Curaleaf Holdings, Inc. (OTC:CURLF), a leading player in the cannabis industry, held its Second Quarter 2024 Earnings Call, where significant developments and financial results were discussed. The company announced the retirement of CEO Matt Darin, with Executive Chairman Boris Jordan stepping in as the new CEO.
Curaleaf reported a modest revenue increase of 2% year-over-year, reaching $342 million for the quarter. Expansion efforts were highlighted, particularly in New York, Ohio, and Florida, with the latter expected to be a major growth driver pending the legalization of adult-use cannabis. The international segment enjoyed a robust 78% growth, led by strong performances in Germany and the United Kingdom.
Key Takeaways
- CEO Matt Darin retires; Executive Chairman Boris Jordan to become CEO.
- Q2 revenue up 2% year-over-year to $342 million.
- Expansion in New York, Ohio, and Florida, with Florida being a top revenue and margin state.
- International business grew by 78%, with Germany and the UK as strong contributors.
- Entry into Asian markets with first wholesale orders to Australia and New Zealand.
- Launch of hemp-derived THC products under the Select brand.
- Anticipated acceleration of growth in the second half of the year.
- The company repurchased $15 million of its bonds, saving approximately $4 million.
- Plans to file amended tax returns for tax refunds.
- Fiscal 2024 guidance reiterated for mid-single-digit revenue growth and mid-20s adjusted EBITDA margins.
- Direct-to-consumer distribution of hemp products now in 25 states, with a partnership with DoorDash (NASDAQ:DASH).
- Consideration of entry into Australian and New Zealand markets while addressing German supply chain issues.
- Investment in Florida market ahead of the potential adult-use vote in November.
Company Outlook
- Curaleaf aims to become a dominant global consumer products manufacturer and distributor of cannabis products.
- The company expects mid-single-digit revenue growth and mid-20s adjusted EBITDA margins for fiscal 2024.
- Investments in Florida are ramping up in anticipation of the adult-use cannabis market, with plans to triple indoor cultivation capacity and increase store count to about 85.
- Continued focus on growth strategies and reducing leverage on the balance sheet.
Bearish Highlights
- Challenges in the industry are acknowledged, but specifics are not detailed in the summary provided.
Bullish Highlights
- Strong international growth, particularly in Germany and the UK, with the recent acquisition of Northern Green contributing to this success.
- Entry into the hemp-derived THC market, viewed as an opportunity to reach new consumers and hedge against the regulated business.
Misses
- The summary provided does not specify any financial misses or shortfalls in expectations.
Q&A Highlights
- Discussion on funding and capital expenditure in Florida in anticipation of adult-use cannabis legalization.
- Opened stores in Ohio showing strong results, with plans to open six more by the next year.
- Improved gross margins due to decreased discounting and better product quality.
- Observations of price compression in states like Florida and Arizona, with a strategic move away from discounting.
- Potential benefits from congressional action if Democrats control the government, with implications for the hemp market and beverage segment.
- The goal of achieving a 50% gross margin in the wholesale business, despite regional market challenges.
Curaleaf's strategic movements and leadership changes align with its goal to cement its position as a leading global cannabis company. With the retirement of CEO Matt Darin, Boris Jordan's new role as CEO is poised to drive the company's growth initiatives. The company's financial health appears stable, with its revenue growing slightly and its international business thriving. The planned expansion in Florida and entry into the hemp market, along with the potential benefits from political developments, indicate Curaleaf's proactive approach to market dynamics. The company's focus on strategic investments and partnerships, such as with DoorDash, suggest an agile adaptation to evolving consumer trends and regulatory landscapes. Curaleaf's financial discipline, exemplified by the bond repurchase and tax refund claims, demonstrates a commitment to optimizing its financial operations. As the company prepares for future market opportunities, investors and industry watchers will be closely monitoring Curaleaf's performance in the evolving cannabis landscape.
InvestingPro Insights
Curaleaf Holdings, Inc. (CURLF) has been navigating a challenging market landscape, as reflected in recent metrics and analyst insights. Here are some key data points and tips from InvestingPro that provide a deeper understanding of Curaleaf's current financial position:
- The market capitalization stands at $2.39 billion, indicating the size and scale of Curaleaf within the cannabis industry.
- A negative P/E ratio of -9.44, and an adjusted P/E ratio for the last twelve months as of Q1 2024 at -11.88, suggest that the company is currently not profitable, a sentiment echoed by analysts who do not anticipate profitability this year.
- The price has experienced significant volatility, with a 1-week price total return of -16.08% and a 3-month price total return of -39.83%, signaling investor concerns and a bearish market sentiment for CURLF.
InvestingPro Tips also reveal that Curaleaf does not pay dividends to shareholders, which is an important consideration for income-focused investors. Moreover, the stock is trading at a high EBIT valuation multiple, which could be a point of analysis for potential investors evaluating the company's earning potential relative to its market value.
For those interested in the detailed analysis and additional tips, InvestingPro has listed 7 tips in total, which can be found at https://www.investing.com/pro/CURLF. These insights may prove invaluable for investors looking to make informed decisions about Curaleaf, especially in light of the recent leadership changes and strategic initiatives outlined in the company's earnings call.
Full transcript - Curaleaf Holdings Inc (CURLF) Q2 2024:
Camilo Lyon: Good afternoon, everyone, and welcome to Curaleaf's 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 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 the 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 SEDAR 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 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.curaleaf.com. With that, I'll turn the call over to Chief Executive Officer, Matt Darin. Matt?
Matt Darin: 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 of Curaleaf 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 have a 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 adviser 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. Boris?
Boris Jordan: 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 adviser to me in this transition. With Curaleaf's deep bench of talent, I have every confidence this will be a smooth transition. While I've 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. And doing this, Curaleaf 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 multibillion 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 returned to a regionalized management structure, which has brought us closer to our customer in 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 and 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 flower. These initiatives will build on an already strong market share position Curaleaf enjoys across the country, with Select as the number 1 vape brand and Grassroots and Find holding two of the top four positions in flower. 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've always had a great vision of making Curaleaf a 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 in the industry -- as the industry embarks on its next significant evolution once the scheduling 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 margin showed successful 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 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 start-up 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, Curaleaf ended the quarter with $89 million of cash on the balance sheet and generated operating cash flow from continuing operations of $30 million and $6 million in free cash flow. Thus far in 2024 is 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 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 in 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 price 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 a 153% wholesale growth compared to last year. We are thrilled to have been a part of the first group of dispensaries to open -- into 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 lines out the door and our second adult-use store, Cuyahoga Falls opened at 8 AM 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 hemp to the broader wholesale market to our full assortment of top-tier brands and products. With Amendment 3 consistently pulling in the mid-60s, the cannabis adult-use ballot initiative in Florida is looking promising. To this end, we are investing and 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, we expect two stores to open next week with opening pace 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 1, 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 Curaleaf 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 underpenetrated 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 22, 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 of brands in 15 countries. To that end, we shipped our first wholesale orders to Australia and New Zealand partners, marking Curaleaf's entry into the Asian region. NGC is an integral part of our international strategy, 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 gain. 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 flower, 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, in over five years, we grew it to 1.3 billion. In Europe, which is twice the population in the U.S., we are the 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 ground-breaking partnership with a large direct-to-consumer distribution partner in the U.S. There is 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 we – 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 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 shift, mix shift 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 and 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 CEO role 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 Curaleaf 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, clearly 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?
Ed Kremer: Thank you, Boris. Total revenue for the second quarter was $342 million, representing a year-over-year increase of 2%. Growth was driven by strength in Maryland, New York, Utah and Ohio, as well as 78% growth in our International segment. Our Domestic segment represented 93% of total revenue and our International segment expanded 7% of total revenue, 150 basis points higher than in the first quarter. As previously mentioned, international growth was driven by the U.K., Germany's Pillar 1 medical market expansion and the addition of NGC. Our channels retail revenue was $265 million compared to $277 million in the second quarter of 2023, down 4% year-over-year as the shift from retail to wholesale that began in earnest last quarter continued in Q2, most notably in New Jersey, Illinois and New York, where the largest number of independent retailers have opened this year. Specifically, our Belmar, New Jersey store had an outsized impact on the year-over-year retail decline due to increased store openings in the immediate area. Wholesale revenue increased 31% to $77 million compared to last year's $58 million and represented 22% of total revenue. The strength of our wholesale revenue was driven by New Jersey, Illinois, New York, Pennsylvania and our International segment. We delivered our first wholesale shipments to Australia and New Zealand in the second quarter. Moving into retail consumer metrics. Transactions were flattish in the second quarter compared to last year. Second quarter basket trends were consistent with the first quarter as year-over-year units per transaction were down 7%, partially offset by AUR increase of 3% compared to last year. We believe the lower income consumer continues to opt for our value offerings as pressure on disposable income from inflation and high interest rates has not abated. That said, innovation and units are inspiring increased trial rates on products like liquid diamonds and food stick. Our second quarter gross profit was 160 million, resulting in a 47% gross margin. Adjusted gross profit was 163 million or 48%. Sequentially, Q2 adjusted gross margin remained steady as a 100 basis point increase in our vertical mix and higher utilization were offset by price compression. Year-over-year Q2 adjusted gross margin increased 250 basis points due to stronger wholesale margin and higher utilization rates in our facilities. SG&A expenses were 110 million in the second quarter and increased 1 million from the year ago period. Core SG&A was 106 million, an increase of 12 million from prior year. The year-over-year increase in our core SG&A primarily reflects investments in international, including the acquisition of NGC, new store openings in Florida and our new hemp line. SG&A was 32% of revenue in the second quarter and a decrease of 40 basis points compared to the year ago period. Our second quarter core SG&A rate was 31%, an increase of 280 basis points. Second quarter net loss from continuing operations was $49 million. Net loss per share from continuing operations was $0.06. Adjusted EBITDA in the second quarter was 73 million compared to 72 million in the prior year period, a 1% increase. Second quarter adjusted EBITDA margin was 21.3% compared to 21.5% in the prior year. Turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of 89 million. Inventory decreased 9 million or 4% compared to last year's second quarter, while net sales grew 2%. Net capital expenditures in the second quarter were 25 million. Given the investments we discussed earlier, we expect 2024 CapEx spending to be approximately 70 million at the higher end of our range, largely due to our Florida expansion initiatives. And should Florida's Amendment 3 pass in November, we could opt to pull forward additional investments from 2025 into the fourth quarter. We will provide more color on our next earnings call. Year-to-date and in the second quarter, we generated operating cash flow from continuing operations of 76 million and 30 million, respectively. Similarly, free cash flow from continuing operations was $39 million and $6 million, respectively. Our outstanding debt was 563 million, net of unamortized debt discounts and deferred financing fees, of which 82% is not due until December 2026. As we continue taking actions to reduce leverage on our balance sheet, during the quarter, we repurchased $15 million of our December 2026 bonds at a 7.75% discount, which combined with our interest savings will save the company approximately $4 million that would have been paid through maturity. We will continue to be opportunistic with future bond purchases in the second quarter. In the second quarter, we made a total of $58 million in payments for taxes, interest and acquisition-related payments. I'd like to provide an update on our tax position. After completing our analysis and based on review of the relevant provision and scheduling history, we are taking the position that the application of Section 280E of the Internal Revenue Code does not apply to Curaleaf's operations. As such, we intend to file amended federal and state income tax returns with refund claims for 2022 and protected claims for the fiscal year 2020 and 2021. For 2023 and beyond, Curaleaf will file as a normal corporate filer. This position is reflected in our Q2 financial statements, moving a substantial portion of our taxes from current to long-term liabilities. We're halfway through the year. And while there is macro uncertainty around us, we are optimistic about the growth catalysts we have articulated. We are reiterating our fiscal 2024 guidance to mid-single-digit revenue growth, albeit at the lower end of the range. Similarly, with respect to adjusted EBITDA margins, we expect to land at the lower end of our mid-20s range as we invest in Florida, international and The Hemp Company. With that, I'll turn the call back to the operator to open the line for questions.
Operator: [Operator Instructions]. Your first question comes from Aaron Grey with Alliance Global Partners (NYSE:GLP).
Aaron Grey: Hi, good evening. Thanks for the questions. Matt, congratulations on all your time and good luck in your future endeavors. First question for me, just regarding the hemp business that you guys have launched now. I wonder if you could speak further in terms of the distribution opportunities. You've referenced 25 states, a direct-to-consumer. I want to also ask about additional color in terms of number of states that will be coming on in terms of brick-and-mortar. You mentioned a large distributor that you have a partnership with. And then also if you could expand upon, I believe, a partnership you have with DoorDash and the number of states that would be available, how that's structured, if it's similar to the DTC state. So any color in terms of how you're planning the brick-and-mortar distribution for hemp would be helpful.
Matt Darin: Aaron, this is Matt. So yes, so we launched during the quarter here, direct-to-consumer through TheHempCompany.com with our full assortment of initial launch of beverages and gummies. We're, as we said, distributing directly to people's homes in 25 states kind of throughout the country, including some major markets, some of which we already operate in, like Florida, others that are new markets for us like Texas. So that's part of the exciting opportunity, it's getting our brands in many large new states that we've not had our brands in previously. We also launched with DoorDash. Today, you can order direct to your door on the DoorDash app in four states, and we have many more coming here. We're going to have 13 states on DoorDash here in the coming months as products get shipped to all those. We're also going to be announcing here soon some partnerships on the brick-and-mortar side with distributors into a bunch of different markets as well as with some retailers. So can't share anything on that specifically right now, but we're pretty excited for the opportunity to get our brands not only direct-to-consumer, but on shelves here, and more to come on that in the near future.
Aaron Grey: Okay. Great. Thanks a lot for that color, Matt. Second question for me, just in terms of the SG&A and related to the margin guide. So it sounds like some of the expenses with international in hemp, 180 basis points to about $6 million. How do we think about that going forward? Were there some of those more onetime in nature that just need to be done for the setup for Germany or hemp? Or is a lot of that going to now be within the base and need to be leveraged via sales? So just trying to help triangulate how we think about the sales growth, some of the helpful color you gave on the margins that have improved? And then how we think about that, that SG&A trend line going forward?
Boris Jordan: So thanks for the question. We will be, as we said, as I said in my script, we exited the second quarter at a 50% gross margin, which is the first time we hit that since our changeover to GAAP from IFRS. And we will continue to -- we saw July numbers fractionally higher than that. So we're already seeing an improvement going into the third quarter, and we expect to continue to see improvements in gross margin. There's a tremendous amount of work that's been done since last year and this year on improving the financial metrics of the company. Particularly right now, we're really focused on the COGS aspect of the business, specifically around our facilities and efficiencies coming out of facilities. Five months ago, we brought on a very experienced Head of Operations from probably the best-in-class operator in the sector. And we've already seen marketable improvements in our business, particularly on the facility side in terms of yields, quality of flower and efficiencies. And so we continue to see an improvement in those margins. We think they'll continue to expand. And those hits that we took in the second quarter were onetime on the hemp business, hemp business going forward. Those were start-up costs. And also, there were some fees and things associated with the NGC transaction, integration of NGC into Curaleaf, but those were really onetime and we'll be moving on into the third quarter already with straight reporting on margins without those being affected to our bottom line.
Aaron Grey: Okay, great. Thanks for the color. Now I'll jump back in the queue.
Operator: The next question comes from Frederico Gomes with ATB Capital Markets. Please go ahead.
Frederico Gomes: Hi, thanks for taking my questions. First question just on the international side. So you mentioned first shipments to Australia and New Zealand. Curious if you could talk about Australia specifically, the opportunity that you see in that market? And I believe that it's a market that is growing. So any comments there?
Boris Jordan: All the markets, all the international markets, given their nascent state, are really growing and expanding. Australia is a large market and is expanding. However, there's quite a bit of competition in that marketplace. New Zealand is a smaller market with less competition and higher margins. So both are very interesting. They both have slightly different dynamics. And at the moment, we are doing a thorough review as to whether or not we want to get in domestic into those markets. So today, we're just importing Curaleaf white label and Curaleaf branded products to introduce those to the markets, working with local distributors. In most markets, however, Curaleaf tends to go vertical, and vertical in the sense that we tend -- want to want to own the distribution ourselves. We have not made that commitment to either Australia and New Zealand at this point in time. We're working through third-party distributors. But for instance, in Europe, in all the markets that we operate with, we also control the end distributors in the local countries that we operate in. And that allows us to control the quality product and the distribution, build relationships with the end consumers as well as on the B2B side with the pharmacy that distribute our products. And so we are reviewing Australia and New Zealand from that perspective. We have not yet made a decision as to whether or not we want to get into those markets, but it's still early days.
Operator: Your next question comes from Russell Stanley with Beacon Securities. Please go ahead.
Russell Stanley: Good afternoon. Thanks for taking my question. Apologies if I missed this earlier, but you identified some bottlenecks to growth in Germany on the May call, signing telemedicine platforms, getting doctors trained, packaging and pharmacies. I'm wondering where you've seen some progress and where you think there's still more work to do on those fronts?
Boris Jordan: Yes. Honest, Russell, we actually are welcoming some of these bottlenecks because if we didn't have them, I think that the business would -- getting our supply chains and everything in order, in order to supply the market is giving us -- these bottlenecks are giving us some time to do that because the market is actually growing a bit faster than we originally anticipated. We're seeing very, very strong growth in the third quarter again with outsized performance in particularly in Germany, but also the UK. So in many ways, some of the bottlenecks are kind of welcome, I think not only to Curaleaf but to everybody else, as we're trying to get all the supply chains in order, in order to supply. Don't forget, as I said in my script, it's an 84 million person market. So if that market penetrates at the level, for instance, of where Florida is on a medical basis, and there's been recently a further loosening of the rules in terms of getting your prescriptions and things like that, then this could be a very, very large market very, very quickly, and I don't believe the industry is fully ready to supply that market, which is a high-class problem short term, but it is nonetheless an issue for the whole market. So overall, we're very pleased with the growth rates. Everyone is working through, the various distributors, everybody is working through the various bottlenecks. And I fully expect that we're going to see outsized growth, both in the third and the fourth quarter coming out of that market.
Operator: Your next question comes from Scott Fortune with ROTH Capital Partners. Please go ahead.
Scott Fortune: Yes, good afternoon. Thanks for the questions here. Just a little bit more color on the Florida market and your positioning. I know you're putting a fair amount of CapEx in there from a production standpoint and kind of the store base that had potential adult-use. Just a sense of building out that state ahead of adult-use and your expectations on potentially continuing to fund or help the campaign for a positive vote approval there in November. Just a little more color on Florida would be great.
Boris Jordan: Yes. So we already funded a portion of some of the commitments in the first quarter, as you know, together with some of the other players. We are in discussions right now as a group of making a second funding in order to help get this over the line. It is pulling well. But nonetheless, we're not taking anything for granted. And I think everybody wants to join together to try to make this thing work. Most of the burden has obviously fallen on the largest operator, Trulieve. But then the second two largest players have picked up the difference and some of the other players have contributed not much at all to the process but we're all trying to rally the troops to get as much money committed so that we can fight the naysayers in that process. In terms of the Florida market, we have always taken a cautious approach to the staging of our CapEx. Originally because of timing, we built out the shell and all the infrastructure, electricity and things like that for the expanded growth. But then we mothballed the rest of it waiting for to see whether this was going to get on the ballot. Once we realized in March and April that this was getting on the ballot, we started the second wave of our CapEx, which was signing leases and getting stores in place to get to that 85 level as well as starting to expand the growth facilities. We've made a decision to invest to get these growth facilities into a significant position by November. We're actually going to be planting late October into some of that capacity so that we have available flower ready. We're then going to wait for the November vote. If the November vote is positive, we're going to have the third wave of CapEx, which will finish the facilities, which will then be -- the rest of the facilities will be finished and planted by early -- late March and early April so that we could be ready for May and June launch. So we have a phasing of all of our CapEx depending on what the results are going to be like. We're also in a position where if we by chance, we don't think this a lot but if by chance, we don't get adult-use those facilities are going to be very helpful in our medical business because we have had some shortage of product and flower on the medical side and certainly of quality because we're building high-quality indoor and Curaleaf, as you also know has both outdoor and greenhouse so we could stop growing in some of the outdoor and greenhouse and just grow in the indoor facilities, which will raise the quality of flower for the medical market. So all-in-all, we have planned this in such a way to mitigate any risk if by chance we don't get adult-use but we don't expect that to be the case.
Operator: Your next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Matt Bottomley: Yes, good evening. Thanks for the questions. Boris, you had mentioned, I think a few markets, New York, Ohio or Germany combined representing near-term growth catalyst for the company. Specifically on Ohio, I'm just wondering relative to your current retail footprint and the near-term opportunity here, is there a specific strategy into getting to that sort of 8-store cap? Or do you have sufficient capacity or maybe competing capacity with respect to service the wholesale market there? Just what's your strategy on the ability to get on the ground running here in a market that, I guess, just opened up for the first time this week?
Boris Jordan: Yes. So we had really outsized results out of the stores that opened yesterday. We have another store that opened today for adult-use. We were surprised that it was well above our internal projections on what we expected in that business. So that's a pleasant surprise in a difficult market. We also have our best performing in terms of yields grow operations in Ohio. So we fully expect and already have started to supply the wholesale market there with very significant demand coming into us on a wholesale product basis. And we expect pricing in the early parts of that process over the next 6 to 12 months to be almost at the level of retail pricing because of the lack of supply. This is a very undersupplied market and the growth rates are going to be quite substantial because regulations didn't allow us to build growth that were bigger than the Tier 1 growth that we have already. So however, we -- as we are allowed to, we will be expanding those growth facilities according to regulation. So we also anticipate to open the 6 stores that we are allowed that we have now by the first quarter of next year. They will be opening up at different times. But between that now and the end of the first quarter, we anticipate to have our full fleet of eight stores open in the Ohio market. But we also see the big wholesale opportunity. And as I said, this is our best performing in terms of yield and manufacturing facility in the country.
Operator: Next question comes from Matt McGinley with Needham. Please go ahead.
Matt McGinley: Thank you. You indicated that gross margin improved throughout the quarter and that you hit 50% in June and July but overall, your gross margin was pretty similar to what you had in the first quarter at around 48%. But you ended at 50%, you were well below that start. Why did that gross margin dip earlier in the quarter? And what's different about the inventory position or mix or production that gives you the conviction that you can sustain that gross margin at around 50% for the remainder of the year?
Boris Jordan: Yes, Matt, to be honest too much discounting around 420 and probably something we're going to look at as a strategy going forward and I don't think you're going to see that but it has been historically a process that everybody has participated in. And instead of discounting just on the day of 420 or a couple of days before it's been a month-long process. And so April was extraordinarily low compared to May and June and June recovered fully. And as a whole, you're going to see Curaleaf changing its strategy and we're already walking away from a lot of the discounting strategies especially with product improvements that we've seen and potency and product assortment. We've had a huge reception to Briq and Stiq, our food stick product. And so we're moving away from a discounting strategy and much more pricing to our margin targets. And so that's why you're seeing very, very strong July. And I think into August, you're going to even see a stronger expansion of margin.
Operator: Next question comes from Ty Collin with Eight Capital. Please go ahead.
Ty Collin: Hi, good afternoon. Thanks for the question. I'm just wondering if you could discuss the level of promotional activity you're seeing across your footprint and how that's changed over the last months and quarters particularly as you're starting to see some weakness emerge in the job market and consumers continue to face a number of headwinds? Just wondering if you could discuss any changes you observed there. Thanks.
Boris Jordan: Yes. So I'll start with macro. Obviously, you can't avoid the macro situation in the country. You've got a high inflationary environment even though we're probably going into a rate reduction cycle that's not going to filter through to the consumer probably for a good 12 months. So I still think that there's the peak period of pressure on the consumer yet to come in the United States. And I think we're going to see that going into the fourth quarter and the first quarter. And so I think there'll be continued pressure. However, the one thing I have noticed and I think we've all noticed about cannabis is that if you have high-quality product itself and you don't have to discount. And so as Curaleaf has improved its operations across the footprint of all of our facilities and our product quality has increased quite dramatically, we're finding that we have to discount much less and so that we can fight some of the price pressures that we've seen in the market today. But we can't avoid the fact that there are also competitors in the marketplace whose maybe balance sheet or other pressures on them are a little bit significant, and so they are discounting dramatically. And we've seen that in two states in particular. And the issue in those is that we're big operators in both those states, that's Florida and Arizona, where we've had $200-plus million businesses. And therefore, we can't escape the fact that there is that price compression in those states. But as we increase the product quality, we're finding that we have to discount less, and more and more people are buying products. An example also is in Germany, where our 420 product prices at probably a 300, 400 basis point difference to our competitors. And the reason being, it's a very, very high-quality product. And one of the reasons we have introduced a mid-tier product under the Curaleaf branding is because there is a lot of price-sensitive consumers. We haven't played in that segment. We do play in that segment in the U.S. We don't play in that segment in Europe. We're now with our Portuguese facility coming online fully. We're starting to export product from there, which will play into that mid-tier, therefore, expanding our customer base at a better pricing. And the cost of that product is significantly lower than our indoor product because we're growing it in greenhouses in Portugal. So we're not going to be eroding our margin, but we are going to be playing in a much wider segment of the market, supplying the Greenhouse grown product into the German market.
Operator: Next question comes from Pablo Zuanic with Zuanic & Associates. Please go ahead.
Pablo Zuanic: Thank you. Boris, I want to ask you a crystal ball question, if you don't mind, but I guess the first one is your latest thoughts in terms of whether we get rescheduling before January 20. Some of us had expected this would happen by August 19, when we had the Democratic convention. But just your latest thoughts on that. But number two, the bigger picture question, and I guess just hear me out here. I know there's a lot of uncertainty, right? What happens with rescheduling, what happens with the election? But let's say that we come to January 20, Kamala Harris, Vice President Harris, is the new President. Democrats control those chambers, right? And I know there's a lot of hypotheticals there, but we still don't have rescheduling. So what happens in that scenario? Based on the comments before, you may just want to reschedule, right? And what I see here is an opportunity with the Farm Bill, right? The 2023 Farm Bill hasn't happened, it's supposed to happen in 2025. Do you believe that there's an opportunity for the blue, the Democrats, right, to push cannabis and then the red, hemp, with the Farm Bill try to come together and do something so we see congressional action in cannabis, and we get the Farm Bill finally done. Sorry, I know there's a lot of hypotheticals there, but I'd love to hear your thoughts on that.
Boris Jordan: I don't have a crystal ball, but let me try and briefly answer the question. So do we think that rescheduling will happen and when? Listen, we know as much as anybody else. We don't know any more than anybody else. My view has always been that if they're going to use this as a campaign issue, the closer you announce something to a campaign, the more people remember it and the better it is. So I've made my position public that if the decision is to reschedule before the election that, that decision will probably, most likely come late September or October rather than before the convention. So that's my view. I hope I'm wrong and it comes before the conversion, but in this particular situation, if they make a decision to reschedule before the election, that's when it would come. So that's what I'm prepared to say on that issue. On the next question, listen, the way I'd like to deal with that is that, these are -- there's a lot of hypotheticals there. So it's very difficult to address. So we can do that in a private conversation because of the long answer. I just want to say one thing. I believe that the hemp market is the one that's having the largest impact on the regulated cannabis. I don't care what anybody says, we're seeing it across the board. But more importantly, what I think it is, is that the regulars cannabis industry, if I can say that, is the OG market. It's where people come that have been using cannabis for a long time and are very familiar with the product. The hemp market is opening up a brand-new customer. The customer that doesn't want to come into a dispensary. The customer that does not want to be seen, associated that is trying these products. And then particularly, the beverage side, I've always said that, just like I said, Europe would be a big market and nobody believes that, now it's becoming that. I've always said beverage is going to be a big market. I think beverage is going to be the largest segment after flower in the cannabis sector in a very short period of time and eventually will be the largest, and the only place you can do that at scale is in the hemp market because of the economy of bottling and then distributing nationally. And so I think that it's a very interesting market to operate in. We want to be a major player in the beverage market. We think there's a huge amount of upside in it, and we're already seeing it in pre-orders that it's very, very interesting. And we'll be expanding our SKUs and expanding the flavors. And different types of products, we'll be issuing through the beverage market here shortly, and we'll be making those announcements. I also think that the cannabis industry needs to work with the hemp industry. Instead of fighting the hemp industry, I think we should be working together. They have a very -- the farmers have a much stronger lobby than the cannabis industry. They seem to have the ear of the Republicans as well with the actions we saw in both Florida and in other states as well. And so Curaleaf is trying to lead the way in that conversation. And we're working together today with large hemp farmers in particular, who have a lot more. It's not the hemp product producer, it's the hemp farmers. They are the ones that have the political power, and we're trying to join together with them in lobbying Washington. The Farm Bill is not going to get voted on this year, it's going to be pushed into next year, and that's where we want to work together between rescheduling and hemp and creating a regulatory framework that would allow all these products based on not the plant that's grown, but by the cannabinoid that are being used. We want equal regulation for THC across both the hemp and the regulated cannabis industry as well as the other psychoactive cannabinoids.
Pablo Zuanic: Thank you.
Operator: Your next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.
Eric Des Lauriers: Great. Thank you for taking my questions. Could you comment on wholesale gross margins and how you expect those to impact company-wide gross margins as wholesale continues becoming a larger mix, especially with the new hire implementing these efficiencies across production and processing. How much margin have you seen? I know it's only, I think you said it's only been five months since that employee joined. And how much more room do you see to go on wholesale gross margins?
Boris Jordan: So our internal target is to target a 50% gross margin on our wholesale business. Our retail business actually commands typically a higher margin than that. Not in every market can we do that, though. There are certainly markets where prices are more compressed like in Arizona where achieving a 50% gross margin is very, very difficult on the wholesale side. So it's -- but our internal target for our salespeople is to target a 50% gross margin in the wholesale business. And particularly, in the Eastern states. In fact, some of the Midwestern states, we're able to achieve that. But in some of the Western states, we're not able to achieve that due to the fact that they have more price compression than the Eastern states. So that's our overall target.
Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Camilo for any closing remarks.
Camilo Lyon: Thanks, everyone, for joining. We will talk to you in 90 days.
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