opex, a nominal change QoQ.

Total Opex was $60 million +$7 million QoQ and comes in at 37% of sales an increase from 34% last Q.

A little creep in Selling… we will see if that was holiday related.

SGA & SBC as a % of Sales: Peer

Last Q, Cresco was in the middle of the pack on combined SGA SBC.  

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

NOP before IFRS Voodoo was $27 million last Q and reduced to $13 million this Q.  The drop in GM, increase in SGA and SBC are the combined reasons.

At current GM% and OPEX$, Cresco requires 82% of existing sales to be +NOP.

Other expenses totaled $45 million versus expenses of $14 million the Q prior:

• Provision for lawsuit of $13.6 million vs nil last Q.
• Interest expense decreased from $11.3 million to $10.3 million. 
• Other Expenses of $19.0 million increased from $3.0 million last Q.  Loss on IFRS derivative instruments provided a swing of $15 million was the main driver.

Taxes were $14 million versus previous Q of $13 million.  280e at work.

That NOP including IFRS voodoo of -$17 million is the driver. 280e relief would be welcomed.

Net Income Was -$23 million versus + $5 million last Q.  Interestingly, Net income attributable to CL was negative $48 million while Non-Controlling Interest had a +$24 million.  NCI’s did better than CL shareholders.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer:

My Adj EBITDA for them fell $10 million QoQ to $30 million.  The $9 million in GM and creep in Selling expense are the big culprits.

If they are accurate on GM impairment for this Q, next Q should shoot back up.

If you look at their Opex Burn for the Q they are at $15 million of source of cash versus +$22 million last Q.  

+EBITDA Quarterly Breakeven Sales: USA Peer

At current GM% and OPEX$’s, Cresco requires 59% of existing sales to generate +EBITDA. Back slid in the Q.

+EBITDA Quarterly Breakeven Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

Here is our new metric.  It is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

CL dropped off this Q as Operations generated less cash while Interest and taxes were virtually unchanged at $24.6 million. They remain positive though.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

CL dipped to 6^th in this metric QoQ.  See if management reason for GM gest addressed next Q.

“Waterfall” – Trend

Cresco’s inventory increased $29 million to $137 million with FG backing up QoQ by $3 million to $29 million.   

Bio Assets decreased by $7 million to $46 million.  Their projected yield decreased to 21,400 KGs a increase of 2% QoQ and below Q2 record of 24,849 KGs.  

“Waterfall” Peer

Cresco remains IFRS so comparing to some of the above US GAAP filers is not appropriate.

Cresco has $136 million in cash, an increase of $79 million from last Q.  They arranged a loan in the Q that saw Current Portion drop by $98 million and Long-Term portion increase by $162 million, for net $64 million in proceeds. Share capital also increased net of a decrease in contributed surplus of +$45 million.

PPE saw an increase of $15 million to $195 million.

Post Q they had considerable activity:

• Subsequent to year end, on January 14, 2021, the Company entered into a definitive agreement with Bluma Wellness Inc. (CSE: BWEL.U) (OTCQX:BMWLF), a vertically integrated operator in Florida.
• On January 14, 2021, the Company announced the commencement of a best efforts overnight marketed offering (the “Offering”) of Subordinate Voting Shares of the Company. On January 15, 2021, the Company closed the Offering for total gross proceeds of approximately $125.0 million.
• On February 16, 2021, the Company closed its acquisition of four Ohio dispensaries previously operated by Verdant Creations, LLC and its affiliates.
• Lastly, on March 18, 2021, the Company entered into a definitive agreement to acquire all of the issued and outstanding equity interests in Cultivate Licensing LLC and BL Real Estate LLC, a vertically integrated Massachusetts operator.

A/P of $86 million is +$24 million QoQ, taxes due of $49 million and current contingent consideration due of $20 million. That aggregates $155 million, greater than their cash position at Q end.

Long term Derivative Liability increase $16 million to $30 million and lease liabilities increased by $10 million to $145 million.

No other material changes were noted on the balance sheet.

What I said last Q:

This is one of the most impressive QoQ’s I have seen in the industry.  Sales increases of +20% on organic growth are difficult to achieve, 63% are unheard of.  They grew more in sales in one Q than Aurora generates per Q.

The Gross Margin improvement has me extremely interested, as they are now very peer comparable despite a tilt toward wholesale.

Opex control was also very commendable. 

They do need to address liquidity and they might well get there via the $100 million accordion.  With SP remaining strong a raise is not out of the question. 

This Q:

Last Q was a very tough Q to follow.  We will see next Q if this was a one Q pause or something more. 

2020 had a strong growth from Illinois rec and PA medical.  They are capped at max Illinois stores and they need the next slate of 75 stores to open in order to generate increased wholesale in Illinois.

They certainly had a growing inventory to feed operations, assuming inventory is correctly match to each state for future growth.  Ohio should start generating more revenue soon with Verdant in for a partial QF21. Bluma and then later in the year Cultivate should contribute.

They have checked off Florida and will increase Massachusetts presence with post Q announcements.

That’s all I got.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in Cresco Labs and will not start one in the next five days.