Q3 2021 Curaleaf Holdings Inc Earnings Call
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Good day and welcome to the surely its third quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchdown pass.
Your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Carlos Withdraws Ma'am. Please go ahead.
Good afternoon, everyone and welcome to <unk> Holdings third quarter, two first one on 'twenty One conference call. Today, we are joined by Boris Jordan Executive Chairman, Joe Lusardi Executive Vice Chairman, Joe Bayer Chief Executive Officer, Neil Davidson, Chief Operating Officer, and Brian Jenkins, Chief Financial Officer.
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 security laws, which by their nature involve estimates projections plans goals forecasts and assumptions, including the successful integration of acquisitions.
Subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward looking statements on certain material factors or assumptions that were applied in drawing a conclusion or making a forecast in such statements.
These forward looking statements speak only as of the date of this conference call and should not be relied upon as 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 our forward looking statements and risks factors can be found in the company's filings and press releases on SEDAR under Canadian Securities Exchange.
During today's conference call <unk> will refer to non <unk> measures do not have any standardized meaning prescribed by <unk> 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 and wastewater wise syndicate.
With that I'd like now to turn the call over to executive Chairman Boris Jordan.
Thank you Carlos good afternoon, everyone and thank you for joining.
Let's begin with an overview of our third quarter results, we delivered record revenue of $317 million in quarter, three representing 2% sequential and 74% year over year growth note that our sequential growth was all organic.
Adjusted EBITDA was 71 million, representing a 22, 5% margin and we generated positive operating cash flow of $52 million.
While we faced some transient challenges in the third quarter, mainly related to legislative headwinds in the northeast and some one time costs largely associated with integrations, we continue to execute well against our strategic initiatives.
As a result, we expect to achieve our one two to $1 3 billion annual revenue guidance, albeit at the lower end of the range growing over 90% year over year.
Despite the headwinds we faced in quarter three the U S. Cannabis market remains extraordinarily strong in its prime for significant growth over the next several years projected to increase from 25 billion. This year totaled 43 billion by 2025 and.
In this context I think it's important to reiterate our long term strategy and market differentiation and why we are so excited about the future of this company. Our strategy has always been to build the largest cannabis company in the world both organically and through M&A selling our nationally recognized trusted brands with the widest distribution footprint.
We're still in the early innings of our industry growth and believe the right strategy for all our stakeholders is to focus first and foremost on gaining market share. We believe this is what makes purely unique and what will enable us to be the winner in this industry of course in order to achieve this goal. It is critical that we have a presence with all of the largest U.
<unk> markets and today, we operate in 23 states, representing the broadest footprint in the industry. Many of our markets like those in the northeast are more established and generate very strong margins for us.
Others are newer like California, Colorado, and Michigan, which we referred to as our investment markets, while our investment markets naturally generate lower margins today. They are critical to <unk> long term growth as they are some of the largest in the country with massive upside potential we have a clear path for profitable growth.
Across all our markets and as we continue to execute improve our operations and gain scale our margins in our investment markets will inherently expand.
In our more established states, we're making strong progress against this initiative, which we believe will result in a strong 22 and beyond purely.
Our third quarter results reflect our strategy, we kept our foot firmly on the gas pedal investing our global distribution brands and products, enabling us to gain share and further position currently to capitalize on the significant growth opportunities, we see coming we expect our margins to improve in the fourth quarter and to achieve an adjusted EBITDA margin of 25.
5% for the full year longer term, we are targeting steady annual margin accretion as we prioritize growth coupled with ongoing operational efficiencies.
Let me now provide you with a little more detail into what we're seeing in the market and how we are executing against our strategy as.
As we previewed on our last earnings call in May we witnessed a general slowdown in the cannabis market in the third quarter, which we believe was largely a factor of the broader softening of U S consumer spending.
Personal consumption expenditures increased just one 6% quarter three according to recent GDP estimates compared to a 12% increase in the second quarter. We believe the candidates industry quality similar path. According to headset BSA. The U S. Cannabis market was essentially flat sequentially in the third quarter compared to an increase of beta.
In 2014, and 15% in quarter two while the slowdown was greater than we expected purely posted total revenue growth that exceeded BBSI in absolute numbers and we gained market share in several of our key states like Arizona, Pennsylvania, Michigan, Florida and Maryland.
At the state level I mentioned earlier, some legislative headwinds in the northeast and New York and New Jersey, the time gap between the approval of adult use in these states and the formal rollout of the adult programs was effectively allowed the illicit market to proliferate.
This has reduced new medical card applications and renewals more than previously anticipated.
In addition, New York did not approve whole flower in the medical market until just last month versus our prior expectation for sales to begin in the third quarter.
While the timing of legislative impacted our results looking ahead, there are several meaningful near term catalysts in the northeast that will have positive effect on our business in New York. The candidates control Board has approved the sale of bulk flower to the medical market and we began selling on October 26, we witnessed strong whole flower results in our first weeks bulk sales which gives.
US increased confidence it will be a catalyst to our revenue and the state beginning in quarter four and into 2022 with.
With respect to adult units, we continue to expect this program to begin in 2023, and we are making strategic investments in anticipation of the significant growth opportunity. We greatly appreciate governor <unk> decisive actions so far in advancing the implementation of adult use program in New York.
We also have line of sight to New Jersey commencing its adult use program in the first quarter of 2022 with our leading market share of the strategic location of our dispensary near the border of Pennsylvania, and the investments we have made building our inventory and capacity. We are fully prepared for new Jersey adult use we expect to benefit significantly from the upcoming growth.
Of adult use sales in new Jersey, and market, which is estimated to expand and aggregate to approximately $2 1 billion.
Connecticut, We believe the adult use program could be up and running by 2023 and are making investments in our operations and expanding our capacity to be ready for this event overall as we have discussed the combined Tri state area as a potential annual market opportunity of $8 billion and we believe we have the right tools in place to win a significant share of it.
This market given our leadership position in these states. We also continue to believe Pennsylvania, Maryland, where <unk> has a strong presence will likely be among the next major states in the northeast to approve adult use condoms. These states are estimated to represent another approximately $4 billion annual market opportunity.
In California, as you know the market is facing a supply demand imbalance and increased competition from illicit players similar to what transpired in Colorado and Oregon. We expect this dynamic to continue to play out over the next 12 to 18 box as a result, we recently divested argue we could grow facility to rationalize.
Our supply chain and improve our margins. We are also working on a more comprehensive strategy for our California operations, and we will communicate that to the market in the next couple of months. We are confident that we will not only continue to win share, but improve our margins and the state of deliver profitable results in California in 2022.
Colorado, we closed the <unk> farms acquisition in October, adding over $2 5 million square feet of outdoor cultivation capacity and two retail dispensaries with whilst why notes. We are now one of the largest wholesalers in the state. We believe this acquisition will help us drive significant market share gains in Colorado, and our vertical integration will contribute to margin expand.
And the market beginning in the fourth quarter and into 2022.
I would also like to touch on Florida, not only because it's an important market that gets a lot of attention, but because it's a great example of our strategy leads to strong results in Florida. Our focus has mainly been on expanding our cultivation footprint and improving our generics and quality as a result of our efforts we have doubled our market share in the state.
To approximately 15% since the beginning of the year and continue to gain share in attractive profit margins, we see significant future growth opportunity in Florida, and we'll make the necessary investments to continue gaining incremental share at appropriate margin levels.
As I mentioned earlier, we will continue to advance our growth strategy, both organically and through strategic acquisitions that add to our top line and are accretive to our margins in that regard. We are very excited to announce today our agreement to acquire <unk> company, a vertically integrated emmis low operating in Nevada, Arizona, and Utah <unk>.
Securely and extensive and highly complementary vertical portfolio of retail and wholesale distribution licenses and cultivation assets <unk> owns and operates six highly trafficked dispensaries under the rebrand with four retail stores in Nevada and two in our results for the company's products are also sold in over 50 additional location.
Across our wholesale distribution network. This is a highly strategic acquisition for us by combining purely from Trikes assets, we will substantially bolster our already leading position in Nevada, Arizona and Utah. We will also gain vertical integration in Utah, which will be a positive for our margins in that state and <unk> overall.
This is a very attractive financial profile upon close the acquisition is expected to be immediately accretive to purely to margins and cash flow. We anticipate the deal to close in 2022 pending approval from the Nevada cannabis compliance board.
In addition to the progress we are making at the state level in the U S. We are also cautiously optimistic the positive changes are forthcoming at the federal level. There are multiple avenues for candidates both chambers, including Senator Schumer comprehensive reform Bill and the Safe Banking Act the safe banking language has now been passed.
The house of Representatives multiple times and most recently was attached to the National Defense Authorization Act, which passed through the house in September. This month, we expect the house Republican led coalition to introduce a common sense reform Bill that would legalize cannabis. This is yet another strong signal that Canada does not a partisan issue and there is broad.
Support across both parties to resolve the federal conflict on candidates the USB C. Along with our government relations team is in constant contact with our elected leaders and their offices and we feel we are very well positioned to have a legislation addressing Canada passed by the end of this legislative session.
Looking to our European business, we saw several positive developments in the third quarter, particularly on the regulatory front in Germany, the largest European market for medical cannabis.
We believe adult use legislation could be part of new governance overall legislative agenda also Portugal, Spain continue moving forward with political processes around possible legalization of recreational use we are encouraged by these developments Europe could believe clearly well positioned to capitalize on the long term growth opportunities in the market.
<unk> has the potential to be twice as large as that of the U S.
Finally, I'd like to touch on our 2021 outlook based on our third quarter results as well as the market factors I discussed earlier, we currently expect to deliver full year revenue of approximately $1 2 billion within our guidance range initiated back in March. In addition, we expect our full year 'twenty, one adjusted EBITDA margin to be 25%.
Let me turn over the call to Joe Baird.
Thank you Boris.
As Boris mentioned, we faced some headwinds in the third quarter, but we continue to successfully execute our strategy for long term growth with a focus on strengthening our four pillars of competitive advantage.
Research and development product commercialization national distribution, and marketing and brand building.
And our strategy is leading to positive results.
In the third quarter, we gained share in seven of the 11 states tracked by headset, and Bds, namely, Arizona, Florida, Illinois, Maryland, Michigan, Pennsylvania, and Oregon.
In Florida, specifically as of the week ending October 23rd our market share based on state released data of milligrams dispensed was approximately 15%.
Double our market share of seven 5% at the end of January.
This was done with minimal additional store openings.
Most notably our Florida state margins continue to stay above our company targets.
We see strong growth potential in the Florida market and expect continued share gain by staying focused on the fundamentals of our business.
Providing high quality flower with a growing variety of strains.
Introducing new and differentiated products like squeeze and click and providing industry leading customer service.
As mentioned on our last call, we expect to reach a total of 60 dispensaries in Florida.
End of 2022.
In terms of our third quarter EBIT margin as <unk> pointed out we faced some legislative headwinds in the northeast, which impacted our revenue growth in these higher margin states.
We also incurred some nonrecurring costs that Ron Jon will discuss in more detail.
In addition, we made increased investments in new store openings and in our marketing efforts to support the growth of our new product Rollouts.
Pricing was only a small piece of the overall impact in Q3.
Looking forward, we expect the headwinds we faced in Q3 to begin to reverse in the fourth quarter and into 2022.
The addition of whole flower in New York in adult use in New Jersey, we will accelerate our growth in these higher margin markets and our new store openings and product Rollouts will begin to bear fruit.
We are now vertically integrated in Colorado, and we divested our Eureka, California grow which will improve our margins in these states in.
In addition, we have rationalized our head count for recently completed M&A.
All of these factors will contribute to stronger performance into next year.
Moving to our distribution platform at the retail level, we continue to strategically expand our leading U S footprint with a focus on quality over quantity.
We opened two new dispensaries in the third quarter, including one in New Jersey, and one in Maine.
And added two additional dispensaries in Colorado through our <unk> acquisition in October.
Our total U S dispensary count to 111 as of today.
During the remainder of 2021, we expect to open an additional six new <unk> retail dispensaries across Arizona, Pennsylvania and Florida.
From a financial perspective, our retail revenue grew 1% sequentially and 66% year over year in the third quarter.
Including both adult use and medical use or total number of retail transactions remains healthy growing 80% year over year.
In addition, the total number of patients continued to grow expanding by 7% from June through September.
At the wholesale level, our revenue grew 3% on a sequential basis and 105% year over year, driven primarily by expansion of our distribution platform.
We grew our number of U S wholesale accounts by 6% sequentially during Q3.
Exceeding 2100 active accounts at the end of the quarter.
In California, we reached a record high 430 wholesale accounts and our Central U S. States. We grew our wholesale active accounts by a strong 12% sequentially and.
And we currently expect to exit 2021 with approximately 2400 wholesale accounts in total.
In terms of cultivation capacity, we are on track to meet our prior guidance to organically add 275000 square feet of flower canopy by the end of the year.
Unfortunately, we have not yet received Illinois state approval to open our Litchfield expansion. Despite its completion, but we're hopeful that we'll receive approval by the end of the year.
With the acquisition of <unk>, we've added our total cultivation capacity by $2 5 million square feet to approximately $4 4 million square feet in total.
This additional capacity will enable us to support our growth plans both in the near term and the long term as <unk> provides us with a platform to serve the U S market on a national scale once Interstate commerce is allowed.
As Boris mentioned in anticipation of adult use in New Jersey, and New York, We continue to make strategic investments to capture more than our fair share of the market.
In New Jersey, we tripled our cultivation capacity with our new Winslow facility in June and expect to double our capacity again with a nearby facility in the next 12 to 24 months.
In New York, we are in the process of expanding our ravine and New York facility and expect to add over 100000 square feet of new capacity before the end of next year.
Furthermore, we're already looking at additional real estate for new retail locations in this state.
Kelly is by far the leading provider in New York and we are one of only two msos with the cultivation capacity to effectively supply the market.
So we expect to see a disproportionate benefit from both whole flower sales in the near term as well as adult use once the program starts.
Moving on to product commercialization and research and development, we successfully launched new products across several markets in the third quarter, driving new customers and product interest across our retail and wholesale operations. In Q3, we continue to introduce our select squeeze product in several new markets, including.
Michigan, New Jersey, and New York, We also introduced our new bites and nano bites gummy product lines, which feature improved taste and faster onset times and we have seen strong early traction in key states like New Jersey, Arizona, Michigan, Nevada, California, and Maryland.
In September we launched our click by select vein system. This unique hardware design feature proprietary pod in stainless steel encasing that users premium oil.
We introduced quake in California, Oregon, and Nevada, and Arizona in Q3 and plan to roll this out to several additional markets by year end.
In October we further expanded our suite of innovative products with the launch of select Snoose bites in Arizona and Nevada.
This product combines a unique one to one ratio of fast acting THC utilizing our nano emulsion technology and long lasting CBS to help our customers experience a more restorative sleep experience.
We will continue to rollout snoose bites in additional markets throughout Q4 and into 2022.
Our focus on R&D is a key differentiating factor for <unk>.
So far this year, we have introduced a 113 new products in all markets and approximately 11% of our year to date revenue has been generated by new products launched in the last 12 months, we will continue to invest in new innovative products to ensure our position as an industry pioneer.
Lastly, on the marketing and branding front in October we introduced grassroots premium flower brand complementing our clearly brand for health and wellness and select brand for adult use. We also to continue to rollout our be noble co branded brand branded.
Branded products to dispensaries in six additional states, including Arizona, Illinois, Maine, Michigan, Nevada, and Oregon.
Since introduction in July 2021, <unk> is now available in eight states.
We were also pleased to announce last month the expansion of our co branded rolling stone by select line to additional markets across the U S, including California, Arizona, Massachusetts in early 2022.
Moving on to <unk> International we are pleased with the progress we continue to make scaling this business.
In the UK, we generated revenue growth of 40% sequentially.
We sold just over one ton of candidates flower to Israel in Q3, and anticipate increasing our sales to Israel sequentially in Q4.
And in Germany, we secured our GDP, we're good distribution practices certification, which allows <unk> to now release, our products directly to the German market.
Finally on November 1st we rebranded <unk> international establishing securely brand in the European market.
With that I'd now like to turn the call over to Ron Jon to discuss our financial results in more detail John.
Thank you Joe let me start by summarizing the results of our third quarter of 2021.
Revenue reached a record $217 million in the third quarter, representing sequential growth of 2% and year over year growth of 74%.
Our Q2 revenue came in below our expectations, primarily due to performance in some of our northeast States.
Detailed revenue was $225 million, an increase of 1% sequentially and 66% year over year, representing 71% of total revenue.
Our year over year retail revenue growth benefited from new customer acquisition and increase in repeat customers.
Opening of 17, new stores in the last 12 months and then increase in E Commerce penetration following the revamp of our digital marketing tools.
Our wholesale revenue grew 3% sequentially and 105% year over year to $92 million and represented 29% of total revenue.
Our year over year wholesale growth was driven primarily by the addition of new accounts and an increase in sales productivity.
At the end of Q3, we had over 2100 wholesale accounts more than double our accounts from the same period last year.
Our gross profit was $144 million for the third quarter of 2021, an increase of 61% from $90 million in the third quarter of 2020.
Gross profit margin was 45, 6% compared with 49, 6% in the prior quarter and 49, 7% in the third quarter of 2020.
The sequential change in gross margin includes a onetime loss on inventory related to our Eureka, California cultivation divestiture as well as a write down on inventory and two of our other states.
Our gross margin in the quarter was also impacted by revenue change at higher margin northeast States and a fire incident at unmanned cultivation facility.
Partially offset by ongoing cultivation and process efficiencies.
Excluding the onetime impacts an unprecedented incident, which totaled approximately $6 $6 million, our third quarter gross margin was 47, 7%.
While we expect our gross margin to increase over time. It may fluctuate periodically based on an investment cycle as we focus on topline growth.
SG&A expense and each $102 million in the third quarter, primarily driven by increased headcount in support of new store openings high travel costs as revenue facing travel resumes.
And marketing support.
And marketing in support of new product rollout.
SG&A as a percentage of revenue was 32% compared with 28% in the prior quarter and 40% in the year ago period.
Our third quarter SG&A also included approximately $13 million of one time expenses, primarily comprised of accounting and professional fees.
Bad debt write off.
And employee severance costs, mainly related to the Eureka, California facility divestiture and our grassroots acquisition.
Excluding these onetime costs SG&A represented 28% of total revenue in the third quarter.
Adjusted EBITDA was $71 million for the third quarter of 2021, an increase of 69% from $42 million in the third quarter of 2020.
The year over year increase was primarily driven by our revenue growth.
Adjusted EBITDA margin was 22, 5% compared with 27% in the prior quarter and 23, 2% in the prior year period, primarily reflecting the change in revenue at our northeast States unexpected.
Unexpected fire incident.
SG&A in support of new store openings and other marketing initiatives aimed at future revenue growth.
In the third quarter, we recorded $39 million of other expenses up from $19 million in the prior quarter and $7 million in the year ago period.
Other expenses, primarily included $16 million of net interest expense $10 million of interest expense related to lease liabilities.
$5 7 million of impairment charges related to the Eureka intangibles, and a loss of $5 $6 million on asset dispositions.
Provision for taxes in the third quarter was $60 million compared to $43 million in the prior quarter and $19 million in the year ago period.
The increase in income tax expense was primarily due to an increase in gross profit subject to ADT tax treatment.
Higher state income tax and certain discrete items totaling $10 6 million.
Discrete items included the write off of certain California, net operating losses, and the year to date, our Google for late tax payment.
Consolidated third quarter net loss allocated accumulate holdings was $57 million.
Compared to a loss of $7 million in the prior quarter and $9 million in the year ago period.
On a year over year basis, our bottom line was primarily impacted by $42 million of higher tax expense.
$25 million.
Other expense and $8 million of higher interest expense.
Turning to our balance sheet and cash flow or.
Our balance sheet remains strong with cash and cash equivalents of $317 million as of September 32021.
At the end of the third quarter, our outstanding debt net of unamortized debt discount was $342 million.
We have engaged a set of financial advisors to help us refinance our current debt facilities and expect to reduce our cost of debt materially.
In preparation for our growth opportunity over the upcoming quarters, we continue to build out inventory in.
In Q3, our inventory reached $346 million, an increase of $42 million sequentially inclusive of $20 million of biological asset adjustments.
Therefore, our business inventory grew by $22 million.
Our Q3 cash flow from operations was $52 million as we continue to manage our net working capital.
We currently expect to be operating cash flow positive in Q4 as well as for the full year.
Net capital expenditures during the quarter were $44 million.
Our investments continue to be focused on expanding cultivation and processing capacity as well as selectively increasing our retail presence in strategic markets.
Capital expenditures for full year 2021 are expected to be approximately $160 million as we continue to invest in cultivation processing and our retail footprint.
Turning to our acquisition of <unk> as announced today, we have agreed to acquire trade companies using a combination of cash and <unk> common shares. The acquisition is structured as a $115 million in cash and 17 million cumulative shares both payable over the next three years with the shared payments commencing in two.
<unk> thousand 23.
$40 million of the cash component will be paid at closing with the remaining 75 million payable over three years.
Additionally, the deal includes an incremental earn out payable in shares in 2023 based on <unk> business, achieving certain EBITDA targets.
We expect <unk> to be accretive to cure lift margins upon close.
The exact timing of closing is contingent upon regulatory approval expected in the second half of 2022.
Looking beyond 2021.
By continued focus on our strategic objectives, we expect to grow faster than the market organically along with adjusted EBITDA margin expansion and positive operating cash flow.
In addition, we will continue to pursue strategic tuck in acquisitions.
With that I will turn the call back over to the operator for.
Questions operator.
We will now begin the question and answer session 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.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two in.
In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
Our first question will come from Vivien <unk> with Cowen. Please go ahead.
Hi, Thank you good evening.
Hi, Vivien.
So I appreciate the color that you guys offer not only around at your retail account presence currently but then your target for wholesale accounts by year end I was wondering if you could offer some context around that in traditional CPG paralyzed. We would talk about ECB are all channels volume, obviously that doesn't jess represent.
The number of doors that you would want to access there is obviously some at ku math around that but if we just kind of think about the target.
400, or the current 2100 day, presumably you don't want to be in every discipline, sorry, so what percentage.
Dispensaries does that 2400 <unk>.
And how are you thinking about that.
For 2022, thank you.
Yes, Hi, Vivien this is Joe Youre right.
We're used to managing the business through ACB, where we're trying to get our skus and the most important outlets.
A little hard to measure that in our in our industry. So.
I've seen I've seen.
Statistics have anywhere from I think 8000 dispensaries in the U S. So that would put us at slightly over 25%.
30% of the dispensaries.
We can wait that on HCV I mean, I'm just not sure how you would do it in our industry, but.
Obviously, we'd like to get to the highest level of HCV.
As possible.
And our ultimate goal is to try to be in every dispensary weekend. So it's a little bit I think it's a little bit different than it would be in traditional CPG because just the scale of the number of outlets that you'd have to call on to get to a $50 $60, 70% ACB waiting but for us.
There are key markets that we're going to focus on like California, which has a large number and growing number of outlets.
New Jersey, New York are going to I think.
Impact that number dramatically over the next couple of years.
If they go out and build.
Even 1000 or 200 dispensaries in each one of those markets, we want to have a high penetration in those outlets but.
It's a great question I'm, just not sure how we would measure it on a traditional CPG basis, because there is no waiting of now what we are seeing as you know.
Our multi store operators popping up in the industry and that's a good thing for us because as we work with multi store operators not only we're getting increased distribution, but I think we're getting a different level of professionalism on how we do merchandising merchandising standards promotion pricing that can be coordinated with 112 point as opposed to 10 individual calls.
So I think it's happening in our industry, it's just pretty early on.
At least for us to draw that analogy.
Understood and I appreciate the transparency around that if I can just squeeze in a related follow up.
Your standing the ECB has clearly not been perfect definition.
Blaine Jo Ann. Thank you how are you philosophically you kind of think about your portfolio penetration in third party <unk> like is it by category or by Us.
Yes. Good flower is just so fragmented right is that flower check the box and then really focus on the novel form factors or is there a targeted number of law rescue use that you would want to see president and third party just trying to get a philosophical understanding.
Yes, I think you have to look at both I think you have to look at which categories that we have a presence and then how deep or what is your SKU counts in each one of those categories right. So we're always looking.
To get them.
Not only horizontal distribution, but vertical distribution in those accounts because.
It's more effective to sell more into existing accounts and trying to go out and get new accounts. So we want to be in the most important categories. I think we're excited about launching <unk>.
<unk> flower because thats going to be we believe that will be.
Potentially better wholesale opportunity, clearly flower, which by and large and sold through our retail outlets and a couple of different third party outlets.
Having a.
Our branded flower brand like grassroots will give us distribution opportunities for sure and flower.
And then we want to continue to innovate in important segments like like vape.
Obviously, that's a big category.
Edibles and eventually <unk>.
Keeping an eye on beverage because it will be big one day, but it's still an emerging category. So as we look at distribution goals.
We have targets just like you would in traditional CPG, which is we want to be in 25% of our accounts in the first 30 days, 50% of our accounts in the first 60 days and Thats, how we manage.
Our wholesale distribution rollouts.
We're trying to bring a traditional approach to getting getting distribution across the marketplace.
Makes perfect sense. Thank you for the color.
Okay.
Our next question will come from Camilo Lyon with BTG. Please go ahead.
Thank you good afternoon, everyone.
Paris unit he mentioned.
The impact of the New Jersey, and New York on the business in the third quarter.
I was wondering if you could give some context.
In other states that you've seen the expectation for onset of adult use and how that transpired with the medical patients.
And how quickly those markets recover.
I can't imagine that medical patients would likely wait a year for.
We are beating their medical cards for New York.
Commenced its program, but I'd love some context on how you think about that.
Those programs starting to recover.
How do you think about the acceleration of whole flower in a market that could actually recharge and catalyze the market for you.
So New York, New Jersey kind of hit the what I would call a perfect storm right you had a.
Reduction because of share of wallet across the country and.
And we saw that as I've said Bds.
BDSI and headset together show a like a half a percent decline quarter on quarter between second quarter and third quarter and we've been telling the market since last may.
What's happening and it accelerated in the third quarter. Obviously, then on top of that you had.
The both of these states announced these adult use programs they decriminalized.
And so with decriminalization medical patients instead of having to spend $100 or $150, depending on the state for their medical card.
Just go into the street because now they can they can have their cannabis, particularly flower they can buy their flower and they don't have to.
Carrier medical card to pay the additional cost of carrying a medical card and so we definitely saw this in Massachusetts.
Massachusetts is a very good example, because the only state that had a long transition period from.
From the time that the ballot initiative was passed to the time, they actually launched adult use program was almost three years.
And so we definitely saw the same thing we saw a rapid falloff in medical patients in the stores we saw.
The illicit market is very efficient so the candidates immediately adds to that state from California, and Oregon and start supplying the state I mean in New York you could go to almost anybody go anywhere on the street any any there's trucks driving around New York and you could buy every single brand you can think of right now and nobody is stopping them because.
It's been decriminalized and so that's the that's the phenomenon we are facing so the longer we wait the more ingrained.
The illicit market now that's the bad news the good news of course is that as we saw in Massachusetts. The minute. They allow us to open up our businesses, we do see a pretty fast recovery because people do actually prefer to go to dispensaries, where they can get.
Cannabis for.
<unk> tested in that space and so they prefer to buy it in a store register regulated than our stores.
The outlet that's not regulated and so so we did see a very fast recovery once Massachusetts.
<unk>.
New York and New Jersey for instance, in New York.
We got a whole flower, we definitely saw patient start to come back as well there was a dramatic increase in activity in our stores on the back of whole flower that shows you again that they'd rather buy it and the dispensary than on the street, but if they can't get it in the dispensary, they're going to go to the street, especially now that is decriminalized.
Listen that's why I'm, calling this a transitory quarter for us because we are we saw the new York effect with whole flower or traffic increase quite dramatically in our stores our revenues in the first couple of weeks almost doubled in those stores.
On the back of whole flower, so thats, a very very positive development, but in new Jersey.
We have line of sight, we believe adult use is going to be in the first quarter. That's the latest information we're getting from the regulators. There. We don't have any reason to believe that that's not true we know they want to get the program off the ground.
In New York, we saw whole flower increased traffic now obviously I think new York is going to be more delay than adult use I think that it's going to be early 'twenty. Three so we'll have to live with whole flower, but we all saw what happened in Florida, what answer this whole flower medical the medical business did increase quite dramatically and so we're kind of bullish on New York next.
We're very bullish obviously on new Jersey next year, but that was the real hit to our numbers.
In New Jersey, I mean, if you look at as Ron John goes through the numbers in detail later on with all the analyst. He will show you that that was the bulk of the decrease in.
And particularly in margin and in revenue in our business.
The east coast the northeast specifically.
That's great color. Thank you and then just segway into Florida.
You've been very vocal and you've talked about the market share gains you've seen there <unk> been investing in market share through gross margin can you just give us your views on what is the target share that youre thinking about what's your end goal here with this more of a one time sort of quarterly experiment in terms of how much traffic you could drive or is there a.
Persistent.
Our strategy here that is going to be in place for for some time to come from the <unk>.
Yes. This is a very long term strategy our gains have been quite.
Even over the three quarters. It started in January we kind of called it.
We told everybody on the fourth quarter and the fourth quarter that we were going to start launching our new grow facilities and our new products. So we saw very steady growth in the first quarter second quarter and third quarter. So there was no change I know there's been a lot of talk about price competition I will tell you. It's one of our strongest gross margins Eduardo.
Our strongest EBITDA margins in all of our states. So all of this talk that.
The margins in Florida, getting decrease because of <unk> market.
Market share gains is absolutely not true.
We actually have a very very strong above average margins well over 30% on the EBITDA side in Florida, and we're very happy with those margins and we continue to grow our share largely and we're doing it on.
On a third of the stores and some of our competition. So we're just being very very efficient in Florida, and we mapped out that strategy last year, we televise the strategy of the market and we executed on this this year.
And.
I'll turn it over good luck with the rest of the year.
Thank you.
Our next question will come from Bob <unk> with Cantor Fitzgerald. Please go ahead.
Thank you Boris if I may regarding the <unk> draft I mean do you touched on.
You had expectations that reform will happen before this congressional term but.
Yes, I'm sure. Your team has had a chance to look at your draft.
If you can just comment on common areas speaking the draft into Schumer draft.
The big differences and then related to that what gives you confidence that.
There will be an agreement as part of all of that it's interesting that both drugs have the feature of Interstate commerce. So if you can comment on that in general. Thank you.
Yeah, So listen I think that what we like about her draft I am not going to go into the details right now Pablo I'm happy to do it later, but our draft.
We think is is much more business oriented.
And much more concise well we think.
The Democratic Bill was kind of a basket of everything thrown in without a lot of transparency.
We like the approach of the what I'll call the moderate Republicans on this issue.
Got both obviously social justice issues, they've got tax issues, they've got Interstate commerce issues in there.
They are moving a little bit faster on import than we would like to see however.
We think that this is also going to be negotiated but the real sort of positive on this pablo.
The Republicans are trying to seize the one issue that's the most popular issue in advance of the midterms and Thats candidates. It is the biggest bipartisan issue in this country through both the Republicans and the Democrats want legalization. They all want safe banking on this thing.
And.
The Democrats got elected a year ago to basically have done nothing except talk and the fact that we're seeing now the moderate wing of the Republican Party step in and start to push cannabis legislation. We believe is going to force. The Democrats to also start to push this because the Democrats go into the midterm elections without cannabis legislation, they're going to pay dearly.
It is they are having a rough time right now and so it's my personal opinion.
This bill coming out of a conservative South Carolina Republican Congresswoman as a major deal in Washington, and I can tell you I've got off a call today at noon and the talk is very very.
Our ramp up in D C right now and there's no way the Democrats are going to want the Republicans to run away as the leaders on cannabis reform and so I think this is all very very good for the industry. The fact, you've got both parties now pushing legislation and both parties wanting to be seen as leaders in <unk> and.
In reforming the kind of a sector. So.
This is probably the most as you know im very cautious usually on these things. This is probably one of the most positive things I've seen.
What happened and this is going to push humor widen booker.
Move on their legislation as well and so I think we could get a compromise how it's going to happen, whether it's going to be in the NDAA or.
And the attachments, so something else I can't tell you right now, but I can tell you the talk in Washington, right now is definitely on cannabis.
We've been told by the Democrats that as soon as they can get reconciliation done this was going to be this and voting are going to be the two highest priorities for the spring of next year. So with now that the Republicans coming on the back of it I think it's a very big positive for the industry.
Two quick follow up on the on the same topic and I'll pass it on so obviously both parties want Interstate commerce right. So it seems like that's a definite could come sooner than most people were expecting but I assume when you talk to investors with modern she said you have capacity that you have an export from state to state in the right place lethal Schwinn Youll should you have the brand portfolio and the distribution network right, but just.
Just again handicap is it is it fair to assume that.
Please proceed with your question, Yes, I think Mike on this follows does it even if we get Interstate commerce, it's going to take years before it is put into effect right, they're going to have to write the rules are going to have to come up with.
Theyre going to do it so.
Personally think the compromise is going to be where I think one thing that gets compromised on will probably be in the short term Interstate commerce because of pressure from the states governors and attorney generals to keep it isolated in the states. So I still think that even though I'm not opposed to Interstate commerce. There are many that are I'm not opposed to it I want to make that point.
Clear I don't think that thats going to be.
That's probably one issue that could get negotiated out of the bill.
I believe we have a better chance now of getting a bill.
By April of next year than we did a week ago.
Because of this but I still think Interstate commerce is the one thing that an important that's probably going to get negotiated out of the bill.
Thank you.
Our next question will come from Owen Bennett with Jefferies. Please go ahead.
Thank you for taking my bankers.
Good evening, Gents hopeful well and I just had a question relating to share trends. So any highlights at the seven states, where you are performing well and I was just hoping maybe you could talk about some of the key states where trends are not going as well as you would like and then perhaps some of the issues that you're facing in those states. Thank you.
Yes.
Question it because in many states we don't have.
A data source link BDSI or a headset to measure share so when we referenced the shares.
Our growing in those 11 states, it's really because.
That has measured data, but that doesn't mean, we're not growing share and other states, which we believe we continue to do and I think.
The key to that growth is.
New product innovation and better distribution of our products. So I think it's pretty fundamental.
<unk>.
And.
How we look at the marketplace.
I think.
Some of the challenges.
In other states have been supply we've just got to make sure that we're getting the right supply in every market and we are.
We've got the right supply chain in every market I think Colorado is good example, where we haven't had tremendous share gains in 'twenty, one, but we feel it's going to be a great market for us in 22 now that we have lost weight swing us we have vertically integrated supply chain, we have the right cost of biomass going into our products. We're looking forward to grabbing cigna.
<unk> share in markets like.
Colorado for next year.
We've gained share in Michigan, but we think theres a lot of head space in Michigan to gain share and figure out our supply chain right, there and as we alluded to we've got to get our supply chain right in California, Although we had share gain slight share gain in California, its nowhere near our expectations of what we wanted to do in that marketplace.
So and we've alluded to the fact that we want to come back with a holistic view of what we wanted to do in California to gain significant share there.
I think both of those.
<unk>.
The big potential markets for us.
And then of course.
New York and New Jersey.
We're optimistic about that for 'twenty, two I think the one market that we still have some work to do here and it's really just.
Building out our capabilities is Massachusetts.
The opportunity I think to grow our wholesale business there.
So.
We werent selling primarily bulk goods in Massachusetts over the last 12 months, we haven't really built out the same type of wholesale distribution system for branded products that we have.
Other states, but we're building that out now so there is no reason to believe we can't.
At the same level of performance in a market like Massachusetts as we do in the other states.
Supply constraints.
Well now we're not so you'll see Massachusetts on the wholesale side really start to accelerate into the second half of the fourth quarter and into the first quarter of next year as we've now built out the capacity in order to be able to supply the market fully.
Okay great.
Helpful. Thanks, guys.
Our next question will come from Max Bottomley with Canaccord Genuity. Please go ahead.
Yes. Good afternoon, everyone. Thanks for taking these questions just wanted to take a step back I know, we talked about Florida, but maybe some of your key markets in absolute dollars just to name a few in Florida, Illinois, Pennsylvania can you give any color on the dynamic youre seeing particularly on the pricing side, putting aside the fact that you still have strong margin. What are you seeing at the retail level in terms of <unk>.
<unk> and its some of the flatness, we've seen in the market data just a function of lower consumer spending or is there more competition, whether it's all listed channels or just more retail stores opening in some of those places.
I think it's twofold, it's what I've said in my in my comments earlier I think one is that we definitely saw a reduction in consumer spend.
We saw it in alcohol I mean don't forget that the difference between cannabis and alcohol, which are quite similar is that is that alcohol and store in store sales, obviously dropped like a stone we saw that in a lot of the alcohol company.
Earnings.
Earnings, but they're there.
<unk> in restaurants, and bars really went up right because they have that outlet and cannabis. We don't have that outlet right. We're only in stores.
So you definitely saw a reduction in activity in the stores.
Takeda this again.
<unk> may many people thought that that was off my rocker when I was saying that but having a 23 store footprint. We saw that happening in may of last of last quarter and has accelerated into into the third quarter. There was no question about it and I think that that was probably the main driver was was share of wallet, we didn't see a lot of <unk>.
We're talking about price competition I have to say, we are not really noticing it except really heavily in California. There is some price competition in Florida, but I think again as I said when you're when you're I don't have any problem selling product at a 30 plus percent EBITDA margin and so I don't consider that price competition, Florida, the only thing that happened in Florida.
The margins come down from $45, 50% EBITDA margins down to 30% to 35% EBITDA margins, which we think are totally acceptable in terms of growing your market share and as I said, we've doubled our market share in Florida on the East coast.
The reduction of the amount of customers coming into stores, and New York, New Jersey, and Connecticut, largely driven by the fact that all three states.
Have have.
Announced adult use programs have decriminalized, but haven't launched the adult use program. So the illicit market is very very strong in those three states and it's definitely taking customers away from the stores to to the street. So I'd say it but as I said I think it's very transient we're already starting to see an improvement in the numbers in the fourth quarter.
We think that going into the first quarter, we will see even more improvements I mean, the other problem typically in the fourth quarter is what we call crop tober right. You have all the illicit cannabis is harvested and end of September into October and is usually sold in the fourth quarter at the beginning of the first quarter that obviously creates substantial competition for regulated players because that Canada.
Sold at a discount to.
The price this is charged.
Regulated players and then we see that dissipate late late into the first quarter and definitely the.
There is a shortage of product in the second and third quarters, and so I really do believe we had heightened heightened use of cannabis during COVID-19, we saw a slight change in that practice in the second end of the second and third quarters and now I think we've gotten back to a normal base and we'll start all of us will start.
Growing from that base as the customer base and the products improving the customer base expands to new customers in the sector and as states like New York, New Jersey, Connecticut.
Go to adult use, Maryland, Pennsylvania, which we think are next on adult use Florida.
That increased the Tam in the marketplace and so again, we think this is a one five quarter thing and we will start to recover into growth going into the fourth and first quarters and we're already seeing that if you look at our October numbers.
Thanks, Brian I appreciate the comments and then just one more question on my end, just maybe pivoting over to try.
If you can comment on the growth prospect prospects of that that in India, particularly Nevada, and Arizona certainly after closing is going to be integrated into your national platform, but $110 million I believe in the press release for this year is pretty impressive from from a sixth store.
Footprint, and then I guess penetration with 50 50, others. So could you just comment on what those prospects are particularly in Nevada, and then maybe the share between retail and wholesale that gets to about 110, assuming you're allowed to say anything.
We're very we have to be very careful because the deal's not closed yet obviously.
The binding agreement signed but we have to go through regulatory approvals, but unusually the reason the regulatory approvals are a little bit longer term is because nevada is notoriously slow in terms of its regulatory approvals most deals take anywhere from six to nine months to get approved and so that could slow the process of integration of that of that deal.
Or what where we're talking to the company about how to best run it as we speak.
But.
So we're anticipating those markets to grow at somewhere between 20%, 25% next year.
We're pretty comfortable with those numbers.
And what's really good about this transaction again is that it really fits and we have a business in Nevada, we have a business a large business in Arizona and we have a very very good store in Utah now we're vertical in Utah, because they're providing us a grow we're adding two great location stores from them into our Arizona business.
So theres a lot of synergy there and in Nevada, It's very synergistic right. Because we have we have a large scale outdoor grow we had a very small indoor grow we're going to expand their indoor grow almost double in size, we're going to build a very large store across the way from from from this from.
From where they have their store now it'll almost create a large cannabis corner with planet <unk> and purely right next to each other we think thats going to be very exciting. This is going to be a very big really sort of a destination store that we're going to build right. There and so we're very very bullish we think that thats, probably as I said, a 20% grow.
With business on the back of our already existing platform plus the synergies that we'll get from combining.
Those businesses with our existing businesses. So it's a.
And the structure of the deal was very good too. So we're very pleased with that transaction as I think are the owners of truck.
Yes.
At a very good multiple I mean, it's going to be immediately accretive to our earnings.
So we like that we like this transaction a lot.
Yes.
Thank you.
Our last question will come from Matt Mcginley with need him. Please go ahead.
Thank you you affirm that youll be at the lower end of the guidance range of around $1 2 billion in 2021, but if you can actually hit $1 2 billion that would imply that revenue could actually be down sequentially in the fourth quarter.
That kind of what you are alluding to are you off to a strong start to the momentum and the trend that <unk> talked to you about in October would make in the third quarter more of an anomaly in the fourth quarter with better in terms of the.
The revenue growth I think I think we will definitely have growth in the fourth quarter.
But given everything that's been going on in the third quarter, we're trying to be cautious with our numbers, but youre going to see growth.
In the fourth quarter.
Okay.
Based on the production capacity that you added in the first half you should have had a substantial decline in average unit costs that would have pushed gross margins higher in this quarter. I know you stated that gross margin rather promotion wasn't the big driver of that gross margin decline and it was more of New York, and New Jersey, but either way when I look at that top line and margin rate According to third quarter whatever happened.
It doesn't appear to be an effective strategy from where I sit you mentioned that whole flower in New York would be a driver of margin into the fourth quarter, but you also have these expansion project underway in New York, and New Jersey, and Connecticut, and I think a couple of other states that will likely pressure margins until those assets become operational in 2022, I'm kind of wondering like.
What are the big drivers that get gross margin higher into the fourth quarter and into 'twenty two.
And then you guys can provide formal guidance on gross margin, but you had alluded to 52% to 54% would be a kind of a normal range is that still a viable target or is that no longer something that you can hit given what you're seeing broadly in the market and the strategy that you're pursuing.
Yes, Matt.
I think.
The mid fifties gross margin target continues to be a viable target in Q3, we got to understand there were a couple of one time events that happened.
Fact of the northeast States. These are high margin states. When you have a revenue decline on our revenue change in there that disproportionately impacts the gross margin I think borders is trying to make you understand that look once that picks up with the New York flower coming back up that's going to help gross margin. That's happened in Q3, you had the Eureka divestiture in the quarter.
That's not going to repeat itself, so thats only going to help the gross margins coming back up and we had some other inventory write offs, we do a really good clean up in our <unk>.
Inventory records, we did that this quarter that really impacted it was very unfortunate in our main facility we had a fire.
We had a couple of different events onetime events that took place in our gross margin. This time youre kind of back those out really there was a change in gross margin quarter over quarter I look at that to be only about like.
200 basis points, so we really need to climb back 200 basis points not necessarily the 400 basis points that actually shows on the gross margin line item and we believe climbing that back is really New York flower coming back.
<unk> revenue coming back that in itself is really going to help them over and above.
In new Jersey over and above the operational efficiencies actually even into Q3 quarter, which is getting masked and we really don't really talk about in Q3, we have cultivation operational efficiencies that happened in Q3 than just getting masked by a lot of these downsides you will start to see them in Q4 Q1.
Our ongoing yes, Matt we had listen we had old CBD write offs.
Kentucky facility tied to the old CBD business that we're in we were holding that for some time.
Hoping we could use some of that product.
As the states liberalized, we decided to take a write off on that on that product.
We had product with our Eureka facility in California, which shutdown because we can now buy flour at a fraction of the price and the supply chain that we can do it there. So we had some inventory write offs. There we had a substantial total loss fire in Massachusetts, and our main growth facility, there, which we're now rebuilding that obviously took a hit on.
The gross margin side. So there were one time events that took place in this quarter.
We applied that hurt the gross margin, but we fully expect to start that recovery between the fourth quarter and first quarter and listen New Jersey you'd have to spend at once adult use a predominant use gets launched like they are saying in February.
Our inventory buildup in our positioning in that marketplace youre going to see not only growth in revenue, but youre going to see dramatic.
Expansion of the margin as well on the back of that and we've seen that in every state that transforms from adult use.
From medical to adult use you'll start to see particularly the underserved states like New Jersey, Youll see not only substantial revenue growth, but you also see expansion of margins. The last thing I will tell you. This is that we also have a very large brand new built facility in Illinois.
You probably have heard us I believe some of the other msos are having the same problem. The regulator is slow moving approval I mean, the facility is fully functioning open at least in our case, we didn't actually plant flowers, we understand one of the other msos actually fully planted the facility and the government came in and rip the plants out.
And so there is there is the Illinois situation as well that we have to deal with that as a regulatory issue. We are working with the regulators to get that approved but theyre definitely slow crawling the approval of and Thats, a very large facility that would double the size of our Illinois business overnight, but it hasnt been approved it's fully it's ready.
Go it was approved all.
All the plans are approved by the state, but for some reason they are slow moving the approval footprint.
Yes.
Okay. Thank you very much.
That's fine.
Yes.
This concludes our question and answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.