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

Hello, everyone, and welcome to Cresco Labs' Second Quarter 2022 Earnings Conference Call. My name is Charlie and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Megan Kulick, Senior Vice President of Investor Relations to begin. Megan, please go ahead.

Thank you. Good morning, and welcome to Cresco Labs Second Quarter 2022 Earnings Conference Call. On the call today, we have Chief Executive Officer and Co-Founder, Charles Bachtell; Chief Financial Officer, Dennis Olis; and Chief Commercial Officer, 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 on SEDAR and is available on our Investor Relations website. These preliminary results for the second quarter of 2022 are provided prior to the completion of all internal and external reviews, and therefore, are subject to adjustments 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, 2022, on SEDAR and EDGAR later this week. Certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian securities legislation as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements may include estimates, projections, goals, forecasts or assumptions that are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future looking events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause the company's actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes to applicable regulations. Additional information regarding the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found in our earnings press release and Cresco Labs filing on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to its forward-looking statements or to update or supplement any information provided on today's call. Please note that all financial information on today's call is presented in U.S. dollars, and all interim financial information is unaudited. In addition, during today's conference call, Cresco Labs will refer to certain non-GAAP financial measures such as adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to and should only be considered in conjunction with GAAP financial measures presented in our financial statements. With that, I will turn it over to Charlie.

Good morning, everyone, and thank you for joining us on the call today. In Q1, we announced the acquisition of Columbia Care, putting us on a path to build what we believe will be the largest engine of value creation in the industry. We have always prioritized breadth and depth in the most strategic markets paired with best-in-class execution across all verticals of the value chain. We believe the Columbia Care acquisition aligns with these priorities and will solidify our leadership position at a key time for our industry. We are matching leadership positions in the states of today with exposure and infrastructure in the states with the catalyst of tomorrow. We are combining the branded product portfolio that U.S. consumers choose more than any other into an operational footprint capable of reaching over 70% of all eligible U.S. consumers. We are matching the most productive per store retail operating model with one of the largest combined retail store platforms in the industry. We are creating an unmatched diversification and balance of revenue by geography and by channel, and we are combining the most productive wholesale platform in cannabis with verticality, which best positions us to compete and state markets continue to mature and evolve. In short, we are creating a company built for leadership. We are making progress towards closing the acquisition, checking off milestone after milestone, HSR review, the Columbia Care shareholder vote and the approval of the Supreme Court of British Columbia have all been completed. The great working relationships our company to build with state regulators has facilitated progress towards individual state approvals and our asset divestiture process is on track. We have multiple bidders for each asset. We have executed LOIs for each, and we are working through the diligence process and moving towards definitive agreements, giving us confidence in receiving worth of $300 million in gross proceeds from the process and a closing date projected around year end. Turning to the quarter, we are pleased to report solid results in the face of an unprecedented macro environment. We generated $218 million in revenue, representing 4% year-over-year growth. We gained or held branded market shares in every state with the exception of California, so chosen by consumers and the #1 most productive per store national retailer. Our adjusted gross margin was 53%, a roughly 200 basis point improvement year-over-year 50 basis points year-over-year in the face of unprecedented inflation. We recognize the challenges currently facing the cannabis industry and a tough macro backdrop. In this environment, we are managing that today while remaining focused on the big picture and the long game. We are holding and growing market share, driving efficiencies across the company to maintain margins, and we are preparing for the integration of Columbia Care to generate substantial future growth. Now let us again review our proven playbook of the 3 specific ways Cresco Labs is delivering long-term growth and shareholder value: One, developing the most strategic geographic footprint; 2, being the leading branded cannabis portfolio; and 3, operating the most productive strategic retail network. So number one, we are developing the most strategic market footprint. We believe our long-standing strategy of being in the states that matter and obtaining meaningful and material market share therein is the recipe for long-term success in any CPG category. Our current 10-state footprint includes $7 billion-plus markets, of which we have the leading branded share position in the 3 robust and competitive markets of Illinois, Pennsylvania, and Massachusetts. We are executing our playbook to expand our market share in other states with opportunities for gaining like Florida, Ohio, and Michigan. While we would not have access to the most significant driver of industry top line growth this year, the state of New Jersey, we do have exposure to Columbia Care. In the interim, we know that strength in market share and continued share growth is the sign of a best-in-class operator, and we look forward to bringing Cresco to the Garden State in 2023. Over the next 3 years, there are an additional 6 large markets expected to switch to developing New York, Pennsylvania, Ohio, Virginia, Florida, and Maryland. Given our combined footprint with Columbia Care, we will have exposure to all of them and will have leading share positions in several. This is arguably the highest value footprint in cannabis, 180 million Americans, all 10 of the 10 highest projected 2025 revenue states and exposure to the largest growth drivers. The acquisition will more than double our retail footprint, give us #1 branded or retail share position in 5 markets and optimizes our operational footprint across markets. It is this level of strategic breadth with in-depth that ensures growth, diversified geographic and channel revenue, and creates an industry leader. Number 2, we maintained our position as the #1 branded product portfolio for BDSA. Again, in Q2, our net wholesale revenue was an industry that's $95 million. Also again, Cresco Labs has the industry's #1 portfolio of branded products chosen by U.S. cannabis consumers, including the #1 portfolio of branded flower, #1 portfolio of branded concentrates, #2 portfolio branded vapes, and a top 5 portfolio of branded edibles. We held or grew share of branded products sequentially during the quarter in every market except California, where we saw a 20 basis point sequential decline. Over the last few quarters, wholesale has been a more challenging business with price compression impacting wholesale more than retail and vertically integrated operators giving preferential treatment to their own brands even if they have lower velocity. Despite this, in both Illinois and Pennsylvania, customers once again spent more money on Cresco Labs branded product than any other company as we maintained our #1 position in both markets and held share. For the first time, we have also taken the #1 branded share position in Massachusetts for BDSA, making this our third $1 billion plus market with the #1 market share. Last quarter, we talked about some of the challenges we had to overcome in Massachusetts, and we are starting to see the hard work that we put in pay off as we have improved cultivation yields, THC percentages, sales processes, and generally aligned our newly acquired assets with Cresco Labs standard operating procedures to grind out market share in this very competitive environment. This type of performance gives us tremendous confidence as we approach the integration of Columbia Care. When we get asked again and again, do brand matter, I would simply answer absolutely. When given a choice, consumers are choosing our brands more than any other, even though for the most part, we have less on the shelves. Despite the current move to verticality, with regulatory caps in most markets, the opening of 185 more dispensaries in Illinois and the 150 independent dispensary set to start the New York adult-use program gives us a preview of how the future structure of this industry will likely look. It will validate our underlying thesis that cannabis is CPG and will show the strength we are creating through our branded product sales and distribution capabilities. Number 3, operating the most productive retail network in the most strategic markets. Q2 retail revenue was $123 million, with same-store sales growing 6% year-over-year and 3% sequentially. Sunnyside continues to rank #1 among the scale national operators with average quarterly revenue of $2.5 million per store across our 50 stores. Our team is doing an excellent job of maximizing the value of every trip in the face of weakening consumer dynamic. Through our sophisticated e-com platform, basket building promotions, and in-store cross-selling programs, we have been able to engage with our shoppers to maximize sales per visit. In Illinois, for example, our top quartile of Sunnyside shop customers made 17% more trips than a year ago. With the launch of new engagement projects like loyalty, text offerings, and suggested selling, we will continue to build sales from our large community of shoppers. While sales growth has been decelerated due to price declines hit most important is that new shoppers are entering this category every day. For example, during Lollapalooza in Chicago, our River North City store saw a record number of first-time shoppers and overall units were up nearly 30% over last year's festival weekend. While pricing dynamics are muting this impact in the immediate term, this data point during the highest inflationary period in over 40 years is incredibly important for underwriting the durability of cannabis and the future potential of the overall thesis. Our retail sales growth has not reached its potential due to some delays in opening new retail stores in Florida and Pennsylvania. We have taken the steps to resolve these issues and replenish the growth pipeline. You will see openings later this quarter with more in Q4 and then Q1 of 2023. The Columbia Care acquisition will more than double our retail footprint, which paired with our industry best productivity and brand portfolio creates an ideal platform for growth. With the industry prioritizing vertical integration, we saw this trend coming and proactively secured a much lighter retail footprint and balanced channel position to ensure that our incredibly popular products get the share of shelf being deserved. Before handing it over to Dennis, I want to thank the Cresco family for everything that they accomplished this quarter. They have done an incredible job of holding and gaining share in almost every market while managing through the macro headwinds, leading the industry's efforts for legislative progress at the federal level and preparing the company to close and integrate one of the largest and most transformational M&A deals this industry has seen. In times like this, leaders lead, and I am very fortunate to be a part of this team for leaders. With that, I will turn it over to Dennis to discuss Q2 results.

Thank you, Charlie, and good morning, everyone. I will be reviewing the financial results from the quarter then highlighting a few items from balance sheet and discussing our capital position. As Charlie mentioned, we are happy to report that our team generated $218 million in revenue in Q2. This reflects sequential revenue growth of 2%, resulting from same-store growth of 3% and plant wholesale revenue in the face of industry-wide price pressure. Year-over-year revenue growth of 4% was muted by our decision to exit third-party distribution in California at the end of Q3 of 2021. Here again, we have demonstrated that we are not afraid to make the tough decisions to add shareholder value and position the company for long-term, sustainable, profitable growth. Our retail performance was particularly strong, growing 22% year-over-year driven by same-store sales growth of 6% and the addition of new stores in Florida and Pennsylvania. This shows the health and performance of our underlying base business but also highlights the importance of the organic incremental assets we expect to see later in the year and into '23. The retail team continues to demonstrate the power of prioritizing the needs of the consumer and developing repeatable and scalable systems to best address them and the results show. On the wholesale side, the strength of our branded product portfolio and gains in the market share allowed us to counter significant pricing pressures and produce a flat sequential wholesale performance. Net wholesale revenue fell 12% year-over-year. But when adjusted for the strategic shift in California distribution, wholesale revenue was flat compared to Q2 of 2021. Given this overall trend, we are proud of the team for maintaining the wholesale revenue in the quarter and actually taking share. While we expect to maintain branded share positions in our markets, further price compression, delays in new independent store openings and MSOs shift towards more verticality will likely disproportionately impact wholesale revenue compared to total market sales and create softness to our overall top line in the back half of the year. But this is temporary. With several new store openings in Florida through Q4 and Q1, our incremental store openings in PA in Q1 of '23 and incremental independent retail doors opening in our home state of Illinois in 2023, we will see organic growth return to the wholesale channel and top line growth overall. Adding the expected close of Columbia Care deal around the end of the year, we are well-positioned to have an incredible 2023 and beyond. Despite the significant price compression in the most recent quarters, our team was able to expand adjusted gross margins by 200 basis points year-over-year to 53%. We saw deterioration in the competitive environment in California last year and took the difficult, but necessary steps to scale down our distribution business there. That decision, combined with improvements in yields, reaching scale in more markets and our entrants into Florida contributed to our gross margin expansion. Our ability to recognize industry trends early and proactively respond to the changing market dynamics enabled us to maintain or grow margins in a difficult macro environment. Looking ahead, our goal is unchanged: to maintain gross margins above 50%. We expect to continue to offset price compression and maintain margins as we realize improvements from the investments we are making today in automation and processing and packaging as well as increases in operational productivity driven by our incredible leadership team. Adjusted SG&A expense, which excludes share-based compensation and noncore items, saw a small increase of $1.3 million to $71 million or 32% of revenue. The increase in SG&A was to staff the additional dispensaries opened in Q1 and marketing spend associated with 420. We expect SG&A to be flat to slightly down in the second half as we appropriately manage our expense plan to address the near-term macro environment while continuing to direct resources toward our long-term company priorities, including the integration of Columbia Care and expanding retail operations. We remain good stewards of expense management while maintaining our leadership position in social and regulatory reform in the cannabis space. This is what leading companies do. Adjusted EBITDA for the second quarter was $51 million represent a margin of 23%, relatively flat compared to Q1. Our goal is to maintain adjusted EBITDA margins at the current level through cost controls and operational efficiencies in the face of market pressures over the next 2 quarters. Cash used in operations was $7 million. In the quarter, we made tax payments and distributions of $67 million relating to 2021 and Q1 '22 extension payments. Of this amount, $43 million was tax payments to non-controlling redeemable unit holders and other members and flow through cash flows from financing activities. In addition, Q2 included second quarter estimated tax payments of $6.3 million and tax distributions of $15 million. Overall, we paid $89 million in taxes during the quarter. It is going to be really good when 280E goes away. Second quarter gross CapEx was approximately $14 million. We expect our capital expenditures for the remainder of 2022 to be approximately $35 million as we continue to optimize and rationalize our national footprint. One of the many benefits from Columbia Care acquisition is the positive impact we expected to have on our need this year and in the future for CapEx to drive future growth. We are comfortable with our existing cash position, the strategic financing available to us and the expectations for proceeds from the divested assets. In closing, there has never been a time in this industry when leadership, scale and financial strength matter more. We are facing unprecedented headwinds from inflation, taxation, cost of capital, but also unprecedented opportunities for growth from regulatory changes on the horizon, strong consumer demand, untapped efficiency, and production and consolidation opportunities. We are in a strong position today and that position will only strengthen once we complete the Columbia Care acquisition. And now I will pass it back to Charlie for some closing comments.

Thank you, Dennis. I am incredibly excited about what lies ahead for Cresco Labs and for this industry. While we all need to manage through the very unique macro pressures of today, it is important that we continue to look down at the field. The outlook for U.S. cannabis is stronger than ever as cannabis remains the next major consumer products category in the United States. The industry is proving itself to be durable, while top line market performance has decelerated in the face of the worst inflation in 40 years; the number of cannabis consumers and units sold is up. We continue to see progress at the state level as a long-awaited regulatory catalyst in states like New Jersey and Illinois begin to unlock. The start of adult-use in New York will happen in the coming quarters in Virginia in Q1 of 2024 and step function changes in a handful of other very large and influential states is expected in the next 2 years. Operators continue to prove themselves resilient. While we are subject to draconian tax provisions and can access the traditional institutional capital pool that is truly sitting right on the sidelines and ready to jump in when they can. I will reiterate what I mentioned in our Q1 call; we have never been closer to achieving federal reform on cannabis than we are right now today. Since our Q1 call, the Senate majority leader officially filed a cannabis-specific bill, and the Senate held its first committee hearing regarding cannabis legalization ever. Again, it reinforces now is the time to lean in, we are. We will keep leading these efforts on behalf of the industry because we understand it is the ultimate unlock and it takes leaders to drive this change. In closing, the macro and industry headwinds we are managing make us so proud of our Cresco team with our operational and strategic initiatives underway, we will continue to keep our head down, execute on the business, put the pieces in place with long-term leadership and achieve our vision of being the most important company in cannabis. With that, I will open the call for questions.

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

A nice quarter, especially given the relative macro backdrop. So Charlie, I want to talk a little bit about the brands movements in the #1 position in Massachusetts, third there. I want to talk about how you are seeing the relative pricing kind of overall for some of these markets where we are seeing pricing pressure, how comfortable you guys are with your own portfolio? And then secondly, how you are liking the current mix between premium, mainstream and value products because we have seen a number of your peers introduced some more value products announced in the recent months; so how you are looking at relative pricing and the mix between the different pricing tiers so you can continue your success in terms of the wholesale.

Yes, Aaron, thanks for the question. This goes back to something we have talked about all along, right, the importance of brand and especially in a price compressed environment where margin pressure exists. Brand architecture is very important, being able to meet the consumer, where they want to be met. So the good, better, best strategy. That is why we originally even developed the House of Brands approach that we developed from the very beginning. So again, I feel like our portfolio is doing the work that it was built to do. And as long as we continue to offer the highest perceived value to the consumer at each of these category levels will continue to be effective. As it relates to the specific markets, maybe Greg, do you want to add some color?

Sure. I think your first question is on pricing, we do expect to see price compression continues in the back half of this year as supply in many of these markets like Pennsylvania, Illinois, and Massachusetts continues to come online and putting some price compression there. I think to Charlie's point, what we are encouraged by in our portfolio is we were one of the first to get out in the value segment, and we have been able to take a material market share with high supply across our markets, we are pleased with that. But we were also able to bring FloraCal to market in Illinois at the premium price point and its success in this market and ability to take share is another example of the right quality product still can command higher prices in the market. So our plans for FloraCal continue to expand that into different markets. So we are encouraged with the strength of our brands, the quality of our products, and our ability to fight price either by offering higher-quality products or finding ways to drive greater margin and our value rates.

Great. Really appreciate that color. And then second question is on the third-party distribution last year, but still have some exposure there, and then we will be taking on exposure to Colorado with the pending Columbia Care acquisition. Just want to get your take in tenor how you are looking at markets such as California and Colorado, where you are seeing pricing pressure there obviously at lower levels, so more difficult to be profitable. So how do you view markets like that, Charlie talked about kind of the long-term branded importance of markets such as that. But in the near term, and obviously, more difficult to generate profitably there. So I want to get your take how you view on those today.

Yes, certainly. And you are right, with those markets sort of at the stage there, and their maturity, it is important to be in those markets. Those markets are you are talking about the largest and second largest cannabis markets in the world. But you want to be present, you want to be relevant, but you need to make sure that you are not exposed to allow those markets to negatively impact the rest of the body. As it relates to our increased exposure in California through the Columbia Care deal, it is really more of an optimized footprint. It allows us to have verticality there. And same in Colorado with the footprint that we will be acquiring through Columbia Care, it has the largest retail footprint in the state. So really verticality is going to be important, also helps with our ability to control our brand presence and positioning on shelf. So we will manage through it, but both markets are important for the exposure to the consumer base and for brand equity that can be built.

Our next question comes from Andrew Bond of Jefferies.

I am Andrew on the line for Owen Bennett. So just wanted to go over your retail strategy a bit; retail sales growing nicely despite some of the pressures you mentioned and appreciate the metrics you gave around same-store sales. But just based on the relatively flat retail sales mix, Cresco's growth does not seem to be driven by kind of an increase in vertical shelf space, correct me if I am wrong, like a lot of other competitors. So can you talk more specifically about that and what is working in your stores, maybe some of the retail tools or strategies that you are looking forward to implementing as you eventually integrate those Columbia Care stores post acquisition.

Sure. Thanks for the question. So from a retail strategy standpoint, we continue to, again, try and address the needs of the consumer. I take a fully focused organization. We do this across our entire platform. So understanding what the consumer that is coming in on the store wants whether that is an expedited experience with an online ordering system or that in store personal touch that helps shepherd them through the decision-making process. So strategically, we want to hire, we want to operate high-volume retail with great locations. It is something that, as we have talked about in prior calls, it is a muscle that we have built over the years. We have become a fairly effective retailer as noted from our revenue per store metrics. And it is something that we will continue to drive, especially as the industry goes through these periods of time where verticality becomes more important and owning your shelves becomes more important. We are excited to incorporate the assets that come with Columbia Care and get that more balanced channel position to allow us to compete the best that we can compete in a market-by-market approach. And Greg, as far as the tools you want to comment on tools.

I think the big thing you will see from us is we believe that our traffic will be driven by the best assortment possible. And so I think one of the questions you asked is our use of verticality at our own stores. Historically, we have always tried to maximize the assortment of our brands and partner brands. And then we will continue to do that to what makes sense to help drive foot traffic and delight our shoppers. From a tool perspective, what we've really built in Sunnyside that's helping us drive not only our retail business or wholesale business is insights in the shopper behavior and understanding what they are looking for, at what price points, and what forms and a lot of those insights are being used to fuel how we think about innovation and capabilities across our platform. And we have seen the successes as we launch brands and able to capture some pretty good market share. From a capabilities then funding side, our folks in the back half of this year, what you are going to see from us is programs like loyalty, where we are going to help not only collect information about how our shoppers shop but also drive loyalty to our stores, but also other ways to grow our basket through technologies like suggestive selling, add-ons. And so our focus really is how do we get the most value out of every shopper coming through our doors in the back half while collecting data that enables us to really start to customize not only messaging, pricing offers, but innovation to those shoppers.

Great. Very helpful details. And for my second question, maybe just following up on your comments on FloraCal and expansion to new states. Obviously, been a highly successful brand for you in California and now just recently rolling on into Illinois in 2Q. Can you remind us which states have already launched FloraCal? Is it just Illinois so far? And then what is performance been there relative to your expectations? And what additional states are you planning to launch the brand in the balance of the year?

Why do not I take that. As you said, we have been very pleased with not only progress at FloraCal in California in a very tough market dynamic. We have launched in Illinois so far. It hit our expectations back over delivered our expectations on not only how the product was going to be received by customers, its ability to command a premium price during this current macroeconomic conditions and pricing conditions. So it shows that quality products can get a premium price from shoppers. Next up for us as we think about FloraCal's opportunity, we are looking at markets like Pennsylvania, Michigan, and Massachusetts; all would be kind of next in our line as we continue to roll that success across our footprint.

Our next question comes from Pablo Zuanic of Cantor Fitzgerald.

Charlie, 2 questions related to capacity. So maybe remind us where you are in New York in terms of current capacity and expansion plans. I mean as those new 150 licensees opened their stores, will you be ready to supply them? And then the second question related to the same topic. Just a reminder, over the next 12 months, where can we see new capacity in driving in your wholesale business? Or we do not really have any new capacity in a major way coming in over the next 12 months?

So where we stand in New York is moving forward with, again, both us and Columbia Care having assets in the state we are moving forward with construction and CapEx plans as it relates to our property, but with an eye towards what the combined footprint of assets will look like and how best to optimize it. Depending on when that markets, Columbia Care currently has a fairly large scale production in the space in the state already. And depending on when adult use kicks off there from the downstream production manufacturing capabilities, will have again, it will be varying degrees depending on when adult use really launches in that state. But by midyear next year, we will have full production capabilities on the processing side, too. As it relates to capacity in other markets, additional capacity, we are again, prioritizing the Columbia Care acquisition. So additional capacity will come online in various states based on combined footprint as opposed to ongoing CapEx projects under Cresco.

Okay. One last one, I am not to nitpick, I think in the past, when you talked about gross proceeds from the divestitures, you had talked about $300 million to $400 million. Today, you said $300 million. I think that is understandable in the current context. But can you clarify there? Or am I misreading the comments?

No. I think we were just confirming that it would be north of $300 million. It will be somewhere in that range, the original range of $300 million to $400 million.

Our next question comes from Derek Dley of Canaccord Genuity.

Just on the Columbia Care transaction, obviously, you have made a lot of headway in terms of securing approvals. Can you just talk about what is left? Do you need state-by-state approval? Do you need municipality approval in some cases in some states? What is left there?

Yes. Thanks, Derek. I would say just overall, again, reiterating the regulatory approval process is going well. Really proud of the team because it is a lot of work. You are talking about all 17 states that have some sort of approval or ownership transfer process that we have to manage. So it definitely is a big project and the combined teams on the Columbia Care and the Cresco side are doing an incredible job of managing it. But you are right, depending on the state, they vary in degrees of difficulty and sophistication in what the process is. We have made great progress. I think as we mentioned, or I think Nick mentioned on this call, about half the states are in almost a completion point. And the other states, the divestiture-related states are, of course, going to be sort of the ones that we will continue to work on through the divestiture transactions. And whether it is state level or municipal level, it does depend on the state, but progress is far along under any of the circumstances. And again, an area that we are confident in being able to manage thoroughly. So I am feeling good about it.

Okay. Good. And then just switching gears a little bit just to your dispensary side. In terms of your new store openings or even what you have seen in the past, you mentioned your Sunnyside stores are adding $2.5 million in revenue per store. Can you comment on what the returns on that looks like? Like, for example, what are the typical payback periods you are seeing or maybe compare that payback period you are seeing now versus what you saw 2 years ago when you were opening stores?

Sure, Greg, will take this one.

Yes. Derek, I think from a general perspective, what we have talked about in the past, and this is pretty consistent, I think, of what our peers have look for as well. We have an internal rate of return that we look at that is somewhere in the 3 years range, 2 to 3 years. We do not overly share that. But I would say, from where these assets and cannabis continue to perform, we are not seeing any sort of change in that payback period. We are able to generate revenue and profit out of those stores that are holding to the standards.

Our next question comes from Vivien Azer of Cowen.

Charlie, I recognized it is an incredibly dynamic backdrop in your crystal ball is probably not perfectly clear. But as you observe the current market dynamics, how has your thinking around the hierarchy of priority states on a pro forma basis changed, if at all, for 2023?

So as far as the prioritization for states in 2023 has changed. I think, again, if I went back in time, regulatory approvals or sort of the unlocks from a regulatory approval standpoint have probably the largest impact on how the positioning evolves over time. Again, I think if I went back a year and half ago, I would have expected some of the 185 stores to be open in Illinois. I think originally we were anticipating New York starting in end of Q3, beginning of Q4 and '22, maybe Jan 1. I do not know if that is the beginning of 2023 is still realistic. We are looking for some good updates from New York here in the near future. But that is sort I would say regulatory change has probably the largest impact on the way that we think about states. And then the ability for sort of the verticality play right now and through the rest of this year is definitely something that is taken into consideration as we are looking at sort of how to approach states. So again, feeling really good about the Columbia Care transaction and the benefit that, that gives us from a balanced approach, both from a geographic diversity standpoint and from a channel diversity standpoint, we think balance at this stage of the industry is very important.

Yes, absolutely. Certainly, I can appreciate the frustration around New York, maybe first half of '23. But just a couple of quick on your comment on Illinois as my follow-up question. I know it is very early days, but certainly; you guys were involved with the social equity participants and licensed winners. So how are you thinking about them as potential customers? Are those conversations starting albeit very early days?