Exclusive Interview with Cresco Labs CEO Charlie Bachtell
Since the beginning of the year, cannabis companies have had to contend with still-constrained capital markets, constantly changing regulations and the COVID-19 pandemic. Within this challenging environment, Cresco Labs (CSE: CL) (OTCQX: CRLBF) has remained committed to growing its strategic footprint and distributing its branded products. Checking in after last speaking with New Cannabis Ventures in January 2020, CEO Charlie Bachtell talked about adding new talent, growing in key markets and preparing the company to weather any storm. The audio of the entire conversation is available at the end of this written summary.
A New CFO and Regional President
In June, Cresco added a new member to its C-suite team: CFO Dennis Olis. Olis comes to the Cresco team with a strong background in the U.S. public markets. He previously served as the CFO of Allscripts Healthcare Solutions and also held a leadership position with Motorola. Olis has in-depth experience aligning finances and operations, according to Bachtell.
Additionally, Cresco appointed a new Regional President of California: David Gacom. He brings his CPG background and experience in operations and marketing to the Cresco team.
Building a Strategic Footprint
Cresco’s long-established strategy has been to develop a meaningful position in each of its strategic markets and focus on the distribution of its branded products. Today, the company continues its track record of executing on that strategy.
When considering which markets are a strategic fit, the Cresco team looks for states with a strong regulatory structure and the population to support a robust cannabis market. Cresco currently has operations in nine markets, and the company is bullish on the bets it has made. The markets have appropriate regulations, and seven of its nine markets are in the top 10 nationally from a city or state population perspective, according to Bachtell. The company is now focused on creating meaningful positions in each market. It has achieved this goal in some, while it has room to grow in others.
Cresco in California
While some of its large peers have not entered California, Cresco has made an aggressive bet in the state. Bachtell believes it is important to create a position in the world’s largest cannabis market as the industry evolves into a major CPG platform.
Cresco has taken a traditional approach by developing its branded products and building the distribution capability to get those products on other company’s shelves. While the California market is complex and full of competition, Cresco is making gains. It has integrated all of the assets it acquired in the state, and its top line is up 40 to 41 percent, according to Bachtell.
Illinois and Pennsylvania
Illinois is Cresco’s first state and Pennsylvania is its second. The company made significant bets in both states, and it has been highly engaged in helping to shape those markets. The company is either at the top or near the top when it comes to market share in both Illinois and Pennsylvania.
The company has strongholds in those markets, and it is deepening its position. Illinois’s recreational market is less than a year old, and Pennsylvania has one of the top medical programs in the country with adult-use a possibility in the short-term. Bachtell sees a lot of runway ahead in these two markets.
Other Markets
Cresco also has operations in states with exciting opportunities ahead, including Massachusetts, Maryland, Michigan and Arizona. As the company grows, it will take a balanced approach to reinvesting in its current markets and considering other markets for expansion. Both organic growth and M&A (either small bolt-on acquisitions in existing markets or deals to enter new states) will play roles in the company’s future, according to Bachtell.
In the past, the company had a pending deal to enter Florida. Plenty of opportunity remains in this market, where companies must be vertical and there is no wholesale, according to Bachtell. While the company likes Florida and will continue to evaluate the state, it does not need to be there until it finds the right opportunity.
Importance of Company Culture
The COVID-19 pandemic is a major event, impacting every one of the approximately 1,800 people on the Cresco team both at work and outside of it. Successfully managing through this challenge boils down to communication and healthy company culture, according to Bachtell. Team members need a solid foundation and to feel supported in order for the company to operate during a time like this.
While Bachtell keeps up with a number of more traditional KPIs, he finds that the most important performance indicator is how the people of the organization are feeling. None of the company’s goals or forecasts are achievable if the people aren’t committed and moving the same direction.
Capital Position
Over the past 12 months, Cresco has poured a significant amount of effort into shoring up its capital position to ensure the company is well-positioned to weather any storm, according to Bachtell. The company completed an equity round late last year, executed a number of sale-leaseback transactions and created a credit facility. The company wanted to put in place the necessary resources to get through the burn process and reach a cash flow-positive position.
The sale-leaseback deals done with Innovative Industrial Properties, including a recent $28.8 million transaction in Massachusetts, have helped the company to free up cash to further develop its infrastructure. The company is beginning to see the benefits of that in Illinois and Pennsylvania. Further expansion in Massachusetts, Michigan and Ohio is paving the path for the company’s growth in Q1 and Q2 of 2021, according to Bachtell.
Cresco is aware of how limited the availability of capital is and how it can come at a high cost. So, its team remains disciplined in capital allocation, ensuring the use of capital is strategic, responsible and effective.
Bachtell is looking forward to the industry becoming more normalized and more traditional paths to capital, like institutional and retail investors, becoming available. The operators that have access to capital even in these limited times will be able to continue accessing capital but at significantly lower costs when this change occurs, according to Bachtell.
Metrics for Success
The company reported record revenue of $94.3 million for the second quarter, 42 percent higher than the first quarter. The company didn’t necessarily expect Q2 to be such a growth quarter, but some of the benefits of expansion done in Illinois and Pennsylvania bore fruit sooner than expected. Bachtell continues to be excited for Q3 and Q4, when the benefits of that expansion will continue to become evident.
Bachtell divides important KPIs into different buckets including cultivation, finance and retail. The Cresco team looks at yield from a grams per square foot perspective and quality perspective (i.e., what percentage of those grams is premium flower or Mid-range, for manufacturing and extraction). The company also carefully tracks cost metrics, like SG&A. On the retail side, traditional metrics like new store performance, number of tickets and basket size help the company to continually learn.
The cannabis industry is anything but static. Cresco takes the stance that challenges, like the pandemic and the inevitability of regulatory change, can be approached as opportunities. The company is prepared to manage through change and find the available opportunities.
Social Equity and Community Involvement
Cresco has been built on the mission to normalize and professionalize cannabis, and a part of that mission is making the industry more diverse and inclusive. Cresco focuses on community involvement and social equity efforts through its Social Equity and Educational Development (SEED) program. This program works on initiatives like expungement, education and workforce development. Cresco has also developed a business incubation program in Illinois to help prepare new business owners for operation and success in the cannabis business. The company plans to roll that incubator out to other markets across the country.
There remains a lot of work to be done in this realm, but Bachtell sees the industry’s future as responsible, respectable and robust, supported by a diverse and inclusive base.
New Cannabis Ventures provides an Investor Dashboard for Cresco Labs, which is a client of New Cannabis Ventures. Listen to the entire interview:
