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spk16: Good afternoon, and welcome to the CureLeaf Holdings First Quarter 2022 Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you ask a question, please press star, then one. If you withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to attend the conference with Jacob Feinstein, Manager of Investor Relations. Please go ahead.
spk13: Good afternoon, everyone, and welcome to Curaleaf Holdings' first quarter 2022 conference call. Today, we are joined by Boris Jordan, Executive Chairman, Joe Lassardi, Executive Vice Chairman, Joe Barron, Chief Executive Officer, Neil Davidson, Interim Chief Financial Officer, and Matt Darin, President of Curaleaf U.S. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions, including the successful integration of acquisitions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were implied in drawing a conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press releases on CEDAR and the Canadian Securities Exchange. During today's conference call, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as adjusted EBITDA, the definitions of which may be found in our earnings press releases. Please note that all financial information is provided in U.S. dollars unless otherwise indicated. With that, I'd like to now turn the call over to Executive Chairman, Boris Jordan.
spk14: Good afternoon, everyone, and thank you for joining us for our first quarter 2022 earnings call. I am pleased to report that Curaleaf had a strong first quarter with year-over-year revenue growth of 20%, to $313 million, and year-over-year adjusted EBITDA growth of 16% to $73 million, generating strong operating cash flow of $57 million. This good news comes from three-quarters of operating in a challenging macroeconomic environment with the various disruptive cycles of the pandemic and reductions in discretionary spending, factors affecting everyone, not just our industry. It's no secret that the first quarter was tough for the entire sector, with BDSA and Headset noting industry growth of just 1% year over year. Yet Curaleaf's growth far outpaced that rate. Despite a challenging environment, a lack of COVID stimulus checks, and the usual first quarter seasonality of cannabis, Curaleaf once again outperformed the broader market, a trend we foresaw and one we intend to maintain. After a difficult start to the year, by March things were... already looking brighter. We have posted a robust recovery with March and April total revenues growing 22% over January and February. Heading into the second and third quarters, we have additional catalysts teed up to keep the momentum going. In Illinois, we completed the first harvest from our Litchfield facility with products being rolled out this month. And in New Jersey, we now have adult use sales in Del Mar, a store which is approaching an annual run rate of nearly $100 million and our other two stores will begin adult use sales later this quarter. And as one of the largest suppliers in the state, favorable wholesale prices in New Jersey have enabled us to take full advantage of the adult use market. In Florida, where we continue to steadily gain share, we have five new store openings in the second quarter. In Pennsylvania, we are substantially increasing our canopy square footage, which will start to deliver product later this year. These investments are consistent with our strategy to drive revenue growth in high margin states. Given those powerful catalysts fueling the next several quarters and the strength of our expansive footprint in total, we continue to expect sequential quarterly revenue growth to resume in the second quarter and for our adjusted EBITDA margins to expand throughout the rest of the year. We are very confident about our current position. The recent waves of consolidation investment in the industry are only validating securely singular strategies of going wide early. As we now have the footprint our peers are trying to mirror, we've spent wisely yet responsibly to build scale and infrastructure, and we are now benefiting from those early investments. These were long-term decisions. Businesses are not built on quarterly strategies. Unlike our competition, the task before us now is simply to further scale our operations rather than establish them. We've stuck to our strategic plan, and we are now ahead of the game and setting the pace. Looking at California, Colorado, and Oregon, although they've had a tough start to the year, we see these investment markets as vital to our long-term growth and brand-building strategies since they represent $7 billion in market opportunities. And in stark contrast to many of our peers, we're uniquely positioned to take a long-term view and withstand the market volatility and pricing pressure in these markets. With that, we remain confident in our guidance of 1.4 to 1.5 billion in full year 22 revenue and expect adjusted EBITDA margins of around 28%. On the legislative front, we are still cautiously optimistic that a version of safe banking will pass during this legislative session, with a higher likelihood coming in the lame duck session. I do want to say that it is a tragedy that it has taken the shooting deaths of several young people working in dispensaries for the urgency of this bill to be recognized. Additionally, it is also critical to pass safe banking to help social equity dispensary owners gain access to capital so they can secure loans without the predatory interest rates. It is no secret that change will be incremental, but we continue to push aggressively for reform and remind Washington that the American voters have made clear repeatedly that they favor cannabis legislative change. Along these lines, the launch of adult use sales in New Jersey is incredibly exciting and came before our May 1st projection. We had lines around the block and hundreds of very happy consumers and this trend continues to grow as we launch edibles and more new products. We believe New Jersey is a catalyst for other Northeast states to accelerate their efforts towards adult use, especially as they begin to witness the tax revenue New Jersey is generating. In particular, New York and Connecticut are ripe to implement their previously passed adult use programs, which we believe will happen in the near future. We expect to be the biggest operator in these markets, important markets, And just as we demonstrated with our early preparation in New Jersey, we are rigorously planning ahead. We are on track to complete the expansion of our New York facility, tripling our canopy square footage and setting us up perfectly for the new adult use market. We are ready for this critical transition in the Northeast. Going abroad, Europe continues to show exciting progress. Revenue across all markets with the United Kingdom at the forefront increased 70% year-over-year. In the United Kingdom, we saw 42% quarter-over-quarter revenue growth. We completed the acquisition of Sapphire Clinic, the country's first private clinic specializing in cannabis. By 2024, the United Kingdom is expected to have a $1.3 billion medical market with nearly 340,000 patients, according to Citi's books. With a population of 70 million people, the United Kingdom's room for growth in medical and beyond is immense, and we are the leading player. In Germany, the health minister recently expressed support for a stepped-up schedule for adult-use cannabis legislation, pushing for the summer legislative agenda rather than this fall. We believe Europe is the next frontier of cannabis, which we estimate has a 229 billion TAM, and Curilich is the only MSO with a meaningful presence. While other operators will be scrambling for years to acquire licenses and paying elevated prices to enter the market, Curleaf will already be operating throughout the continent and strengthening our platform. Our early investment in Europe is evidence again of our long-term strategy paying off. Overall, I'd like to reiterate that the future is indeed bright and the best is yet to come. We are still in the early innings and we remain bullish on the future of cannabis and its potential to become a $320 billion-plus global industry. You've all heard me say size matters. That's never been truer than at this moment in our still-emerging industry. With Cureleaf's innovative products, the broadest distribution platform, and strong brands, there is no other operator more prepared to seize this moment. We have planned for it, and we are right where we want to be. Finally today, we announced that Matt Darren, currently president of Cureleaf, U.S. will be assuming the role of CEO of Curaleaf, effective today. I've asked Joe Baird to head up a new division for Curaleaf where his experience as a brand builder and CPG leader will be instrumental for a major new initiative. This move positions us well on several fronts. We will benefit from Matt Darren's leadership and experience in running day-to-day operations, commercialization, and driving executional efficiencies. and we will tap Joe Baird's considerable expertise, driving CPG's strategy to launch our new division. I have the utmost confidence that this change is the logical next step in Curaleaf's journey as the leading global cannabis company serving both adult use and health and wellness markets. In fact, we have never been more confident about our future. With that, let me turn the call over to Joe Baird.
spk11: Thanks, Boris. We had another exciting quarter to start the year for Cureleaf. In fact, this quarter marks the 17th consecutive quarter of retail revenue growth and our 12th consecutive quarter of positive adjusted EBITDA. Turning to some business highlights and updates, beginning at the state level. As Boris mentioned, in Illinois, we had our first harvest on April 13th from our expanded Litchfield campus, which more than doubled our canopy square footage. This increased capacity will enable us to continue to maximize our vertical mix of Cureleaf products in our own stores, as well as grow wholesale operations as we continue to ramp this new capacity. Even prior to the Litchfield expansion, Cureleaf gained market share quarter over quarter, and we expect that to continue. Overall, Illinois is a top market for us, and we will have a step function in growth once the state's award the 185 licenses resulting in more points of sale. In Pennsylvania, we have seen four consecutive quarters of market share gains as a result of increased production from our manufacturing facilities and several new store openings, with two more on the horizon in 2022. In addition, we have significant cultivation capacity coming on throughout the rest of the year. Because of the strength of our vertical platform and the quality of our products, we will continue to drive scale. With a population of 13 million, a 40% greater addressable TAM than New Jersey, the opportunity in Pennsylvania is massive. And with adult use legislation on the horizon, we could not be more excited about our position in the state. In Florida, we have continued to execute successfully on our business plan. scaling our operations and becoming the solid number two player. We are best in class in terms of volume per store and have consistently increased our market share. At the end of Q1 2021, Cureleaf had 9% market share for both flour and oil products. At the end of Q1 2022, Cureleaf had 14% market share for flour and 13% market share for oil. To further put this into perspective, flour sales have increased 129% year-over-year, and oil sales have increased 102% year-over-year, being done with only eight new store openings. Our increased product variety and the recent launch of live rosin vapes and concentrates, select X-Bytes, and blue kudu chocolates has led to further output through our dispensaries. with milligrams dispensed per store growing 68% from March of 2021 to March of 2022. The capital spent on expanding capacity during the height of the pandemic and last year are seeing strong returns and operating efficiencies are increasing by the day. I would also like to note that this was done without a full quarter of SKUs from our ACE extraction system, a proprietary technology that produces our first solventless products and the cleanest oil on the market. Overall, Florida is a model of how prudent capital allocation and operational diligence, which have led to strong share gains in a battleground market. Regarding research and development, in the first quarter, 17% of our revenue came from products launched within the last 12 months. For reference, For the full year of 2021, that statistic was 11%. We are confident we invest more than anyone else in R&D than in the industry. And the fact that nearly one-fifth of our revenue came from recently launched products is a good indicator as to the return from those investments. On top of this, our new products are bringing customers back to the stores. According to Shopify, a good repeat purchase rate is 27%. With that in mind, Qlik has a repeat purchase rate of 53%, Select Essentials has a rate of 47%, and our Classic Bites 2.0 has a rate of 44%. We believe highly formulated products backed by science are where the true value is, and our customers are trusting Curaleaf for those choices. Turning to retail, we saw a January and February slowdown, but March turned out to be a record month for Cureleaf with transactions up 18% from February. At the same time, despite the macro environment and increased retail competition, our average order value remained steady quarter over quarter. April also showed strong results, which included a record 420 with a net revenue increase of 45% year over year. Encouragingly, we have seen retail revenue increase monthly from the beginning of the year, and we see continued strong momentum heading into the rest of the year. We added 11 new stores during the quarter, four in Arizona, four in Pennsylvania, and three in Florida to end the quarter with 128. The four stores in Arizona come from the first quarter closing of Bloom. As of today, we have opened three stores to 131, and there are more to come as the year progresses. Looking at wholesale, we ended the quarter with over 2,200 independent wholesale accounts across the country, an increase of 10% year over year. We saw good momentum with our wholesale business heading into the new year, but because of the macro environment experienced in January and February, reorders were substantially down, leading to a decline in wholesale over the fourth quarter. Despite that, I am encouraged by the strong year-over-year growth in some of our key markets. This includes Pennsylvania, where we had 127% year-over-year growth, Maryland with 126% year-over-year growth, and Michigan with 51% year-over-year growth. Michigan stands out given it's one of our investment markets, and with BDSA projecting the state to be nearly $3 billion in a $3 billion market in 2026, we are pleased to see the proliferation of our wholesale operations there. We also expect tremendous growth in our wholesale business in New Jersey for the next several years as the adult use market develops. Between our geographic reach, our own retail footprint, and access to 2,200 independent dispensaries across the country, our distribution footprint remains unmatched, and we'll continue to invest in it to build competitive advantage. With that, I'll turn the call over to Neil to discuss our financial results in more detail.
spk15: Neil? Thank you, Joe. Now let me provide some details on our first quarter 2022 results. Total revenue for the quarter was $313 million, representing year-over-year growth of 20%. Retail revenue was $226 million compared with $188 million in the first quarter of 2021, representing 21% year-over-year growth. Retail revenue came to 72% of total revenue in line with the 2021 period. Wholesale revenue grew 19% year-over-year to $86 million, representing 27% of total revenue. Sequentially, retail revenues were up slightly, while wholesale revenues declined 9%. The decline in our wholesale revenues resulted from the low reorders we experienced in January and February, as Joe discussed, and pricing discipline we continue to observe in both California and Colorado, resulting in lower overall sales for the quarters. Our gross profit on cannabis sales was $154 million for the first quarter, an increase of 20% year over year from $128 million. Gross profit margin was 49.3%, the same as the first quarter of 2021. Consequently, gross profit margins declined 40 basis points due largely to the state mix of revenue during the quarter. SG&A expense was $100 million in the first quarter compared with $100 million in the prior quarter and $80 million in the year-ago period. The year-over-year increase in SG&A primarily reflects increased headcount in support of new store openings, the impact of annual merit increases, and higher travel costs as revenue-facing travel resumes. SG&A as a percentage of revenue was 32%. compared with 31% in both the prior quarter and in the year-ago period. Our first quarter SG&A included approximately $6.5 million of adjusted EBITDA add-backs versus $9.5 million in the prior quarter. Excluding the add-backs, our SG&A represented 30% of total revenue in the first quarter and 28% in the prior quarter. Adjusted EBITDA for the first quarter was $73 million, a 16% year-over-year increase. Sequentially, adjusted EBITDA declined $6.7 million, or 8%. The decline over the prior quarter was attributable to the 40 basis point decline in gross profit margins as discussed and approximately $3.5 million in margin dollars related to the decline in wholesale revenue. Additionally, SG&A, excluding ad backs, increased by $2.5 million, resulting from approximately $1 million related to annual wage increases and approximately $1.5 million related to store openings in Pennsylvania and Florida, as well as the acquisition of Bloom. Our investment markets, including Europe, impacted our consolidated adjusted EBITDA margins by approximately 570 basis points versus 770 basis points in the fourth quarter. Now, turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of 243 million as of March 31st, 2022. At the end of the first quarter, our outstanding debt was $584 million net of unamortized debt discounts and debt issuance costs. As mentioned on our last call, in preparation for the upcoming growth in several markets in 2022, we are building up our inventory. In 2021, our inventory increased $43 million sequentially, inclusive of $24 million of biological asset adjustments. Therefore, our business inventory grew by 19 million, primarily due to inventory buildup from our New Jersey facilities in preparation for adult use, an increase in Arizona related to the acquisition of Bloom, and increases in Illinois and Pennsylvania as we increased production capacity. We see this decreasing as the New Jersey adult use market ramps. Our wholesale increases in the second quarter and beyond and we opened additional stores. Net capital expenditures during the quarter were 30 million. Our investments continue to be focused on expanding cultivation and processing capacity, as well as strategically increasing our retail presence. First quarter cash flow from operations was 57 million. We continue to expect to generate positive operating cash flow for the full year 2022. Most importantly, we believe our current cash position, as well as the operating cash generation this year, is sufficient to fund our operation and CapEx plans, which, as a reminder, will be approximately $150 million for the full year 2022. Finally, to recap our 2022 guidance, we remain confident in full year revenue of $1.4 billion to $1.5 billion. with where we fall in this range being largely dependent on the macroeconomic environment and the timing of regulatory approvals. Our growth in 2022 will be driven by the expansion of our retail footprint in Florida, Pennsylvania, and Arizona, the expansion of wholesale accounts, closing of Trite, and the performance of our recently closed acquisitions of Los Suenos and Blimp. We continue to expect adjusted EBITDA margins of around 28% with margins expanding sequentially in the remaining quarters of 2022 as we leverage our SG&A further and drive revenue growth through our vertically integrated markets like Florida, Illinois, New Jersey, and Pennsylvania. With that, I'll turn the call back to the operator to open the line for questions.
spk16: We will now begin the question and answer session. To ask a question, you may press star then 1 and 2 on the phone keypad. If you're using a speakerphone, please pick up your handset before pressing keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If you have further questions, please re-enter the queue again. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Camilo Lyon with BTIG. You may now go ahead.
spk00: Thanks, and good afternoon, everyone. It's great to hear about the acceleration that you saw in March continuing to April. Boris, maybe for you, I was hoping to get some more color on New Jersey. And specifically, I think last fall, you talked about an expectation for wholesale markets and your business in particular to turn on in the back half of the year, but given how strong sales have been, I'm wondering if there's an updated outlook on your wholesale opportunities.
spk14: That's very true. All right, Camilo. Yes, we thought that with the buildup of inventory that there would be enough inventory to handle the 12 to 13 stores that are opened up now or will be opened up between now and the end of the quarter. However, what we've seen is demand has been very, very strong And there hasn't been the inventory we originally anticipated in the marketplace. So Cureleaf is definitely a port of call for most of the operators looking for inventory. However, we've had to be very careful in managing that because just our Belmar store, as I indicated in my talk earlier, is running at a $100 million run rate at this point in time. And we're about to open up Edgewater and Bordentown over the next few weeks. And so with those opening up, we are wholesaling. but we're also being very careful to make sure that our stores are fully stocked as we capture the full margin of the chain by selling through our stores. But we are selling in the wholesale market, and I think you'll see Curaleaf products in almost all stores around the state at this point in time.
spk00: And can you talk about the flow of your product pipeline into the stores? I know that there's been some choppiness with getting everything ready on day one. for everybody, for all the operators. So maybe just help us understand when you think about that $100 million run rate, is that just because of what you're seeing today, but in addition to the added products that you'll also have coming on, or is the added SKU count going to increase that? How do we think about that dynamic?
spk14: I think the first thing we all need to recognize is that New Jersey is massively underserved in terms of products. So Demand is going to outstrip supply dramatically for the foreseeable future. It's probably one of the few states that I've seen in my eight or nine years in the sector that's so skewed towards not having enough product. And so I don't think the existing players are really going to have an issue with selling their product. So almost anything you put on the shelves at the moment is going to sell. But you're exactly right. One of the problems is the launch happens so fast. that a lot of the products were not approved yet or we weren't able to package yet or we weren't able to get the right packaging for them because the state was making changes up until the last minute. And so there was a slower start in rolling out, for instance, edibles or in the case of Pure Leaf Squeeze, quickly sold out. So now we're starting to ramp up there. I think our edibles lines are starting to reach or getting close to starting to reach the capacity. So I think we're going to get much more edibles out, and that's the one that's really in demand right now. I think also squeeze is coming back on the market, and then we'll start to see more and more SKUs. I mean, the biggest issue in New Jersey is testing, obviously. There's only a few testing labs that are available, and demand is very high. And so we have to get the testing protocols in New Jersey have changed, where now you have to get everything tested, whereas under the medical program you didn't. And so that's the one worry. At the moment, we're not seeing a huge problem there. But as time goes on and more operators have more product available to them, I think you could start seeing a little bit of a backlog because of the testing labs. We also hope more testing labs will open. But I think you're going to see a lot more SKUs and a lot more product offerings coming out of both Cura Leaf and our competitors into the marketplace. But again, this is one of those unique situations where we can sell everything we can produce and then some.
spk02: Our next question will come from Vivian Azar with Cohen.
spk16: You may now go ahead.
spk12: Hi, this is Harrison Vivas on for Vivian. Thanks so much for taking the questions. So just on international, can you provide maybe specifically what international sales were in the quarter and how that business is trending in terms of profitability? And then just stepping back a bit, Boris, you talked about Germany's health minister announcing plans to accelerate legalization. So can you kind of just frame up the opportunity you see in Germany specifically and maybe offer some color around that? your competitive positioning in the market today. Thanks very much. Yeah. Yeah.
spk14: So actually, uh, while we, after we recorded, uh, our, um, our, uh, um, uh, called it today, the justice minister in Germany came out and said he wants to push it even earlier. So we now have two different ministers coming out and trying to push, uh, the adult use legislation. He wants it in 23, uh, whereas we anticipated that would come out in 24. Again, we still think it's probably more like a 24 program. But there seems to be a tremendous amount of pressure in the German market to launch adult use sales. I mean, the medical market in Germany is still very small. It's, you know, it's a hundred and some odd thousand patients. It's a small market. We, together with about five or six other players, are participating in that marketplace right now. Even the U.K. market right now, the U.K. market seems to be growing even faster than the German medical markets. But the German market overall is expected to be, I just listened to a presentation today, approximately a 12 billion euro market. It's bigger than California and Canada put together. Those two markets right now are running around 14 billion US dollars. And so we anticipate that that's going to be a very, very big play. And it's coming right down the pipeline. And you really have to be there in advance. You have to register your products. We're going through all that now. You have to register your SKUs. It's a much more difficult process than in the U.S. to get into that marketplace. And so we feel very good about the decision to be there. Germany is going to be an absolute game changer. I actually think Germany will be adult use, legal federal adult use before the United States.
spk04: Great. Super helpful.
spk12: And then I guess just doubling back on the profitability, I think you've talked about international markets. operating at a gross margin kind of in line with the company average, but can you talk about the operating EBIT profitability trends in the international business?
spk14: It's a very small business today, so it impacts our numbers by about 1% negative effect on the EBITDA line. So the 100 basis points of negative EBITDA, we're running at around an $8 million first quarter revenue run rate. So it's still a very small business compared to where we expect it to be in 24. The whole purpose of this exercise was to build up our business going into 24, 25. However, the surprise to us, there were two surprises, is the fast rate of growth in the UK, where we're growing at 45% quarter over quarter. And in the medical market, there's very few players that were by far the largest operator. And as we said, we expect that market to be around a $1.3 to $1.4 billion market in 2023-2024. So that's going to be tremendous growth for Curaleaf. And obviously then on the back of that, German adult use. And those are really the two markets that we're focused on right now in terms of registering our products, getting everything into place so that we can take full advantage of them.
spk02: Our next question will come from Matt McGinley with NeedHand.
spk16: You may now go ahead.
spk06: Thank you. My first question is on the gross margin rate. Do you expect that increase this year to mostly come from greater scale in all markets, or would that be driven more by single-state drivers like New Jersey with the adult use opening there? And how do you think about overall risk to your gross margin rate from pricing as the year progresses? Do you think that that is more of a heavy factor on the gross margin early in the year, or do you think that that will persist throughout the remainder of the year?
spk14: So thanks, Matt. So I think it's a combination of things. The first, as you've seen, we're starting to improve the profitability, as Neil pointed out, in our investment markets. So we've gone from, you know, 700 to 550 basis point hit to our overall number in those states. So that's California, Oregon, and Colorado. So as we integrate Los Suenos, as we convert... You know, the raw material to oil and start to launch the select brand in that state like we did in Michigan, where we're now, I believe, the number one brand for oil sales on the wholesale market. That will start to bring up our gross margin. And as we said to you, we expect to operate somewhere between a 50% and 52% gross margin for the year. And we feel very comfortable in that number. So obviously, New Jersey will help because New Jersey is a very high margin market at the moment with where the pricing is coming. So New Jersey will contribute. But, you know, Florida, of all things, is running at a much higher level than we originally. When we spoke last, we were running at around a 34% EBITDA margin. In Florida, we closed the first quarter at close to 40%. So we're starting to see, as our scale comes into place, we're starting to see improvements in Florida. We're starting to see improvements, obviously, in New Jersey, in our investment markets, and across the full footprint. I think the one place we still probably won't see improvement is in Europe. because Europe is very much in investment mode at the moment, and we continue to probably see pressure, maybe additional pressure there. But we will definitely see increase in gross margin across the U.S. platform at scales here over the next several quarters.
spk15: Boris, I would also add one of the benefits of our vertically integrated markets, and we've mentioned capacity coming online in Illinois. I also mentioned my prepared remarks. some capacity coming on in Pennsylvania later this year. One of the benefits is our in-house brands and our vertical market allow for higher margins. So even if there is some pricing pressure in those markets, it impacts our margins less so.
spk06: Great. And my second question is probably for you, Neil. Your income taxes payable balance was at a historical peak in the first quarter. What do you expect your cash tax payments to be into the second quarter?
spk15: Yeah, the $180 million I think you're talking about, that obviously has both our full year and Q1 accrual in it. Our tax payment will be a little bit north of $100 million.
spk03: Got it.
spk02: Our next question will come from Awan Bennett with Jefferies. You may now go ahead.
spk08: Evening, gents. Hope all well. First question, I was just hoping you could please just give me some more color on the new CPG division, what it will be looking to achieve exactly, and how you think it may differ yourself and peers. Thanks.
spk14: We're not going to be able to do that at this stage. It's still in progress, however. We will be making an announcement probably around July, the first week of July, on that division and what it will be doing as we finish up the legal work as well as board approvals at the company level for the establishment of that division. But it's been something that's been a work in progress for some time. We're very excited about it. We think it could become a major, major part of Curaleaf, but we do have to hold back until we get final approvals until we can make that announcement.
spk08: Okay, thanks. And then just to follow up on the ACE extraction, you mentioned at year end you were hoping to be running stored inventory in Colorado through that in early April, and then after Colorado, roll that out in California. I was just wondering, did you manage to hit those timelines and kind of any early feedback, if that's the case? Or if you're running slightly behind, what sort of date can we expect that to be in Colorado and California now?
spk04: Matt, do you want to take that, or Joe?
spk11: Yeah, this is Joe. I'm happy to do that. Well, the good news is we have it up and running in Florida, and it's performing very well, so it's actually better than we expected. In Colorado, we have the equipment all in place, but we've been having some permitting problems, not with ACE itself, but just closing on a transaction there to get the permits that we need for the build-out. So, We think we've gotten that squared away. As you know, it's not the first time we've come across delays based on regulatory delays and some bureaucratic issues that we're dealing with. But we feel pretty confident we'll be able to get that up and running in roughly the next 60 days if we get the permits. All the work that's been done, the equipment is there. We just have to literally get the stamps. And the California equipment is being delivered over the next four weeks. And As soon as we finish for Colorado, we're going to go right to California.
spk02: Our next question will come from Aaron Gray with Alliance Global Partners.
spk16: You may now go ahead.
spk09: Hi, good evening, and thank you for the question. So first one for me is one to touch on Pennsylvania. I believe you said two store openings, also plans for more cultivation coming on later this year. So, you know, just given some of the pricing pressure that we've seen in the market, just how you think about the degree of cultivation that you look to have. Obviously, you have more stores come online. You've had a number of store openings. Neil, I think you just alluded to potentially having more of your own brands sold to the store, which could help. But just in terms of how you're looking at the Pennsylvania market, the degree of cultivation expansion amid the pricing pressure, but also for the prospects potentially of adult use to come on board, too. Thank you.
spk04: Joe, you want to get that?
spk11: Yeah. I mean, listen, we couldn't be happier with Pennsylvania, as we said in our statement. We do have somewhat of a supply constraint in the marketplace. We're able to keep our pricing. But we also have a well-known brand, especially the grassroots brand, which is performing really well. So we need to get more capacity in the marketplace. At some point, there will be an oversupply. But at this point, we continue to grow share. We continue to build revenue. So we're going to continue to build, not only for our vertical integration, but we have a very robust wholesale business that we can't supply 100% of the demand today. So we're excited about Pennsylvania. We'll continue to expand there. I think as we look at rolling out our new products, which haven't hit the market yet, hopefully the market will become a little bit more receptive to different product formats over time. and we'll get some more new technologies in there. But as you said, we believe that adult use is on the horizon in Pennsylvania. So we're going to continue to ramp up and be ready, because when that happens, as we said in our script, we think that Pennsylvania could be even larger than New Jersey. And if that's the case, it's going to be on the supply for years. And I think it's a good time to invest in Pennsylvania.
spk14: Yeah, and I'd just like to add that we haven't seen, as we said in the last quarter, we haven't seen the pricing pressure at And Curaleap, I know that sounds strange given that almost everybody else has said they have, but we have not seen pricing pressure for Curaleap in Pennsylvania at this point in time.
spk09: All right, great. Thank you very much for that, Kyler. And then second question for me, just on overall consumer trends, I believe you said ticket roughly flat, just given the broader consumer backdrop. Have you seen any kind of differences maybe in trade down or maybe consumer activity in And then maybe if there's a difference between the medical and adult use markets in terms of overall consumer trends amid inflation and rising gas prices? Thank you.
spk11: You want to take that, Bruce? I'm happy to do that, yeah. I mean, I think, listen, it's not a surprise that we're seeing some pressure on the consumer front as they just have less disposable income. There are a lot of economic headwinds that we're facing, and we're seeing that in our store, I think. Broadly speaking, to your point, it's more consistent on the medical side as far as spending because they have a routine and a regimen of how they consume their products and they don't want to deviate from that. Adult use is a little bit more discretionary, so we see a little bit more fluctuation there. But we believe that we continue to get foot traffic through the door. We're increasing the number of transactions. And as we bring new consumers into the cannabis category, we think we're going to continue to see growth. So we're very bullish on the back half of the year, as Boris said in his prepared remarks. We think it's going to be a strong back half and a recovery. So we want to be prepared. We want to make sure we have enough supply. We want to make sure that we're moving people through our retail operations with the right experience and helping people make the right choices around products, which is part of the hallmark of what we do well. And we're excited about the back half of 2022.
spk02: Our next question will come from Spencer Haines with Wolf Research.
spk16: You may now go ahead.
spk17: Great. Thank you. Can you talk about how much of a benefit M&A was in 1Q to the sequential sales performance in the quarter? And then what do you think from a pricing standpoint in 1Q and heading into 2Q for the industry?
spk15: Neil, you want to take that? Yeah, I can answer the first question. The first question, Bloom, which closed January 18th, contributed about $10.9 million of revenue.
spk04: Great.
spk17: And what are you seeing from a pricing standpoint as you look from 1Q to 2Q? Are you seeing any stabilization or any seasonality in the pricing over the last few months?
spk11: I can take that. Listen, I think we're, as we said, we're going to continue to see some pricing pressure for sure. But what we've been doing, as we always do, to counteract that is to try to increase the quality of our products. and increased differentiation. And that's what we've been doing. An example of that is in Florida where we launched live rosin, which isn't being sold as a discount because of the unique product in the marketplace. X-fights coming into the market, which drive premium pricing. So like always, we're trying to focus on the quality of our products, the differentiation of our products to be able to mitigate any kind of pricing pressure we feel. But at the same time, we're driving scale. And I think that's the important part is even as we see pricing pressure, we're getting expanded margins because we're continuing to drive scale across our business. That's something I think that uniquely positions us in the category or in our industry is that we will continue to drive top line, but we're also going to get margin expansion. We're going to get that because we're growing scale based on investments we've made over the last two or three years. And now we're seeing the benefits of that. And that's why Again, I think I sound repetitive, but I'm very excited about the back half of 2022 because I see a lot of the investment we've made, a lot of the programs we put in place are now starting to reap the benefits. And, you know, we could see that pipeline. And that's what's driving our enthusiasm.
spk16: Our next question will come from Matt Bottomley with Canaccord Genuity. You may now go ahead.
spk01: Good evening, everyone. Hope you're all well. I just wanted to go back to New Jersey. Boris, you had mentioned in the last earnings call that you're expecting the ramp, I don't know if you used the word modest, but just sort of tapered expectations given the limited infrastructure. So can you give any color or maybe orders of magnitude as to how close to $100 million run rate of your store is in adult use relative to what it was doing in medical and maybe what we should expect in terms of the lift in Q2 now that adult use is on?
spk14: Yeah, listen, I think that we were running, just trying to remember, we were probably running at about a little bit less than half that as a medical. Now, that was our best store in our system for a long time in the medical program. And so we were running at a little bit less than half of that number. But that number keeps picking up every single day as we introduce more products. And as demand builds and education around the state as well as Pennsylvania, which is 10 minutes away from that store, gets educated in the fact that that store is open and adult use is open. So we anticipate continued growth, not stabilization, but actually continued growth in that store moving forward. And I fully expect that that store will reach that $100 million run rate. You know, how the other stores do differently. And our other stores, it's still a question. I mean, I think our Bordentown store, which is our largest store in the system, I think it's over 12,000 square feet with almost 30 registers. That one will hopefully open up in June. And that one's closer to Trenton. So that will be addressing a different group of customers. And we hope that just the size and the fact that we have a lot more product than anybody else will attract a lot of people to that store as well. And then Edgewater, we think, you know, maybe a couple of weeks, hopefully, will be open. And that store is, you know, about 20 minutes away from Belmar. So we're still open to see how that behaves versus, you know, or does it cannibalize Belmar or does it actually add? We suspect it'll add because the lines around Belmar are still quite long. And I think we're the only store that still have substantial lines around it. And so we think that that will take a little bit away from – It'll help us out a little bit managing the amount of patient flow going into Belmar. And obviously, when there are lines around stores, that turns patients and customers away. So we're trying to get away from the line so that we can process more of those customers. And obviously, on the wholesale side, it's what I said earlier. On the wholesale side, a lot of the other stores are starting to ration product. And so we see quite a bit of demand on the wholesale side. And pricing is at the top level. I mean, pricing is you know, at the $4,500 a pound to $5,000 a pound level, which is what we saw in Massachusetts, for instance, when that state converted from medical to adult use. We saw that in Illinois and any other states. But this particular state, the problem here is that it's just going to take years to build the infrastructure in order to be able to start supplying. I mean, I think there was five or ten times the amount of stores, or at least five times the amount of stores in Illinois when that when that market got launched, and certainly there was at least five times, if not ten times, the cultivation capacity that we're seeing that we have in New Jersey. So we think that this market will be supply constrained for some time going forward.
spk01: Great. Appreciate all that. And then just my other question has to do with just the wholesale segment. So you'd mentioned reordering patterns and a little bit of pricing in some of the western states, I think California, Colorado. Can you give any color on what the sort of split is between what contributed more to the decline and then any color particularly on the eastern markets or northeastern markets? I know you mentioned Pennsylvania seems to be holding in well on the pricing, but just any sort of trends that we could see in some of the more robust markets in the northeast?
spk14: Yeah, listen, I think that Massachusetts is definitely starting to see some issues with demand. Margins are still okay, but but we're definitely starting to see some pricing pressures in Massachusetts. Obviously, California is going through a massive, massive decline and massive pricing pressures at the moment. So that's a market where we're definitely not expanding our sales at the moment and trying to keep a nice position in the marketplace but not expand that business at all. Colorado is a market that went through some pricing pressures as well this year. We anticipate we're starting to see some firming into the end of the year. We hope that that will help going into next year as well. So we hope that that will be a better market at the end of next year. And obviously, Nevada has now, we don't have a very large wholesale business in Nevada, but definitely we've seen watching the market that there's been some pricing pressures in Nevada as well. You know, Arizona is staying very, very good. Pennsylvania is very good for us. Illinois is just a great market for us. Florida is just going from strength to strength. Obviously, we're now adding New Jersey. Maryland is very good for us. So we have plenty of states where we're still feeling very, very good. And obviously, the adult youth onset in Connecticut, New York, and potentially in Maryland over the next 12 to 18 months, we think it's just going to add to that. So we're very excited about New York and Connecticut coming online at the end of this year, early next year. And then obviously we think Pennsylvania and Maryland may be coming on within 12 months as well. So there's a lot of activity on the East Coast, which we think will just add to our business.
spk02: Our next question will come from Eric DeLaurier with Craig Halem Capital Group.
spk16: You may now go ahead.
spk07: Great. Thank you for taking my questions. I was wondering, first, if you could just expand on what kind of inflation expectations you guys have built into the Your margin guide? Thanks.
spk04: Neil, you want to go with that?
spk15: Yeah, I mean, I would say we have some elevated discounting built in. But when looking at, so going into Q2, the biggest drivers there are really adult use in New Jersey and continued market share in Florida. Looking in the back half, yeah, the macroeconomic is a piece of it, but also regulatory timing.
spk11: Yeah, and I'd just add to that, I think maybe part of the question was relating to our raw materials, but we've talked about the fact, even though we're seeing some pricing pressure, inflation pressure on raw materials, we're actually buying at a consistent price and getting scale. So the scale is offsetting any kind of inflation we're seeing on our packaged goods or raw materials. So we continue to see the benefit of scale, and we continue to see the benefit going into the back half of 2022. So we don't think there's going to be a major impact for us on COGS because it's being offset by better utilization and leverage in each of the different areas.
spk07: Okay, great. I appreciate that, Collar. And then maybe just kind of tacking on to the previous question that was asked, On your wholesale accounts, so I guess just kind of focus on accounts versus pricing here, could you just expand a bit more on where you saw some of that quarter-over-quarter decrease in wholesale accounts and then maybe how we should think about that number trending throughout 22 across your different markets? Thank you.
spk11: Yeah, Boris, I'll take that if you don't mind. I mean, we've always said that Building out the strongest distribution platform in the cannabis industry is one of our key pillars of competitive advantage, and we continue to invest in that. So we'll see expansion, we believe, throughout the rest of 2022. We did make a choice to reduce the number of accounts in Oklahoma, so that brought our number down, but we quickly made that up in other states. I think we're a little over 2,200 today, and we'll continue to build out In key markets, as we said in Illinois, when they launched 185 new licenses, we want to get our fair share of those accounts. We want to build accounts in existing markets. We really haven't tapped into the Colorado market yet, so I think that is a big growth area for us on a wholesale basis, and that's obviously key to our plan for 2022. And then obviously New Jersey, you know, as that market ramps up. I think we're going to be aggressively expanding our wholesale footprint in New York. So, you know, we can't give an exact number, but, you know, we're going to continue to build out distribution because we think that is one of the keys to long-term success in the industry.
spk14: Yeah, and I would not forget, I would not lose track of New York. New York's going to be a massive wholesale market, right? The state is sponsoring 200 licenses worldwide. than obviously all of the existing operators licenses. So, you know, New York could open up with almost 240 licenses on the retail side. And obviously, Curaleaf is the largest wholesale supplier of product in New York State. So that's going to be a very, very big market for Curaleaf. And, you know, the other operators, if they actually do launch in early next year, you know, there's virtually nobody that can catch up. I mean, some of our competitors are
spk16: Our next question will come from Glenn Mattson with Leidenberg. You may now go ahead.
spk05: Yeah, thanks for taking the question. I wanted to just hit on the Europe opportunity a little more as that seems to be picking up steam quickly. Boris, maybe can you help us understand for those of us who are less familiar with the legislative process? you know, if something gets introduced this summer, just kind of how quickly that could turn on, first of all. And then second of all, you know, your presence there is still kind of, it's big compared to the other MSOs, but small in real terms. Can you give us a sense of what kind of investment would be needed over what kind of timeframe? And then just your competitive position versus some of the other people that are, you know, have gotten a decent presence in Europe, such as some of the Canadian players.
spk04: I'm not sure if we lost Boris.
spk11: He got cut off on my end. He just came back, so I missed the question. Okay, there you are, Boris. So I just came back and I missed the question.
spk05: So go ahead. Yeah, Boris, I'll repeat it. Sorry, just a question about the Europe opportunity, the timing, how long you think it would take for real change to take place, just for those of us that are less familiar with the legislative process in Europe, number one. Number two, what kind of investment do you think is needed and over what kind of time period? And third, Could you just kind of flesh out more the competitive position in relation to some of the other guys who are bigger in Europe, such as the Canadian LPs?
spk14: Yeah, so the Canadian LPs definitely have a head start on Kira Leaf, particularly Tilray. To be honest, Canopy and Aurora largely are out. I mean, Aurora has a bit of a business in Germany. Canopy basically left the region. So it's really Tilray and Aurora that are participating there. There's some other small players that are exporting to Europe as well, but it's largely white labeling. They're not pushing their own brands. Our strategy is very different. We have our own cultivation. We're fully vertical. We have our own manufacturing. We're currently expanding both of those cultivation and manufacturing to meet the demand for both the medical program in the UK as well as the adult use program in Germany. As I said earlier in the call, the German government is trying to accelerate approval of the adult use program. It could come as early as 23. We think it's going to be 24, early 24. But just today, the justice minister came out and indicated that it may be as early as 23. So, I mean, that's a very, very large market. Just consider that to be California and Canada put together. In terms of size, that's 83 million people. And it's a 28 to 29 percent Canada's penetration use market. So we see that as a huge growth opportunity for us. And it could be, you know, that business over several years could be the size of our U.S. business. So, you know, the U.K. medical market, we anticipate being about a $1.3 billion market in two years. We're the largest operator in that market today. In the German market, we're a little bit behind because we just entered it. But we fully anticipate that by the time the adult use program goes between some M&A that we have in the works as well as our organic build-out, we'll be one of the larger players in that marketplace. That's our goal, is to be within the top three players in Germany as the adult use market gets launched.
spk05: Great. That's a great call there. Thanks. And one quick one just on Michigan. I think in the previous call you talked about Michigan has included Michigan as one of the
spk14: investment markets um i don't think it was good today was there some change there or just no no it's definitely one of our investment markets in terms of the fact that you know we we are expanding our wholesale business there it's growing at uh select i think was uh was uh was uh made the largest uh uh um vape brand sold in the status as of uh i think last quarter And we are, however, we are not vertical in that state yet. We're still trying to make our mind up as to how we build our supply chain in order to improve our margin profile in the state. And so that's something that's still under consideration within Carol Leaf at the moment. In Colorado and California, we've made those decisions and we're starting to incorporate that. And we're starting to see improvements in margin, whereas in Michigan, we have not yet made up our decision as to whether we will be. But we will make that decision shortly. And maybe by the next earnings call, we'll be making
spk04: making some announcements.
spk02: Our next question will come from Pablo Zuanek with Cancer Fitzgerald.
spk16: You may now go ahead.
spk18: Hi, this is Matthew Baker on for Pablo. Thank you for taking our question. Given where stocks are right now, would it make sense and would you consider taking it or is that something that's out of the question? Thanks.
spk04: Would we consider doing what? Taking the company private?
spk14: Yes. No, I don't think that we'd be considered taking the company private at this point in time. We think the capital is better used in this growth market. You know, the business has continued to expand. The business continues to go to strength to strength. We anticipate a very strong year this year. The fact that the equity markets haven't caught up yet is just a matter of time. They will catch up. I'm not at all worried about that. And my job is to continue to build out the business. And I think the capital is better used and building the business than taking the company private at this point in time.
spk19: All right. Thank you for the callers.
spk04: Jacob, I think we have to jump to the calls, right? Yep, we do.
spk14: So we'll have to take the rest of the calls as we go to the analysts. We have to complete the call. Thank you. All right.
spk16: This concludes our question and answer session. I would like to turn the conference back over to Boris Jordan for any closing remarks.
spk11: I think Boris may have signed out, so this is Joe. I'd just like to reiterate that despite the headwinds we faced in the first quarter, we couldn't be more optimistic about where we are with the business, with our business plan, and what we're building as far as the strategic platform to be continually successful for the next few years. We have a lot in the pipeline going into the back half of the year, including New Jersey, which is certainly going to be a tailwind for us. I think our ACE extraction technology as well early on is is already proving to be very effective for us, and we continue to build that on our platform like nobody else in the marketplace. So we're very excited about where we are in the industry, and we are looking forward to a great back half of the year. Thank you.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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