CRLBF - Cresco Labs Inc. (CRLBF) Q4 2022 Earnings Call Transcript
2023-03-16 12:51:14 ET
Cresco Labs Inc. (CRLBF)
Q4 2022 Earnings Conference Call
March 16, 2023 08:30 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 Transformation Officer
Conference Call Participants
Aaron Grey - Alliance Global Partners
Andrew Partheniou - Stifel
Matt Mcginley - Needham & Company
Scott Fortune - ROTH MKM
Gerald Pascarelli - Wedbush Securities
Presentation
Operator
Good day and welcome to the Cresco Labs Fourth 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, Senior Vice President of Investor Relations for Cresco Labs. Please go ahead, Megan.
Megan Kulick
Thank you. Good morning and welcome to Cresco Labs fourth 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 Transformation Officer Greg Butler, who will be available for the Q&A.
Prior to this call, we issued our fourth quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the fourth quarter and full year 2022 are provided prior to completion of all internal and external reviews and therefore subject to adjustments until the filing of the company’s financial statements and MD&A for the quarter and year ending December 31, 2022 on SEDAR and EDGAR later this week.
Certain statements made on today’s call may contain forward-looking information within the meaning of the applicable Canadian securities legislation as well as within the meaning of 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 events, plans or objectives, which are inherently uncertain and subject to a number of risks and uncertainties that may cause the company’s actual results or performance to materially differ from such forward-looking statements, including economic conditions and changes in applicable regulation.
Additional information on 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 filing on SEDAR and with the Securities and Exchange Commission. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to 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 call, Cresco Labs refer to certain non-GAAP financial measures such as adjusted revenue, adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to and should only be considered in conjunction with 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. On today’s call, we are going to provide a brief overview of 2022, add some context and perspective that’s critical to have during unique times like these, review how we are seeing 2023 take shape, and the strategies we have developed to create the strongest Cresco Labs possible. As you know, 2022 was a tough year. We had inflationary pressures that hadn’t been seen in generations; supply chain issues from a global pandemic magnified by geopolitical tension and war and set all kinds of records that no one likes to see. Like the most expensive price per gallon for gasoline in the U.S ever.
From our frontline position in DC, we were reasonably optimistic that some type of federal cannabis reform would be achieved by year end. That didn’t happen. That combined with the headwinds of increased competition, price compression, and stress consumer wallets created a challenging year for cannabis operators and investors. And unfortunately, we think that continues into 2023, but times like these are when objectivity and perspective are very important.
Despite the challenges in 2022, Cresco team generated $843 million in sales, our highest total ever despite rationalizing out low margin revenue from prior years. Our continued relentless focus on providing the highest perceived value to the consumer has led us to being the number one selling portfolio of branded cannabis products in the entire industry for the second year in a row. We produced 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. We earned shelf space in approximately 1,600 dispensaries across our 10 state wholesale footprints and rang up more than 4.6 million orders at our Sunnyside dispensaries.
We drove operating efficiencies that allowed us to maintain margins during a period of price compression. This team also volunteered over 11,000 hours for community organizations over the year and assisted thousands of people through the cannabis conviction expungement process. I want to thank the entire Cresco Labs team for their hard work over the past year. It was not an easy one. But our core values were on display all over the place. And you got everything that this year was willing to give.
We all have to realize that the tough year of 2022 does nothing to change the long-term thesis and opportunity that gives cannabis. This industry is going to be one of the largest consumer products categories in the United States and in the world, full stock. Nothing about 2022 changes this. Last year, the limited regulated market reached over $25 billion in sales, employed approximately 0.5 million Americans produced almost $4 billion in state tax revenue. And the current estimated regulated plus illicit cannabis market in the U.S. already exceeds the size of the U.S. beer industry. We made tremendous progress in educating our federal legislators through our end of year efforts, which is a fundamental step in obtaining common sense reform ahead.
None of the current challenges we face change these facts. What periods like this do is they forced the separation of the wheat from the chaff. That’s a healthy thing and something we welcome. Dynamic and challenging times require operators to be equally dynamic and turn those challenges into opportunities. The great thing is we are built for this. We will lead through this period by continuing to improve our operations and operating efficiency, strengthen our balance sheet, and prioritizing cash generation.
Cresco Labs has the scale and the expertise to succeed. We are executing against the major controllable objectives of our 3-year plan, ensuring we have the most strategic footprint, broadening our wholesale brand leadership and driving retail productivity across a larger base. Again, 2023 is not likely to get any easier, which is why our priorities are clear. We are laser focused on our core capabilities, core markets, core products and core brands. We are leaning into that core, investing wisely and rationalizing and optimizing everything to improve profitability, generate more cash and strengthen our balance sheet health. Simply put, we understand the assignment.
Now to review the three pillars of our strategic plan and how we are executing this year. Number one, we are ensuring we have the most strategic geographic footprint. As we look to optimize our footprint to drive profitability and long-term industry leadership. We are prioritizing having exposure to the growth states of tomorrow along with scale diversification and profitability across our current markets. We believe that the pending Columbia Care acquisition acts in furtherance of achieving these goals. We continue to work through our two remaining material divestitures in Ohio and Florida and are making progress with both.
The capital market conditions have undoubtedly changed since we originally started this process, but we continue to see interest in these assets and in the cannabis industry from investors that have a longer time horizon and recognize the asymmetrical payoff potential given today’s valuations. Between the ongoing divestitures and the operational and balance sheet improvements going on at both companies today, we see the path forward that will position the combined company with a solid capital structure, strong liquidity position and profitable operations.
Across our own organization, we are taking substantial steps to improve our positioning. Rationalizing and optimizing have been at the forefront of our approach since late ‘21 when we announced our strategic shift away from third-party distribution in California. We continue to evaluate every state and take actions that prioritize the core and deemphasize underperforming or underutilized areas of our business. Yesterday, we internally announced further steps to eliminate underutilized facilities and unprofitable products in California, focusing on our more advanced and cost competitive FloraCal facility.
In Arizona, where we are under scaled, we have shutdown our margin dilutive greenhouse operations. While these two actions will have a modest top line impact this year, we encourage shareholders to gauge our performance this year based on improvements and profitability, which we expect to start in Q2 and grow through the year as the impact from the decisions flow through our P&L. At the same time, we are doubling down on our successful operations. Year-to-date, we have opened 8 new stores between Florida and Pennsylvania, two states where we have significant economies of scale and strong margins.
All in since, we took control of the Florida operations less than 2 years ago, we have added 20 new stores in the state. And we will continue to opportunistically add to this footprint in 2023. In Pennsylvania, where we historically have been under retailed relative to our peers, we will be opening our remaining four doors through the spring and summer, which has the double benefit of driving retail growth and improving our competitiveness in the wholesale market. While we execute these operational and retail initiatives, we continue to reorganize our teams to re increase the speed of decision making reduce redundancies, and drive overall efficiencies. Dennis will discuss it in more detail. But these investments are a good example of our capital deployment strategy for the year. We are focused on wise investments that have fast payback periods and act in furtherance of our goal to drive profitability, cash generation, and enhance competitiveness and leave the industry.
Number two, we maintained our position as the number one branded product portfolio per BDSA. In 2023, our plan is to double down on this core portfolio focusing on the capabilities the products and the brands that have made us the market share leader in Illinois, Pennsylvania, and Massachusetts. Innovation in new products contributed a material amount to our revenue in 2022, and we plan to build on that success this year. We are focused on operationalizing, some of the key innovations we started last year. The pipeline includes several higher potency and higher yield strains, manufacturing products like lozenges, infused pre-rolls, live resin, premium gummies and the liquid live resin carts that have proven so popular in Pennsylvania and Illinois.
Consistent with our investment philosophy, the capital needed to support these launches in more markets has a short payback period and a high certainty of success. After 2 straight years of having the number one house of brands, we have proven that consumers love our products and brands. The steps we are taking this year to bring more of those proven products to market will give us stronger margins and pricing flexibility to continue to take shelf space in new stores as they open and be the preferred complement to any vertically integrated retailer’s house brand.
Number three, we are also doubling down on our highly productive retail in the most strategic states. As we open new stores, we continue to achieve operating leverage across our footprint. For example, we recently rolled out our new and improved Sunnyside loyalty program in Illinois, Florida, Massachusetts and Ohio. The loyalty program complements our custom-built ecommerce platform Sunnyside.shop, which we believe is the most customer friendly retail platform in the industry. The two combined are a rich source of data for understanding and exploring consumer behavior and improving retail efficiency. And 2022, approximately 75% of our Sunnyside sales come through Sunnyside.shop. Those sales follow the 80-20 rule, where nearly 80% of sales come from the top 20% of customers giving us incredible insight into the behavior of our highest value customers. We are using that data combined with custom emails, text prompts and offers to drive smarter promotional activity in cement those high value shoppers to the Sunnyside brand.
The feedback loop between our scale data set and decision making is accelerating leading to better store management more efficient staffing, improve menu creation and more targeted innovation and product planning on the production side of the business too. As we open new stores and competitors in our market, it is imperative that we flex our muscles as a highly skilled scaled retailer to improve customer experience and four wall economics to maintain profitability market share and out compete. As 2023 shapes up to be another challenging year. We are confident that our scale and organizational expertise lays a strong foundation, that combined with our ability and willingness to make the tough decisions will position Cresco Labs and its shareholders to reap the tremendous rewards in the long-term growth of the cannabis industry. In 2023, we are doubling down on our successful core; we are setting the stage for a much stronger company going forward.
Now I will turn it over to Dennis to review our financial results.
Dennis Olis
Thank you, Charlie and good morning everyone. I will be reviewing the financial results from the quarter and full year, then highlighting a few items from the balance sheet and discussing our capital position. Overall, we are pleased with the performance of the team both in the quarter and in year. While 2022 was a challenging year for the industry, we continue to take the necessary steps to improve cultivation and manufacturing efficiencies to build on our top share position in key markets, while remaining maniacally focused on driving profitable growth, preserving cash and making strategic investments to expand margins going forward. We also took this opportunity to make tough decisions cleaned up noise in various parts of the business and take the appropriate proactive steps this quarter to strengthen our balance sheet through site rationalization, inventory management and intangible valuation assessments to put us in the strongest position possible going into 2023.
Turning to our results, we generated $200 million in revenue in Q4. The decrease year-over-year was driven by a combination of price compression in the second half of the year across our markets, and the strategic decision in late 2021 to exit certain low margin businesses in California. For the full year, we achieved $843 million in total revenue, up 3% year-over-year. Normalizing for the removal of third-party California distribution, adjusted revenue growth was approximately 6% year-over-year.
Retail revenue in Q4 was down 1% year-over-year as new stores opened in the immediate vicinity of some of our stores in Illinois and Pennsylvania. For the full year, retail revenue grew 17% year-over-year. As we discussed them a third quarter call, we expect the initial impact from new doors to be negative. But as additional stores opening markets that expand access, we expect that our proficiencies in the wholesale market will produce more gains than we lose in the retail market.
On the wholesale side, we faced continued pressure in the quarter driven by pricing pressure in most markets and increase verticalization on the shelves of our MSO customers. For the full year, wholesale revenues were down 11%, but down 5% after adjusting for this strategic shift in California we have already discussed and unit sales were up significantly. Our branded units sold were up 37% year-over-year, which according to BDSA outperform general market growth. We held the number one share of branded sales in Pennsylvania, Illinois, Massachusetts, and overall, for markets tracked by BDSA. We gained or held branded share sequentially in all of our markets, except California and Maryland, where share fell modestly in the quarter.
Looking ahead to Q1, we expect total revenue to be down slightly from Q4 due to traditional seasonality. The continuation of new competitors store openings near our dispensaries in Illinois and Pennsylvania, and the focus on verticality by MSOs. We currently don’t have the benefit of net new market contributors like New Jersey, but we expect that adult-use catalysts in Ohio, Pennsylvania, Maryland and Florida over the next 2 years to generate material growth in some of our strongest states.
In combination with our pending acquisition of Columbia Care, we will have access to every major adult use market in the country. We expect to see sequential growth in both the wholesale and retail channels after Q1. As Charlie mentioned, we will have several new store openings in Florida and four more stores opening in Pennsylvania before the end of summer. We also expect an acceleration of the opening of new independent retail doors in our home state of Illinois, giving a boost to our wholesale revenues. The velocity of our brands continues to be extraordinarily strong, making product from Cresco high supply and FloraCal must haves on existing and new shelves.
Gross profit in the quarter including non-recurring, non-cash charges primarily related to net realizable value adjustments to inventory decreased 269 basis points sequentially to 45%. Excluding those non-cash, non-recurring items, gross profit margin was 50% in line with our long-term target. We reduced our net inventory by $17 million in the quarter, primarily from our targeted inventory management efforts and partially from the NRB charges I just mentioned. Across our footprint, we are doing a much better job of bringing rooms on and offline to meet our flexible demand planning, limiting aged inventories, reducing operating costs and lowering the need for promotional activity. We are very comfortable with the current inventory position and expect further improvements as we double down on our core states and operations and optimize our asset base.
Adjusted SG&A expense, which excludes share based compensation and non-core items, was essentially flat with third quarter as $68 million. We are proactively managing our operating expenses and taking a critical eye to our cost structure, both at corporate and on a state-by-state basis. We expect the impact of these initiatives to lead to a meaningful decline in SG&A dollars by the end of Q2 and into Q3. We are intensely focused on finding other ways to improve our long-term competitiveness, rationalize our existing footprint, and improve our overall profitability and cash generation in 2023. Adjusted EBITDA where we include the NRB and other non-cash, non-recurring charges I mentioned earlier, was $31 million in Q4, representing a margin of 15%. If we had adjusted for these changes, our adjusted EBITDA margin would have been approximately 20%. Our near-term goal is for adjusted EBITDA margins in the low to mid 20%, and we expect adjusted EBITDA margin to improve throughout the year as cost saving measures we took in the fourth quarter and the first quarter begin to flow through.
As Charlie mentioned in his remarks, we continue to take the necessary actions to optimize our asset base and operate more efficiently. As a result of our actions in California and Arizona as well as industry-wide changes in valuations, we e took a $141 million non-cash impairment charge in the quarter. Again, we took appropriate proactive steps this quarter to strengthen our balance sheet through site rationalization, inventory management, and intangible valuation assessments to put us in the best possible position to excel in 2023.
We generated positive operating cash flow of $4 million in the fourth quarter, bringing the full year to $19 million. We spent $13 million on CapEx in Q4, primarily from the addition of new stores in Florida and the development of our upstate New York cultivation. For the full year, CapEx totaled $83 million. We ended the quarter with $122 million of cash on the balance sheet. As I stated earlier, free cash flow improvement is our number one goal in 2023. With the improvements we are making to our operations, continued cost management, significantly lower capital expenditure requirements and the strategic financing available to us, we feel good about our cash position.
At this time in our emerging industry, leadership, scale and financial strength matter most, the macroeconomic headwinds, lack of near-term regulatory changes, industry pricing pressures and tight capital markets, require us to make difficult decisions to remain at the top of the industry. But as Charlie said, we are built for this. We are planning our business for the regulatory competitive environment that exists today. The actions we are taking will set us up to benefit from the unprecedented opportunities for growth we see in the future.
Regulatory changes will come eventually. And in the meantime, consumer demand remains strong and we see untapped opportunities for efficiency and production and overhead cost reductions. With the likelihood of new adult markets coming online, we see a bright future for those companies that weather the current storm and come out on the other side stronger than ever.
With that, I will pass it back to Charlie for some closing comments.
Charles Bachtell
Thank you, Dennis. While 2022 was a challenging year for cannabis, the cannabis thesis remains unchanged and Cresco Labs is doing what needs to be done for long-term industry leadership. As we set our plans and goals for 2023 and beyond, we are proactively managing through the unique macro pressures of today with an eye toward the future. In the meantime, we will continue to focus our efforts on what needs to be done by prioritizing our profitable core. What you can expect from us is: one, continued leadership in branded cannabis products; two, rationalizing and optimizing our footprint; three, expanding the reach and efficiencies of our retail business; four, generating more cash flow and strengthen our balance sheet; and five, continue to lead the efforts on federal reform.
With that, I will open the call for questions.
Question-and-Answer Session
Operator
Thank you. The first question today comes from Aaron Grey with Alliance Global Partners. Aaron, please go ahead.
Aaron Grey
Good morning and thank you for the questions. So, first question for me, I just want to dig a little bit more in terms of the EBITDA margin. So, 20% on the adjusted basis if you take out some of the inventory realization measures that you did. So going forward, you mentioned that you expect EBITDA margins to improve after the first quarter. Just want to know in terms of what types of pricing pressure you have embedded within that, because I know you are going to be exiting Arizona and also closing out one facility in California. So want to know what type of pricing pressure you had embedded and just how much EBITDA margin expansion we might be able to expect after the first quarter? Thank you.
Charles Bachtell
Hey, good morning, Aaron, this is Charlie. Thanks for the question. So, when it comes to even the margin profiles, we are taking those actions, significant actions on the SG&A side of the business gross margin everywhere that we can, from CAG standpoint etcetera to as you have seen in these prior past couple of quarters maintain margins. We have increased sort of the approach and the aggressiveness, as you mentioned, that the California and Arizona moves that are coming up, are larger in scale to be able to help us not only kind of maintain margins, but also provide the opportunity to increase in traditional specific on that. Dennis, do want to add some more color?
Dennis Olis
Yes. Sure. Thanks Aaron. So, as Charlie noted, the big movers are going to be the actions that we are taking in California and in Arizona. Those actions will be completed somewhere around the end of the first quarter going into the second quarter. So, we will start to see the full benefit of that in Q3 and probably half a quarter in the second quarter for those actions. On top of that, we are expecting some additional growth from the addition of new stores in Florida and Pennsylvania that will come in the spring and early summer. And again, that will drive higher revenue in the second half of the year. So and then just the top of office, we continually are looking for ways to become more efficient and operate in a more productive, cost efficient manner at a corporate level and at the state level. So overall, if you look at all the actions we are taking to manage our cost structure, and offset that a little bit by the pricing pressures, I would expect margins to be in the low 20% for the second half of the year.
Aaron Grey
Okay. Great. Thank you. That’s really helpful. And want to touch a little bit more on Illinois, a key state for you guys don’t really work, especially on the retail side. But with the 185 social equity stores starting to open up, I want to know what your expectations are for number one, your own retail stores, if there is potentially pressure as it gets more saturated in some of the markets. And then what you are targeting in terms of market share for these new third-party stores to build to offset any potential revenue impacts to your existing stores? Thank you.
Charles Bachtell
Yes. This is Charlie again. So, you are right, like as these new stores opened, the 185, it does present a great opportunity for us, especially on the branded product side, and the wholesale side, which is what began looking on with our long-term thesis here. So, the opportunity is there from the additional stores that they opened. The initial set of stores that they opened or likely to see – and as we are seeing from the first few are likely to be closer to existing retail stores that we haven’t had that does put competitive pressure on those stores. But there will be a tipping point in which the wholesale opportunity outweighs the retail risk. Any additional color, Greg?
Greg Butler
No, the only thing I would add to that is we are pretty confident in our products performance the market. If you look at our branded product sales were up 24% overall across all the market we shows as a real love and demand for our products. So, as more wholesale doors open, we are pretty confident, we are going to get in and are really strong share of shelves with our products because they not only have great velocity attached to them, but we think from a profit per square foot, there is a great story there. Second part of your question, but our own retail, we are very pleased with our retail performance. We know that there will be some increased competition as new stores open up around. Usually that does mean lower some price promo to attract shoppers. But with the launch of our loyalty program, and some of the trends we are seeing, we are pretty confident that we have got the right tools in place to really hold on to our high value shoppers, even as new doors open up.
Aaron Grey
Okay. Great. Thanks very much for the detail and I will hop back into the queue.
Charles Bachtell
Thanks Aaron.
Operator
The next question comes from Andrew Partheniou with Stifel. Please go ahead, Andrew.
Andrew Partheniou
Hi. Good morning. Thanks for taking my question. I wanted to discuss the Columbia Care transaction and kind of your path to closing that. Could you talk a little bit about the capital raising environment? I am making the assumption here that this is what is causing some delays. As you previously mentioned, strong interest in the assets that you still need to divest in Florida, Ohio, and Maryland, do you still think that you can get the $300 million of total proceeds and how much of that could be in cash so you can pay-down debt?
Charles Bachtell
Andrew, thanks for the question. This is Charlie. So, as far as the deal goes, as we mentioned like rationale still holds up. We do see a path to close. And – but to some of the points in your question, some of the things are within our control, some are not. So, as it relates to the capital raising environment for potential buyers, the capital raising environment, while it has definitely degraded since deal announcement, even from the initial strategic approach to the divestitures, we weren’t focused on sort of the traditional type of borrower that’s dependent on the traditional cannabis capital markets. So, right off the bat, it reduce the buyer pool size. But look, we are working on it. We have got some great advancements there in recent weeks, and we are optimistic that we will be able to get that across the finish line. When it comes to the total amount of gross proceeds, I think we are seeing pressure there and likely will come in under that initial $300 million amount. But we also have opportunities to divest other assets in the portfolios that aren’t necessarily required. Regulatory divestitures, but either redundant or underutilized assets that can help sort of address that delta. I think I hit on everything, let me know if I missed.
Andrew Partheniou
No, you definitely addressed it. Thank you very much for that. I mean there is the cash component, but can understand if you are not in a position to talk about that. Just related to that on timing, when do you have to announce something in terms of the required divestments to make the new outside date? Is it as soon as the end of March, or could it be slightly after that. And I am just trying to understand scenarios here. What happens if you don’t close the transaction after this new outside date? Do you need to go back to – do either parties need to go back to shareholders for approvals? Do you need to go back to the boards for approvals? Just trying to understand a little bit more of the process and the different scenarios?
Charles Bachtell
So, I think just to kind of answer it in reverse. I think different scenarios may lead to different obligations on the parties. So, I don’t know that I can answer that question perfectly. And as it relates to the outside date, we are still well within the range for hitting that outside date. But we do the outside date is still absolutely reachable. And we have got some runway before that would come into question. From a regulatory approval process, is that that’s the strength of both organizations, but we will be advising the public as soon as we have additional information on that.
Andrew Partheniou
Appreciate the answers. I will get back in the queue.
Charles Bachtell
Thanks Andrew.
Operator
Our next question comes from Matt Mcginley with Needham & Company. Please go ahead, Matt.
Matt Mcginley
Thank you. So, given total impairments in the fourth quarter, and then the phasing out of the older production facilities in the third quarter, put your back half gross margin rated at 46%, that those are likely one-time events. But as you think about the goal going forward, is it still realistic to think that you can remain above 50% or is what you are seeing our pricing likely keep the gross margin rate this year below that 50% target?
Charles Bachtell
Dennis, do you want to take that?
Dennis Olis
Yes. Thanks Matt. So, the chunks that we took in the fourth quarter really related to just the cleanup of inventory. I am actually quite pleased with the fact that we were able to decrease our total inventory balance by over $17 million sequentially from Q3. Less than half of that was related to these one-time charges for net realizable value charges and some excess inventory. So, we took this opportunity to really evaluate our inventory position in every location that we have across the country, and took the opportunity to do some cleanup in the quarter. It was that the expense of a short-term hit in non-cash, non-recurring items in Q4 that really took us from a absent that we would have been at that 50% level. So, as I noted earlier, we still believe that a 50% margin give or take is still the right target. And we still think that that is very achievable, With the pricing pressures we have being offset by some of the actions that were taken to improve our overall efficiencies and operations, across all of our cultivation and manufacturing sites, in addition to some of the actions that were taken in California and Arizona, some of our lower-margin markets. You combine all that together, and I still feel comfortable that our long-term and even short-term goal this year is still in the 50% range for gross margins.
Matt Mcginley
Great. And on the EBITDA trend for the year, there is a lot of the cost savings won’t really come through. And so the second quarter, and then you will get some action there, because the first quarter looks like the fourth quarter in terms of rate, and should we have seen that comes more from gross margin recovery versus G&A given the store additions that you have already made this quarter.
Dennis Olis
Yes. I think that’s right. We talked about the top line being down modestly from Q4 to Q1 due to some seasonality, so forth, so. And then some of the actions that we talked about in California and Arizona were being implemented in Q1, so we really wanted savings until later in Q2. So, I think if you look at the improvements that we are going to see sequentially from Q4 to Q1, it’s really going to be related to the gross margin improvements, where we won’t have these one-time charges in Q1 that we took in Q4.
Matt Mcginley
Okay. Thank you.
Dennis Olis
Thanks Matt.
Operator
The next question comes from Scott Fortune with ROTH MKM. Please go ahead, Scott.
Scott Fortune
Yes. Good morning. Thanks for taking questions. Just wanted to provide a little more color the California market and kind of discuss the kind of right sizing of the facilities there. Obviously, the pricing environment out there, we are seeing a little bit of improvement versus some other states. But kind of there are still challenges from the retailers in getting products and getting paid for that, just kind of step us through kind of like were California and the right sizing there kind of ends up for you and your outlook for improving through the second half year potentially for you?
Charles Bachtell
Thanks Scott. This is Charlie. I will take it. It is really kind of a right sizing for us in California. Internally, we are talking about it sort of is that shrink to grow, where we are really focusing on the core things we are doing. As we talked about in the prepared remarks, 2023 for us is the year of the core, core markets, core products, core capabilities, core brands, etcetera. And as we are looking at our overall footprint, it’s leaning in and doubling down on the things that drive the most amount of value that give us the best margin profiles that allow us to create the most cash flow and profitability. And so with California, it really the realization there is – the environment there is, it’s a tough market, it’s complex. We have got opportunities in the footprint, that if we apply those resources to can produce more. And right now, as we talked about in the prepared remarks, that is 2022, 2023 it is doubling down on the things that drive the most amount of value the core. I mean that’s why we made the decision to California.
Scott Fortune
Okay. Appreciate the color. And then real quick, CapEx kind of what’ obviously you are guiding or kind of expectations for new stores in Florida and Pennsylvania outside of that, kind of how should we look at the CapEx budget for compared to last year moving forward?
Charles Bachtell
Dennis will take this.
Dennis Olis
Yes. Thanks Scott. So, the CapEx that we had in 2022 was about $83 million. We expect the CapEx expenditures in ‘23 to be about half of that, so somewhere in the $40 million to $45 million range. You are spot on the big chunk of that will be attributed to the new store openings in Florida and in Pennsylvania, to be another little chunk that’s related to completing the build-out of our New York facility and then ongoing maintenance. So, overall, it will be a substantial decline in CapEx spend year-over-year. And we have made a lot of investments over the last 2 years that are starting up. We are starting to see the benefits of that, but we do expect the CapEx in 2023 to be about half of what we saw this year.
Scott Fortune
Thanks. Appreciate the color. I will jump back in the queue.
Charles Bachtell
Thank you, Scott.
Operator
Our next question comes from Gerald Pascarelli with Wedbush Securities. Gerald, please go ahead.
Gerald Pascarelli
Hi team. Thanks very much for the question. Charlie, I guess this one is for you. It’s just regarding New York and the rollout of adult use sales. Broad sentiment around this market and the overall opportunity is nothing great, at least over the near-term. And so any updated thoughts you have regarding the adult use rollout and the overall market opportunity in particular, given how important of a status will be for you? And even more important once the Columbia Care deal closes, any incremental color that would be helpful. Thank you.
Charles Bachtell
Gerald. So, as it relates to New York, it’s tough to comment on before we know what the regs look like. I think the sentiment that you voiced is it’s real. There is concern there. It’s not as smooth of a transition for medical and adult use, or there is not as much clarity as anybody would like. That said, there has been some improvement. There has been some increased engagement on the current illicit market structures there. There is a plan. There is a path. It required some legislative fixes in order to even kind of get to this point. So, there is the opportunity. Again, it’s almost similar to the way that we talk about the entire cannabis industry, like 2022, challenging year, 2023 is going to be also. Does that change the long-term thesis for cannabis, absolutely not. So, with New York, you are talking about arguably the second largest cannabis market in the world. If we can work with the regulators to make sure that the structure that gets put in place can provide sufficiently viable opportunities for licensees to really get in there and succeed, it’s going to be a great market. And the onus is on us to make sure we work with them to get the regulatory structure that works. So, I hope to have more clarity in future updates on the calls.
Gerald Pascarelli
It sounds great. Thanks very much for the color. I will hop back into the queue.
Charles Bachtell
Thanks Gerald.
Operator
Thank you everyone for your questions today. We have no further questions. So, this concludes our call. Thank you everyone for joining us today. You may now disconnect your lines.
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Cresco Labs Inc. (CRLBF) Q4 2022 Earnings Call Transcript