Q2 2021 Curaleaf Holdings Inc Earnings Call
[music].
Good afternoon, and welcome to the Q really second quarter, Keith out from 'twenty, 1 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on your Touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Carlos much also head of Investor Relations.
Please go ahead.
Good afternoon, everyone and welcome to clearly holdings second quarter 2021 core French school.
So they were joined by Boris Jordan Executive Chairman, Joe Lusardi, Executive Vice Chairman, Joe Bayer Chief Executive Officer, Neil Davidson, Chief operating Officer, and Ryan <unk> Chief Financial Officer.
Before we begin I would like to remind you, though the comments on today's call will include forward looking statements within the meaning of Canadian and United States security 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.
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 for 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 from press releases on either under Canadian Securities Exchange.
During today's call for Ensco, clearly, if we'll refer to non I, if our as measures.
Have any standardized meaning prescribed by a year for us such as adjusted EBITDA. 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, everyone and thank you for joining us today for <unk>.
Second quarter earnings results call before I begin I want to welcome Ron Chung Korea, our new Chief Financial Officer, having held multiple financial positions at CPG and technology companies for I'm, John brings a breadth of experience for the team and we're very happy to have them joined the company I also would like to thank Mike.
Carlotti, our former CFO for all of his contributions we wish him a speedy recovery.
Our record second quarter results reflect the continued success of purely strategy unrivaled reach scale and strategic positioning in the U S. Cannabis market as we once again delivered all time high levels of sales and adjusted EBITDA profitability.
We also acquired an unmatched presence in Europe, which provides us another major long term growth lever for our business and establish a securely global pure play candidates market leader by revenue and geographic reach.
During the second quarter, we delivered on our guidance with total revenue rising to 312 billion equivalent to a sequential growth of 20% and year on year growth of 166%.
Excluding our new <unk> International business, which we started consolidating for the first time this quarter, our revenue increased to $307 million.
In terms of driving profitability, we posted record results here as well our group adjusted EBITDA margin reached 27%, increasing approximately 300 basis points sequentially and our core U S business, our adjusted EBITDA margin expanded to 28% up 400 basis points sequentially as we benefited from our <unk>.
<unk> scale and capture operating efficiencies.
Not only are we delivering impressive margin gains, but we remain focused on growth and the major opportunities that lie ahead.
Executing on international strategy, we have built a deep operational capability on the ground in all the key U S state cannabis markets and we are.
Early entrance into many more that will become relevant contributors to revenue and profitability over time.
Today, we operate in 5 states that contributed at least 100 million in annualized revenue and 2 more will be joining this group in the next several months.
The other 16 states or markets with tremendous potential where we have established a solid presence and were medical and adult use cannabis programs continue to evolve.
To further strengthen our U S business in May we agreed to acquire <unk>, a 66 acre outdoor grow operations in Colorado to help us better serve the $2 billion plus annual medical and adult use cannabis market in Colorado, the second largest market in the U S. Today.
Upon closing this transaction will significantly expand our cultivation capacity boost our profitability in the state as well as integrate vertically and position of leading low cost producer in the U S. We expect this transaction to close soon.
At the federal level last month Senator Schumer introduced the long awaited comprehensive federal candidates built.
Pure leaf has led industry efforts to push for sector reform, including expanded access to banking stock exchange uplift being sensible taxation and regulation and social equity initiatives.
There is unprecedented support for cannabis reform across the political spectrum and by multiple industry and minority groups. This should provide strong motivation for Democrats and Republicans to negotiate and agree to a final version of the Bill we expect plenty of debate around the details for the coming months and believe some level for them.
Which will minimally include banking and investor safeguards will be passed before the midterm elections.
A wide scope of the bill underlines the importance of having a long term flexible strategy in place taking into account the various potential outcomes.
Our long term strategy in multiple planning horizons.
Very much taken this into consideration for example, our investment Los Angeles cultivation facility provides us with very low.
Cost efficient high quality supply of biomass for both our needs and those of wholesale customers and the state today, but it's ultimately capable of supplying biomass on a regional scale in the event of full Interstate commerce.
Also at the federal level last month Congress approved removal of roadblocks to scientific research into cannabis, noting the potential therapeutic effects of the plant and maintained an existing provision that shield state of medical marijuana laws from intervention by the Justice Department.
Just as importantly for near term growth state level regulatory liberalization trends are accelerating in.
In New Jersey, we anticipate that adult use sales will begin in late 2021 and to fully ramp up into early 2022.
Look forward for seeing the draft regulations for adult use sales this month and have been preparing to address this market with a full suite of products, our new cultivation and processing facilities harvesting regularly and we intend to maintain our leadership position in the state.
We also look forward to opening our third dispenser and border just south of Trenton. This month.
In Connecticut, we anticipate adult use sales will begin in the second quarter of 2022, we have commissioned a significant expansion of our cultivation and manufacturing facilities are in process to secure additional retail sites in advance of the adult use program commencement.
We look forward to addressing a new customer set and maintaining our leading position.
In New York, we expect adult use sales to begin by early 2023, we are waiting for the Senate to confirm appointees to begin working on the regulations whole flower long demanded by New York patients and expected by future consumers is on the Governor's desk awaiting approval it's.
<unk> Kota quite into law, so it's not a matter.
We.
We have commissioned another 110000 square feet to our cultivation complex and will ramp up additional capacity as we get a clear view on the regulations and timing.
The combined Tri State region, where we have a leading market presence has a population of $32 million received hundreds of millions of tourists every year and as a potential estimated annual market opportunity of around $8 billion.
Given our robust capacity.
Our retail network and strong brand identity, we are uniquely positioned to address this combined market.
The potential in the northeast also expense beyond these 3 states by 2023 of the estimated the Pennsylvania, and Maryland, where clearly for strong presence will likely be among the next major states in the region to approve adult use cannabis with a combined population of around $19 million.
Once these additional states become adult use they are estimated to represent another incremental $3 billion annual market opportunity.
And the sixth largest northeast markets. According to forecast data for BDSI securely.
Today, the number 1 market share and will be 1 of the main beneficiaries of these markets ramp up.
Looking beyond our market, leading U S presence another major milestone during the second quarter was clearly its entry into the global cannabis market with the successful completion in April of our acquisition of <unk>, the largest vertically integrated independent cannabis company in Europe, which has now been rebranded and consolidated as purely international.
We remain very positive on developments in Europe, and its growth potential.
Overall, we have never been more optimistic on the near and long term outlooks for the business based on the trends. We see today, we are on track to hit the midpoint of our full year <unk> revenue guidance of 1.2 to $1.3 billion for our U S operations.
Overall purely for still in the early innings of an industry that has tremendous potential for growth and we have high confidence that our national strategy and solid execution, we will seize the opportunity and create significant value for shareholders with that let me turn the call over to our CEO Joe Bayer.
Thank you Boris and good afternoon, everyone.
What can I say it was a great quarter securely in the cannabis industry as a whole.
We are extremely happy with our record results for the quarter as it is definitive proof that our strategy is working.
I'm also incredibly excited about the significant advances we are continuing to make in product commercialization and research and development.
Our capabilities in these areas are unmatched in the industry and will continue to act as 1 of our pillars of long term competitive advantage.
I'll provide more detail on some of our most exciting initiatives later in the call.
Let me start my walk through at the retail level.
We continue selectively expanding our market leading U S footprint as we move into our next phase of retail expansion. We continue to focus on quality over quantity and are only adding premium and flagship stores in the right locations.
We opened 5 new dispensaries in the quarter, including 2 in Pennsylvania.
1 in Illinois.
Our second location in New Jersey, and our first adult use store and Mayne.
Followed by another opening in wells, Maine on July 23rd.
Bringing our total U S dispensary count to 108 as of today.
During the remainder of 2021, we expect to open an additional 8 new <unk> retail dispensaries across Arizona.
Florida, New Jersey and Pennsylvania.
We have steadily gained market share in Florida.
We plan to build on this with new store openings and expect to have a total of 60 dispensaries in the state by the end of 2022.
As we've mentioned in the past we are also in the process of rebranding all of our dispensaries to reflect a more contemporary but welcoming look which we believe is relevant to our legacy medical patients as well as adult use consumers.
We expect the rebranding to be complete by the end of September.
Our operating and financial metrics on the retail side, we're very positive with second quarter retail revenue growing 18% sequentially.
Including both adult use and medical use the total number of transactions was up 17% during the second quarter.
On the medical side of the business. The total number of patients continue to grow.
Expanding during the month of June by 7% from March while maintaining average order value.
At the wholesale level, we grew the number of U S wholesale accounts by 9% during the second quarter to surpass 2000 active accounts, which helped drive sequential revenue growth of approximately 24%.
Our wholesale distribution platform is another of our pillars of sustainable competitive advantage.
As a CPG focused company, we continue to believe in the power brands and we continue to invest in a portfolio that reaches the widest array of cannabis consumers.
This quarter, we introduced a rolling stone select partnership in Nevada, and we launched the <unk> brand in Massachusetts and Maryland.
Leveraging strategic partnerships and relationships to drive select and clearly visibility in preference to new demographics.
In terms of cultivation capacity, we began harvesting from our new cultivation centers in Florida.
Arizona.
Pennsylvania, Maine, and New Jersey.
With these expansions we have now brought online nearly 250000 square feet of our expected annual expansion of 275000 square feet of flower canopy during the first half of the year.
We expect to commission, an additional 40000 square feet in the second half.
This additional capacity.
Not only serve as a catalyst for accelerated growth, but will also help improve our operating margins in the second half of the year.
We are also in the process of building additional capacity that will be commissioned in 2022, and a number of key states, including New York, New Jersey, Connecticut, Florida and Pennsylvania.
We are excited about our prospects for the balance of the year.
For example, in Florida, we expect to continue gaining market share driven by the continued expansion of our cultivation and new store openings in the second half of the year.
In New Jersey, our third Dispensary will open imminently and our new cultivation site will help ramp up our wholesale business in this day.
In Massachusetts, we expect that our wholesale business will continue to drive growth and.
And in Maryland, we are in the process of moving our dispensaries to superior locations and should benefit from a full quarter of a larger cultivation and processing site in the state.
Moving on to product commercialization and research and development, we have a number of exciting initiatives underway.
As we said in previous calls to investors. We are in the final stages of pilot testing, our proprietary new extraction technology, which should substantially bring down our cost of production, which.
Which we expect to rollout in early 2022.
This quarter, we will launch our improved classic gummy and nano gummy, you utilizing innovative technology to provide consumers the ultimate choice and control over the way they enjoy their experience.
Also we continue to bring fresh innovation to the squeeze line.
Including our latest proprietary NAV technology, which is even faster acting than our current nano technology, along with new flavors to add variety to Hawaii.
We have also been working on developing innovation formulations and unique delivery technologies and exploring the potential benefits of other cannabinoids such as <unk>.
Th C D and C. B T through multiple clinical studies, we expect to bring products to market that incorporate these cannabinoids in the second half of 2021.
In addition, we are actively developing many innovative products within the vape concentrate or oral <unk> ready to drink beverage and topical categories that will be launched in 2022.
When we think of innovation, we think of terms of little innovation and big innovation.
We've launched over 187, new products over the past 18 months.
The majority of which were little lie.
Little IR products to fill out our portfolio assortment across our footprint Inc.
Proving flavor texture and so forth.
Squeeze was our first example of a big Guy, where we developed proprietary technology and packaging to bring a new product for the market.
Now that we have ramped up our research and development capabilities. Our interface innovation funnel is full of exciting new technologies and form factors that will provide a steady stream of new products over the next 18 months.
Moving on to our European operations clearly for international.
While still a small contributor to revenue it continues making important strides.
In the United Kingdom, We launched our second strain of medical cannabis flower to meet the significant growth in patient demand.
We have witnessed the 250% increase in patient numbers in the U K since the launch of our first medical cannabis flower product in March of this year.
Also as announced in June we entered into a strategic partnership in Germany, with a pharmaceutical company called sample.
A leader in the treatment of Parkinson's disease.
We launched you Vigo, Inc. Co branded medical cannabis product manufactured by surely international in Spain and distributed throughout Germany.
For the product was recently adopted by free specialized pain clinics.
In Spain, our pharma lab into alchemy received additional EU GMP certification for the processing of medical cannabis flower. It can now manufacture and distribute medical medical cannabis products for commercialization and investigational purposes.
Beyond Europe, we exported 1.1 tons of medical cannabis flower to Israel.
Only the second company to do so under the new regulation.
The product has been very well received and is on track to being sold out by the end of August.
Israel has over 100000 patients currently and is adding a further 3000 each month.
Finally, Portugal, and Walter I'm, moving forward with their respective political processes around possible legalization of adult use cannabis.
Spain is moving forward with the discussion on the medical cannabis program and their French Supreme Court gave me a very important judgment, establishing the legality of CBD wellness products in France.
I'd like to close with some important updates on other things, we're doing as the industry leader in matters of social responsibility.
And our initiative to do business with candidates brands and celerity suppliers and advocacy organizations from underrepresented communities. We ended the quarter with 63 partners.
In addition, we launched our be knowable pre rolls in July in Massachusetts, and Maryland, with a portion of sales dedicated to funding local organizations dedicated to advancing social equity and providing opportunities to those directly impacted by the war on drugs.
On the environmental front I'm pleased to share that truly has hired map collective a female founded green Tech startup.
For complete an audit of our carbon footprint and we have assembled a task force to evaluate strategies for becoming carbon neutral.
Now, let me turn the call over to Roger.
Thank you. Thank you Joe.
And thank you bonus for the warm welcome.
And good afternoon to everyone.
And bonus and John mentioned during the quarter, we achieved many financial milestones.
Revenue reached a record $312 million, which represented sequential growth of 20% and year over year growth of 166 per cent.
We reported detailed revenue up $222 million sequential growth of 18, 4% and year over year growth of 235 per cent.
Retail revenue represented 71 per cent of total revenue.
Our strong sequential growth was primarily driven by new customer acquisition and increasing that these customers.
Additionally, we benefited from the opening of 5 new stores in selective locations and from increased e-commerce penetration.
Wholesale revenue grew 22, 7% sequentially and 168 per cent year over year to 89 million and represented 29% of total revenue.
This growth was driven by the addition of new accounts and an increase in sales productivity.
Gross margin increased to approximately 50%, increasing 669 basis points year on year.
On a sequential basis gross margin increased 34 basis points.
This was possible due to an increase in yields of the existing cultivation facilities and new state of art facilities coming online during the quarter.
We expect to continue benefiting from these trends in the second half for beer.
SG&A expense was $88 million or 28, 2% of consolidated revenue of 259 basis points reduction versus 38% in the first quarter.
Looking solely at our U S business SG&A was 81 million for 2006, 4% of revenue and even greater sequential reduction in SG&A of 435 basis points.
As we work diligently to capture operating efficiencies across all business processes.
Adjusted EBITDA reached $84.4 million up.
Up 34, 7% sequentially and 201% year over year, primarily driven by strong revenue growth and increased operating leverage.
On a consolidated basis, adjusted EBITDA margin reached 27% up 297 basis points sequentially.
Our core U S business saw an even greater dean, reaching an adjusted EBITDA margin of 28, 1% up 400 basis points sequentially.
With regard to full year adjusted EBITDA margin for our U S business, we expect it to be in line with our prior guidance.
In addition, quarterly international margins I expect it to have slightly dilutive impact on consolidated margins.
But do you expect this impact to significantly decline in the fourth quarter.
Provision for taxes in the second quarter was $42.6 million as compared with $30.7 million in the first quarter, primarily due to higher gross profit.
Consolidated second quarter net loss allocated securely was $7 million, which includes closing expenses and 1 time charges related to the <unk> transaction.
The U S business second quarter net losses significantly decreased from $17 million from the first quarter to $1.8 million.
We continue to maintain a strong balance sheet with cash and cash equivalents of $234 million.
Up from $315 million in the prior quarter.
At the end of the second quarter, our outstanding debt net of unamortized debt discount was $238 million.
We plan to explore opportunities to refinance our debt facilities at the first opportunity in January 'twenty, 2 and we expect to bring down the cost of our debt.
Net capital expenditures during the quarter was $41.9 million.
Investments were focused on expanding cultivation and processing capacity as well as selectively increasing our retail presence in strategic markets.
Capital expenditures for the full year 2021 are expected to be approximately $140 million as we continued to invest in cultivation.
Processing and all of the detailed footprint in order to prepare for continued strong revenue growth in 'twenty 2 and beyond.
In closing we are pleased with our financial performance this quarter.
On an organic basis, we delivered 18% sequential revenue growth and 400 basis points of adjusted EBITDA margin improvement.
We expect this trend to continue in the coming quarters, which will help us drive operating cash flow in the second quarter of the year.
Now, let me turn the call back to Joe.
Thank you Ryan in closing I would like to thank the entire <unk> team for their continued focus on execution, we remain committed to growing our top line expanding profitability.
Adding cultivation capacity and developing innovative new formulations and form factors backed by science.
And as always with a focus on creating shareholder value.
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 to ask a question you May Press Star then 1 on your Touchtone phone.
They are using a speaker phone please pick up your handset before pressing the keys.
Let's try a question please press star 1.
Our first question today comes from Pablo <unk> with Cantor Fitzgerald.
Thank you Boris.
Boris I guess, just 1 question first.
You have spoken in the past of trying to get ready for the Interstate trade and you made that acquisition in Colorado, but at the same time, you're expanding capacity aggressively at the state level in the east.
I've seen in the past you've said that in the long term.
Cultivation needs to be you know may not be so.
Economical in a multitude of Interstate trade. So I'm just trying to put the 2 things together right do you believe that by the mid terms, we have for labor reform, but I'm guessing you don't expect Interstate intrastate trade there to happen like with the state would be for 5 years out. So accounts you had expanding these can you just reconcile the 2 things and thank you.
Yeah, I think I think Pablo you have it exactly right, we do anticipate to have significant reform.
By April of next year. However, we believe that's going to be more around safe banking tax reform and social Justice issues. We don't believe the federal government at this point in time is ready for full Interstate commerce.
Could happen, there's always a risk, but we don't believe that that's what's going to happen given that we're pretty close to the processes involved in it pretty intimately that's where our thinking is at the moment and given that we have incredible demand that's about to come up from the East Coast I mean, New York.
As we said in our report in New York, New Jersey, Connecticut, What we think will be soon Pennsylvania, and Maryland, all of whom represent about 11% to $12 million.
For a $12 billion of potential market demand, we need to be prepared for that so we are expanding in new Jersey, we have already expanded we're expanding a bit more we're expanding in New York, we're expanding in Connecticut.
But you know the margins coming from those businesses are so great that we expect the payback on those growth facilities to be reasonably quickly. So we are preparing for those markets, we have to be able to supply those markets, we want to maintain our market share.
And we also believe that the interstate comp performance unlikely to come and.
And this next package.
I'll just squeeze 1 quick 1 just just an update in terms for the competitive.
Landscaping, Florida, and Pennsylvania, because of Florida, we're hearing about some operators doing.
Buy 1 get 1 free it up for promotions for more than a week and the gifts, Pennsylvania somewhere retailers are telling me that they've been able to buy in mainstream and in lower end of the flower market.
With prices right, which are which means that there's some pressure there there in terms for a while supply increasing faster than do you mind, just just quit corner in central Florida, and Pennsylvania competitive landscape. Yeah. So so both of those markets are different and that they're.
There are similar in that they're both medical they're different in that.
Florida has more cultivation capacity.
At this point it is more developed than Pennsylvania, we have not seen pricing pressures in Pennsylvania at this point in time we.
We feel that that market continues to grow and continues to expand however, even though Florida is growing first of all the summer months tend to be slower in Florida, because a lot of people do leave the state.
They do come back in the fall and we have seen some pricing pressures from Florida. However, we continue to see very robust.
EBITDA margins out of our Florida business. So it hasn't affected our margin at this point in time, but there's definitely competition for market share in Florida at this point in time for 3 main operators truly purely at all but and sort of terra are seem to be competing for the top spot. So, but I do think that that isn't going to get out of free.
And in any way and I again, I want to reiterate the margins are still very strong.
Got it thank you.
Our next question comes from Vivien <unk> with Cowen.
Hi, Thank you.
You guys work on optimizing your cultivation.
Putting these new processes in place.
Just give us an update on how you're thinking about your gross margin progression from here, obviously very nice improvement in the gross margin in the quarter, but relative to some peers.
There is an opportunity and in particular, given kind of the novel approach from a low cost methodology for any any kind of.
Color over the medium term would be helpful. Thank you.
Sure Vivien, we are we're continuing to expand our gross margin we anticipate.
Meeting the targets that we outlined at the beginning of the year, which is a 30% EBITDA margin.
And a a about a 52 to 54 per cent eventually.
Gross margin.
Now we're just at 50 per cent 1 needs to remember that cure leaf. Unlike some of our competitors.
A much wider footprint.
And now we have the European business and so it's just taking us a little bit longer to get there, but the sheer size of growth of the business.
Really compensates for that so in the end of the day I've always stipulated that for me growth as a priority.
Priority I believe that getting our brands out there on both national and global basis is very important but we are very very comfortable that we will be operating at a 30 plus percent EBITDA margin next year throughout the year.
Understood. Thank you and Joe My follow up is for you. Please I believe I heard you say, you're targeting 60 dispensaries in Florida by the end of 2022, you also commented on new door additions in the back half of 2021. He is all for any more color on kind of the phasing of bridging GAAP I believe you have 37 doors and for that today. Thank you.
Yeah I think.
As I mentioned on my prerecorded comments, we've really started to focus on quality as well as a quantity of of new store openings in Florida as we've already alluded to on this call, it's getting more competitive and we want to make sure that we're preparing ourselves to compete as effectively as possible and that includes you know higher quality.
<unk> greater volume of product, but also our locations of our own retail stores. So we.
We expect to open somewhere.
Somewhere between 4 and 6 new stores this.
This year.
In Florida, and then the balance of those would be in 2022.
Perfect. Thank you.
Our next question comes from Camilo Lyon with P. T I D.
Thank you good afternoon.
So for us it's great to see the 20% quota very strong indeed.
You kept the full year revenue guidance intact.
Any thing you can help us.
Any color you can give us to help us understand the cadence between Q3 Q for how that should unfold and how he and how.
Conservation projects will come online too and catalyze a.
The differences between Q3 and Q4.
I mean, we we anticipate continued strong growth into Q3 and Q4 I mean, historically everybody knows that Q4 is a crop tober, there's always pressure on camp on the cannabis market with illicit cannabis coming out of mainly California, and Oregon, and so we're always a little bit careful to make sure that we don't over.
Estimate what we can do also there's 1 more factor and that is the issue of New York to we just don't know when the whole flowers gonna drop whether it's going to drop in September whether it's going to drop in the fourth quarter. We did think that it would get signed we were told by New York authorities that it would get signed in early in early August late July.
It didn't obviously I think we all understand why it's on the Governor's desk, but the governor has got other issues to deal with at the moment. So Canada is probably not number 1 but as we said on the call earlier its not a question of if it's a question of when because it is codify that law. So we will get whole flower and whole flower, obviously is going to be a big number for us.
Surely given that we're the largest supplier of flower in New York on the wholesale market as well as through our own stores. So we're just trying to be a little bit careful on how the fourth quarter third and fourth quarters work out, but we're very confident in the organic growth, which is why we you know we guided at the beginning of the year between 1.2 and $1.3 billion of revenue and were very calm.
For the bold to say that we believe that we will definitely meet the mid point.
On our base U S business, obviously with our European business being on top of that.
And we're just trying to be conservative regarding where we come out on some of the factors that I raised otherwise we still continue to see it in terms of cultivation. We've got a lot of new cultivation coming online some of which is coming online to be honest in the third quarter.
Which really doesn't really start harvesting.
Properly until December. So this question about how much of that cultivation will actually.
Hit the market in the fourth quarter versus the first quarter of <unk> of 22, you know obviously, we won't recognize the fact that the supply chain has got some stress on it globally and so some of the cultivation projects are our are obviously slightly held back although I have to say the team materially done a great job, but none of them are.
Our delayed more than sort of a month.
But that 1 month does it change the picture in terms of the amount of flower that would come out of those facilities. This year versus January of next year. So that's why we guided in the middle of the range. We're just trying to be cautious to make sure that we understand that we have.
Definitely can meet the numbers that we're outlining that's what Tim Miller.
Yeah, that's perfect. Thanks for the color and then.
Going back to the question that was asked earlier around your margins.
Last quarter, you you kind of gave high level margins.
Progression for your more established markets and the more nascent markets has anything changed on the established market.
The rupee in terms of those margins that youre seeing it.
It seems like it's it's the younger more nascent markets are the ones that are starting to catch up I just wanted to make sure that there wasn't anything that we're missing.
We haven't seen any kind of pressure or not.
In our more established markets, we still see robust growth as matter of fact, we had margin expansion in states like New York, and New Jersey, which are markets that we've had for some time.
You know the smaller markets as we bring on the cultivation. We just brought on a major cultivation. So in Arizona, that's going to obviously expand our margin as we start to sell our own flowers through our stores rather than you know.
Keystone again flower from from other growers and so you know that that's going to help margins as well.
So I think Joe said, we've just brought on a large facility 2 facilities the share to 50000 square foot.
Canopy facilities in Florida, 1 that's already harvesting now 1 that will be harvesting in the late fourth quarter. So all of those things will continue to add to margin, we have a new facility coming online.
In Pennsylvania, and Illinois also in the third quarter that will be harvesting the sometime in the fourth quarter. So all of these all of these facilities should add to margin expansion into late fourth quarter early.
For our first quarter of 'twenty 2.
Our next question comes from Andrew price and you with Stifel GMP.
Bye. Thank you for taking my questions and congrats on the great quarter.
You know you guys have a pretty unique footprint being you know the only 1 with a real national presence and and so many different states.
And you know 1 of the.
1 of the advantages is is some interesting insights on the consumer level I'm wondering you know with with Covid coming back.
There are restrictions easing in life coming back to normal.
Could you talk a little bit about what you're seeing in terms of consumer behavior, whether it's consumption of purchasing behavior.
You know any high level comments could be useful to kind of understand.
You know the the trends.
You know going into Covid, there was increased consumption and and.
And people were.
Voting more of their wallet share to cannabis and kind of.
Looking forward what do you expect.
Listen I think that Covid was obviously very good for cannabis.
Widen the customer base, both on the wellness side as well as in the adult use side.
<unk> had some increase.
Demand during the peak of the original Covid flare ups that we had in 2020.
We definitely saw and I think the Bds analytics are shows that we definitely saw a.
10 top states with Bds covers have a slowdown between from for it.
In May and June if you look at the most recent numbers that have come out you'll see that.
10 of their states showed a slight decrease in sales. We don't think that that's a demand issue of long term demand trend, we think that that or oh too much competition. We think that was a share of wallet. You know people were cooped up in their homes for over a year and the day that they saw.
Started to venture out they were going on vacations that we're traveling abroad.
And so you know people are moving around between states. Some so they couldn't use their cards on vacations and so we definitely saw a little bit of a change in habits, but nothing dramatic I'm, just a little bit of softness and we think you know we've seen some green shoots in July.
Illinois reported early numbers that showed a substantial increase in July we'd like to see some of the other numbers before we can make a definitive view, but purely for viewers is that going into September and the fourth quarter, we should as people start to come back home and go back to work I'm, assuming the delta value dozens of them doesn't flare up.
And you know sort of what happened in Europe, we think that demand should start to pick up again for cannabis products or normalized into late third into the fourth quarter. Obviously, if we get hit by a substantial COVID-19 or God forbid another locked down that potentially could actually reflect very very positively because we could get the same kind of reaction.
That we got in 2020. So overall, we remain very positive you know back in May when I mentioned the publicly that we saw a slowdown we just felt that it's important to be transparent with the market and we were proved to be right because the official statistics that show.
Flow down in end demand in all the key states around the country and purely being the only operator that actually reflect in C 23 states across the country.
And early barometer of what then Bds was able to confirm but as you can see it did not reflect it.
Our numbers are we were still able to meet our guidance in the second quarter and we continue to feel that we're going to meet our guidance for the year.
Thanks for that very detailed answer.
Maybe switching gears you know on the call you know you guys mentioned about potentially refinancing your debt.
And in early 2022 could you remind us where you're at now with that.
In terms of our cost of debt and you know where you might be targeting them what kind of color are you seeing in the debt markets now.
Could we see any potential traditional mortgages or are you know all of your a substantial amount of your real estate already in and locked in sale leasebacks I'm, just a little bit of extra color there because I thought that was an interesting comment.
Yeah listen we've always been very transparent about our debt position, we were the first to issue a non.
For your 2 year non call note Oh without any warrants are back in January of 2020, we we added another $50 million for that note at a substantially reduced rate. Our initial note was issued at 13%. This 1 was there sort of a ton in the quarter back in January of this year, we've since seen even though.
Further a contraction.
And then in the cannabis market.
A couple of deals from the market right now at 9%.
For the companies that are much smaller than purely for <unk> given that the substantial cash flow generation that we expect to see in the second half for this year. We think we'll be in a very strong position in January when we go to refinance our notes I don't want to predict exactly what rate, we're going to get but obviously, we anticipate being in the single digits and more can.
Ben.
Some of the other deals in the market today, given our size scale and credit worthiness. So that will obviously add a tremendous amount of cash flow to the bottom line. Because you know, it's it's going to reduce the cost of our financing substantially on the wheat side some of our REIT financing. So we do have the ability.
A certain point in time to refinance I don't have that information exactly here are some of them are long term notes that we can't refinance so but for the most part are purely for refinancings were done at a lower level than most of our competition. So we're not too fussed about it we feel pretty good at those that we can refinance we certainly will do that when the time is up.
And again, if you have a question you can press Star then 1 and we'd like to remind you to limit yourself to 1 question and 1 follow up.
Our next question comes from Eric <unk> with Craig Hallum capital growth.
Great. Thanks for taking my questions Congrats on the strong growth in the quarter.
So you've talked a lot about your innovation pipeline I appreciate the color there and your focus on derivative products with brands like select but well flower remains king in most markets and you guys are continuing to build out capacity flower coming online in New York et cetera can.
Can you help us understand where you guys love to compete with flower are you guys focusing on sort of premium quality premium pricing is it good quality at a great price just any color on just kind of reminding us of your flower strategy would be helpful. Thanks.
Hey, Joe will you take that.
Yeah I think.
We are certainly continuing to not only improve the quality of our file, but there, but the quantity and the yields of our flower, but you know.
As a as a large cultivator.
We don't see ourselves as a a.
Niche grauer who's focused on very boutique high in flower, where we're really targeting you know great flower at a very reasonable price and I think we can achieve that in most of our markets today and in the markets that we haven't yet we're on our way to achieving that and I think that's really the cornerstone of our of our pricing strategy is that we want to just.
Produce a great value proposition to our consumers, whether it's in flower or candidly any other product format, where we're delivering.
We see ourselves for somebody who has got the ability to.
Produce great products at a reasonable price with high quality and high consistency and that's.
The cornerstone of our strategy.
Okay, Great. That's helpful. I appreciate that.
And then my follow up here I guess a bit of a follow up on the on the previous question. Boris You mentioned you expect from significant cash flow generation in the back half of the year here.
Year to date, you guys have generated an impressive $147 million in EBITDA.
Cash flow from operations seems elusive you guys are at a loss of $79 million can.
Can you just help us understand the difference there.
And what it's going to take to get you guys for cash flow positive.
Roger do you want to cover that.
Sure.
You're right I mean from for Q2, we did have a negative cash flow from ops, but as the margins continue to increase in Q3, and Q4 or maybe you are expecting out of adjusted EBITDA margin to really crossed the 30% Mark for Q4, that's really going to dropdown into the cash flow and then also the Capex needs is also going to continue to go down we did book.
Non of inventory in Q2 to really support the demand coming in the back stop that's not going to be that much needed for new Capex investments. So that's also going to help from a cash flow from ops. So we believe in the back half, especially in Q4, we will start to be a positive cash flow too.
Our next question comes from Matt Mcginley with Needham.
Okay. Thank you Mike.
My question is regarding Capex, you said in the prepared remarks that you expect new capacity and New York, New Jersey, Connecticut, Florida, I think is Ta in 2022, Italian spot the guide Capex dollars today, but if you look at your asset base in your planned expansion do you think we're at peak Capex with $140 million. This year or do you think that youre going to have continued.
Projects are going to have big amounts of Capex for when you deploy it.
And frankly the growth in 'twenty, 3 and beyond or are we kind of like I said, a peak capex number this year.
I think I think I'll start and then I'll, let Joe also continue it but on this year.
The big Capex number for US this year was.
Was new York.
And we have made a decision at this point in time to just expand to that limit that we at least now know that New York will definitely allow us to have rather than go out and spend a tremendous amount of capital building for.
Further.
Further expansion facilities in New York, given that we don't think New York is going to get going really until January of 2023, if we hear from the state over the next several months as they put the commission a place that they will allow us to have more than call. It a 150000 square feet of canopy. Then we'll go out and build it we've secured the sites we have all the locations.
We have drawings, we're ready to go but we've just decided that at this point in time why go out and build as well as the fact that the state is its been frowning upon people announcing that they're going to build capacity over and above what the state has indicated to everybody that theyre going to probably award at this point in time and so in order not to upset the <unk>.
Later to stay in good standing with them. We're building what we know that at the moment is the discussion around you know a 150000 of canopy for the existing our OS and then if that changes we've got plenty of time and we've got the location set up to build that that number was around $50 million, which has taken our capex down to the level.
Where we are now.
Okay.
Okay, sorry to read to reinforcing bar said.
The $150 million is a good proxy for our steady state capital programs, but if we see accelerated growth opportunities in the marketplace. We're prepared to spend behind those opportunities. If new York allows additional cultivation capacity, we're going to build it.
But I think you'll also see qualitatively a shift as we've talked about we really we really look at our capital program across 3 time Horizons, we continue to build out our existing footprint in key markets like New York and New Jersey are even Arizona.
But we also are spending for the eventual nationality of of the business right. So we'll start seeing quantitative shift in shorter term capital projects hopefully to longer term capital projects as those products become more feasible in the marketplace, but I think you know the 150 is a good proxy for it.
For an annual spend.
Okay. Thank you and then maybe a big picture question on the production footprint and cost from the 'twenty and beyond that I think force related to that.
What are you what are you hoping to achieve or learn from this little swing as it can be immediately applied year. Other production facilities, because I don't think you have anything it's like this facility the day. Thank you.
On top of that like how much more of an opportunity is there to harmonize your purchasing costs across the national footprint to drive those unit costs down or is it more of an opportunity on driving cultivation costs down in those individual facilities, where you get more of the upside over the long term.
Great job for Us I'm, assuming you want me to start with that 1 and then I'll I'll actually defer to Neil Neil Davidson was also on the Bill.
But I think the.
What we're hoping to do with our projects like last Wayne, Yes, as we've talked about is accomplished 2 goals. The first goal is we are going to provide capacity much needed capacity in a market like Colorado, which is a big market and we're under shared and so where we're providing existing biomass for our formulated products.
In a market that we think is very attractive.
And where undershirt.
On a longer term basis, we're trying to blend our overall cost of cultivation.
Net to the lowest total delivered cost and that.
<unk>, where we have facilities.
Primarily indoor capable capable for producing high end high THC flower.
With greenhouse, which is primarily used as feedstock for certain types of products and biomass and then of course outdoor which is primarily biomass for formulated products and by creating the right blend of those technologies were hoping to get to the total book you know delivered the lowest total delivered cost in the marketplace.
So we will do that in Colorado by providing our current needs.
We'll use that technology of outdoor scale and cultivation to be able to lower our total cost of delivery and we also perfecting genetics that can potentially be used in an outdoor basis across the U S. So for us, it's a very strategic opportunity to.
Take a step change in our business.
We're very excited about them.
The ability to work with the last 1 you have to do that.
Our final question today comes from Matt Bottomley with Canaccord Genuity.
Yeah.
Good evening and congrats on the continued success at all I just wanted to pivot back to some of your commentary on on what Chuck Schumer had put out there. It has dropped discussion I know, it's not fundamental to the business and you guys have more important things to focus on a day over day, but I'm just curious on maybe Boris if if you wanted to comment on what you think.
Potentially needs to be put into that bail or taken out of that bill in order to pass and also any thoughts on the taxation. There. That's a lot of the feedback I've been getting from investors is the impact of a potential 25 per cent federal tax net of the removal of $2.80, and if that were to stay as it is how that looks in your view to to the fundamentals on the tax line.
Well I think it's it's it's very early to discuss what this law is going to look like right. There was a wishlist that was put down on paper.
From the 3 senators and it was discussed internally quite extensively.
And I think it's got all the right pieces in it I think it's going to go into a negotiation now.
Obviously, the federal tax rate of 23% to 25% would be very very good for the industry and more importantly, just the fact that we could write off.
Our expenses will be very very helpful. I mean today. The you know the average company's paying well over 50 per cent taxes, you know 55 to 60 call. It.
Because of the because of the <unk> status. So you know it's going to bring down the cost dramatically I think the bigger question is what is the excise tax is going to look like and how is that gonna be structured and that's something that's going to be up for discussion negotiation I suspect. It will look a lot like alcohol where higher alcohol.
Alcohol content this tax for the higher rates local lower alcohol levels were taxed at a lower rate.
Which is very similar to 2 kind of it. So I think that that's going to be the discussion that's going to be had outside of that but as I said I think that the laws more going to be focused on on a you know I think the Interstate commerce issue, it's going to be the biggest problem. At this point in time I, just don't think that a lot of the Republicans are ready for that at this point in time.
But I do know that we're value very good with votes from the Senate for a safe banking law. So.
There is bipartisan support basically now I don't want to say for 100 per cent, but I would say, it's the closest we've ever been.
<unk> approval, if that law came to the floor to get past I think that's a huge huge accomplishment that's been done by the whole industry and its lobbying as well as you know Senator schumer widen by.
Book or that some.
Admittedly flaw it really put a lot of pressure basically a lot of Republicans are saying, Hey, you know what.
We're really comfortable with the safe banking, we were not quite yet ready for Interstate commerce. So I think and I think the Democrats can get comfortable with as you know a law that allows for state to determine what laws. They want and we've seen that gambling. So I don't see you know that's the structure under which gambling operates in United States I don't see that why that couldn't be the.
Same for cannabis and so I just think it's a it's a matter of negotiations as everything is but the good news is I don't know if everybody has noticed this but we're starting to see some bipartisan work in D C.
We're seeing it on infrastructure I think we're going to see it on the debt ceiling and under.
On the budget.
You know its good were going into a nice environment, where once we're through infrastructure and the budget. That's fueling the next big Good next biggest true with cannabis and so you know the bipartisan work that's being done on those laws I think is going to benefit the work on cannabis.
Understood and appreciate that and then just a follow up on the more on the core fundamentals here 2 markets in particular, just Arizona and New York, So, Arizona any commentary on how that ramp is going it seems to be pretty healthy with respect to the onboarding of recreational use.
It used to just given the fact that the existing medical market seemed very friendly to those certain types of product forms and the other just being New York. So you mentioned flower, hoping to come online there and I'm just curious on what your expectations are on potential magnitude, there maybe relative to Florida or other markets, where you have experienced that just given that the the locations at least that 1 that I've been to in New York.
I feel more like clinics theyre not really your typical dispensaries clearly not that many in the state overall.
So just wondering if you think that the addition of flower will be a material driver to new our new customers coming into the legal channel.
There's no question that flower will change the picture. It has in every state where or whole flower has been approved and it's very consistent throughout.
Throughout the country with flowers introduced.
And the Bud and whole flower form.
Demand really picks up quite dramatically people still rather buy let's be honest in a in a store than on the street for the most part because they know what they're getting and they're getting a safe product.
For something or something like that so from a safety perspective, it does help obviously.
The rec legalization.
Legalization would help it even more because it would increase the amount of stores throughout the state.
Biggest problem right now is you've got 10 operators each with you now.
For stores and so that's quite limiting in terms of access.
But we do expect a substantial pick up in demand and to be honest for the most part it would be purely because clearly because the largest cultivation operations in this day and as Ron Jon had mentioned earlier 1 of the cash flow issues is that we have been building product in New York.
In New Jersey, and other states getting ready for what's going to be a big change in New Jersey of course, it's gonna be rack in November in New York, It's gonna be a whole flower.
As soon as the you know the governor signs it and you know the.
The good news business that if cuomo is either in peak still resides.
It's our understanding that the lieutenant governor would be taking this places very favorable towards cannabis and it's probably likely to sign into law pretty quickly after coming into office. So we're pretty comfortable that this is going to happen, whereas unfortunately stuck in.
You know, what it's becoming a regular routine in the country and that is.
Scandals around governors, and congressmen and senators and that's what we're in the middle of with Cuomo right now and it's quite understandable that he doesn't really have time to focus on the cannabis issue. So that's 1 of the things that we think is probably going to get pushed out into the fourth quarter over September but it could happen much faster if he resigns.
This concludes our question and answer session I would like to hand, the call back over to Carlos mature for for some closing remarks.
Yeah.
Thank you all for joining us today I'd like to note that we will be participating in a number of upcoming virtual conferences and events, including a fireside chat with boys true kind of courts virtual kind of his conference tomorrow at 9 a M eastern time.
Each will be webcast live please visit our investor relations website for axis.
We look forward to updating you will further on our progress of these events as well as some of our third quarter 2021 financial resource pool in the meantime make sure to for dedicated clearly for Investor Relations, Twitter accounts, which notch day stay well and safe.
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