Curaleaf Holdings, Inc.

second quarter 2024 conference call today. And apologies for those technical difficulties at the start. Today I am 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 the Canadian and U.S. securities laws. 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 of the forward-looking statements and risk factors can be found in the company's filings and press release on CDAR and EDGAR. During today's conference call, in order to provide greater transparency regarding Curaleaf's 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 US GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by US GAAP, should not be considered measures of Curaleaf's 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 release issued today and available on our investor relations website at ir.curerelief.com. With that, I'll turn the call over to Chief Executive Officer Matt Jones. Matt?

Thank you, Camilo. Good afternoon, everyone. Before we get into the details of the call, I'd like to address our investors, the financial community, and all Carol Leaf employees listening to the call. After much reflection, I have decided to retire from my post as CEO to focus on more time with my family. When I embarked on my cannabis journey 11 years ago, I could not have envisioned where it would take me. My cannabis career began behind a dispensary counter serving medical patients in the first days of the Illinois market. This experience opened my eyes to the power of the cannabis plants and inspired me to dedicate my life to this amazing industry. My partners and I worked hard to grow the grassroots business rapidly and had the good fortune to sell it to Curaleaf in 2020. I was thrilled to have been part of this transformative transaction that helped create the largest cannabis company in the world. After various leadership positions at Curaleaf, I became CEO in May, 2022. And in those two plus years, I've had the honor to work alongside and develop relationships with truly exceptional people whom I will miss. I'm grateful to Boris for giving me the opportunity to lead the best cannabis company in the world. I will stay on as a special advisor to the CEO until year end to ensure there is an orderly transition as Boris steps in to lead Curaleaf into the future. I am proud of all that we have accomplished and look forward to watching the company execute its vision of being the global leader in cannabis. We are at a pivotal time for our industry on the cusp of federal reform and the future is very bright. I leave knowing the business is foundationally stronger today than when I found it, and more importantly, that Curaleaf's best days are yet to come. Horace.

Thank you, Matt, for your leadership, your contributions to the business, and your endless dedication to Curaleaf. It's been a pleasure working with you, and along with the entire company, I wish you a great time with your family, and I'm grateful that you're staying on as a special advisor to me in this transition. With Cureleaf's deep bench of talent, I have every confidence this will be a smooth transition. While I have remained close to the business as executive chairman, in my expanded role as CEO, I'll be able to better effectuate further streamlining of the organization, speed up decision-making, accelerate growth initiatives, and drive margin expansion. In doing this, Cureleaf will return to its entrepreneurial roots, which were grounded in a more streamlined and leaner organization. I've always operated under this mindset to successfully create numerous multi-billion dollar global businesses across financial services, technology, and energy industries, and cannabis will be no different. Since co-founding Curaleaf 10 years ago, my team and I have been involved in 26 acquisitions in the U.S. and Europe to build Curaleaf into the global cannabis business it is today. During the last 18 months, we started an aggressive streamlining campaign which led to a shutdown of operations in efficient markets, significant expense reductions of over $90 million, and a return to a regionalized management structure, which has brought us closer to our customer and our markets. This work positions us to reap the benefits of the platform that we've created with revenue growth, expanding margins, and cash flow generation. More recently, we've embarked on a profit growth action plan aimed at driving greater efficiencies across all of our cultivation processing facilities. Driving these changes is our new EVP of operations, who recently came to us from one of the top tier competitors. His impact on the team and the overall business has already been felt. Processes and standards have improved dramatically, which is contributing to higher quality and more consistent flour. These initiatives will build on an already strong market share position Curaleaf enjoys across the country, with Select as the number one vape brand in grassroots and Find holding two of the top four positions in flour. Our focus on yield management and cost containment is also starting to bear fruit and will combine to drive tangible margin improvement over the next two to three quarters. In fact, we exited the second quarter on a high note with a June gross margin of 50%, and that trajectory has improved in July. Today we are in a much more focused and leaner organization than we were two years ago, but I see many opportunities for the company to go further in its effort. We have a concrete strategy centered on building a platform for our brands that will power our financial model and drive growth globally. To that end, I have always had a great vision of making Curaleaf the dominant global consumer products manufacturer and distributor of cannabis products. And while there has been great progress made in the face of turbulent markets, there is much more for us to achieve. I will work tirelessly for our customers and our shareholders and our employees to ensure the company reaches its fullest potential, particularly as the industry embarks on its next significant evolution once rescheduling is finalized. Moving on to our second quarter review. Second quarter revenue of $342 million, up 2% compared to last year's second quarter revenue of $336 million. Adjusted gross margins of 48% was up 250 basis points compared to last year. As previously mentioned, our gross margins showed successive improvement each month with June exiting the quarter at 50%. I'm encouraged by this progress and expect back half margins to also trend in the 50 plus percent range. Adjusted EBITDA was $73 million, or 21.3%, compared to $72 million, or 21.5% last year. Continued investments in our rapidly growing international segment, coupled with new startup investments in the hemp company, weighed on our margins by a combined 180 basis points. These investments are critical to supporting the current and future revenue streams from these newer segments that complement our domestic regulated business. In addition, we also made $58 million in tax acquisition and debt-related payments during the quarter to further reduce leverage on our balance sheet while also investing $25 million in capital projects. Despite these investments and debt payments, Curly vended the quarter with $89 million of cash on the balance sheet and generated operating cash flow from 10-year operations of $30 million and $6 million in free cash flow. Thus far in 2024, it's unfolding as we guided with growth back-end weighted. Specifically, we entered the year with a view that growth would be subdued in the first half due to continued price compression, the shift from retail to wholesale, and increased competition from the hemp market, before accelerating in the second half as state and country catalysts come online. Let's delve into these catalysts that will drive accelerated growth and include New York, Ohio, Florida International, and hemp. After a rocky start to its adult use program, New York is showing signs of becoming a strong and healthy market for us. Actions taken by the governor's office to support law enforcement has resulted in over 1,000 illicit operators shutting down at last count to the direct benefit of the legal market. Assuming this trend of enforcement continues, New York is on a solid path to becoming a $5 billion market opportunity we always envisioned it would be. To extend our leadership position in the state, we recently opened a new medical store in Rochester and converted two of our medical stores to co-located medical and adult use stores. With respect to wholesale, which is the prize we are eyeing, we have been successful in opening new independent accounts every week. To date, there are approximately 151 adult use dispensaries in New York, and we are selling into roughly 50% of them, a solid increase from last quarter. Without question, New York is about maximizing wholesale. We are hyper-focused on allocating the necessary resources and upgrading our sales down to ensure we are best positioned in all partner doors. In the second quarter, these efforts translated into 153% wholesale growth compared to last year. We are thrilled to have been a part of the first group of dispensaries to open ions to our brand portfolio across the state as adult use sales formally commenced yesterday. We had a fantastic reception by a local community, our first approved adult use dispensary in Newark, Ohio, store with lines out the door. and our second adult-use store in Chahoga Falls opened at 8 a.m. today. Given its low medical penetration rate, Ohio is a market we see reaching $2 billion over the next few years. To capture as much share as possible, our retail team is moving quickly to open our next six stores, which we expect will be complete by early 2025. Our Johnstown facility is one of our most productive in our fleet, and we are looking forward to introducing all of us to the broader wholesale market to our full assortment of top-tier brands and products. With Amendment 3 consistently polling in the mid-60s, the cannabis adult use ballot initiative in Florida is looking promising. To this end, we are investing in tripling our indoor cultivation capacity and expanding our total store count to approximately 85 in the state by the time adult use likely begins next May. We opened one new store during quarter two, expect two stores to open next week, with opening pages set to accelerate thereafter. Not surprisingly, Florida is consuming the lion's share of our CapEx budget this year. However, given the opportunity for the market to triple to $6 billion at high margins due to its retail-only structure, we are not slowing down. Florida already is the top state by revenue and margin for us, and the potential conversion to adult-use market will have a significantly positive impact on our business. Our international business experienced superb 78% year-over-year growth, led by the UK, Germany, Poland, and contributions from Northern Green Acquisition. Following the enactment of Germany's expanded Pillar 1 medical program on April 1st, the number of new cannabis patients entered the program has seen a significant surge, resulting in a remarkable 76% sequential growth for Curaleaf in the quarter. Our 420 brand, known for its premium positioning, continues to enjoy an estimated 20% market share. In addition, today we introduced our Cureleaf branded flower at more accessible price points to accommodate the growing number of cost-conscious patients looking for product quality and consistency at affordable prices, further helping to solidify and extend our market share position. These initial numbers out of Germany are impressive and underscore our view that cannabis demand by Germans is robust. However, we are still in the early stages of growth in this vastly under-penetrated market. Total patients today are estimated to be between 200,000 and 300,000 out of a population of 84 million, implying just a 0.4% penetration. I'm highly optimistic on Germany's cannabis future and its influence on the rest of the EU nations, thus putting Curaleaf in an enviable position to win across the continent. The United Kingdom also showed robust growth, and we are extending our share position. Our UK clinic was awarded Cannabis Clinic of the Year at the Cannabis Business Awards in June, amongst other awards recognizing the Curaleaf team as international industry leaders. On April 22nd, we closed the Northern Green acquisition, marking another milestone in our strategic vision to create a truly global supply chain through which we can distribute our portfolio grants in 15 countries. To that end, we shipped our first wholesale orders to Australia and New Zealand partners, marking Curly's entry into the Asian region. NGC is an integral part of our international strategy, as well as our as well as our margin enhancement plan. To this point, I am pleased to report that international gross margins improved meaningfully this quarter, with NGC partially contributing to the gains. We will begin seeing the full quarter benefits of the acquisition in the third and fourth quarters. NGC's contribution to our margins will increase. As we complete the integration of NGC and begin to scale production in our Portuguese cultivation facility with purely branded flour, we expect to realize continued international gross margin improvements through year end. thus narrowing the gap with our domestic gross margins. When assessing the nascent market signals in Europe, it is impossible to dismiss the striking similarities between Curaleaf's U.S. business in 2018 and Curaleaf's international business today. In 2018, our domestic revenue was $77 million, and over five years, we grew it to $1.3 billion. In Europe, which is twice the population of the U.S., we are its largest operator, and yet it remains early days in the development of the European cannabis industry. Given the tremendous opportunity ahead, I believe the growth rates in our international segment over the next five years could look similar to what we've experienced in the U.S. In June, we announced our entry into the hemp-derived THC market with two product lines, select edibles and select zero-proof seltzers. Our decision to enter the hemp category was based on two factors. First, to expand the select brand in a capital-light manner to consumers we are not reaching today with responsibly sourced, safe, and tested products. and second, to use it as a hedge against our regulated business. Leveraging distribution channels not available in our regulated business, we launched our direct-to-consumer website, thehempcompany.com, that currently ships to 25 states plus D.C. We also entered into the groundbreaking partnership with a large direct-to-consumer distribution partner in the U.S., There's no question that the regulated cannabis and hemp worlds are converging rapidly. Ultimately, we believe the consumer will not distinguish between the two channels as long as the trust in our products and brands remains uniform. While still early days, we are pleased with the positive reception to our hemp line of select products we are seeing from customers, distributors, and retailers as this category is poised to become a more meaningful contributor to Curaleaf in the coming years. As such, we expect to grow the hemp business rapidly through increased breadth of distribution partners and expanded product line assortment in beverages. We believe the combination of our select hemp and select cannabis lines will further extend the select brand's number one position in the U.S. All that said, I'm cognizant of the choppy environment the industry is contending with. Price compression is still present in important states like Arizona and Florida, where we have a number one and number two share position, respectively. And the natural makeshift from retail sales to wholesale is evolving quickly in states such as Illinois, New Jersey, and New York as independent doors open. Ultimately, the expansion of the wholesale market is healthy for the industry and the growth of our brand portfolio. Wholesale distribution of our brands has always been our long-term vision, and we will continue to scale the business in a manner that leverages the benefits of both channels of distribution. Turning to our outlook, we remain consistent in our view that the business will accelerate in the back half of the year, both in revenue and margin. We continue to expect full-year revenue will grow at a mid-single-digit rate, albeit at the lower end of the range, consistent with our current consensus of $1.4 billion. As previously discussed, we see many exciting growth opportunities to compete for, not the least of which are international in the hemp company. We continue to expect adjusted EBITDA margins to be in the mid-20s, albeit at the lower end of the range due to these anticipated investments. In closing, I step into the CER roles with my eyes wide open about the complexities of operating a global cannabis enterprise, but I'm also excited about the opportunities in front of Pureleaf to forge new paths. We will be mindful to remain focused on executing the basics with precision every day. With the strength and support from our 5,000-plus global team members, whom I want to thank for their daily effort and hard work, Curleys have never been in a better position to lead the global cannabis market. With that, I'll turn the call over to our CFO, Ed Kremer. Ed.