Cresco Labs - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to Cresco Labs' second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on your touchtone phone. To withdraw your question, please press star one again. Please note this event is being recorded. I would now like to turn the call over to TJ Cole, Senior Vice President, Corporate Development and Investor Relations for Cresco Labs. Please go ahead.

TJ Cole (SVP of Corporate Development and Investor Relations)

Thank you. Good morning, and welcome to Cresco Labs' second quarter 2024 earnings conference call. On the call today, we have Chief Executive Officer and Co-Founder, Charles Bachtell, Chief Financial Officer, Dennis Olis, and President, Greg Butler, who will be available for the Q&A. Prior to this call, we issued our second quarter earnings press release, which has been filed in SEDAR and is available on our investor relations website. These preliminary results for the second quarter of 2024 are provided prior to completion of all internal and external reviews, and therefore, are subject to adjustment until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the quarter ended June 30, 2024 on SEDAR and EDGAR. Before we begin, I want to remind you that statements made on today's call may contain forward-looking information.

Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described in our earnings press release and in the MD&A filed with the securities regulators. This call also contains non-GAAP measures, also outlined in our earnings press release and in the MD&A filed with the securities regulators. Please also note that all financial information on today's call is presented in U.S. dollars, and all interim financial information is unaudited. With that, I'll turn the call over to Charlie.

Charles Bachtell (CEO and Co-Founder)

Good morning, everyone, and thank you for joining us on the call today. I'm pleased to walk you through our Q2 results and demonstrate the sustainability of the improvements we've made to the business over the past year. We entered this quarter building on the strong foundation we've developed and with growing momentum in the industry. The DEA's comment period on rescheduling recently closed, with roughly 92% of the over 40,000 comments submitted in overwhelming support of reclassifying cannabis to a Schedule III substance or declassifying cannabis entirely. Recent polls also show energy swelling around Florida's Amendment 3 initiative to legalize cannabis for adult-use this November.

As the pace of reform challenges even the most patient of us, it's important for all stakeholders to remember that cannabis reform consistently polls higher than any candidate in any election, and the public has made it clear that it's time for change. Reform is imminent, and we are ready. Our Q2 results show how strengthening our core and emphasizing free cash flow are laying the groundwork for profitable growth and strategic positioning for the transformational catalysts ahead. In the quarter, we generated $184 million in revenue at a 52% adjusted gross profit margin and a 29% adjusted EBITDA margin. Year-over-year, we generated a 565 basis point improvement on our adjusted gross profit margin and removed approximately $34 million in annualized adjusted SG&A spend.

Our consistent focus on margin expansion enabled us to deliver $54 million in adjusted EBITDA, up $13 million year-over-year. Finally, we generated $54 million in operating cash flow year to date, which is $32 million more than the first half of last year. This, combined with our revised tax strategy that Dennis will cover later in the call, will allow us to continue to strengthen our balance sheet and enable strategic capital deployment to support future growth. Cresco Labs is creating the financial profile and perfecting the playbook we need to win. Our branded product and retail portfolio performance are evidence of our differentiated capabilities. We consistently outperform our markets, maintaining leading share positions in the largest markets like Illinois, Pennsylvania, and Massachusetts, and gaining share in some of the most competitive markets, like Florida.

Our unique skill set and financial discipline have enabled us to drive scale and improve margins as we look towards new markets to replicate our winning strategy. Now I'm going to share more on the three pillars we're executing against to create the strongest and most valuable Cresco Labs for the years to come. Number one, we're ensuring we have the most strategic footprint. We're strengthening our positions in Ohio, Pennsylvania, and Florida, the three largest likely near-term catalysts in our industry that'll drive significant growth in the years to come. Adult-use sales officially launched earlier this week in Ohio, and it's been energizing to be a part of another major milestone for cannabis. The seventh most populated state in the country will be another example of a responsible, respectable, and robust legal cannabis program.

I want to thank Ohio's Division of Cannabis Control for working so hard to design a program that's going to bring incredible value to their state and opportunities for their residents. I also can't say enough about the Cresco team, who manages all the complexities of this conversion with grace and expertise. We're already seeing some of the impact from recent cultivation upgrades we've made in Ohio, including a 26% increase in yield per sq ft and a 23% increase in average potency as we drive full utilization of our canopy. This will allow us to meet the increased adult-use demand while still maintaining our existing supply to serve medical patients and wholesale customers. Our next project is to expand Sunnyside's reach by opening our three additional dispensaries in Ohio.

Kudos to our real estate team, who've already identified sites that'll complement our existing leading retail portfolio in the state. In Pennsylvania, there's a lot of momentum behind bipartisan adult-use legislation, and we see a path to legalization as lawmakers reconvene this fall. In the meantime, we're deepening our number one position in the state through smart capital allocation. In addition to the upgrades to cultivation we talked about last quarter, we just expanded our dispensary operations by acquiring two existing locations and the ability to open one additional dispensary. With a nominal impact in Q2, this is an incremental, non-material investment that will have a high ROI. We see a clear pathway to unlock strategic value as we convert these stores to the Sunnyside platform, optimize operations, and ramp up on potential adult-use legalization.

In Florida, we've more than doubled revenue year-over-year as we continue flexing every muscle to improve edible and vape throughput, increase potency, and maximize cultivation yields. We're currently executing an expansion plan to support the growing demand for our products under the state's medical program, with additional plans that we can turn on if the adult-use is legalized in November. We're focused on making smart investments in these markets, where our strong retail and wholesale capabilities could add value quickly. Over the last few quarters, we've used a capital-efficient approach to add more Sunnyside dispensaries and increase cultivation capacity. We're preparing to scale up strategically so that we're capturing maximum share while generating high returns on our investments, regardless of where each of these state adult-use regulations land. Number two, we remain the leader in branded wholesale products.

We continue perfecting our branded product playbook, enabling us to beat out competitors and hold the number one overall share position in Illinois, Pennsylvania, and Massachusetts. For BDSA, we also have top portfolio positions nationally in branded flower, concentrates, vapes, and edibles. As we discussed last quarter, continuous improvement in portfolio evaluation are foundational to that playbook. For instance, to maintain the strong growth we've seen in the pre-roll category, we've been diligently testing new processes and technology to increase productivity and margins. The early results are promising, with a 10x increase in throughput. This is a good example of how we're leveraging our scale to test new processes in one state before rolling them out across our footprint to capture the benefits of large buying power. We're also creating tailored wholesale plans to adapt to continued retail fragmentation across the industry.

In markets like Massachusetts, we're exercising discipline and finding the right retail partners to invest in, going deeper with our highest value accounts while reducing exposure to non-performing accounts to preserve top line while also protecting margin. In markets like Illinois, we're getting our products on every new shelf and expanding our points of distribution while keeping our menu depth and introducing new innovations in forms, flavors, and strains. Our focus on providing innovative products at the highest quality, while constantly finding efficiencies in our cost structure, continues to deliver one of the strongest cannabis portfolios in the industry. And number three, we're building a highly productive retail portfolio in the most strategic states. In Q2, we increased our index to fair share across our markets, with Sunnyside performing 36% better than comparable dispensaries.

In fact, we're outperforming average fair share in almost all of our markets, with our fair share in Florida consistently making gains and growing more competitive every quarter. We're more than twice as productive in some of our most important states, and we're expecting even more fair share improvement across our footprint in the quarters ahead. Last quarter, we talked about how our tech capabilities contribute to our market-winning results, but in-store optimization is another important lever we pull. We continue to refine our assortment and display of accessories and non-cannabis products, ensuring we're meeting consumer trends while maximizing every inch of our dispensaries. Over the last year, we've increased non-cannabis revenue in our stores by 9%. We're also constantly evolving our approach to customer engagement. We're complementing the e-commerce tactics covered last quarter with a unique push marketing strategy.

We're leveraging the sunnyside.shop platform, customer segmentation, and purchase history to create targeted, high ROI campaigns. In trialing this method, customers we've targeted are making more repeat purchases and have increased average monthly spending by 20%. We have a proven track record of generating above average retail productivity across our markets, thanks to repeatable operating procedures, a proprietary tech stack, and the team's collective dedication to continuous improvement. These capabilities will continue to be invaluable as we ramp up additional dispensaries to meet Sunnyside standards in the months ahead. In closing, our strategy is simple: win in strategic markets with a brand portfolio consumers love and best-in-class retail operations. We'll continue making smart investments to strategically target new growth markets, where these established capabilities will help us generate premium returns. With that, I'll turn it over to Dennis to provide more details on our Q2 performance.

Dennis Olis (CFO)

Thank you, Charlie, and good morning, everyone. We continue to demonstrate that the changes we've made in the last year and our improved profitability are sustainable. The increased cash flow we're generating, along with the normalized taxes, will allow us to strengthen our balance sheet, increase our footprint, and invest in strategic growth opportunities to drive our results in the years to come. In the quarter, we generated $184 million in revenue while generating more gross profit. Our operations team continued to impress, finding incremental improvements to lower cost of goods and increase gross profit, even in an environment that is inflationary for cost and deflationary for cannabis pricing. We increased absolute adjusted gross profit to $97 million, an adjusted gross margin of 52%. That represents a 565 basis point improvement year-over-year.

We've continued to maintain strong cost controls across the organization, with adjusted SG&A as a percentage of revenue at 29%, a 229 basis point improvement from last year. We had a small increase sequentially in absolute adjusted SG&A to support and maximize the opportunity of the adult-use conversion in Ohio and the two additional stores acquired in Pennsylvania. Q2 adjusted EBITDA was $54 million, or 29% of revenue, up 33% year-over-year. This is our third consecutive quarter, generating over $50 million of adjusted EBITDA. This consistency demonstrates the sustainability of the actions we took last year. Our Ohio going adult-use and the potential conversions in Florida and Pennsylvania, we can support much higher revenue and generate significant operating leverage on our current cost structure.

In Q2, we generated $18 million in operating cash flow and $11 million in positive free cash flow as we paid our semiannual interest payments. At $54 million for the first six months of the year, we've generated more than double the amount of cash we did in the same period last year. We're going to put this cash to use by strengthening the balance sheet, investing in our core growth states, and pursuing strategic growth opportunities. We spent $6 million on CapEx during Q2. We expect to spend between $40 million-$60 million for the full year, inclusive of upgrades already made to our Ohio cultivation and production facility, as well as expansion in Pennsylvania and Florida in advance of potential adult-use.

2024 has developed much as we expected, and we are maintaining the expectations we set on our Q4 call and reiterated in Q1. We expect Q3 revenue to be relatively flat compared to Q2, with the late start of adult-use in Ohio and limited initial incremental supply and new form factors. We expect it to start contributing growth in Q4. We're looking forward to Ohio's adult-use conversion and the anticipated conversions in Florida and Pennsylvania to generate significant year-over-year growth in both 2025 and 2026. Strategically, we are targeting to keep gross margins around 50% as we believe that's an appropriate operating structure for our business. Having said that, there can be quarterly variability driven by price pressures, revenue composition by state, and portfolio mix. We expect to maintain SG&A as a percentage of revenue consistent with Q2.

As we've talked about previously and delivered through the first half of the year, operating cash flow will be significantly higher than last year. On a quarterly basis, like in Q2, Q4 will have lower cash flow because of our semiannual interest payments. Regarding taxes, we intend to file as a normal business for 2023 and beyond. This new position will result in estimated tax savings of $65 million in 2024, directly impacting our cash flow and bolstering our balance sheet. For the time being, a corresponding uncertain tax position, a UTP, relating to these tax savings will be recorded on the balance sheet. We have worked closely with our expert advisors to be incredibly thoughtful in how we design this approach. We're comfortable with our read on Section 280E and its implications.

As a result of the new tax position and our corporate structure, a step-up to fair market value in the company's tax receivable agreement liability has been recorded in our financial statements. Most of the assets being stepped up to fair market value will be amortized over 15 years, effectively decreasing our annual tax expense by a corresponding amount over that period, creating a net neutral impact. This one-time charge is reflected in the other expense line in our income statement this quarter. Our 2024 results so far show how our focus on the core and prioritization of free cash flow are laying the groundwork for profitable growth for years to come. With that, I'll pass it back to Charlie.

Charles Bachtell (CEO and Co-Founder)

There are exciting and meaningful legislative shifts on the horizon, and the public has never been louder with their support for cannabis. We've reached a tipping point, with almost half of all states in the country, representing more than half the country's population, having legalized cannabis for adult-use and more adopting common-sense regulations every day. Still, while we're encouraged by plans for rescheduling and adult-use conversions, we're putting our energy and resources into building a growth business that's designed for sustainable success, regardless of what happens legislatively. We continue to prove out our strategy in every state we operate in, maintaining and gaining share in some of the country's largest and most competitive markets. We're leaning into our improved operating cash flow and profitability to seize on our business's momentum.

This means making smart, high ROI investments in our core markets, reinforcing the capabilities and infrastructure needed to win in states with adult-use potential, and exploring accretive, incremental M&A and new business opportunities. A big thank you and congratulations to the Cresco team on producing a great quarter. And with that, I'll open the call for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up. Thank you. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead.

Remi Smith (Equity Research Associate)

Hi, good morning, and thank you for taking my question. This is Remi Smith on for Aaron Grey. My first question, in regards to your gross margin, it remains healthy for four quarters, about 50% or 52% in the Q. I know you kind of touched on you expected to remain around 50%, in 2H, but just seeing if you could provide some more color on if there's any additional margin improvements. I mean, you made, said you made a number of efficiency gains, and you'll get a little bit of benefit from Ohio adult-use, but there seemed to be some pricing pressure in the market.

Just wanted if you could provide a little bit more color on the 52% gross margin this quarter, and how you think about it in the back half of the year?

Charles Bachtell (CEO and Co-Founder)

Good morning, this is Charlie. I'll start, and then Dennis will add some more color. But, you know, really, really pleased with the team's execution in the quarter and managing the puts and takes that are inherent across the industry and our footprints. And so it's really active management of the business that produces the gross profit margins that you've been seeing from us over the last few quarters, and it's the same approach that we'll take in the quarters ahead. There are, as we said in the prepared remarks, certain levers that really sort of drive margin profiles, including state mix, product mix, et cetera. We're excited about Ohio's adult-use program launch from Tuesday. We know that that'll be a driver of our business for quarters and years ahead.

As far as pricing pressure, I think you mentioned pricing pressure in Ohio. Specifically, I think that typically what we see from a transition to medical to adult-use follows that same trend, but when adult-use launches, it tends to, you see, an increase in pricing for a period of time. Yes.

Dennis Olis (CFO)

Yeah, just building on what Charlie said. Look, we saw some favorability in the state mix in Q2 that had a favorable impact on our margins in the quarter. So, again, Florida was very strong for us in Q2. That helps drive margins up. With the price pressures that we're seeing in the marketplace, that does put some pressure on margins overall. I think we've done a great job in offsetting that with some efficiencies in our manufacturing and cultivation facilities.

As we look to the second half of the year, and as we see some growth in Ohio, particularly in fourth quarter with adult-use, that will have a slight negative impact on margins that'll get us back, and we think closer to the 50% margin, as we exit the year, until we get our facilities in Ohio up to speed and get them to our average margin performance.

Remi Smith (Equity Research Associate)

All right. That was really helpful. Then, my second question, in regards to New York, I know it's a market you've been constructive on historically, and while there have been a little bit of hurdles in terms of the illicit market, initially, actions taken by the illicit, by the state against the illicit stores, coupled with, material amount of legal store openings, really helped drive some growth in the market. Just wanted to get your take on, are you viewing the market, particularly with the wholesale side, and then potentially allocating some CapEx there?

Charles Bachtell (CEO and Co-Founder)

So, you know, our position on New York has not changed from prior calls. We're optimistic that New York is gonna be a large market going forward, but the start to the legal program there has been challenging. And as we're looking at our total footprint and being, you know, super diligent with allocation of capital, there's other opportunities in our footprint and in our business. When you compare the New York opportunity today to the other opportunities that we have in trying to drive the highest ROI in the reasonable period of time, it's a challenge. So we're encouraged by what we're seeing there.

We do think long term, New York is gonna be a big, robust program that we'll be happy to be a part of, but in the interim, and in the immediate term, there's other opportunities that we're pushing forward with.

Remi Smith (Equity Research Associate)

Great. That's all for me. I'll hop back into queue.

Charles Bachtell (CEO and Co-Founder)

Thank you.

Operator (participant)

Your next question comes from the line of Scott Fortune with Roth Capital Partners. Please go ahead.

Nick Anderson (VP and Senior Research Analyst)

Yeah, good morning. This is Nick on for Scott. Congrats on the good quarter here. First question for me is just on product mix. I know it differs by state, but can you give us just a general sense of what you saw from the consumer on the quarter, given the potentially kind of tempered macro backdrop here? And just wondering if that translated any changes in spending behavior, and how that impacted your mix between the good, better, and best categories. Thank you.

Charles Bachtell (CEO and Co-Founder)

We'll have Greg start with this one.

Greg Butler (President)

Good morning, Nick. You know, in general, for the major trends across states, and I'll start by saying each state does have a little bit of nuance that makes it unique, but on a macro level for trends, not surprising, what you are seeing is shoppers are looking for value, across all categories, all consumer goods categories. That includes cannabis. We're seeing growth in our value formats, are high. We're seeing growth in value formats across the categories are high as consumers look to find ways to save money. It doesn't mean, though, that just value segments are growing. We're actually seeing higher price, more premium products, especially like interesting products that are different and new, are able to generate and pull dollars from consumers' wallets, and drive some excitement.

But I think the macro trend is that there is a value shopper out there. Things are expensive, and as more cannabis becomes available at lower prices and better product quality, it becomes a competitive offering for them.

Nick Anderson (VP and Senior Research Analyst)

Got it. I appreciate that color. Second one for me, just on the in-house breeding program. You mentioned the goal of 50% of your menus to be Cresco exclusive strains by 2025. Could you just provide some color around the difference in economics from selling and growing those strains and just where you're at today in terms of reaching that target?

Greg Butler (President)

I'll take that, too. I think, you know, what we're finding is, obviously, there's a benefit of selling house brands in your, in your own retail. But for us, what's really important is we look at how our products perform and the quality of products we're putting out there and what we're really proud of them. And what you see in our number one share position across most of our states, is that the products that we're making drive really, really strong velocity. Now, that's important for us, 'cause obviously, better velocity is better turns, means better profitability. But we also think that's the winning equation for all of our partner accounts out there, too.

Because if our brands turn faster and warrant better pricing, that's a win-win on profitability for Cresco, and our Sunnyside stores, but it's also a win-win for our partners as well. So it is much more of a focus on the best quality product that drives the highest velocities, which we're pretty confident we're doing okay there, as we see our number one share still hold.

Nick Anderson (VP and Senior Research Analyst)

Great. That's it for me. Congrats on the quarter.

Greg Butler (President)

Thank you.

Operator (participant)

Your next question comes from the line of Pablo Zuanic with Zuanic & Associates. Please go ahead.

Pablo Zuanic (Managing Partner)

Thank you. Look, two questions. One for Dennis. In terms of the state, the statement you made on planning, you know, normal company for 2023 and 2024, but will you also be asking for tax refunds for 2020 to 2022? And if not, why not, right? And then the second question for Charlie, if I may. Can you just share your latest expectations in terms of the rescheduling process? Are you still confident that we get this done by inauguration day? Thank you.

Charles Bachtell (CEO and Co-Founder)

All right, so we'll start with Dennis.

Dennis Olis (CFO)

Yeah. Thanks, Pablo. Yeah, as you noted, yeah, we did file or taken the tax position for 2023 and 2024. We will plan on looking protective claims for 2020 through 2022 in the coming quarters.

Charles Bachtell (CEO and Co-Founder)

Sorry, and then I'll take the second part of the question.

Pablo Zuanic (Managing Partner)

Yeah.

Charles Bachtell (CEO and Co-Founder)

Yeah, Pablo. So latest expectations on rescheduling, you know, don't have the crystal ball, but I know that the relevant parties are actively reviewing the next steps that they want to take, whether it relates to the hearing or no hearing, and we will know as soon as they are ready to communicate that publicly. I think that's the best position that everybody involved can take. As I said in the prepared remarks, I know it tests the patience of even the most patient of us, but this is a very popular issue. This is a very active political cycle, and so I think you're, you know, optimistic here, but we'll see. They'll let us know as soon as they're ready to let us know.

Pablo Zuanic (Managing Partner)

And if I can just get a follow-up on Ohio. You know, we can say that maybe perhaps the adult-use there is a bit of a light start, right? They call it non-medical. The rules for AU are not fully out yet. I mean, is that a big deal, or we should see a very strong ramp anyway? Or if we don't see a strong ramp right now, when do we start getting those AU rules? If you can just give some context into the nuances there. Thank you.

Charles Bachtell (CEO and Co-Founder)

Sure. So I, I think you articulated it well. The, the best way to think about the Ohio adult-use launch in, in the immediate, term, is that it really is. Every, everything is being done pursuant to the medical program structure and rules, except you're allowed to let non-patients into the dispensary to make purchases, too. So if from an awareness standpoint, from a marketing standpoint, it, it's still pursuant to the rules that have been in place there for, for years under the medical structure. Nothing there has changed, so you may have seen that if you were in market. Right now, it, it still looks and feels very, very, similar to it did under the medical program.

The expectations on adult-use rules are this fall, and, you know, we're encouraged by the work that the division is putting in there to kind of try and, try and produce the best launch to the adult-use program as possible. We really do appreciate the effort that they put into launching the adult-use access as soon as possible. It's a really important part of successfully having a, an adult-use law and program, is making sure that there's not a giant gap between when a law gets passed and when a program gets launched. So it's really important, and we look forward to the rules coming out. Again, expectations are this fall for the adult-use rules.

Pablo Zuanic (Managing Partner)

Thank you.

Operator (participant)

Your next question comes from the line of Najib Islam with Canaccord Genuity. Please go ahead.

Najib Islam (Equity Research Associate)

Good morning. It's Najib speaking in for Luke. So one question I have is, within Florida, what's been some of the key factors helping you gain market share there, and how would your growth plans kind of shift gears if adult-use goes through in November?

Charles Bachtell (CEO and Co-Founder)

So, this is Charlie. I'll take the second part of that first. So as we talked about, I think, on our last call, we've got a phased approach to Florida that we think it, it puts us in the most appropriate position possible. We, we are really encouraged by the, the growth that that team has been able to create over the last year in the medical structure. So we are in a position where, we know that we can continue to grow in that state, even if it stays a, a medical program. And so we're taking actions in this phased approach to put us in the best position possible for medical or adult-use. It'll also help for the initial stages of adult-use if it passes.

If adult-use does pass, then we do have a phase II approach, that would be an increase in production capacity to go along with that law passing. But rationale or reason behind the growth, I'll pass it over to Greg.

Greg Butler (President)

Yeah. Good morning. I think as we look at what we've always said, our view in every market we go into, is that we can compete well to get to a leading market position. We're seeing that across states, and in Florida, we're starting to see us grow in that state. I would say the key drivers for us, one, is we believe in our platform. The Sunnyside platform we've built, is showing great results across many of the markets we operate in, Florida being one of them, on how it's both attracting customers to our stores and delighting them with the products that we're offering in our stores. The quality of team of running those stores are doing their best to continue to recruit and bring new customers, into Sunnyside to see the difference.

And then finally, from a product perspective, what we're able to produce in the market, from our facility is not only are we producing, we believe, is superior products, but also we're able to increase our supply coming out of our footprint that enables us to fuel our stores. That helps us drive that growth. So it is a, it's a really great story for us, and we're very proud about, of our teams really getting in the market, understanding the market, and building a platform that we think is gonna be competitive if it remains medical, and will only be supercharged if it goes into adult-use.

Charles Bachtell (CEO and Co-Founder)

Yeah.

Najib Islam (Equity Research Associate)

Sure. Got it. And another question I have is, once you implement pre-roll manufacturing improvements in one state, how easy is it to roll out across your footprint, and is there any meaningful CapEx associated with that?

Greg Butler (President)

I'll take that question as well. From a, you know, how we think about our SOPs, we do try to find consistent, repeatable, scalable solutions across each of our states. That's why you're seeing the margin improvement that Dennis talked about. So when it comes specifically to pre-rolls, as we or any capability, as we finalize a form that we think gets us to the best unit economics at the best quality, we will look to roll out across states. We will prioritize states where we think there's room for us to get in there and take share, so not every single state will turn on all at once.

From a CapEx perspective, it's pretty minimal CapEx for us to do that, especially as we think of a staged approach that goes market by market to find out where we have an opportunity to take share in that segment of the market.

Najib Islam (Equity Research Associate)

Sure. Got it. Thanks.

Operator (participant)

Your final question comes from the line of Andrew Semple with Ventum Financial. Please go ahead.

Andrew Semple (Special Situations Equity Research Analyst)

Hey, good morning. First of all, congrats on the results. First question would just be getting a sense on the Cresco team's stance on Florida ahead of the November votes, and how aggressive you plan to be in terms of deploying capital in the, in the state. I know Florida was mentioned as a state where you're planning some capital investments later this year. Just wondering if there's the potential to go much larger than you've already stated, if the vote were to be successful.

Charles Bachtell (CEO and Co-Founder)

Sure. So this is Charlie. I'll take that. So we're, you know how we're feeling about Florida, as it relates to the ballot initiative, we follow the news. We're actively engaged in the efforts down there, and look, we're optimistic. We're encouraged by what we're seeing.

And, and so that does make us optimistic for, for the likelihood of it passing come November. That said, as, as we've mentioned, this phased approach we think is the most prudent and appropriate because it, it, it'll be successful for us regardless of the outcome. And that's an important thing that we've just, we've learned over the 10 years that we've been in the cannabis space, is try to put yourself in a position where you're, you're gonna have success and you're gonna win, regardless if a binary situation is a positive or, or not. And, and so it's an appropriate next step for us. Yes, if adult-use passes, we do have a, a fairly substantial phase II approach that'll go along with it. So feeling, feeling good about where Florida's at, and we're feeling really good about our approach.

Andrew Semple (Special Situations Equity Research Analyst)

Great. That's helpful. And just a follow-up question would just be more broadly, across your retail portfolio. Over the past couple quarters, has there been any major shifts in, the vertical integration, you've deployed at your Sunnyside, store shelves in terms of carrying more Cresco-branded products, just as it relates to some of the margin improvement that we've seen over the past few quarters? Has there been any shift in strategy there, or, or has that been fairly consistent?

Greg Butler (President)

Hi, it's Greg. Let me take that. Our view and how we run our assortment, in our stores is we do look for what is the highest velocity SKUs we offer, and we think of velocity that's truly, you know, showing you what our shoppers demand and what they prefer.

Now, as I mentioned on an earlier question, a lot of the times that tends to be our brands, so that's really encouraging. But then as we think about others, if there's another brand or another format that has really strong velocity, that's also ideally accretive to what we're offering in our assortment, that certainly is gonna be something that we're gonna pick up and put in our stores. And there's also new segments that are emerging, which maybe we're not quite ready to get into yet, but we'll do a test and learn other assortment in our stores to see how it's gonna unfold and how the economics look behind it.

So I wouldn't say that there's a forced requirement of how much we're putting into our stores, but rather we are looking at how do we optimize own brands and third-party brands to make sure that the profit story is the strongest, and that really does come down to consumer pull velocities. And as I mentioned before, that does tend to lead us to our own brands, but always opportunity for other brands in there as well.

Andrew Semple (Special Situations Equity Research Analyst)

Thank you.

Charles Bachtell (CEO and Co-Founder)

Thank you.

Operator (participant)

That concludes our Q&A session. I will now turn the call back over to Charlie Bachtell for closing remarks. Please go ahead.

Charles Bachtell (CEO and Co-Founder)

Yeah, just want to thank everybody for joining in today, and most importantly, want to thank the Cresco team for a really solid quarter. Thank you, guys. Congratulations, and we'll talk to everybody in a couple of months. Goodbye.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.