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spk09: Good afternoon and welcome to the Curaleaf Holdings second quarter 2022 conference call. All participants will be in listen-only mode. Should 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. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. please limit yourself to one question at this time. Please note, this event is being recorded. I would now like to turn the conference over to Manager of Investor Relations, Jacob Feinstein. Jacob, please go ahead.
spk11: Good afternoon, everyone, and welcome to Curaleaf Holdings' second quarter 2022 conference call. Today, we are joined by Boris Jordan, Executive Chairman, Joe Lassardi, Executive Vice Chairman, Matt Darin, Chief Executive Officer, and Neil Davidson, Interim Chief Financial Officer. 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 security 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 can cause actual results or outcomes to differ materially from those expressed in 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 statement, 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, Curley 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 release. 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.
spk01: Thank you, Jacob. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that CureLeaf had a record-breaking second quarter, with revenue growth of 8% to $338 million quarter over quarter. Our momentum coming out of the last quarter continued with strong performance in quarter two. Adjusted EBITDA grew by 18% to $86 million. Gross margins increased by 267 basis points to 52%, and we were able to raise adjusted EBITDA margins by 223 basis points to 26%. Our performance demonstrates the power of the Curaleaf platform in 22 states plus eight countries in Europe, 136 retail locations, and 2,200 wholesale accounts. And the returns we are realizing on our early investments in vertical integration, scale, and strength in core markets. We are also seeing the benefits of our continuing focus on products, leadership, and operational excellence that Matt will tell you about later. Securely platform, our size, scale, cash flow, and balance sheet are competitive advantages among the multi-state operators. We have historically raised capital at the lowest cost in the industry, allowing us to build operations organically while picking up assets at accretive rates to extend the reach of our business. Our long-term debt financing, plus our future cash flow generation, positions Curaleaf to be selectively opportunistic to continue our growth strategy in the wave of consolidations that will inevitably hit the industry. We are and always have been focused on long-term value creation. and our original vision of global cannabis leadership has arrived. Cannabis legislation is now a global story, and today Curaleaf is the leader in this emerging global industry. We built our leadership in the US not just on scale, but with early investments in product innovation, brands, quality and safety, legislative reform efforts, CSR initiatives, and talent development. We have established a strong presence in Europe and intend to take that cure relief model to emerging markets around the world. To this point, Europe is undoubtedly the next big opportunity as an estimated 229 billion market with medical and adult use making headway in several countries, most notably in Germany. With a population of 80 million, Germany is the economic powerhouse of the EU and is leading the way in cannabis reform with adult use program expected in early 2024. Our early focus on Europe has given Curaleaf a formidable strategic asset, a strong foundation, and one of the industry's critical global markets. We see Europe as a major driver of our growth in 2024 and beyond. In fact, I'm spending more time on Europe and traveling the continent to ensure we are best positioned to leverage this enormous opportunity. Curaleaf International continues to build our platform in eight markets, and we are engaged with government at all levels across the continent with regard to legal reform and regulatory oversight in emerging medical and adult use markets. We expect to be making some exciting announcements soon. In the US, we are feeling optimistic about the prospects for meaningful legislative reform as Washington is increasingly being pressured to act. With the introduction of the Cannabis Administration and Opportunity Act in July, Congress can shift from a fully legalization proposal to one that has a better chance of garnering the 60 votes necessary for passage. We are all energized by fast-moving support for SAFE and the bipartisan desire to finally pass meaningful legislative reform for our industry. We have recent increasing bipartisan support for SAFE Banking. Just last week, Senator Cory Booker of New Jersey, who was considered a major obstacle to the bill, went on the record in support of Safe Plus, calling it a very important piece of legislation. It's another bullish sign that our industry's advocacy is having an impact in Washington, and this key reform is closer than ever. Also, the House just passed the Medical Marijuana and Cannabinoid Research Expansion Act. significant bipartisan bill to allow federally sanctioned scientific study of the uses, efficacy, and the effects of cannabis. This research is critical for the future success of legalization. Pure Leaf is a leader of our industry's lobbying, and we remain confident that meaningful change can come to our industry this year. Regarding our new business venture spearheaded by Joe Baer, as we put the final pieces of this business in place ahead of our launch, we are very excited this opportunity may be bigger than we originally expected. We look forward to providing details soon, but meanwhile, I'll leave you with this. Cannabis will sooner than later become an omnichannel CPG category, and Cureleaf is aggressively exploring the winning operational sales distribution strategies of the next generation of global vertically integrated multichannel cannabis companies. All of us at Cureleaf are pleased with our record-breaking results this quarter, especially considering the uncertain macroeconomic backdrop with equity and debt markets contracting, interest rates rising, record inflation, and recessionary conditions putting pressure on all businesses. That said, Curaleaf is not standing idle. We are preparing for a recessionary environment by appropriately tightening our belts, being aggressive about cost savings, improving supply chains. We are pursuing opportunities to reduce costs and withstand pricing pressures, primarily in West Coast markets. And we are closely monitoring we are looking closely at headcount, travel, and all controllable expenses to continue our performance in any economic environment. An example of actions we have taken to improve our profitability include rationalizing low margin states such as California and Colorado, While having a presence in these markets is critical to long-term brand building, we see no need to participate in irrational pricing behavior and prefer to preserve cash and wait for these markets to complete their natural rebalancing. In light of the macroeconomic trends coupled with regulatory delays that have impacted the opening of our Bordentown store in New Jersey and our proactive decision to rationalize wholesale in lower margin states, we now expect to be closer to the bottom end of our $1.4 to $1.5 billion revenue guidance. I have experienced the highs and lows and the doubters and the drivers of emerging markets in over 30 years of building successful businesses. And right now, where we are today with Cureleaf, I couldn't be more excited about what's in store. Otherwise, I would not still be working this hard for our team members, our customers, and our shareholders after all these years. I believe in this business and the future of cannabis. It is the most exciting global growth opportunity in a generation. I also believe that Curaleaf is the first company in the world poised to leverage the massive opportunity in front of us, both domestically and internationally, an accomplishment that will reward our shareholders with growth and profitability for years to come. Finally, a key distinguishing factor why I believe Curaleaf has the wind in our sails is that we have assembled the best leadership team in the industry. On that note, I'm pleased to introduce Matt Darren to make some exciting announcements, brief you on the impact of his first 90 days as CEO, and share some highlights for the quarter.
spk07: Thanks, Forrest. I'd like to begin with some exciting news for all of us at Curaleaf, besides the record-breaking quarter. When I assumed the CEO role 90 days ago, I focused on three key areas, leadership and culture, operational excellence, and delivering quality products at scale. We know that successful organizations are built on leadership and culture. Over the past three months, we have reorganized Purely for long-term success and stability by assembling an executive leadership team that is second to none in the industry. Tania Rivers joined us in May as our first Chief People Officer, and she's made an impact since day one. Today, I am pleased to announce and welcome three outstanding additions to our executive leadership team. Ed Kremer, Camila Lyons, and Mitch Harris. Ed Kremer will be joining Curaleaf as Chief Financial Officer. Ed brings a wealth of experience as a public company CFO and leader at companies such as Oakley and Beats by Dre, as well as a background in the cannabis industry, including a recent U.S. GAAP conversion and SEC registration process. Neil Davidson will be staying on for a transition period to help onboard Ed in his new role. I want to thank Neil for his continued partnership and dedication to Curaleaf. Camilo Lyon has joined Curaleaf as Chief Investment Officer from BCIG, where he most recently worked as a managing director covering the global consumer and cannabis sectors. Camilo brings deep knowledge and relationships to the role, and I'm thrilled to have him lead the capital markets and investor relations function. Mitch Herra has joined as Chief Strategy Officer. Mitch is a seasoned strategist and dealmaker with years of experience on Wall Street and in cannabis, and will be a dynamic leader for our M&A, international, and R&D functions. With these hires, we have added significantly to Curalee's capabilities in finance, investment, and strategy. I'm very excited to have Ed, Camilo, and Mitch join the team that's building the leading vertically integrated multi-channel cannabis company in the world. My second area of focus as CEO has been building a culture of operational excellence and continuous improvement throughout the organization. We've made this a key priority of the executive leadership team with a focus on execution, building scalable global enterprise processes and systems, and using data to make informed decisions. We've delivered on several key initiatives already. PureLeaf has executed business optimization strategies to consolidate operations, invest in automation, outsource non-value-add functions, and reduce costs, especially in the mature markets where more advanced supply chains have formed. These strategies have contributed to our 52% gross margin in the second quarter, a sequential 267 basis point increase. We have integrated retail, wholesale, and planning teams to enhance communication and business strategies, speed decision making, and increase discipline and inventory management. We've made exciting strides in using data analytics to optimize labor productivity, a major cost area for our business. Our team is producing increasingly sophisticated reporting, providing retail, cultivation, operations, and shared services leaders with enhanced visibility into performance. Our presence and scale in key markets in both retail and wholesale channels throughout the U.S. provides PureLeaf with the biggest window on consumers, their preferences, and behaviors. We are rapidly developing the strategic assets and our ability to apply our proprietary market intelligence and insights across the company in R&D, commercialization, marketing, and strategy. Another focus of my first 90 days was products and brands. I am very excited about our current suite of products and brands, as well as our pipeline of innovations. Early investments in R&D and quality standards are paying off with industry-leading innovation and commercialization. Let me highlight a few key areas. We are building Select into the number one vape brand in the world by leveraging the power of our distribution platform and investing in innovative extraction technology, hardware, and product development. We have successfully taken a regional West Coast brand in four states and have now expanded into 19 states, with more to come, including Europe, achieving revenue growth approaching 400% since acquisitions. In flour, we are executing on our plan to expand the premium grassroots brand, known for high quality indoor flour and premium concentrates, to markets throughout the U.S. Our launch of grassroots in two new markets, Massachusetts and Nevada, is going extremely well. More key markets are on the way, including California and Florida. Additionally, our Farmer Select program in California has been a great success. We've partnered with Licensed Legacy and Diverse Farmers in Northern California in a testament to the power of the industry working together, large and small players, and welcoming legacy talent into the legal ecosystem. We're very, very proud of these partnerships. At the premium end, we launched live rosin in Florida using our proprietary solventless ACE extraction system and continue to grow this product line. We plan to launch in Colorado later this year. Our Select Essentials line is resonating with the value-focused consumer and has built strong consumer loyalty in the seven states where it's available, with more on the horizon. We launched our innovative ClickPod system in three new markets in the second quarter, making it now available in 16 states, where it enjoys a greater than 50% repeat purchase rate. This is a very strong platform we're building on in the coming months. All told, we are very pleased with the return on investment and continued performance of the Select brand. Cheerleaf fruits are in health and wellness, and we have introduced a new product line with many more opportunities to come. Our Plant Precision line is designed for specific wellness categories with low-dose THC combined with minor cannabinoids. The high-absorption gel is the first of its kind, and we expect Plant Precision to be a popular favorite with a variety of consumer segments. Beverage is a category we expect will grow in the coming years, and in May we launched our Endless Coat Seltzer product to serve the market. Endless Coast had a very successful pilot launch and sold out at all dispensaries. We expect to roll out Endless Coast in more states in the coming year. Neil will take you through the second quarter numbers in a few minutes, but before I turn it over, I'd like to step back and share some highlights of the quarter. New Jersey has been one of the industry's bright spots since adult use sales launched on April 21st. Our New Jersey business has already doubled year over year, and we are the largest cannabis retailer and wholesaler in the states. generating outside returns with more growth on the horizon. Our Belmar dispensary is the number one destination in the state with the best customer service and experience. The launch of adult use in New Jersey was also a testament to the strength of our organization. Faced with huge day one demand and a booming market thereafter, with transactions more than doubling quarter over quarter, the Curaleaf team stepped up and executed exceptionally well. delivering high quality product and a great experience to customers in New Jersey. Our strong execution continued in Florida during the second quarter. We opened our 51st dispensary last week in Tampa and expect to approach 60 operating dispensaries by year end. Our performance in Florida is best in class. Our dispensaries are the most productive in the state and we are gaining market share by focusing on providing customers what they want, high quality products with an assortment that meets all needs supported by exciting, innovative product launches. We have a solid and growth share position and continue to be very profitable in Florida. Our new dispensaries are opening up in top retail locations throughout the state, and we've broken ground in expansion of our cultivation facility as we continue to invest there. In Illinois, we are seeing the benefits of the expansion of our Litchfield Manufacturing Facility. We have doubled the vertical mix in our retail locations since the beginning of the year with continued expansion of Selecting Grassroots in Illinois. We're encouraged by the 7% sequential market growth we've seen in the adult use market in July and have continued opportunities to drive growth margin expansion there and in other key markets as we scale production and launch new products. We're also pleased that an additional 185 social equity licenses have been issued, and we are building relationships with these owners to serve their wholesale needs in advance of openings. which we expect in early 2023. We have some significant catalysts coming in the Northeast with the expected launch of adult use in Connecticut and New York. We are preparing in advance of these opportunities and continue to invest in both states. We've seen strong momentum in Connecticut with 9% quarter-over-quarter growth versus Q1. And we are already the largest established player and the market leader in New York, which represents an estimated $4 billion market. Our retail business showed significant improvement over the last quarter. We added seven new dispensaries, closing the second quarter with 135 retail locations nationally. Retail revenue is up 11.4% quarter-over-quarter, our 18th consecutive quarter of growth. The focus on our vertical mix is paying off. We saw a 500 basis point improvement this quarter alone. As important, 65% of our retail products consist of purely France. We think this is a significant competitive advantage. On the wholesale side, we are focused on growing profitable market share in our core states and improving margins. This has come at a small cost to Topline as we saw a 2% reduction in revenue during the quarter, largely as a result of continued price rationalization in California and Colorado. Offsetting these declines, New Jersey led our growth states, with wholesale revenue increasing 220% quarter-over-quarter. Finally, on international, Curaleaf International revenue was up 50% year-over-year, with UK up 320% year-over-year and 18% quarter-over-quarter. We see Europe as the next frontier for growth in the cannabis industry and are leveraging the experience and resources we've developed in the U.S. to be first movers as major European countries legalize cannabis for medical and eventually adult use. Across the continent, we are executing on plans to bring our industry-leading products and brands to Europe to fully establish Purelead as the global leader in cannabis. In the UK, our recently acquired Sapphire clinics have seen an 800% increase in patient counts, and the UK is a market ripe for expansion. In Germany, we're building a larger presence in advance of adult use with a focus on supply chain and distribution. Germany will be the driver for Europe, and we are investing considerable time and resources to capture leading market share in advance of adult use legalization, with more announcements to follow soon. In Portugal, we've driven capacity expansion and operational improvements at our cultivation campus and are growing high-quality flower to export through Europe. Our Portugal campus is a strategic asset for our European footprint, and we are continuing to invest in all aspects of operations there. We secured two additional licenses at our Spanish EU GMP facility and have increased production capacity by 20 times for extraction and manufacturing of our products and brands into Europe and other markets, including Israel, the largest medical cannabis market outside of North America. Overall, the fundamentals of our business remain strong despite macro pressures on the consumer. However, in the current environment of inflation and economic uncertainty, we are seeing some distinctive shifts in customer behavior that we are optimizing on. Our typical customers are coming in more frequently, which is driving more traffic to our dispensaries, with transactions increasing 20% quarter over quarter. But they're spending a little less each visit. This aligns with a partial shift to the paycheck cycle-driven behavior consumer brands see in times of economic uncertainty. The other good news is that current customer behavior indicates that our business is a recession-resistant staple. We've seen that despite disruptions in the economy, politics, and culture, People want their cannabis. In some markets, we are even seeing premium products showing stickiness with repeat buyers. And we continue to meet the customer where they are, with value-oriented products, strategic promotions, and best-in-class service. While I'm very pleased with the quarter's results, I'm even more excited about Shirley's future. By focusing on leadership and culture, operational excellence, and delivering quality products and brands of scale, we will continue to grow, improve our margins, and drive profitability. There is simply no other cannabis company with the power of our platform, the commitment and resources to execute our long-term strategy, and the leadership drive to cement this industry as a powerful force we know it will be for years to come. Now I'd like to turn the call over to CFO Neil Davidson.
spk00: Neil? Thank you, Matt. First, I want to welcome Ed to the role of CFO, and most importantly, I want to thank everyone at CuraLeaf for one of the best experiences of my life. I've met some amazing people since joining in 2019, and I'm proud to have played a role in the company's continued success. A quick update on our accounting firm. As part of our planned transition to US GAAP no later than the first quarter of 2023, and in connection with an eventual listing on a senior U.S. national stock exchange, we will be transitioning from the PKF Calgary office of our accounting firm to the PKF New York office. As such, I wanted to thank the PKF and Terry's team for all their hard work over the years and welcome PKF O'Connor Davies on board. With that, let me provide some details on our second quarter 2022 results. Total revenue for the quarter was a record $338 million, representing quarter-over-quarter and year-over-year growth of 8%. Retail revenue was $252 million, compared with $222 million in the second quarter of 2021, representing 13% year-over-year growth. Wholesale revenue decreased 6% year-over-year to $84 million, representing 25% of total revenue. Sequentially, retail revenues were up 11%, resulting in our 18th quarter of sequential retail growth, while wholesale revenues declined 2%, a result of continued rationalization of our wholesale business in lower margin states. Our gross profit on cannabis sales was $175 million for the first quarter, an increase of 13% year-over-year from $155 million. Gross profit margin was 51.9% compared to 49.6 in the year-ago period. Sequentially, gross margins increased 267 basis points from 49.3% to 51.9% due largely to the increase in vertically integrated products sold in our dispensaries and the mix of revenue in higher margin states. Moreover, despite a 2% decline in wholesale revenue, Both gross margin and gross profit on cannabis sales from wholesale revenues improved sequentially. SG&A expense was $108 million in the second quarter compared with $100 million in the prior quarter and $88 million in the year-ago period. The year-over-year increase in SG&A primarily reflects increased headcount in support of new store openings and the launch of adult use in New Jersey. higher travel costs as revenue-facing travel resumes, and higher levels of expenses related to research and development activities and sales and marketing spend during the quarter. SG&A as a percentage of revenue was 32% in the current and prior quarter and 28% in the year-ago period. Our second quarter SG&A included approximately $5.7 million of adjusted EBITDA add-backs versus $6.5 million in the prior quarter. Excluding the add-backs, our SG&A represented 30% of total revenue in the current and prior quarter. Adjusted EBITDA for the first quarter was $86 million, a 2% year-over-year increase. Sequentially, adjusted EBITDA increased $13 million, or 18%. The increase over the prior quarter was attributable to the 267 basis point increase in gross profit margins, as discussed, offset by SG&A excluding ad backs increasing by 8.6 million for the reasons previously mentioned. Our investment markets, including Europe, impacted our consolidated adjusted EBITDA margins by approximately 517 basis points versus 515 basis points in the first quarter. Turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of 187 million as of June 30th, 2022. At the end of the second quarter, our outstanding debt was 587 million net of unamortized debt discounts and debt issuance costs and had a weighted average interest rate of 7.3% with almost three quarters of our outstanding debt not due until December 2026. Net capital expenditures during the quarter were $30 million, bringing our year-to-date total to $60 million. Our investments continue to be focused on expanding cultivation and processing capacity as well as strategically increasing our retail presence. As a result of evaluating a number of our projects and prioritizing certain investments, we now expect our full-year capital expenditures to approximate $125 million. We remain focused on our cash position as well as on generating positive operating cash flow this year and beyond. In fact, for the six months ended June 30, 2022, our cash flow from operations was positive $12 million. Inventory this quarter declined $5 million, contributing to working capital and to operating cash flow expansion. Excluding inventory and biological assets, as well as the expected tax payment made during the quarter, working capital was neutral to our operating cash flow. We expect these trends to continue and expect to generate substantial positive operating cash flow for the full year 2022 which will be sufficient to cover our current obligations and anticipated capital expenditures. On the margin front, we continue to increase our vertical mix in our retail stores, overweight retail revenue growth in higher margin states, rationalize wholesale markets in lower margin states, and monitor our SG&A expenses. As a result, we expect to see further leverage in expanding adjusted EBITDA margins sequentially in the remaining quarters of 2022. Finally, we initiated full-year 2022 revenue guidance of $1.4 billion to $1.5 billion in March of this year, with where we fell in this range being largely dependent on the macroeconomic environment and the timing of regulatory approvals. Given what we know today, we still expect to be within this range, albeit at the lower end, with third quarter revenue up flat to low single digits sequentially, and the fourth quarter accelerating as we expect to close trike. With that, I'll turn the call back to the operator to open the line for questions.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Again, please limit yourself to just one question. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Vivian Azer of Cohen. Please go ahead.
spk12: Hi. Thanks. Good afternoon. You guys are clearly being very proactive about balancing a lot of puts and takes in managing your margin outlook, which is clearly commendable. I was just wondering if you could unpack a little bit some of that margin tension. You're deprioritizing California and Colorado, which is great, but certainly you've got a lift from New Jersey. So if you can help us think about dimensionalizing that as we think about those different levers in the back half of the year, I think that would be great. Thank you.
spk01: Matt, you wanted to take that? I'll take that.
spk07: Yeah, so... I think we are very focused on continuing to drive growth in our high-margin states. New Jersey is certainly one of those and has been a major catalyst in the second quarter, and we see a lot more upside with our Bordentown dispensary opening and continued wholesale growth. opportunities but there's a number of other high margin markets that we continue to really focus on places like florida and illinois and arizona and those so i think it's really a diversified mix of high margin states that we're really focusing on you know continuing to drive growth in those markets And, yeah, some of the other West markets where it has been a bit more challenging, we're really being judicious with the way we're managing our wholesale business, our customers, et cetera, to ensure that we are maximizing margin, even given some of the headwinds that exist. And so that's a lot of what we've been doing that you're seeing fall through in the margin profile here that's improving.
spk09: The next question is, comes from Andrew Partineo of Stiefel GPM. Please go ahead.
spk10: Hi, good evening. Congrats on the strong quarter, and thanks for taking my questions. Just looking at your guidance, could you detail what are your major assumptions embedded in 2022 in your sales? EBITDA as well, guidance. Namely, when do you think the Borden store could open in New Jersey for REC? And do you expect Trike to contribute fully in Q4? Thanks. Go ahead, Neil.
spk00: Yeah, so I would say, you know, looking at guiding towards the bottom end of our range largely has to do with rationalizing our wholesale revenues and which, as you've seen, the benefits are already showing in our margins. The second piece, you know, we're being a little bit more conservative with respect to New Jersey Bordentown. That's simply a regulatory approval, so that we really are expecting a full benefit in Q4. And then just some general assumptions about what everybody's seen around the macro around the consumers. So that kind of all bundled together led us to thinking of Q3 as a flat to low single-digit increase, of course, off the robust 8% growth in Q2. And then going into Q4, I think the big step function there is obviously trike, which we do expect a full quarter of, and then Bordentown, which we do expect a full quarter of.
spk09: The next question comes from Matt McGinley of Needham. Please go ahead.
spk06: Great. Thank you. I have maybe two that I'll bundle together in CapEx and Taxes Payable. You mentioned that you're dropping your CapEx from 145 to 125. And my question is, is that a shift related to the timing of projects? Are you reassessing a need for capital investment in some states? And then with Taxes Payable, it looks like they only made about $60 million in cash tax payment in the second quarter. but you're still sitting on an overall balance of $125 million. If you have the cash on hand and you're confident in your ability to generate cash flow, why not pay on time and save yourself the penalties going forward?
spk00: Yep. So the first one with respect to CapEx, we've always looked at the return on investment on some of those capital expenditures. And given this environment, we've just scaled back on some of the one-a-halves versus some of the things that are going to impact growth in the immediacy or in 2023. So we've just taken a slightly different lens and been able to carve it down to $125 million. With respect to the cash tax payment, I think once you see our 10-Q file tomorrow, the tax payment is actually closer to $110 million. We are reassessing quarterly tax payments, but I think what you're including in the number that you provided is the current quarters provision as well. So we did make a $110 million tax payment and still even with that generated positive 12 million cash flow for the full year, or for the six months, sorry.
spk09: The next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
spk04: Good evening, all. Congrats on the strong quarter. Just wanted to pivot back to some of the commentary on the decisions around your wholesale contribution and obviously safeguarding your margin. I'm just curious because, you know, when you look back to before buying Select, you know, that was a brand that I guess anecdotally you sort of see everywhere in sort of the Pacific West Coast. I'm just wondering how you balance the decision between, you know, near-term margin, you know, mitigation on the decline versus overall brand building. Do you view there's a risk of of tapering back your exposure with some of your wholesale contribution in the short term, given that some markets, arguably like California, will be beneficial for long-term brand building. So not questioning the decision, just wondering how you balance those two elements. Matt?
spk07: Sure, yeah. So look, I think as we touched on in the call, we've brought Select from four to 19 states. So in terms of the growth of the Select brand, We're very focused on that growth and very focused on continuing to launch new products under that brand and I think have really executed well on that. As it relates to markets like California, we are taking a closer lens at how we're managing hundreds and hundreds of different accounts to ensure that we are continuing to focus on margin, especially in the near term here. You're right. We are certainly focused on continuing to keep the brand exposure and the distribution of Select and our other brands in these large markets. And so that is a focus of ours, and we're continuing to do that. And we're at 2,200 and counting doors throughout the country and soon to be more in Europe. But I think we are also really focused on making sure that we're properly servicing the high-value accounts and the large customers in that overall.
spk09: The next question comes from Aaron Gray of Alliance Global Partners. Please go ahead.
spk02: Hi, good evening, and thank you for the question. So just on the guidance, just shifting over to the fourth quarter, right? You said 3Q, you know, flat to up 3%. So that implies, you know, about a $50 million increase in 4Q. Just wanted to know in terms of your expectations for TRIQE. It was $110 million, I believe, in 2021. Can you comment on how those sales have trended? Maybe some expectations that you might have in terms of the contribution to 4Q? Do you think about the organic uptick on top of the acquisition closing? Thank you.
spk01: We're expecting approximately a $20 million contribution on trike in the fourth quarter, so you can extrapolate the growth on the organic side.
spk09: The next question comes from Scott Fortune of Roth Capital. Please go ahead.
spk15: Captain, if you can dig in a little bit more on New Jersey, the cadence there is a little bit better than I thought. You originally thought it was from that side, but you throw Wayne open one more store, and you're getting real good, strong wholesale sell-throughs. Kind of step us through as you look at the end of 2022 into 2023, your positioning for New Jersey and the opportunity to continue to be the leading wholesaler there and the opportunity overall for New Jersey going forward here. A little more color on that. That'd be great.
spk01: So obviously with more store openings, we anticipate the market breadth to grow. And so we'll have much more wholesale opportunities. Today we are the largest wholesalers in the market, although we have some competition as well, with two other players having extra capacity for wholesale purposes. As more stores open up, and we anticipate that more stores will be opening up every single quarter, the opportunity on the wholesale side will grow. Obviously the big one for us also will be the opening of Bordentown. Bordentown is a very strategically located store on a major thoroughway in New Jersey, It's our most northern store, so it's close to very large population centers like Trenton, very easy to get access to. And it's also our biggest store. So I think it's a 14,000-square-foot store, 31 POS stations. And so we're able to process a tremendous amount of people through that store. And it's north enough from our Belmar store that it won't cannibalize the business in Belmar. If you look at Belmar and Edgewater, those two stores are quite close to each other. and so there's a small level of cannibalization there about 20 minutes apart, whereas this one is much more north, and so it won't be cannibalized, and it's a very, very good store. And so we have the opportunity of both Bordentown as well as additional stores opening up on the wholesale side. Curaleaf invested very heavily in cultivation early on, and so not only do we have good inventory, but more importantly, we have great capacity to continue to expand stores our ability to provide product to the marketplace. And so we're very excited about New Jersey. We think that New Jersey is a $2 billion market. It's early days in terms of its start, and we think it will continue to grow as stores open up every single quarter.
spk09: Next question comes from Ty Collin of 8 Capital. Please go ahead.
spk05: Hi there. My question's on Curaleaf International. I'm wondering if you could help us understand what level of additional investment would be needed in Europe to supply a major adult use market? Specifically, are there any pieces missing from a talent or facilities perspective, or is it basically plug and play at this point?
spk01: So, we're going to devise our supply chain capacity based on the rules that come out of Germany in October. So we're expecting the first pieces of draft legislation on the adult use market out in early or mid-October. At that point in time, we'll be able to make an educated guess in terms of what capacity we're going to need depending on that program. But we are already expanding capacity based on our current demand coming from the U.K., Israel, and Germany. Obviously, with adult use, we anticipate that that capacity will have to be double, if not tripled, in order to meet that. We have some information coming out about our European business very, very shortly, so we'll give more transparency on that. But we are anticipating that the German – adult use program will be a $1 billion increase in the first year, moving over a four-year period to about a $5 billion market. So it's a very large market with very significant penetration. And so we do anticipate that we'll have to grow our current ability of 250,000 square feet to probably triple that in order to be able to supply that marketplace. But the good news is it's capital light to the extent that we don't need to build a facility in each one of the German states or anywhere we can build in Portugal and export to Germany from there. So we are, however, waiting for the final rules, the final law to come out or the draft law to come out to see what the rules are going to be in terms of imports. And at that point in time, we'll make the assessment and make the investment. We have had all our teams out there in the last two months assessing and seeing whether or not we have enough power, enough land, and et cetera, in order to build the facilities we're going to need to supply the German adult use market.
spk09: The next question comes from Eric Delorier of Craig Hallam Capital Group. Please go ahead.
spk03: Great. Thank you for taking my question. My question is on the wholesale side. So understand that you are rationalizing your wholesale sales in markets like California and Colorado with the pricing there. But you've also commented pretty extensively on the increasing mix of vertical sales. Could you help us quantify how both impacted wholesale growth this quarter and then maybe help us identify some of the markets where you expect continued total growth in terms of retail plus wholesale, but maybe we could see some flattening wholesale as you you know, either focus on increasing the vertical mix or maybe just experiencing some pricing there as well. That would be great.
spk00: Thank you. Yeah, let me give you one quick tidbit, and then I'll hand it over to Matt. But I said in my remarks we saw, you know, a decrease of about 2% on wholesale revenues, but our gross profit increased. I will also tell you gross margin dollars increased slightly. So hopefully that helps your modeling. But basically, think of it as a 2% decline in revenue with about the same contribution or gross margin. Matt, you want to comment on growth?
spk07: Yeah. So look, certainly vertical mix has been a focus. As I mentioned, our vertical mix for Q2 was 65% across 135 retail locations. And we continue to see that as an opportunity, especially in, uh, some of our larger, um, retail markets. You know, we also see tremendous opportunity on the wholesale side in many of, uh, of those same markets and some different ones, uh, really prompted by, you know, a few different catalysts. One is just additional new dispensaries that are going to be opening in places like New Jersey and Illinois, uh, and key markets like that. So, you know, those are all new customers for us to be able to, uh, And we've invested in capacity and into product innovation and things in anticipation of that, knowing that there was going to be more wholesale customers coming online in many of those markets. You know, certainly adult use on the horizon in places like Connecticut and New York are also going to create a number of other wholesale opportunities as well. So we're focused on being very prepared for those as well.
spk09: Next question comes from Bill Kirk of MKM Partners. Please go ahead.
spk08: Thank you. So forgive me if I missed it, but do you have any early thoughts on the Florida initiative filed for the 2024 ballot?
spk01: We've just recently been introduced to it. Matt had a meeting with the CEO at Trulief about a week ago. They discussed it, so we're still looking at it. We like the fact that there's an initiative to get this adult use program going in Florida. We think it's not going to be a cheap exercise. It's going to be very, very expensive, so we're going to need the whole industry to chip in to do it. In the past, however, my efforts in getting the industry to chip in on Washington efforts has been more difficult. I'm hoping the CEO of Trulieve will have better luck in getting everybody together. Certainly, Curaleaf would be very supportive of a program to get adult use in Florida.
spk09: Seeing no more questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to Executive Chairman Boris Jordan for any closing remarks.
spk01: I'd like to thank everyone for joining our call. We're delighted with the quarter. And any other questions investors may have, you can DM us or reach out through our IR department. Thank you very much.
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