Curaleaf Holdings, Inc.

Good afternoon, and welcome to the Cure Relief Holdings, Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 run your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Camilo Lyons Chief Investment Officer. Please go ahead.

Good afternoon, everyone, and welcome to CareLeak Holdings' third quarter 2023 conference call. Today, we're joined by Executive Chairman Boris Jordan, Chief Executive Officer Matt Darin, and Chief Financial Officer Ed Kremer. Before we begin, I'd like to remind everyone that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States security law. which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions, including the successful integration of acquisitions and are subject to risk 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 applied 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 on the forward-looking statements and risk factors can be found in the company's filings and press release on CDAR and the Canadian Securities Exchange. During today's conference call, in order to provide greater transparency regarding Curelease operating performance, we will refer to certain non-GAAP financial measures and non-GAAP financial ratios that involve adjustments to GAAP results. Such non-GAAP measures and ratios do not have a standardized meaning under U.S. GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by U.S. GAAP, should not be considered measures of cure lease liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP financial measures under the heading Reconciliation of Non-GAAP Financial Measures in our earnings press release issued today and available on our Investors Relations website at ir.curaleaf.com. With that, I'll turn the call over to Executive Chairman Boris Jordan. Boris?

Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our third quarter 2023 results. During the last four years, we completed 14 acquisitions, and those transactions have been central to helping us achieve our stated goal of establishing Curaleaf as the world's leading cannabis company. Throughout 2023, the company has been focused on improving efficiency metrics and dialing in operations to maximize its existing asset base. We have taken significant steps to eliminate redundancies, strategically reduce headcount, exit unprofitable markets. Most of these actions occurred in the first half of the year, and in the third quarter, we took the final steps in our asset optimization plan. Specifically, we have reduced duplicative facilities in Nevada from three growth sites to one facility. We have exited low-margin, low-growth operations in Michigan and Vermont. We have shuttered our legacy Kentucky research facility and consolidated R&D operations to Massachusetts and the UK. These were difficult decisions, but I'm confident that they will better position Curaleaf for strong, consistent financial results going forward. In total, these actions resulted in a $22 million non-cash impairment charge. Year to date, we have eliminated an additional 100 basis points of margin drag from rationalizing non-core markets and assets. Moreover, we have reduced total headcount by 18% in the last 12 months, while automating manufacturing processes in our Tier 1 facilities. These initiatives are yielding $90 million in annualized expense savings. While the impact of these actions has not yet fully flowed through our P&L, they are already bearing fruit as evidenced by our 24% domestic EBITDA margin, and I expect continued improvements throughout year end and into 2024. I'm confident that our current 17-state exposure gives us the right domestic footprint and a presence in key markets that we expect will drive outsized growth over the next several years. We are now positioned to achieve our profit goals, and I do not foresee any further state exits. With that, let's discuss our third quarter results. We reported revenue of $333 million, which excludes 3.5 million from operations we discontinued in the third quarter. On a comparable basis, quarter three revenues were up 2% versus last year, $326 million. Sequentially, revenue was down less than 1% due to the deliberate actions we took to rationalize lower profit SKUs and reduce overall promotional activity, while emphasizing first-party product to reduce inventory. While this effort, which began in quarter two and carried over into quarter three, tempered our top line, it was necessary to set the business on a better course for growth and profitability going forward. With these changes behind us, we expect to see a resumption of sales growth in quarter four and into 2024. Adjusted gross margin was 46% up from 45% in the second quarter. Margins benefited from lower discounts and more profitable mix of SKUs, but were also negatively impacted by our decision early in the year to idle growth capacity in some states to better balance our inventory with demand. This underutilization hurt our margins by 400 basis points in the third quarter. That said, with most of this inventory right-sizing now behind us, new revenue catalysts emerging and pricing stabilizing, we are selectively adding capacity to meet accelerating demand in several markets and thus expect to recover this loss margin over the coming quarters and are targeting our normalized gross margin to exceed 50%. Adjusted EBITDA margins of 23% up 100 basis points versus quarter two, despite 150 basis point drag from our international operations. Overall, we reduced inventory by another $18 million and ended the quarter with $118 million in cash while generating $33 million in free cash flow from continuing operations. I am pleased with how we have been able to transform and improve our operations, but we are striving for more. To propel our growth and margin expansion initiatives, we have implemented a decentralized regional reporting structure with the goal of empowering our team members on the ground with greater control over their markets. This organizational realignment, which comprises four domestic regions plus international, has already resulted in improved communication among the key functional groups. It has also sped up our decision-making such that we are better able to respond to dynamic local market changes while staying closely attuned to the needs of our customers. We have already begun to see the benefits of this realignment, including an improved retail product assortment, enhanced third-party buying, and increased wholesale profitability. This was evident in September, which was our strongest month of the quarter, and we remain encouraged as quarter four is off to a solid start as well. Thinking globally and acting locally, this is the mantra we have embraced, and this is how we will win now in the long term domestically and internationally. Federal legislative progress continues to grind forward on multiple fronts. We remain optimistic that the DA will support the HHS recommendation to move cannabis to Schedule III. This would eliminate the onerous 280E tax provision and ProcureLeaf would result in cash tax savings of at least $150 million this year. We also continue to believe that there is a path forward for the passage of the Safe Banking Act. But these last few weeks have only confirmed how difficult it can be to predict the timing of an outcome in D.C. particularly during this current period of heightened geopolitical tensions. Our international business continues to be robust, and in the third quarter, revenue grew 120% versus last year, driven by strength in both Germany and the UK. We continue to expect the Bundestag to finalize the proposed Pillar 1 expansion on the German medical market over the next few weeks and expect implementations in early 2024. With its population of 84 million people, Germany is poised to be a significant growth catalyst for CureLeaf years to come the nascent uk market continues to perform well for us and we are increasingly leveraging our number one share position to educate consumers on the benefits of cannabis more recently poland with its population of 41 million people is becoming a burgeoning medical cannabis market in which we are leveraging our scale and leading presence to be a major supplier in that market domestically we are optimistic that new york cannabis program will start moving forward again and that we will enter the wholesale market this quarter and be permitted to open our first adult use dispensary by UN. New York is our home state, and I believe will be a $5 to $7 billion opportunity over time. CureLeaf is a dominant market share in the current medical market, and we will build off our existing presence to be a major player in the adult use market as well. Also, Ohio shows great promise for us after its citizens made it the 24th state to end cannabis prohibition by voting to legalize adult use cannabis. As a reminder, we already have two Ohio stores and four more in the pipeline. We will be prepared for when the $4 billion state market opportunity transitions to adult use. We remain focused on expanding our investor base by improving access to our shares. To this end, last month, we formally applied to list on the Toronto Stock Exchange after completing the required equity offering, which we raised 16 million Canadian dollars. Our legal team is working throughout the final stages of the approval process, and we remain on track to uplift this quarter. Listing on a major exchange as TSX will help with custody issues, allowing for broader institutional involvement. It should also help improve trading volume, and this increased liquidity should help to lower the volatility in our stock, which will benefit all of our stakeholders. Finally, on guidance, as I mentioned earlier, trends improve throughout the quarter, with September being the strongest month. The fourth quarter has also gotten off to a solid start. That said, we continue to take a prudently measured stance on global geopolitical risks and pressures on the consumer have become more elevated. For quarter four, we expect revenue to be up slightly from the third quarter. For the year, we expect revenue growth of approximately 5% versus comparable 2022 revenue of 1.275 billion, the upper end of our guidance range of low to mid single-digit growth. We continue to expect full year A bid down margin to come in around 23%, consistent with our prior guidance of low end of mid 20s%. In closing, I would like to thank all of our hardworking Pureleaf employees. It is the effort and dedication of our thousands of team members that gives our customers a great experience in our stores and allows us to offer the widest selection of innovative, safe, and high quality products. The heavy lifting is behind us and with growth catalysts of New York, Germany, Ohio, and wholesale coupled with margin expansion from improved capacity utilization and a cleaner inventory position, we will enter 2024 from a position of strength. With that, I'll turn the call over to CEO Matt Downer.