Cresco Labs Inc. (CL) Earnings Call Transcript & Summary

Good day, and welcome to the Cresco Labs Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Good morning, and welcome to Cresco Labs' Fourth Quarter 2020 Earnings Conference Call. I'm joined today by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our Chief Financial Officer, Dennis Olis; and our Chief Commercial Officer, Greg Butler, who will be available for Q&A. Prior to this call, we issued our fourth quarter and full year 2020 earnings press release. This document has been filed with SEDAR and is available on our Investor Relations website at investors.crescolabs.com. We plan to file our corresponding financial statements and MD&A for the 3 and 12 months ended December 31, 2020, on SEDAR, subsequent to this call. Before we begin our remarks, I'd like to remind everybody that certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian securities legislation as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include estimates, projections, goals, forecasts or assumptions, which are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations. Additional information about the material factors and assumptions forming the basis for our forward-looking statements and risk factors can be found under Risk Factors in Cresco Labs' publicly available filings at www.sedar.com. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco Labs will refer to some non-IFRS financial measures, such as adjusted EBITDA and operational gross profit, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for the calculation of these measures and reconciliations to the most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Please also note that all financial information on today's call is presented in U.S. dollars, unless otherwise noted, and all interim financial information is unaudited. With that, I'll now turn the call over to CEO, Charlie Bachtell. Charlie, please go ahead.

Good morning, everyone, and thank you for joining us on today's call. We hope you and your families remain healthy and well. For those on the call today who have participated in U.S. cannabis for a long time as an investor, a patient, an employee or a business owner, your support and effort helped build this sector into the fastest-growing industry in the U.S., employing over 330,000 people with over $17.5 billion in sales during 2020. To the many new investors and stakeholders on the call today joining us for the first time, welcome. I'll begin our call this morning with some highlights from the fourth quarter and full year and review the 5 specific ways Cresco Labs delivered growth and shareholder value in 2020. I'll also provide a preview of our growth drivers in 2021 and discuss some of our most recent announcements. Dennis will then cover our financial results and capital position in more detail. After that, we look forward to answering your questions. In a year marked by unprecedented challenges, 2020 was remarkably validating for U.S. cannabis as the industry was designated as an essential business alongside pharmacies and grocery stores. And for Cresco Labs, 2020 was a remarkable year of execution and growth. At the outset, I want to spotlight that our results could not have been achieved without the outsized contributions from the entire Cresco Labs family. And I couldn't be more proud of what we accomplished together. In validation of our own thesis, we are winning this industry by building the most strategic geographic footprint, establishing meaningful material positions in each of those markets and prioritizing the middle 2 verticals of the value chain, branded products and the wholesale distribution of those branded products. Our record performance in 2020 proves the value of our differentiated strategy and demonstrates our best-in-class ability to execute it. We are telling a unique story of strategic breadth with depth and execution. The investments we made, the hard work devoted by our team and our unwavering focus on the stated strategy led to outstanding results. Revenue in 2020 was $476 million, a year-over-year increase of 271%, the largest growth among Tier 1 MSOs. We generated $116 million of adjusted EBITDA, over 15x more than 2019. With $274 million in 2020 net wholesale revenue, the highest among any operator, Cresco Labs is the #1 wholesaler of branded cannabis products, period. Our retail revenue of $202 million for the year was up 316% from 2019. With $69 million in Q4 from 19 stores, our Sunnyside retail platform generated average revenue per store of $3.6 million, the highest among Tier 1 MSOs. After delivering 3 consecutive quarters of more than 40% sequential top line growth, in Q4, we substantiated this growth and generated another quarter of record revenue at $162 million, record operational gross profit margin of 55% and record adjusted EBITDA of $50 million. With all of the challenges that 2020 presented and the results that Cresco Labs produced, it would be hard to say that anyone managed the year better than this team. Last year, we introduced the framework for the 5 specific ways Cresco Labs would deliver growth and shareholder value in 2020. We dedicated ourselves to this strategy while creating strategic breadth with depth and execution. First, we invested our resources in the most strategic markets. Including Florida, Cresco Labs will have meaningful operations in all 7 of the top 10 most populated states in the country that have cannabis programs. We also now have operations in 7 different markets, with greater than $1 billion annualized run rate. With the recently announced Cultivate acquisition, we will have a top 3 market share position in 3 of these $1 billion-plus markets. And in 2020, we proved that we're investing in the right states as markets in our footprint grew 55%, outpacing all remaining markets, which saw a 34% growth. In Illinois and Pennsylvania during 2020, we completed the largest scaling of operations in our company's history. In Q4, we achieved our highest-ever market share of both states. This is proof that when we invest in a market, we take share. We've established the most strategic footprint in cannabis and developed a proven playbook to gain leading market positions. Second, we are the #1 wholesaler of branded cannabis products, period. 2020 net wholesale revenue was $274 million, by a meaningful amount than most in the industry. In Q4, per BDS Analytics, our brand, Cresco, was the #1 sold cannabis brand in the country, while our other brands like High Supply were among the fastest growing. During the quarter, we increased wholesale penetration by 12% sequentially and distributed our industry-leading house of brands to a record 929 stores in 9 states. We also continue to bring innovation to market through recent launches, including the Wonder brand, Good News gummies, High Supply Live Cartridges and Mindy's chocolate. While others prioritize new retail stores in 2020, Cresco Labs is laser-focused on building expertise and executing in the middle 2 verticals of the value chain to achieve big market shares in the states that matter most, expertise that will continue to create competitive advantages for years to come. Third, our retail platform outperformed. 2020 retail revenue was $202 million, an increase of $154 million, or 316% from 2019. Q4 same-store sales grew 166% year-over-year on a basis of 15 stores. Our average revenue per store for the 19 stores opened during the entirety of Q4 was $3.6 million, by far the highest among Tier 1 MSOs. While Cresco Labs remains dedicated to the middle 2 verticals of the value chain, our Sunnyside platform, supported by our team's execution of an omnichannel capabilities, produced massive same-store sales growth, attracted more customers, grew transaction sizes and earned an outsized share of the market. We opened 1 new Sunnyside location during the fourth quarter in Naperville, Illinois on December 23, making Cresco Labs the first and still only operator to open all of our eligible stores in the state, another example of how we're strategically developing high-volume retail outlets and executing on all of our opportunities in limited license states. Fourth, we took share in California. In 2020, while California state sales increased 25%, Cresco Labs' California revenue more than doubled since integrating Origin House in Q1. In the world's most competitive cannabis market, our brands continued to be received exceptionally well. Our brand, FloraCal, was the top 10 flower brand in California during Q4. And partner brand, Kings Garden, improved to third on the list. Cresco's Liquid Live Resin continues to grow and is on the verge of the top 10 in the vape category, and Kings Garden Shatter was #1 in its category. There's no better test for an operator's ability to execute in wholesale than competing in California. Quarter after quarter after quarter, we took share in this state in 2020. Over the long term, to build a truly national cannabis company, winning in California is a prerequisite, and we look forward to growing our share in 2021. Fifth, we generated substantial operating leverage as we scaled. SG&A as a percentage of revenue went from 48.6% in 2019 to 31.3% in 2020. To put it another way, while our SG&A expense was $23 million higher in Q4 2020 than in '19, revenue grew $121 million over the same period. This is how you create long-term growth and sustainable profitability. Make the investments in people and processes to support growth, then execute the strategy and scale efficiently. The U.S. cannabis industry saw massive growth in 2020, and Cresco Labs consistently outpaced it. As for the framework we laid out at the beginning of the year, we executed. We delivered on what we set out to do, resulting in the largest year-over-year growth top and bottom line among Tier 1 MSOs, the most wholesale revenue in the industry and the highest-performing retail platform, strategic breadth, depth and execution. In 2021, it's rinse and repeat. And as we deploy our playbook in more states, we will drive substantial growth from those markets. Now here are the 3 ways Cresco Labs will deliver growth and shareholder value in 2021. First, executing our playbook in the most strategic markets through organic growth and accretive M&A. Our goal is ultimately to achieve top 3 market positioning in all 10 of our strategic states. Just as we did in Illinois and Pennsylvania in 2020, we're executing our playbook to go deeper in more markets. We've seen the power of executing this strategy already. As a reminder, we grew revenue 96% in the second half of 2020 versus the first half. In 2021, cultivation and manufacturing expansion projects are underway in Massachusetts, Ohio and Michigan. That will allow us to drive robust wholesale growth in the second half of the year. We've also recently announced 3 phenomenal acquisitions in Florida, Ohio and Massachusetts. Through our enhanced M&A framework, we've deliberately canvassed opportunities across the sector and found accretive assets with premium cultivation, differentiated retail and strong management teams that will further our vision of becoming the most important company in cannabis. Through the Bluma transaction, we gained access to the key market of Florida. With Bluma's ultra-premium flower cultivation and highly productive retail stores, we'll enter the state with competitive advantages that will drive top line growth and market share gains. We'll also immediately benefit from the unique margin profile achieved in Florida's forced vertical operating environment. That will be new to our P&L. With an expected close in Q2, we look forward to entering Florida and amplifying operations this year to establish a material market position in the Southeast. In February, we closed on the Verdant acquisition and adding 4 retail stores, all of which reside in dense population centers of Ohio, the 7th largest state in the country. As we increase our processing and manufacturing operations, Ohio will represent another opportunity to achieve 100% wholesale penetration in the back half of the year. Finally, last week, we announced the definitive agreement to acquire Cultivate, a long-time operator in Massachusetts. Combined operations upon closing will include nearly 100,000 square feet of active canopy, 3 adult-use retail locations and 3 medical retail locations, the maximum allowed for cultivation and retail in the state. This transaction will vault Cresco Labs into a top 3 position in Massachusetts, the Northeast's largest adult-use market, again, the third such billion-dollar-plus market where we will have a top 3 share. Upon closing the transaction expected in Q4, Cresco Labs will operate the maximum number of retail stores in 4 of our 6 states with retail limits. At the precipice of a transformational moment in U.S. cannabis, now is the time to further our leadership in the country's most important markets. Second, increasing our leadership as the #1 wholesaler of branded cannabis products. In 2021, our brands will reach more shelves across the country. We'll generate greater wholesale velocity, and we'll increase supply in key states like Massachusetts, Ohio and Michigan. Automation and process improvements will not only increase capacity and throughput from our existing facilities, but will further enhance the quality and consistency of products for the benefit of consumers. We'll roll out new brands along our innovation pipeline as we continue to match our offerings with consumer needs. And to us, being the best wholesale operator means going beyond having the single best-selling cannabis brand in the country. In 2021, you'll see us continue developing our portfolio of leading brands to serve all segments of customers, occasions and form factors to take share across categories. Third, operating high-volume strategic retail stores. In 2021, we'll continue to refine our retail model to drive performance that exceeds pro forma share and state averages. This year, we could potentially see the return of tourism and increased foot traffic, which may challenge some operators' ability to manage throughput. We look forward to the test as we continue improving our 4-wall economics and executing a superior omnichannel approach to retail at Sunnyside. Our record-setting results in 2020 clearly proved the value of our differentiated strategy and our best-in-class ability to execute it. We're winning this industry by building the most strategic geographic footprint, establishing top 3 positions in each of those markets and prioritizing the middle 2 verticals of the value chain. In 2021, it's rinse and repeat, and we'll execute our playbook to meet the needs of our stakeholders while driving growth and shareholder value. At the risk of being repetitive, strategic breadth, depth and execution. I'll now pass the call to Dennis, our CFO, to provide highlights from our financial results and then discuss our capital position.

Thank you, Charlie, and good morning, everyone. 2020 was a remarkable year for Cresco Labs. Our investments in strategic states, our leadership in the wholesale distribution of branded products and our highly efficient Sunnyside retail model has led to outstanding results. For the full year, we generated 271% top line growth, the highest among Tier 1 MSOs; 30% improvement in SG&A as a percent of revenue, also highest among Tier 1 MSOs; $116 million of adjusted EBITDA for the full year, 15x more than 2019. We also strengthened our cash position, exiting 2020 with $136 million in cash on the balance sheet compared to $49 million at the end of 2019, thanks in part to $39 million in positive operating cash flow over the past 2 quarters. Revenue in Q4 was $162 million, an increase of $9 million or 6% sequentially from effectively the same asset base. Revenue mix for the fourth quarter was 56% wholesale and 44% retail. Most importantly, while state market growth was muted after incredibly strong Q3, Cresco Labs capitalized on the opportunity and took share in several states. 86% of revenue was contributed from our top 3 states in 2020. We set out to establish material positions in Illinois, Pennsylvania and California, and we did. As we dedicate our resources to more states in 2021, we'll see increased contributions across our footprint and continue to diversify our growth. Going forward, we'll provide this metric on an annual basis as a guidepost for our state-by-state revenue mix. Fourth quarter operational gross margin was 55%, a 192 basis point improvement sequentially. Similar to 2020, we expect to see some variability quarter-to-quarter over the coming year as new cultivation facilities come online and our revenue mix shifts between states. However, we expect there is still room for upside of gross margins as we achieve scale in more states and continue creating efficiencies across our footprint. Excluding share-based compensation and onetime costs, SG&A was 27% of revenue compared to 26% in Q3. We'll continue to invest in automation, product innovation, consumer analytics and our brands to support our next phase of growth. While this will add some variability to SG&A as a percent of revenue quarter-to-quarter, we fully expect to see continued improvement, especially in the second half of the year and beyond. Fourth quarter adjusted EBITDA was $50 million, an 8% increase from Q3. As a team, we're thrilled with sustained profitability exhibited by our business as we held EBITDA margin over 30% while reinvesting to support greater scale. Q4 net CapEx was approximately $8 million. Q4 operating cash flow was $21 million compared to $18 million in Q3, resulting in record free cash flow of $13 million in the quarter. During the quarter, we amended our debt facility, extending the maturity to January 2023, increasing our prepayment flexibility and upsizing it by $86 million to fund the expansion of our operations. We exited Q4 with $136 million in cash, and subsequent to the quarter, raised an additional $125 million, putting our pro forma cash position at $261 million. In this additional raise, we were pleased to include 7 new and existing institutional investors, all of whom value our differentiated strategy and execution. Our capital position has never been stronger. And in 2021, we intend to pursue both organic growth opportunities and additional accretive M&A to generate returns and shareholder value. Also subsequent to the quarter, we expect to complete the divestiture of 180 Smoke, a legacy asset from Origin House. 180 Smoke historically contributed about $2.5 million of revenue per quarter, but was not part of our core strategy. We continue to stay disciplined and thoughtful about capital allocation, operating only in the most strategic markets with the goal of achieving top 3 market positions in each. I'll now briefly touch on prevailing market dynamics we're seeing so far in Q1. Overall, 2021 will be another incredibly strong year of organic market growth around the country, but we recognize that seasonality and short-term demand trends do exist. In Illinois, for example, only 2 new retail stores had opened year-to-date as of March 8. However, we've seen a handful of new stores opened just in the last 2 weeks, and more openings are expected between now and the end of Q2 as we wait for the next 75 dispensary licenses to be issued and opened. In California, illicit supply is harvested and becomes available in Q4. And we, therefore, see a stronger cadence of market growth in Q2 and Q3. Despite these short-term dynamics, our strategic footprint offers ample opportunities, and our strategy will continue to enable us to grow above the total market, especially in the second half of the year. After record performance in 2020, we'll repeat the playbook for success in 2021. We're making the investments today to expand cultivation and manufacturing, build our back-end operations and grow our team to drive substantial top line growth for the future. Additionally, strategic acquisitions like Florida and Massachusetts provide substantial platforms for long-term growth and sustainable profitability. At Cresco Labs, we intentionally focus on growing the company in a way that creates success today while also planning for the long term. You see this in our approach to the value chain. Branded products and wholesale distribution not only provide incredible revenue opportunities today, this is also where the most value will be derived long term. We're taking the same approach to potentially banking reform. We're executing operationally given the regulations today and simultaneously preparing for the future. We recently filed Forms 40-F, S-8 and F-10 with the SEC to begin registering our shares in the U.S. We also plan to begin reporting under U.S. GAAP this year. When changes happen at the federal level, we will be ready to capitalize on the opportunity. In summary, 2020 was a remarkable year. We grew our market share in several key states. We executed the integration of Origin House and took meaningful share in California. We're the #1 wholesaler of branded cannabis products. Our retail stores produce massive same-store sales growth and are the most productive on a per-store basis among Tier 1 MSOs. On top of that, we generated 30% EBITDA margins and positive free cash flow in both Q3 and Q4. With pro forma cash of $261 million, our capital position has never been stronger, and we're prepared to execute on the opportunities in front of us. We're encouraged by the increased engagement we're seeing from the capital markets from long-term participants, new entrants and from those still on the sidelines. We echo their excitement about the future of this industry and look forward to another outstanding year ahead. Thank you for your time. I'll now pass the call back to Charlie for final remarks.

Thanks, Dennis. The last 12 months will be remembered forever, for the challenges we all have experienced and the change that had to be managed. As we put 2020 behind us, it's important to note, challenges and managing change will be a constant in this industry. A dynamic, complex regulatory structure and unpredictable events will be par for the course for years to come. That's why nothing is more important than a company's ability to articulate a sound strategy, manage through change and execute despite any challenges that arise. We've built Cresco Labs to succeed in the status quo as well as in the inevitable progress we anticipate throughout the state and at the federal level. Everything we've done to grow as an organization, from our strategic regional footprints, disciplined capital allocation, emphasis on social impact and equity, engagement in government affairs, focusing on the middle 2 verticals of the value chain, spearheading omnichannel retail, all of these elements have created our current success while preparing us for sustainable long-term growth as this industry evolves. We formed this company in 2013 with the mission to normalize and professionalize the industry, and we're achieving this mission. To wrap up, I know I speak on behalf of the entire team when I say that I'm very excited about the future for Cresco Labs. We are validating our thesis and positioned to capitalize on opportunities in 2021 and beyond. Our industry-leading execution was on display in 2020, and it's what you can expect from Cresco Labs going forward. We embrace the challenges of executing in an ever-changing landscape. We don't fear it. We're building the company to win it. Thank you for your time today. I'll now ask the operator to open the line for questions.

[Operator Instructions] Our first question comes from Aaron Grey from Alliance Global.

Congrats on the quarter. So first question from me. I just wanted to talk a little bit about performance in California, just if you could give a little bit of incremental color about how you guys performed there during the quarter, where you guys stand right now in terms of penetration on the distribution side and then just updating us in terms of -- I know you gave a little bit of color there on the prepared remarks, but updating us in terms of kind of your plans to really kind of drive growth there in terms of additional points of distribution and then also introducing the new products there.

Aaron, thanks for the comments. And with regard to California, California is the largest cannabis market in the world. So we're excited, we're encouraged what we're seeing there. And we also know that us being in California, developing a California game plan and executing it is key to long-term success, not only in that state, but across our platform. So the realization that we were able to create quarter over quarter over quarter share growth in that state, now we have not only some of our own brands, but other partner brands on our platform that are in or near the top 10 from a brand standpoint in the state. Again, very encouraging and sets us up well, not only for future success there, but across the rest of the platform. As it relates to additional sell-through and penetration, I'll hand it over to Greg Butler here.

Thanks for the question. I think, as Charlie mentioned, we remain extremely bullish in California. Q4, as a market, as Dennis mentioned earlier, has a little bit of seasonality with what they call Croptober impacting. But as we look at run rates, entering -- ending Q4 and as we look at Q1, really encouraged by what we're seeing in the market. Regarding distribution, we feel good about our distribution. We remain one of the largest distributors in the state. We've added a number of accounts in Q4. We continue to add accounts as we announced during the Q1. And so from a penetration perspective, we still hold that we have one of the strongest, if not the strongest, number of accounts being called on by a distributor, with plenty of room for us to continue to not only open new doors as new doors open up in the state, but continue to build our distribution of owned brand and partner brands across the state.

[Operator Instructions] Our next question comes from Camilo Lyon from BTIG.

I wanted to ask about your CapEx plans for this year. How we should think about your gross CapEx expenditures? And how that ties into cultivation assets that are coming online and how that plays through the P&L? You talked about the back half reacceleration, but help us think about implications on both the gross and SG&A line. That would be incredibly helpful.

Definitely. Thanks for the question. We're really excited to sort of take that playbook that we've developed and deploy it again -- in 2020, that will create these results in 2021. For specific details on what we're doing in '21, I'll kick it over to Dennis.

Thanks, Charlie. Thanks for the question. So as Charlie noted, we're extremely pleased with the return that we have on our invested capital that we've done historically, and we'll continue to be diligent in our spend. As we look to 2021, you can assume that the net CapEx expense is going to be in the $10 million to $15 million range per quarter. That's after TI improvements. As we've noted in the past, the funds for the expansion in Massachusetts, Ohio and Michigan are already funded through previous sale leasebacks. And we'll continue to use those funds to build the capability in our cultivation and processing centers in the first half of the year so that we can reap the benefits of those expansions in the second half of the year. In terms of where the CapEx expense is going to hit on the P&L, the bulk of the $10 million to $15 million expense per quarter will be spent in the area of COGS around automation, around expanding our cultivation capabilities and so forth. There will be a small component of that, that will go toward back-end improvements in automation and IT systems and accounting and so forth. But 80-plus percent of the expense will fall into the COGS line.

Thanks for the color on that. That's very helpful. With respect to the Bluma acquisition, I'm curious to understand how you envision going after this market. It's a very large market and has got a solid position in there from a product perspective and a premium price perspective. How do you plan to leverage this acquisition? And ultimately, what is the vision that you have for this market?

It's a great question. We're very excited about the Florida market. It's one of the biggest markets in the country. It fits our overall strategy, of course, with having the most strategic geographic footprint in the industry. And the way that we look at that market, we've been asked before, it's not a wholesale market, does that fit the Cresco sort of platform strategy? And our thesis and our perspective on that is it absolutely does because it's not a wholesale or retail market. It's an execution market. The way that, that structure is with the forced vertical integration where you're not able to rely on third-party product to put on your shelf and you're not also now -- maybe you're not able to rely on third-party shelf to get your product into, you've got to be self-sufficient. You've got to prove that you can build cultivation facilities, that you can take quality cannabis, that you can open retail stores and then you can get your products in the hands of consumers. And when you look at Florida from that perspective, you're competing against yourself. It is an execution game. And as we always talk about, we are execution. That's what we do. So it really -- it fits our platform. It fits our strategy very well. And we see a lot of upside still to come in that Florida market, not only from a medical market standpoint, but, of course, an eventual flip to an adult-use structure there, too. So very excited about Florida.

Is this a test-and-learn year for Florida? Or will you accelerate the growth opportunity?

I think we'll be accelerating the growth opportunity there. Again, it's our -- it's execution. So it really is -- it's reliant on us to push that ball forward there. And of course, the benefits of Florida to our P&L, we are the only one of our peers that don't have those unique margin profiles of Florida in the P&L yet. So we're very excited about the state.

Our next question comes from Vivien Azer from Cowen and Co.

Charlie, given the news that's coming out of New York in the last, call it, 24 hours, I was hoping that you could comment on some of the press reporting around the perceived market structure, whether it's going to be 2 tier or 3 tier and how you would think about executing against either of those paradigms.

Vivien, thanks for the question. Look, we are -- we're very excited. We're encouraged about the progress that we're seeing in New York, full stop. Any time you have a state that is having these levels of discussions and potential agreement on migrating from just medical to medical and adult use is a phenomenal leap forward for not only the industry in that state, but the industry at large. So I think it's also -- though it's premature to really put too much stock in what we're hearing so far, it's very limited. I think we're all -- that are engaged in the state are active in conversations. New York is interested in making sure that all stakeholders that are impacted by the decisions there have a voice, and they're taking all of those into consideration. So I think it's a little premature to comment too much on what's been released in the press so far. And we look forward to seeing a draft of actual bill language. Hopefully, we'll be seeing that soon. As far as a 2-tier or 3-tier distribution platform. Again, this is where Cresco has built this organization to really be successful with either structure because either one of those structures is a potential eventuality for the industry at large. So with us focusing on the middle 2 verticals of the value chain while also having distribution in certain states, our house of brands platform, that sort of approach is really good for not only self-distribution but if there is a 3-tiered system that gets developed at some point in time, that's what that third tier of distributor also wants to distribute as well. And Greg, do you have additional comments on that area?

No. I think Charlie [ has said ] most of that. I think because we've always been a wholesale customer-focused operator, we would view a 3-tier system as being very similar. We would compete to make sure that we've got our share of those trucks going out. And we know that, from any other industry that operates in a similar manner, that the ability to bring quality, scale products to market, innovation onto those trucks is a way that you can not only win wholesale customers but win over distributors, too. And so very core to our business today and something that we think we could leverage if that's the way this goes.

That makes good sense and certainly consistent with your commentary around your focus on wholesale. Sort of follow-up on that then. Obviously, the acquisition in Florida is going to skew some of those metrics a little bit. But can you talk about where in the medium-term basis you guys would aspirationally look for your revenue mix to land wholesale versus retail?

Might kick that over to Dennis.

Yes. I think what you'll see is, as things continue to grow here, and we start to get into Florida, Massachusetts and other states and build capabilities, expand in California and other places, I think that, ultimately, our -- we will land somewhere in the 60%, 40% range, 60% wholesale, 40% retail.

Our next question comes from Kenric Tyghe from ATB Capital Markets.

Congrats on the quarter. Charlie, just a different attack on the earlier question with respect to New York. Can you speak to what needs to happen in terms of evolution and readiness for this to work? You've seen a number of states taking very different approaches in terms of very -- someone with particularly protracted lead times. Virginia would jump to mind. Others where they perhaps rushed it up and ended up face-planting. Can you just speak to the readiness on the ground or rather the lack there, rather what needs to happen in New York for this to work, yes, through the course of this year?

Yes, it's a great question. And thanks, Kenric, for the nice comments. Again, very encouraged to see the progress in New York. You're talking about the fourth most populated state in the U.S., the financial capital of the world. So we really like the way that this is going, and it is progress for the industry and for the state and for Cresco. So as far as what we've seen in our experience is really key to a successful launch of an adult-use program, use Illinois, probably is the best example, is the incumbents leading the charge because the infrastructure, to whatever extent, is built. The operating experience is built. Of course, you need new entrants in the space. You need more inclusive, diverse entrants in that space, and that's going to be a priority in -- I think the way that New York is approaching this. But it's really important to have those incumbents, experienced successful operators, lead the charge. And I think that's something that we'll see with how New York unfolds. As far as readiness, to your point, it has been a fairly limited medical market to date. Some retail infrastructure is there. There's limited production infrastructure. But only speaking for Cresco Labs, this is kind of our sweet spot. As we've showed over the last couple of years, we know how to build buildings. We know how to copay cannabis. We know how to open more stores. And we know how to get product into the hands of consumers very efficiently and very quickly.

Great color. And if I could just pivot back to Illinois quickly. [ Your capital ] I see, your own 10-store footprint. Obviously, we have new licenses coming on stream through the year, but only saw 2 of those in the first quarter. Recognizing it will be lumpy, could you give some indication as to whether there's potential for a little bit of a catch-up here by way of store build in the second quarter? And how you think about or how we should think about potential evolution and a store exit in the Illinois market looking into 2022?

It's a great question. And it's a great talking point, too, because this is where you've got to build these organizations for the long-term play in the industry. And you will see some lumpiness from quarter to quarter as these new evolutions of these markets unfold. To your point, there was very limited store openings in the first 2 months of Q4. And then there was quite a few store openings in the last like 3 weeks of Q4. We're seeing a similar trend develop in Q1, where we only had 2 stores open, I think, before March 9. And then you've had a handful plus of stores open in the last 2 weeks, and we expect that momentum to sort of continue, especially as -- hopefully continue to, out of the COVID issue, weather gets nicer. Those are other things that have impacted Q4 and Q1, but we're very encouraged by what we've seen in the last 2 to 3 weeks as far as momentum on that side. And I know Greg's got some perspective on this, too. Greg?

I think the only thing I'll add to that is you're absolutely correct that we closed Q4 about 85 active dispensaries in the state. We had estimated a few more to open each month in Q1. That's been slow, to your earlier point. And what I would tell you right now is what we're seeing is we are looking towards Q2 here is that dispensaries are starting to open up. And so that's definitely your question about catch-up, we will now start to see kind of the revenue from those stores materialize as we've seen in the past, which is these stores open and they're fairly incremental volume. So we would expect that going forward.

We have a question now from Pablo Zuanic from Cantor Fitzgerald.

Two questions, Charlie. But first, just on Pennsylvania. I mean if I try to put your comments together with the data, you would see that Pennsylvania as a market has softened, particularly in the fourth quarter. And I know it's a backward-looking question, but if you can comment on that. And where I'm coming from is I'm looking at BDS Analytics in California's market was down 6% in the fourth quarter. Illinois official data shows it was up 14%. Pennsylvania, there's no official data, right? But you said you gained share in all those 3 states, and your sales were up 6% sequentially. So they would mainly think that Pennsylvania is softening. Can you comment on that? You probably have a good view of that market given your large presence there.

Yes. Thanks, Pablo. I think what we're -- to be specific about it, again, we saw great sort of performance in Q4 as a sector, but then there was definitely certain markets that did better than others. As you mentioned, California was down from Q3 to Q4. But year-over-year, Q4 was up 20% compared to 2019. So softness in California, where we're able to take share. Pennsylvania, I think, was -- I don't know that there is softness necessarily, but I think, with our numbers being so heavily weighted in those 3 states, that's where you get that balancing of the California results with fairly stable results in Illinois and PA. I would also say this is an opportunity to clarify too that wholesale performance in a state doesn't mirror retail performance in the state on 1:1 ratio in those quarters, so you've also got a bit of that.

Okay. And then just -- we see in the future the advent of interstate trade. Just tell us what are your views on that. I know it's a crystal ball question. But if you're talking to investors and analysts, how do you -- I guess, there's 2 more question. What do you need to do to adjust your operation to interstate trade? Is it a huge adjustment? Or are you well positioned? And how would you compare yourself with other MSOs in terms of that leap and adjustment you have to make? Would you be better positioned than others? Just comment on that, if you can.

Certainly. We're excited for that potential, right, to have the industry open up and really be a normalized industry with national reach and depth. It has always been a part of our thesis and the way that we built the business, hence, focusing on those middle 2 verticals of the value chain, creating those brands, figuring out distribution. It also lends to our very strategic approach to our state footprint, where we have developed regional hubs, right, points of execution of depth, whether you look out West, whether you look in the Midwest, whether you look in the Northeast and now with our entry into Florida. So again, focusing on the middle 2 verticals of the value chain, creating those brands and then also establishing the strategic footprint really prepares us well for the eventual migration to interstate commerce.

Okay. And if I could add one last one. In the case of Illinois, obviously, these new 75 stores have been slow, right? I think there's been lawsuits, maybe bureaucratic issues. I mean what can other states learn in terms of what's happening with Illinois, in terms of a very good intention, right, of doing 1 store reg to existing operators and then 75 new licenses for newcomers, what would other states learn from that experience in implementing that very good intention?

Yes. I'll try and give you a brief answer because I think to unpack that could take hours. But I think, very simply, incumbents, the strength of the incumbents in that market are incredibly important. Because if you look at Illinois and the phenomenal year that Illinois had, every single dollar was generated by incumbents. Every single new job was created by incumbents. So it's really important to be able to rely on the existing operators in the state, especially when you have high-quality, high-performance operators. The other thing is you've got to -- well, you have to be sensitive to the components that go into the scoring metric. You also have to try and make them very objective and sort of insulate yourself from the potential challenge going forward, and it's easier said than done. So again, I think we could spend a couple of hours talking through that. But relying on incumbents and then really, really moving forward with an objective evaluation and distribution is key.

Our next question comes from Michael Lavery from Piper Sandler.

Just wanted to sort of follow up on some of the retail questions and the interstate commerce piece and then tie them together a little bit. Some of the metrics you gave on your retail stores are certainly solid. And so even if your focus is more the wholesale brand kind of middle piece of the value chain, it certainly seems like you can walk and chew gum. So as you think about interstate commerce, even if it's unclear how and when it may evolve, the one thing that seems clear is that the retail stores will certainly be specific to one state. And so isn't that still kind of a nice anchor to have? And how much -- I guess, are you deemphasizing the retail stores? It sounds like maybe not too much, but is that the right mindset for how to think about the role they could play in an interstate commerce world just given geographically specific anchors? And is that important?

Yes. Thanks for the question. Greg, do you want to take this one?

The rest of your question is, are we de-emphasizing retail? What I'd tell you is retail is a part of our business now. Our core business will always -- has been always be wholesale. But on the retail side, as Charlie mentioned earlier, we are capped in Illinois. We're allowed to have 10. We have 10. We will, with Cultivate, be it our cap in Massachusetts or what any operator can have which is 3 and in Ohio. And in many ways, Bluma, the deal for us, one of the levers for growth is to expand its retail footprint in Florida. And so our real objective right now is to maximize both the revenue and the margin we get out of the retail we have in the states, which we are fully utilized today from our cap perspective and then continue to build out retail and markets where it makes sense. But long term, our view is if you look at the markets we operate in, take a market like Massachusetts, we are capped at 3. And there will probably be somewhere of 100 new dispensaries opening up in that state alone. And so we want to make sure that while we are maximizing the margin revenue of those 3 stores, we're really flying across the other 100-plus stores that exists in that state. And I think if you go state by state, like California or Michigan, you see those dynamics at play, which is ultimately you want to play across distribution, not just within the capped number of stores we're allowed to operate. So very important today, we're maximizing what we can get in those stores. But again, long-term vision is playing across the distribution that we know is coming fast and furious.

Yes. No. Good perspective and makes sense. Just one more on pricing. Can you give a sense of how you see that maybe evolving or not? And specifically thinking maybe of some states where capacity has been ramping up like Pennsylvania or Illinois, are you seeing pricing hold steady? Is there any downward pressure? Can you just give some color on how you're seeing those dynamics evolve?

Why don't I continue and take that as well? As pricing, we obviously get a lot of questions on pricing. There's a lot of hypotheses that pricing is going to come. We are watching that closely. I would tell you right now, while there was some price compression in 2017, 2018 across the market, it rebounded. And we're not seeing the price compression today. Now we will always look to the future. What we would say is our business is well designed to handle pricing, scale and scale costs of being a large producer like ourselves gives us that cost advantage, which can make sure we stay competitive if pricing comes in the future. But I will tell you, as it stands right now, we're just not seeing the compression today.

Our next question comes from Matt McGinley from Needham.

I agree with your assessment that your retail productivity is outstanding. Do you think you can sustain that level of retail revenue per unit with the addition of retail units in Ohio and Florida? And maybe put another way, can you comp enough in Illinois, which presumably is the majority of the reason why your productivity is so high, to offset what will probably be, what I would assume would be lower volume units in Florida and Ohio?

Matt, thanks for the question. Again, I couldn't be more proud of the team on the retail side and the productivity and the efficiency that they've been able to create. And I'll hand it over to Greg here for more color. But really, systems are, I would say, the biggest driver, and processes are the biggest driver of why you're seeing such an efficient platform develop here at Sunnyside. Greg, more color?

You are right. As we open more stores, you do have to plan for productivity on a per-store basis would go down. And so you're absolutely correct there. But what I will tell you, though, even in our core stores, we've just begun to really engage on the e-commerce platform on figuring out how do we get more revenue out of every trip to one of our stores, whether that's through different product assortment offerings, whether that's through basket builders, whether that's through incenting, kind of if you're a flower-only consumer to come in and try an edible. There is tremendous growth in productivity that we can see in our stores ahead of us as we get smarter on the e-commerce side. But from a pure retail business perspective, you are right. As you open more stores, we do have to plan for a productivity per store to define, but lots and lots of growth ahead of us and how we can continue to grow those trips.

Great. And on the adjustments to the add-backs, I should say, to gross margin and G&A, they really surged in the fourth quarter. I think at $18 million added back to G&A and $10 million related to gross margin with rebranding and expansion costs. Can you walk us through what that $18 million was in the fourth quarter? And given the announcement that you had in the first quarter, does that remain elevated into this year? Or is that costs that may have been pulled forward into the fourth quarter? And then can you walk through kind of what those marketing spend costs and things related to product launches are an ongoing thing, why should we exclude that $10 million from the gross margin on an ongoing basis? Like what's really onetime in nature about that sort of spend?

Dennis?

Yes. Thanks for the question. So from an add-back standpoint, as it relates to -- let's start with the gross margin and cost of goods sold impact, the $9 million or so. The bulk of that is the final cleanup associated with Origin House, and that's a legacy of rebranding the product, cleaning up some excess inventory and so forth. Those costs will go away -- are gone. So we will no longer carry those costs going into 2021. This is a final cleanup of a lot of the acquisition and integration costs associated with Origin House. So going forward, that won't exist. From a -- the $18 million that you noted back down in SG&A, a large component of that, and you'll see that in our filings that come out later today or tomorrow, is associated with a deal that we consummated with a former executive of the company, a settlement that had -- the negotiations had begun last quarter. We resolved it this quarter, so we did take a significant expense for that in Q4. Outside of that -- so that's, again, another onetime cost. There is a small amount of COVID cost in there that will not carry forward into 2021. And then the rest of it is very small dollars associated with acquisition costs, a little bit of severance costs and the like. So when you look at both the rebranding costs, which we carried in -- we just wanted to be consistent in carrying that forward through the full year of 2020. Those costs will not carry into 2021. When you look at the $18 million of SG&A, the bulk of that will not carry forward. Those are onetime costs and will not carry into 2021 as well.

Our next question comes from Neal Gilmer from Haywood Securities.

Maybe just one question from me on -- for the follow-up on the Florida market. From Bluma's perspective, one of the constraints for going aggressively into that market was obviously the balance sheet. With respect to opening more retail stories, at least that's my understanding. When you take a look at the asset when you finish the acquisition, can you give us a sense as to sort of what sort of cultivation levels they have? And does that support more retail openings in the near term? Or does your focus need to be on expanding cultivation and then we should look towards either late this year or early next year of increased retail presence in the Florida market?

Yes. It's a great question. This is Charlie. I'll take it. Again, the philosophy of Bluma, the approach to the business, super strategic, very in line with Cresco. You only open as many stores, high volume, strategically located stores as you need in order to get your volume of product through them. So I wouldn't -- so the way that we're looking at it is, as we add additional capacity from a cultivation standpoint, processing standpoint, you will see stores open. We've already -- there was a public disclosure of investment down there to expand the capacity. That's something that we will continue to do in a post-closing scenario. And so I think -- I expect to see growth down there -- second half realistically focused. And definitely, into 2022, you'll see a commitment from Cresco to that Florida market. We like it a lot.

Our next question comes from Derek Dley from Canaccord.

Yes. This is Luke on the line for Derek this morning. I just wanted to -- a couple of P&L questions, I guess. I just want to dig a little bit further on how you see your operational gross margin playing out over the course of the year. I realize that Bluma closing in Q2, we're likely going to see a step-up in operational gross margins there, plus the continued efficiencies that you're going to realize out of your assets. Should we be thinking about it as sort of a consistent increase over the balance of the year with a more material step-up in Q2? Or are there other factors we should be considering?

Dennis?

Yes. Thanks, Luke, for the question. So we're real pleased with the improvement that we've seen in our manufacturing cost from last year to this year. We've gained a couple of hundred points basis points over that period. When we talk about and think about our gross profits going forward, there's going to be volatility from quarter to quarter. Over the long haul, we do expect to see improvements. But from quarter to quarter, there could be volatility as the mix might shift between states and California may be taking on a little bit higher revenue mix. That could have a negative impact. There could also -- there will also be, as we start to build some of the cultivation costs in Ohio and Massachusetts and Michigan, just as we saw in the first half last year. There's a little bit of volatility as you bring a new site up that could have a negative impact. That's all being offset by the fact that we're doing a lot of great work in terms of automation and improving our yields in our factories. Ty Gent has joined the company as a COO, and he's bringing a lot of great expertise around manufacturing and processing that will help drive efficiencies throughout our cultivation and packaging centers. So again, just in summary, there's a lot of good things, automation and so forth that's happening that's going to improve margins. The mix that Charlie noted with Florida and the fully integrated operations there that allows you higher returns, that will be, in part, a little bit offset by some of the increases in cultivation and so forth. But overall, we would expect it to be a general improvement in gross margins, operational gross profits throughout the course of the year, but there will be volatility from quarter to quarter.

Understood. And then maybe one for Charlie here. Just on the Cultivate acquisition, that was impressive. We thought, particularly just because of the multiple, and it increases your presence in what's a really strong market. If we think about just the M&A pipeline in general and what you're seeing from a multiple basis from a quality of assets basis, how are you viewing the current market?

Yes. And thanks for the comments. We love the Cultivate transaction for all the reasons, great team, great people, great track record of execution in that Massachusetts market. It is already a supply-constrained market. And as we've noted earlier, I mean, there's going to be stores that continue to open. Greater Boston area market is untapped. So very -- we like that transaction at the time. From what we're seeing across the rest of the opportunities, I think we'll just -- we'll say there's a lot of opportunities out there, but we'll continue to be disciplined and diligent in the way that we look at M&A to gain greater depth in the markets that we're already in. And we'll continue to be very -- the M&A team that we have in-house now is phenomenal. And the level of diligence that we're putting into these deal structures to really create the accretive outcome is at another level. So really happy with what we're seeing, and that will continue from us.

Our next question comes from Andrew Partheniou from Stifel GMP.

Maybe just continuing on the M&A line here. You do have lots of organic growth opportunity with Florida especially and your other markets. Would you say that organic would be a little bit more the focus here going forward? We've heard across the spectrum that pricing overall in the M&A market has increased somewhat. Has that made making deals a little bit more difficult, especially in the context that you guys are doing some great due diligence and being cognizant of spend and being disciplined on accretion.

Yes. Thanks for the question, Andrew. I think you're right. And I would say, even my answer to the previous question, it's not just sort of the M&A evaluation team. It's the growth strategy evaluation team. So you're absolutely right. It is opportunities for accretive expansion through M&A, but also accretive expansion organically, that's constantly being weighed in how we allocate capital for the highest return on invested capital. So you'll see both from us. And we'll only do M&A where we see that it is a better outcome than investing that dollar in organic growth. So it's all part of the mix, all part of the evaluation.

Great. And maybe also continuing on a previous theme of pricing. Massachusetts has been a rec market for some time now, and yet the pricing is still very strong on the wholesale side. Looking to Illinois and Pennsylvania, I would say, firstly, in Illinois, especially those 75 new licenses, we're not exactly sure when they're going to come online. It seems like retail store productivity levels may have hit a short-term ceiling. What do you think it could happen between now and when those 75 new stores would come online? Do you think pricing could change given the fact that Massachusetts still remains very strong, even though it's had quite some time as a rec market? And a similar question on Pennsylvania.

Yes. It's a great question, and it's something that we think about constantly. We like to see where margins are now. They're great and at a very high level. What happens between now and when those 75 licenses get issued is that the rest of the potential 110 dispensaries that the incumbents were allowed to open actually get opened. So we still see some store growth there. But I know, Greg, you've got perspective on margins and price long term.

Yes. I think, look, as you mentioned, phase 1, as more stores open, we do tend to see that those stores are fairly incremental as they allow new shoppers to access the industry and bring in new volume. And so it does tend to drive incrementality. I think you're also right to say that in phase 2, as you get more competition in retail, you are going to have increased pressure amongst retail prices, but that is also one of the advantages of being a wholesale provider in that we are ensuring that we are offering a portfolio of brands that can play at the low price point, the high price point. I think anyone who says, prices can go down, you can look at California and -- you still have premium products selling in California at a premium price as long as the value proposition is there. And you have a lot of value products. So it is, in many ways, looking at a price architecture very similar to any consumer good. And so that is how we've restructured our business. And we feel like if there is price compression in the future, as I mentioned earlier in the call, we've got the right scale to help us play costs. We've got the right portfolio to help us play across price points. And if retailers go head to head and take down their individual margin, that's their decision, and we'll continue to offer a really strong portfolio of wholesale brands.

Thanks for that additional color. And just one more housekeeping item. I know you guys already gave color on those $10 million relaunching, rebranding expansion costs. Is it possible at all to break out in terms of dollar amounts what those final cleanups of Origin House were as part of the $10 million?

Yes. Thanks, Andrew. I think we've given quite a bit of color on that in terms of the bulk of those costs being associated with Origin House and getting that behind us. And again, as I mentioned, those costs will not continue going forward. We will be converting to U.S. GAAP in 2021. And as such, we won't carry those costs going forward.

We have a question now from Scott Fortune from ROTH Capital Partners.

This is Nick stepping in for Scott. Just one question here on the branding side. And you began to touch on this in your prepared remarks, but are there any brands you'd like to expand upon here that have seen kind of incremental success in California or through your overall wholesale business? And kind of off of that, how is being one of the key distributors within the California market affected the way you guys approach your in-house brand strategy?

Thanks for the question. Greg?

Yes. Thanks for question, Nick. As we mentioned earlier, we were thrilled with the performance of our brands in Q4, Cresco becoming one of the largest wholesale brands and, I think, the largest, according to BDS in the country. High Supply and a few others, amongst some of the fastest-growing brands in the U.S., so very, very happy with Q4 performance. Really excited about what we're going to show in Q1 on brand performance. Regarding distribution in California, we view that as we are building customer relationships. That team out there has done a wonderful job of getting into all the accounts in the state that matter and really building out a strong assortment. Our view in that state, as always, we want to own a share of shelf. That can be with partner brands. That can be with our own brands. And so that's why we focus on both owned and partnered. They're -- we believe you can have multiple brands that play in the segment. If you look at assortment of those stores, they take multiple brands in segments. And so we want to be that distribution partner of choice that is offering whatever the retailer is looking to buy. And we will service that through some of our own, but we will also continue to service that through really strong partner brands like Kings Garden and others.

Our next question comes from Graeme Kreindler from Eight Capital.

I just wanted to follow up regarding the metric you provided of 86% of sales coming from your 3 core states. Yes, I think it would be logical to expect that, that proportion comes down moving forward given ramp-up and tuck-in of acquisitions throughout the year. But is there any other more specific detail with respect to the direction or magnitude where that mix might end up for the 2021 year, this year coming ahead?

Thanks, Graeme. Dennis?

Yes. Thanks, Graeme. The -- like I said, we're at 86% today, top 3 states. Over the course of the year, as we expanded in Ohio, Massachusetts and Michigan, you'll see that come down a couple of points. Florida, again, based on the timing of when that closes, that will also be another thing that will take the total numbers down. And then as Cultivate hits, which we expect late in the fourth -- sometime in the fourth quarter or so, that will again have another drop. So it's hard to predict exactly what the percent will be going by the end of the year just because of the unknown timing of when those deals will close, but it will be a material drop from where we're at today to where we expect to end the year.

Our next question comes from Glenn Mattson from Ladenburg.

[indiscernible] here, something for Glenn. Some articles came out saying that President Biden is now onboard with full legalization. Maybe he wants to decriminalize and then the state [ will pay or maybe he wants to schedule ]. Could you please share your view on the Biden administration and where the President stands on the issue?

Yes. Thanks for the question. It's another one of those where we're really encouraged by the -- even the platform, the perspective that they've given so far that this is a priority, that this is a criminal justice priority, it's a social equity priority. And again, with critical mass already being reached on a state basis, you've got a lot of legislators in Congress that are from states that have medical cannabis programs and adult-use cannabis programs. So we're very encouraged by what we're hearing. We're encouraged to see [ safe pending ] in the House and in the Senate. All of these are, at a macro level, when you take a step back, so fundamentally important from where we've been since the last century in advocating for a more progressive view on cannabis at a federal level. That -- we'll continue to monitor, we'll continue to engage, and we'll see where the final language ends up being on these pending and proposed bill. But at a macro level, just couldn't be more encouraged by seeing progress at a federal level in the way that we've seen it in the last 2 months.

And our final question comes from Andrew Semple from Echelon Capital Markets.

Congrats on the quarter. My question here, when you were first integrating the Origin House assets, gross margin enhancement was important -- was an important goal for you in 2020. Now that you've had that business for a full year, are you happy with the current level of gross margins coming out of that state? And do you see room for further upside in the years ahead as you continue to scale?

Thanks, Andrew. Dennis?

Yes. Thanks, Andrew, for the question. So we have seen a pretty sizable improvement in gross profit in California from last year, even the first quarter of this year, when we incorporated Origin House into where we're at today. I think there's still quite a bit of room for improvement. We're continuing to drive cost out as we've been talking about with the Origin House costs as well as looking to increase margins. It is a unique situation there with a lot of third-party products, so the margin expectations in that market are less. But we have seen a pretty sizable improvement, and we expect to see that to continue to improve throughout the course of 2021 and beyond.

Excellent. With that being our last question, I just want to thank everybody for being on the call today, and we look forward to being back in front of you for Q1 results very soon. Have a great rest of the day, a great weekend. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for joining, and you may now disconnect your lines.