Cresco Labs Inc. (OTCQX:CRLBF) Q2 2022 Earnings Conference Call August 17, 2022 8:30 AM ET
Company Participants
Megan Kulick – Investor Relations
Charles Bachtell – Chief Executive Officer and Co-Founder
Dennis Olis – Chief Financial Officer
Greg Butler – Chief Commercial Officer
Conference Call Participants
Aaron Grey – Alliance Global Partners
Andrew Bond – Jefferies
Pablo Zuanic – Cantor Fitzgerald
Derek Dley – Canaccord Genuity
Vivien Azer – Cowen
Andrew Partheniou – Stifel
Kenric Tyghe – ATB Capital Markets
Matt Mcginley – Needham & Co.
Scott Fortune – ROTH Capital Partners
Michael Lavery – Piper Sandler
Operator
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’ll now hand over to your host Megan Kulick, Senior Vice President of Investor Relations to begin. Megan, please go ahead.
Megan Kulick
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 with 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 a reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with the GAAP financial measures presented in our financial statements.
With that, I will turn it over to Charlie.
Charles Bachtell
Good morning, everyone. 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’ve 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’re matching leadership positions in the states of today, with exposure and infrastructure in the states with the catalyst of tomorrow. We’re 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’re matching the most productive per store retail operating model with one of the largest combined retail store platforms in the industry.
We’re creating an unmatched diversification and balance of revenue by geography and by channel and we’re combining the most productive wholesale platform in cannabis with verticality, which best positions us to compete as state markets continue to mature and evolve. In short, we’re creating a company built for leadership.
We’re making progress towards closing the acquisition, checking off milestone after milestone, HSR review, the Columbia Care’s shareholder vote, and the approval of the Supreme Court of British Columbia have all been completed. The great working relationships our companies have built 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’ve executed LOIs for each and we’re working through the diligence process and moving towards definitive agreements, giving us confidence in receiving north of $300 million in gross proceeds from the process and a closing date projected around year end.
Turning to the quarter, we’re pleased to report solid results in the face of an unprecedented macro environment. We generated $218 million in revenue representing a 4% year-over-year growth. We’ve gained or held branded market share in every state with the exception of California, where we purposely reduced exposure last year.
For BDSA, we’ve maintained our industry position as the number one wholesaler of branded cannabis, the number one branded product portfolio chosen by consumers and the number one most productive per store national retailer. Our adjusted gross margin was 53%, a roughly 200 basis point improvement year-over-year in a market where prices fell between 10% to 30% depending on the state. And our adjusted EBITDA margin was 23%, up a 150 basis points year-over-year in the face of unprecedented inflation.
We recognize the challenges currently facing the cannabis industry and the tough macro backdrop we are operating against. In this environment, we are managing that today, while remaining focused on the big picture and the long-game. We’re holding and growing market share, driving efficiencies across the company to maintain margins, and we’re preparing for the integration of Columbia Care to generate substantial future growth.
Now let’s again review our proven playbook of the three specific ways Cresco Labs is delivering long-term growth and shareholder value. One, developing the most strategic geographic footprint; two, being the leading branded cannabis portfolio; and three, operating the most productive strategic retail network.
So number one, we’re developing the most strategic market footprint. We believe our longstanding 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, in which we have the leading branded share position in the three robust and competitive markets of Illinois, Pennsylvania, and Massachusetts. We’re executing our playbook to expand our market share in other states with opportunities for gain like Florida, Ohio and Michigan.
While we won’t have access to the most significant driver of the industry top line growth this year, the State of New Jersey, we do have exposure through 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 three years are an additional six large markets expected to switch to adult use: New York, Pennsylvania, Ohio, Virginia, Florida and Maryland. Given our combined footprint with Columbia Care, we will have exposure to all of them. And we’ll 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 the number one branded or retail share position in five markets and optimizes our operational footprint across markets. It is this level of strategic breadth, with the depth that ensures growth, diversifies geographic and channel revenue and creates an industry leader.
Number two, we maintained our position as the number one branded product portfolio
per BDSA. Again, in Q2, our net wholesale revenue was an industry best $95 million. Also, again, Cresco Labs has the industry’s number one portfolio of branded products chosen by U.S. cannabis consumers, including the number one portfolio of branded flower, number one portfolio of branded concentrates, number two portfolio of branded vapes and a top 5 portfolio of branded edibles. We held a good 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 brand, 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 number one position in both markets and held share. For the first time, we’ve also taken the number one branded share position in Massachusetts per BDSA, making this our third $1 billion-plus market with the number one market share.
Last quarter we talked about some of the challenges we had to overcome in Massachusetts and we’re starting to see the hard work that we put in pay off as we’ve 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 brands matter? I 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 owned shelves. Despite the current move to verticality with regulatory caps in most markets, the opening of 185 more dispensaries in Illinois, and a 150 independent dispensaries 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’re creating through our branded product sales and distribution capabilities.
Number three, 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 number one on the scaled national operators with an 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 a weakening consumer dynamic. Through our sophisticated ecom platforms, basket building promotions and in-store cross-selling programs, we’ve 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 suggestive selling, we will continue to build sales from our large community of shoppers. While sales growth has been decelerating due to price declines, 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.
A retail sales growth hasn’t reached its potential due to some delays in opening new retail stores in Florida and Pennsylvania, we’re paving the steps to resolve these issues and replenish the growth pipeline. You’ll see openings later this quarter with more in Q4 and then in 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 shelves they deserve.
Before handing it over to Dennis, I want to thank the Cresco family for everything that they accomplished this quarter. They’ve 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’m very fortunate to be a part of this team full of leaders.
With that, I’ll turn it over to Dennis to discuss Q2 results.
Dennis Olis
Thank you, Charlie, and good morning, everyone. I’ll be reviewing the financial results from the quarter, then highlighting a few items from the balance sheet and discussing our capital position.
As Charlie mentioned, we’re 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 flat wholesale revenue in the face of industrywide 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’ve demonstrated that we’re 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’re 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’ll 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’re well positioned to have an incredible 2023 and beyond. Despite this 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 entrance in the Florida contributed to our gross margin expansion. Our ability to recognize industry trends early and proactively respond to the changing market dynamics enables 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’re 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 two 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 unitholders 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’s 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, on tap efficiency in 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’ll pass it back to Charlie for some closing comments.
Charles Bachtell
Thank you, Dennis. I’m 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’s important that we continue to look down 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 accelerated 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 long awaited regulatory catalysts 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 two years.
Operators continue to prove themselves resilient, although subject to draconian tax provisions and can’t access the traditional institutional capital pool that is truly sitting right on the sidelines and ready to jump in when they can.
I’ll reiterate what I mentioned in our Q1 call. We’ve 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 the 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’s the ultimate unlock, and it takes leaders to drive this change.
In closing the macro and industry headwinds, we’re managing make us so proud of our Cresco team. With our operational and strategic initiatives underway, we’ll continue to keep our heads down, execute on the business, put the pieces in place for long-term leadership and achieve our vision of being the most important company in cannabis.
With that, I’ll open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Aaron Grey of Alliance Global Partners.
Aaron Grey
Thank you for the questions and a nice quarter, especially given the relative macro backdrop. So Charlie, I want to talk a little bit about the brand’s movements, number one position in Massachusetts, third there. Want to talk about how you’re seeing the relative pricing kind of overall for some of these markets where we’re seeing pricing pressure, how comfortable you guys are with your own portfolio? And then secondly, how you’re looking at the current mix between premium, mainstream and value products? Because we’ve seen a number of your peers introduce 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 compare your success in terms of the wholesale? Thank you.
Charles Bachtell
Yes, Aaron, thanks for thanks for the question. This goes back to something we’ve 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’s 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, we will continue to be effective. As it relates to the specific markets, maybe Greg, do you want to add some color?
Greg Butler
Sure. I think as you — your first question is on pricing, we do expect to see price compression continues the back half of this year, as supply in many of these markets like Pennsylvania, Illinois, 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 into value segment. And we’ve been able to take material market share with high supply across our markets, are pleased with that. 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 is to 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 on our value brands.
Aaron Grey
And then second question for me, just as we look at mature markets, so for California you guys obviously exited some of the third-party distribution last year, but still have some exposure there, and then will be taking on exposure, it’s Colorado with the pending Columbia Care acquisition. So I want to get your take in terms of how you’re looking at markets such as California and Colorado where you are seeing pricing pressure there obviously at lower levels, some more difficult to be profitable. So how do you view markets like that? Charlie talked about kind of the long-term, brand and importance of markets such as that but in the near term and obviously more difficult to generate profitably there. So want to get your take in terms of how you are viewing those today?
Charles Bachtell
Certainly and your right, with those markets sort of at the stage they’re in, in their maturity, it’s important to be in those markets as those markets are — you’re 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’re not exposed to allow those markets to negatively impact the rest of the body.
And as it relates to our increased exposure in California through the Columbia Care deal, it’s really more of an optimized footprint and it allows us to have verticality there. And same in Colorado with the footprint that we’ll 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’ll manage through it, but both markets are important for the exposure to the consumer base and for brand equity that can be built.
Operator
Our next question comes from Andrew Bond of Jefferies.
Andrew Bond
Andrew Bond on the line for Owen Bennett. Thank you for taking our questions. 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 doesn’t seem to be driven by kind of an increase in vertical shelf space, correct me if I’m wrong, like a lot of other competitors. So can you talk more specifically about that and what’s working in your stores? Maybe some of the retail tools or strategies that you’re looking forward to implementing as you eventually integrate those Columbia Care stores post acquisition? Thank you.
Charles Bachtell
From a retail strategy standpoint, we continue to, again try and address the needs of the consumer. As a stakeholder focused organization, we do this across our entire platform, right? So understanding what the consumer that’s coming into the store wants, whether that’s a — 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 operate high volume retail with great locations. It’s something that as we’ve talked about in prior calls, it’s a muscle that we’ve built over the years. We have become a fairly effective retailer, as noted from our revenue per store metrics. And it’s something that 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’re 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, do you want to comment on tools?
Greg Butler
I think the big things you’ll 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 in our own stores. Historically, we’ve tried to maximize the assortment of our brands and partner brands. And then we’ll 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 now in our retail business or wholesale business is insights into shopper behavior and understanding what they’re 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 you’ve seen the successes as we’ve launched brands as now that capture some pretty good market share.
From a capabilities on Sunnyside, our folks — in back half of this year, what you’re going to see from us is programs like loyalty, where we’re going to help not only collect information about how our shoppers shop, but also drive loyalty into our stores, but also other ways to grow our baskets 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.
Andrew Bond
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’s performance been there relative to your expectations? And what additional states are you planning to launch the brand in the balance of the year? Thank you.
Greg Butler
Well, I will take that. As we said, we have been very pleased with not only progress of FloraCal in California in a very tough market dynamic, we’ve launched in Illinois so far. It hit our expectations, in fact 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’re 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.
Operator
Our next question comes from Pablo Zuanic of Cantor Fitzgerald.
Pablo Zuanic
Charlie, two 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 open 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 driving in your wholesale business, or we don’t really have any new capacity in a major way coming in over the next 12 months?
Charles Bachtell
Thanks, Pablo. So where we stand in New York is moving forward with — again it’s both us and Colombia Care having assets in the state. We’re 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 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 we’ll have — again, it’ll be a 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’re 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.
Pablo Zuanic
And last one. Not to nitpick, I think in the past when you talked about gross proceeds from the divestitures you talked about $300 million to $400 million. Today you said $300 million. I think that’s understandable in the current context. But can you clarify there, or am I miss-reading the comments?
Charles Bachtell
No, I think we were just confirming that it would be north of $300 million, it’ll be somewhere in that range, the original range of $300 million to $400 million.
Operator
Our next question comes from Derek Dley of Canaccord Genuity.
Derek Dley
Just on the Columbia Care transaction, obviously made a lot of headway in terms of securing approvals. Can you just talk about, what’s left? Do you need state by state approval? Do you need municipality approval in some cases in some states? What’s left there?
Charles Bachtell
Thanks, Derek. I would say just overall, again, reiterating, the regulatory approval process is going well. Really proud of the team because it’s a lot of work, you’re 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 teams, the combined teams on the Columbia Care and the Cresco side are doing an incredible job of managing it. But you’re right there, depending on the state, the varying degrees of difficulty and sophistication in what the process is, we’ve made great progress. I think as we can mentioned — or I think Nick mentioned on his call about half the states are almost at 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’s 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’re confident in being able to manage thoroughly. So feeling good about it.
Derek Dley
And then just switching gears a little bit just to your dispensary side. In terms of your new store openings or even what you’ve seen in the past, you mentioned your Sunnyside stores 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’re seeing or maybe compare that payback period you’re seeing now versus what you saw two years ago when you were opening stores?
Charles Bachtell
Sure, Greg would take this one.
Greg Butler
Yes. Good morning, Derek. I think from a general perspective, what we’ve talked about in the past is — and this is pretty consistent, I think with what our peers have looked for as well, we have an internal rate of return that we look at, it’s somewhere in the three year range — two to three years. We don’t overly share that. But I would say from where these assets in cannabis continue to perform, we’re not seeing any sort of change in that payback period. We’re able to generate revenue and profit out of those stores that are holding those standards.
Operator
Our next question comes from Vivien Azer of Cowen.
Vivien Azer
Charlie, I recognize it’s an incredibly dynamic backdrop and your crystal ball is probably not perfectly clear. But as you observe the current market dynamics, how has it your thinking around the hierarchy of priority states on a pro forma basis changed if at all for 2023? Thanks.
Charles Bachtell
Thanks, Vivien. 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 a 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 don’t know if that’s the beginning of 2023 is still realistic. We’ll see. We’re looking for some good updates from New York here in the near future. But that’s sort of how we’ve — 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’re 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. I think balance at this stage of the industry is very important.
Vivien Azer
Yes, absolutely. Certainly, I can appreciate the frustration around New York, maybe first half of ’23. But just to double click on your comment on Illinois, is my follow-up question. I know it’s very early days, but certainly you guys were involved in — involved with the social equity participants and licensed winners. So how are you thinking about them as potential customers? And are those conversations starting, albeit very early days?
Charles Bachtell
No, certainly those conversations again have been ongoing. We’ve been a partner to the initiative from the very beginning with the passing of the legislation and of course when the original announcement of recipients was made. So it’s been tough to have our partners be put in a position that they’ve been put in over the past couple of years with the delays. But we think that there’s a tremendous opportunity for them to be good partners of ours in the coming years, and for us to them. Now, I don’t know if all 185 are going to stay where they’re at. I think you’re going to see some additional entities make some acquisitions with some of those licenses.
And again, there’s puts and takes and the pros and cons to that. But I think the interest in the Illinois market is there, the opportunity in the Illinois market is there. And so we’re really excited to see that unfold. And again, be a good partner to those groups coming into the state.
Operator
Our next question comes from Andrew Partheniou of Stifel.
Andrew Partheniou
You mentioned receiving over $300 million for the divested assets, which I think was previously discussed to fund CapEx and pay down debt. Understanding that you may not be comfortable putting a CapEx number out there for after 2022. But maybe you could talk about leverage and how you see your balance sheet? What does an ideal leverage ratio or debt to EBITDA look like? And how should we think about raising capital when cost of equity is high and cost of debt is rising in this inflationary environment?
Charles Bachtell
Thanks, Andrew. We’re going to have Dennis take that.
Dennis Olis
Thank you, Andrew. As we’ve talked about on previous calls, the amount of CapEx that we’ll need to spend for the balance of this year will come down considerably, as we look at the benefits of the Columbia Care acquisition and look at our combined footprint. We had previously talked about a number of about $100 million. That number will drop to about $60 million to $65 million for the full year for Cresco Labs.
As it relates to proceeds from the divestitures, we will continue to — the plan is to pay down some of the existing debt and have a leverage ratio in 1.5 range as we exit 2023, combined reduction in the overall debt balance that we have as a company. And with the proceeds, again, we’ll be able to have some money in our pocket so that we don’t anticipate having to do any type of raise, won’t be any type of equity raise in the foreseeable future. So we feel that we’ll be at a really good strong cash position to pay down our debt, increase our balance sheet and improve our leverage overall.
Andrew Partheniou
And thinking about this quarter and near term here, could you talk a little bit about what the promotional trend was quarter-over-quarter? It’s impressive that you increased your gross margin in a seasonally higher promotional period. Q3, arguably, if you think about seasonality could be a little bit less promotional. So could we see further improvement here? Or is the trend of price compression kind of negate any kind of seasonality factors? And if price compression does negate, where are you seeing the most impact in your portfolio?
Dennis Olis
So why don’t I take this? I think as we mentioned earlier in the call, we do — we are planning and expecting to see price compression continue across many of our markets. That’s been the case for the first half of this year, and there’s nothing that suggest as we get into Q3 that’s going to slow down. And so we’ve planned for that. We think that’s going to probably see itself intensify the most in markets like Pennsylvania. We will continue to see supply come online, putting pricing pressure in that market. We don’t expect Massachusetts to give up on price promotions. And so we’re planning for that and we’ll see it. Florida, Florida was a pretty aggressive price promotion coming into the year, slowed a little bit in the market. But that could continue as we get into the back half of the year.
So those are the markets we see intensification for us, because we’re planning for that. It’s about how are we managing costs in those markets to make sure that we can respond with price if we have to, and ensure we’re holding margin. And so proactively planning for how prices might come down, which we’ve been doing, and then starting to manage our cost base to support margin growth, even if that happens is where we’re focused. And hopefully, we will be surprised here that pricing doesn’t hit as hard in the back half of the year. But we are taking all the actions now to make sure if it does that our margins stay strong.
Operator
Our next question comes from Kenric Tyghe of ATB Capital Markets.
Kenric Tyghe
Charlie, in Illinois, could we speak to — we’ve seen over the last number of months sequential declines in the average basket in Illinois. Could you speak to even directionally not just how your average basket has trended in the state, but also perhaps just the gap relative to the average basket? And how you would see that in the back — so evolving in the back half here? Apologies.
Charles Bachtell
Thanks Kenric, I’ll start and then Greg will add some more color to it too. But I think what we’re seeing in Illinois from sort of the gradual slide here in basket size is not unique to Illinois, I think this is a dynamic that exists when you have the macro headwinds and the macro pressures that we’re seeing. When you have gas costs what gas costs, you’re going to see different behaviors in consumers whether that’s let’s frequency in shopping, or whether that’s trading down in category. So again, it’s one of the things that a comprehensive portfolio strategy, and then in store sort of activities and basket building tools we’re using to try and counter but I don’t know that I would limit it to Illinois. And Greg any additional color?
Greg Butler
I think specifically Kenric here on Illinois, what we’ve seen and this is why we are — we’ve highlighted the back half of the year could look tough from a growth perspective in some of these markets is each of these seasonal lifts that we expect to see in a quarter for the first half of the year have not been hitting as high as expected. And so that is showing you that it is — there’s price compression for sure happening, which is impacting baskets, but there’s also slowdown in foot traffic. And I think if you look at from a retail perspective, whether it’s our retails or others, most — many of us expect to see seasonal lifts of foot traffic as we got to summer months. We’re seeing a little bit of that, but nowhere near as what we’ve expected to see. And so that reduction in traffic with a bit of price compression is definitely putting some pressure on top line revenue. And to Charlie’s point, that is not a Illinois specific, that’s across markets, you’re starting to see that growth, or that compressional growth.
Our focus has always been delighting our shoppers and so as we get into the second half of the year, we’re planning for a potential scenario where foot traffic continues to be pressured. And so finding ways to increase the value of every shopper transaction, whether that’s going to add an extra item to the basket, whether that’s more selective on how we’re thinking about price promos is how we’re going to manage through it, and how we think we’re going to continue to hold our above fair share in many of our markets as we get into the second half of the year.
Kenric Tyghe
And just switching quickly to Massachusetts, obviously nice to see the move there and you’re sort of taking number one position in the state. Can you just speak to the — what are the key fixes that you needed to make to the Massachusetts business? And how sticky do you think those will prove? And how sticky in by definition then do you think your position will be in the market again, as we look through the back end of this year, into next? Or are the Massachusetts fixers sticky? Or is there is there some noise in that movement in the quarter?
Charles Bachtell
So I think, again, just taking a realistic look at Massachusetts, we integrated a fairly large acquisition there at the very beginning of the year. So it’s one thing to close a transaction, and it’s another to fully integrate. And I think what you’re seeing from us is the benefits of the work, and the discipline and the integration process bearing fruit and improvements, as we mentioned, on the call from a yield perspective, from a quality perspective of products coming out. It really goes back to the fundamentals of offering the highest perceived value to the consumer. It’s always a good strategy, right? So I think that’s the execution of the traditional playbook bearing fruit and very happy to see it. Greg, anything you want to add?
Greg Butler
I think the big things I’d add to that is, as we’ve looked at our share and your questions on stickiness, absolutely we believe it’s sticky. We gave up some share in Q1 to Q2, because we were moving through some inventory that we had to with the integration, which we were selling heavy as Q4, Q1, we did not have in Q2. So the growth you’re seeing in Q2 to become the number one is our go forward portfolio coming into the market. And so on the vape side, we’ve seen some nice growth. The team has done a tremendous job of getting out there and explaining what makes our products superior with Liquid Live Resin and taking some share.
And then as we get into the back half the year, as we mentioned on previous calls, we expect to see improvements in our flower quality, higher potency, more strain diversity, which is going to give us an opportunity to go take some share on flower as well, even amongst the continued price compression that exists in flower in the market. So what you’re seeing in Q2 is the beginning of getting the right house of brands into the market. And our view on that is we’re going to continue to grow from there.
Operator
Our next question comes from Matt Mcginley of Needham and Co.
Matt Mcginley
Thanks for the detail on the back half outlook in your prepared remarks. I just want to make sure I have the moving pieces right. It sounded like you thought you would have some retail dollar growth from unit addition. But you might see some decline in wholesale given price compression. And then Dennis said that the G&A dollars would go down a little bit. But you were targeting EBITDA rate to be flat at around 23%. I think that implies your gross margin will probably be flat or down a little. Is that about the right shape of what you’re expecting into the back half?
Dennis Olis
Thanks for the question, Matt. So, yes, you’re spot on. So we do — we will continue to manage our SG&A costs. As we have for the last several quarters, it’s been relatively flat. We will continue to manage that we do expect to see a slight decline in the second half from our current levels on the SG&A front. We are — as we’ve talked about several times now on this call, there has been — the press compression will put some pressure on our gross margins. We’re looking to offset that through automation and improved yields and productivity at those sites. But we do expect there to perhaps be some pressure on gross margins which would allow us to keep our adjusted EBITDA margins relatively flat sequentially.
Matt Mcginley
And the question on cash flow. You had that $69 million in cash flow or cash outflow, I think that was related to cultivator announced this quarter that — I think Dennis, you had some of that was tax related, I’m not sure if I mixed some of those together. But I know you have some other earn outs with Laurel Harvest related dispensary opening. So overall what do you expect the cash payments will be through year end? And how should we think about the timing of those payments given — I think some of those were tied to specific deliverables around the store openings that you probably have good visibility into?
Dennis Olis
Yes, so from a cash flow perspective, as we talked about, there’s $89 million of taxes that were paid out in the quarter. Now due to the structure of the company, that is — does show up on two separate lines, but there was a huge tax payout as it relates to this quarter. And again, we have 280E to thank for a big portion of that.
If we look at some of the earn outs that you talked about, those were — there was some cash component to that but there was a larger component to that, that was related to equity that had been provided as part of those transactions. So, the cash disbursements was fairly low as it relates to the earn outs in the quarter.
If we look at our cash position going forward, we feel really good about where we’re at from a cash perspective, our ability to generate cash from our existing business. The tax payment, the large tax payment is primarily behind us. And I feel pretty good about our position going forward.
Operator
Next question comes from Scott Fortune of ROTH Capital Partners.
Scott Fortune
Maybe a little bit on the operation improvements — improving yield production from outside, you could jump in and grazing in Massachusetts, but just want to continue to call out further opportunities for production efficiencies, as you look at your footprint kind of in the different states? And then how you look at that opportunity, as you bring on the Columbia Care assets, and production and operational efficiencies for those assets going forward? You can move further on continuing efficiencies to offset the pricing pressures that you’re seeing?
Charles Bachtell
The opportunities for further efficiency, I think are great across the sector. Historically, the ability to benefit and create the scale and efficiencies from automation is limited in this space, that’s starting to lessen I think from the barriers of the inability to create that efficiency is starting to lessen. We are developing the scale in our markets, in our underlying markets that can afford us the ability to utilize automation to create a greater efficiencies and the benefits that flow from them. And I think just this is we continue to focus on continuous improvements from an operational perspective with our center of excellence. These are the types of things again, the playbook in cannabis, it for each operator needs to continually evolve and get better it leads that’s what we prioritize throughout the organization this idea of continuous improvement. So it’s something that you’ll see from us as we go forward. It’s absolutely one of the benefits of the Columbia Care deal and why we’re so excited about it is the opportunity to rationalize the dual sets of assets that we have in these various states. We can really create optimization in 2023 and on that neither one of our companies could do on our own. Now, that’s not only from an operational perspective, but that’s even from a back of the house and SG&A perspective, too. So the synergies and the optimization that are going to flow from the Columbia Care deal are pretty profound, very excited about it.
Scott Fortune
And then real quick last question from me is providing a little color on expectations of the Illinois retail store rollout and timing. Obviously, you don’t expect them all to come on board? How should we look at that cadence as you see these retail stores kind of getting licenses and coming on board and looking at second and will primarily into 2023?
Charles Bachtell
Ensure as it relates to the stores opening in Illinois. I think it’s going to be a gradual turn on a when it comes to the 185 licensed opportunities. There’s certain groups, of course, are going to be better prepared to move forward than others. And he said that trade we think we’ll see some now before the end of the year here, a nominal amount, but I think you’ll see some get opened before the end of the year, I think you’ll see a gradual build throughout 2023 into the back half of 2023 and then some of the 2024.
I think just being realistic about the preparedness and the capabilities of the large pool of recipients, it varies. It’s one of the things that makes us excited about New York, I mean, New York as a state is underwriting and investing in that program at a level that no state has ever done before. So when you kind of compare those two scenarios, the 150 stores that are going to open in New York, now very high level of confidence that those are going to get their doors open, that there’s going to be shelves that need product on them. So excited for both states, but we’re going to make sure that we do what we can to assist and get doors open and both.
Operator
And our final question of today comes from Michael Lavery of Piper Sandler.
Michael Lavery
I just wanted to come back to the margins and you’ve called out a few of the drivers of puts in takes, but the discontinuation of the California third-party distribution sounds like it was a pretty big offset to allow the headwinds. Can you quantify how significant that was?
Charles Bachtell
We haven’t provided any specifics on our margins in California. We made the decision, which is a tough decision to make, but to exit the third party distribution business in California, because it was a challenging business to be in and it did have a was diluted to our overall margins. The impact of that, certainly in the California market helped improve the margins in California pretty dramatically. But when you look at the overall impact across the company, it did have a smaller effect, it’s still a positive effect. That in part is what has allowed us to show some margin improvements sequentially.
But again, we understand that there are pretty significant price compression factors that are offsetting some of the gains we’re making in other areas. And all the things combined are what gives us confidence that we can maintain gross margins over 50% of the foreseeable future.
Michael Lavery
When you called out the yields and better scale and entering Florida as other positives would on the total company basis, the margin mix benefit from the discontinuation in California have been a bigger driver, are they all about comparable? I guess just trying to understand where it ranks come in the hierarchy of things?
Charles Bachtell
Yes, I mean, somewhat comparable today but as we continue to scale up in Florida, again, the vertical market there enables you to have much larger margins and our overall profile. So, we expect to see that opportunity in Florida will have a bigger impact on us going forward. But again, there’s other headwinds that we’re facing that that will put pressure on margins.
Michael Lavery
And then just on the Columbia Care deal, you just touched on some of the efficiencies and cost synergies. From the revenue side are you underrepresented in those stores or is there’s sort of ways we should expect revenue synergies to give a lift as well, once if you’re underrepresented now you can sort of, improve just get a distribution boost after it closes. Is there any much of that should we be expecting?
Dennis Olis
Yes, this is Dennis. So there will be an uplift in that. Certainly as we look to markets like California, where we don’t have stores and we don’t have that distribution ability to have the stores to put our product into so there will be some improvements in terms of their overall position on our shelves, or our product on their shelves in their stores. That is certainly an opportunity that will give us some uplift once that deal closes.
Operator
At this time, we currently have no further questions and therefore this concludes today’s call. Thank you for joining. You may now disconnect your lines.
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