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Edited Transcript of RGZ.H.V earnings conference call or presentation 24-Apr-19 12:00pm GMT

Q4 2018 Cresco Labs Inc Earnings Call

Vancouver Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Cresco Labs Inc earnings conference call or presentation Wednesday, April 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Miles

Cresco Labs Inc. - VP of IR

* Charles Bachtell

Cresco Labs Inc. - Co-Founder, CEO & Director

* Joseph Stevens Caltabiano

Cresco Labs Inc. - President, Co-founder & Director

* Ken Amann

Cresco Labs Inc. - CFO

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Conference Call Participants

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* Derek Dley

Canaccord Genuity Limited, Research Division - MD & Consumer Products Analyst

* Jesse Pytlak

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Robert Fagan

GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare

* Russell Stanley

Beacon Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Cresco Labs Fourth Quarter 2018 Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Aaron Miles, Vice President of Investor Relations for Cresco Labs. Please go ahead.

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Aaron Miles, Cresco Labs Inc. - VP of IR [2]

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Good morning, and welcome to Cresco Labs' Fourth Quarter 2018 Earnings Conference Call. We look forward to speaking with you today and discussing the great progress we have made at the company.

I'm joined on today's call by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our President and Co-Founder, Joe Caltabiano; and our Chief Financial Officer, Ken Amann.

Prior to this call, we issued our fourth quarter 2018 earnings press release and financial statements for the 3 months and full year ended December 31, 2018. Copies of these documents have been filed with SEDAR and are available on our Investor Relations website at investors.crescolabs.com.

Before we begin our remarks, I would like to remind everyone that 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. Such forward-looking statements may include estimates, projections, goals, forecasts or assumptions, which 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 are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations.

Additional information about the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found under Risk Factors in Cresco's CSE Listing Statement filed with SEDAR on November 30, 2018, and available at www.sedar.com. Cresco does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call.

In addition, during today's call, Cresco will refer to some non-IFRS financial measures such as adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS 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 IFRS financial measures presented in our financial statements.

Please also note that all financial information on today's call is presented in U.S. dollars unless otherwise noted.

And with that, I will now turn our call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [3]

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Good morning, everybody, and thank you for joining us today on this call. I'm going to start off with a brief overview of the highlights of the quarter. Joe will provide some commentary on operational developments, and Ken will discuss our financial results in more detail. After that, we will be happy to take your questions.

We're very pleased that we delivered another profitable quarter of pretax income despite a significant amount of expenses that were onetime in nature related to our reverse takeover, our public stock listing and our financing activity. Our ability to absorb these onetime expenses and still deliver a profit for our shareholders is a reflection of our strong execution across all areas of our operations and the strength of the economics of our business model.

We generated revenue of $17 million for the quarter, a 411% year-over-year increase compared to Q4 of '17, and $13.7 million in adjusted EBITDA, which reflects the impact of approximately $14.3 million of onetime costs. These strong results are attributable to our continued success in entering new markets with high regulation, increasing our production and processing capability and expanding the distribution of our unique and sophisticated house of brands.

We believe that we are executing very well against our strategic plan and making outstanding progress in all of the key areas that we've identified for building the value of Cresco. Since our founding in 2013, we have delivered on the milestones that we've established for ourselves, which is a testament again to our disciplined business strategy, the hard work of the talented team we've assembled and our strong commitment to holding ourselves accountable to and creating value for our shareholders.

Earlier this month, we announced the acquisition of Origin House, which is a transformational deal that positions Cresco as a leader in the cannabis industry with the premier distribution platform in the U.S. and serving the greatest number of dispensaries in the country. The significance of this deal and the enormous lead it gives us in California over other multistate operators cannot be minimized. We firmly believe that the company that builds a dominant position in California, the largest regulated cannabis market in the world, will ultimately dominate the broader cannabis industry. With the addition of Origin House's existing infrastructure and proven brand building and distribution expertise, we've taken a leadership position in California and now have the platform and model to capture a leading share across North America as the market for medical use and regulated adult-use cannabis continues to grow. We spoke in great detail about the combination with Origin House on our call a couple of weeks ago, so I want to spend the remainder of our time today discussing the progress we've made in other key areas of the company.

Another significant piece of our strategic plan came to fruition last month with our entrance into the Florida market through our pending acquisition of VidaCann, one of the largest and most advanced providers of medical cannabis in the state. Simply put, Florida was the last market that we had targeted for our initial strategically developed geographic footprint, giving us operations in 7 of the 10 most populated states in the U.S., and we're very pleased that we were able to execute on plan. Given the size of the Florida market, we expect to have a very positive impact on our growth trajectory.

With this transaction, we've acquired a license that will allow us to open 35 dispensaries, which in 2020, we'll automatically become licensed to open an unlimited number of dispensaries in Florida as well as a fully operational state-of-the-art 75,000 square-foot cultivation and GMP-certified processing facility that will support the production of our full suite of brands.

VidaCann currently has 8 operational dispensaries and another 6 that will be operational by the end of Q2. By the end of 2019, we expect to have a total of 20 dispensaries open in Florida. For roughly the same consideration it would have cost to acquire just the license plus CapEx and OpEx to get operational, we were able to acquire an asset that is currently operational in all respects, eliminate a material amount of execution risk, saved a tremendous amount of operational and leadership bandwidth. And while our asset is currently generating material revenue, any acquirer of a nonoperational license will not have revenue until likely 2020. With our proven ability to execute and get operational more quickly than industry competitors as well as our compelling suite of brands that we can offer, we expect to efficiently scale our operations in Florida and achieve the same high rate of market share that we have achieved in other states. As with the Origin House transaction, we really like the strategic nature of the VidaCann acquisition.

In addition, we recently received our approval to enter the Michigan market, which represents another example of the successes we've had in winning access to new markets using our professional proven approach to the application process. With the receipt of the prequalification for our license, we've completed the most comprehensive portion of Michigan's application process, and we can now move forward with licensing approval for the facility we intend to operate.

Michigan is one of the largest medical cannabis markets in the country with an estimated patient population of nearly 300,000 registered patients. The state is also steadily moving towards implementation of the law passed last year that legalized the state's adult-use program, which would bring the total cannabis market to nearly $1.4 billion by 2022 according to Arcview Market Research and BDS Analytics.

The addition of both the Florida and Michigan markets would give us operations in 11 states, including 7 of the 10 most populated states. When Origin House's Canadian footprint is included, we'll have a total exposure to more than 185 million residents in North America and significantly more when the tourism market is included. Our domestic footprint covers nearly 70% of the total addressable market for legal cannabis sales in the U.S., and with the addition of Origin House, we'll have distribution in nearly 725 dispensaries across the country, with more being added every month, which significantly accelerates our efforts to build the first national brand in the cannabis industry.

In support of these efforts, we believe it was necessary to bring world-class consumer product marketers into the cannabis industry to begin applying best practices around how we build our brand portfolio. Our newly formed team has decades of experience building and managing some of the most iconic consumer brands and is led by our Chief Experience Officer, Scott Wilson, the former Global Creative Director at Nike. We have also built the team around him with marketing veterans from Gatorade, MillerCoors, Johnson & Johnson, Walgreens and from national advertising agencies.

Our marketing team has been leveraging best-in-class capabilities from traditional CPG in a cannabis, building a robust consumer segmentation to inform our portfolio management, building breakthrough consumer campaigns for our brands and creating innovation pipeline to drive disruptive growth. In just a few months, we've elevated the positioning and visual identity for our current brands that will allow them to scale and create the first truly national brands within cannabis. We've also leveraged the segmentation in our retail data to inform new product development, and we will be debuting new brands in the second half of 2019 to ensure that we continue to address each of the major customer market segments that solve their unique needs.

Another key step in building the first national brand is the formation of our new wellness subsidiary, Well Beings, following the legalization of CBD as a result of the passing of the '18 Farm Bill. Well Beings will focus on developing a line of high-quality, hemp-derived CBD wellness products for distribution to all 50 states. The subsidiary will have its own unique product line, but equally as important, the subsidiary will produce and distribute CBD versions of our existing branded products, including Cresco, Remedi and Mindy's Edibles, to help drive awareness of these brands outside of the licensed dispensary channel. Well Beings will enable us to sell in the states where we don't currently have a license to operate and distribute our products. It will also enable us to target the next logical base of consumers, individuals who want cannabinoid-based products but don't have access to legalized medical or adult-use dispensaries as well as consumers who might not be interested in THC products.

Turning to other key developments. In January, Tom Manning, the recently former CEO of Dun & Bradstreet, was appointed as our Chairman of the Board. In addition to an amazing career that has included stints at firms like McKinsey and as President of Ernst & Young Asia, one of the things that Tom brings to the Board is an expertise in corporate governance, matched by few individuals in the country. As we continue to grow and expand Tom's leadership, we'll ensure that Cresco remains true to our core company values of high corporate governance standards, integrity, longevity, fiduciary responsibility and providing high shareholder value.

Now I'd like to give a brief update on regulatory developments in our home state of Illinois. As has been previously announced, I'm very pleased to be a part of Governor JB Pritzker's transition team relating to the development of the adult-use law in Illinois. It's been great to participate in the conversation about regulated adult-use legalization and to help inform these discussions with the first-hand experience of a cannabis industry operator. As the governor has made clear, the legalization of adult-use cannabis is a priority for the administration, and there are many productive and encouraging discussions being had with legislators. Outside of state-level efforts, it's worth noting that the new Mayor-elect of Chicago is pro-legalization, which will certainly be helpful to the cause.

In looking at the regulatory developments across our entire geographic footprint, we're seeing very positive trends. 8 of the 11 states in which we operate have already enacted or are in the process of evaluating a regulated adult-use program. We believe the geographic presence we have built puts us in an excellent position to capitalize on what should be a steady increase in our addressable market as more of the states we operate in develop adult-use programs.

From a national legislative standpoint, 2 weeks ago, the STATES Act was reintroduced in both the U.S. House and Senate, with both Democratic and Republican lawmakers sponsoring it in each. This bill would block federal intervention from people complying with state cannabis laws, leaving it entirely up to the states to decide their own cannabis laws and regulations. This law would be transformative for our industry.

Also, a couple of weeks ago, the U.S. House Finance Committee approved the House version of the SAFE Act, expanding the cannabis industry's access to banks, which will soon go to a full floor vote. This is only the third time in history a cannabis bill has cleared a congressional committee.

Finally, I want to highlight the progress we've made in a relatively short period of time to enhance the marketability of our stock. On December 3, we began trading on the Canadian Securities Exchange, which was then followed up in March by being approved to list on the OTCQX, the highest tier of the 3 OTC markets. Furthermore, Cresco Labs and Origin House were recently included in the newly created Horizons U.S. Marijuana Index ETF. These are important milestones for the company and reflects our commitment to adhering to high standards of compliance, disclosure and corporate governance. While the TSX and the U.S. Exchanges continue to evaluate the inclusion of U.S. cannabis operators, Cresco Labs is continuing to take steps to ensure preparedness to participate.

The acquisition of Origin House and the impact the newly issued shares will have on our float will also open up our stock to a much larger universe of potential investors. Post-closing, Cresco will have one of the largest floats of any company in the cannabis industry and significant liquidity in our stock. Combined with the platform we are building, we believe this will make Cresco an attractive investment vehicle for the increasing number of larger institutional investors who are looking to deploy capital in the cannabis space.

Now I'd like to introduce Joe Caltabiano, Co-Founder and President, to cover some of the additional recent updates and highlights.

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Joseph Stevens Caltabiano, Cresco Labs Inc. - President, Co-founder & Director [4]

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Thanks, Charlie, and thanks, everyone, for joining us this morning. As Charlie mentioned, we've been extremely productive over the last few months in terms of entering new markets, scaling our production capabilities and expanding distribution. I'd like to walk through some of those recent key developments in a number of our largest markets.

Starting off in Illinois, we've seen extraordinary pickup in the number of registered patients for the state's medical use program. Over the past 2 months, approximately 11,000 patients have signed up, which has increased the total number of qualified patients by approximately 20%. The implementation of the alternatives to opioids program began on February 1, which was a little later than expected, but the process for registering patients has been significantly streamlined, and the 3-month waiting period has been eliminated, along with the need for fingerprinting and background checks for all patients with any qualifying condition. With the approval of a doctor, a patient can receive a medical use cannabis card in just 1 day.

We are actively working to educate doctors and patients on the benefits of using cannabis as an alternative to opioids. With approximately 6 million opioid scripts written in Illinois annually, we expect to see steady growth in the number of patients utilizing cannabis through this program in the coming months.

In December, we acquired 2 additional medical cannabis dispensaries, 1 located in the popular Wrigleyville neighborhood of Chicago. These represent our fourth and fifth dispensaries in Illinois, the maximum number that any single company can own. We're the first company in Illinois to reach this limit and as these new dispensaries will add to the leading market share that we already have in the state. We have also now received regulatory approval for our outstanding dispensary transactions in the state and closed them just last week.

With the acceleration we are seeing in patient registration, the expansion of our cultivation facility in Lincoln becomes even more valuable to the company. Construction is underway on an effort to expand this facility to 170,000 square feet, and we expect it to be completed in Q2.

Moving on to Pennsylvania. We're seeing strong trends in patient registration. Pennsylvania now has approximately 100,000 qualified patients and is adding patients at a rate of more than 8,000 per month. In December, we won our second merit-based dispensary license in Pennsylvania, which allows for 3 additional dispensaries. This is particularly notable given the limited number of retail location in such a populous state. This new license will enable us to have a retail presence in both Pittsburgh and Philadelphia markets. We continue to have products in every dispensary in the state, and this new license will further our market leadership in one of the most attractive and highly coveted markets in the country. In February, we opened up our third dispensary in the state, which is the final dispensary allowed under this first license. The new dispensary in New Kensington is experiencing rapid growth in a very short period of time. We continue to make progress on the 70,000-square-foot expansion of our facility in Brookville, which will provide over 50,000 square feet of additional cultivation space. We expect this project to be completed next month.

Moving to Ohio. In January, we made the first legal sale of medical marijuana in the state. This is the second consecutive state in which we were first to market following our similar success in Pennsylvania. This speaks to our team's outstanding execution and unparalleled speed to market. While the Ohio program launched a little later than we expected due to some delays in getting the testing labs online, we are now seeing a ramp-up in patient registrations. To date, approximately 25,000 patients have been qualified. However, sales are relatively small at this point given that there are only 13 dispensaries currently open in the state, with only 1 of them being in a major city. Accordingly, with somewhat limited access, only about 40% of the qualified patients have made a purchase so far. We expect that number to grow and sales to become more meaningful as additional dispensaries are opened.

Looking east of Massachusetts, in December, we announced our agreement to acquire Hope Heal Health, and in February, we opened our first dispensary under this license, which once again demonstrates our speed to market. The Fall River dispensary opened with a wide selection of medical-grade cannabis products. Just last week, we were granted approval for our adult-use license, which will allow us to fully capitalize on the fast-growing market in Massachusetts, where there are 11 operating adult-use dispensaries in the state and averaging $1 million in sales per month.

Moving to Nevada. We are seeing very strong demand for our Mindy's Edibles line. In less than 6 months after launching in Nevada, Mindy's are currently being carried in 62 of the 67 dispensaries in the state. Headset, a real-time data analytics firm focused on the cannabis industry, recently published data showing that Mindy's had 3 products ranked in the top 10 edibles sold in the state, including the #1 selling product for the past 2 months. The popularity we are seeing in Nevada bodes well for sales in other states as we continue to expand the distribution for this product line.

In Arizona, we are rolling out wholesale distribution of our Cresco brand in the second quarter. This line, which consists of more than 50 products, should have a positive impact on driving sales growth in Arizona.

Finally, in the country's largest cannabis market, California, on an ongoing basis, we significantly increased our distribution over the past few months. Our products are now carried in more than 100 dispensaries across the state, which is up from just a few handful when we had our last earnings call in December. During the second quarter, we will open up our pending processing facility in Mendota, which will enable us to further distribute our full suite of brands in California. Of course, the acquisition of Origin House is a complete game changer. Origin House delivers more than 50 cannabis brands to over 500 dispensaries in California, representing approximately 60% market penetration and getting us the premier distribution platform in the state.

In terms of new markets, obviously, we expect Florida to begin making a major contribution following the acquisition that we just announced. And Michigan will be another large market on track to be added to our footprint this year. Since relaunching its medical cannabis program in 2017 to include an expanded list of qualifying conditions, Florida has seen tremendous growth in patient registrations. The total number of qualified patients is now approaching 200,000 and is expected to reach 550,000 by 2022. The medical cannabis market in Florida was estimated by Arcview to be $456 million in 2018 and is projected to increase to $1.7 billion by 2022 given the state's growing population, robust tourism and largely elderly community. Last month, Florida also approved the sale of flower, which historically accounts for between 45% and 50% of an overall market.

In summary, we are exceptionally pleased with the progress we are making in our targeted states. We believe the foundation and presence we are building in the largest cannabis markets in the country will translate into strong results for the company in the coming years.

And now I'd like to turn the call over to Ken Amann, our CFO, to speak about our quarterly financials.

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Ken Amann, Cresco Labs Inc. - CFO [5]

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Thank you, Joe, and good morning, everyone. I'll begin by reviewing the financial highlights of the quarter and then address our current liquidity position and capital markets activity. Please note that all numbers are stated in U.S. dollars.

I also want to point out that during this call, I will provide certain results that exclude the impact of biological assets. Under IFRS requirements, we must include a measurement of biological assets, and the change in overall fair value has recorded the gain or loss in the income statement each quarter.

Finally, we will also begin providing pro forma financial results. As you know, we are in the initial stages of scaling our business, which includes many transactions that are positioning us for long-term profitable growth. We believe that metrics such as pro forma revenue and adjusted EBITDA are helpful to both management and the investment community in understanding the underlying operating performance of the business and assessing key trends. We have included a reconciliation of our pro forma results and other non-IFRS measures in our earnings release.

Turning to the results. I am pleased to report fourth quarter 2018 revenue of $17 million, which represents a 411% increase year-over-year and a 33% increase quarter-over-quarter. Relative to the third quarter of 2018, the increase in revenue was driven by strong growth in Pennsylvania and Illinois and the launch of operations in California, Arizona and Maryland. For the full year 2018, our total revenue was $43.3 million, up $32.3 million or 294% from the prior year. Our fourth quarter revenue mix was approximately 60% wholesale and 40% retail compared to 70% and 30%, respectively, in the third quarter of 2018. Fourth quarter wholesale revenue, which consists of revenue from cultivation and production of consumer packaged goods to third-party retailers, grew nearly 15% over third quarter and over 300% from the comparable prior year period. Again, this was driven by strong growth in Pennsylvania and Illinois and launch of new markets in the quarter.

Turning to our retail business. Revenue nearly doubled from third quarter driven by higher patient demand in our existing retail locations and the acquisition of 5 new dispensaries in the quarter, including 4 in Illinois and 1 in Arizona. Our pro forma revenue, which reflects consolidated results of less than majority-owned affiliates and acquisitions made during the period presented as occurring at the beginning of the quarter and the beginning of the year, was $22.5 million for the fourth quarter of 2018. Full year pro forma revenue of $75.6 million was up $64.6 million or 588% from prior year.

Before the impact of biological assets, the company generated Q4 gross profit of $7.3 million or 42.8% of revenues compared to a gross profit loss of $100,000 from the comparable prior year period. For the year, the company generated gross profit of $18.9 million or 43.7% of revenues compared to gross profit of just over $600,000 or 5.8% of revenues. We expect our gross profit margin to continue to improve as we recognize operational efficiencies associated with scaling the business and expanding our production capabilities in key markets.

We also record a net benefit related to the fair value of our biological assets of $17 million in the fourth quarter primarily driven from the increase in cultivation footprint and the number of plants under cultivation.

Our total expenses in the fourth quarter were $25.4 million compared to $2.3 million in the prior year period. Of that amount, nearly $16.1 million is related to share-based incentive compensation and onetime costs associated with the RTO process, acquisitions and financing fees. The balance [and] increase represents significant investments in our team and operational infrastructure to drive strategic initiatives that better position the company for future growth.

In Q4, the company generated pretax income of nearly $1 million compared to a pretax loss of $3 million in the comparable prior year period. After eliminating costs related to share-based incentive compensation and onetime costs associated with acquisitions in the RTO process, our adjusted EBITDA is $13.7 million for the quarter, up $5.3 million from last quarter. On a full year basis, adjusted EBITDA of $21.7 million, which is up $25.6 million from the prior year. Please refer to the reconciliation of adjusted EBITDA in our press release for additional details.

Turning to our balance sheet and liquidity measures. As of December 31, 2018, Cresco had total assets of over $315 million, including cash and cash equivalents of $131.3 million, up from $93.9 million last quarter. The increase in total assets and our cash balances from the end of the prior quarter reflects the proceeds from financing activities completed during the quarter. As of 12/31/2018, the company had a working capital position of approximately $170 million with 0 debt on our balance sheet. We have demonstrated our ability to raise capital with gross proceeds of $205 million in 2018 to fund our future growth. We will remain fiscally responsible as we deploy capital to our existing production facilities and increase our geographic footprint into new markets to drive incremental revenue and earnings growth for the company.

With respect to our share count, Cresco currently has approximately 295 million shares outstanding on a fully diluted basis. As Charlie mentioned, the acquisition of Origin House will increase our float to one of the largest in the industry and provide significant liquidity in our stock.

Before the -- I turn the call back over to Charlie, I would like to comment about our expectations for 2019. As you have heard from Charlie and Joe, we put a strong foundation in place. We have exceptional momentum building in the largest markets in the country, and we expect to deliver significant growth in the coming years. However, given the pace of developments both within our business, given our recent M&A activity and the cannabis industry in general, we will not be providing formal financial targets at this time. There are too many variables outside of our control for us to make projections with a degree of accuracy that we would want for formal guidance. With that being said, we feel extremely confident 2019 will be a very positive year for Cresco and our shareholders.

I'll now turn the call back to Charlie for his final remarks.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [6]

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Thanks, Ken. I'd like to close today with a few comments about our outlook and the outlook for the cannabis market in general. When we look at the trends driving the industry right now, it's hard not to get really excited about the support for more progressive views on access to cannabis and the momentum towards adult-use legalization. In a highly divided country politically, it's rare to find bipartisan support for any issue, but cannabis legalization is one such issue where being pro cannabis has become an electable position. And it's notable that a number of the declared candidates for the 2020 presidential election have changed their position on the issue. They now publicly support legalization, where just a few years ago, they were in opposition. Polling data consistently shows that approximately 2/3 of Americans are in favor of legalization of cannabis, and this is clearly having an impact on the views of politicians at every level of government. There was more federal legislation related to legalization that was drafted and submitted in March of '19 than in all of 2018. So from a political standpoint, the positive momentum is certainly accelerating. The passage of the Farm Bill was a great first step, and there is bipartisan support for the STATES Act. We think over the next 12 to 18 months, we will see more federal legislation being passed that is favorable for the cannabis industry.

And then at the retail level, we're seeing more retailers announcing plans to offer CBD products from large pharmacy chains like CVS and Walgreens to influential and admired high-end retailers like Barneys. When consumers see CBD products being offered at stores located right next to Target and Starbucks, it can't help but destigmatize and build trust in CBD products and other cannabinoid-based products and move us in a positive direction towards the normalizing of the entire industry.

As we look at 2019 and beyond, we see an abundance of catalysts that we believe will have a positive impact on our ability to drive continued growth in revenue and earnings. Just to name a few of the catalysts that are specific to Cresco, the acquisition of Origin House fundamentally changes the competitive landscape in the cannabis industry and immediately establishes Cresco as the leading multistate operator in California, with the ability to replicate this model in other states. We're entering large, new markets like Florida and Michigan. We're expanding our distribution in our current states and expect to see significant growth in California, Ohio, Arizona, Illinois, Pennsylvania and Massachusetts this year. We're launching our new wellness subsidiary, which will distribute our CBD versions of our house of brands to a national consumer base. And we're expanding our cultivation and processing capacity to effectively supply the growing demand we're seeing in our targeted markets.

From a larger industry and addressable market standpoint, we're seeing positive trends in the number of states moving towards adult-use legalization. We're seeing more states embracing the use of cannabis and the fight against opioid addiction. And we're seeing continued growth in qualifying patients and an acceleration in the rate of new registrations in many areas as education, awareness and access improves across the country.

Going forward, our strategy for building Cresco will continue to be centered around the normalization and professionalization of the cannabis market. We will focus on generating strategic and disciplined growth in regulated markets that fit our compliance-focused nature and also have large potential population footprints.

Including Origin House, we've now built the company to more than 1,100 employees nationwide. We continue to build out not only the leadership team, but also the next level of Cresco organization to ensure that the Cresco culture, model and disciplined approach to execution permeates through our entire operation. Our progress in attracting top-tier talent has enabled us to create a scalable platform that is critical for supporting a national company.

In 2019, we're confident that our continued strong execution and disciplined stewardship of capital will help us make further progress on developing the industry's first true consumer packaged goods company and enhancing value for our shareholders in the process.

I want to thank you all for dialing in today. Operator, we're now ready for some questions. Please open up the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Derek Dley with Canaccord Genuity.

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Derek Dley, Canaccord Genuity Limited, Research Division - MD & Consumer Products Analyst [2]

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I appreciate all the detail you guys gave in the comments. Just wondering if we could get a bit of an update just on Illinois versus your expectations. It sounds like, as Joe referred, the acceleration in medical patients has been quite strong. So how do you view that market on the medical side today? And looking forward to potential adult-use legalization, how do you view your capacity in terms of being able to fulfill that increase in demand that's likely to come in Illinois?

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Joseph Stevens Caltabiano, Cresco Labs Inc. - President, Co-founder & Director [3]

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Derek, it's Joe. Thanks for the question. So in Illinois, we're certainly seeing the current administration help expedite patients getting cards. That's the linchpin that held the growth of the Illinois market from expanding to where we initially had thought this program would be at. You're seeing patients now who went from approximately 90 days to get a medical card to, in most instances, 24 hours. That's accelerated patient growth to levels that we see in other markets like Pennsylvania. So the patients getting access to the cards has been incredible. You're also seeing new bills introduced on the medical side that will expand patient conditions, hopefully, adding chronic pain, adding some other conditions that the previous administration had stopped from getting added to the medical conditions. So we're excited to see the medical program continue to expand. Patients getting access is a top priority for Cresco. We continue to educate doctors, patients.

And in addition, as far as capacity, we are under construction on our Lincoln facility, adding a considerable amount of cultivation square footage. We've also updated our labs in our Joliet facility to handle more capacity. So we're in a position to handle not only the perceived patient growth on a medical side this year, but preparing for adult recreational use on a go-forward basis into 2020.

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Ken Amann, Cresco Labs Inc. - CFO [4]

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And Derek, this is Ken. Just to add on in terms of the patient numbers that we're seeing. Since the implementation of the Alternative to Opioids Act, the average monthly patient increase is up 65% compared to the trailing 6-month average. And we've already added in the first 3 months of this year nearly 10,000 patients. So our total patient count is up in Illinois (inaudible) percent from where we ended on 12/31/18. So certainly positive signs, especially considering these are still early days with the implementation of that program.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [5]

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Yes. We'll continue to see ramp-up, too, with Illinois, Pennsylvania and Ohio having roughly the same overall population. Now that the accessibility and the application process for patients also is roughly similar, historically in Pennsylvania and even in Ohio, in the first few months of that program, you're seeing on average between 8,000 and 10,000 patients join a month. So we expect Illinois to ramp up to around that rate as well.

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Derek Dley, Canaccord Genuity Limited, Research Division - MD & Consumer Products Analyst [6]

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Great. And can you just provide us with just an updated statistic on your market share in Illinois, Pennsylvania? I get Ohio is very early stage, so I'm not looking for much color there, but on Illinois and Pennsylvania.

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Ken Amann, Cresco Labs Inc. - CFO [7]

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Derek, this is Ken. Just in terms of Illinois, that's a great question, and we're happy to announce that for the fourth quarter ending 12/31, we saw our 12th consecutive quarter of market share increase in Illinois, dating all the way back to Q1 of 2016, where our market share in Illinois increased to 28%, up roughly another 1.5 points from Q3 of 2018. In terms of Pennsylvania, again, what we're seeing there is market share pretty consistent around 30% for the overall market.

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Derek Dley, Canaccord Genuity Limited, Research Division - MD & Consumer Products Analyst [8]

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Great. And just switching gears a little bit here. When we think about Florida, with flower now being allowed for sale, in other markets where we've seen similar dynamic, I think Pennsylvania is a market that did not allow flower and now does, what kind of sales increase just industry-wide did you guys witness in those markets? And what -- how should we sort of view Florida going forward?

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [9]

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We're really excited about the overall ramp-up in Florida. Flower definitely is a material component to any market. In most markets around the country, it represents anywhere around 40% to 50% of the overall market size. In Pennsylvania, I'll defer to Joe. I think it was about...

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Joseph Stevens Caltabiano, Cresco Labs Inc. - President, Co-founder & Director [10]

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35% to 40% uptick.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [11]

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Yes. And for the most part, that's not cannibalization of current customer base either, that's an inclusion, that's on top. So we saw a significant increase in the overall market in Pennsylvania with the inclusion of flower.

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Operator [12]

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And our next question will come from the line of Robert Fagan with GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [13]

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Congrats on the great growth in the quarter. I was just wondering if I could ask a little bit about the pro forma sales number. I'm assuming that, that may not include all of your pending acquisitions. Perhaps there's quite a few there, Origin House, VidaCann, Massachusetts and even some of those stores in Illinois. So is there a way you guys can give us a little bit more detail as to which acquisitions are in that pro forma number and which may not be?

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Ken Amann, Cresco Labs Inc. - CFO [14]

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Robert, this is Ken. Yes. Absolutely. In terms of the total pro forma revenue for Q4, again, that was $22.5 million of that amount that would comprise primarily of revenues from Illinois and Pennsylvania. And then also part of the quarter for Arizona, we launched California and then a small amount from Maryland. That pro forma revenue does not include any revenue from New York, Massachusetts or Florida for the time being. Those will be incorporated in Q1 of 2019.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [15]

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Okay. So on that sense, it wouldn't include Origin House either and, therefore, suggesting there could be significant upside to that pro forma number?

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Ken Amann, Cresco Labs Inc. - CFO [16]

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That's correct.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [17]

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Great. Just wanted to ask about the progress of the expansion in production capacity in Illinois and Pennsylvania. Seems like, at least from our perspective, that, that's moving quicker than expected and could be completed midyear this year versus perhaps what we had expected more end of the year. Is that kind of accelerating in terms of the growth potential that you see in those states? And do you expect those once completed expansions will be fully ramped up in what kind of time frame?

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Joseph Stevens Caltabiano, Cresco Labs Inc. - President, Co-founder & Director [18]

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This is Joe. So the construction -- we've certainly put the foot on the gas this year to get construction up to where we anticipate we need to for patient growth not only in '19 but, again, trending into 2020. So we will have a material amount of the capacity online and functioning this year, with those construction projects in Illinois being turned over in this quarter as well as Pennsylvania being turned over to the operations team this quarter. So the goal is certainly to monitor and continue to expand as these markets continue to grow and be good stewards of capital as it relates to CapEx. But also, staying in front of patient growth, staying in front of patient demand is a top priority of Cresco.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [19]

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Okay. Great news there. Last one and I'll get back in queue. Just wondering if you guys have any update that you could share with respect to the process for Illinois legalization, with the legislative session for this year ending quite soon. Has there been any significant movement or ability to gain visibility into when adult-use could come online?

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [20]

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Yes. This is Charlie. Thanks, Rob. The -- Illinois continues to move forward with plans to implement and pass adult-use legislation this session. Again, you've got a unique scenario in Illinois maybe compared to some other states where you've got an elected governor that ran on a platform where 2 of the 4 pillars were anchored. Pillars for objectives were anchored by passing an adult-use law. And they were substantial components to his platform. And he also has the support of a supermajority in both sides of the house. So again, unique to Illinois compared to maybe some other states that are discussing the topic, and everything continues to move forward in a beneficial way.

The one thing I will say, just like with any legislation, that has a high amount of visibility and potential for -- it's highly scrutinized. That's the kind of thing that will figure itself out towards the end of the legislative session. So that looks to be like most things that are somewhat, I don't want to say polarizing, but that have that sort of exposure to them. They get figured out right at the end of legislative session.

So all indications are that will be the same for the adult-use law in Illinois.

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Operator [21]

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And our next question will come from the line of Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [22]

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First question is just on the comments with respect to guidance for 2019. I guess I just wanted to confirm. Is that specific to 2019? Are you still comfortable with the 2020 pro forma guidance that you provided along with the announcement of Origin House 3, 4 weeks ago?

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Ken Amann, Cresco Labs Inc. - CFO [23]

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Just to be clear, Russell, those were not management estimates. Those were consensus estimates. They're already out in the marketplace.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [24]

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Okay. And just looking at -- when you include Origin House in the mix and look what the revenue mix looks like, you mentioned I think a 70-30 split this quarter. What does the pro forma mix look like? And are you comfortable with that? What sort of subsequent moves do you think you need to make in order to get a balance that you like?

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Joseph Stevens Caltabiano, Cresco Labs Inc. - President, Co-founder & Director [25]

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I think -- this is Joe. From a revenue split standpoint, the 70-30, it's certainly something that we target. As Origin House comes online, you'll certainly have an increase on the wholesale side and the distribution side of revenue. But as Florida comes online, you'll have an increase on that retail revenue. So I think we'll stay in that balance of 70-30. As different markets shift, there's certainly a goal for us to maintain as a brand distribution company, the development of brands and the distribution of those brands. So focusing on the wholesale side while still participating in retail. So I think you'll see us stay in line with that.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [26]

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Great. And obviously, thanks for the comments on adult-use in Illinois, and just wondering what your parallel thoughts are in Pennsylvania. They're obviously I think a little further behind. In the process, I think the town halls are still underway, but what are your thoughts on probabilities and time lines there?

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [27]

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Yes, this is Charlie. Thanks, Russ. The -- I think Pennsylvania moved faster towards having this conversation than anybody expected. So 2019 I don't think was [a legitimate] time frame for any sort of legislation being passed in Pennsylvania and as much as it was encouraging to see them lay the groundwork for moving towards adult-use legislation in 2019, which I think by all accounts is ahead of schedule. So does that make it a 2020 issue? I think they're looking at it like it could be a 2020 issue, and that's why they're doing their diligence now, which is great to see.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [28]

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Great. And just one last question and I'll jump back in the queue. With respect to Origin House, just wondering, any update you can provide us as far as any sort of preliminary integration efforts that are underway?

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [29]

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They are well underway. We could confirm that. It's a big focus for us. You're talking about the largest cannabis market in the world in a very impressive and developed distribution platform. So they've got team members that have disciplines and expertise in disciplines that we don't have. And so the integration -- and vice versa. So the integration of the companies is a priority for us. It's a big deal. There's a lot of synergies that are just very apparent on the surface, but there's even more as we continue to dig in and proceed with the integration process. So well underway and extremely excited about what we're seeing every day.

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Operator [30]

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And due to time, we only have time for one more question. Our last question will come from the line of Jesse Pytlak with Cormark.

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Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [31]

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I just kind of want to focus in on the Well Beings subsidiary and just hoping maybe you'd give a little bit more color on terms of the -- how you kind of plan to develop that business and when you might commercialize it and what your initial markets might be that you roll it out in.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [32]

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Sure. So again, just overall strategy -- this is Charlie, by the way. Good morning, Jesse. The overall strategy in that area, again, is a mix between not only wanting to develop a hemp-derived CBD product and brand for the benefit of participation in the CBD market, but it really is this incredible vehicle that's being offered to a company like Cresco Labs that's so focused on developing consumer products goods and developing a national footprint for us to be able to get other components of our house of brands into sort of that mindshare and exposure to the customers that live in states that don't have cannabis laws or even ones that do that aren't uncomfortable maybe going into a cannabis -- a licensed cannabis dispensary yet to buy a cannabinoid-based product. So the ability for us to get our house of brands, several components of our house of brands in front of that consumer now. We say it all the time, the estimates that are out there, the $80 billion industry by 2030, that's roughly $68 billion more than the current industry is. That doesn't come from the current customer consuming more. That comes from a new customer base evaluating and coming into the market. And to a great extent, we feel like the future of the cannabis space is going to be developed by people who might start with CBD-only products as their first cannabinoid-based product that they try. So it's an important segment to be a part of. It's why we're very excited about it.

As far as the commercialization of it, that's something that we're continuing to develop, and we're very excited about the progress. We expect commercialization [new and extent] to happen this quarter. And the channels that we're focusing on include -- it's the beauty of the CBD space, right, is all of the channels are available, for the most part, which would include big-box retailers like CVS and Walgreens and Whole Foods as well as direct-to-consumer and mail orders.

So one thing I can tell you is I don't expect us to cultivate our own hemp to derive the CBD. I think that's -- as we've talked about many times, for anybody who's -- who we've discussed sort of our thesis on the importance of which verticals of the value chain to focus on, we don't anticipate doing cultivation to create CBD, and we also don't anticipate having the own brick-and-mortar retail to distribute the CBD products to the customers.

So we'll evaluate more traditional distribution channels that are available, the traditional CPG industry.

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Operator [33]

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Thank you. And that concludes our question-and-answer session for today. I will now hand the conference back over to Charlie Bachtell, Chief Executive Officer, for any closing comments and remarks.

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Charles Bachtell, Cresco Labs Inc. - Co-Founder, CEO & Director [34]

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So very briefly again, we appreciate everybody for calling in today. We're very excited to announce the results of the 2018 year and extremely excited about the future of Cresco Labs in this space, continuing to create that shareholder value, with a focus on regulatory compliance and corporate governance. Thanks, everybody, for calling in, and we'll talk soon.

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Operator [35]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.