At Cantor Fitzgerald. This meeting is being recorded. We have the CEO of Cresco Labs and founder of Cresco Labs, Charlie Bachtell, today joining us. Welcome, Charlie.
Good morning, Pablo. Thanks for having us.
Yeah, thank you for taking the time here. So look, we have a number of questions we're gonna go through. For those of you on the line, please email, send them through the chat room better, through Zoom. I think it's better than email for me, but I'll go through my list of questions first. So I guess just a big picture question, Charlie. You know, and of course, we'll touch on what's happening in the sector, abroad, but we've seen the opportunity that this presents for investors thinking more longer term. But one question I get a lot is that as more MSOs begin to expand and enter more states, they begin to look the same, right? So everyone is in Illinois, everyone is in Pennsylvania. When I say everyone, of course, that's a very loose term, right?
But just a reminder of what makes Cresco Labs different from other companies, and when people are looking at MSOs, you know, what type of things they should be focusing on. I notice not all MSOs are built the same way, obviously. Go ahead. Thank you, Charlie.
Yeah, for sure. And, and again, thanks for having us today. I think, at the end there, you sort of provided some of the answer. Not all, not all MSOs are built the same way. Presence in a state does not equal presence in a state. And, you know, I think when you look at Cresco Labs, you're looking at a company that has a very focused strategy, only focusing on high-value states, right? Very strategic geographic footprint, obtaining meaningful material positions in each of those markets. We definitely prioritize the middle two verticals of the value chain, brand development and, and distribution of those brands onto as many, as many shelves as possible. But I also think an incredible track record of execution.
You know, we're in all seven of the ten most populated states in the U.S. with cannabis programs. By the end of the year, after really integrating and consolidating our Massachusetts acquisition, we'll have top three market share in three of those markets. Number one wholesaler of branded cannabis products in the world. Number one brand year to date. That data just came out, which was nice to see. And again, that market share, that market positioning, I think, points to differentiation. So yeah, happy to be here today and excited for the discussion.
Right. So let's jump into what's happening in the third quarter, right? We're, you know, from a micro perspective, we are hearing about a bit of a slowdown from some companies, share of wallet shifting into dining out, travel, less cannabis consumption, people going back to their offices, and the data also, at least for Illinois, Massachusetts, Florida, the latest data points to somewhat of a slowdown. Of course, an industry growing well ahead of most other industries, but slowing versus a two-year pace. Any big picture thoughts in terms of consumer trends in the Q3 so far?
You know, I think the assessment's fair. What we you know, I think what we, the way that we look at it is Q2 probably had some tailwinds that boosted consumer demand. You know, if you just sort of look at the macro elements that were impacting us as just in general and the consumers in general, Q2 was nice. You had sort of a nice dip in COVID, a return to normal, so to speak. You had good weather and so it was strong. Q2 was strong. Q2 was stronger than we expected it to be. But I do think that's more of the story than anything systemic that we're taking from Q3.
I think you're just seeing some of the impacts of return to wearing masks indoors and kids going back to school, and more of the macro pressure that would impact sales than anything systemic related to cannabis.
That's good. And in terms of profit margins, you know, one question that people normally ask, what happens when you get interstate trade? But to me, it's more what happens even within the silo system of restricted license states, right? We're hearing of some price pressure in Florida, Pennsylvania, some people even mentioning Massachusetts. And should we assume that margins in some of these license-restricted states begin to soften? What, what's going on in that regard?
Yeah, it depends on the horizon that you wanna look at. Sure, I think price compression is part of the future, right? When we're modeling out our business, we include a component of price compression as we build out the model in future quarters. That said, I think in some of the limited license states, you're seeing durability in pricing. But to your point, we're also seeing some competition, right? So as more operators, you made a point earlier, more multi-state operators getting into some of these markets, opportunities are there, strategies are there to try and take market share and price as a lever. And that's why we try to prioritize the value proposition that we're offering to consumers.
Quality is durable and, you know, more production, more biomass, more competition is seen more in the middle section and lower sections of the product offerings. We just wanna make sure that we continue to produce high-quality products consistently, make sure that they're available. And I think, again, from a margin perspective, not only does that help you maintain market share, but from a margin perspective, don't forget, we continue to get smarter. We continue to build scale, we continue to get more efficient, we continue to increase automation. So you know, that addresses some of the margin pressure that you would see from additional competition.
Understood. I'm gonna jump into the numbers now, but before we do that, just a reminder of your expansion plans, right? Where are you adding stores in second half? Where are you getting new capacity, whether in 3Q, 4Q, or 2022? Just a brief reminder in that regard.
Yeah so, you know, adding stores, clearly Florida, right? I mean, Florida, you'll see more stores from us in Florida. And I think we guided to having sixteen stores, which was double the original amount that we acquired by that anniversary date, which is the end of Q1. Tracking there, you know, Maryland, we just added Blair Wellness. It'll be a Q4 close, but we just announced that Blair Wellness acquisition. PA, we've got the licensing that allows us to open up two more stores, so you'll see that from us. And, you know, we'll continue to look for opportunities there, even if they're not currently under the umbrella, to increase our positioning in our markets and drive greater depth. Where are we adding capacity?
Massachusetts, you know, the closing of the Cultivate acquisition brings on pretty significant additional capacity there. It takes us from about 18,000 sq ft to 64,000 sq ft, when you include our CapEx project that was already underway in Fall River, so that was great. Near the end of Q4, we've already operationalized, but we'll see the impact, the revenue impact, in Q4, end of Q4, beginning of Q1, from the Michigan cultivation build-out. Very excited about that. You know, we've had good success in Michigan with our manufactured products, but we've been relying on third-party inputs to produce it. So we're excited to bring our flower offerings.
Makes us a lot better wholesaler when we have a broad suite of products that we can put on a shelf for a retailer. It makes us a much better partner. So excited about that. And, you know, I think Florida and New York, of course, if you're looking a bit further down the line, further expansions and build out in New York.
Great. Thank you. So look, just on those specific number questions, so let's see what you can really share here. But the consensus number for the third quarter in terms of sales is about $223 million. You know, can you give any context to that number, or just again, how people should think about... Well, we did touch on how people should think about 3Q versus 2Q, right? I think you pointed to a bit of a slowdown.
Yeah, you know,
But can you comment on that number?
Yeah. I mean, we've been since last year when we sort of have line of sight into what twenty twenty-one was gonna look like, we were a second half story. Again, Q2 was a bit better than we had expected, but yeah, definitely more in Q4. So Q3 for us already was not necessarily the growth quarter as much as Q4 would be. But comfortable and incredibly proud of the team for what they've done. Again, the macro issues of the ups and downs and the ebbs and flows of COVID, you know, don't you can't underestimate or overstate the impact that that can have on you know, operations and team members. So they've done an incredible job.
But yeah, you know, comfortable with the way that the second half of the year is shaping up, and excited about 2022 also.
Right. Another point, in your case, you're still guiding for exiting 2021 with $1 billion in sales, right?
Correct.
Is that a December number or a fourth quarter number that we should think about?
That's a fourth quarter number.
Okay.
That's what we had said in Q1 and reiterated in Q2 call.
Right. And then, look, I'm gonna try to stay big picture, but in terms of EBITDA margins, right? So second quarter, about 25%, you have the benefit of Florida, Cultivate, Massachusetts, right? I think consensus has EBITDA margins to about, you know, 29%-30% by the fourth quarter, right? We have, I'm looking at consensus here again, I'm sorry. Second quarter was 22%. Consensus for the third is about 25%. Fourth quarter, almost 30%. We should expect that type of ramp-up, given the new states, right?
Yeah, new states, and again, that capacity coming online, those investments that we made, and the investments not only in the CapEx, but in the operational capacity from manpower, the resources that it takes to actually bring that product to market. You know, a lot of those investments are made well in advance of revenue realization. So yeah, comfortable with where we're heading and looking good, especially as we go into 2022.
Right. Okay. And then just moving away from the numbers, you know, I get the point that Cresco derives a larger percentage of sales from wholesale than retail, compared to other MSOs, similar size. But could someone say that it's a bit by default, right? You have Origin House in California, big, you know, your third largest market, that's all wholesale. In Illinois, by rule, you cannot store more than 40% of your own products in your stores. So how much of the high wholesale number ratio is more by default than really strategically defined by the company?
That's an interesting question. I don't think any of it's by default, in as much as strategy has informed the way that we built the company from day one. And it also helps inform the way that we approach government affairs activity, too. I don't think. Look, I think if you asked any of my peer set where the eventual play is here, I know I saw the conversation that you had with Boris. Where this industry goes is primarily a wholesale focus. It's a consumer packaged goods, consumer products category. So for us, you know, I think very early on in our strategic development pre-application in Illinois, it was: Do you want to be, you know, fill in the name.
Do you want to be Anheuser-Busch, or do you want to own corner liquor stores? And for us, it was, we wanted to be in the production and distribution of consumer products. So yeah, I think it might be a bit of a chicken or the egg discussion, 'cause I think our strategy informed the states that we sort of found ourselves pursuing. And then, of course, it also informs the discussions that we have with policymakers and legislators. And you're seeing the way that this industry is developing, the newest laws that are being passed, a great number of retail opportunities and great opportunities on the production and wholesale distribution side, if that's your focus.
Yeah. Well, that's good. Thank you. And then just moving on in terms of M&A, how would you define the M&A strategy of the company? It's about entering new states. Is it about, you know, certain parts of the value chain? Obviously, obviously, this year is, you know, Ohio, Florida, Massachusetts. How do we think about that going forward?
... Yeah, I mean, the way that we think about M&A, it's a part of our overall strategy. Overall strategy, again, super simple, create the most strategic geographic footprint that we can and obtain those meaningful material positions in each of the markets. So, you know, having compiled, you know, Florida was kind of the last market that we felt like we had to have. There's some other ones that kind of meet the criteria that could be potential states for us. Our definition of a strategic state is appropriate regulations with big populations to support robust markets. But, you know, we've got seven of the, you know, all seven of the ten most populated states in the U.S. with cannabis programs, we're in them.
So I would say right now, where our main focus is, while we're observant for anything that comes up, we'll take a look at it, we'll run it through our process and our formula. But, you know, most likely M&A is, for the time being, gonna be creating that depth and meaningful material market positions in these very valuable states that we've already gained access to.
Got it. And the last question on the M&A front, what lessons did you learn from the Origin House deal, and any kind of buyer's remorse, you know, two years later after that deal?
Buyer's remorse, to be honest with you, I don't think that way. The Origin House deal. Look, if you like the fact that we have the number one market share in Illinois and Pennsylvania, that we have the number one brand in the country, that we're the largest wholesaler of branded products, you know, scaled production, the operating leverage that comes from it, arguably lowest cost of capital on our last equity round and our credit facility, then I think you like Origin House, too. I mean, those are the capabilities that came from that acquisition. So no, buyer's remorse, again, I don't think that way. But there was great capabilities, world-class capabilities, that have greatly impacted Cresco in the way that we've developed, so.
But I will tell you, you know, from an M&A strategic development standpoint, of course, we're in a different position now from a resource standpoint, from an experience standpoint, talent standpoint, than we were back in, you know, early 2019. So the team that we have in place now, from both the evaluation, the development, the execution, and the integration standpoint when it comes to M&A, is just it's a different beast. So, and again, you've seen, I think our allocation of capital in the way that we've approached M&A over the last 12 months is, you know, arguably best in class.
Got it. Thank you. So let's just move this. We're gonna come back to more nitty-gritty questions at the state level, but staying on a macro, big picture. In terms of federal level changes, you know, your take on the discussion draft that was released on July fourteenth by Senator Schumer, in terms of likelihood of package, timing, you know, does it really happen in this congressional term?
Yeah, you know, I think, it feels familiar. The day that it came out, Senator Schumer said: "Look, I know I don't have support for this, but, it's for discussion purposes, allows me to have that engagement, find out what they like, what they don't like, and work on it." And at the other end of the spectrum, you've got SAFE, that I think is, you know, most agree that SAFE has bipartisan support to pass today. So the position that we find ourselves in with this pending opportunity, this pending option with SAFE, and arguably a less aggressive bill that got put forward by Schumer, Booker, Wyden, than some people thought it was gonna be.
The way that I look at it, again, just my own opinion, and based on the several years of government affairs experience in the cannabis industry at local and state levels, this looks and feels fairly similar to processes that I've witnessed and been a part of at a state level that results in legislation getting passed. You know, if you ask me, I'm optimistic on it. I think if I was... It's better than a coin flip. Any legislation is difficult.
You know, from my prior career being an attorney to this, these are the types of things that you could have something that looks like a slam dunk and, you know, and a totally unrelated issue could come in and wipe it right off the desk. Saw that happen in New York a couple years. So, you know, by no means is anything a given, but I think it's more likely than not that something does happen, and that something probably takes from both SAFE and the Schumer, Booker, Wyden bill. Probably looks more like SAFE than the other bill, though. I do think it's more likely than not that something does happen before midterms.
Got it. And just to maybe dig deeper there, if you were advising the Democrats that are sponsoring the bill, what do you think the final bill would need to look like to garner enough Republican support?
Well, I you know, not to generalize parties, but I think the social responsibility, criminal justice aspects are not at the forefront of the Republican Party's objectives as it relates to this. I think the Republican Party see this as, you know, an incredible industry that can create jobs, can create tax revenue, could also reduce budgets in other areas, so reduce spending, you know, from that criminal justice side. But I think the further you get towards sort of restorative justice, the more challenging it'll be. So that's why I think something, if it was gonna have a title, I think we've thrown this out there before, but like SAFE Plus, I think is likely where you keep the necessary votes from the R side.
... Right, and just along the same lines, you know, could we expect a Cole Memo 2.0, for example, right? And could there be, because that would be like the DOJ pretty much issuing safe harbor language without necessarily congressional legislation, right? But is that something that can be expected, or it's really Congress acting first before the DOJ does anything? Any thoughts on that?
It's a good question. I don't know that this is. I would expect that this current path that we're on is the more likely path, but again, you never know, in the way that these develop. That might be an alternative that gets presented, as an alternative if it doesn't look like a legislative fix is in the cards before midterms. I do think it's important for the Democrats, especially the leadership, that has identified this as a priority, to make an impact here. So look, they've got a lot of tools and a lot of levers at their disposal, when it comes to policymaking and, or, and/or guidance. So we'll see.
But I think the current path that we're on is the most likely path today.
Got it. And the last question on the subject, you know, from my perspective, when I look at the draft in detail, I see the fingerprints of the alcohol and tobacco industry, right? Things like interstate trade. There's even a passage about, you know, integration that implies a two-tier system, where cultivators will not own retail. Of course, we don't know what the final bill would look like. This is not even a bill, it's a discussion draft, right? But in the assumption that eventually, by twenty-five, earlier or later, we have federal legalization, interstate trade, maybe a broader scope of retailing, you know, what is Cresco doing to prepare for that day? And I know you've touched on it already, especially on the focus on brands and distribution, but just a brief answer on that.
Yeah, I mean, honestly, I think the fundamental strategy, right, of focusing on brands and distribution. If I go back to 2013, when that was developed, it was of course, it was developed with the idea of, you know, this is what today looks like, but in the future, that's what we think the future looks like. That definition, that description of the future, of course, included interstate commerce and just a more, a normalized industry.
And that's why our focus on brands and distribution from day one is truly in furtherance of that idea that at some state this is a normalized industry with interstate commerce and whatever nuances or tweaks or quirks it has, similar to alcohol and tobacco and even pharma, layer those on top, but normalized interstate commerce, traditional sort of retail opportunities. That's why we've always prioritized brands and distribution over brick-and-mortar retail.
Right. So just one question on brands and not to get too philosophical. I mean, what I'm seeing and hearing from a number of people, there's a concern that flower is not brandable, right? It's about strains, a little bit like wine. At the moment, most, especially if I what I would call house brands, they don't even grow them. They buy from other people, and they put their retail banner on the flower brand, that maybe you can brand edibles and vape, but not so much flower. Any quick thoughts on that? Because, yes, I hear the argument, you know, Anheuser-Busch, Marlboro, longer term, but, you know, when we think about the categories, can you really brand flower?
Honestly, I think it was in your description. I mean, I don't think wine is an example of unbrandable product. I think wine is branded grapes, right? It's so yeah, I think flower absolutely is brandable. It's not as obvious, I think, to your point, it's not. At the earlier stages, and this, I think, is more based on traditional legacy markets, where you did not have branded flower. But in the markets where you do, where, like in Illinois and everything that's come subsequently, it's branded flower. It's not deli style, it's not like a commodity that you go out of the, you know, get from the bin in the grocery store.
It's branded, and I think branded in a similar way to the way that you would think about wine, and that all, of course, it all stems from the progression and the development and the sophistication of the consumer, but yeah, I think flower is brandable for sure.
Right. Thank you. I agree. I agree. Although it may be more fragmented, but I agree.
Yeah.
Just shifting the discussion to stock performance. Obviously, you know, weakness in the sector. I know we should think long term, stay the course. That's the message most investors are getting from us. But, you know, MSO is down about 25% over the last three months, S&P up 5%. Any thoughts on the sector malaise, if you want to call it that right now?
I don't know that I would have anything great to add to that. I think you're seeing operators, ourselves, our peers, just continue to get better. You know, the growth is there. You know, if you want to look at this month over month, you can. You know, I can tell you, we're not. We're not. We didn't build Cresco to win Q3 of 2021. You know what I mean? Like, it's. We have a longer vision here. Of course, being successful today and winning tomorrow is core to our beliefs, but the fundamentals, the businesses, the markets, they just continue to get better and better.
Look, we don't have access to the components that really, from a pure stock performance standpoint, that sustainable fundamental foundation of, you know, US exchanges, institutional investors, the everyman U.S. retail investor. That's not part of the cannabis story yet. It will be. In the interim, we're building some pretty incredible companies here. So, very positive from our perspective. We're going to have ebbs and flows from market performance, but I love the way that our organization continues to get better, more efficient, smarter. It's what I want to see.
Yeah, I agree. And you know, the stocks are so illiquid, right? We're talking $5 million-$10 million a day OTC, so anything can move in one direction or the other, and I don't imagine in terms of positive catalyst to shift the current trend, in my view. On that point, what would be the sector milestone catalyst, and I'm talking sector-wise, that you would highlight and tell investors to, you know, expect over the next 12 months, outside, of course, the Schumer bill, what happens there?
I think the state level legislative change, again, you know, we're gonna see midterms here in about a year. You're gonna see more states move forward with medical and/or adult use laws. And I think that, in and of itself, should be seen as a phenomenal catalyst that it just can. Look, I say this all the time, right? Because I've heard it, it's been said to me, when things didn't go our way at a legislative front, but you know, good policy doesn't always make good politics. But I think we're at a certain point, good policy does create good politics. And cannabis entered that zone, you know, over the last 18 months. And I think you'll just continue to see that.
It'o not, you know, it might not happen overnight, but the industry is doing everything that it needs to do to put itself in the right place with the consumers and the general public to get that support that then drives policy change, so you wanna continue to see that, but yeah, otherwise, I think it's state-based changes are most impactful catalysts until we get something at a federal level.
Got it. And then just moving on to your current shareholder structure, maybe just a reminder, you know, the controlling group, the individuals, what percent is the free float based on your numbers? But maybe more important that, you know, from outside, it would seem that other investors, and I'm sure you also, are trying to attract long-term institutional holders, right? Can you somehow disclose who they are? Can you give us an update where you are in that regard?
Yeah, it's a good question. I think you hit it on the head. Yeah, from our standpoint, just, you know, we're totally unlocked. We don't have any... Except for most recent, of course, M&A activity, that would have some lockups associated with it, but we don't have any from the original, sort of, long-standing shareholder base. But yeah, the sort of opportunity to provide some liquidity to some early stage investors, I think everybody understands that, the people that have been in this for now, you know, seven, eight years, might be looking for some liquidity.
What we're, I think, again to the sector, at least the peer set, what we try to do is we try to match them up with good, large, you know, like-minded, long-hold, big funds or institutions that are gonna make for good, positive shareholders going forward. There's kind of a win-win opportunity there. Win, win, win, if you include the company.
Right. And okay, I mean, not to dig deeper there, but it seems to me from outside that, and I'm not saying you necessarily, that in some cases, some CEOs and other companies are grappling with the issue that do they sell part of their stake to third-party investors to bring, you know, high quality investors into the mix. But while they do that, they dilute their own stake, right? And people will think about that in different ways. How do you think about that yourself?
Sure.
And I'm not saying... Yeah, go ahead.
I think there's a tipping point there somewhere. I think you just need to be responsible. You know, up to a certain point, I think it's the responsible thing, it is the pro-shareholder thing to do, would be to get high quality big investors into the shareholder base. But, you know, sure, I mean, I get the concern if there was too much selling going on there. But from what I've seen so far, the way that I think our peers are thinking about it, I don't think anybody's thinking about an exit in the way that they're approaching it, as much as it's building up a stronger shareholder base, which shareholders should like.
Right. Again, if I move back to state level fundamentals, maybe when you talk to investors, you know, and they are talking to Cresco, and those same investors talking to other investors, what do you think they are not getting, or maybe misunderstanding of your company, or you're not getting enough credit for Cresco specifically? Or maybe it's all clear out there.
Yeah, I don't know. You know, I think there's still the discussion of, you know, it's retail and the importance of retail, and. But I honestly, I think at this point, look, we were definitely further out on the limb than our peers, historically. But I, you know, in the recent discussions that I've listened to, it seems like, you know, they're sort of coming more towards the. Look, retail has a role, no doubt about it, when you're talking about limited license states, where you have the opportunity to have X number of a total of Y. Not only is it a good revenue generating opportunity, but we also use retail very strategically to enhance our wholesale business.
I think, you know, again, depending on the stage of the development, the sophistication of the investor, there's a lot to learn. There's a lot of nuance in the cannabis space. Takes a little bit of time. There's a learning curve. But for the most part, I think the story is understood. And we're just gonna continue to show the effectiveness of it, the strength of it, and the rest will take care of itself.
Right. Look, before I jump into the states, I want to read a couple of questions here from the chat room that are related on more macro themes. One is about, you know, if you can talk about the funding environment outside of the Big Five or so, what's available, and what are the terms released twelve months ago? You know, obviously, you were able to refinance debt at much more favorable terms, right? But just general comments there.
I don't know. I can tell you, we're really happy with the balance sheet right now, with everything that we have, that we're looking at for the next, you know, 12, 18 months. I do think the opportunity is there. Look, there's more interest in this space. I know with the current market trends, it's maybe tough to see it or it would be challenged, but I think there's more interest in this space than there ever has been. You know, I think a lot of very smart strategic investors are looking at this as an opportunity. And so I don't know if you're looking from an equity standpoint, there's investors out there that wanna put money up to play in cannabis.
And then from a debt standpoint, there's definitely better terms, you know, today, than there were a year ago, and those were better than they were the year before. So I think, again, the understanding of the opportunity in cannabis is at the forefront of many strategic investors' minds, and there's more capital available than ever. Now, is this the environment to do it? I don't know. You'd have to make that decision for yourselves as organizations.
Got it. And can we do one more here, Charlie, before we jump into more state-level questions? You know, obviously, a lot of people on the chat room, also, you know, New York, California. You know, just high level, and I know we've touched on this, but, sometimes I try to explain to people why, say, a Planet 13 goes and buys, you know, $55 million for a paper license in Florida, right? They bought it from, from Harvest, and they're just buying paper, because supposedly Harvest will transfer the assets to Trulieve stores and cultivation. You paid recently for a store in Maryland, I believe $25 million-$30 million, but that's, that's par for the course. That's what most stores are going for, you know, around $25 million.
So maybe just for those that are somewhat new to the industry, why do those numbers make sense, right? And the context of the question is that someday, right, we have interstate trade, the scope of retailing broadens, brick-and-mortar, you have Amazon shipping across states. So this, you know, very negative nightmare scenario, people say, cultivation east of the Mississippi is worth nothing. Yes, you may have a dispensary, but if there's 1,000 stores in the state, and you have Amazon, and you have Walmart, and all those retailing, what is that worth, right? And my answer to that, I'm sorry to be so long-winded here, but, you know, I'm thinking, okay, you're paying $25 million, but that's four to five times EBITDA in a medical market. Once that becomes recreational, the market goes up, you know, four or five times.
So you're pretty much recovering your money in one year's time, as we've seen in Illinois, especially with new stores, new licenses may take two years to come in, so you have a huge window in rec, right, for a year or two. So that $25 million looks like a pretty good investment. But just a big picture comment in terms of those numbers, because that store, I could make the argument, $25 million for a store in Maryland by 2025, under the nightmare scenario that I talk about in terms of, you know, broad competition across the board, you know, maybe not worth much. But you made your money before, and by the end, that's probably helped you build your brands anyway. Any thoughts there? I know it's a lot there, but like-
Oh, look, I agree with... I think your thought process is right on, right? So that's why we do, again, prioritize the development of brands of the consumer products and the distribution in as many stores as possible. So if that nightmare scenario happens, the impact there is just really more of, it's more of a, it's an operational shift as opposed to a strategic shift, for us. Now, I would also say that for the person asking the question, you're asking about the least likely scenario that is currently on the table right now.
Us, as organizations, and even when I got into this, into the space, you got to play the game with the rules that exist today and the team that you can put on the field. It's not like we could wait and see what happens with federal change. People have been advocating for broad, sweeping, you know, regulatory change at a federal level for generations. From our experience, and not only in cannabis, but in other industries, change happens incrementally. We can expect time and incremental steps to occur before something along the lines of, you know, Amazon shipping across the country and making brick-and-mortar retail irrelevant would occur.
I also would think, again, why we're not as heavily invested in brick-and-mortar retail is there is always gonna be a role for brick-and-mortar retail, even in, you know, today's day and age and tomorrow's day and age, consumers still like to go into a store and buy certain products. It needs to be experiential. There needs to be a reason for it, but you could still get people to go and, you know, to make purchases in stores. But you want to be very selective, location, location, location, and again, an experiential sort of opportunity. So you just want to be strategic with it. That's why you won't see us get overleveraged on brick-and-mortar retail. It's just, it's a little bit different than our core thesis.
Got it. That's really helpful. Charlie, let's touch on individual state-level questions. Let's start, normally, we'll start with Illinois. I want to leave that for the end. So let's start with New York. When do the recreational sales start, based on your outlook? Any thoughts on cultivation caps? Just, let's start with that first.
Yeah, you know, and I've been... I don't, but, for better or worse, I don't know that my position on this has changed much since, since the law was actually passed. You've, you've got some puts and takes, of course. Anytime that you have a change at the highest office of the state, you've got new variables that come into play. Now, I think, we've been saying that the sort of the most aggressive potential was in October of 2022 for adult use sales. Rationale behind that, again, from based on conversations, but also there's just kind of a, I think, a fairly easy understood strategy would be before the elections, right?
You know, to show success in a major legislative initiative that you launched before voters go back to the ballot, it makes a ton of sense. I don't know that. Again, that was the most optimistic, aggressive timeline. I think more realistic. And again, I don't know that much of that has changed one way or the other because of the puts and takes with the new governor in place. But, it's probably more likely that the more likely scenario is right around the beginning of the year in 2023.
Right. A quick reminder, your cultivation capacity in New York right now, and, you know, how do you think about expanding that, when there could be a cap, but we don't know if there will be one or what it will be?
Yeah, again, no, no, no, no cultivation capacity in New York, currently. You know, as you go back over the last couple of years with allocation of capital, with the highest return, New York's medical program didn't warrant it. But moving forward with the development plans, currently, and we'll be ready when adult use launches.
Right. And the last question on New York: What are you hearing about flower being added to the medical program? What we've been hearing is that the DOH there pretty much passed it on to a commission. The commission will have to decide, so it could take a while.
I think, I think you've probably got similar information to what we have. I think that's a TBD.
Right. Okay. On Massachusetts, you know, I guess the question is, given the cap on three, of three stores and a cap of 100,000 sq ft of cultivation, it becomes a very fragmented market, right? So how do you stand out there? I mean, you still want to be there, it's an attractive state, but, the caps are very low.
Yeah, you know, it's you've got a great dynamic right now and for the foreseeable future, with this additional retail coming online and in really important areas, you know, Boston proper, et cetera, and less cultivation capacity, less production going on. So more companies that are just retailers. So you've got a good dynamic for a wholesale-focused organization. And, you know, if everybody gets up to 100,000 sq ft, then it's how good of an operator are you? And how good of a sales platform and go-to-market strategy do you have? If you can get more grams per sq ft at a higher quality out of that same expensive sq ft of cultivation, you're gonna win.
So that's where, you know, operational excellence and execution comes in, if the playing fields are level. We like those scenarios.
Okay, moving on. Thank you. Moving on to Florida, just, you know, benchmark Bluma with similar-sized operators in Florida, and related questions, since other companies are adding stores more aggressively in Florida than you are, are you lagging? Just quick thoughts there.
No, I don't think we're lagging. I think, you know, we had a game plan to execute some existing strategies that were in place that we inherited, and moving forward with those, I think anytime you're new to a state, you've got to take the opportunity to really refine the strategy that you had going in to make sure that it makes sense in real life, but we, I don't think we're lagging, I don't think we're hesitating, and I don't think we're behind any sort of schedule right now, so proud of the team for continuing to move the ball forward from the existing plans that were there, and also continue to get smarter and refine those go-forward plans that we have for the state.
So yeah, you know, like the position that we're in in Florida, but you'll see a lot more from us over the next twenty-four months in Florida.
Okay. And I know it's a big state, but you know I think since May Trulieve and Harvest have accounted for almost half of all the new stores open, right? And although it's starting from like 20-25% of stores. So I'm just wondering and of course I have a selling store so at some point even if the municipalities don't put caps on stores at some point you know there's so many corners right? There's so many places where you can have a dispensary or that's really a long-term concern.
Yeah, more of a... Not too concerned about it, because I don't, off the top of my head, I don't even know how many are in Florida. Florida's a giant state, you know, third most populated state in the country. And eventually, you've got wholesale sales down there, too. So I don't think you need to own all of your own retail in order to be really effective. Plus, there's home delivery in Florida. So if you talk about sort of the current state and the future state, as long as you're in position to be able to distribute to the people of Florida, you're gonna be in a good position.
So you just have to check both the boxes: responsible footprint from a brick-and-mortar standpoint, but also that reach and connectivity to make sure that you can get your products into the hands of consumers all over the state.
Right. And last question on Florida, in terms of competition, I mean, we're hearing about price pressures, gross margins coming down, a big ramp-up in cultivation capacity by various operators. What are you seeing?
There's some of that, but I think there's also, you know, discounting has been a part of Florida for a long time. And now there's some aggressive pricing strategies out there, but that's why you don't wanna, you wanna find your points of differentiation, right? You wanna offer a different value proposition to the consumer. You know, I can tell you, I don't think the organizations that have, you know, the higher quality products that the consumers are willing to pay for, you're not seeing the aggressive pricing on those products. I'll put it that way.
You know, discounting's always been a part of the Florida dynamic down there, and, but that's where you really want to make sure that you're differentiating yourself on the quality side.
Right. Look, before I jump to California, someone in the chat room is asking about New Jersey. Obviously, you're not there. There are still some private operators, Ayr Wellness, but, Garden State Dispensary. How are you thinking about New Jersey? Applying organically through the licensing system, that may take a while, or, you know, is that an opportunity? Any things with that?
You know, we've got plenty of opportunity in our existing footprint to invest capital with phenomenal returns. So if the price was right, sure, I don't have anything against New Jersey. I'm just not, I don't want to overpay. And again, we've got a lot on our plate in the markets that we're already in, where we already have infrastructure, where we already have management, where we already have resources to go deeper and really take those markets. And so it's got to be the right opportunity for us to deviate and put resources and allocate resources to a new state.
Right. Okay. Just on California, obviously, we're all hearing about price pressures across the board from new cultivation, I guess, new companies that are into the market, adding cultivation, others expanding, the illicit market apparently making a comeback. Just talk about price pressures in the California market and how that affects your Origin House build business in terms of your own brands, but also your partner brands.
Yeah, you know, I mean, it's, it, it's a dynamic market. There's no doubt about it, and, and again, part of the, part of the purpose of being in California is to understand what might be a future state for a lot of the markets that, you know, my peers that, and us currently operate in, that have limited licenses with big barriers to entry, so yeah, yeah, I mean, you're, you're seeing a, you're seeing a dynamic that is somewhat unique, but is also potentially cyclical in, in California. You see it from time to time. There's a, there's a lot of product in the market. It all, you know, for the most part, tends to be in that sort of average to value category. It's very competitive.
You still see the value proposition to the consumer is still what's driving all of that, even the increased competition, right? Is the quality of the product for the price that they're paying for it. So if you can maintain your relevance and your position in that higher ultra premium category, it's creating defensibility, it's creating durability and pricing. And you know, really proud of the team. We just won an award out there at the High Times Cup, which again just shows our dedication to making sure that we're putting good quality products into the market. That always works with consumers. But yeah, you know, we have a different business out there.
That third-party distribution model out there is different than what we have in our other markets. And for sure, we've got brands on the platform that are square, right in the middle of that very competitive environment, and the pressure is real. The impact is definitely there, and, but it's something that we just continue to evaluate, and we'll continue to make decisions based on the information available to us that we know are in the best interest of the org and our shareholders as we move forward.
I know most of us have access to Headset data, but can you share with us some metrics or numbers that, you know, would indicate how well your brands are doing in California? I know it's a fragmented market, but, you know, just high level.
Yeah, I mean, I think the Headset or the BDS data kind of speaks for itself. It does show you brand performance month over month. And, you know, we're very pleased with the way that we've been able to. And again, this is kind of through the Origin House acquisition, created this opportunity for us to get access to this number of doors and really bring our brands out into the largest cannabis market in the world, and see how they perform and make them better. And so we're pleased with the brand performance out there. Some of our own internal brands have done better than others. So again, learning lessons that we've been able to incorporate into some of our other markets in the way that we think about marketing and branding.
But, yeah, I think the Headset or BDS data is as relevant of validation or line of sight as you're gonna get.
Right. Look, I'm gonna ask you a question about 3Q. But if I'm a partner brand selling, you know, to you through Origin House, and I'm seeing all this counting going on right now, if I can afford, maybe I'll just stay out of the market, right? So you would see a big drop in sales in 3Q because of these price pressures. And compare the dynamic in terms of the partner brands and your own brands in OH, in, in Origin House in the third quarter.
Yeah, look, I think you're identifying risks that are definitely relevant for that type of business model. And again, it's something that we think about regularly. It's why, you know, from the very beginning, if you go back to the beginning of our entrance into that market, it wasn't to prioritize the distribution of third-party brands, it was to use that as a vehicle to get our own brands into those doors and onto those shelves. And over time, quarter-over-quarter, we continued to increase the percentage of our own brands that are on those trucks. So, but yeah, you're right. That variability and those risks and those decisions are all there for third-party brands and each of those organizations to have to make.
Okay. Last one on California regarding Origin House. I mean, how does the distributor model play out as online continues to grow, right? You have company producers like Lowell Farms, you know, doing their own distribution online, home delivery, I guess. You have providers like Eaze and Stem doing delivery online. More stores are expanding their own omni-channel tools. How does that, how does Origin House play in that, in that expanding online future?
Yeah, and Continuum is the name of the operation out there, but yeah, it's a great point. As the consumer evolves, as the markets evolve, the product still has to go from producer to even the delivery distributor, so to speak, but look, that dynamic and that opportunity to see how this evolves is something that we're very observant with, and again, it'll be the drivers of the next decisions that we make based on the information available to us.
... and before I jump into Pennsylvania, you know, we're hearing a lot about California brands like Cookies or Lowell Farms or Stiiizy. And, like, they have a right to win in other states compared, you know, to the incumbents in those other states. Is that being exaggerated, or is there some truth to this?
Just totally on the comment, nobody has a right to win in any state. You gotta earn it. So that goes for us, too. But, yeah, just because you're the largest operator or brand in California, does not mean you're going to have success in these other markets, especially with the fragmented regulatory structure that we have today. It just in the same way that just because we're the biggest brands in Illinois and Pennsylvania, doesn't mean that we're gonna have success when we go into our next state. We gotta earn it. We gotta win it. We gotta take it.
Right. Okay, moving on to Pennsylvania, again, the Headset data points to a slowdown, right? And I could see the July number was juiced by the fact that the governor, you know, allowed people to buy ninety-day supplies for thirty days. So it helped July, but August can drop month on month, and we may see September also dropping. So just, you know, are you seeing that? And again, there seems to be price pressure there, not only in the low end, but in the mainstream channel, in flower, and more of that going into oil, which means that vape prices are also coming down. I mean, it doesn't paint a nice picture, especially if New Jersey starts sales, you know, by February next year. Any thoughts on that? In general, about the state before we talk about price point in Pennsylvania.
I have very little concern about the state of Pennsylvania. And again, I think it's dangerous to look at month-over-month performance in any of these markets, especially when you're talking about sort of a medical market that still has more doors that can be opened that still has the opportunity for greater expansion as medical, and then let alone with the opportunity and the catalyst of adult use, which is a matter of when, not if. So no, no concerns over Pennsylvania at any sort of longer than month-over-month view of that market performance. It's still one of the strongest cannabis markets. It might possibly be the strongest medical market on a per capita basis in the U.S. So we like the market a lot.
I think, again, you know, adult use. You're right about the opportunity for consumers from Pennsylvania to potentially go into other markets and buy adult use. But when you layer on the adult use taxes in those markets, if they're a medical consumer in Pennsylvania, I'm not sure that I see the catalyst to make them go over to another state and acquire more expensive product and pay taxes on it. So I also, again, I'm bullish on Pennsylvania moving forward with adult use in the near term.
Right. And then just staying on Pennsylvania, is one of those states where there's no cultivation cap. I mean, can you remind us where you're in terms of capacity and maybe a little bit more precise in terms of when you get new capacity coming through?
Yeah.
That's it, what you have right now, there's no expansion plans for the time being.
No, Pennsylvania is a market where we have the opportunity to go deeper, right? I think we have, currently, we have four stores open. We have the licensing that will allow us to open six. We can definitely have more retail, especially with the effective retail platform that we've built. We've, you know, we've proven ourselves to be pretty good retailers. So there's opportunity for us there. And then from a capacity standpoint, too, I think we've publicly released, I think it's about 88,000 sq ft of canopy in that market. And you'll see us moving forward with plans to increase capacity there in the future.
Okay. But just to clarify on the storefront, I understand the focus on wholesale. In most other companies, again, to that 15-18 store cap, you're still far below that.
Yeah.
You want to more pursue the wholesale side of things than necessarily get to a 15-18 cap, store number.
Yeah, but again, keep in mind, we use retail very strategically in helping our wholesale business. It's also a great defensive measure, too, to make sure that you don't get flanked. So yeah, I think, look, the fact that we have number one market share there as a wholesaler, and we only have four stores, is pretty incredible. Because the product going into your own stores is also included in their numbers for everybody else. So, we're definitely performing well in that state. We have the opportunity to increase that. That will lead to greater capacity in one way or another, being developed in that state. And also, we have an opportunity there to acquire some more retail store fronts.
I don't know that we go to 15. I don't know, but we could definitely have more than six.
Right. But, yeah, I know this is at least one question, but, you know, the assumption is that New Jersey goes rec. You have long lines, you know, around the blocks, and, people coming from Pennsylvania to New Jersey, although I take the point on the low and on saving on the tax side to get a medical card. But at some point, the Republicans in the Pennsylvania legislature probably get the message and want to legalize rec, or is that too simplistic an analysis? I'm talking Pennsylvania.
Those discussions are already... They're already happening. And I know the governor, of course, is more vocal than anybody else, but-
Sure.
Yeah, the discussions and the development of drafts are already occurring in the Pennsylvania legislature.
Yeah. Before we jump into Illinois, from the chat room, something asking about, buying back stock. I think there's only one MSO that's doing that right now, but what are your thoughts on that?
Yeah, I mean, it's an interesting idea. It's something that we've evaluated previously. I mean, we've been. We've seen darker days in years past, right? And where we knew that we were, we were definitely of value. It's something that we look at, but it's, you gotta do the analysis, and is that the best use of your capital, or can you put your capital to better use? It's a formula.
... Oh, thank you. So we jump into Illinois. I want to take one- I have a few questions here, but one question from the chat room is whether, are we going to have on-site lounges in Illinois? And can you, like, expand your stores to that? Is that being discussed or we don't know?
It is. The law actually allows it, and they had the first one open up, more southern part of the state. The law allows it, and I think it just defers to the municipalities. So the municipalities are gonna be in control of whether or not they allow for consumption lounges. But and again, I don't know that that's necessarily at the forefront of what Illinois needs to do right now. They need to get those licenses into the hands of the social equity applicants and get those new doors open. But yeah, there will be consumption lounges in Illinois. I just don't have line of sight on how that develops or when.
Right. Okay, so just more on Illinois. So we are at one hundred and ten stores, right? It's still the incumbents, fifty-five times two. We have three lotteries, fifty-five each, so that's one eighty-five. But a lot of people think that nothing happens until, in terms of meaningful new stores, until mid-2022. Those new one eighty-five, you don't really get them done until late 2023. I mean, what are your thoughts on that? A reminder why it's taking so long.
Yeah, you know, why it's taken so long, I'll take it in the inverse. Why it's taken so long, there's an aspect of this type of application process that you see it in every state, by the way. I think every application process, like, since Illinois, has come with litigation attached to it. And you know, every state tries to figure out ways to insulate themselves better from the disruption of legal challenges, but it's unfortunately par for the course. I think this sort of process being as sensitive of an issue as it is, is just, it's created more focus and more intensity as it relates to the issuing of these licenses.
You have a pending litigation that has put a hold on the actual handing out of any of these licenses. So you're right, the lotteries have occurred. The names have been drawn, so to speak, but there is this pending litigation that needs to get cleared up first before those get in anybody's hands. So then, part one of your question, timeline for, you know, moving forward with that, you know, the day that those licenses are actually in the hands of the applicants, then you just put a normal sort of time frame on it. You know, I think the... Could you get stores open in ninety, a hundred and twenty days at the, you know, the most aggressive timeline, some?
The majority of it'll take longer than that. You know, I think, you know, the vast majority of them should be open within twelve months of when they get licenses in their hands, or there's bigger problems at play with those licenses.
But regarding the 185, do they all come at the... are the licenses in the end being all given at the same time, or it's like phased in, in terms of three different lots?
No, this would be at the same time. When the restriction, when that litigation hold is lifted, the names have already been drawn, the 185 recipients are already identified.
Right. Okay. Before we talk about your business in Illinois, what lessons could New York learn from Illinois when it comes to the social equity programs? What could the regulators there do different?
You know, I think getting the licenses into the hands of the recipients as soon as possible is key, and I think that the states that have managed the litigation pressure the best are the ones that get the licenses out, get them into the hands, get operators moving forward, so you know, I think you just have to be very efficient and expeditious in the way that you get those licenses out and move the ball forward.
Right. You know, would you want to comment, in terms of you have 10 stores there in Illinois, any color in terms of, you know, revenue per store? Are you above the state average? What can you share there in terms of how those stores, those 10 stores perform versus peers and versus the rest of the state?
You know, on a per store basis, we have the highest performing stores of any of the peer set. So yeah, our stores in Illinois, same store sales and per store sales are above average. The team does an incredible job. And I don't know that we give it much more color than that, but yeah, we're greater than our pro rata share. And, you know, to your point, like, market share, when 185 more licenses come on, you know, we fully expect that market share as a whole will be impacted by it. But we always look at pro rata and want to make sure that we're sort of punching above our weight class, doing better than pro rata share.
Right. And just in terms of the competition, you know, have you seen a little more new cultivation coming through? At least the publicly available data in terms of wholesale prices shows very strong prices, still no decline. But, how is that playing out so far?
I think there's some additional capacity coming online, but I think that shows the strength of the demand here in Illinois, is that you know, every incremental, whether it's a new store opening or new product coming into the market, the market's been pretty durable. Now, will that maintain itself? Look, I think there's potential, you know, the idea that how many people can you actually get through 110 doors? There's a finite amount, but again, I think all of these stores, the operators are getting more efficient. They're figuring out how to manage additional clientele, so the waits are lower, and that can absorb additional capacity that comes into the market.
Yeah. Look, I mean, two more questions in the case with Illinois. So, in terms of competition from the illicit market and from, say, Delta-8 being sold in vape shops, how would you characterize that? Is that, that's been there always, or has it changed? And any thoughts on... I know this question could be asked for every state, but in the case of Illinois, specifically, how is it playing out?
Look, you know, as a proponent of, you know, the regulated nature, right? The normalizing and professionalizing of cannabis. The way that we do, you know, get positive incremental change on the subject matter of cannabis is you just gotta make sure that you're dotting all I's, you're crossing all T's, and that you're doing the things that you need to do in order to change perspective to gain that support to allow progress to happen. And, you know, my fear with unregulated products, you know, I could go back to the Vapeg ate issue that we had a couple of years ago. You know, unregulated products has inherent risk. It's as simple as that. So, that's my concern and I'm less concerned with it from a commercial standpoint.
You know, I remember being sort of really frustrated when CBD, before the Farm Bill, when CBD kind of became ubiquitous, and it was available everywhere, in every gas station that you went into. It was really frustrating because our cost of producing CBD products per the regulations that we had to adhere to was so high, there was no way that we could be competitive with it. It's. I'm sort of not concerned about the competitive or commercial pressure of it, in as much as I would hate for it to derail the incredible progress and the incredible opportunity that we have in front of us, as it relates to the further development of legislation around greater access to cannabis.
Right. Charlie, I know we're well past the hour mark. We really appreciate your time here. Any closing remarks? And maybe just a reminder for investors what to focus on, you know, forests versus the trees type of question. And thanks again.
You know, I think this was thorough. I think you did a great job, Pablo, making sure that we covered a lot of bases. Appreciate the opportunity, and definitely want to get you to Illinois as soon as you're able to travel. Would love to show you what the facilities and the operations look like here.
Yeah. I look forward to it. Thank you very much, Charlie, and thanks, everyone, for joining. Have a good day.
Thanks, Pablo.