Cresco Labs Inc.
Q1 2021 Earnings Call Transcript

Published: 27 May 2021

[Operator:]

Good day and welcome to Cresco Labs' First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

[Jake Graves:]

Good morning and welcome to Cresco Labs' first quarter 2021 earnings conference call. I am joined today by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our Chief Financial Officer, Dennis Olis; and our Chief Commercial Officer, Greg Butler, who will be available for Q&A.

[Charlie Bachtell:]

Good morning, everyone and thank you all for joining us today. I'll begin with a few highlights from the first quarter and discuss our year-to-date progress on the three specific ways Cresco Labs is delivering growth and shareholder value in 2021. After that, Dennis will provide additional details from our financial results, highlighting the changes related to our transition to GAAP this quarter, and discuss our strong capital position as we approach the midpoint of 2021. After that, we look forward to taking your questions. At this time last year, the world looked and felt a lot differently than it does today. Reflecting back on May of 2020 it's amazing to think that today a third of the U.S. is now fully vaccinated, travel restrictions are being lifted and Wrigley Field is back to 60% capacity. For the cannabis industry, the change we've witnessed year-over-year has been extraordinary, with nine new states passing medical or adult-use laws over the last 12 months and a growing excitement about cannabis’ total addressable market. For Cresco Labs, I'm proud to say that the last year has been transformational. We've operationalized multiple organic growth projects and are nearing completion on several new ones. We've announced and closed acquisitions in strategic markets, and we have significantly expanded the presence of our brands across the country. Today as an organization, we're in a similar phase of the growth cycle that we were in at this time last year. And what we achieved in 2020 is a sign of what's to come. On the call this morning, we'll cover all of the details in the first quarter, discussing the transition to GAAP and the removal of previously broken out one-time costs to provide an apples-to-apples comparison to prior quarters. Before we dig into the quarter, which always remained a constant part of the Cresco Labs story is having a clear and focused strategy of building the most strategic geographic footprint, obtaining material positions in each state and emphasizing the middle two verticals of the value chain.

[Dennis Olis:]

Thank you, Charlie, and good morning, everyone. Before digging into the numbers, we're pleased to make the conversion to U.S. GAAP this quarter and to continue preparing for the company for future capital opportunities in the U.S. All of us here today believe that federal regulatory change on cannabis is only a matter of time and I can tell you Cresco Labs is now structurally prepared to take advantage of what awaits us in the U.S. markets. With the long game in mind, we're taking the opportunity at the outset of the year to transition to GAAP. The move to breakout of and provide you with clarity on the transition. For the purpose of comparing Q1 on an apples-to-apples basis to prior quarters in the prior year, we provided a table in our earnings press release showing our operating results for the four quarters of 2020 recapped under U.S. GAAP. All numbers and comparisons, I reference today will be in U.S. GAAP and U.S. dollars unless otherwise specified. Turning to the numbers. Revenue in the first quarter was $178.4 million up 10% quarter-over-quarter and 159% year-over-year. In Q1, we consolidated 40 retail stores through the Verdant acquisition in Ohio halfway through the quarter on February 16. We're happy with the top-line performance this quarter on the underlying business especially given that our focus in Q4 and Q1 was deliberately on building, staffing and refining operations for our next phase of growth. Revenue mix in the first quarter was 54% wholesale and 46% of retail. We're proud to say that $96 million of wholesale revenue, we were made the number one wholesaler of branded products and cannabis. Despite unexpectedly slow retail openings in January and February, the seven store openings in the back half of March and 11 openings in April provided strong growth opportunities for our Illinois wholesale business and positive momentum for Q2. On the retail side, while the same-store sales growing 9% sequentially then $3.8 million of average revenue per store in Q1, continues to be the most productive per store retail platform among top MSOs. We also closed on the Bluma transaction on April 14, and look forward to reporting as a combined company starting in Q2. Gross profit in Q1 was $87 million, or 49% of revenue compared to 46% in Q4, again, a reminder that all of these comparisons to prior quarters are apples-to-apples under GAAP. We expect gross margin to be above 50% in the subsequent three quarters of this year as we reach like Florida, Massachusetts and Ohio. Similar to the cadence we saw in 2020 expansion costs are being absorbed in advance of revenue as we increased production capacity and infrastructure to support it. In Q1, we had $600,000 in tax charges for the fair value market of the inventory acquired from Verdant. In Q2, we expected this will be a larger line item as we consolidate Bluma into our results. First quarter SG&A expense excluding share-based compensation and one time items was $58 million, or 32% of revenue. You can see on a GAAP basis from Q1 to Q3 last year, we held SG&A expense flat while revenue grew 131%. Then from Q3 to Q4, costs outpaced revenue for the period as we began to ramp operations for 2021 growth. In the second half of this year, we'll expect to see revenues significantly outpace expenses once again. Adjusted EBITDA for the first quarter was $35 million, a 17% increase from Q4 under GAAP. We've invested heavily in both CapEx and OpEx to build the operating platform and capacity that will drive our next leg of growth. Looking ahead, we expect substantial growth of EBITDA margins as previously announced expansion projects bring supply to market and we integrate creative acquisitions like Bluma and Cultivate. First quarter net CapEx was approximately $16 million. As a reminder, the expansion projects in Massachusetts, Ohio and Michigan are already funded from sale leaseback transactions, that the cost of such lease is already reflected in our P&L. As we aim to go deeper in more states like Florida and New York, we'll keep you apprised of our expansion plans as we get closer to deploying capital. There's an abundance of high ROI opportunities within our footprint and we will continue to keep our foot on the gas as we aim for tax free share positions in each of our 10 markets. We exited Q1 with $256 million in cash on the balance sheet, putting us in a strong position to pursue both organic opportunities and additional accretive M&A to generate shareholder value. To summarize the impact on the bottom-line going from Q4 under IFRS to Q1 under GAAP, we have approximately $3 million of additional in SG&A related to the new treatment of leases and $13 million of relaunched rebranding COVID and other costs that were no longer breaking out. The conversion from IFRS also impacts on cultivation costs or expense for facilities not yet at full utilization. Until a facility is producing at full capacity, we take a charge to the P&L rather than burden the inventory with additional fixed costs. This creates some variability in leading up to full utilization of facilities. All that said, on an apples-to-apples basis adjusted EBITDA grew sequential in Q1 and the fundamentals of our business will continue improving over the coming quarters. Our efforts during Q1 has set the stage for soft strong growth in the remainder of 2021 and beyond. To give you a sense of our internal projections, we expect that by the end of the year Cresco Labs annualized revenue will be at a run rate of more than $1 billion with gross profit margins north of 50% and an adjusted EBITDA margin of at least 30%. We have a valuable footprint with a diverse set of growth initiatives already underway, and we're laser focused on gaining meaningful share in each of our 10 states. We look forward to updating you on our progress. Thank you for your time today. And now, I'll hand the call back to Charlie for a few final remarks.

[Charlie Bachtell:]

Thanks, Dennis. To close, we're incredibly encouraged by the developments being made on cannabis within the states and at the federal level. As I've said many times before, this industry has been built on incremental steps that at one time may have seemed insignificant but later turned out to be pivotal moments of progress. Cresco Labs continues to play the leading role in the education and advocation of a normalized and professionalized cannabis industry. And we've built our organization to succeed today and as the industry inevitably evolved in the U.S. We embrace the challenges of an ever changing landscape and this eventual $100 billion plus industry. We're playing the long game and we're building this company to win. We have arguably the most valuable footprint in cannabis. We've demonstrably established leading positions in multiple billion dollar plus markets and have laid the foundation to achieve more top three market shares over the quarters to come. With a diverse set of growth initiatives already underway that are yet to contribute to the P&L. We're very bullish on the future. 2021 is going to be an exciting year for Cresco Labs and the industry and I very much look forward to speaking to you again on our Q2 call. Thank you for your time today. I'll now ask the operator to open the line for questions.

[Operator:]

Our first question comes from Scott Fortune of ROTH Capital Partners. Apologies. We have lost Scott. So I will move on to our next question from Aaron Grey of Alliance Global Partners.

[Aaron Grey:]

So first one for me. Mostly wanted to talk about the EBITDA margin rights, you guys provided some guidance, for the end of the year, thanks for giving some guidance on that. So 30%, just want to think about, as we kind of look forward in the business, how do you think about, the potential margin that you can get through as we look to 2022 and beyond, especially as you think about maybe going into deeper into markets, and also investing back into the business. Do you think there's a lot of opportunity beyond that 30%? Or are you guys playing more of a top-line game right now and if you want to get to but then beyond that you want to focus on maybe investing more back into the business beyond just trying to get a profitability as much as possible. So any kind of guidance on that would be helpful. Thanks.

[Charlie Bachtell:]

Aaron, thanks for the question. This is Charlie, I'll start and then kick to Dennis. We're excited about the outlook, right, and we're putting the pieces in place to really develop that scale and depth in the footprint that we've created, right. You know our story, our story is pretty solidly focused on creating that most strategic geographic footprint possible, and then getting that meaningful material position in those states. And what we've seen so far is that when we can create that meaningful material position in our state, the margin profiles are pretty phenomenal. So in mid last year, to really prepare for 2021 was create depth in most states like Massachusetts, Michigan, Ohio, the acquisition in Florida and the steps that we're taking there to really ramp up through the rest of this year and into '22. They do create excitement for us in margin profiles will look like exiting the year and going into '22. But I think it's a valid question about from there, where does it go, we do like to invest back into the business, this footprint that we've created, it's very valuable. And we know that the long-term value is like creating scale in these states that really matter. Dennis?

[Dennis Olis:]

Yes, thanks Aaron. Again, as we kind of laid out in the press release and the script, our results in EBITDA margins will continue to grow through the course of the year. The scale that Charlie talked about a lot of that comes up in the second half of the year. And we'll get the scale going into the Q4 and beyond. So there is opportunity to grow. Furthermore, if you look at our SG&A expenses and how we're investing there, we're investing to -- for a billion plus dollar company and we're making those investments now. And we'll reap the benefits of those in the second half of the year and certainly into 2022 and we expect to get further leverage from those investments as well.

[Aaron Grey:]

Okay, great. Thanks for that color. And then, second question for me, is on Florida, congrats on closing that. Just wanted to give an incremental color maybe in terms of quantifying some of the cultivation expansion initiatives and then timing that you have in the state. And then, I believe Bluma had previously, mentioned plans for four additional your store openings in 2021. Charlie, I think you mentioned earlier, you want to double that within the next 12 months. So to even clarify, if we still have plans for maybe a doubling within the next 12 months for four those to be within a calendar year 2021? Thanks.

[Charlie Bachtell:]

Yes, great question. And we're incredibly excited about that Florida market, as we explained in the prepared remarks, it's a very unique structure down there and it rewards execution and it rewards execution with their unique profit margins. So the way that we're approaching it as we knew coming and now , we're about a month in to the post closing integration. So plans are still in development. But we wanted to take a fast hit the ground running approach to some incremental growth strategies while we continue to finalize what the larger scale build out will look like. But it's a meaningful state. We want to have just like we do in all of our state, the top three position down there, we're going to invest the next day to create that outcome.

[Operator:]

Our next question comes from Vivien Azer of Cowen.

[Vivien Azer:]

So to piggyback on Aaron's question, as we think about the guidance and thank you for that. When you characterize your billion dollar revenue run rate aspiration as well as the 30% adjusted EBITDA margin, are we meant to understand that is as a fourth quarter runway, or is that something that you hope to hit kind of in December, but perhaps, the blended margin or revenue numbers in the fourth quarter might be shy of that expectation?

[Charlie Bachtell:]

Thanks Vivien for the question and it's a good question, just for clarification, the Q4 outcome for us that we're speaking to, there's a high competence factor there. We have the pieces to achieve it. So we're really excited about not only what the second half of this year looks like for us, but the acceleration that we have going into '22 also.

[Vivien Azer:]

Perfect. Thanks for that. And then, Aaron and I were clearly like minded in our questions, because my follow up is also on Florida. But differently in evaluating your weekly, Bluma's weekly market share recognizing a lot of this was, not while the business was under your control, it does look like there's a fair amount of momentum in concentrates just in terms of kind of the growth concentrates, obviously, picking up a fair amount of share per capita wise in Florida. So can you just talk about kind of your capabilities there? And what if any enhancements you'd like to make to deepen your penetration in concentrates?

[Charlie Bachtell:]

Yes, certainly. I think I'll start this and then I might ask Greg to provide some comments too, because I think really the -- what we've seen with Bluma so far is without question, best in class execution when it comes to quality flower and really high-end or concentrates, the live resin as they're creating down there, I think is best in class for an industry, not just Florida. So they really created that platform already. And what we're looking forward to doing as we ramp up expansions and not only on cultivation and production side, but also with retailer needs, the omni-channel approach to getting consumers their products is broadening the breadth of the offerings down there. As we mentioned in the prepared remarks, getting edibles into that marketplace as soon as possible and the other concentrate forms that we excel at with the live resin, etc. onto that platform as soon as we can, while we build out a broader offering set. And Greg?

[Greg Butler:]

One of the things in the Florida market is just like every market, patients are looking for variety. And one of the benefits we have in our house of brands, we have lots of brands that service lots of different consumer needs. And so even though you're in the forest, vertical nature of the state, we believe that we can create stores that have one of the most robust offerings of different brands and different forms by leveraging what we've done in other states and taking into our stores in that state, which we think in addition to store growth that we're planning to achieve in Florida. We will also drive back to growth by having one of the most competitive assortments in the state.

[Operator:]

Our next question comes from Camilo Lyon of BTIG.

[Camilo Lyon:]

And congrats on the top on momentum, it's really nice to see. Just keeping with the theme here on Florida. Charlie, I’m just curious if you could just articulate a little bit in greater detail around your capacity -- your cultivation capacity and what that supports from stores perspective today. And how, what the timeline is on your expectation of expanding that capacity, that cultivation capacity around supplying a much larger store base? And then, I have a follow up please.

[Charlie Bachtell:]

Yes, absolutely. So, again, good question. Florida, we want to be as we laid out over the last couple of years very strategic in the way that we approach the state and that doesn't change as we now find ourselves to be an operator within Florida. So, again, incrementally the guidance so far with regard to additional store openings will be supported by production capacity plans that are already underway. So I can tell you the cement pads already been poured for the expansion that will be able to service the store account that's roughly double of what it is. And we'll start to see that as we get towards the end of this year here, that actually reaches store shelves. But the larger scale expansion project is something that'll be relevant for 2022 and it's still on development. Again, Bluma historically has been a really good job of managing number of stores, to production availability. And that won't change with us. I think we talked about in the prepared remarks, with 3.8 million for store in a quarter, we like to have high volume, very efficient, very effective retail outlets. And that's something that'll continue on as we implement the broader plan in Florida. But the broader plan is 2022 and beyond the incremental steps will be seen second half of '21.

[Camilo Lyon:]

Great, that's helpful. Thank you. And then, my follow up is on New York. I think you touched on it briefly in the prepared remarks, I’m just curious how you're thinking about CapEx allocation. I don't believe you have cultivation in the state but in preparation for adult-use turning on. How do you think about the timeline there for your CapEx investment in preparation for that switch?

[Charlie Bachtell:]

Definitely we see CapEx investment begin this year, we were thrilled that the development in New York and adult-use market you're probably looking at the second largest cannabis market in the world behind California. So we're going to make sure that we're prepared to create that top three position that we're going to achieve in every state. But there's also still a lot of work to chop on what the structure of -- in the details of that program look like. So as we're going to move forward with plans this year, it's also very important that we receive that guidance and sort of how that's going to look and feel so we can develop the structure accordingly. Very excited about New York overall.

[Camilo Lyon:]

Great. And on that point, is there -- can you tell us where you're at on cultivation or even land in that process? Are you at a point where at secured land and waiting for guidance on how much you can build out? Where are you in the phasing of just that very large project that can be very time consuming?

[Charlie Bachtell:]

Yes, optionality is there for us. Again, there's no geographic restrictions really in New York. You basically have the whole state that's available to you. So there's a couple of options that we're looking at, that we would have the ability to move forward on immediately. But again, guidance is important. You want to make sure that you build that out correctly. And as we've proven before, we're pretty good at getting buildings built and operationalized and products on shelves.

[Operator:]

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

[Kenric Tyghe:]

Charlie, with respect to your top three sort of target, I'd like to better understand or how do you think about defending your most in the life of Pennsylvania, what supports your conviction, what differentiates your offering to tick in the context of, the slew of transactions that are either recently announced, close or closing from everybody from -- Verdant truly Columbia . Can you just help us better understand your sort of thinking around your moat in Pennsylvania as one example. And as some other markets, where you are already number one or two player, that would be great.

[Charlie Bachtell:]

Yes, Kenric. Thanks for the question. Look, Pennsylvania is receiving a lot of attention, because it's an incredibly attractive market. And we've known that for a while, we do appreciate, enjoy our number one market share there. And we have no designs of giving up the position. And again, while number one is great and top three is the goal in every state that we're in. So we just want to make sure that we are in a driver's seat position in all of our markets. So, we don't really look at that many of our states as moat or having moats or unique advantages in them. We approach all of our markets, like we have to be a better competitor than our peer set. So we're going to make sure that we have the capacity available to meet the growing and very strong demand from the consumer base in the state. We're going to make sure that we produce the quality of products that the consumer wants. And then, we're also going to make sure that we manage our footprint, both not on just the cultivation side, but on the retail side with -- to make sure that we maintain our position in that state. And then, Greg also had some comments on it.

[Greg Butler:]

Just to build on that, we believe that the strength of our brands or products, our wholesale business does gives advantage. And even in state today, where you have a lot of our competitors only retail, we have 100% distribution state, which means if you have a good product that we believe patients consumers line, we will get it on shelves.

[Kenric Tyghe:]

That’s fair. Thanks gents. And just one other quick one, just switching gears to Illinois. Can you just refresh us on the new license expectations? I think certainly people looking for kind of June, July, any additional color on that and how you think about that sort of impacting not only your sort of shelter in wholesale, but just broader market dynamics, if those 75 licenses are finally issued here in the third quarter.

[Charlie Bachtell:]

Yes. So we're very excited for the expansion of the dispensary licenses here in Illinois. And now it's not just the 75. It's the 75. It's another 110 and then another 35. I hate to comment on legislation before pen is to paper on it. But we had success in the house here over the past couple of days in the Senate, and the support from the governor was issued yesterday. So we're looking to have that legislation that'll provide the path forward for that completed here in relatively short basis. And it's terrific, it's needless to say, with our wholesale focus, a lot of growth opportunities is presented there with the expansion of doors in Illinois. So for us, very exciting. There's some other components that billed to which are really important, which is the ability to move dispensary locations, there's other components that are great that will continue to drive growth in this Illinois market, where again, we are number one market share and here we do have a unique advantage with those three cultivation licenses. So we'll be able to have that capacity to be able to service the demand in the state. So very excited about it and hopefully, it's a very, very near-term event.

[Operator:]

Our next question comes from Matt McGinley of Needham.

[Matt McGinley:]

My question is on retail productivity, with the acquisitions in Ohio and Florida, will that impact the retail productivity into the second quarter? Is it reasonable to assume that those retail outlets sustain, something around that 3.8 million productivity per unit? Does that fit with what might be the inclusion of these lower volume units?

[Charlie Bachtell:]

Good morning, Matt. Thanks for the question. I will hand that over to Greg.

[Greg Butler:]

Good morning, Matt. You are. As we add more stores, we tend to see, there's a ramp up of stores. So we continue to open doors. There is on average evolution to the productivity overall. So we always expect to see that. Now what I would say is, what continues to make us very encouraged is, we look at same store sales for our stores. They continue to show very healthy growth rates, right? And so even though you will have the solution to they're just smaller store volumes at the beginning, those existing stores continue to grow across our states.

[Matt McGinley:]

And on the gross margin, do you -- what do you assume drive that gross margin north of 50% into the second quarter? Is that primarily the inclusion of Florida or is that more productivity gains and planned capacity? And moreover, under GAAP gap with the asset base you have coming together? What do you think gross margin rate could normalize for Cresco?

[Dennis Olis:]

Yes, thanks for the question Matt. So gross margins will improve throughout the course of the year. So again, we are varying some of the costs of the sale leaseback expense in some of our expansions that we have in Michigan, Massachusetts and Ohio, so varying the cost without the revenue that will come up in the second half of the year. We also as you noted, we will have Florida go live which will certainly help the mix and the volume that the gross margin percent in total for the company started this quarter and moving through the rest of the year. But if you look at it in a big picture and I would, in the space we are fully utilized in Illinois, Pennsylvania, for example, I put our gross margins up against anybody in the industry. As we continue to expand and increase capacity in Michigan, Massachusetts, Ohio and Florida and get those facilities up to scale. We will expect margins to continue to improve. So we're optimistic about where margins will go. As we said, we expect to have margins in excess of 50%, for the balance of the year. Longer term, we'll continue to make the proper investments to improve automation and look to expand margins as we move forward as well.

[Operator:]

Our next question comes from Pablo Zuanic of Cantor Fitzgerald.

[Pablo Zuanic:]

Look, gentlemen, it's a very simplistic question. But just thinking of the wholesale business, you got that 60% round sequential growth in the third quarter, then flat in the fourth and up 6% in the first, right? As we think of the rest of the year, how does that play out, right? It seems in the 2Q, you will have it around your capacity coming in, and it's more 4Q story, can you give some color there just to -- it's a modeling question, but it seems that wholesale in organic and expansion, that you're doing aside of acquisitions, you will have much growth in 4Q. Can you go through that? Thanks.

[Charlie Bachtell:]

Sure, Pablo. Appreciate the question. I think the growth, you saw, we had 5% growth, here on the wholesale side in Q1. I'd say that that growth could have been more had we had more doors open in Illinois in January, February in the first half of March. So there's also capacity in Illinois that we have optimization in Illinois that's underway, that will allow us to actually get more juice from the same squeeze. And that's the case across our platform and nationwide. So I think that's where the growth comes from in Q2 and Q3, and before the additional capacity from Ohio, Massachusetts, and then later, towards the end of the year, beginning in 2022 in Michigan, come online.

[Pablo Zuanic:]

Got it. Thank you. And then, this is bit of a general philosophical question. But, I get the idea of wanting to be top three in key markets. But in those markets, where you have caps, like Massachusetts, rivalry stores, 100,000 square feet in terms of cultivation. Everyone gets to cap eventually and it's difficult to be a leader or adult-free doesn't mean much, because it's a fragmented market, right? So how do you think about that, because at the end of the day in Pennsylvania, pretty much every one of the guys would have15 stores or more, just go through that, because one idea, one thing is being number one in Florida with 15% market share and being number one in Arizona with 10% retail share. How do you think about that? Thanks.

[Charlie Bachtell:]

Yes. I agree with you. Again, I think it's one of the reasons that we prioritize the middle two verticals in the value chain, right, because I think where you see the caps, the majority of the caps is going to be on retail. But that's just not an approved in this cap, that's not a total cap. So I would envision, our thesis is, there will always be more and more retail, owned by more and more independent non verticals that come into the states. So the opportunity for that type of expansion and where again market leadership really matters is on the wholesale side more so than on the retail side. And, there's benefits to be in top three, in every market with the strength of our footprint having a presence in all seven of the executing in the states that we have making sure that they're valuable states not only does that build strong margin profiles by scale, also build that brand equity as additional states come on, we'll take a look at them, they meet their criteria of strategic state will expand. But that's the strategy, that's the rationale for really focusing on not only the middle two verticals, but achieving that top three status in every state that we're in.

[Pablo Zuanic:]

Right. And squeeze one last one here. Other companies have talked about what they call the Schumer wheel dropping this month or next. Do you have any views on that? And how would you characterize Cresco versus other MSOs in terms of your positioning when interstate trade arrives whenever that happens? Thanks.

[Charlie Bachtell:]

Technically, I think there was two more Pablo. I think we are, of course, we're active on not only state legislative initiatives but of course, federal. I'm Chairman of the National Cannabis Roundtable. So we're engaged in this. What I'll tell you is, we're building the company to be successful today with this current dynamic that we've been operating in for the last six years and inherently in the way that we develop our business model. It prepares us to be successful long-term within open market, interstate commerce, federal legalization, right? That prioritization of building brands and distribution is akin to traditional CPG. That's why we built the company, the way that we built it. It is a matter of when not if, I don't know when that's going to happen. But I can tell you, we are the company that's built to win today. And we have the company that's built to win in the future.

[Operator:]

Our next question comes from Michael Lavery of Piper Sandler.

[Michael Lavery:]

Just I'll actually sort of tie two questions together instead of attacking on extras. But you mentioned the importance of insights from California in particular, just curious what you're seeing and learning there. And then, the related follow up just from the brands perspectives mentioned, in so many states, how important that is. And then, you're seeing some equity building, how those tie together? And how do you see brands, your brands developing in the space?

[Charlie Bachtell:]

Thanks, Michael. Good morning. I'll take the first half and then Greg will comment on the second. California is a marketplace, it is the largest cannabis market in the world, also uber competitive, right. So it's a consumer base that is fairly well knowledgeable in cannabis. And it doesn't look and feel and act from that perspective, like a more mature market. I won’t say that it is mature, it's still developing, but it acts like a more mature market. So consumer insights and how to operate not only brands that resonate with consumers, but operate in a competitive market with lower margins is something that everybody needs prepare for, as you have a longer view in this industry and if you want to have a leadership position in it. So it's been insightful for us, we're investing there because of the dynamics of that state and what it provides for us now, even if it is a lower margin business, especially on the distribution side. As it relates to brands, though, I'll hand it over to Greg.

[Greg Butler:]

As we live in California, in all of our markets, and look at the industry as a whole, what you are seeing is that this industry has a wide breadth of both consumers and patients that have very different needs, interests and forms they're willing to consume. And so as we think of our house of brands, our portfolio brands, we're very much focused on trying to figure out what are the consumer occasions and needs that are most important and building the right value propositions and our brands to win against us, right? And that's why we have a little bit different approach, which is we do believe this market is going to have many different brands for many different consumers versus one brand for all. And that's the thesis of our investment strategy.

[Operator:]

Our next question comes from Andrew Partheniou of Stifel GMP.

[Andrew Partheniou:]

Maybe I could start with just your acquisitions. You have a few to integrate this year. Before them, you already had a strong cultivation knowledge, especially through Floracal, which now as I understand white labels for some very strong brand like cookies. Now you're acquiring, or you have acquired Bluma, which also has a strong reputation for the quality among your other acquisition. Could you talk or could you walk us through, how do you integrate your acquisitions and share best practices? What kind of pace that takes and any other kind of color that you can share on how you think about integrating assets acquired to be helpful.

[Charlie Bachtell:]

Hi, Andrew, thanks for the question. I think we could spend a long time sort of going through that and it's because it fascinating, it is strategic and competitive advantage to be able to integrate acquisitions and we've developed practice in it. And it's also one of the areas if you look at the spends in Q4 and Q1 where we have invested in building out that platform to be able to integrate these acquisitions that are coming online here already and through the remainder of the year, because we've had successful integration is more important than the announcement of a transaction without question. So, again, it's a great question. Best practices are developed by reasonable professionals with acumen in their subject matter coming together and developing what that next best practice is together. So, not to be too philosophical, but it's having a roadmap, it’s having an outline, but it's also having an open mind to really work together for the benefit of the org. And again, Cresco Labs is built to be the most important company in cannabis, that type of culture, that type of approach flows through in our integration models as well.

[Andrew Partheniou:]

Thanks for that. And just switching gears, talking about your West Coast presence in California in particular. Last year, we saw some record wildfires. And this year, it seems to -- that might be repeated. Could you discuss, what did you see last year in terms of any impact or unexpected, positive outcomes from these wildfires? And how do you see this year unfolding?

[Charlie Bachtell:]

So, I mean, it's tough to project last year, we were fortunate and we didn't have material interruption from those fires, but it was close. And from the perspective of our Cresco family members that are out there, there is definitely concern and we're fortunate not to have material negative impacts, but tough to project on what the rest of this year would look like. It is part of operating a business. We also didn't expect a global pandemic last year either. So understanding how to manage through scenarios is part of operating an effective business and it's something that we'll continue to address as needed.

[Operator:]

Our next question comes from Graeme Kreindler of Eight Capital.

[Graeme Kreindler:]

Just one question. Want to follow up? Greg, I think you mentioned earlier in the call with respect to the gross margin and outlook through the balance of the year that the mix what's being sold in Florida is going to help to propel the gross margin to that 50% plus point. If I look at the update Bluma put out back from February, their gross margin was at 41% for the month there. So just I mean, that would imply to me that there's been significant increases in efficiencies over the past couple of months. And finally, I just want to confirm if that's the case, or maybe get a bit more color in terms of what's changed in that last update on public record. Thanks.

[Charlie Bachtell:]

We might have Dennis start this, if you have more than for Greg. Greg will jump in.

[Dennis Olis:]

Yes, thanks for the Graeme. So in Florida, we talked about there the impact that Florida would have on the overall gross margin of the company. The fact that it is an integrated market where you cultivate and sell that product through your own stores, just has an inherent higher margin to it and it will be a positive impact. So I talked about mix, I wasn't talking mix of products; I was talking about the mix of the Florida model into the greater Cresco Labs margin profile. Having said that, they continue to expand and their stores and rolled out some additional stores in Q1. So their margin profile I think is higher than what you've said, going into Q2 and beyond and more in line with what you see in some of the other players on the Florida market. So again, that will be accretive to our overall margins for the balance of this year and going forward.

[Operator:]

Our next question comes from Andrew Semple of Echelon Capital Markets.

[Andrew Semple:]

Just a pair of questions on the guidance, the first one here, so you're guiding towards EBITDA margins using the year at 30%. It is quite a bump from the 20% level we saw in Q1. In your view is that being driven primarily by the gross margin side or due to operating leverage? And how are those two factors going to influence the EBITDA margins over the course of the year?

[Charlie Bachtell:]

Good morning. Dennis?

[Dennis Olis:]

Yes. Thanks for the question. So the improvement that we're seeing from our current EBITDA margin levels to where we expect to end the year at the 30 plus percent range, is really a combination of improvements that we expect to see in gross margin, I kind of highlighted some of the improvements that we expect to see. Earlier in the call, but also sort of leverage that we're going to get our SG&A spent. So we're making investments now to help offer people and processes and branding are products, that the percentage of revenue for this percentage of SG&A spend as percentage of revenue will explain in the second half of the year. So again, we expect to get the leverage from the investments that we're making now in the second half of the year. And then, in addition to the revenue growth and the gross margin performance, that's how we feel comfortable going from our current levels to the 30 plus percent in Q4.

[Andrew Semple:]

That's great color. Thank you. And then, just a follow up here, on the sales guidance for the year, just want to clarify whether Cultivate is being included in that exit run rate of over a billion dollars expected by the end of the year. Thank you.

[Dennis Olis:]

I'll take that one again. This is Dennis. Yes. Cultivate, we are assuming in that assumption that Cultivate is rolled into our financials for the full quarter of q4.

[Operator:]

Our next question comes from Glenn Mattson of Ladenburg Thalmann.

[Glenn Mattson:]

I realize, this is late in the call. So just one for me. But I wanted us to get a little more color on the Michigan market. So when you talk about, you mentioned that you want to be top three everywhere, obviously. But you kind of focused on Massachusetts and Ohio as your next targets for that. So just thinking about Michigan, it's highly fragmented. Maybe you're learning a lot from California that could translate to that market. But no one's really figured it out to a great degree yet. So maybe you can just give us a sense of, what do you think you guys can accomplish in the medium term in Michigan. And that's it for me. Thanks.

[Greg Butler:]

Thanks for the question, Glenn. Michigan, you are absolutely correct, highly fragmented. That's why we believe our wholesale approach is the right approach for Michigan. We are in the process of building out our capacity for the state. And so through the back half of this year into Q4 and 2022, you'll see that come online. So our goal for the state, is to really ensure that we're increasing our penetration across doors that exist with our wholesale brands. So we will be bringing our suite of portfolio into Michigan as we get into 2022 with a goal of taking meaningful share and so that's our strategy to state.

[Operator:]

Our next question comes from Luke Hannan of Canaccord Genuity.

[Luke Hannan:]

Dennis, I'm wanted to go back to an earlier point I think you mentioned on SG&A. You guys are expecting to see leverage in the back half of the year. And obviously, that's going to come primarily from a larger revenue base. But I guess when you look at your SG&A line in general and your infrastructure and the people that you have in place, like how many -- where would the incremental costs come from, I guess if you feel you need to add any people or a cost into the system in order to drive that 1 billion in annual run rate. Where will be the additional cost that we could see throughout the course of the year?

[Dennis Olis:]

Yes, thank you for that. So the costs will increase during -- obviously integration costs. I want to talk about the acquisition that we have in Bluma and then Cultivate will come on later in the year. So there will be some costs that we will look for to get some synergies by integrating those companies into the Cresco family. We will continue to make investments in people and processes, building back end operation to support a billion plus dollar company and making sure that we get the systems and processes in place for inventory tracking and automation and just even financial systems, for example. So we'll continue to make those investments. And then, as we roll out retail stores in Florida and Pennsylvania and Massachusetts, there will be some costs associated with hiring the staff and making sure that we've got the right people in place. But overall, I mean, we built the foundation. We're building the foundation in Q4 and Q1 investments, to help us grow the company and be in a position where we can start to build those leverages and start to recognize synergies and efficiencies more quickly in the second half of the year and beyond.

[Luke Hannan:]

Got it. Thanks for that. Charlie, maybe this one's for you. I think you had mentioned earlier in the call in Ohio that you're close to 80% wholesale penetration. Now, I think you've commented in the past, that you plan to get to the 100% wholesale penetration in the back half of the year. I guess my question, the two part question. The first is beyond just incremental cultivation coming online, how specifically do you close that gap? And then beyond that, for those dispensaries where you already have mature products already being sold? How do you expand, I guess we'll call it shelf penetration within those stores or velocity of those same products, what specific levers that you have, within the Ohio market to drive that.

[Charlie Bachtell:]

It's ability to extract and process and manufacture products in Ohio. To-date, we did not receive our processing license at the same time we received our cultivation license. So to-date, we've only been selling flower into the state of Ohio. So as we now build out, we received the processing license, we built out the lab that'll come online here in second half of the year, we're actually bringing our full suite of product forms and our full house of brands to the Ohio market for the first time. So that's how we'll go from the 80% to the desired 100% penetration and also take down more shelf space. We've only been playing on the flower shelf so far. So we'll be bringing in those additional form factors and additional house of brands. Greg, any additional comments?

[Greg Butler:]

on every one of those accounts we have relationships with today as we know there's a tremendous opportunity for us to expand not just beyond our flower -- curve flower offerings, but on all formats so we can get, it's such a great opportunity for us.

[Operator:]

There are no further questions in the queue.

[Charlie Bachtell:]

Excellent. So that's it for questions. Just want to thank everybody for joining us on the call today. We look forward to speaking to you on our Q2 call. I hope everybody in the U.S. has a wonderful Memorial Day. Thanks, everybody. Bye-bye.

[Operator:]

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