Curaleaf reports growth and strategic expansions in Q1 2024 By Investing.com

Curaleaf Holdings (OTC:) has delivered a robust financial performance in the first quarter of 2024, with a 2% year-over-year increase in total revenue amounting to $339 million. The cannabis company’s earnings call highlighted the positive impact of the DEA’s decision to reschedule cannabis to Schedule 3, which is expected to save Curaleaf over $150 million in 2024 taxes.

Executive Chairman Boris Jordan emphasized the significance of the Safer Banking Bill for the industry’s access to banking services, while CEO Matt Darin underscored the company’s successful brand expansion and product diversification. The company also reaffirmed its fiscal 2024 guidance of mid-single-digit revenue growth and mid-20% adjusted EBITDA margins.

Key Takeaways

  • Curaleaf anticipates saving over $150 million in taxes due to the DEA’s rescheduling of cannabis.
  • The company’s international business grew by 59% in the first quarter and is expected to reach $100 million in revenue in 2024.
  • Plans for expansion include Florida, Ohio, and the hemp-derived THC market.
  • Curaleaf’s Select brand leads in the vape category in Massachusetts, and Grassroots is successful in the flower category.
  • The company is focusing on infused flower and pre-rolls to counter pricing pressure.
  • Wholesale sales are up, but domestic retail sales have declined.
  • Curaleaf is rebranding clinics in the UK and acquiring suppliers in Canada and Poland.
  • The company’s entry into the hemp-derived THC market includes edibles and beverages.
  • Curaleaf is seeking refunds of federal income tax based on the belief that section 280E does not apply to its business activities.

Company Outlook

  • Mid-single-digit revenue growth and mid-20% adjusted EBITDA margins are reaffirmed for fiscal 2024.
  • Low single-digit revenue growth expected for the second quarter compared to the first quarter.
  • Operating cash flow is projected to exceed $100 million for the full year.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Bearish Highlights

  • Domestic retail sales have seen a downturn.

Bullish Highlights

  • Strong international growth, notably in Germany and Poland.
  • Gross margin improvement due to better absorption costs.
  • Reduction in SG&A expenses leading to increased profitability.
  • Strong balance sheet and leverage reduction through bond repurchases.

Misses

  • A slight decrease in vertical mix impacting gross margins.

Q&A Highlights

  • Curaleaf is preparing to file as a normal taxpayer for 2023 and 2024 and may amend certain prior year returns.
  • The German market is experiencing stronger growth than anticipated, with telemedicine platforms adding a record number of patients in April.
  • The company spent three years developing a compliant supply chain for hemp-derived products and plans to launch seltzers and edibles.
  • Inventory was a $3 million drag, but the company is on track to achieve its operating cash flow guidance.
  • Curaleaf aims to build a vertical supply chain in the international business to improve margins and control.

Curaleaf’s strategic focus on product diversification and international expansion, coupled with the anticipated tax savings and growth in key markets, positions the company for continued success in the evolving cannabis industry. The company’s efforts to adapt to market demands and regulatory changes reflect a proactive approach to capitalizing on opportunities within the sector.

InvestingPro Insights

Curaleaf Holdings’ (CURLF) recent performance and strategic moves paint a picture of a company on the rise, with a focus on expansion and diversification. The InvestingPro data and tips provide additional context to understand the company’s financial health and market position.

InvestingPro Data indicates that Curaleaf has a Market Cap of approximately $3.88 billion, reflecting its significant presence in the cannabis industry. The company’s P/E Ratio stands at -13.37, and when adjusted for the last twelve months as of Q4 2023, it further dips to -20.36. This negative ratio suggests that Curaleaf is not currently profitable, aligning with analysts’ expectations that the company will not be profitable this year. Despite this, the company’s revenue growth remains positive, with a 5.58% increase over the last twelve months as of Q4 2023.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

InvestingPro Tips highlight that Curaleaf’s stock price movements have been quite volatile, which is a critical factor for investors to consider. Moreover, the company’s short-term obligations exceed its liquid assets, posing potential risks in terms of financial flexibility.

On the positive side, Curaleaf has seen a high return over the last year, with a 109.92% price total return, which may attract investors looking for growth potential in their portfolios. Still, it is worth noting that Curaleaf does not pay a dividend to shareholders, which could be a consideration for income-focused investors.

Investors seeking more in-depth analysis can find additional InvestingPro Tips on the company’s profile at https://www.investing.com/pro/CURLF. By using the coupon code PRONEWS24, users can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to a total of 9 insightful tips for Curaleaf Holdings.

Curaleaf’s strategic focus, combined with the insights from InvestingPro, suggests that while there are challenges, there are also significant opportunities for the company in the dynamic cannabis market.

Full transcript – Curaleaf Holdings Inc (CURLF) Q1 2024:

Operator: Good day, and welcome to the Curaleaf Holdings First Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Camilo Lyon, Chief Investment Officer. Please go ahead.

Camilo Lyon: Good afternoon, everyone, and welcome to Curaleaf Holdings’ first quarter 2024 conference call. Today, I’m 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 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 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 releases 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 press release issued today and available on our Investor Relations website at ir.curaleaf.com. With that, I’ll turn the call over to Executive Chairman, Boris Jordan. Boris?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Boris Jordan: Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our first quarter results. The decision last week by the DEA to reschedule cannabis to Schedule 3 is one of the game-changing catalysts we’ve been eagerly anticipating for nearly 10 years. I believe this long overdue change will create a seismic shift for us and the industry, and we’re grateful to the Biden administration for moving it forward. Important medical research of the plant can finally proceed unencumbered, a crucial development for consumers seeking alternatives to opiates and other pharmaceuticals. Most immediately for us, of course, it means an end to the punitive 280E tax, which as the largest beneficiary could save us over $150 million in 2024 taxes. But there is more work to be done to put cannabis on the same plane as other consumer products. The industry still lacks proper access to banks and credit cards, seasoned service providers and established stable technology stack. All of this can be remedied if leadership in Congress moves to pass the Safer Banking Bill. The process continues to move forward, albeit more slowly than we would like. However, the rescheduling news strengthens the case for expediting Safer. On the issue of tax, Curaleaf has further reviewed with legal counsel the basis for filing federal tax returns on grounds that Section 280E of the tax code does not apply to its business. Subject to completing that review, Curaleaf anticipates it will file as a normal tax payer for 2023 and 2024. We also anticipate amending certain prior year returns to claim refunds of excess federal income tax that was paid based upon application of Section 280E. I’d like to provide an update on custody solutions. We recently added another global custodian, Euroclear, to our list of financial institutions that will custody our shares. Euroclear is the custodian of the international investment community. With BNY Mellon (NYSE:), State Street (NYSE:), and now Euroclear, we have 3 of the top 4 largest custodians in the world able to hold our shares. This in concert with our TSX listing makes Curaleaf eligible for index inclusion, specifically the MSCI Small Cap Canada, S&P TSX Small Cap and the Canada indices. Based on the parameters set by these indices, we believe we meet the necessary criteria for inclusion. This leads me to our first quarter highlights. We started the year off on a good note. Consistent with our expectations, first quarter revenue grew 2% to $339 million, compared to last year’s first quarter revenue of $333 million. With our facilities fully operational, our first quarter gross margin improved by 120 basis points from the fourth quarter. We’re making solid strides in our objective of achieving our stated 2024 gross margin target of 50%. Adjusted EBITDA margin was 23%, representing year-over-year margin expansion of 40 basis points. We ended the first quarter with $105 million of cash on the balance sheet and generated operating cash from continuing operations of $46 million and free cash flow of $33 million. We are deploying some of this cash into reducing leverage on our balance sheet. Ed will discuss our efforts in greater detail. Through the team’s execution of my strategic mission, Curaleaf has evolved from an MSO to an MCO, a multi country operator. As the lone U.S. MCO, this descriptor more accurately represents our global vision and business that today spans over 15 countries across the world. Our ambition is to leverage the expanding global platform we have created with the distribution of our brand portfolio. With each ensuing quarter, we will create further separation from our peers as a result of the global strategic lens through which we operate, and we expect our European growth catalyst to emerge more fully in the second half of the year and into 2025. These strategic investments have been made over the past few years are beginning to pay off. In the first quarter, our international business grew 59% year-over-year and 12% sequentially and remains on track to hit $100 million in revenue this year. We are seeing solid gains in our key markets in the U.K., Germany, and Poland. In the U.K., we are benefiting from strong patient reception of our recently introduced edibles and vapes. In Poland, we acquired Can4Med, a highly regarded pharmaceutical distributor. With a population of 38 million people, Poland is proving to be a strong market for us, much like Germany as demand for our indoor flower continues to outstrip supply. On April 1, Germany enacted its Pillar 1 legislation, which decriminalized cannabis by removing it from narcotics list, the benefit of which is far greater access to medical cannabis for all its citizens. In the first month since the law took effect, we have seen a substantial increase in patient counts entering the marketplace. These increases have surpassed expectations, and while still early, the signs are very promising for what this market will ultimately contribute to Curaleaf. To further bolster our position in Europe, in late March, we announced the acquisition of Northern Green Canada, a EU-GMP certified producer of high quality indoor flower. Not only is NGC transaction accretive to our international gross margins, but it also ensures the stability of our supply chain into Europe. An added benefit from this transaction is the ability to study two other high growth medical cannabis markets NGC currently sells into, Australia and New Zealand. This acquisition represents another key pillar in the development of our global brand strategy. We welcome NGC to the Curaleaf family. Returning stateside, I was encouraged to see the Florida Supreme Court decide in favor of putting the recreational cannabis measure on the November ballot. As active contributors to the Smart and Save campaign, we are deeply committed to helping Amendment 3 pass the 60% threshold. And acting as a united industry coalition, we believe there is ample support for it. In fact, we are moving forward with our capacity expansion and new store build out plan to meet the expected surge in demand that could increase the market 2x to 3x to $5 billion to $6 billion. At the expected time of adult use launch in 2025, Curaleaf will have the necessary cultivation capacity and retail footprint in place to compete for the leadership position in Florida. In Ohio, we are actively preparing for adult use conversion that could come in the next few months. The Ohio adult use market shows great growth potential as it is the seventh largest state in the U.S. by population with an underpenetrated medical market. We are excited for Ohio and the potential $2 billion market opportunity that will come after adult use sales commence. Our long-term strategic success rests on expanding our brands into as many points of distribution as possible. We have spent a good deal of time exploring the hemp category and we feel it is important to enter the hemp derived THC market with safe tested products, which by some estimate is as big as the regulated cannabis market. As such, we will begin shipping a fully compliant line of hemp derived THC beverages and edibles under our select brand in the second half of the year. Like our foray into Europe, this is another long-term growth driver that will unfold and develop over the coming quarters and years. Taken together, all of the investments we have made domestically and internationally set the foundation for accelerated growth and market share gains in ’25 and ’26 and beyond. Lastly, on our outlook, we are reiterating our full year guidance. We continue to expect revenue to grow in the mid-single-digits and adjusted EBITDA margin to be in the mid-20%. I’d like to end my remarks by thanking all the members of our team around the world that contribute to making Curaleaf the global leader in cannabis. We are very encouraged by the recent catalysts that are providing an important inflection point to our industry and our company. Our success in the future potential would not be possible without our entire team who believe in the mission and bring it to life every day. With that, I’ll turn the call over to our CEO, Matt Darin. Matt?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Matt Darin: Thanks, Boris. As the cannabis market continues to develop, distribution of our brands across all channels becomes increasingly important. To this point, we are laser focused on expanding the global reach of our brand portfolio with Select, Grassroots, Curaleaf and Four 20 in Europe leading the way. In a seasonally slower first quarter, our team came together and executed well to gain 33 basis points of total market share across all BDSA states. Specifically, we expanded our share in some of the largest markets throughout the U.S., specifically Arizona, Pennsylvania, Nevada, Illinois and Massachusetts. Select was again the number one vape brand in the first quarter, a testament to the quality and innovation we continue to bring to the category with Brick still driving outsized gains eight months after its market debut. We will continue to build on the Select platform to further extend our lead in the U.S., while also taking the brand abroad to our key European markets over time. In Flower, we have made significant strides in improving all key metrics including strain diversity, average potencies, yields and bud to trim ratios. These efforts are gaining traction as evidenced by Grassroots and fine flower holding two of the top five brand positions in the category according to BDSA. We have great talent across our cultivation and operations teams and through research and development and iterative process improvements, I have no doubt we will further increase our quality and efficiency metrics. Flower continues to drive the market and winning in this category is our North Star. I’m confident we’re on the right trajectory with our relentless focus on quality and innovation, but there is still so much opportunity in front of us. One such opportunity is infused flower and pre-rolls, both of which are helping to mitigate pricing pressure as these products command higher prices and are showing significant incremental growth in the flower category. Demand for these innovations is insatiable, and our operations team is quickly moving to increase supply. For instance, our Grassroots-infused pre-rolls are instant sellouts in New Jersey, Nevada, Arizona, Maryland and Illinois. Success that we’ll be replicating as we roll out these product lines across more states. By channel, consistent with our expectations, our domestic retail sales were down 3.6% sequentially, impacted by seasonality and accelerated independent dispensary opening in Jersey and Illinois. To catalyze our retail growth, we are leaning into our product assortment, industry leading rewards program, and customer service. We continue to evolve our retail experience both in store and online, especially through our mobile app, which has gained significant traction and is approaching 200,000 downloads. In our domestic wholesale segment, we generated 3.2% growth, which helped curb the retail decline. The wholesale growth was broad based with nearly all states showing solid sequential growth. This is a primary focus as more dispensaries open in key markets such as New York, New Jersey and Illinois. Pricing at retail is showing signs of stabilization with some of our states showing sequential increases. Most impactful lever we can pull to stabilize and drive prices higher is innovation. We are seeing this play out in real time with our infused flower and pre-roll program and we saw earlier with Brick our 2 gram vape. On a per gram basis, flower pricing increased versus the fourth quarter. We attribute this to improved strain diversity, greater consistency of our flower production, and more targeted pricing and promotional strategies. In Vapes, the rate of decline has moderated from the fourth quarter. However, we are yet to see pricing turn overall positive. Digging deeper into key states, despite many of the headlines, the New York adult use market is open for business with over 100 approved dispensaries. We were pleased with our first full quarter of adult use sales in New York as our Newberg store has ramped very well and is performing to our expectations. We are finalizing the site for our next two adult use dispensaries that we expect will be high volume stores. Wholesale, we saw a 51% sequential surge in growth, as we were diligent in adding key wholesale accounts every month. Curaleaf has shelf space in the most productive independent stores in the state. And with more licenses being issued, we are excited about the continued growth that will come from this 5 billion plus market opportunity. As I alluded to earlier, the story in New Jersey and Illinois is a tale of two channels. With over 100 new dispensaries opened in each state in the last few quarters, retail has faced increasing pressures. However, we have been pleased with the strength of our wholesale business that has served to offset much of the declines. Prospect to New Jersey, we have replanted our Belmar cultivation facility in order to meet demand from the growing population of independent doors in the state. Arizona deserves another mention. Despite the market contracting in the first quarter, we held sales stable from the fourth quarter and as a result grew market share by 125 basis points. Arizona is a core market for us with 16 high performing dispensaries and a growing wholesale business. Our teams on the ground are performing well week after week, yet they are hungry for more gains. We’ve been busy on the international front and the foundation we have built for Curaleaf got stronger in the first quarter. We rebranded our Sapphire Clinics in the U.K. to Curaleaf Clinics and the power of the Curaleaf brand has been on display with the positive feedback we’ve received from patients. We announced the strategic acquisition of a key supplier, Northern Green Canada, that cements our supply of high quality indoor EU GMP certified flower for our key European markets, while also enhancing our margins done in an accretive purchase price. We also announced the acquisition of Can4Med, a distributor in the rapidly growing Polish market that is already paying dividends. We are taking the many learnings from the U.S. and applying them to Europe, including how we enter new markets and how we go about building our supply chain, so that we can realize greater success earlier. The expansion and development of our Portuguese cultivation and processing facilities is progressing according to plan. We anticipate we will begin shipping EU GMP flower from Portugal to Germany and Poland in the third quarter, which will complement our NGC Indoor Flower, thus rounding out our product portfolio. We are the only truly global operator with a vertical supply chain and we will continue to press our advantage to drive further market share gains. As a leader in the global cannabis industry, we believe it is imperative to have our brands available to consumers in both physical and digital channels. Consistent with this view, we are entering the hemp derived THC business with an expanded assortment of select edibles and select zero proof beverages ready to launch by the third quarter. We are launching these products the same way we’ve done in state regulated cannabis programs over the past decade through safe, compliant, third-party tested, properly labeled products that consumers can trust will deliver a positive experience. Hemp category continues to grow at a rapid pace, and this new channel opens the door to a much wider audience than those currently shopping in dispensaries. We will start small and learn how consumers interact with our brands outside of our dispensaries. Our team has a continuous improvement mindset and we are constantly adapting to the ever-evolving cannabis landscape. Our unique exposure to the most significant catalyst on the horizon, continued expansion of the New York market, expansion of Pillar 1 in Germany, Ohio, Florida and Pennsylvania adult use sets us up for robust growth, especially in 2025 and beyond. Global cannabis industry is still in its infancy and we have built a foundation for long-term success. I’ll close by thanking all our team members across the organization who are instrumental in making our results possible. Their tireless effort and commitment to win is felt by our loyal customers. With that, I’ll turn the call over to our CFO, Ed Kremer. Ed?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Ed Kremer: Thank you, Matt. Today, I’ll review our Q1 2024 results and provide additional color on our outlook. Total revenue for the first quarter was $339 million, representing a year-over-year increase of 2%. Growth was driven largely by strength in Maryland, Connecticut, New York, Arizona and 59% growth in our international segment. By channel, retail revenue was $268 million, compared to $271 million in the first quarter of 2023, down 1% year-over-year, while wholesale revenue increased 16% year-over-year to $70 million and represented 21% of total revenue. Looking at our consumer metrics. Transactions increased 1% year-over-year in the first quarter, but were down 4% sequentially due to normal seasonality. Average order value was down 4% compared to the first quarter last year, largely driven by a 6% decline in units per transaction. That said, UPTs have been steady for the past three quarters and AUR was flat year-over-year. Adjusted gross profit was $161 million resulting in a 48% gross margin. Sequentially, Q1 adjusted gross margin increased 120 basis points compared with fourth quarter largely due to improved absorption cost as we planted more rooms to meet demand. SG&A expenses were $104 million in the first quarter, a decrease of $6 million from the year ago period despite investments in new stores and international growth initiatives. The year-over-year decrease in SG&A primarily reflects continued focus on operating efficiencies and lower professional fees. SG&A as a percentage of revenue was 31% in the first quarter, an improvement of 240 basis points compared to the year-ago period. Our first quarter SG&A included approximately $4.5 million of add backs resulting in our core SG&A expenses of $100 million in Q1 or 29.5% of revenue, an improvement of 100 basis points year-over-year. First quarter net loss was $48 million or $0.07 per share and we ended the first quarter with 736 million fully diluted shares outstanding. Adjusted EBITDA for the first quarter was $77 million, compared to $74 million last year, a 4% increase, resulting in an EBITDA margin of 23% and 22%, respectively. Sequentially, our adjusted EBITDA margin decreased by 140 basis points from the fourth quarter due to a seasonally lower sales base and increased payroll expenses. We achieved our Q1 EBITDA margin despite a drag of 180 basis points from international. For the year, we expect the international drag to improve to 130 basis points as international sales growth will continue to outpace the U.S. Now turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $105 million, inventory increased $3 million or 1% sequentially compared to the fourth quarter, driven by normal seasonal build into the 4/20 holiday season. Net capital expenditures in the quarter were $13 million. We expect 2024 CapEx to be approximately $50 million to $70 million, a $10 million increase to the higher end of the range depending on the timing of our Florida expansion initiatives ahead of adult use. We generated operating and free cash flow from continuing operations of $46 million and $33 million, respectively. Our outstanding debt was $580 million net of unamortized debt discounts and deferred financing fees of which 82% is not due until December 2026. In an effort to reduce leverage on our balance sheet, subsequent to quarter end, we began buying back our December 2026 notes in open market transactions. To date, we have repurchased $15 million of our 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. As Boris mentioned, in coordination with counsel, Curaleaf is investigating its options for seeking refunds of federal income tax paid on the basis that internal revenue code section 280E does not apply to its business activities. If supported by legal advice, Curaleaf anticipates it will file as a normal taxpayer for 2023 and 2024 and amend certain prior year returns. We’re off to a good start and the many growth catalysts we have are beginning to materialize, with more coming over the next few quarters. While macro pressures on the consumer continue to be felt, particularly on the lower income demographic, we are reiterating our fiscal 2024 guidance of mid-single-digit revenue growth. We continue to expect full year adjusted EBITDA margins to be in the mid-20% range. And for the second quarter, we expect revenue to grow low single-digits versus the first quarter. Excluding any benefit the company would receive by filing as a normal taxpayer, we still expect to generate operating cash flow in excess of $100 million. And with that, I’ll turn the call back over to the operator to open the line for questions.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Aaron Grey of Alliance Global Partners (NYSE:).

Aaron Grey: So for my question, I want to touch on Germany. Obviously, still early days of cannabis reform there that took effect of April 1. But if you could give me color in terms of what you’re seeing in terms of initial demand of additional physicians, through telemedicine, more pharmacies starting to dispense cannabis and also the patient growth. So I know just five weeks in, but any color you could provide? And then also on your initiatives you have to increase education for both physicians and patients there?

Matt Darin: I’ll take that. So we have, through our relationships with the largest telemedicine platforms in Germany, we can say that, most of the telemedicine platforms have added more patients in April than they’ve added in their whole history in the medical program in Germany. So that is definitely more ambitious, and more aggressive than we originally anticipated. So that’s good news on that front. Curaleaf in terms of its revenue has also seen stronger growth than we originally anticipated on the business, but it’s still from, as you know, small numbers, and growing. So it’s early for us to be able to say, what this program is going to look like, but all the early signs are very, very positive. If there’s any impediments to the program, it’s signing up the telemedicine platforms, getting doctors trained and signed up, so that they can write more scripts. We’re definitely seeing excitement from the pharmacies. More pharmacies are starting to order. The only bottleneck with pharmacies is that these pharmacies are reasonably small and they don’t have large packaging facilities, and so that could become an impediment, but they’re all starting to invest in that area. So as we originally told everyone, we believe that the German program will be very substantial in size. We’re certainly seeing that early demand from patients. However, there are some things that the industry needs to get over in order for that demand to flow through. We anticipate seeing at the end of this quarter being able to give more color in our next quarterly update in terms of how the industry is developing, but all looks very, very positive so far.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: The next question comes from Russell Stanley from Beacon Securities.

Russell Stanley: Just around gross margin improvement, congrats on that. Understanding assay utilization, the big driver there up 120 bps quarter-over-quarter. The press release notes that reduced vertical mix was a bit of a headwind in the quarter. So I’m wondering what the gross improvement was out of the asset utilization and what you’re seeing in terms of third-party product demand?

Ed Kremer: We did have some vertical mix. I mean, vertical mix was very, very small in its decrease. As you noted, most of the increase did come from our rooms coming online through the first quarter and we expect that to continue to yield improvement in subsequent quarters. I can’t give you the specific sort of impact from one to the other, but in the aggregate, obviously, the utilization outpaced the decline of the vertical mix.

Operator: The next question comes from Matt McGinley of Needham.

Matt McGinley: Can you give us some color on what drove that $46 million in operating cash flow? We don’t have a full balance sheet or cash flow, but I think you mentioned that inventory was a $3 million drag. And again, I’m not sure like how should we think about that in terms of the guide that you gave last quarter for $100 million. Are we halfway to the target? Or does some of this reverse and this is more of an anomaly where you generate more cash flow relative to what you expect to do for the full year?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Ed Kremer: I think the way you should think about that in my comment of generating over $100 million as a normal under our current conditions. I mean, I think that what benefited Q1 was the fact that we did not make a full tax payment for the reasons aforementioned on our position. So that helped generate sort of outsized operating cash in the quarter. We are on track — to just to put a pin in it, we’re on track according to our guidance as I gave that we will still achieve our initial target as we mentioned over $100 million irrespective of any tax benefit.

Operator: Our next question comes from Matt Bottomley of Canaccord Genuity.

Matt Bottomley: This question is maybe more for Boris or he wants to jump in. But just on some of the commentary you’ve given in this quarter and in past about increased custodial considerations of who’s able to hold the stock. I’m just wondering how that relates to cannabis still being as a Schedule 1 drug. I mean, is it going to be something that we really need to see pen to paper on a Schedule 3? Or do you think the headlines with respect to just maybe a notice of a rule amendment with the DEA might be something that moves the needle. I know this isn’t a typical earnings question, it’s more about your stock. But I’m just curious if you think some of the headlines that we might get in the coming months here to confirm what’s been reported as of last week would be something that actually moves the needle with respect to more capital coming into this space?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Boris Jordan: Yes. I mean, thanks for the question. So I was referring specifically to Curaleaf and our situation. So, because of our TSX up list and because of our restructuring that we put in place at the end of last year and prior to the up list to the TSX, we were able to achieve the custody from both Bank of New York, Pershing, State Street, and Euroclear. That relates specifically to the actions taken by Curaleaf. I cannot speak for our colleagues, the other companies, in terms of what their plans are. But in our plans, we always wanted to create a situation where we could be held and we could at least solve the plumbing problem, for holding Curaleaf stock. And so that problem, the last of the three, which was Euroclear, we received last week. That was also important for us because of the inclusion into the global indices, the MSCI, the TSX, and the S&P indices, to Canadian, S&P indices, which we believe we’ve now met all the requirements to be able to be included in those indices, the first of which I understand is reviewing sometime, over the next 30 days, and then the rest, probably sometime in September. But in terms of the industry as a whole, I think that we need to wait and see what the rule is going to look like and what the guidance from the from DOJ will be like on the back of rescheduling. The one thing is that we are highly confident that rescheduling is going to happen. I know there’s a lot of talk out there whether it won’t will happen. Every information that we have include more information we got today is this rescheduling will happen from Schedule 1 to Schedule 3. Now, the important thing will be what will the DOJ say on the back of that? Will the DOJ come out with guidance, which then FinCEN will pick up on? And where will FinCEN come out on these things? These are things that are out of our control today to understand. We need to see what the final rule looks like, and then we need to see where the DOJ was. There’s going to be a DOJ memo on the back of it, which we believe there will be, but we don’t know a 100%. Based on that DOJ memo, then we know that Janet Yellen’s position has been that she wants this sector banked. So our view is that it’s more likely than not that that since then will probably, depending on this reschedule, will give positive guidance to financial institutions. Will that be enough for uplisting and full banking services? We don’t know. Obviously, Safer Banking would really be the sort of the solution to this problem, but Safer Banking definitely is not going to be, as we all know now, voted on here in May with the FAA, which is what the original target was going to be. There is conversation now between McConnell and his Republicans about doing something at the end of the year, but we don’t really want to speculate on that. So far, the Republicans have been a big disappointment, particularly, Senator McConnell on Safer Banking. He is stepping down in November, so there is some optimism that maybe in the lame duck we might be able to get Safer Banking. But, again, that’s all conjecture. We don’t know for sure, but, obviously, we’re not stopping our work in Washington to get it. So the short of it is we’re hopeful, that the rescheduling might get some guidance out of FinCEN and the treasury that will help the industry in either uplisting or getting better banking services.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: The next question comes from Scott Fortune of ROTH MKM.

Scott Fortune: Boris, I just want to kind of follow-up on Aaron’s (NYSE:) question about Germany and provide a little color on that market. You called out telemedicine demand is really adding potential patients from that side of things. But more importantly, can you step us through the kind of key for prescribing physicians or even consumer patients to kind of gravitate towards Curaleaf brands as a leading option? Any initiatives or marketing or education allocations that you need to really build your brand recognition for the doctors and consumers in the EU? Just kind of step it through that process to really start garnering market share there for the Curaleaf brand.

Boris Jordan: Sure. We’re working very closely with all the telemedicine platforms. We just signed, an agreement last week with one of the largest telemedicine platforms in Germany to distribute our products and market our products on their marketplace part of their site. So they have both the telemedicine platform, and they have a marketplace. And Curaleaf is, through its 420 brand, is very much present on that. Curaleaf will also start shipping at the end of June for the first time Curaleaf branded products, which will play in the different categories. So 420 is playing in the premium category, and 420 is the absolute leader in Germany at the premium level. And now we’ll start to ship our Curaleaf products, which will play in the mid-tier level because there’s a lot of volume going through in the mid-tier, more price sensitive level for the patients in Germany. So we’re working with telemedicine platforms. We’re working with doctors. We’re working with pharmacies. I mean, we have a very large effort and infrastructure in Germany to promote our brands. We know that being early and being aggressive is the way to win brand loyalty and having superior products. These are all things that we’re doing, trying to stay on the edge of it, and we think we have a pretty strong position at the moment, and we’re seeing that reflect in the numbers that are coming across. Albeit still not in a very tight level, not in a very substantial level, but the growth rates are impressive.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: Our next question comes from Gerald Pascarelli of Wedbush Securities.

Gerald Pascarelli: I just had a question on hemp derived, the hemp derived product commentary. I guess, what, like, why now? Which drove your decision to enter into hemp derived products? I assume that you believe that they are having or they will eventually have a meaningful impact to traditional cannabis sales. So just looking to confirm the why now aspect of that. And then I apologize if I missed this, but as you look to rollout these products initially, are there certain channels that you’re going to look to prioritize?

Ed Kremer: So I want to make it clear that Curaleaf did not approach this lightly. We have spent the better part of three years. You might remember that I mentioned about three years ago that Curaleaf was looking at a new line of business, and this was the one. We spent an enormous amount of time on developing a supply chain which was fully compliant. The early efforts of doing that, we ran into certain problems in that, the supply chain, the Curaleaf that was fully compliant under federal law that we put in place, had a higher cost than a lot of these synthetic products that are being produced by these small operators around the country. We cannot afford to go to the market without a fully compliant, fully tested product, which reflects the same standards that we sell our other products in. And so we took a breather about a year and a half into the process where we could not figure out a way to come up with a compliant or rather cost effective, commercial cost effective supply chain. We have now been able to do that. And so because of the fact that we have been able to put a supply chain together for two specific products, which is our seltzers as well as our edibles. Because of that, we’ve made a decision to start a process of launching these products. We’ve done some test cases around the country, very small at the moment, but now we’re going to go more wide. And we are going to work with your traditional national distributors, and we’ll have more information on that in ensuing months on who we’re working with and what we’re doing. But we are going to be distributing as an omnichannel around the country only in those states where these products are compliant. We’re being very, very careful and making sure that we don’t step outside the line, but we believe this is a very large market segment. We believe it’s growing at a very, very fast pace, and we believe that not being part of that as the largest cannabis company in the world would be a mistake. And so we took three years to prepare for this, and we finally are able to launch products that will be competitive and safe for our customers.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: The next question comes from Pablo Zuanic of Zuanic & Associates.

Pablo Zuanic: Just to follow-up on the first question, when you talk about the large opportunity, can you give us an idea of the size of the total addressable market that you’re looking at there? And if I may separately, regarding Florida, do you wait until the value to start adding more capacity, to adding more stores or do you do it now? And just talk about how well the industry is working together ahead of the campaign to get the ballot passed?

Ed Kremer: So I’ll address — I believe your connection will be great, but I’ll address the first part of the question. Matt, I’ll address the second. I believe your first part of the question was on hemp and what the addressable market is there. We think that the addressable market in hemp is probably somewhere around where the cannabis sector — the regulated cannabis sector is now. It may be a little bit less, maybe a little bit more, but we think it’s about the same. So it’s definitely a multibillion dollar market. And more importantly, it’s one where you can distribute centrally. So the cost of distribution in that market is going to be substantially more efficient or lower. For instance, we only have to build one bottling plant instead of numerous bottling plants in order to, and which we have done. We have our own bottling lines, in order to deliver these products. We’re also going to be working with third parties on that as well in terms of co-packers and things like that. So we’ve been able to, as I said, create a supply chain now that is commercially viable and is safe, and we think that will attract a lot of customers because a lot of the products that are on shelves today have a lot of synthetics in them, that are not desirable, are not necessarily tested or regulated, and our products are going to be very similar, if not identical to the product that we would be selling in any other highly regulated market. With that, I’ll hand over the Florida issue to Matt. He’s leading that.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Matt Darin: And so on Florida, we’re moving forward with plans to continue to add cultivation capacity and to fill out our store portfolio. That was already in the works. We had built out the shell of a building that we’re able to, on a modular basis, buildout, grow rooms to meet the demands of the market. Today, we’ve got a very efficient operation with the capacity that we have and the store locations that we have opened. So we have opportunity just in the medical market to continue to invest there which we’re doing. But the way we’re doing it is in the unlikely event that November does not go well, we have every ability to kind of throttle back the spend there and to slow down the pipeline of new stores. So, we’re keeping optionality. We’re moving things forward because we have need for it today. But depending on the results of that in the event that the amendment does not pass, we will not be overextended there.

Operator: The next question comes from Frederico Gomes of ATB Capital Markets.

Unidentified Analyst: This is Brenna on for Federico. Thanks for taking our question. So you’ve spoken about being bullish about the international business and the continued strategic expansion. So that definitely seems to be shaping up well. Bear in mind that certain segments of the international business will be more or less margin accretive. I just want to get some color on where you see there being some easy levers that can be pulled to narrow the international segment’s margin drag?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Ed Kremer: I think that on international, the issue is volume and scale. We’re going to reach a little bit of $100 million to $100 million plus this year. And we’ll — at the end of this year, we’ll take a look at how that growth is developing. But as you’ve seen, we’ve been growing at 100% or 50% or 60% on an annualized basis, from a small scale when we bought the business. And now we will take a look at the end of this year on how the German, particularly the German and Polish businesses are developing. The U.K. business is pretty easy to model out. The German and Poland businesses is a little bit more difficult because they’re brand new and they’re early stage. So I think that by the fourth quarter, we’ll have a pretty good idea of how we’re looking at next year. But if you look at the comparables to other medical markets like Florida and others that got launched, this is going to be a very large market. And so far, the results, as I said, that we’ve seen in the first five weeks have been very impressive and above our own, and I think the industry knows I’ve been very bullish on Europe, and it’s been above our own expectations. So we’re hopeful, going into the latter part of — the second part of this year that we’ll be able to make much more accurate predictions about growth going into 2025.

Unidentified Company Representative: Look, from a margin standpoint, I would just add, we’re building a vertical supply chain, very similar to what we’ve done in the states that we’ve been in a leading market share position. So that was part of the rationale behind the Northern Green acquisition, which was a supplier supplying high quality GMP flower to Germany. Now bringing that captive into our supply chain is going to increase margins, give us more certainty, more control of the supply chain. And it’s a playbook that we found to be very successful and that we’re seeing a lot of opportunity in Europe and in additional countries.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matt Darin for any closing remarks.

Matt Darin: Thank you everyone for joining, and we look forward to seeing you next quarter.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

SOURCE: Investing.com – Stock Market News   (go to source)
AUTHOR: Investing.com
All copyrights for this article, including images, are reserved to the original source and/or creator(s).

Advertisement

You might also like