Cresco Labs Earnings release

Sometimes you can read something +10 times and never notice something.  Then you see it. 

From CL Presser:

That Net Income footnote has been there awhile. CL owns 56% of Cresco Labs LLC, their main operating entity. We have written about the NCI impact here. This is something that likely speaks to the market cap differentials that many investors speak about when comparing CL to peers. CL does not earn 44% of the Net income from Cresco Labs, LLC but it gets rolled into EBITDA via Net Income and the other addbacks.

What I said last Q

Pluses

• Sales increase +10%
• Self owned retail was +15% QoQ while wholesale was +6%
• GM rebounded but remains below record level in Q3F20

Minuses:

• OPEX increases $11 million and +3% of sales to 40%

This Q:

Pluses

• Sales increase +18%
• Self owned retail was +22% QoQ (acquisition assisted) while wholesale was +14%
• GM softened to 48% BUT they have an inventory step up (Bluma acquisition) that if added back would have seen an increase to 51%.  As long as they don’t whack acquired inventory at year end like Origin House, that is a nice uptick.
• +Net income of $2.7 million
• EBITDA increases to $40 million (+$5 million on a +$14 million in GM)

Minuses:

• OPEX increases $15 million and +1% of sales to 41%
• Net Operating profit backed off a smidge to $15 million from $16 million but should get a lift next Q with booking SBC and step ups from Bluma out of the way.
• With cash at $131million, they needed a raise and then they did a debt raise of fresh money of +$200 million.

They add Bluma in Florida.  PP $240 million.  G/I $117 million.

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:

10 States (+1 QoQ), 33 dispensaries (+9 QoQ), 18 manufacturing and processing (+1 QoQ)

1. Illinois: Cultivation 3, Dispensaries 10

• Penn: Cultivation 1, Dispensaries 4 (+1 QoQ)
• Ohio: Cultivation 1, Dispensaries 5

• 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
• Michigan: 1 cultivation

Entering Massachusetts via Cultivate acquisition.

Their sales have increased $32 million to $210 million QoQ.  Sales growth has accelerated for two Q’s after a softness in Dec 2020.

Wholesale and Retail sales mix changed to 52-48 from 54-46 last Q.  Wrong direction for a self-described wholesaler, but they indicate they see this ratio moving forward.  Illinois finally released licenses for the two new sets of licenses.  They expect the wholesale ramp to happen in earnest 6-12 months out as the stores open.

USA Retail Revenue: Peer & Trend

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

Retail Table:

Retail increased +$18 million +22% to $101 million.  Bluma was $8 million of the increase.  Verdant for the whole Q was $6 million (+$ 3million from last Q). Without the acquisition impacts they would have had +$7 million or +8% sales in retail.  We had eyeballed sales increases in various states where there is disclosure at +14% QoQ.

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 -6% increase QoQ, but still highest in peer group. Illinois sales are likely the reason, as Illinois has been growing cannabis sales tremendously since adult use in 2020. Cresco is the top MSO in per store sales.  They do only have 33 versus much more stores at CURA, TRUL, and GTII.

We have started tracking their Non-Controlling Interests retail stores in Illinois to get a closer look at what is going on in state, which is their big driver. Their Rockford store (CL owns 75%) is jamming it: $21 million in sales for the Q is Planet Hollywood good, with a +15% increase in sales in the Q.  The store is 17 miles from the Wisconsin border, and out of state makes up +30% of Illinois adult use sales.  The Lakeview store (CL owns 88%) is running at $12 million last Q +18%.  Rockford and Lakeview make up 33% of retail revenue while representing only 6% of the store fleet count.

Retail GM% in Illinois is healthy at 53% and 50% for Rockford and Lakeview.

USA Wholesale Revenue: Peer & Trend

Wholesale wise Cresco is the largest in the above peer set but plateaued two Q’s prior and showed an uptick the last two Qs. 

Wholesale increased $13 million +14% to $109 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 + ROU 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 decreased on the metric to $0.66 revenue per dollar of combined PPE + ROU and G/I from $0.66 last Q.  Third highest in the group.  The drop is due to adding $224 million in G/I and $60 million in PPE+ROU in the Q largely from Bluma, to the denominator.

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.

Income Statement Drivers & Breakeven: Peer

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

Gross Margin: USA Peer & Trend

Gross Margin increased by $14 million to $101 million and decreased from 49% of sales to 48%.  However, they do have a $6 million inventory step up from acquisition that if backed out brings GM to 51%.  They are launching cultivation assets that have expenses prior to revenue generation, which also tends to soften GM%.  They are suggesting GM% should increase as they get more revenue spread against the production costs base.

Increase in retail mix was likely also the reason for GM improvement.

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 $0.32 of annualized GM for each $1 they have spent on PPE + ROU and G/I a slide from last Q of $0.35. Again, the loading of the denominator was the reason.

CL is in 3rd 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 just increase sales.

Gross Margin: USA Peer

Cresco exceeds only AYR and MMEN.  Without the step up they would move up to Harvest’s level of GM.

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 $4.2 million to $11.4 million for the Q and increased to 5.5% as a % of sales from 4.1%.   This is the highest selling expense on record.

Administration expenses increased by $5.8 million to $50.3 million and decreased 1% as % of sales to 24%. Adding the Admin from Bluma is likely the largest contributor. Notable changes:

• Salaries and related increased by $5.1 million to $35 million
• Technology increased $1.4 million to $4.1 million
• Other OPEX also decreased $1.1 million no mention of what they constitute in financials or MDA.  And given they did the earnings CC before publishing financials on Sedar, I doubt anyone asked about any of these increases.

Combined SGA is $62 million a QoQ increase of $10 million. 

SBC increased $2.5 million to $8.8 million and represents 4% of sales. Bluma SBC awards likely the reason.

Depreciation of $5.7 million rounds off Opex, nominal change QoQ.

Total Opex was $86 million +$15 million QoQ and comes in at 41% of sales an increase from 40% last Q.

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 was $16 million last Q and decreased to $15 million this Q.  The OPEX increase ate up the GM increase.

At current GM% and OPEX$, Cresco requires 85% of existing sales to be +NOP.

Other Income totaled $1 million versus expenses of $24 million the Q prior:

• Interest expense $11.4 million this Q. Stable.  This will increase with additional $200 million in debt from post Q raise. 
• Other Income of $12.7 million versus expenses last Q of $12.3 million last Q.   Drops in stock price led to fair value gains this Q versus the increase in Q1 where stock price gains led to losses.

Taxes were $13.5 million versus previous Q of $15.5 million.  280e at work.

Net Income Was -$4.8 million versus -$24 million last Q, as NCI adjustments re-allocate $7.5 million in positive net income to others and CL shareholders get -$4.8 million.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer:

My Adj EBITDA for them increase $5 million QoQ to $40 million.  They picked up only $5 million despite GM increasing by $14 million.  The creep in G&A and SBC crimped that.

I do not addback their $5.3 million for acquisitions and non-core operations as there is no split and they are acquiring companies quarterly.

If you look at their Opex Burn for the Q they are at $1.8 million of source of cash versus +$8.5 million last Q.   Positive but it has declined the last three Q’s. 

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)

We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

As with the other annualized metrics that slid back on Bluma acquisitions this Q, so did the EBITDA version, dropping from $0.14 to $0.13.

There are tied for 4^th with CURA, but trail TRUL and GTII.

+EBITDA Quarterly Breakeven Sales: USA Peer

At current GM% and OPEX$’s, Cresco requires 60% of existing sales to generate +EBITDA.  

+EBITDA Quarterly Breakeven Sales: North American Peer

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

Here is our new metric from last Q.  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 improved in the Q but did not approach the record in Q3F20. Aggregate interest and taxes were $25 million versus $27 million last Q.  Interest + Taxes decreased $2 million QoQ.

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

CL remains 6^th in this metric QoQ.  They improved from 3% last Q to 7% this Q. 

“Waterfall” – Trend

Cresco’s changed to US GAAP in the Q1F2021.   Inventory is $103 million with FG increasing QoQ by $7.4 million to $34 million.  Finally reverses that FG decreases for the past two Q’s.  

CoGS were $103 million which gives CL 1.00:1 inventory turnover for the Q.  They do have ability to purchase 3^rd party in some states to fill shelves.

“Waterfall” Peer

CURA and TER remain the last two IFRS hold outs.

Cresco has $131 million in cash, a decrease of $124 million from last Q.  They have $101 million in A/P and Accrued Liabilities a $46 million decrease QoQ.   

PPE saw an increase of $49 million to $299 million and Right of Use Assets increased $12 million to $79 million, for a net +$61 million. Bluma assets likely the bulk of the reason.

G/I increased to $899 million from $675 million. Bluma acquisition.

Income tax was paid down $36 million to $19 million, as double payments in Q.

Share capital increased $307 million as Bluma rolled through.

What I said last Q:

It is good to sales increase +10%.  While they are wholesale focused the retail is what is carrying the water for them this quarter.  Illinois likely the driver.

Good to see GM bounce back after the impairment last Q.  Not quite all the way but sufficiently.

SGA creep was large this Q.  I will go and review the CC transcript and see if they discussed it.  I will add an edit if they did. 

They have a good cash position, but that A/P and Accrued Liability does not look sustainable at that level. 

They get a full Q from Ohio next Q and a partial Q from Bluma in FLA. MA acquisition still on deck for Q3f21.

This Q:

Nice sales increases, albeit a little aided by acquisitions in Q and acquisitions last Q being on board for a full Q. GM net of step up increased.  Opex increase crimped some of the progress.  We will see if SGA is flat in the back half as per CC.

Cash gets a needed boost with a fresh $200 million coming in via debt versus dilution.  Pendulum seems to be swinging back to debt raises from equity raises.

A pretty tidy Q.  Keep an eye on SGA and GM next Q to see if narratives hold.

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.