Q1 2021 Curaleaf Holdings Inc Earnings Call
[music].
Good day and welcome to the care in the first quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Last question you May Press Star then one on a touchtone phone to withdraw your question Press Star then two please.
Please note this event is being recorded.
I'd now like to turn the conference over to senior Vice President head of Investor Relations and capital markets Carlos My dry though please go ahead.
Turn on everyone and welcome to purely holdings first quarter two bolt on on 'twenty, One conference call.
So they were joined by Boris Jordan Executive Chairman, Joe Lusardi Executive Vice Chairman.
Dolby on Chief Executive Officer, Neil Davidson, Chief operating Officer on Christina Taylor, Senior Vice President of Finance and accounting.
Before we begin I would like to remind you that the comments on today's call will include forward looking statements within the meaning of Canadian and United States Securities laws, which by their nature involve estimates projections plans goals forecasts and assumptions, including the successful integration of acquisitions and are subject to risk.
So on uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward looking statements all certain material factors or assumptions that were applied in drawing a conclusion or making a forecast in such statements.
These forward looking statements speak only as of the date on this conference call and should not be relied on 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 Adil.
<unk> information about the material factors and assumptions, forming the basis of the forward looking statements and risk factors can be found in the Companys filings on press releases on CS are on the Canadian Securities Exchange.
During today's conference call pure leaf will refer to non <unk> measures that do not have any standardized meaning prescribed by EIOPA risks such as pro forma revenue adjusted EBITDA on managed revenue the definitions of which may be found in our earnings press release.
Please note that all financial information is provided in U S dollars unless otherwise indicated.
With that I'd like now to turn the call over to executive Chairman Boris Jordan.
Good afternoon, and thank you for joining us before I begin I want to take a moment to welcome Christina Taylor, our senior Vice President of Finance and accounting from the call today, Christine will be handling the financial review discussion this quarter stepping in for our CFO, Michael Carlotti, who is currently out on them.
Medical depot that sucks, we wish Mike all the very best gross profit recovery.
And our full year 2020 earnings call, we shared with you our strategy for the company, which is centered around three key growth pillars.
First extending our U S leadership by continuing to build our national platform and winning brands.
Building, the foundation and infrastructure to accelerate growth by capitalizing upon the potential federal legalization and third.
This growth strategy to the rest of the world as the global leader in cash.
During the first quarter, we continued executing across this strategy delivering record financial results and achieving a number of key milestones starting with our financial results, we exceeded our guidance and achieved record revenue of $260 million.
A growth of 170 year over year also we posted record adjusted EBITDA of 63 million equivalent to a growth rate of 213% year on year on a margin of 24%. We are very excited about the platform. We have built across the country and the increased opportunity for further mark.
On an expansion as many of our new markets continue to develop.
We have a track record.
That's well execution, we're putting her expertise and discipline to work in the states, where we recently started operating.
For example on the 10 states, where we have had a presence for at least two years for full year 2020, we generated a combined gross margin of 54%. These 10 states accounted for 71% of our total revenues last year.
Other 12 states, which are newer for us such as California, Colorado, and Michigan, and Utah had a combined gross margin of 32%. These newer markets accounted for only 29% on a combined revenue in 2020, but they are the ones that presents the biggest opportunity from margin expansion in the next one or two years as they develop sufficient scale as we integrate vertical.
And some of them as we optimize the retail wholesale mix and as we increase our product offerings.
In January we raised 290 million from our common stock offerings and revolving credit facility. We ended the quarter with a strong position on liquidity to pursue additional organic and inorganic growth opportunities.
So on January adult use sales began in Arizona just weeks after voters approved legislation faster than anyone anticipated, we were able to rise to the challenge launching adult use sales across our eight current Arizona dispensaries and benefit from the rapid increase in demand on.
Northeastern presence as one of our main points of key competitive advantage in New Jersey currently already has a market leading position with over 30% medical market share and we continue to anticipate that the state will open for adult use sales by the fourth quarter of 2021, we're investing heavily ahead of its launch of adult use sales and.
Help meet expected demand in each state is expected to be a $2 1 billion dollar market opportunity.
The coming weeks, we will double our canopy square footage and opened two additional dispensaries, giving us three the maximum allowance dispensaries in the largest growth capability in the state with only 12 part of licensees.
And New York adult use cannabis legalized on March 31st and net sales are expected to begin in 2022. This represents another game changing catalysts materially on a significant milestone from the cannabis industry today purely because of number one cannabis company in New York, which has immense room for growth for state with 29 people.
The medical program or just a $150 million due to a significant restrictions on obtaining medical patient licenses versus other medical markets.
Illicit market of close to 5 billion.
New York is not only important in terms of revenue generation, but also brand building.
Its population in New York will become the second most populous adult use state behind California. In addition in 2019, a record high 244 million tourists visited New York and New York City in particular, it was one of the most influential cities in the world for brand visibility and value creation.
Vertically integrated operations will be able to wholesale and distribute their products to any retail and opened four additional stores for a total of eight stores three of which can be co located with the medical on adult use that.
Currently we are working with regulators and other operators to bring whole flower into the medical program with our installed capacity to supply the low we're better positioned.
Possession than any other than the sales benefit from flower sales in the medical market for which there is considerable pent up demand.
In April we established purely as the global pure play cannabis market leader by revenue and geographic reach as we closed the acquisition of feedback.
And simultaneously established purely international.
In parallel with the closing we successfully raised 130 million from a strategic investor 50 of which were directed at funding the entire cash portion of the acquisition. The remaining 80 million will be used to fund our European investment plan.
Overall, the acquisition was completed for under 3% of our market capitalization, resulting in minimal dilution to our shareholders.
These transactions provide a cure all equally strong presence and toy potentially 230 billion European market that is just beginning to develop and we're very excited about the future. There are stated last quarter. The acquisition of <unk> will not detract from our focus on the U S. As EMACS leadership team will remain intact, allowing.
Our U S employees to focus on our home market.
Also on April we received regulatory approvals in Illinois, which enabled us to rebrand all 10 of our locations acquired in the grassroots deal and the state are securely stores welcome to all of our team members in the state.
Finally earlier this month, we optimized our footprint, Maryland strengthen our position as the leading cannabis operator in the state. We now have 55000 square foot co located cultivation processing facility and dispensary. We also completed the sale of our interest in a cultivation and processing facility in Frederick Maryland for 27 and a half.
U S.
Moving on to the federal landscape in late April Safe Banking Act passed the house with a high degree of Bipartisanship and is now on the Senate Bill will expand cannabis industry access to banking and can potentially include other stipulations, such as we'll move up to the safe Harbor language for institutional investors and the ability to uplift to a major U S stock.
Standards set.
Senate majority leader Schumer is moving ahead to introduce an all inclusive federal cannabis reform, which goes beyond the safe Banking Act and which is expected to be released soon.
Humorous stated that he believes safe banking would pass however, because he thinks he has one shot at this with Republicans he wants to introduce a broader bill to capture the full window of opportunity for meaningful candidates legislative change.
While the industry continues to pursue the safe banking act on its own schumer's more comprehensive cannabis legislation bill will achieve everything we expected from safe banking in terms of access to banking and capital markets and the removal of $2 80, he had more.
Finally, we are increasing our guidance for the second quarter to 305 to 315 million, which is above consensus based on the performance of our business. During April on the beginning of the day. Thus we remain on track to meet our full year revenue guidance of one two to one three building and on adjusted EBITDA margin of a proxy.
On the 30%.
Last week, we achieved another milestone by becoming the largest catalyst company in the world in terms of revenue, but also the most valuable in terms of its market capitalization I would like to thank our investors for continuing to recognize our work we will remain focused on enhancing shareholder value.
Also want to thank our extraordinary leadership in each and every team member who has contributed to <unk> growth and success. We truly appreciate their hard work dedication and passion to our business with that let me turn the call over to Joe Bear.
Thanks, Boris and good afternoon, everyone I am pleased to announce another quarter of record revenue and earnings as we continue to build out our national platform.
We are progressing well towards building, an omni channel distribution platform with both a very extensive wholesale operation and a successful high margin retail business.
We also remain intensely focused on execution as we drive scale through our cultivation and operations.
Our team continues to effectively manage the inherent tradeoffs between geographic mix Chan.
Channel mix product mix and pricing to achieve our goal on further expanding our presence while maximizing our margins and building scale.
Based on the breadth of our platform the strength of our balance sheet and our experienced management team I believe we are uniquely poised to take advantage of the explosive growth ahead as the industry continues to grow to $100 billion and beyond.
At the retail level, we continued our national expansion by opening six new stores ending the quarter with 102 retail locations.
We have since opened an additional four locations to bring our total to 106.
And have an additional 32 licenses available to watch for further development.
Our retail footprint now covers 42% of the U S population and processes close to 20000 transactions per day.
Including both adult use and medical use the total number of transactions was up 12% during the first quarter.
On the medical side of the business. The total number of patients continued to grow expanding by 17% quarter over quarter and during the month of March the average order value among our patients grew 7% from December.
We continue to see strong momentum across our entire footprint.
But here are some notable highlights.
In Arizona, we swiftly met the demands associated with the early launch of adult use sales two months ahead of the anticipated rollout date.
Sales and foot traffic grew substantially when compared to the prior quarter.
In Pennsylvania, we opened one new store during the quarter and shortly thereafter, we opened an additional two stores, bringing our count to 12, all of which are now Kelly branded.
In Illinois, we opened our 10th site and the first week of April the maximum allowed by the state and all stores are now branded as pure leaf.
In Florida sales continued to expand with improvement in inventory and product assortment and on market share in this state grew during the first quarter by 360 basis points. According to the Florida Department of health.
In New Jersey, we are building on our market leadership in this state by adding two large new retail locations, which are now in full construction mode and have expected expected openings. This summer.
These new locations will position us to address the anticipated surge in demand from pending adult use sales later this year.
And just this month, we opened our first adult use stores in Maine.
During the quarter, we continued to make operational improvements, we implemented successful pricing and promotional strategies to drive customer traffic, we are leveraging technology to support the customer journey and our operations and we are making better use of data analytics to design promotions and it sure.
Our pricing is competitive.
As a result of all of the above retail revenue grew by 14% sequentially.
And 231% year over year, representing 72% of our total revenue.
At the wholesale level, we closed the quarter with just shy of 2000 wholesale partner accounts and are on track to surpass this number in the coming weeks.
We saw a strong growth in the western part of the country due to the acceleration of Arizona recreational sales.
At the beginning of a rebound in our Nevada business and the introduction of several new select products, including select squeeze essentials and fresh.
Squeeze is a game changing beverage enhancer.
Essentials is a high potency oil with Turkey and from our most popular strains.
And fresh is a premium distillate oil with bolt fruit flavors targeted at new entrants into the category.
The introduction of squeeze is to date, the widest cannabis product launch in the nation Ava.
Available already in 14 states and growing to 17 by the end of May.
Demand has been strong and the product continues to fly off the shelves.
But more importantly, squeezes. The first example of an end to end product launch when we identified a white space in the market then developed proprietary packaging and science through our nano emulsion technology in flavor systems and leveraged on our marketing capabilities to launch a national product.
We will launch a squeeze we have built the processes the expertise and the infrastructure to continue launching formulated products on a national scale.
Just last week, we were notified that our nano products, including squeezed.
Earned an honorable mention from the fast company's annual life changing ideas list and the consumer products category.
Further evidence of the increasing consumer confidence in cannabis.
In addition to the growth in the West we recognize growth from the continued expansion of the select brand in key strategic markets like Massachusetts, New York, New Jersey, Maryland, Illinois, and Pennsylvania.
We are confident that as candidates acceptance continues to scale across a variety of demographics cultures and geographic regions. We will have a product solution to fit the various needs of our consumers and we're incredibly excited about that.
We will remain focused on developing highly formulated products based on science and distributing them widely there.
This is one of our key differentiating factors relative to our peers.
During the quarter wholesale revenue represented 28% of total revenue a sequential growth of 12% and 254% growth year over year.
In terms of our cultivation, our footprint is on track to grow by 275000 square feet in 2020 one as guided.
This includes important new capacity coming online in Arizona, Florida, Massachusetts, and New Jersey during the second and third quarters.
All helping fuel the growth trajectory towards our year end targets.
In New Jersey, our Winslow cultivation facility is now online more than doubling our current canopy.
To this supply constrained state heading into adult use sales later this year.
Also we are actively working on plans to expand our cultivation footprint to the 150000 square feet cannot be limit allowed by the state.
In New York the expansion of our current cultivation facilities underway, adding 200% to the current amount of kind of be ahead of adult use sales.
We on working with regulators to determine the optimal expansion that will be allowed and needed to support our new adult use market.
We are being thoughtful with our investments in cultivation expansion not only considering the immediate opportunities in places like New York, and New Jersey, but keeping in mind that Interstate commerce will eventually be allowed.
Moving on to research and development during the quarter, we continued developing a range of delivery and extraction technologies.
In addition, we formalized national and international relationships with top universities to perform clinical testing of our formulations, providing real data on efficacy for a number of high value therapeutic areas.
We will continue to aggressively grow our R&D capabilities by bringing cutting edge technology, and a multi disciplinary team of world class scientists.
Finally during the quarter, we continue adding talent with over 1100 people, joining pure leaf and bringing the number of team members to over 4200 by quarter end.
Today that number is over 4800, which comes from the regulatory approval that integrated nearly 350 grassroots employees in Illinois as well as additional hires across the company.
New hires are coming from pharma biotech media and CPG, all with significant experience in their fields.
Now I'll turn the call over to Christine Taylor.
Thank you Dan good afternoon, everyone.
Got it on our first quarter financial results. We started 2021 on solid footing by posting our eighth consecutive quarter on record revenue record adjusted EBITDA direction can you focus on driving incremental shareholder value.
Start by sharing some highlights.
We achieved record revenue of $260 million up 170% over last year and 13% sequentially.
It made the significant improvement despite some tough weather conditions in several of our markets first.
First quarter year over year retail and wholesale revenue grew nearly 240% fueled by acquisition as well as a robust 75% increase from organic revenue growth.
We also saw sequential revenue growth in several markets, including Arizona due to the approval of adult use in Florida due to increased market share in cultivation capacity.
In addition, retail and wholesale revenue continued to grow and the Massachusetts, New York, Pennsylvania, and Illinois market.
Although we continue to feel the impact from COVID-19, many of our fourth quarter revenue headwinds improved on the first quarter.
After distribution of stimulus checks, we saw an increase in consumer spend on our part.
As the economy continues to open across the country, we expect to see ongoing strong demand for our products across the board.
Our gross margins from candidate sales continue to improve with a year over year increase of 638 basis points to 49, 3%.
Increase represents a 100 basis point improvement over the prior quarter.
The margin growth was primarily due to better efficiencies and increased operating capacity and our cultivation and processing facilities.
We expect Canada sales gross margins to trend upward as we continue with numerous initiatives focused on expanding margins and fully integrating acquisition. However, we foresee some level of quarterly fluctuations in those margins that will smoothed out over time.
SG&A, excluding nonrecurring items as a percentage of total revenue decreased significantly, reaching 29% compared to 36% in the first quarter of 2020.
SG&A for the quarter totaled $80 million, including $6 million and nonrecurring expenses as compared to $46 million on the prior year and $68 million in the fourth quarter.
We expect SG&A to decline further as a percentage of revenue as we continue to grow and scale our operations as we capture additional cost savings through targeted initiatives and as we realize additional synergies from acquisition.
I would also like to note that as we guided last quarter share based compensation expense returned to a third quarter 2020 levels at $4 9 million in the first quarter.
We reported record adjusted EBITDA of $63 million in the first quarter up 213% versus the prior year and 16% sequentially.
Improvement in sequential adjusted EBITDA was primarily driven by higher gross margins across several states.
Most notably in Florida, California, Pennsylvania, New York, Ohio, and Utah.
First quarter adjusted EBITDA margins reached 24%. That's previously noted we continue to focus on improving adjusted EBITDA margins through our initiatives specifically targeted to improve overall operating efficiency.
First quarter net loss was 7% of revenue compared to 16% of revenue in the prior year.
We believe adjusted EBITDA continues to be the best measure of our performance as it excludes the impact of noncash charges related to biological assets.
Appreciation and amortization share based compensation.
Well as nonrecurring expenses incurred during the quarter.
As in previous quarters, our reconciliation of net loss to adjusted EBITDA is included in our earnings release.
Cash and equivalents grew to $315 million at the end of the first quarter from $74 million on the prior quarter.
First quarter cash balance was positively impacted by the debt and equity raises we completed in January excludes the $80 million in cash that will be held it surely if international to support future growth and investment.
Capital expenditures during the quarter were $31 million and we continue to expect 2021 full year capital expenditures to total approximately $125 million.
Now, let me turn the call back over to Joe.
Thank you Christine I'd like to close with some important updates on other things we're doing as the industry leader.
We as a mission driven company remain deeply committed to each other and to our communities.
As such surely fuse social responsibility as an integral part of our culture.
For example are rooted in good initiatives was launched in February following nine months of intensive internal assessments as to how true leaf can be most impactful.
One of the central components of our rooted in good initiative is our goal of having 10% of hires in 2020, one coming from communities directly impacted by the war on drugs.
Also with our executive Roundtable initiative, we are the first cannabis company to match C suite executives with proteges from underserved communities to provide mentorship upon entering the industry.
I'm happy to report that the executive Roundtable kicked off this month with clearly executives meeting with their counterparts in engaging in discussions about how to improve the industry and provide opportunities.
I'm pleased to report, we've just launched our internal sustainability task force to explore ways to reduce our carbon footprint and work towards building a more environmentally responsible industry.
Finally, we have also pledged for 'twenty by 'twenty five.
Supportive initiative to partner with 420 local communities and small businesses by 2025, we have already established 60, new community partnerships on route to our larger goal.
I'm incredibly proud of the work of all of our team members across the country and I'll reiterate what I tell them every day.
<unk> never been a better time to be in cannabis.
And there's no better place to be than careless.
Truly believe that and I'm incredibly excited about our future.
In closing we are happy with our results of the first quarter and excited for the continued momentum in the second quarter and the opportunity ahead.
With that I'll turn the call back to the operator to open the line for questions.
Okay.
We will now begin the question and answer session.
No we will be accepting one question and one relevant follow up question to.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Yeah.
And the first question comes from Pablo damage with Cantor Fitzgerald. Please go ahead.
Thank you on tour.
Relations on the water can I just ask for more color. If you got on regarding Florida, and Arizona are what type of growth that you've seen or you saw on that but you didn't get on medical business on break and it gives a Florida your life and you talked about you know 320 360 bps of market share gains. If you can give more color. There in terms of what you know product formats on on what type of growth you saw there.
Thank you.
Yeah I'll take that this is Joe Barron in Florida I think.
The share gains were primarily based on our accessibility of flower as we've talked about before we've had supply constraints.
Throughout 2020, and with our new growth coming on line. We now have a more flower in the marketplace. So we've basically held share on our formulated products and we've grown share on.
On flower.
And in Arizona on the growth was primarily coming through our I don't use clientele.
We've seen almost a double doubling of patients over the time since the program was launched and most of those are coming through adult use sales.
Can I ask just a quick follow up on maybe just a broader theme for the full force you know there's a lot on talking to the industry about the lobby empowered with atmosphere industry and we hear you know that the alcohol on tobacco low we are much stronger at the federal level I Wonder if you have any thoughts on that in terms of you know benchmarking on them and so low empowered bushel saw you know top ocwen.
I know, it's a very general question, but if you don't give quarterly would be helpful. Thank you.
Thanks, Pablo I would tell you that the Msos are organized in Washington, We're working together through the U S. C C.
You know Ed we recently tried to get the the episodes together on a very specific initiative around safe banking. We're in the process right now of having separate calls we've had several group calls we're now having separate calls were raised some money in order to create a fund in order to continue our lobbying effort.
In Washington, I think we've got one shot.
Before the midterms as soon as show most law drops we've got really one shot to get this through and I want to make sure that the sector is very well prepared for it. So we're currently raising funds in order to be able to make sure. This is outside of the normal funds that we used to fund our upper clear. This is additional pumps to make sure that we can.
To get regulatory change in Washington, now as I said in my in my overall statement on Schumer Schumer believes he put safe banking, which surprised us a little bit but he believes that if they put safe by from two a vote on the Senate would pass.
But he wants to get much more than just sleep thinking oh. He thinks he's got one shot it that's what the Republicans, it's always putting a much broader bill the reason for the lease on hold up we learned today as the tumors on discussions with the FDA about what their role would be in a federal legalization and so that's what's currently holding it up but we do expect that bought a drop.
Sometime in may or at least that's what we've been told by them.
From bookers on widens people.
Great. Thank you.
The next question comes from Vivien <unk> with Cowen. Please go ahead.
Thank you good afternoon, that's true.
To follow up on on the comment on that was just made about availability of flower I was curious if you could offer on.
Some detail around what your total portfolio mix it looks like day in terms of flower versus dates and other form factors. Thanks.
I don't have the exact numbers. This is getting Joe This is Joe, but I don't I don't have the exact numbers in front of me, but I think we are broadwell, we are broadly around a 50 545 split of formulated products versus flower.
We've again, we've we've brought our new online grow them on new indoor grow online this quarter and we're seeing good productivity out of it in good quality. So we fully expect to continue to grow share in Florida, and we continue to look to flower to be able to help us do that so we're creating a balanced portfolio and.
We feel pretty optimistic about not only the second quarter, but the full year in Florida.
Got it yeah. That's helpful. Thanks, and then just on a fall.
Flow up with select squeeze recognizing it's early days and it's not yet fully distributed.
Through your system, but can you share with us any targets you might have in terms of portfolio mix for that product over the next year or two.
Yeah, I think it's.
Generally speaking I'll start with just a new product targets. We you know we're targeting last year, we did about 15% of on our.
Revenue through new products, and I think we'll probably be able to get somewhere between 10 and 15% again. This year. That's just one of several products that we launch them.
It's a new category as you said, it's early days you know beverages is still a very very small piece of consumption in the U S. Cannabis industry. So we don't expect it to be a huge part of our overall mix for 2021, but I think it is a growing segment and it is something that's differentiated and unique in the marketplace.
It will take some time to build traction behind the product we've gotten great early feedback.
Feedback from both trade and consumers, but it is a new form factor. So we will have to educate consumers and of course, they have to start shifting over to beverages as a form of consumption. So you know somewhere in the low single digit a mix of our products.
Okay understood. Thank you very much.
Yeah.
Yeah.
The next question comes from Andrew personnel with Stifel. Please go ahead.
Yeah.
Hi, good afternoon, Thanks for taking my questions and congrats on the quarter.
You know there.
In March we had you know.
From strong spending from what we hear in the industry from stimulus checks.
Just wondering if you could give a little bit of color.
Don't know, if you're able to quantify that or maybe talk about it qualitatively.
And you know tying that into your Q2 guidance, which suggests an acceleration of growth at least in dollar sales are from Q1.
How do you see that when taking the spin stimulus spending and into account on obviously the 420 holiday do you think that some of the stimulus spending fell through into into Q2 and that drove some of the growth or.
Is this really all driven by production expansions that you expect to come on line in Q2.
Yeah, I'll take the stroke.
We definitely saw an increase on sales in the second half of March when we did our call. If you'll remember in early March our last earnings call. We hadn't seen the increase in sales based on on stimulus at that point in time, we really started seeing it right. After that we thought right through into the first couple of weeks of April.
And then I'd say that we started seeing a tapering off after for 'twenty.
Sort of you know those robust stimulus type trucks. However, in our case, we always expected and I think we always told everyone that we thought that the second quarter would be an inflection point for purely or largely because of the heavy investment that we did an expansion.
And going deeper in our existing key states and so for instance in Florida, We launched a brand new 50000 square foot on indoor facility in the fourth quarter, but now it's fully harvest day. We also are building a second one that is going to launch in the third quarter. In addition to the 250000 green.
We also just are doing our first outdoor harvest.
Our homestead facility down South So you know a lot of the investment initiatives that we had come on during last year are now starting to produce significant.
Our production in terms of a flower and vape as well as other products same thing in Arizona. We added 50000, we added 50000 in Massachusetts. We added we added about 120000, New Jersey all of these facilities are starting to harvest.
In the second quarter. So you will see a pretty robust second.
Second quarter and go into especially into the third quarter, but we're now sort of trending at about $100 million run rate.
That's not where the industry, but we don't see that tapering off unless there's some kind of major economic chip demand was quite strong at this point in time.
Thanks for that great color, and maybe switching gears and talking about cash deployment on your balance sheet and M&A.
You know you obviously just discussed are a number of projects that you have ongoing.
And you know with your wide national presence.
There.
Is.
There's there's for sure plenty of additional projects that you guys could be thinking about especially in <unk>.
In New York.
You know how do you think about cash deployment here does M&A play a role or do you feel like you have enough organic opportunities to keep your plateful.
I think that Oh, we don't we won't continue to do M&A I think shortly we'll be announcing some things when we have a lot of initiatives going on mainly.
Those three initial strategic points that I outlined.
But most of them and they would do it falls in two categories.
Expansion in existing states, where we feel that we can still expand beyond our existing capacity and where the regulators are allowing us to do it on.
Lee.
Strategic acquisitions are those focused around our focus on what will happen after federal legalization youll see some activity in that category shortly as well so we're being very tactical right now about where we do our M&A.
<unk> of our money right now is going into you.
You know broadening our base in the state of operations. So we have construction projects on cultivation processing, and Illinois, Pennsylvania, as we said in New Jersey.
Arizona.
We're doing a lot of outdoor facilities that we're set up we've had great success in Florida with our new outdoor facility in Florida with our reach in the harvest. So we're starting to expand our outdoor capability, which brings down our cost dramatically for the product that we're that we're growing and so we're really focused now on on on what without we're not taking on.
If our foot off the pedal on terms of growth, but we're also focused on making sure that we can expand our margins and meet those targets that we made for the Europe at 30%. So that's really a focus of ours Likewise, where we're doing you know where we've had some good news in Europe. We've got if we are looking to go adult use as I said, Switzerland, France, just came out with it with the.
<unk> just last week, a parliamentary committee to approve adult use cannabis in France.
So we're starting to look at expansion of our facilities there as I said, it but so much more on a.
Capex light model there because we can grow all of our product and in Portugal, and in process and in Spain, and the distributed throughout Europe, but we're being very very tactical in terms of what our M&A, but most of our capital right now is being spent on capital projects and expanding our existing capacity in the states where we operate.
Okay.
Thanks for that great color and congrats again I'll get back in the queue.
Yeah.
Thanks.
Yeah.
The next question comes from Camilo Lyon with BTG. Please go ahead.
Thanks, Good afternoon, and I'll add my congrats as well Boris.
You talked about New York I'm wondering I'm wondering if you have an update on when the state will allow whole flower sales to begin in the medical market. This year, what you've done to prepare for that and also how you're thinking about that longer term kind of headstart.
On that you've been given you will likely be given in this market and what can that be too from a share perspective, and I have a follow up.
So I'm going to let Joe answer the question on on when we think it will get going let me just give you the big picture, though that the opportunity is enormous the pent up demand.
It's very very significant as you know we currently sell ground flower at.
And are the leader in that category in the state and I can only say that once the state does allow us to soak when on par. We think it will be quite substantial. We are you know we are the largest providers of flower in the market. So we have a very large inventory on hand, right now that we could go out and sell if that happened and we anticipate.
That we would sell all of it and I'm talking to you know tens and tens of millions of dollars of inventory ready to go to the market. Once the state allows us to do it and so I'll, let Joe address because I know you had a call I think as early as yesterday or today or with regulators in New York about when that might happen.
Yeah, I I would first of all I'll just echo what Bob said about are available on our readiness to service the market I think we've talked about in the past that in most of our key states were supply constrained in New York is the one where we actually have supply and we're constrained by the size of the market and the patient size. So we're very.
Eager to get them whole flower into the market place we were working with.
Regulators is as recently as today thinking about the timing I think it boils down to testing protocols that we're trying to work through with them.
So I can't give a definitive time line, but they are keenly interested in getting product into the marketplace and we're just trying to overcome some technical hurdles around the testing protocols for our whole flower versus ground flower, but I can assure you that everybody is anxious to get them whole flower into.
A medical program and we're working very closely with regulators to do that.
It's just a pause on that is is coal.
Whole flower sales in New York contemplated in your guidance and then my second question is I'm just moving on to federal legislation movement Board. She said I think you gave some great detail on the Schumer plan. It is true risk that the human plant starts to drown out the individual statesville from working.
On its way through Congress.
Do we need to rely on the humor plan getting through for any sort of legislation to get through it all or nothing.
Oh I think that.
Schumer is really trying to do is throw in everything into this bill and.
Present that and then you know negotiate and committees down to a a bill that could pass on.
Congress and Ah.
That's where he is he wants to put pressure.
On the Republicans and I think he wants to try to attach and eventually to something with the Republic is really want he's very confident he's going to get something done I'll be honest I have a healthy dose of skepticism.
About anything much broader than safe banking at this point in time, but you know the Senator notice has said it better than I do that's for sure.
And he is very very very positive that he can get something done and I think one of the reasons. He's taking this time because he wants to make sure. It's a comprehensive bill that is well thought through and doesn't have huge gaps on holding it and addresses some of the issues that Republicans have regarding product quality and type thing.
And as Joe said that New York as you know testing protocols and and regulations about what kind of products can be issue. So I think that that is what is the process who's going through now so I do think it'll be a comprehensive bill whether or not you know what he can get through the Congress is literally I mean, I can't predict that betting simple way I can only say that he has.
Very serious about it on this.
This is not you know something like the more act, where they just throw it in in order to put pressure on Republicans. This is something that you know, they're really working on they've got big teams working on this they're going to throw at you know page by page on making sure that the bill is comprehensive.
We are pretty much waiting all of us in anticipation to see when it comes out we've been told most recently.
The F D. A is if a flight hold up on it because they've now gotten themselves involved in it and we'll see what happens here over the next couple of weeks, but we've told them. It should drop in bay and that gives us plenty of time, we've always been telling people. This is going to take some thought if it was safe banking, we thought they could do it in six to nine months or more comprehensive built we think is a year relative.
First quarter type situation on it.
Could happen faster a lot of things happening, but I would be a little bit more careful and predicting the speed of which those get stuck well listen if he can actually get a more comprehensive build on that's actually better for the overall industry, we can probably wait for that.
I agree on it and just that whole flower question is that included in your guidance.
No. We so I wanted to make sure that none.
None of our European revenues.
None of our New Jersey, or New York rack and none of pulp while none of these things on art.
Our guidance only includes on it what we have.
In the market today.
Perfect. Thanks, so much on the best.
The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good evening, all congrats again on the quarter I just wanted to stay on this this topic on on the federal legalization, maybe I'll start with Boris or whoever but you.
You know one of the questions that I get quite a bit it sort of relates to sort of three particular elements within what investors are looking at with respect to this market eventually opening up.
On a more organic sense and that's the ability to cross state lines with product the ability for Msos like yourself to uplift and then the impact of potential 280 E. So within those categories. What types of levers do you think has to be in the schumer legislation to allow any or all of those to pass them. You know many think the safe banking act on it in itself wont be enough to really move the needle on any.
Of those those items with the exception of maybe 280 E C.
So if you could just give me any sort of color on on what you would hope what the wish list is just with respect to what's in schumer's legislation that might allow for any of those three categories to sort of open up more than they are today.
But in the end.
Our conversation so we can only talk about conversations at the moment, because we haven't actually seen any pieces that we're keeping a very close to that or truck and our conversations with staffers on as well as the senator on these issues are they claim but all of the things that you mentioned are in.
The law as we speak so that's all of those things are going to be there. So they're not only addressing shelves from justice issues, which is what they're mostly talking about but they're also addressing all the businesses, including tax we've had numerous conversations with the people writing, but the law. They understand fully that you can't do social justice issues.
Oh without dealing with the tax issue without dealing with the cost of capital without dealing with the uplift.
So these are right I mean, when you've got workers, playing a line workers, having their banks bank accounts shutdown at chase and Citi because they work for a cannabis company that is a real problem how can you finance entrepreneur.
Entrepreneur or licenses on the social justified if if they can't even open up a bank account.
Or if the cost of capital in the industry as you know north of 10%. So these are the things that they claim are all and this law, but again, we have to go with what they're telling us we haven't actually seen it but they do say that all of these things are covered in the car that's going to be put forward and I think that.
There's no question that what the Senator really wants to make sure that the business issues are also tied to some of the in equity issues that have happened, whether they'd be social justice or or.
Our decriminalization or or prison reform issues on these are all issues that he wants addressed and this law. So I don't think the law will get past strictly on business issues and it'll get passed with a mixture of some of these a very very important social justice are true together with the business issues.
Great. That's very helpful. I just want to ask one other question pivoting here on on <unk>. So just with the capital that's sitting in that subsidiary you know you mentioned, Israel and Swift in some other countries, but I'm wondering if there's any near term opportunity to deploy that it sounds like it's not a capital intensive initiatives. So within the $80 million that there I'm just curious as to.
What you think the I guess the population is of potential M&A targets or other greenfield initiatives and maybe certain business models that you think that would work I know theres, a theres a Canadian company Canadian LP that owns the actual pharmacies and I think it's Germany are is that a model that makes sense. When you talk about distribution or is it more partnerships with with various.
Countries and legislators in order to continue to expand.
So we're going to address the European expansion on our third quarter call. As you know we only closed the transaction in April.
We're getting on top of that business, and and working with management and I feel that albeit a lot more comfortable and addressing those issues I can only say to you that at the moment, we're focusing on the expansion of our existing capacity in both Portugal, the upgrade up to two.
And we'll have some yes, youre going to hear about this over the next couple of days, we'll get have some some press reports on some of the new products on the stuff that we're coming out and some of the regulatory issues that we're dealing with they're all positive by the way, but in terms of the bar our real strategy on our M&A and an expansion in Europe, we're going to really address that in the third quarter when we see.
Real comfortable that the.
We've gotten on top of the issues and we know how to deploy on where to deploy the capital for the time being what we're doing is expanding the existing facilities that we have there and we're in discussions in various of these countries regarding our expansion opportunities regarding up you know places like Israel.
Like you mentioned pharmacies, we we do have that kind of distribution in the U K.
That's how we distribute product right now in the U K, but we are mostly looking at working with local distributors.
Terms of distribution on the product, including potentially acquiring distribution company and some of these countries in order to continue to to distribute our products.
Okay. Great helpful look forward to that then thanks again yourself right.
Right.
The next question comes from Matt Mcginley with Needham. Please go ahead.
Thank you your your second quarter revenue guide implies a 45% to $55 million sequential increase in revenue, which would mean you would only need about $20 million revenue increase in the third quarter, and then again in 'twenty and $20 million in the fourth quarter to hit the midpoint of your full year guide. So I have two questions on that is it is it retail or wholesale.
Sales.
Driving your second quarter revenue increase and then second given you have these big you have these big cultivation expansion projects in Arizona, Florida, Massachusetts, and New Jersey that it wouldn't really contribute until the back half is there something I'm missing about why the dollar growth would slow in the back half or are you just being conservative with with not taking this for you guys.
Well, Matt given that we've historically as you know.
One have you know different issues with regulators and getting these things online and sometimes the you know the first harvest don't come out as strong as that you'd like in terms of what we're trying to be careful but I will tell you that you know for it. So I'll give an example, we had a very successful outdoor harvest completely unexpected in Florida first time, but we grow outdoors.
In Florida very harsh climate.
Credibly successful harvests, there were getting very very good harvest out of our Florida facilities on our indoor facilities.
We have more facilities that are getting launched with another 50000 square foot indoor and we're building two more on top of that in Florida, but we have another 50 launching in the third quarter of this year. So you know we just don't know exactly when that will come on if that comes out a little bit earlier, we get great early harvest.
This might be a bit better, but if if you know the harvests are a little bit weaker than we tried to be you know a careful in the way we forecast that our numbers, but you know at the moment, we are very comfortable which is why we tried to give.
<unk> overall guidance for the year, but we're giving you know quite firm guidance for for for the second quarter, where we're seeing the numbers really really strong and as I said, we're running at sort of 100 plus million dollar bumps at the moment.
Okay and enforce this.
Is it retail or wholesale growth driving the second quarter revenue.
They're both it's both it's both it's both.
Retail, obviously, which gives us more margin because we're selling our own product through our stores. So as for instance in Arizona, you'll see an expansion of margins on second quarter, because we'll have a lot more of the product on our stores will be our own coming out with new cultivation facilities same thing in Florida, and other places and in other states like New York and others, where we're <unk>.
Moving to really build the big wholesale business coming out of our facilities as well. So it's a mixture of both I don't know Joe if you want to add anything to that it's a slight weighting towards wholesale line. When you look at the total mix.
But just curious and then.
My second question is on the on the proceeds from asset sales can you give us an update on on the proceeds do you expect to generate from the asset sales I think you had 30 million that you highlighted you would get from the Maryland reorganization last week that you had asset sales pending on a number of other states. You had originally assumed I think it was $65 million to $75 million in proceeds last year.
And I'm just wondering if there's any update on the overall range that you would make.
Yeah. The main the main assets sale, but we have coming up is the sale of the.
The Illinois stores, the extra Illinois stores are two parallel.
Transaction that needs to be approved by the regulators on so we're waiting for regulatory approval to execute on that transaction, we did a little bit better on that sales than we originally anticipated. So I think the number is.
$10 million to $20 million above what our original forecast low.
Okay. Thank you.
The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening, thanks for the questions first.
First one from me our board she mentioned on potential M&A that could set you up for eventual federal legalization. So just wondering if you could provide some further color in terms of how you might think about whether or not there'll be you know cultivation in a low cost state or otherwise like what are you thinking about that would be the best place to set you guys up and then also whether or not you would wait for such an acquisition until you.
Further color on which Federal Bureau was getting momentum and just better you know better.
In terms of timing of when that would come too. Thank you well look obviously the acquisitions are focused around not only you know we're trying to make sure that their actual actually good for our current business as well. So yes, there will be some of them will be around cultivation I don't want to give too much because the transaction.
I'm speaking about specifically hasnt close but will close shortly.
At the time that it closes we really wanted to spend some time explaining it because it is it's gonna be a bit of a game changer on the cultivation side for us.
Well.
Fundamentally transform the sort of cost of what we do it. So I wanted to spend some time on that this is not something that's much further away I mean, we're talking you know you know.
A week or so weighted well well well inform the market once that's complete.
Alright, great well look forward to that then second question from me just thinking along the lines of cultivation. So from New York Kenneth P limit. That's one thing that we're still not not quite sure on.
Joe You mentioned they were just meeting with regulators and we had a conversation. So just wondering if you can give any more incremental color in terms of you know how new York is thinking about the potential cap limit on cultivation and then how you guys are thinking about potentially adding cultivation I'm in New York you've seen.
Some of your peers kind of take.
Take a step ahead on kind of already purchased from greenhouses or otherwise still not knowing the canopy on potentially using it for some other purposes, social equity or otherwise. So I was wondering if you have any incremental color on potential cannot clemson whether or not you wouldnt look to make a purchase you know ahead of actually knowing that thanks.
Yeah I think.
Go ahead Joe.
Well I was going to say I think the overarching.
Premise with New York cause they want to rollout a you know a balanced but a robust marketplace and they realize that the aros have to play a role on that the question.
Becomes you know how quickly the program will scale up and how large they think it's going to be and then therefore, you know what kind of foundation. They do they are ours to provide to ramp up on you know the industry.
But I think they are looking at trying to create a balanced our balanced portfolio of of Msos and Roes that are coming into the marketplace existing as well as new msos that might come in and providing opportunities for other people to participate in all aspects of the marketplace. So.
It's hard to put a number on where we think the canopy limits will be but I think that the good news is we have a very constructive dialogue going on I'm thinking about you know how quickly the market will develop them how big we think the market will be how many different types of players we think will be entering the marketplace and I think they're on.
They are open minded to those types of discussions to create a program that is gonna be responsible for everybody as far as our willingness to invest ahead of of the.
Limit channel I mean, we are willing to do that but we're not going to do it rationally you know we've been very clear in our calls with with this group as well as with our discussions with New York regulators that we want to be a good partner in New York you know, we have a leading share there where we're the leader leading player in New York, It's a it's on.
One of our core markets and we wanted to make sure that we're working.
With the regulators to be able to.
Ensure that there's going to be a smooth transition to adult use and if that means that we need to invest ahead of demand we're willing to do that but we just need to do it in concert with with the regulators.
Okay, great. Thanks for the color.
The next question comes from Scott Fortune with Roth Capital. Please go ahead.
Yeah. Thanks for the question real quick just kind of following up on the GAAP grass roots, the Saturday fully integrated now or optimize or there's still some room for efficiency, there and leading to that you know you you continue to expand.
You know aggressively to build out and capture scale from.
My standpoint, but defer through on kind of the cadence of them to get to that 30% adjusted EBITDA margins that you're looking towards the end of the year to scale and reduce costs kind of comfort.
The comfort level getting there by the end of the year here.
It's got a it's all about scale right. So as we as we are you know bring online. These large cultivation processing facilities as we get better and what we're doing.
Youre going to start seeing them.
Said in my opening remarks.
The 10 states that we've been in for two to three years, where there were already over 30% EBITDA margins on all of those states.
But some of the newer states that we came in where we weren't vertically integrated like California, where we have a very large wholesale business.
You know Colorado.
Michigan.
Some of these states. We you know we're not yet fully vertically integrated we are integrating we are doing our best to do that we will get there over the next couple of quarters, but those states are running at slower.
That's not.
Not particularly high EBITDA margins at the moment, but they will get there just as all the other states got there eventually and one has to understand that you know you know I think today's transaction that took place in the market as the others.
It really justifies our strategy historically, our strategy historically has been you know to build out the footprint to get into the states and then we've been building out the infrastructure in the states and so we're starting to see the benefits of that you'll start seeing them in the second the third the fourth going into next year, you'll start seeing substantial benefits from this and we think that we will reach those.
Those EBITDA margins and at the same time maintained our growth, which is very very important to us. We think it's a this is a.
Very much of a growth industry, we think it's important to get growth under our belt and get them. All this based on and as we integrate these these various cultivation facilities processing facilities. When you start to get the economics up. So we're very comfortable we're going to get to the target that we're that we outlined to everybody. This year on and will also meet and hopefully beat.
The growth targets that we put out to a vast majority.
Okay. No I appreciate the color and then a real quick follow up on on he Mac I think you guys mentioned you Wanna get breakeven towards the end early 2022.
Are you seeing kind of COVID-19 it seems like a lot sales in our in our society.
This year, but.
And was there a base level I know that's on your day.
Base level that you guys were looking for from a revenue side from from next couple of years from coming back.
We have on our revenue or revenue from him back because we said this year, it's $35 million to $40 million.
With a flat to a small insignificant a loss on a net income basis.
Really don't want to give any guidance yet for 'twenty two 'twenty three as I said, we will address that issue in the third quarter call.
Okay. Thanks, that's it from me.
Okay.
Sure.
This concludes our question and answer session I would now like to turn the conference back over to Carlos Madrassa for any closing remarks.
Thank you all for joining us today I'd like to note that we will be participating in a number of upcoming virtual conference on events, including a fireside chat with Boris through clinical words virtual Kennedy's conference Tomorrow at nine a M. Eastern time, Bruce will also be participating in an interview through previews from partners on May 20.
For the latest information on current leaves conference participation on events.
Please visit the events section in our Investor Relations website we.
We look forward to updating you will further on our progress from these events as well as some on our second quarter 2021 financial resource called stay well and safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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