Cresco Labs Inc. (OTCQX:CRLBF) Q3 2022 Earnings Conference Call November 15, 2022 8:30 AM ET
Company Participants
Megan Kulick – Senior Vice President, 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 Partheniou – Stifel GMP
Owen Bennett – Jefferies
Vivien Azer – Cowen
Luke Hannan – Canaccord Genuity
Scott Fortune – ROTH Capital Partners
Operator
Good day and welcome to Cresco Labs’ Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Megan Kulick, SVP of Investor Relations for Cresco Labs. Please go ahead.
Megan Kulick
Thank you. Good morning and welcome to Cresco Labs third 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 in the Q&A.
Prior to this call, we issued our third quarter earnings press release which has been filed on SEDAR and is available on our Investor Relations website. The preliminary results for the third 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 September 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 forward-looking statements, including economic conditions and changes in 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 in Cresco Labs filings on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to any of its forward-looking statements or to update or supplement any information provided on today’s call. Please note that all financial information on today’s call is presented in U.S. dollars and all interim financial information is unaudited.
In addition, during today’s conference call, Cresco Labs will refer to certain non-GAAP financial measures such as adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered only 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 and thank you for joining us on the call today. We are at an exciting time for the cannabis industry and approaching a clear inflection point, with new entrants, traditional industries and legislators all taking a greater interest in cannabis. The federal government officially recognized that the current scheduling is out of date and out of step with American values. Further affirmed in last Tuesday’s election, when two new states, both parts of our pro forma footprint, voted to pass new adult-use cannabis laws.
At Cresco Labs, we are focused on creating a company built for leadership ahead of that inflection point, creating the muscles, the institutional knowledge and the systems infrastructure to lead this emerging CPG category. We are building the most strategic geographic footprint and asset base paired with excellence across CPG brand building and traditional retailing. We are optimizing our assets, our margins and balance sheet to maximize shareholder value when federal reform occurs.
On November 4, we announced a meaningful step forward to closing the Columbia Care acquisition by executing definitive agreements to divest assets in the states of Illinois, New York and Massachusetts. This is a significant hurdle cleared in our mission to combine Cresco Labs with Columbia Care, which will expand our leadership position in today’s premier cannabis markets and the growth states of tomorrow, combined our industry leading branded products portfolio across a footprint reaching over 70% of eligible U.S. consumers, leverage our highly productive per store retail model across one of the largest retail networks in the industry, and create diversification of revenue by geography and by channel. In short, we are creating a company built to effectively compete today and for industry leadership long-term.
Turning to the quarter, we are pleased to report solid results despite multiple industry headwinds. We generated $210 million in revenue. Per BDSA, we have maintained our industry position as the number one wholesaler of branded cannabis products, the number one selling branded portfolio of products, and one of the most efficient retailers. This quarter, we took several actions to set us up for long-term improvement, including the closing of underperforming facilities and the liquidation of related inventory, which had a short-term negative impact on gross margin of about 340 basis points, which Dennis will talk about in detail.
As a result, our adjusted gross margin was 47% and our adjusted EBITDA margin was 20%. I want to emphasize the actions we took were proactive to align our cost structure and optimize our operations ahead of the Columbia Care closing and in furtherance of our commitment to improved margin growth in the coming quarters. Transitioning to the current U.S. macro backdrop simply put, it’s challenging. But as I mentioned, last quarter, cannabis is proving to be durable. Across our stores, shoppers continue to buy more cannabis with transaction and units both up 24% plus. In this environment, we are balancing managing the today, while remaining focused on the big picture and the long-game.
We are building brands and improving our retail operations. We are preparing for the integration of Columbia Care to generate substantial future growth. And we are selectively deploying capital and strengthening our balance sheet to have the flexibility to respond to any regulatory structure we see ahead. Companies that can manage the current challenges most strategically and execute operationally will slingshot forward when the wins inevitably shift and cannabis achieves its potential of being a major U.S. consumer products category of the future. The playbook we launched in 2020 is working and will continue to deliver long-term growth and shareholder value.
Let’s again review the three pillars of that playbook. Number one, we are developing the most strategic geographic footprint. The Columbia Care deal fits perfectly into our playbook and accomplishes all of our goals. It creates arguably the highest value footprint in cannabis, access to 180 million Americans, all 10 of the 10 highest projected 2025 revenue states and exposure to the largest industry growth drivers of the next few years. The acquisition will more than double our retail footprint, gives us the number one market share position in five markets, and optimizes our operational footprint across markets.
We are targeting the end of Q1 2023 based on our projected timelines to get on the necessary state level regulatory agendas, close the divestitures and complete other standard closing processes. With the recently announced divestitures signed, we can now concentrate on our deals in other states and other potentially redundant assets, which we could elect to divest to optimize our footprint and balance sheet. We are still targeting about $300 million in total proceeds and we will provide more detail on those as soon as we can.
Number two, we maintained our position as the number one branded product portfolio per BDSA. Again in Q3, our net wholesale revenue was an industry best $93 million. We had 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 three portfolio of branded vapes, and a top five portfolio of branded edibles. Over the last few quarters, we have seen competitors prioritize their own products on their own shelves, which has had an outsized impact on us as the largest wholesaler. However, we have strengthened our capabilities in the face of this intensified verticality in ways that will serve us well as the industry matures.
Our house of brands approach enables us to reach more consumers and our Cresco brand has become the largest cannabis brand in the industry. Our high-low brand offerings have leveraged different category elasticities to not only enable growth in the value segment with high supply being the largest value brand in the U.S., but also launching premium offerings consumers are willing to pay more for like the successful expansion of FloraCal into new markets. Brands that connect with customers and provide value will be the winners when new third-party retailers open their doors as wholesale based market structures like New York, New Jersey, Maryland, Virginia and Illinois launch and expand. We are building the brands that command a high share of shelf and the growth markets of the future are built to reward strong brands and companies with branded distribution capabilities.
Number three, operating a highly productive retail network in the most strategic markets. Q3 retail revenue was $118 million, up 11% year-over-year. The year-over-year growth was achieved despite increased competition and pricing pressure in Pennsylvania, Hurricane related store closures in Florida and more vertically driven price competition in Illinois. We opened 3 new stores in Florida during the quarter with more planned in Q4 and a robust store opening planned in both Florida and Pennsylvania in 2023. Along with our own internal store opening plan, the Columbia Care acquisition will more than double our retail footprint giving us one of the lightest retail footprints in the industry and ensuring our products get the share of shelf they deserve.
As we have always said, we are focused on providing the best value proposition to the consumer. The evolution of this industry requires an ever improving retail experience including better value to ensure that the growing legal dispensary network takes greater share of the total cannabis market. To that end, our team is doing an excellent job of maximizing the value of every trip for our customers, utilizing customer purchasing data, basket building programs to generate more sales per trip, and establishing our loyalty program in Q4 will enable us to capture more than our fair share of retail revenues today and in the future.
Before handing it over to Dennis, I want to thank the Cresco family for doing what they do in a challenging environment, where expense control efforts are requiring us to do more with less. They continue to execute the base business at an incredibly high level they have become known for while planning for the future of this company and preparing to close and integrate Columbia Care.
With that, I will turn it over to Dennis to discuss Q3 results.
Dennis Olis
Thank you, Charlie and good morning everyone. In Q3, our team generated over $210 million in revenue. Retail revenue grew 11% year-over-year driven by our ability to hold same-store sales and the addition of new stores in Florida and Pennsylvania. This shows the health and performance of our underlying base retail business, where we continue to perform better than our fair share in most markets. While sequential revenue dipped slightly driven mainly by pricing pressures with some increased competition and weather-related store closures, overall demand for our products remained strong, with units sold at retail, up 24% year-over-year.
On the wholesale side, revenue was down about 7% year-over-year after adjusting for the strategic shift from third-party distribution in California implemented in Q4 of ‘21. Sequentially, wholesale revenue was down 2.7% primarily related to increased verticalization amongst peers, while independent retail stores in Illinois have yet to open. Even with these challenges, we held the number one share of branded product sales in Pennsylvania, Illinois, Massachusetts and overall markets tracked by BDSA.
Looking ahead to Q4, without the benefit of new market growth contributors like New Jersey, we do expect a sequential decline in revenue due primarily to traditional seasonality and a continued focus on verticality by several of our peers. As we said after our Q2 call, this is temporary. We will see growth in both our wholesale and retail channels in 2023, with several new store openings in Florida toward the end of Q4 and in Q1 and new store openings in Pennsylvania in 2023 and the opening of new independent retail doors in our home state of Illinois. Adding the expected close of the Columbia Care deal at the end of Q1, we are well positioned to have a strong 2023 and beyond with access to all of the largest industry growth catalysts.
As Charlie mentioned earlier, we have been taking actions ahead of the Columbia Care acquisition to optimize our asset base, including shutting down underutilized higher cost facilities over the last couple of quarters. While winding down these facilities, we experienced greater underutilization charges and higher cost associated with the closings that has been allocated to the products still being produced during the period. As those products sell through, they carry a higher cost of goods sold. We also refined our cost models in the quarter, which will give us more accurate real-time cost information going forward. This resulted in lowering the cost base of some of our inventory to net realizable value and other non-recurring non-cash cost expensed in the quarter. All-in, these actions resulted in approximately a 340 basis point drag on gross margin in the quarter. It’s important to note that without these actions and a non-cash impact on accounting, our adjusted gross margin would have been closer to 51% instead of the 47% reported. While these actions contributed to a temporary decline in gross margin, they were the right thing to do for the business in the long-term.
Our long-term operating target of 50% gross margin is unchanged. In furtherance of our efforts to appropriately manage cost in the business adjusted SG&A expense decreased by $3.6 million sequentially to $67 million or 32% of revenue. We expect a further decline in SG&A dollars in the fourth quarter. I want to highlight that the reduction in SG&A in the quarter was achieved despite a significant increase in lobbying and government affairs spending in the quarter as we leaned into the progress we are seeing in the D.C. and New York. Again, this shows we are prioritizing our spend towards long-term business priorities, including driving legislative change to benefit our shareholders. We will continue to look at other ways to improve our long-term competitiveness, rationalize our existing footprint, and improve our overall profitability and cash generation.
Adjusted EBITDA for the third quarter was $42 million representing a margin of 20%. Excluding the measures I have already highlighted, our adjusted EBITDA margin would have been approximately 23% in line with the second quarter. Our near-term goal is for adjusted EBITDA margins in the mid-20% range. We are laser focused on cash generation that showed in the quarter.
Cash from operations was $26 million, up from the use of $7 million in Q2. In the quarter, working capital contributed positively to operating cash flow, reversing the working capital drag we saw in the first half of the year. Third quarter gross CapEx was approximately $21 million, including $10 million for New York. Year-to-date, our capital expenditures include nearly $35 million for the purchase of our New York real estate and the initial site construction.
Looking forward, we expect our capital expenditures in Q4 to be approximately $15 million to $20 million. We expect we are nearing the end of our substantial CapEx projects as the Columbia Care acquisition effectively replaces most of our future CapEx requirements, leading to a significantly improved free cash flow in the future. We ended the quarter with over $130 million of cash on the balance sheet and we are comfortable with our existing cash position, the strategic financing available to us and the expectations for proceeds from the invested assets. The recently announced Combs’ transaction includes $110 million in cash at close and we continue to work for definitive agreements to sell the remaining assets required to close the Columbia Care transaction as well as redundant assets in other markets.
Cash from these divestitures will be used to de-lever the combined company. As we said in Q2, there has never been a better time in this industry when leadership, scale and financial strength matter more. While we are facing unique headwinds, we see unprecedented opportunities for growth from regulatory change on the horizon, strong consumer demand, untapped efficiencies and production and consolidation opportunities. As we look toward 2023 and the completion of the Columbia Care acquisition, we believe we are in a strong position to expand our leadership position, improving top line growth, profitability, cash flow and shareholder returns.
I will pass it back to Charlie for some closing comments.
Charles Bachtell
Thank you, Dennis. The future is bright for our industry and Cresco Labs. We are proactively managing through the unique macro pressures of today, while making decisions for strength in the future. The outlook for U.S. cannabis is stronger than ever as we are clearly seeing it develop into the next major consumer products category in the United States. The industry is proving itself to be a new consumer staple and recession resistant. We continue to see progress at the state level as long-waited regulatory catalysts in states like New Jersey, New York and Illinois begin to unlock. Other new markets like Virginia, Maryland and Missouri launched newly approved adult-use programs and election results in Pennsylvania increased the likelihood of future legislative change. And the tides are changing in D.C. with the likelihood of federal reform improving daily.
We have never been closer to achieving reform than we are right now. We believe the mid-term election results were favorable for action this year. It reinforces that now is the time to lean in and we are. We will keep leading these efforts on behalf of the industry because we understand it’s the ultimate unlock of value for our stakeholders and for the industry at large. Operators continue to prove themselves resilient despite having one and a half hands tied behind our back with punitive tax provisions and limited access to capital. Imagine what we will accomplish when both hands are free.
With that, I will open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question today comes from Aaron Grey from Alliance Global Partners. Your line is open.
Aaron Grey
Hi, good morning and thank you for the questions. So first question for me want to talk a little bit about the verticality impact that you guys had in the quarter? Just want to get more conscious of how much room we think there is to go. You said there might be continued impact in the fourth quarter. So kind of where you kind of stand on that? I think it kind of continues on beyond 2022? And then exactly in what markets you are seeing that impact in? You talked about Illinois and I imagine that is another. So if you are talking about the market to know what levers you might have across third-party stores in the Illinois, your own stores in PA, so the markets impacted what levers you might have? And then what more we might have going from the impact of verticality? Thank you.
Charles Bachtell
Thanks, Aaron and good morning. I think where we are seeing sort of the verticality expressed the most is in the states of Illinois and Pennsylvania, pretty heavy MSO dominant states. And again, as we mentioned on our last call, a lot of it has to do with if you have got New Jersey as a growth driver in your asset base, then your existing markets, you can put more of your own brand across your own shelves and really drive greater margins in those markets that are experiencing price compression. So, there is rational sort of thought behind this. And for us, we have always strived to be the second most prominent house of brands on our peers’ shelves that’s going to continue to be the strategy. And as additional independents open up – as we open up more of our own stores in Pennsylvania, that’s where we see the opportunity not only to combat the verticality greater, but also achieve greater growth.
Aaron Grey
Okay, great. Really appreciate that color. And then Charlie, on the cannabis roundtable, so just wanted to know what posts you might have, post the election, as we wait and see what happens in the lame duck session in terms of safe banking, how might be shaping up, if you might be hearing in terms of the prospects of that passing by the end of the year versus one might have heard prior to the election? Thank you.
Charles Bachtell
Yes. As I mentioned in the remarks, I think the mid-term outcomes are favorable for achieving some reform this year and so felt good about it going into the mid-terms. There was good momentum. I think the legislators that are involved in leading the effort have definitely educated themselves further over the last couple of months. And I think that’s the best scenario for our industry. I think the more that you learn about this, the more that you understand the importance of achieving some financial regulatory reform before the end of the year as social equity licensees are trying to get operations off the ground in states like Illinois, New York, New Jersey etcetera. Very important access to capitalism is a main gatekeeper to being able to see success in those areas. So, I think the likelihood of success there is it’s higher than it was before the mid-terms and we have been optimistic for the last couple of months that we will see some change. So that hasn’t – we haven’t deviated from that.
Aaron Grey
Alright, great. Thank you very much for the color and I will drop back into queue.
Charles Bachtell
Thanks, Aaron.
Operator
We now turn to Andrew Partheniou from Stifel GMP. Your line is open.
Andrew Partheniou
Hi, good morning. Thanks for taking my questions. Maybe just thinking about your footprint here, should we expect any other footprint optimization actions, any facilities that you want to right-size or inventory that you need to still sell through in Q4 going forward? In other words, do you expect that 340 basis point headwind to unwind and benefit in Q4? And then when Columbia Care closes, how is this going to work with your pro forma footprint? Do you think you are going to have all the assets that you want and none that you don’t on Day 1 or do you think you will still need some time months, quarters to work through that?
Charles Bachtell
Hi, good morning, Andrew and thanks for the question. So, I think one is for the actions that were taken already, as Dennis had mentioned on the call that was primarily seen in Q3 and you won’t see that impact in Q4. As far as continuing to evaluate and rationalize our footprint in the assets, I think that’s something every company should be doing. I don’t think that not even sector related, I think with where we find ourselves with the macro environment and political issues at play and also with our industry, what does happen here between now and the end of December could have a material impact on what the next couple of years look like in the space. So, it’s something that I think we have an obligation to continue to do is make sure that we have an optimized asset base and that we are well prepared to be as competitive as we possibly can be going forward.
Andrew Partheniou
Thanks for that. And just wondering if you could provide any updated thoughts on creating a pro forma footprint that’s more heavily skewed towards the West Coast? Are you thinking there maybe a trend reversal with respect to the challenging environment there? Is this more of a long-term brand building strategy or is there something else here?
Charles Bachtell
No, I appreciate the question. And I think I might have forgotten to finish the last one. I do think we will have the assets that we need upon closing to sort of meet our goals and our obligations as far as the close combined co. As we look at sort of the weighting of the footprint, I think you could look at there – the combined footprint as being West Coast leaning at the start, but really, you look at the growth markets. The reason that we did the deal, you are getting the New Jerseys, you are getting the Marylands, you are optimizing New York, you’ve got the big unlocks and the big growth drivers tend to be on the East Coast. So the West Coast assets that will be coming along with the deal actually help optimize the businesses that we already have in those states and we will continue to rationalize and make sure that we are as competitive as we can be in those markets. And Greg, additional color?
Greg Butler
I think this answered your question on that. I don’t – as we project forward, we don’t see a lot of improvement necessarily in the industry trends in those markets, but to Charlie’s point, our focus is how do we get margin and improved margin and the team at Columbia Care have done a great job of starting that and we think through cultivation expertise that we are bringing in through improvements to quality of products in some of the states we can find ways to optimize that pretty heavy revenue base they have in the West, but drive margin. So, that’s really our focus over the next couple of quarters.
Andrew Partheniou
Thank you very much for that. I will get back into queue.
Operator
Our next question comes from Owen Bennett from Jefferies. Your line is open.
Owen Bennett
Good morning, gents and hope all well. I first just wanted to ask about New York. So you recently began construction on your facility in Hudson Valley. I just wanted to get your latest thoughts on the rollout in New York bullishness, especially given the latest developments of the social equity rollout on what’s going on with [indiscernible]? And then how you are thinking about this new facility and the Columbia Care facility coexisting post deal? Thank you.
Charles Bachtell
Yes. Thanks, Owen. So yes, we continue to learn more about New York. As the weeks and months go by hopefully, we will learn even more about the future regulations before the end of the year, that’s the expectation. As it relates to sort of the combined asset base, we are taking a very, what I would say, appropriate phased approach to the infrastructure that we are building there. Columbia Care has a great facility with a lot of canopy potential already in their footprint and the facility that we are building out in Ellenville is it’s there to sort of complete the whole picture. It’s mainly a manufacturing. Phase 1 is mainly a manufacturing operation with some indoor and we think that will make us really competitive when this market does get off the ground. Recent updates there still have us believing that a market will launch around year end with small and continue to grow through 2023. And I think our footprint gives us the opportunity to bring the products that we make to market at the quality and consistency that that New York consumer is really going to demand. So, we are still bullish on New York.
Owen Bennett
Great. Thanks Charlie. I just have one follow-up on California, which you may have kind of touched upon already, when Greg said, doesn’t think you are really seeing improvement West Coast. But I mean surely, they think that pricing may be about the bottom. Columbia Care comments yesterday, looks like they stay stabilized their business there somewhat. So, I just wanted some more California specific comments on the dynamics and how that’s evolving there. And I am wondering if we do see stabilization into next year, will you start to lean into a bit more investment in California again?
Charles Bachtell
That’s excellent. So, yes, I think the stabilization that’s been mentioned by our peers is relatively accurate. You are starting to see stabilization out there. But we will still have to rationalize investments and opportunities in California versus the incredible opportunities that we have in other places of that combined footprint. Again, when we are looking at the greatest return on invested capital, some of those new additions to our footprint, are going to require us to lean in pretty heavy to take the share position that we are accustomed to achieving and in states where we get scale. So, we are going to rationalize the footprint. And we will see where that leads from there. Greg?
Greg Butler
The only thing I would add to that is, I think on your point, there is – I think if you look at the quarter-over-quarter trends, there is some stabilization of some of the price declines, particularly if you look at year-over-year, trends coming in. My comment was more as we stayed to the west, we are building our models around, let’s assume that we are not going to get it off top line growth, because if you look at other states around call it, California, Colorado, Oregon and Washington. While we are pleased to see some stabilization pricing, there is still room for that pricing to go lower, if all of a sudden supply-demand becomes unbalanced in future quarters. So, instead of assuming we are going to get market growth by relying on the industry to give us revenue, ours is how do we improve the quality of those assets to drive margin as we go forward. So, any investment, your earlier question that we have made would be investments in our facilities to focus on quality. But really, to our next couple of quarters, as we get to a pro forma company, it is about driving better margin out of the facilities we have.
Owen Bennett
Great., Thanks gents. Very helpful.
Charles Bachtell
Thanks Owen.
Operator
Our next question comes from Vivien Azer from Cowen. Your line is open.
Vivien Azer
Hi. Good morning. My first one is I think quick, Dennis, you mentioned the $3.6 million in SG&A savings in the quarter and suggested that there was further improvement to come in 4Q. Can you dimensionalize that a little bit? Thank you.
Dennis Olis
Yes. Thanks Vivien. So yes, we did recognize some additional savings in Q3 relative to Q2. Just as we are rationalizing our footprint, we are also rationalizing all of our costs. So a lot of the corporate costs that we are looking at, and we are preparing ourselves for an eventual – the acquisition with Columbia Care. So, we are trying to get proactive and looking at every single dollar that we are spending at a corporate level. And that’s within the regions from an SG&A standpoint. So, we do expect to see some sequential drop in total SG&A costs from Q3 to Q4. And we will continue to manage those costs effectively as we go forward. Post merger, I think there is a lot of opportunities to continue to drive the SG&A leverage down even further and we will continue to, again, challenge ourselves to look at every dollar that we spend.
Vivien Azer
Perfect. Thanks for that. And then Charlie and Greg, love to focus on the top line understandably. And Charlie, I appreciate your optimism around growth in ‘23, in particular, given all the new door openings that you guys have slated coupled with New York coming online. But if we kind of looked at things on an underlying basis for some of your kind of core more established states, like do you think that we can see, like solid top line growth on the same-store sales basis out of a market like Illinois or perhaps Cresco wages in Pennsylvania, but similar question for Pennsylvania? Thanks.
Charles Bachtell
So, same-store sales growth in mature markets needs to come from a couple of different areas, whether that’s greater demand increase, whether it’s from a consumer standpoint and/or ability to spend, along with potentially lower prices, making it more affordable for the consumer to buy. That said, I think we have got great locations in both of our – both of those markets, Illinois and Pennsylvania. As more products comes into the market, as more – I am sorry as more doors open up in the market, it could drive more demand in those markets. And that’s where we would expect to see potentially same-store sales increase. But I think that has to be balanced with where do these new doors open. So, if we have significant number of new doors open around ours, we have seen negative impacts on some of our stores when a competitor opens up relatively across the street. So, we are going to manage that to the best of our ability. And I would say overall too from a, from a growth perspective in these markets, particularly Illinois, as those 185 doors start to open, again, depending on where they open and when they open, we will see some opportunities. But we will also see some risk. If the first, a handful or two doors open up around our retail, in theory that could have a greater impact on our retail revenue than it does on our wholesale revenue. But we do know looking long-term, the 185 doors and the future ones that will open after that, of course provide more wholesale upside potential than retail revenue risk is.
Vivien Azer
Understood. Thank you.
Charles Bachtell
Thanks Vivien.
Operator
[Operator Instructions] We will now turn to Luke Hannan from Canaccord Genuity. Your line is open.
Luke Hannan
Thanks. Good morning everyone. I just wanted to ask on the CapEx plans for next year. Charlie, how are you thinking about – you talked about you want to allocate capital based on where you think you can get the greatest return on invested capital. Broadly speaking, and assuming the close of Columbia Care takes place at the end of Q1, how are you thinking about allocating those dollars over the course of next year?
Charles Bachtell
Sure. I will start it off and then I think Dennis will add some additional color. We are going to again continue with our rationalization exercise that currently we have underway. And depending on when the transaction closes, and also what happens in D.C. There are some factors that impact the way that we are thinking about our CapEx plans for next year. We love the footprint that Columbia Care is bringing to the table, including the infrastructure that does reduce significantly our sort of our original standalone CapEx plans that we would have as a standalone company. But we will again prioritize return on invested capital. And I could see either the opportunity for margin improvement or growth at the top line to be where we will deploy capital in 2023.
Dennis Olis
Yes, Luke and then just to build on that, as Charlie noted, most of our large CapEx projects will be completed this year or early into next year. When we look at New York, the investments we are making in New York and our facility in Ellenville are nearing completion there. There will be a little bit of carryover into next year. And then again, the combined footprint of our two companies eliminates a lot of the CapEx that we would need independently. So, most – again, most of the large projects will be completed. The CapEx that we are looking at next year is really going to be around store openings, around automation, around improving our overall efficiencies within our cultivation and manufacturing facilities that we have currently. And then again, we will continue to rationalize that combined footprint as well.
Luke Hannan
Got it. And Dennis, maybe this one is for you. What’s the comfortable level of leverage that we should anticipate from the combined company going forward, assuming you are able to get the proceeds from the asset divestitures that you expect and so on?
Dennis Olis
Yes. Are you talking debt leverage, or are you talking about leveraging from a margin perspective?
Luke Hannan
Debt leverage? Yes.
Dennis Olis
Yes. As we have talked about previously, we are going to use most of the proceeds that we are going to get from the divestitures to de-lever the company. So, we expect that coming out of 2023, our net debt to equity ratio would be in about 1.5x range. And again, that’s consistent with what we have said in the past, the proceeds that we are getting from the divestitures are in line with our previous expectations and what we have communicated. So, everything is going according to plan at this point.
Luke Hannan
Alright. Thank you very much.
Operator
We will now turn to Scott Fortune from ROTH Capital Partners. Your line is open.
Scott Fortune
Yes. Good morning and thanks for the question. Can you just provide a little color on the health of the consumer? Obviously, we are seeing a little pressure there and challenges and kind of the product volumes that you drive and are we seeing continuing trade down in consumption here, but just overall kind of expectation of consumer going forward and your products to match the consumer demand there?
Charles Bachtell
Yes. I will take this. Overall trends we are seeing is, more consumers are buying more cannabis, as unit volume continues to grow. And so our thesis as the consumer – one of the questions we usually get it is a stable durable, good, answer is we do. We see this is now part of the routine consumers, which is why unit volumes continue to remain strong. And quite frankly, consumers are able to now get cannabis at a lower price than before as price compression is hitting. At the same time we have overruled inflation. So, it’s a good value story for consumers. You are coming to shift down. We are seeing it from a consumer shifting down from more premium price to value price, which is why you are seeing the growth of value. We are very pleased with the strength of our house brands, that’s why we built our good better best strategy to ensure that we have the right offerings. So, when consumers are looking to shift down, they have an offering that we can move to. And that’s why we have seen success on high supply. But from overall transaction, I think the piece that remains unique to cannabis who were watching closely is we do have the illicit market that sits right by the legal market, which also is a price substitute. Today, it’s hard to find out if consumers are shifting into that market. And by the unit growth we are seeing in our stores, we would say consumers are continuing to stay in the legal market. But obviously that remains a price substitute for us.
Scott Fortune
Okay. I appreciate the color. And then two real quick on Massachusetts, you have brought the facilities fully online here, can you provide a little bit of color or margin improvement you expect now with the facilities in place and hands off revenue obviously the price pressure that’s gone messages, this is kind of a percentage of stand the potential improvements there for you in Massachusetts?
Charles Bachtell
Well, I will continue with that. In Mass, our focus has been as you mentioned, to improve the quality of cultivation coming out of our facilities. We have started to see improvements, but that does take some time to cycle through. And so we are starting to see some of our yields with higher potency, which will come to the market, which is so important just given the quality of product that’s on the market and the prices being charged. So, that is area of focus, which we are getting into Q4, you will see from us is continued improvements in quality on our flower side and then also continuing to really drive education across the market against our Cresco liquid live resin. The market still the heavy distillate market and our challenge and opportunity is to continue to drive awareness with store owners and shoppers around what makes a live resin superior to a distillate which as we continue to do that there is continued growth in the market for us to take share.
Scott Fortune
Got it. I appreciate and I will jump back in the queue.
Charles Bachtell
Thank you.
Dennis Olis
Thanks Scott.
Operator
We will now turn to Glenn Mattson from Club Ladenburg [ph]. Your line is open.
Unidentified Analyst
Hi. Thanks for taking the question. Just thinking about even the adjusted gross margins being down a couple 100 basis points, maybe you alluded to this already, and I missed it. But I am thinking about kind of the more profitable markets out there, like Florida, and I am wondering, is there – are you seeing a little bit of pressure in that? Can you characterize the Florida market for us? Thanks.
Charles Bachtell
Yes. Thanks Glenn. So, as we talked about the margin impacts that we saw, the 340 basis points that we are talking about really relate to activities in California and Arizona, where we again rationalized some of our footprints and got proactive and taking actions around. As it relates to Florida, again, just because of the vertical nature of that state, those margins typically do run a bit higher than we see in other markets. So, while there is a lot of price pressures in Florida as they are in other markets, we are doing a lot of things to help offset some of that price pressures through automation and expanding our portfolio of products and so forth. So, margins continue to be strong in Florida. And there is a little bit of price pressures, but again, nothing material.
Unidentified Analyst
Thank you. And could you give us any more color on the other asset sales in terms of the – maybe the first batch to this one entity, was that more low-hanging fruit and the other ones are going to be a little harder to get across the goal line? And do you think they will be more like large one-off transaction and just some color around how that process is going. Thanks.
Charles Bachtell
Sorry. Juggled in the room at the low-hanging fruit. I don’t know what I would describe it as low-hanging fruit. Look M&A in this industry is challenging. It’s been a challenging year to do it. And I think what you see with that announcement is you see the strength of the Cresco and the Columbia Care teams and being able to get this deal across the finish line. So, it’s nice to have those three states New York, Mass and Illinois taking care of. And we are working on the remainders. We are happy with where we are at with them, and we will be providing updates on those as soon as we can.
Unidentified Analyst
Thanks for the color.
Charles Bachtell
Alright. Thanks Glenn.
Operator
This concludes our Q&A and today’s conference call. We would like to thank you for your participation. You may now disconnect your lines.
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