Good day, and welcome to the Cresco Labs 2021 Second Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs.
Please go ahead.
Good morning, and welcome to Cresco Labs' 2nd quarter 2021 earnings conference call. On the call today, we have Chief Executive Officer and Co Founder, Charlie Bachtell Chief Financial Officer, Dennis Olis and Chief Commercial Officer, Greg Butler, who will be available for Q and A. Prior to this call, we issued our 2nd quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. We plan to file our corresponding financial statements and MD and A for the 3 6 months ended June 30, 2021 on SEDAR and EDGAR later today. Certain statements made on today's call may contain forward looking information within the meaning of 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 are 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 are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward looking statements, including economic conditions and changes in applicable regulations. Additional information regarding material factors and assumptions forming the basis for our forward looking statements and risk factors Can be found in our earnings press release and in Cresco Labs' filings on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward looking statements or to update or supplement any information provided on today's call. Please also note that all financial In addition, during today's conference call, Cresco Labs will refer to some non GAAP financial measures, such as adjusted EBITDA, which do not have any standardized meaning prescribed by GAAP.
Please refer to our earnings press release for the calculation of these measures and a 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 measure is presented in our financial statements. With that, I'll now turn the call over to Charlie.
Hi, everyone, and thank you all for joining us this morning. We're once again very pleased to share our results with you today and discuss what an outstanding quarter this was for our organization. Early in the Q2, as the weather warmed up, COVID restrictions lifted and tourism returned to cities around the country. We saw consumer demand reach all time highs in numerous cannabis markets around the country. Between strong demand growth, Continued progression of state legalization efforts and renewed potential for federal reform, we believe the outlook for the U.
S. Cannabis sector Has never been brighter than it is today. As for Cresco, we love the trajectory we're on. We've demonstrated the ability to reach and non dilutive capital to create more growth for shareholders. We continue to advance this industry with thought leadership and engagement in the legislative process.
We're winning awards for product quality. Our social equity team is developing and incubating license winners. Our brands are dominating categories in numerous states 100 and 23% year over year. We've demonstrated industry leadership on both sides of the field. With $109,000,000 of net We remain the number one wholesaler of branded cannabis products in the industry.
With $101,000,000 of retail revenue From 33 stores, Sunnyside remains the most effective and productive per store retail platform among scaled national retailers. Q2 gross margin adjusted for the fair value markup of acquired inventory increased to 51% and Adjusted EBITDA increased to $46,000,000 growing 30% sequentially. In Q1, we mentioned that we were optimizing operations across the footprint. While we consolidated newly acquired Florida assets midway through April, approximately 86% of our sequential top line improvement was driven from organic growth in existing states. We're very proud of the performance in Q2, but we're even more excited to begin seeing the contributions from our 2020, 2021 growth that are still to come later this year.
We invested in infrastructure, operationalized new assets and deployed our playbook across the footprint. Once again, we're hitting our stride as we enter the next phase of growth. On previous calls, we've discussed the 3 specific ways Cresco Labs is delivering growth and shareholder value. This framework provides a simple straightforward view and the logic behind our strategy. Before discussing the how, it's important to first reiterate the why.
First, we're investing in the most important U. S. Markets to build meaningful material market share positions and create the most valuable footprint in cannabis. We've established operations in 10 of the most strategic markets in the U. S.
And now we're focused on achieving top 3 market share positions in each state. In doing so, we generate scalable capabilities, increase operating leverage and create leading brands in the largest, most influential states through quality, consistency and availability. 2nd, we're increasing our leadership in wholesale because we believe strong capabilities in the middle verticals of the value chain is Key for long term success. We've demonstrated the unique ability to build cultivation capacity, bring brands to market and distribute to 100% of retail stores. As more and more non vertical independent retailers enter this industry, this proven playbook will continue to be a formula success today and as regulatory structures inevitably evolve.
3rd, we're operating high volume retail stores to better understand consumer preferences, Compliment our wholesale operations and drive profitability. Maximizing retail opportunities in limited license states will continue to serve As an important aspect of our plan to drive near term value creation. Using the fundamentals of established consumer industries, we've created our strategy to achieve growth And shareholder value in 2021, while simultaneously building the platform for long term leadership in cannabis. Now let's review the 3 specific ways Cresco Labs is executing in 2021. Number 1, accelerating growth through organic investments in M and A in the most important markets.
In April, our entrance into Florida marked significant milestone for our company, and we're thrilled to welcome the entire Blooma team to the Cresco family. We're off to a phenomenal start in the With pro form a Florida revenue growing 33% in Q2 over Q1. Integration is moving quickly and has already yielded numerous operational improvements, Increased cultivation output and facilitated valuable knowledge sharing between the two companies. Over the coming quarters, we'll begin to roll out additional form factors like edibles, More brands from the Cresco Labs portfolio, expand cultivation capacity and double the current store count. As an organization, we've become proficient In closing and seamlessly integrating new assets through M and A, this ability creates tangible shareholder value and makes us all the more excited for our upcoming acquisitions.
Massachusetts represents a substantial growth opportunity in the back half of this year and into 2022 as we complete the 2 initiatives that 1st, we're nearing the initial harvest from the expansion of our Fall River cultivation facility, which will drive meaningful impact on our operating leverage in Q4. 2nd, upon the closing of the Cultivate transaction, we'll operate the maximum number of dispensaries, double our cultivation footprint and become the premier wholesaler for the state's more than 170 retail outlets. In Ohio, we're seeing outstanding performance from the 4 new Sunnyside stores, and the team is working to bring product to market From our new extraction and manufacturing capabilities that will introduce our full suite of offerings to the state for the first time. Once again, The maximum number of retail stores, a robust wholesale portfolio and already more than 80% penetration, Cresco Labs will be positioned to accelerate growth in Q4 4, on our way to earning another top three market share. To round out the cultivation expansion projects we initiated last year, We're looking forward to the first harvest in our Michigan facility around year end.
With more than $450,000,000 of quarterly state sales, we're excited to deploy our proven playbook Led with CPG fundamentals to Michigan's massive fast growing adult use market and build a commanding market share position. We've made incredible progress year to date investing in our strategic footprint. We're constantly analyzing state dynamics, evaluating the needs of stakeholders, impacting where the puck is going and making responsible strategic investments for the benefit of our shareholders. With upside driven by regulatory change in Illinois and New York and encouraging adult use discussions happening in Ohio, Maryland, Pennsylvania and Florida, Now is the time to execute our playbook and establish the foundation for multiyear growth in the country's most important markets. Number 2, increasing our leadership as the number one wholesaler of branded cannabis products.
Q2 net wholesale revenue grew 14% sequentially to $109,000,000 by far the most in the industry. During the quarter, our brands reached more than 1,000 retail stores around the country for the first time. We continue to bring innovation to market through recent launches under the Good News and Wonder Wellness brands. Illinois was a standout market in Q2 with state sales rising 19% supported by 11 store openings in April and robust consumer demand growth. We continue to execute our wholesale strategy at the highest level with a number one share position in the state.
For BDSA data, Cresco is the number one best selling brand in the state. We have the top 2 best selling flower brands with Cresco and High Supply, the number one edibles portfolio with Mindy's Good News and Wonder Wellness And the number one concentrate brand with Cresco. We've held our leading market share steady since Q3 of last year and still have the largest potential future cultivation capacity of any operator in the state. With 185 new retail licenses forthcoming, This is exactly why we believe in the prioritization of wholesale over owned retail, and we could not be in a better position to capture growth in Illinois next year and beyond. Across our footprint, we're relentlessly focused on the pillars of successful brand building, knowing what the consumer needs, quality, consistency and availability.
Our Michigan team deserves a shout out here. At the 2021 Hash Bash Cup held last month, our Cresco brand took home 1st and second place in the vape category, 1st and second place in concentrates and Mindy's are in 2nd place in the edibles category. This is a perfect example of how the quality of Cresco Labs products stacks up in even the most competitive markets, and this bodes well for our launch of premium flower in Michigan in 20 In California, over the last 12 months, we've successfully competed to grow our share of the market, sharpened our wholesale expertise and establish a meaningful presence in the world's largest and most influential cannabis market. We've leveraged top performing partner brands open doors for our owned brand portfolio and over time demand for our own brands has steadily grown. Our high low flower portfolio strategy with FloraCal and Hi Supply delivered year over year growth of 173%, while shelf penetration and repeat purchasing across key accounts has continued to increase.
In vape, we grew 71% year over year and Cresco is now the 8th best selling live resin cart in the marketplace according to BDSA. Recognizing our key Advantage in the cultivation and processing of premium flower, we will continue to strategically manage our California operations to both capitalize on the enormous top opportunity while reducing costs and increasing profitability. Strong wholesale capabilities are critical for future success in the cannabis industry and with the top selling brand portfolio in multiple states. No company has proven these capabilities more than Cresco Labs. Number 3, operating high volume strategic retail Q2 revenue was $101,000,000 22% growth quarter over quarter.
Same store sales grew 14% sequentially for the 20 stores opened during the entirety of Q1 and 58% year over year for the 16 stores opened in Q2 of 2020. Average quarterly revenue per store increased to $3,900,000 for the 24 stores opened during all of Q2, the highest per store revenue among While we're very pleased with our retail performance in the first half of the year, there's even more to look forward to as we add stores in Florida, Massachusetts and Pennsylvania and make enhancements to Illinois locations. In a perfect example of how our retail teams are The 4 Verdant stores, all of which had been opened for 2 plus years, increased revenue on a pro form by 12% sequentially in Q2 after we took control, outpacing the market by 30%. We've developed a repeatable model how to attract more consumers, deliver an unparalleled shopping experience and earn outsized share of the market. The model will continue to deploy this year as we grow Sunnyside.
In summary, we continue to validate our thesis that you win this industry by building the most strategic geographic footprint, Establishing material positions in each of those markets and vertical integration is key in the near term, but the greatest opportunity for creating long term shareholder value Is in branded products and the wholesale distribution of those branded products. We have market leadership positions in multiple $1,000,000,000 markets. We're the number one wholesaler of branded cannabis products in the industry, and we have the most productive per store retail operations of any scaled national operator. As an organization, as shareholders, as employees, as community members and as advocates, we are all fierce believers in what the future holds for this industry. Using the fundamentals of established consumer industries, we've created our strategy to achieve long term success, And we are executing.
With that, I'll now pass the call to Dennis.
Thank you, Charlie, and good morning, everyone. I'll begin by reviewing the financial results from the quarter, then highlight a few items from the balance sheet and discuss our capital position. As a reminder, we converted from IFRS to U. S. GAAP in Q1 and continue to make investments in stock compliance in advance of a future listing on the U.
S. Exchange. Q2 was another quarter of head down execution as we deployed our playbook in more markets, foundation for growth, we've secured additional funding to pursue expansion in states like New York, Florida and $10,000,000 of revenue, up 18% quarter over quarter and 123% year over year. During the quarter, We consolidated Blooma on April 14, benefited from a full quarter of the 4 new stores in Ohio and had our first quarter since removing 180 Smoke. Parsing out these items, we had a fantastic quarter of 15% sequential organic growth, driven primarily by process improvements within production facilities and same store sales growth across our footprint.
As Charlie mentioned, the contributions from most of our 2021 growth initiatives are still ahead, putting us in a strong position to achieve our internal estimate of $250,000,000 of Q4 revenue. Q2 revenue mix was 52% wholesale and 48% retail. Our emphasis on the middle two verticals resulted in $109,000,000 in net wholesale revenue, A 14% increase quarter over quarter and a 98% increase year over year. Our highly productive retail generated $101,000,000 of revenue from 33 stores, up 22% quarter over quarter and 158% year over year. Our retail sales in the quarter benefited from Florida's vertically integrated structure, which will continue to be reported as a retail revenue in our financial results.
We're proud to say that we remain the number one wholesaler of branded products in cannabis and Sunnyside continues to be the most productive per store retail The completion of growth initiatives in Massachusetts and Ohio and expect to recognize the full benefits of the Florida acquisition as well as new retail openings across multiple states. Turning to gross profit, excluding the Fair value markup of acquired Blooma inventory, we generated $108,000,000 or 51% of revenue in Q2, A 182 basis point increase from Q1. As we discussed last quarter, gross margin is expected to increase as facility expansions are completed and costs associated with those facilities are absorbed over a larger revenue base. We also expect the acquisition of Cultivate and continued growth in Florida to positively impact gross margins in the second half of the year. 2nd quarter SG and A expense, excluding share based compensation and onetime items, was $66,000,000 or 31.6 percent of revenue compared to 32.4 percent in Q1.
The increase in absolute SG and A dollars from Q1 is primarily related to Blooma as are the one time charges related to transaction fees and severance.
We expect SG and A
as a percentage of revenue to decline over the back half of the year as we continue to grow top Complete investments in corporate infrastructure and recognize SG and A savings as we complete the integration work for acquisitions. Adjusted EBITDA for the 2nd quarter was $46,000,000 a 30% increase from Q1 outpacing our revenue growth. Adjusted EBITDA margin was 22% in the quarter, a 207 basis point increase from the previous quarter. Looking ahead, we expect to see contributions to profitability from gross margin expansion, continued operation leverage improvement, as well as closing of accretive acquisitions like Cultivate. We reaffirm our internal estimate of 30% EBITDA margin for Q4 see additional upside in 2022 as we deepen our operations across more states.
2nd quarter CapEx was approximately $29,000,000 $16,000,000 of which was funded through tenant improvement allowances. We exited Q2 with $131,000,000 in on the balance sheet after making the 2020 tax payments during the quarter. Earlier this week, we completed the refinancing and upsizing of our term loan, Effectively increasing funding by an incremental $200,000,000 I'm proud to report that we've accomplished what we believe is the lowest cost of capital in the industry today by reducing the interest rate to 9.5% without any dilutive equity components. We've also simplified our capital structure and consolidated the loan with 5 existing institutional lenders. This additional funding positions us for significant high margin growth within our existing states over the coming years.
The proceeds will be used to capitalize on expansion opportunities in New York, Florida and Pennsylvania and allow us to continue pursuing high return investments in key markets. Finally, a congratulation to all of our team members for the outstanding performance in Q2. These results could not have been achieved without your dedication and enormous individual contribution. The 1st 2 quarters of 2021 set the stage for strong growth in the remainder of the year and beyond, and we couldn't be more excited about what lies ahead. Thank you for your time today.
And I'll now hand the call back to Charlie for a few final remarks.
To close, I'll first echo Dennis' congratulations to our team for the Standing performance so far this year. I've personally had the chance to get back out into the field over the past few months to visit our cultivation and retail sites around the country. After 15 months of working virtually and managing the business mostly remotely, it has been incredibly invigorating to see our hyper growth in action and connect with our incredible team members face to face once again. In Illinois, the social equity license lotteries are underway and we're excited for what this means for the winners, For the state and for this industry, we are proud to report that multiple license winners were part of our 2020 seed programs incubator. We are so proud of these organizations.
They put in the work, they met the challenge and they've been rewarded with an opportunity of a lifetime. We look forward to helping them operationalize their businesses for success. We're also extremely proud of the internal team members who volunteered 100 of hours to This is the product of years of hard work and a groundbreaking event for inclusiveness and social justice in cannabis As Cresco Labs continues being a stakeholder focused organization and leads by example, we firmly believe that a responsible industry leads to a respectable industry Leads to the most robust industry possible. Lastly, related to the Federal Cannabis Administration framework introduced last month, As a company, we're simply never been more excited about the future. We've always known that this industry creates win win win scenarios and now the unmatched potential of cannabis Is being discussed at the highest levels.
We've taken the steps as an organization to prepare our business to succeed today Thank you for your time. And I'll now ask the operator to open the line for questions.
And as a reminder,
Thanks very much and good morning and congrats on the great quarter. Dennis, I think I'll start with just a clarification
on the
guidance. Maintaining that full year outlook that the $1,000,000,000 exit run rate Out of Q4, you had a very strong quarter here in Q2, you talked about all of the new cultivation projects coming online. I'm just wondering, there's a pretty meaningful deceleration implied in that guidance in the Q3, Q4 period. Is there anything that we're now contemplating that would suggest that we should contemplate that, again, given that you've got very Strong cultivation projects coming online, I think in Massachusetts and Ohio, plus the Cultivate acquisition.
Yes. Thanks, Malo, for the question. So, as we noted, we're confident in our guidance that we provided for Q4 ending the year to $250,000,000 run rate. As you noted, there is some expansion opportunities in Massachusetts and Ohio. We do have some additional store openings throughout the second half of the year in Florida, a couple more in Pennsylvania.
We will see an increase from Q2 to Q3, but there will be a bigger step up from Q3 to Q4 as those expansions in Massachusetts and Ohio go live at the end of Q3. But again, we feel comfortable with that. We know there's risk associated with COVID and other variables going on. But Again, we stand by our guidance that we provided last quarter and we reaffirm it today.
Great. Thanks. And then, Charlie, if I could ask on that last point that you mentioned in your prepared remarks regarding The licenses, the lottery winners in Illinois. Can you tell us what you're hearing from Those lottery winners, as to the timing of when we should expect those stores to open and come online? Then more importantly, how are you planning your inventory to supply that new crop of demand that's going to populate the state?
Yes, definitely. And it's a great question because you've got a lot of opportunities that are being provided to Operators that are new to the industry. So I think just realistically looking at it, I think some have what we've heard out there at least, some have some pretty aggressive timelines, which By all means, I hope that they are able to hit. I think a realistic look at this from our experience in the industry is it takes potentially 6, 9, 12 months to open up the store from the time that you get to go forward to do it. So I think you'll probably see the majority Of licensees fall somewhere in that timeline, might look like a bell curve, who knows.
But one thing I can tell you is We're going to be there to assist in any way that we can because we know that the future growth in this industry is driven by additional doors being opened. So very excited That we've gotten into this stage of the lottery and issuing the licenses and very excited about what it means for the state and this industry as a whole.
That's great. If I could speak one more in on Florida. Now that you've got maybe you had aluminum under your belt for almost Quarter, maybe a little over a quarter. The market's developed, it's become more competitive. You're ramping up your cultivation there.
Bloom's positioning is much more of a premium end brand in the market. Can you tell us how you're thinking about the further development of That brand in the market, as you bring your brands into Florida, all within the context of what's seemingly a more competitive in price promoted market?
Yes, I mean, it's a great point, right? So the way that we look at Florida and the way that we looked at Blooma When we evaluated how we wanted to make our entrance into the state of Florida, whether that differentiated offering that they do have, which is that premium category, the ultra premium Category. So it sort of addresses both points. It's something that we'll continue to promote and grow down there because We love the category. We love that category in every market.
It's stable. It's durable. It's what the consumer wants. And it's also, From a pricing standpoint, durable. So we will continue to grow that category Down in Florida and across the rest of our platform as we bring in the rest of our offerings from a brand standpoint, from a product standpoint.
Do you want to add anything?
No, I think the only thing to add that we're encouraged about Florida, and as we look at the latest data, flower still remains 50% of sales in the marketplace. So as So as Charlie said, like we can continue to play the hand of that and we have a portfolio of brands that allows us to play all price points of flower. But also if you look at the growth of other segments like edibles that went from 3% to now 8% of the market, that's meaningful growth on that segment We have a very strong portfolio of edible brands that we can bring into the market and play there. So it is about, as Charlie said, opening doors,
but really bringing our full portfolio of brands to go after every consumer and patient opportunity
that exists. And Got it. Thanks for the color.
Good luck and continued success. Thanks.
Thanks, Camille.
Our next question comes from Vivien Azer from Cowen. Vivien, your line will be open if you'd like to Proceed with your question now.
Thank you. Good morning.
Good morning.
So my first question, please on California, it's been kind of widely discussed that there's been some pretty Full price deflation in the wholesale market, Charlie, in particular for outdoor. I'm curious if you can comment at all on the implications for that On margins for the Origin House business, please? Thank you.
Sure. And good morning, Vivian. And Yes, California is it's a competitive market. It's the most competitive market in the world, while it's also the largest. So The additional supply that's coming into the market, as you identified, is primarily on that sort of the mixed light and outdoor category, which is Uber competitive.
And so the majority of the price compression that you're seeing out there in the competition tends to be in that area, Which is again, it's why we prioritize the high low play that includes the premium and ultra premium categories too. Stability there, there's durability there. And as far as what it means for the Cresco Labs California business out there, Certain elements of what we distribute are in more of a competitive state than maybe in prior quarters. But we're still seeing growth across our product and brand suites in our own brand offerings, which is great to see.
Understood. That's helpful. And then just to follow-up on that then. As you guys contemplate the back half of the year, it sounds like you're quite constructive on your own outlook, given the amount of Capacity that you're bringing online plus new doors, did you contemplate any price deflation broadly across your marketplace as you updated or
And I'll turn this over to Dennis too for maybe some additional color. But I think we always appropriately model in a little bit of flexibility when it comes to pricing More states than others in very high barrier to entry, potentially supply constrained markets less so Then in those open very competitive markets. Dennis?
Yes, we do evaluate that on a state by state basis and actually across the Various product lines with input stakes. So, we did contemplate a little bit of price drop across the as Charlie noted, some of the lower and mid ends and really kept the high end products fairly stable for the balance of the year.
Understood. Thanks very much.
Thank you. Thanks, Vivien.
Our next question comes from Aaron Grey from Alliance Global Partners. Aaron, your line will be open if you'd like to proceed with your question now.
Hi, good morning. Congrats on the quarter and thank you for the question. So first one for me is kind of picking back off that last one. So 30% EBITDA margin target you guys have for 4Q, Obviously, you guys have some scale coming online. It looks like that will be driven by a mix of gross margin.
You have some potential baked into some markets as well as SG and A leverage. But could you maybe help to quantify maybe how much you look to be a mix of SG and A leverage
You're right. We're really excited about the trajectory that we're on heading into the back half of the year here. And we do have some incremental additions to the platform that will Definitely contribute to that bridge. So again, confident in reaffirming the guidance today. And Dennis, do you want to add any specifics?
Yes, thanks. So as it relates to the walk from where we're at today at adjusted EBITDA to the 30% that we're Again, reaffirming our guidance for Q4. There will be the expansions, as Charlie noted, in manufacturing. We'll also get some additional efficiencies throughout our Factoring and pack out facility. So that will be we will expect to see a couple of 100 basis point improvement on gross margins.
And then from an SG and A standpoint, we've made a number of investments. We've been talking about this for a while. We do make some investments in our facilities ahead of the So we've been carrying that cost that will now be offset with revenue through those expansions. But also on an SG and A standpoint, the investments we've made there will stabilize. We'll get some additional efficiencies through the integration efforts at Bluma that are, for the most part, Now as we enter into Q3, so some of the costs that we carried in Q2 associated with the Bluma acquisition are now being phased Into the rest of the company.
And we feel fairly confident that we will our total dollars Spend on SG and A excluding excise tax and retail expansions will be fairly flat from now through the second half of the year.
Okay. Thanks for that color. That's helpful. And then second question for me, kind of a high level one. Charlie, You mentioned the evolving regulatory landscape and how your kind of wholesale strategy fits into that.
So first part, we're talking more at the state level or also eventually at the federal level? And then at the state level, I'm just curious, do you believe there might be some states where you do see That regulatory environment involved, and I'm simply looking at, let's say, like Massachusetts, right, where you have limited cultivation that each operator can own. Now you've had a lot of expansion at store level. Some people are having difficulty getting supplies. Do you feel like there will be the point where those states potentially lift The amount of cannabis they might allow proper air to better allow supply within the state?
Thank you.
So it's a great question. And I think at the root of the question is, There's so much to be written, right, in the way that this industry develops. And that's why as an organization, we've always Put such a priority on being engaged at that government affairs, regulatory affairs level, because it's really important that There is a perspective that is available for the legislators, regulators as they're thinking about how the industry should develop that they can rely on And that they can learn from. So it's one of the reasons that we've always prioritized that level of engagement. From a federal level, do I think Our focus on being wholesale driven plays to future developments at a federal and estate level, simply, yes.
And it's not by chance. It's when we first evaluated the industry and we sort of said, all right, what kind of company do we want to build And why? You looked at where this industry was going. I don't think it was it wasn't too complex. We know that this is going to be Sort of more available, more open federal legalization at some point in time, therefore, build a company that could succeed today And that can also succeed in the future.
And that's why we really decided to be vertically integrated because of the benefits that it provides today, but prioritize those middle two verticals because I think in the long term at a state level and a federal level, There will be more retail that will need products on its shelves that aren't vertically integrated, and we want to be on all those shelves.
Okay. Thanks for that color. I've scratched me in the quarter. I'll jump back in the queue.
Thanks, Eric.
Our next question comes from Michael Lavery from Piper Sandler.
Good morning.
Just wanted to unpack the retail sales per store productivity you called out a little bit. And Obviously, at a high level, it's some amount of execution, I'm sure, that's driving it. But can you drill into that a little bit more and just maybe get At some of what's moving the needle there? And how much, if any, there's in terms of growth or improvement, it varies by geography?
Yes. Thanks for the question, Michael. So I've said it on prior calls, it's pretty cool to be able to reflect back on this and say, I think we entered 2020 as an operator that had retail And we exited 2020, came into 2021 as a retailer. And the improvements from a system standpoint, from an operation standpoint, just given A methodology, a leadership standpoint that we've made over the last year, you're really seeing the results of it. And I'm going to hand it over to Greg for some more specifics.
Just at a high level, do I think that there's more juice to be squeezed from it? Of course, I think there's opportunities for us to continue optimizing with continuous improvement across Every element of what we do, which is what makes this challenging and fun at the same time. So yes, there's definitely more that we can actually create we can become even a better retailer, which I'm really excited to continue to see happen. And Greg, any specifics that you want to add?
I would say the only thing that we'd add here is just give you a sense of Why we are very bullish on our retail is that our growth, this quarter really was driven by trips in what we'd call transactions into our existing Store base, with some growth with new store openings, but really getting more to same store sales, which really is bringing new customers in. We saw some compression on baskets, which you'd expect as you're rapidly growing in customers who are entering stores for the first time.
But that's the big takeaway is that
we're getting more customers into our stores. We're getting customers through our stores faster and it's very encouraging.
Okay, great. That's helpful. And just a quick question. Excuse me, you mentioned Schumer's plan and At least the potential direction for federal legislation or regulation. You've worked closely with That you operate in, especially shaping some of the recreational use guidelines as they've evolved and things like that.
Have you
That's a great question. We've always again, as we looked at this industry and where it could progress to years back, there's always an opportunity for a regulator like The FDA to be involved. So we've always kept that in mind. As far as conversations with regulators like that, they've started At a very, very high level, but I think it's important to see where the legislation actually ends And so just commenting a little bit on that, really encouraged by what we see and this does feel familiar. This does feel how it is felt at a state level as it progresses from sort of being not Politically popular or good politics to having that flip where good policy does become good politics And a lot of this does feel familiar.
So really encouraged by the path it's on. There's going to be a lot of news over the coming quarters. Some of it will sound great, some of it might not, but that's definitely part of this process. And so No. With the familiarity of the process, very encouraged by the outcome, potential outcome.
Okay, great. Thanks so much.
Our next question comes from Andrew Parthenough from Stifel.
The debt that you raised, you guys obviously have Significantly increased your cash position, essentially creating a war chest for yourselves. Wondering If you could remind us or provide any kind of color on CapEx plans, perhaps If not given a specific number, maybe remind us what's already funded through sale leasebacks. And also a little bit of color on what you're seeing in M and A and your thoughts around that, any white space that you guys Might want to fill in or anything in particular that you might want to call out?
Sure. And thanks for the question, Andy. I think to start with, it's just an It's the right time in this industry to really take advantage of the opportunities that are in front of us, right, with the momentum that's behind us at State level, at the federal level, internally from an operational perspective, the scale we're building, the systems we're building, the team that we have, Now is the time to really make that push to establish long term leadership. And so With the cost of capital that we were able to obtain, it was a great opportunity at the right time for us. As far as use of funds, Dennis, do you want to touch on that a bit?
Yes. Thanks for the question, Andrew. So just to reiterate, The $400,000,000 that we secured announced this morning, about $188,000,000 of that will be used to pay our existing debt down. So the net proceeds will be just over $200,000,000 after we pay off the existing debt, which will be at a significantly lower interest rate versus what our current our previous debt had been at. So the funds will be used as we noted in the remarks to fund our growth in California Excuse me, in New York and in Florida and even in Pennsylvania, where we're looking to expand our cultivation facilities in those three states.
So we again believe that this was a great way to raise funds at a what we believe is the lowest cost of capital in the industry today In a non dilutive manner. So that was very important to us to be able to secure those funds without diluting shareholder value. So We're excited about the opportunity to expand in those states. What that will do from a CapEx standpoint is we've talked about previously about $10,000,000 to $15,000,000 a quarter in CapEx Expense, more of a maintenance mode that did not at the time contemplate that we will be funding these expansions through sale leasebacks. So the fact that now we will be funding that through the capital that we just recently raised, I would expect to see total gross CapEx in the second half of the year, somewhere in the $70,000,000 range.
If I net that with the tenant improvement allowance, that will be closer to
Thank you so much for that great color. And maybe expanding on that, in particular, New York, Have you secured a site there? I think I saw that you guys might be looking at someplace in Ulster County. What are your thoughts around that ahead of regulations being written? And how are you strategically approaching the market there?
Yes. This is Charlie. I'll take that. The I think we have enough information in New York, Right. With what was in the legislation and the discussions that have been happening with the decision makers going forward that we feel comfortable moving forward.
We're moving forward, and we're going to be prepared for when adult use does launch. The way that we're approaching that market is going to be really Consistent with the way that we approach the other markets that we're in. And that's really looking at and understanding the regulatory framework That's been established so far by legislation. And the way that, that was drafted, it looks good to us. It's going to Allow us to establish a really meaningful wholesale operation with a lot of Independent non vertical retailers that we really look forward to working with and getting our products on their shelves.
Our next question comes from Scott Fortune from Roth Capital Partners.
Real quick one, I'll focus back on California and the ongoing build out there in the state and the strong presence of brand you have in that largest market. But In your comments, you're still working on reducing cost in California. Can you provide a little bit color on the margin structure in California and the opportunity to Increased margins incrementally going forward and kind of some of the measures you're working in California to really optimize that state and your positioning
Sure. Good morning, Scott, and thanks for the question. Again, the California market, we like the California market, largest market in the world. It feels like a proving ground, also very influential. So we're excited with the performance of our own brands.
We're excited that we continue to grow share there. And as it relates to the margin structure, I think it's just that these owned brands have higher margin profiles than 3rd party brands. So management of the product mix It's really important. And that's why when we talk about the strategic approach to managing California, it really is to make sure we get our brands on shelves And also make sure that we've got the profitability structure from that state that we want to have. We understand why it's important to be there And we are enjoying competing out there.
It's good for the company. And Greg, do you have?
The only The only thing I'd add to
that is just also if
you look at our own brand portfolio, we are very much focused on the premium side of the marketplace, which we mentioned earlier, a lot of Price compression you're seeing in California is coming at the low end. And so as we look at our business, ensuring that we are building out our business And so that's very much our focus.
Thanks. I appreciate the color. And then really, Craig, following back on Florida, with the results from Boumenon, your 8 locations, with that thing to go up to 15. Can you provide a little bit color on the timing around capacity in Florida, bringing that on board the supply, more stores? You haven't guided for the numbers there from that standpoint.
And with respect to Blooma kind of ramping up the gross margins up to kind of 50% beyond similar to the company. Just one more color on that would be helpful.
Sure, Scott. I'll start it and then I think we've got some other contributions here at the table. So, yes, Florida, the 15 store footprint is already Serviced by existing capacity or shortly finishing capacity additions that were started So while we were waiting to close the transaction, so feel good about our ability to get product across our shelves. As we develop a more robust scaled out operating platform in the state, state dynamics down there to your point, Even the gross profit margins you mentioned are light for fully vertically integrated operating model. So It's a great state.
It's got a great future in our platform. First, Greg, do
you have a comment? No, I think just on previous calls, we had talked about kind of our expansion On the retail side, and our goal is to get is try to get into starting Q1 of next year with almost double the amount of retail doors
that we are operating today.
And so that is very much our focus right now in the state is getting those doors open and running here over the next end of this quarter or next quarter. And then from a cultivation perspective, we are very encouraged by what we're seeing. We do have the opportunity to expand Our facility down there, but also we're seeing some nice yields off of the existing facility, which is helping us ensure that we have enough supply, not only for the existing demand that we have, but also as we bring in our portfolio of brands into the state, we have the supply to really, Really go happy against those. So as Charlie mentioned, very excited about our opportunity to really grow share.
And then, yes, this is Dennis. Just to add on to the gross margin comment. One of the things that was very attractive to us entering the Florida It was the margins that you can extract out of that state because it is vertically integrated. So we would expect to see much higher margins than the 50% Stated for Florida comparable to what some other folks down there are seeing today.
Got it. I appreciate the color and I'll jump back in the queue.
Thanks. Thank you, Scott.
Our next question comes from Pablo Zuvanik from Cantor Fitzgerald.
Thank you. Charlie, I joined the call late. So I'm sorry this was asked already, but can you The competitive landscape in Pennsylvania, I'm hearing from retailers that there are price pressures in the mainstream flower side and And maybe related to that, just a reminder of your competitive position in wholesale in Pennsylvania compared to Illinois, right? You seem to be the largest. I don't think you can use some metrics there in wholesale.
But in Pennsylvania, I would say you are maybe 105 in terms of wholesale. Just some color there or metrics
Sure. So I'll start with the second part first. I think there There's publicly available data that shows us as number 1 or number 2, Q1 and Q2 in Pennsylvania, where we've historically been. So Brand performance there couldn't be stronger. And again, it all comes down to the team.
They perform there, they It's great to see. As far as the competitive landscape and where it's headed, simply put, we're bullish on Pennsylvania. It's either the number 1 or number 2 on a per capita basis medical market in the country, with still the upside of potentially new stores opening in the medical structure, let alone the productive discussions that are happening already On an adult use transition. So I think the opportunities in Pennsylvania are incredibly strong. It's a state that We'll continue to prioritize.
And you know us, we don't give up our market positions. Greg, do you
have Comment? The only thing I'd add to that is, just to build on what Charlie was saying, our focus in Pennsylvania to date has been on in the vape category The liquid LIBORAS, which I think, if you look at the most recent data set shows us number 1 or number 2 depending on the data set you're looking at. And so we hold a very strong position with that. And if you think of the amount of our own retail versus the amount of other people's retail that we're It shows how a good product can get on anyone's shelves. And so We're very pleased with liquid live resin.
We have some a line of sight of how we're going to continue to take share of the vape category. But I'd also add that We really are under indexed in Pennsylvania on flower, particularly in premium flower, which we do very well in every market we operate in. As you look at the second half of this year and next year, that's a real opportunity for us to focus and drive growth in our flower business, which is only going to help us continue to grow Our total share within the market.
Thank you. And maybe, Charlie, just one quick follow-up in terms of Brands, of course, you are building your house of brands, your portfolio, but I'm beginning to see more competitors relying on license, Right. I mean, if I can mention, I'm saying in Illinois with cookies and lower farms. When you look at that in other Dave, some of your peers, licensing brands from others, is that shopping? Is that creating a new competitive set For you, is that something you may think about doing in the future?
Just some context there would be helpful. Thank
I mean, it's a good question, right? So again, we are brand forward, no doubt about it, whether that be owned brands or third party brands. We're the licensee for Kiva in Illinois. So it's something that we've already evaluated. We do find value there.
Like traditional CPG, when you're on the manufacturing or distribution side, there is rationale behind carrying or producing a competitor's product If it allows you to control more of that shelf space in the state. So it's dynamic. Of course, We like building our own brands. We're good at it and we can get them on shelves and we meet the needs of the consumers. So of we'll continue to prioritize our own consumer brands, but it's a dynamic scenario and we evaluate it.
Yes. Thank you.
Our next question comes from
Thank you and good morning. Charlie, a question for you on promotional sorry, Charlie. First and foremost, on promotional activity, we've heard from a number of your competitors that it seemed to be elevated in quarter. Can you speak to Which markets which of your markets this was most notable in? And perhaps further more for Dennis, what impact, If any, that had on your gross margin in quarter, just trying to understand the ebb and flow and potentially looking to the second half here, of the underpins for your conviction on further gross margin expansion and whether the promotion activity in quarter factors into that discussion.
Thanks, Generik. And Greg, do you want to take that? Yes.
I think to answer your question, the first part was just which of our markets we think we are seeing the most Price promotion, Kendrick, is that correct? And that one, I would say, Pennsylvania, it's probably one of the markets that we're seeing the biggest shift and change. Particularly in the lower end of that market, you are seeing more retailers push Harder pricing, which is a change from historics in that market. Florida continues to be a promotion heavy market But that's been pretty consistent with Florida over time.
Real quick, I would add that's another reason going back to Pablo's question on licensing, Having to pay a royalty fee in a competitive landscape is tough.
And from a margin perspective, Kenric, the impact in quarter was de minimis.
Thank you. That's great color. I appreciate that. And then just a follow-up on Pennsylvania. You sort of great segue on that one.
Is there a dynamic in Pennsylvania currently, whether it's further bifurcation in terms of high low and a hollowing out that middle? Or how do we think about the evolution there? Is it a consumer under a little more pressure, decreased Sort of share of wallet being able to be directed to discretionary items given sort of rising inflation and other parts of the consumer wallet. Maybe just any additional color there on sort of the evolving dynamic and consumer behavior in Pennsylvania would be great. Thank you.
Yes. So Pennsylvania, look, we're Pennsylvania continues to be a very healthy market. The market grew 12% versus Q1, and we are seeing a rolling trend improvement on patient counts. So it continues to be healthy on growth perspective. Pricing has been compressed a bit, as I mentioned earlier, on the vape segment, and that's a little bit because of the combination of the amount of cultivation coming online and Virginia's regulatory environment of what you can and can't do with pale flower.
And so we are seeing more consumers Push, we think, more of the biomass into the vape category, which is driving a little bit of price compression. What I think you're going to see over the next quarter here in the beginning of next year is more players like ourselves, bring more premium flower into the marketplace, We should right size some of the supply pushes that we're seeing right now in the vape category where most of the price promotion activity is happening.
Our next question comes from Glenn Mattson from Ladenburg Thalmann. Glenn, your line is open now if you'd like to proceed.
Yeah. Hi, thanks for taking the question. I realize it's late in the call, so I'll just keep it to 1. But kind of on
a conceptual basis, so when you think about,
obviously, you're not giving any guidance So when you think about obviously, you're not giving any guidance or targets for growth in 2022. But just when you think about Your positioning in the marketplace versus your competitors and the assets you have in your portfolio today and all the growth drivers as you head into 20 22, such as the wholesale expansions in New York spring to flower perhaps and Florida and Massachusetts and all those things. And you compare those to other competitors who have some of those things plus New Jersey. I'm just curious how you feel like Your portfolio stacks in terms of your ability to keep pace with the rest of the industry next year Versus others who may have New Jersey exposure that has significant potential. Some color there Great.
Thanks.
Sure. Thanks, Glenn. So again, conceptually looking at it, we love our footprint, right? We've got All 7 of the top 10 most populated states in the U. S.
With cannabis programs covered. And it's an incredible it's an incredibly Valuable footprint. Now tons of opportunity left in it, right? We want to achieve top 3 status in each one of these states. We've got a ton of opportunities in front of us to go achieve that.
And so with that comes the growth from within, Which also tends to, from an expense standpoint and an operating leverage and a return on invested capital standpoint, be very appealing. That said, we're always observant. We look at other states. We'll continue to look at other states That don't have reasonable regulatory structures yet, but may in the very near future. That said, do I see us Stretching into markets that have adult use programs, but have very small populations and potential market sizes, No.
We're going to be very judicious and diligent in the way that we invest our capital and in the way that we approach these markets because we approach them to win.
Sorry, one more quick one. Amit, as you look out further like into that into next year and so what would you imagine the mix be between wholesale and retail about the same Or will wholesale grow as a percentage of the pie?
I think there's just going to be a little ebb and flow in that number. Florida coming online, all of that gets recognized as retail. But then as additional dispensaries open up in Illinois and other markets, New York in particular, that's be primarily wholesale. So you'll see some noise in the number. But yes, I think this mix is pretty consistent with what we see long term.
Great. Thanks for that.
Thank you.
We have no further questions. So I'll hand back to our speakers to make any final remarks.
Just want to thank everybody for
This concludes today's call. Thank you for joining and you may now disconnect your lines.