Curaleaf Holdings, Inc.

Good day, and welcome to Curaleaf Holdings' third quarter of 2024 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance today, 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 telephone keypad. And to withdraw a question, please press star, then two. During Q&A, we ask that you please limit yourself to only one question. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Camilo Lyon, Chief Investment Officer. Please go ahead.

Good afternoon, everyone, and welcome to CureLeaf Holdings' third quarter 2024 conference call. Today, I'm joined by Chairman and Chief Executive Officer Boris Jordan 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 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 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 prediction 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 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 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 pure 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 release issued today. and available on our investor relations website at ir.curaleaf.com. With that, I'll turn the call over to Chairman and Chief Executive Officer, Boris Jordan. Boris?

Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our third quarter results. Before diving in, I would like to acknowledge the result of yesterday's presidential election. First and foremost, congratulations to President-elect Donald Trump on his electoral win. If you have been following Curaleaf's election coverage, our token of vote marketing campaign accurately predicted this outcome with our Donald O.G. flower strain narrowly defeating our Kamala Kush strain in the four states where we ran the poll. For the first time ever, both presidential candidates publicly touted pro-cannabis stances on the campaign trail. With President-elect Trump in office, we are hopeful that real federal reform, including rescheduling and safer banking, can pass. Trump closed his speech last night by saying, promises made, promises kept. We've already been in touch with his transition team to ensure that the new administration falls through on its commitments made to the industry. In our expertise, historically, President Trump has put an effort to deliver on his campaign promises, and we see no reason why this time would be different. On the flip side, last night's Florida election results were disappointing, to say the least, as Amendment 3 failed to meet the 60% threshold it needed to pass. However, we cannot ignore that 56% majority of Floridians voted in favor, the same margin as Trump's victory reflecting the bipartisan nature of the issue. As we mentioned in our previous earnings call, we have staged our investment in Florida to safeguard against this outcome, and now we'll progress accordingly. That said, as the second largest operator in the state, the store footprint and capacity expansion we have already begun will serve to improve our competitive position in today's medical market. In fact, we remain bullish on Florida and still see tremendous opportunity to expand our market share by upgrading our production capabilities to produce high-quality indoor flour and by adding additional stores to our footprint to fill in the gaps in our state map. We have six markets that generate nine figures in annual sales. Florida is one of them, and our international platform is on track to be another one this year. Moreover, Florida represents a low teens percent of our total revenue. By design, our global presence offers a diversification of revenue streams that mitigates any concentration of risk, and our international platform gives us exposure to exceptional growth that is unique to Curaleaf. I firmly believe the companies that have diversified asset base that are generating cash with access to capital and have a solid long-term shareholder base will prevail. To this point, we will analyze every asset in our portfolio for its profitability and cash return profile. The upside is this environment will lead to a much-needed consolidation in the industry, not just for the sake of top-line growth, but for profitable cash-generating growth. Needless to say, we are at an inflection point in the industry and at cure-lease. Curaleaf has always been the largest player in the cannabis sector, and we need to get back to being the leading player. As chairman of the company, my focus was on strategic vision and investing in growth, and we succeeded in building significant scale and an international footprint. However, as CEO and founder of the company, my focus is now on delivering value to all shareholders through discipline, execution of fundamental operating principles. Leveraging our entrepreneurial heritage, we are reorienting the company to focus on a program we are calling returned to our roots, refining margins, organic growth, optimizing cash flow, tightening the balance sheet, and strategic expansion. Although it is still early days in my tenure, this new focus is reflected in our third quarter results. We announced a revenue of $331 million, which is slightly down 1% compared to last year. Meanwhile, our focus on profitability resulted in adjusted gross margins of 49%, up 310 basis points year over year, with all reasons showing an increase. Overall adjusted EBITDA margins also improved to 23% as gross margin gains and cost savings initiatives were offset by expense deleverage on more modest sales. We ended the quarter with $90 million of cash on the balance sheet and generated $42 million of operating cash flow from continuing operations. After substantial investments in CapEx this quarter, we generated $14 million of free cash flow from continuing operations. The industry has experienced the pressures of regulatory overhang, increased competition, unprecedented weather conditions, and irrational pricing strategies. For curaleaf, the top line headwinds can be broken down by the dynamics of the specific states we operate in, and we have acknowledged and addressed them head on. In Arizona, we saw pricing collapse due to an extended summer with record-breaking temperatures, resulting in market decline of 19% year over year. The seasonality has now subsided and traffic has stabilized, Yet through it all, we were able to grow our market share by 100 basis points. In Pennsylvania, our competition moved to an aggressive pricing strategy. We actively chose to manage and actually expand our margins instead of chasing sales. We have since reassorted our stores to effectively compete and are seeing healthy, profitable growth. In Illinois, we continue to see pressure for more store openings. However, the challenges of the market were exasperated by supply disruption due to a failed harvest in our Illinois grow. The grow is now fully harvesting, and for the first time since the acquisition of grassroots, we are utilizing 100% of our capacity in Illinois and product qualities to the best it's ever been. In Florida, we experienced a longer summer than usual, delaying the return of the seasonal patient population and reducing traffic. Additionally, Hurricane Helene impacted the final days of the quarter as we had to close 15 stores. The impact from Hurricane Milton in early October was more pronounced with 46 store closures. Thankfully, we didn't sustain any damage to our stores or facilities, and most importantly, none of our employees were injured. I'm very grateful to our team who worked tirelessly in those critical days to get us back online and minimize business disruptions. And finally, in New Jersey, we have been and continue to be the largest player in that state. So we have been disproportionately impacted by the surge of store openings around us. For context, our Belmar store has had 23 independent stores open within a 20-minute drive in the last 12 months. New openings are beginning to slow down, but the market is saturated. We are driving our wholesale business to capitalize on the new doors and offset the increased retail competition. Outside of New Jersey, the above factors were specific to the third quarter, and we are seeing stabilization early in the fourth quarter. Taking a step back from our business specifically, the cannabis sector in the U.S. has continued to see significant price compression this year. According to BDSA, pricing was down 11% in the third quarter, with some states down as much as 19%. We know that the Delta 9 market has played a considerable role in this trend, and we believe it is cannibalizing share and driving increased competition. The cannabis sector took 10 years to grow to a $30 billion market. Meanwhile, hemp only took two years to grow into what is estimated now to be $20 to $25 billion market. It is impossible to ignore the outsized impact that these new market entrants have had on the regulated cannabis business. With half the country now having access to adult-use cannabis, and despite the fragmented nature of the industry, national trends are becoming more evident and more important. Pricing continues to taper off to levels much lower than anyone anticipated. This macro environment is one of the key drivers of our shift towards focusing on sustainable and profitable organic growth by maintaining share in challenged markets and growing share where we see strategic opportunity. Speaking of strategic opportunities, I would like to provide an update on our actionable growth drivers. The international segment, the adult use markets in New York, and Ohio, and our hemp business. Our international business was a bright spot again, growing 82% year-over-year and 17% quarter-over-quarter to $30 million. The business is on pace to exit the year above our projected $100 million target. Also, gross margin continued to improve, expanding 400 basis points from the second quarter. Both Germany and United Kingdom are leading this growth. In Germany, we believe the patient population is roughly tripled to 600,000 since the April 1st enactment of the newly expanded cannabis medical law. Based on market data that we have aggregated, we believe our 420 brand is among the top two brands in the market. In the UK, we continue to grow our share by offering customers greater value and superior customer service. Last month, we instituted a subscription program in our clinic which should improve retention rates and lower upfront costs for our patients. Going into 2025, the international business will start to drive meaningful contribution to CureLeaf. Without doubt, there is a lot of opportunity that we are aggressively going after, and we continue to evaluate additional geographies for strategic expansion. In New York, we continued to penetrate the new wholesale doors at a rapid clip, reaching 57% penetration of doors in the market today, which contributed to over 100% growth in wholesale revenue versus last year. Our indoor flower quality has never been better, and we are reaping the benefits of the team's dedicated focus, which led to the state enjoying 52% year-over-year growth. The market in New York is improving, and I believe will continue to accelerate next year. In Ohio, we launched adult use sales in early August and have seen our business nearly double compared to last year and 40% sequentially. Our two stores are performing well, even though marketing to adult use customers are not allowed thus far, which we believe has hampered overall consumer awareness. We are making solid progress on our next two stores, which we plan to have open in early 2025, with the remaining four slated to open in the following months. At the hemp company, our initial launch of our small line of test SKUs in select edibles and zero-proof seltzers are gaining traction in both our DTC and wholesale channels. We're now refining our manufacturing process for mass production, and in parallel, we are working with distributors and strategic partners. In early 2025, we will launch an expanded assortment of products that will cater to the hemp consumer, which I'll share more about in our fourth quarter call. We are excited by the momentum we are seeing across these vectors, and we are confident they will support the profitable organic growth and strategic expansion that we are prioritizing. In my first month as CEO, my core actions have focused on refining margins, optimizing cash flow. To achieve these objectives, I have challenged the management team to execute against the following six focus areas. New leadership. We have and will continue to upgrade our management team in key regions and functional areas and have revamped our broader organizational structure to better execute on our strategic priorities. On product quality, we have upgraded our practices across our cultivation manufacturing facilities. The result has been a dramatic gain in flower yield and quality. I am relentless in Curly's commitment to excellent quality and high safety standards and will not accept anything short of that. For portfolio rationalization, we conducted a deep dive into portfolio review to evaluate our leading brands and to rationalize our SKUs. We are eliminating 20% of our underperforming SKUs that do not meet growth or profitability hurdles. On cost reduction, since July, we have identified hundreds of margin initiatives throughout the organizations that we have or are in the process of implementing. In addition, Over the last two months, as CEO, we have identified an incremental 25 million of annualized savings, with the majority coming from reduced labor, marketing, and IT expenses. In operating efficiency, we've invested in facility upgrades, streamlined our supply chain, and reduced labor and overhead in order to continue to minimize our costs. On inventory management, we are committed to reducing the inventory on our balance sheet, and we are targeting best-in-class inventory turns to drive product velocity and cash conversion. I am pleased to report that the team is making great headway against all of these objectives. To summarize, we have done an immense amount of work in the last 90 days, but we are just getting started. Refocusing the business while navigating the volatility of this industry will take time, but we will bring the entrepreneurial spirit and winning culture back to Curaleaf. We may see slower growth before re-accelerating as the many investment initiatives we have underway will take time to fully come to fruition and flow through the P&L. We are hyper-focused on returning to our roots, driving durable improvements in our margin profile and cash generation while also prudently investing in the future. With that, I'll turn the call over to CFO Ed Kremer to go over the financials in greater detail. Ed.