Q4 2021 Curaleaf Holdings Inc Earnings Call
[music].
Okay.
[music].
Tim.
[music].
Can we get to the already.
Yes.
Wednesday.
[music].
Can you please provide.
Okay.
[music] It does that we'll see Tonight.
Okay.
Yes.
[music].
Yeah.
Right.
[music].
Great.
Thank you.
[music].
Hi.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
So would you say.
Yes.
Is it worse.
Okay.
Good afternoon, and welcome to the <unk> Holdings fourth quarter and fiscal year in 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to senior Vice President head of Investor Relations and capital markets. Mr. Carlos Madrazo. Please go ahead.
Good afternoon, everyone and welcome to purely holdings fourth quarter and fiscal year end 2021 conference call.
Today, we're joined by Boris Jordan Executive Chairman, Joe Lusardi, Executive Vice Chairman, Joe Barron, Chief Executive Officer, Ranjan, Kalia, Chief Financial Officer, and Matt Stern President of purely if U S.
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 Securities laws, which by their nature involve estimates projections plans goals forecasts and assumptions, including the successful integration of acquisitions and are subject to risks and uncertainties.
Could close 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 the forward looking statements and risk factors can be found in the company's filings and press.
This releases on SEDAR and the Canadian Securities Exchange.
During today's conference call pure leaf will refer to non <unk> measures that do not have any standardized meaning prescribed by <unk> for risk. So it's just a joke state of Utah.
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 to now turn the call over to executive Chairman Boris Jordan.
Thank you Carlos good afternoon, everyone and thank you for joining us for our fourth quarter and full year 2021 earnings call 2021 was another exceptional year for Charlie we executed well jumpstart strategy on all fronts, enabling us to deliver strong financial and operating.
Results, while further positioning purely for continued strong growth.
We reached a significant milestone in 2021 generating total revenue of just over $1 2 billion for the first time in our company's history, representing 93% growth over 2020.
This achievement is even more impressive when you consider that we have more than quadrupled our business since 2019.
We generated adjusted EBITDA of $298 million, representing 107% growth at 160 basis points of margin accretion and.
And we ended the year with one of the strongest balance sheets in the industry and to support our ongoing growth strategy. In addition to our financial performance in 2021, we executed a strategic acquisition that of <unk>.
And our ability to continue gaining share in key U S states and enabled us to enter the highly attractive European market.
We see tremendous long term growth potential.
Looking at the fourth quarter, we delivered financial results in line with our expectations, enabling us to achieve a full year 2021 guidance.
Total revenue was a record $320 million, an increase of 1% sequentially and 39% year over year our quarter four.
Over a year growth was primarily organic.
Our adjusted EBITDA was $80 million in the fourth quarter, representing 12% sequential and 48% year over year growth.
Our quarter four EBITDA margin was approximately 26% in the U S and 25% on a consolidated basis up 240 basis points sequentially as we improved our gross margin significantly versus last quarter. Despite.
Despite the more challenging economic environment in the second half 2020 , one as well as the typical seasonal impact of crop tober in quarter. Four our continued strong execution, leading products and strong brands enabled us to deliver fourth quarter sequential growth, but again exceeded the total market, which declined by approximately four.
According to BDSI and headset.
We also made significant progress in the fourth quarter strengthening our balance sheet as we previously announced in December we completed the largest debt offering by any public demo slowed today.
Issuing $475 million of 8% senior secured notes we are very pleased with this transaction as we reduced the annual interest rate on our outstanding debt by approximately.
<unk> 700 basis points, while at the same time, providing us with ample liquidity to pursue our growth initiatives.
We were also active on the M&A front in quarter. Four in addition to the triad deal, which we discussed at length on our last call. We also announced two strategic acquisitions in the highly attractive, Arizona market Enclitic Bloom and natural remedy patients at Bloom gave us for additional retail stores located in four major cities.
Further expanded our cultivation and production capacity in the state and contributed severally highly successful brands to our business.
Over and above the globe is very profitable business that will be immediately accretive to our margins now I would like to turn to a discussion of what we are currently seeing in the market as well as our key initiatives for 2002.
We believe more than ever in the future of cannabis and its potential to become a 100 billion dollar plus industry like all industries. However, we will face periods of rapid expansion as we saw over the past three years and periods of more measured growth, but growth is inevitable as more markets continue to open to medical and adult use.
And consumer adoption increases.
As we look towards the beginning of 2022, we are seeing a period of tempered growth driven by two main factors.
First the delay of significant legislative catalyst in the national and state level, albeit we do expect New Jersey. Its adult use program to come online at the beginning of May.
And second and more challenging consumer demand environment as a result of the shrinking to question as a result of shrinking discretionary income due to the end of Covid stimulus checks inflation levels not seen in decades and increased pressure related to the current conflict.
Between Russia and Ukraine.
The consumer price Index for example, rose <unk> six in January versus December driving inflation up seven 5% year over year.
Furthermore, recent forecasts from the conference Board estimate, but real disposable income in the U S will declined by three 2% in.
In 2022. This was after growing every year since 2019.
Taking these factors into consideration, we expect our recent trend of softer industry growth, which began in quarter three of last year will continue through the first quarter of 'twenty two followed by a resumption of growth in the second quarter and through the remainder of the year.
Spite these temporary market conditions, we remain positive on both overall industry expansion and pure leaf topline growth for 'twenty two.
We're even more enthusiastic about our growth in 2020 for the fundamentals of the cannabis industry remains incredibly strong with several powerful catalysts that will propel the next phase of industry growth from $25 today to almost 50 billion over the next five years.
With our scale, leading products and brands and excellent balance sheet and liquidity position. We believe there's no better company than purely to navigate this current market environment and to benefit from the tremendous long term growth opportunity available to us. So let me now discuss some of the key catalysts that we expect will support our above market.
Growth.
Starting with New Jersey.
Right the unfortunate delaying their use.
Adult use program, we do believe that adult use sales will begin in new Jersey around maybe first our government relations team.
Constant contact with the Governor's office, and we're doing everything in our power to help facilitate the process. We have complied with all existing CRC got slides our application for adult use sales is complete and as we have mentioned several times, we have ample inventory to support both medical and adult use markets immediately.
There is no question that clearly will benefit significantly from the upcoming growth of adult use sales in new Jersey in 2022 market, which is estimated to expand in aggregate to approximately $2 1 billion.
Looking beyond this year, we see several powerful tailwind to our growth in 2023 and 2024 that we are really excited about or as we continue to expect New York to launch its adult use program in 2020 three as a reminder, new York is expected to ultimately be the second largest U S cannabis market.
More than 5 billion annual sales, we believe Connecticut's adult use program could also begin either late 'twenty early 'twenty, three representing a 570 million dollar plus market.
And we expect that Pennsylvania, and Maryland, maybe next major states in our footprint to approve adult use potentially launching their program sometime in 2024 with a combined population of the $19 million, Pennsylvania, Maryland represented estimated additional 4 billion annual market opportunity.
We have never been more ready to capitalize on the massive potential revenue opportunity coming in New York, New Jersey, Connecticut, Pennsylvania, and Maryland.
These states represent the aggregate and opportunity of $12 billion market and we continue to believe Charlie will benefit disproportionately as we are one of the largest if not the largest operator in each one of these states.
I also want to highlight the <unk> grow our future growth catalysts extends beyond the U S something but we believe is both unique when compared to our MSL peers and underappreciated in the market today over the past few weeks I have visited all of our European operations and I have to say that I couldnt be more.
About the future of our international business in the UK purely as it retained its leading position and continued to show strong 50% sequential revenue growth in quarter, four, albeit off a small base.
Adding to our positive outlook in December Germany's new government agreed to legalize cannabis for recreational use which we believe could begin by 2024, there's a significant long term positive for our international business as Germany represents Europe's largest economy and cannabis market projected to reach.
$2 5 billion in adult use and medical sales by 2025, according to be the assay and we believe it could exceed $10 billion at maturity.
Furthermore, we believe Germany could be a catalyst for other European countries moving faster towards legalization.
Very excited about our growth potential in Europe and market with nearly 750 million people and an estimated 229 billion Tam.
Shifting to our priorities for 2002, our focus is to continue organically expanding our business by broadening our distribution introducing new formulated products and strengthening our national brands. Our strategy has always been to build the largest cannabis company in the world critical to this strategy is having a meaningful presence in.
All of the largest U S markets, which means operating in states like California, Colorado, Michigan in Oregon, which we call our investment markets.
Our investment markets currently generate lower margins on average.
There are more competitive and represent states that are still building scale. We believe it is vital to our long term growth and brand building strategy to operate in these states since they represent nearly 40% of the total U S addressable market or 10 billion U S dollars.
In addition to our organic growth strategy. We will also continue to look at M&A, but we will only consider executing highly accretive tuck in acquisitions in a way that is beneficial to our shareholders as I mentioned before with one of the strongest balance sheets in the industry. We believe we are well positioned to continue pursuing pursuing organic.
Growth plan, while also being selective in terms of our M&A strategy.
While top line growth remains our focus we are also dedicated to streamlining and making our operations more efficient so realized consistent margin accretion.
We see a path towards strong margin improvement in 2022, and beyond driven by greater economies of scale, our ongoing initiatives to increase efficiency in our cultivation and production facilities and a continued focus on SG&A leverage.
In terms of our financial outlook. We currently expect to generate 2022 total revenue of between 141 5 billion.
At the midpoint of our guidance our total revenue growth was 20% compared to what the U S industry growth of approximately 15% based on recent research analyst estimates.
We also expect to achieve an adjusted EBITDA margin of around 28%.
Finally, we expect to deliver positive operating cash flow for the full year.
In closing 2021 was a great year for Carol we delivered strong financial results and made excellent progress against all our key initiatives what sets us up well for a successful 2022 and beyond while the current equity markets have been challenging for everyone. I firmly believe that surely has a strong position.
Any time in our history.
Opportunities ahead of us are significant and I believe we have the right strategy in place to capitalize on this opportunity and deliver increased value to all of our stakeholders.
Also want to thank the entire pure leaf team for their commitment to our company and to our customers and patients their dedication to building the world's leading Canada's company is the key to our ongoing success and I believe the best is still ahead of us with that let me turn it over to Joe Burke.
Thanks, Boris 2021 was a successful year for <unk> as we continued to strengthen the four pillars of our competitive advantage, including research and development National distribution.
Branding and marketing and our World class team.
Turning to some business highlights and updates beginning at the state level as.
As Boris mentioned, we have a tremendous opportunity for growth in our core markets within the northeast and we are ready for adult use to commence in new Jersey.
Outside of the northeast, we continue to see solid momentum across our focused markets.
Pennsylvania remains a strong growth market for us as we gained share for the second straight quarter.
Since the beginning of 2022, we have opened three new retail locations in Pennsylvania with a fourth expected. This month, which we expect will continue to help drive our above market growth in this state.
In Illinois, I'm pleased to report that we received state approval to open our Litchfield expansion site in January and we expect our first harvest from this facility to occur in the second quarter of this year.
Our increased capacity is expected to be a growth driver for us in Illinois in 2022.
Florida also remains a key focus procure leaf where we plan to continue expanding our capacity and retail distribution.
In 2020 , one we almost doubled our market share in Florida and in fact last week. We just spent more milligrams of THC in Florida than we ever have in the company's history.
In January we added two new retail locations in Florida for a total of 44 dispensaries and we have another 11 stores identified and under development.
Shifting sites to the West Coast, we are focused on improving margins in our investment markets, such as California and Colorado.
When California saw the typical seasonal impact of crop tober in Q4, I'm pleased to say, we made progress improving our margins in the state driven by our supply chain rationalization efforts, including the previously announced sale of our Eureka facility as well as the reduced cost of wholesale biomass.
In Colorado, our Los Angeles acquisition will have a positive impact both on our revenue and our supply chain and therefore, our margins in the state.
Beginning in the second quarter of 2022.
In Arizona as Boris mentioned earlier, we bolstered our market position through the Bloom and natural remedy acquisitions.
We remain a top two player in this high growth state and are excited about our growth opportunities there in 2022.
Turning to research and development, we continue to successfully launch new products across our markets in the fourth quarter, driving new customers and increased product interest across our retail and wholesale operations.
In 2020 , one we introduced 147, new products in our markets with approximately 11% of our revenue generated by new products launched within the last 12 months.
We launched our new select ex pipeline in December , which we believe delivers the fastest strongest in the logging while against lasting effects of any gummy product on the market today.
Ex bites are currently available in Arizona, and Maine, with additional states, including Colorado, and Nevada coming soon.
We also continue to see strong customer traction with our innovative click by select vapor system and introduce click in several new markets in Q4, including Massachusetts.
Maryland, Nevada.
Netiquette, Florida, and Michigan against amongst others.
We have an exciting pipeline of new products that we'll be launching in 2022 within all of our core brands, including select purely and grassroots.
Additionally, we're also evaluating national expansion of several of the brands. We recently acquired through the Bloom acquisition, such as haze in Maine and certain mutants.
There's no doubt that our strategy of creating differentiated products backed by science is creating sustainable competitive advantage.
Moving to our distribution, we added eight new dispensaries in the fourth quarter, including five in Florida, one in Arizona and two in Colorado through our own loss Swingers acquisition.
As I mentioned earlier since the end of Q4, we have continued to expand our retail presence by adding two additional stores in Florida.
Three in Pennsylvania, and four in Arizona through our Bloom acquisition for a total of 126 dispensaries nationwide as of today.
From a financial perspective, our retail revenue was $860 million for full year for the full year of 2021 an increase of 103% year over year.
In the fourth quarter retail revenue was essentially flat on a sequential basis and increased 37% year over year.
Our annual revenue growth was supported by the addition of 21, new dispensaries in 2020 one.
On the wellness business, our number of retail transactions per month grew 3% sequentially in Q4, while average order values remained consistent quarter over quarter. In addition, the total number of patients.
Were essentially flat in December versus September and grew 16% year over year.
At the wholesale level, our revenue was $347 million in 2021, an increase of 113% in.
In Q4 wholesale revenue grew 2% on a sequential basis and 46% year over year.
Our growth was driven primarily by the expansion of our distribution platform for the full year. We added just over 1100 wholesale partner accounts, reaching approximately 2300 active accounts at year end.
Up over 90% year over year.
During Q4, we grew our number of U S. Wholesale accounts by 8% sequentially led by our Central U S States, which were up over 15% driven by our entrance into the into the Missouri market and continued growth in Michigan.
We also continue to generate solid new account growth in our western markets in Q4, driven by additions in California, Colorado and Oregon.
In terms of cultivation capacity as of December 31, 2021 our total cultivation and production capacity comprised approximately 4.4 million square feet, an increase of over $2 5 million square feet from 2020.
Most of this increase was a result of our acquisition of loss Wayne. Yes. However, we met our prior guidance to organically add 275000 square feet of flower canopy by year end.
For 2022, our cultivation expansion plans are predominantly focused on Pennsylvania, New York.
Illinois, Arizona and Maine.
Finally, before turning the call over to Ron Jon I would like to expand on what Boris mentioned with respect to our overall strategy.
We believe in order to build the world's leading cannabis company you have to operate in the world's largest markets.
California, Colorado, Michigan in Oregon in total represent approximately $10 billion of today's 25 billion dollar candidates industry sales.
Europe , which we also considered as one of our investment markets represents an estimated $229 billion of addressable market size.
The opportunity here is tremendous and you simply can't build the world's leading candidates company without operating at scale in these markets.
With that said our investment markets do operate with a different margin profile today versus a more established states.
To put this into context for the full year of 2020 , one our investment markets, including Europe represented and approximately 700 basis point drag on our adjusted EBITDA margin, meaning that our EBIT margin. Excluding these states would have been around 32% for that same time period.
Despite the current impact to our margins, we believe it's critical to our growth and brand building strategy to be in these markets, which we believe will be one of the largest growth catalyst for the industry over the next five years.
While it will take time, we have strategies in place to drive consistent margin expansion across these markets and are confident that by leveraging our four pillars of competitive advantage, namely developing differentiated products backed by science built.
Building out the broadest distribution platform in the industry.
Creating consumer preferred brands and building the strongest team in the cannabis industry, we will win in these markets.
With that said I'd now like to turn the call over to Ron Jon to discuss our financial results in more detail.
Brian John .
Thank you Joe Let me now provide you with a summary of <unk> results for the fourth quarter of 2021.
Total revenue reached a record $320 million in the fourth quarter, representing sequential growth of 1% and year over year growth of 39%.
On Q4 revenue was essentially in line with our expectations and primarily reflected continued year over year organic growth driven by new store openings the.
The addition of new wholesale accounts.
Product launches and the expansion of our cultivation production facilities.
Retail revenue was $226 million compared with $225 million in the prior quarter and up 37% year over year.
Retail represented 71% of total revenue.
Year over year retail revenue growth benefited from the addition of 21 new stores during 2021 as well as an increase in our e-commerce penetration floating the revamp of our digital marketing tools.
Wholesale revenue grew 2% sequentially and 46% year over year to 94 million and represented 29% of total revenue.
On a year to go to your wholesale growth was supported by the addition of new partner accounts.
At the end of Q4, we had approximately 2300 wholesale accounts.
More than 90% from the year ago period.
Our gross profit was 159 million for the fourth quarter of 2021, an increase of 10% from $144 million in the prior quarter and 45% from $110 million in the fourth quarter of 2020.
Gross profit margin was 49, 7%, representing an increase of approximately 410 basis points sequentially.
90 basis points year over year.
The increase in our gross margin primarily reflects continued efficiency.
Automation and processing facilities.
Improving economies of scale.
In addition, the sequential increase in our gross margin reflects a loss on inventory related to Zika, California facility divestiture.
And the write down of certain other inventory in the third quarter of 2021, which did not reoccur.
SG&A expense was $100 million in the fourth quarter compared with $102 million in the prior quarter and $68 million in the year ago period.
The year over year increase in SG&A, primarily reflects increased headcount in support of new store openings.
Higher travel costs as revenue facing travel resumes and marketing in support of new product Rollouts.
SG&A as a percentage of revenue was 31% compared with 32% in the prior quarter and 30% in the year ago period.
Our fourth quarter SG&A also included approximately $10 million of adjusted EBITDA add backs versus $19 million in the prior quarter.
Our SG&A, excluding add backs represented 28% of total revenue in the fourth quarter.
Adjusted EBITDA was $80 million for the fourth quarter of 2021, an increase of 12% sequentially and 48% year over year.
Our Q4 EBITDA growth was faster than our revenue growth a trend that we expect to continue in FY 'twenty two.
Adjusted EBITDA margin was 24, 9% in Q4, an increase of 240 basis points sequentially and 140.
<unk> points from the year ago period.
In the fourth quarter, we recorded 33 million of total <unk>.
Expense net compared with $39 million in the prior quarter and $18 million in the year ago period.
Other expenses, primarily included $13 million of net interest expense.
$9 million of interest expense related to lease liabilities and a $9 million impairment charge on intangible assets.
Our Q4 income before taxes was $10 million up from 3 million in the third quarter.
And from 5 million in the prior year period.
It's also worth highlighting that our pre tax profit more than doubled to 65 million for the full year 2021.
We didn't put taxes in the fourth quarter was $40 million compared to $60 million in the prior quarter and 42 million in the year ago period.
Consolidated fourth quarter net loss allocated securely holdings was 28 million compared with a loss of 55 million in the prior quarter and a loss of $37 million in the prior year period.
On a sequential basis, our net loss improved by 49% or $27 million.
Now turning to our balance sheet and cash flow.
Our balance sheet remains strong with cash and cash equivalents of $2 $99 million as of December 31, 2021.
At the end of fourth quarter.
Standing debt was $436 million net of unamortized discounts and debt issuance costs.
In preparation for the growth opportunity over the upcoming quarters, we continued to build up our inventory.
In Q4, our inventory increased $45 million sequentially inclusive of $20 million of biological asset adjustments.
Therefore, our business inventory grew by $25 million, primarily due to inventory buildup at recently completed last minute acquisition and on the New Jersey facility in preparation for adult use.
Our Q4 cash used in operations was approximately $6 5 million.
Cash flow from operations was positive been adjusted for $9 million of working capital investment at Las <unk> and $7 5 million of inventory buildup in New Jersey.
Net capital expenditures during the quarter were $55 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 expenditure for fiscal year 2021 $172 million.
Turning to our 2022 guidance.
As Bruce mentioned earlier, we currently expect 2022 revenue of $1 four to $1 5 billion and where we fall within this guidance range is largely dependent upon economic impacts from rising inflation and regulatory approvals.
Our growth will be driven by increased productivity of existing stores expansion of new retail stores in Florida, Pennsylvania, and Arizona wholesale account additions product introductions, and the announced acquisitions of lost Manias Bloom and Troy.
At the midpoint of our guidance, we anticipate that new Jersey's adult use program commences on may 1st and our acquisition of trade flows and in October for Us.
We expect 2022, adjusted EBITDA margins of around 28% representing over 300 basis points of improvement from 2021.
On an adjusted EBITDA margin guidance implies strong, 30% plus year over year growth.
We expect gross margin expansion to primarily benefit from a fully them cultivation facilities opened in 2021 in states like Florida, New Jersey, and Pennsylvania, and new cultivation going live in 2022, such as in Illinois.
We also expect increased cost efficiencies across our shared services functions offset by investment in our branding and marketing initiatives in 2022.
Finally, we expect to generate positive operating cash flow for full year 2022.
We believe our current cash position as well as our operating cash generation. This year is sufficient to fund our capex plans.
Which we expect to be approximately $150 million in 2022.
With that I will turn the call back to the operator to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two we also ask that you. Please limit yourself to one question and one follow up.
And our first question will come from Camilo, Leon with beat T. I G. Please go ahead.
Thank you and good afternoon.
Congrats on the strong close to the finish to the year guys.
You gave us a lot of detail here to go through and I. Appreciate all the color it certainly very helpful.
In a pretty volatile market.
Boris maybe if you could just talk to us about what youre seeing on the pricing front in some of your key markets I was particularly interested in the comment you made on Pennsylvania and that ended up being a.
Good growth market for you.
What are you seeing on the pricing front, and maybe tie that into how youre thinking about.
That playing into the gross margin and EBITDA margin outlook for 'twenty two.
Well. Thank you Camilo, we have we have not experienced the same price pricing pressure that some other companies that are in <unk>.
Pennsylvania, I've mentioned on recent calls or in calls in previous quarters.
Obviously, there was some disruption in middle of.
Middle of February with the change in the Oh, the regulator's position on Vapes, but the company was able to quickly adjust to that.
And supply in our stores with with wood.
Oh, Oh Oh.
Particularly on the fourth quarter, we really didn't we had a strong fourth quarter, we didnt feel that the price compression obviously, there's a lot of players in Pennsylvania, We do we.
We do feel that there will be more competition as we go forward, but we feel that we have good presence good distribution on our stores.
And especially with the added cultivation, that's coming online. This year, we feel very very strongly about our position in Pennsylvania. During this year.
Great and then how does how do we think about you know.
Your promotional slash your pricing positioning.
As you roll out through 2020 till given in like given all the commentary you made around the macro and the challenges with inflationary pressures and I'm like yes, I think we tried to be we've tried to reflect that in the guidance on our on our EBITDA margin right. Instead of you know trying to shoot for hydro we tried to be realistic.
Where we thought things were going to end up and obviously before some of these markets go adult use.
More and more product buildup and more and more competition buildup. These medical markets. We do expect to have some level of pricing.
On competition, So we decided to guide at the level, where we thought we were very comfortable that we're going to make which is the 28% which is still a 300 basis point improvement over our guidance or our EBITDA.
For 2021.
Got it and then Ranjan, if I could follow up on that comment with respect to the cadence.
Of of how these margins should progress as is it safe to think that we should see a progressive improvement quarter to quarter to quarter.
That gets you to a blended 20% such that maybe the fourth quarter is actually well above that number.
Yes, absolutely I mean.
Q4 for 2022 we will cross the 28% Mark which means it really sets up a great run rate for FY 'twenty three for us.
We expect coming out of Q1, it'll be a sequential growth with Q4 2020.
Ending with higher than 28% with one like I said it sets upgrade for 'twenty, we're really excited in terms of.
Gross margin improvement SG&A leverage I mean does SG&A leverage, but really seeing on shared services and we will continue to investing in a more modern brand building, that's just going to set us up to gain market share.
Great and then if I could just squeeze one more in Boris I was.
Definitely heartened by the comments you made on New Jersey, turning on in May maybe you could shed some more color on.
The confidence that you have of putting that out there I think the commission is an incredibly slow given anything so I.
I think may would be a welcome to date for the for the commencement of that adult use program, but any more color you can provide would be great and maybe Joe.
I can say it we're in regular where the only thing I can say is we're in regular touch with the regulator we understand that.
There's up to five companies that are ready to launch with their full documentation and and completed we fully we would expect from what we're hearing and for what the Governor said frankly recently that Oh at the March 24th meeting that they should improve.
Good amount of the company's two to launch the law says that there's a 30 day period from the time that they announced and approved till the time that we can start adult use sales, we're being a little conservative given that there are some other things that still need to be finished up that maybe a little bit later, rather than the 24th it might be somewhere around the first one.
Personally cause right, but we feel as good as we possibly can but we think this time, they're actually going to launch the program.
From your lips spores from relapse, thanks, very much and good luck with the the the first quarter.
Two.
Again to ask a question. Please press Star then one.
And also please only ask one question and one follow up to allow for other questions to be answered.
Our next question will come from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening, congrats on the quarter on thanks for the questions. So.
Boris I appreciate the color you mentioned in terms of some of the computer consumer pressure that you're seeing and I believe you expect it to improve after <unk>.
Just curious in terms of fresh Youre seeing can you comment maybe on the basket size, maybe some potential trade down that youre seeing in terms of candidates just given that it's more of a cash only business versus the ability to use credit cards. I was wondering if maybe it's a little more exacerbated certain so some of the pressure you're seeing on your side versus the broader consumer market. Thank you for listening.
I think the first the first quarter.
One of the things that we've that we've seen.
Early on in January was a bit of a hangover from you know typically we got a hangover. It was kind of a it was kind of almost the perfect storm, we got a little bit of a hangover from the holiday period, which we get every year January in the first couple of weeks you know people usually have a dry January they're not drinking and they're not smoking, they're not doing a lot of these things. So that was something that we saw this.
Second thing I would say that you know January was the first month.
Last January you had a $600 $600 stimulus check obviously this January didnt have that you also had some inflationary pressures.
Started to come through and in January and then you also have typically in the first.
First month and a half of the quarter you still have the hangover from October right. So crop Cobra is usually a fourth quarter and first half with the first quarter. In fact, the good news is January was a tough tough month for all consumer goods companies.
Our country I think we've seen that across the board.
But what we're seeing we saw dramatic improvement good solid improvement in the second half of February and the start of March has been very healthy and so we're definitely seeing that trend as you know March and April are typically the best months for cannabis during the year.
But January was a very very tough month for I think everybody in the industry at all consumer goods companies. So it wasn't as though it was smaller basket sizes. It was more about the fact that several things came together in mid January a little bit weaker than normal and we're definitely seeing a recovery here into the second half of February into March.
That's great that's helpful color and good to see the recovery there.
Second question for me in terms of the branch strategy you mentioned natural expansion of some of the Blum brands you guys. Just acquired so just want some color in terms of your parent brand strategy as you previously to select Asian recreational securely Azure Azure wellness, France with our focused brand strategy overall, so any color in terms of your thoughts now in terms of adding both national brands.
I think they might differ in terms of price segments and categories and how youre thinking about the national canvas market place. Thank you.
<unk>.
Who handles brand for us and so that drove it I.
I think we've always said that we have our core brands of selecting purely for them on the.
Lifestyle side and the.
On the medical side, but we.
We think that the consumer landscape is going to evolve and change and as that does is it does evolve and change we are going to look for new brands to meet new segments of the marketplace. So I think as we.
Look to expand our brand portfolio, we will be looking for brands that either.
M will.
Appeal to different consumer segments within the market or different formats, I think both of them had some great products in different different formats than we do they have great tablets. They have great means they have a ready to drink beverages. So we're looking at whether those those products make sense to not only sell on a broader scale inside of Arizona, but should we be thinking.
Thinking about taking those into other markets I think you know.
Over time, we know that there's going to be a additional assortment of variety of needed as we continue to grow and and we want to just do that in a thoughtful way.
Okay, great. Thanks, very much and I'm going to pass it on.
The next question will come from Vivien <unk> with Cowen. Please go ahead.
Hi, This is Harris and leave us on surveying maybe and thanks for taking the question.
So first wanted to clarify the commentary on the on the revenue outlook.
One four to $1 5 billion in sales it looks to be shy of the $1 6 billion that consensus was looking for Boris I believe you suggested that you expect growth to come in ahead of consensus estimates. So can you can you reconcile that is there a mismatch in an organic versus pro forma revenue growth because our analysis suggests that the street was looking for roughly 30% of revenue.
Growth going.
Going into 2022 are heading into today's print. So that's that's what.
I think our position is that you know we're taking reports.
Uh huh.
Built baidu produced by yourselves frankly on some of the other analysts.
We're looking at a market that.
That looks like it will grow by about 15% during 2022.
So we fully anticipate that will grow faster than the market.
But given that there is some uncertainty around when some of these programs are going to start we felt that it would be wise to particularly new Jersey when are when the trade transactional close we felt that it would be prudent to come in with where they are with a range that.
141 5 billion.
These programs got going faster, if theyre more aggressive if they ramp up faster that might change, but right now we feel very comfortable with our guidance of one four to $1 5 billion.
Okay understood and then just in terms of a follow up so just in the context of your peers seeing gross margin compression due to pricing pressure as well as inflationary cost input cost environment.
I know you said you really haven't seen as much pricing pressure, but can you can you kind of talk about you know your gross margin expansion and maybe and maybe quantify the impact that that you know the the improvement in efficiencies and economies of scale had as well as the pricing pressure or potentially an inflationary cost environment. How can you can you get.
We provide a bridge to that number 90 bps of expansion.
So we always told everybody in our Cogs in the previous year that we were just getting up to scale, there's certain areas, where we are in Pennsylvania, we're getting up to scale now with the expansion of our gross utility, Illinois, you know, we're gonna be harvesting here very very soon a brand new facility there, we're getting up to scale. So.
Added Bloom and Arizona has made us what we believe the largest operator, there and that's given us tremendous scale there as well there's huge synergies from the trike and acquisition as well by being able to bring those operations, both in Arizona, and Nevada, and Utah together, we're definitely starting to see were in corporate rating.
Our new technology, our new.
But extraction technology Ace, it's now operational in Florida.
That's going to make us very competitive, but it's going to expand margins in Florida.
We'll be able to sell product.
At current pricing levels are much higher margin for us because of the fact that we incorporated this very new very efficient technology, which is proprietary to girly. The second market that we're launching that in at the end of this quarter and will start operational operations in the second quarter as Colorado and the third market is California. So.
We have a strategy of appealing as Joe mentioned in his presentation.
You know five states on the West coast that are more competitive we have a different strategy that we don't have a retail strategy. We have a wholesale strategy and our strategy is very much geared at around our new technology, new process technology, which has been approved and the cost of extraction and lift the quality and introduce new.
Products into that marketplace. So.
Combination of scale.
On the East coast.
Especially with New Jersey coming online.
New York expansion, Pennsylvania expansion.
Illinois expansion, new technologies, and new to Extractions garage in Florida, Colorado, California. All of this together adds to an expansion of our <unk> of our gross margin.
And our EBITDA margin as well.
Understood. Thanks, so much I'll jump back in the queue.
No.
The next question will come from Andrew <unk> with Stifel. Please go ahead.
Hi, good morning, Thanks for taking my questions and congrats on the quarter.
Thank you Andrew.
Maybe just starting off could you give a little bit of color on what your organic versus inorganic growth was in the quarter.
You know and and.
Thinking about.
Your cash balance and you know the formidable balance sheet that you have.
Do you see that your growth outlook in 2022, you know absent strike is gonna be mainly.
Mainly about organic growth or do you see more optionality for acquisitions.
So obviously, we didn't build any acquisitions into our model, except the ones that Ron Jon mentioned slow trike.
Built in.
As of October one obviously, if that if that moves earlier, then obviously, we'll capture that in our numbers as well and that would obviously increase our ourselves.
But we don't want a bottle.
M&A that we haven't done at this point in time, So bloom is modeled in as the.
The basically the first of February around the first in February as we close that transaction.
The last one dose is factored in as of the close of the transaction in October .
Our organic.
The fourth quarter was all organic we have a little bit of sales that came out of.
Laughter Winehouse, but it's you know, let's wait it out to as an outdoor cultivators and wholesaler and so they they harvest in October and they make sales throughout the whole year. So it didn't capture tremendous amount of those sales in the fourth quarter, we anticipate starting to capture those sales.
Towards the end of the first into the second and third quarters is when we see a lot of those sales coming through.
We're also doing some of that biomass amongst windows as we incorporate our new technology.
Our ace technology, our extraction technology in Colorado, which will start working in the early part of April we will start to manufacture on select products at much higher quantity, which captures a much higher margin than selling well then selling biomass and so that's also going to add two to our too.
Our our margins as well.
Thanks for that and.
Just to clarify on your on your revenue guidance.
Does that include New Jersey wrecked turning on.
Yeah, Yeah. So it includes new Jersey.
First week of the first week.
Hum.
However, you do need to understand that we anticipate the first quarter two quarters in new Jersey to be slow ramp given the fact that one there'll be tremendous amount of inventory on the market and to that you know we have to fight for the customer to move away from what has been a proliferating black market.
Two a regulated market and so we're hoping that that that that will take place we anticipate full ramp up by the fourth quarter, but we do think that the first two quarters.
We remain sort of may to the end of the second quarter till June and going into the third quarter will be a slightly slower ramp than we originally anticipated had the program started earlier.
Thanks for that I'll get back in the queue.
The next question will come from Matt Mcginley with Needham and company. Please go ahead.
Thank you my question is on the cash flow generation.
Based on the midpoint of your topline guidance and a 28% EBITDA margin you expect a little over $100 million and EBITDA growth in 'twenty, two which alone should get you to positive cash flow from ops, but that increase in EBITDA wouldn't get you all the way to covering $150 million of Capex from cash flow and I'm. Just wondering are you assuming a big working capital unwind this year or what.
We'll get you to positive cash flow from ops, where you can cover that that bucket being capex.
Thanks for that question, yes, we anticipate that we brought we built a lot of inventory that in some of our markets.
And then, particularly in new Jersey, and anticipation for our for our adult use. So we fully anticipate that will be much more efficient that inventory management as we go on likewise.
We built a lot of inventory because we were launching ace in Florida. So it will be a lot better now that ace has actually launched and operational in Florida will be going through that biomass very quickly and bringing those products to market. So we do anticipate youll, probably see a pretty marketable improvement.
And inventory, bringing inventory levels down in the second quarter, which will also raise.
Or quite a bit of cash for us.
From operations.
Great and on the.
Capex, the $150 million and what states would you expect this investment to be more focused on are you making more.
Investments in Capex on the on the efficiency side or will you continue to be weighted more towards the overall growth of the production footprint and I ask that from the standpoint of we typically think of Capex as a revenue driver, but I'm wondering if this is more of a bigger.
Bigger and how this capex. This year is more of a margin driver for you.
So it's a combination we divide our capex between.
Between Cogs.
Cultivation and production retail expansion.
Other being some of the efficiencies in our R&D facility. So.
Maintenance, capex and things like that but we anticipate that.
Obviously, Pennsylvania is a big.
Capex number for us.
The fact that we're opening up our new facility there at Chambersburg.
And that's a big part of the New York Big ramp there are four adult use. So that's the second biggest in terms of a dollar spent on the operation side, Florida.
We're adding.
Another girl House in Florida.
In order to fill that.
It's a bit below supply the new stores that we're opening up.
We have a lot of R&D facility, we got another piece of the R&D facility, then there's some small stuff in Colorado, and California, mainly driven.
The ace equipment, that's being put into those states to make our operations more efficient and then the second you know second basket is retail.
About 118 is $118 million as operations Capex about retail capex was about $27 million.
That goes into the retail side, that's mainly driven of Florida.
Connecticut, Pennsylvania, Illinois, Arizona, Massachusetts, So in that order so on the operation side, Its Pennsylvania, New York, Florida.
National stuff on the R&D side, Colorado.
In California, and on retail, Florida, Connecticut, Pennsylvania, Illinois, Arizona and Massachusetts.
We're investing in the on the retail side, a total of about 145, and a half a million dollars of capex.
Okay, great thanks for that color.
The next question will come from Bob <unk> with Cantor Fitzgerald. Please go ahead.
Thank you.
Boris you know one question I keep getting from investors is about where they are really physically open rates that are not so I. Appreciate all the color you gave when they beat the margins from the difference between the illicit market to them the more of the established markets.
But when I look at select according to hits at select used to have 20% market share in vape in California in 2018, I know, you're only has 5% right. So, California H supposed to be the key test market for all of the top 10 of these companies what's happening with your vape shared in California, and you know what.
Should we think how should we think about that in terms of a string soliciting brand in general thanks.
Yeah. So we saw select select has actually exceeded our internal expectations as the brand we broadly across the whole country is now and I think almost 19 or 20 states and in those states, where we really focus on.
Building on the margin side on the East Coast, that's done very well, we definitely slowed are intentionally are our select sales in California until we could build the supply chain now that we have as that goes.
Into California.
You'll probably see an increase of those sales sometime in the third quarter, probably because California's our third market, we will be installing the ace equipment.
First being as I said, Florida, which is now fully operational.
Being Colorado, which is a new market for us, we really think it's an exciting market and so we and with the outdoor grow there. We really felt that that that was going to give us the biggest bang for the Buck and in the third market Big California, California. As you know is going through a very very difficult period of time right now.
Supply chain and the structure of the market the taxes et cetera. So we decided to bring that business down a little until such time as we could install the supply chain, including our used equipment that would provide us a higher margin on that business and so I think that by the third quarter. Pablo you will start to see an increase of our <unk>.
Sure.
Select in California.
If I can ask just you don't want the reform outlook I know, it's always a crystal ball question, but your latest views in terms of liberal or really just safe banking passing this year, where the attached with shippers would be like competes or or or you know being a bus on its own things.
I don't think we're going to get passed on its own.
This changes almost every week follow up but you know there was a.
More positive.
This week, we heard that one of the more powerful senators are involved in the original while I'm not going to mention because I was pulled out was allowed to.
Involved in the original law has started a call around committees and started to talk about safe rather than the broader la we think that's a very very positive development, but obviously you know.
With the situation and tragic situation in Russia, and Ukraine as well as the unexpected retirement of a Supreme Court Judge has put other matters on the docket as well, but we do know that there's quite a bit of support.
Positive is that.
We're now seeing.
One of the more powerful centers involved in the process thinking that maybe the better option to pass this year rather than trying to go through the full law. So that gave us a glimmer of hope.
That that may actually happen and so we are anticipating.
Seeing more information on that issue, but it did make the Cogs to very powerful committee chairman asking them their views on say rather than going with the full.
Law that they were trying to pass.
That's good news thank you.
The next question will come from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good evening, Boris Joe and team I. Appreciate the question just wanted to go back to your comments on New Jersey.
You had mentioned you're expecting maybe it being a little more of a modest ramp for the first couple of quarters and I'm just trying to again get a better understanding of what the market dynamics are there what the dynamics are currently with the current illicit market. So I'm Canadian and we saw you know for example in Vancouver in British Columbia, There was a lot of pop up shops in other places that actually.
Looked quite legitimate and legal that a lot of consumers, we're going to that.
We're taking away from legal sales, whereas we had in Boston you know Theres, a brookline store that was rumored rumored to be doing very very significant sales at the beginning of <unk>.
Massachusetts adult use so where does new Jersey fall on that spectrum with respect to the stores that are opened given that you know there's there's not that many relative to the overall size of the state that needs to be serviced.
I think so let me start from the beginning the first is that when they do approve here at the end of March going into April .
We don't expect a lot of operators to get approved right away right. So even if we listen to what the states that I think five operators already we heard up to eight maybe ready by March 24th but say they even approved five operators right. That's three stores per operator, right. So so that's not a huge access point market.
At this point in time.
Likewise, a lot of those operators like purely also have a tremendous amount of inventory buildup that we've been preparing for the new Jersey. Our launch. So that's why we feel like it's going to take a look at not all stores are approved with all operators because some of the jurisdictions are being very slow about getting their letters that organically.
Approvals through through their various municipalities and so we think that the market you know you know this.
Stores will be opened obviously, we're going to have to make heavy lines and there'll be a huge amount of activity, but in terms of sheer volume of business until the full market opens up and all the operator to open up we think that it'll be a slow ramp now when it comes to the black market competition, what we've seen it was a good point that you brought up I can't speak for Canada, but I can't speak for Massachusetts.
You know Joe Lusardi night launch there and that was a very slow launch and of course.
We were very worried about the perforation of the black market, but eventually the black market disappeared right. The regulated market takes over and the black market disappears for the most part so I mean, it's still there, but it's not there it's not real competition, but you know the longer. These these regulators weight in approving these programs that the harder. It is you know the more proliferation of the black market happens.
Again, it always ends up the regulated stores when they win because the quality of the product that's kind of the product and people prefer to go and buy product in the store. That's got tested product then into a store that does that they don't know what they're buying so the regulated market will win but it's just going to take a bit of a ramp up and so we thought it was prudent in our number.
Theres not to overwhelm.
You know the numbers coming out of New Jersey, we think by the fourth quarter that margins should be firing on all cylinders, but we do think they need to they need to get all the operators into the market all at once to all the operators are in the market once they start opening up and giving out new licenses, we think that the market will go.
Dramatic expansion again.
No Theres a lot of product now most of this product will be out of the market.
The market will be underserved again in our opinion by the fourth quarter, we think the market will have a reasonable amount of Oh.
Product.
In May and June in third quarter, we think by the fourth quarter, but we'll work through those inventories and you're going to start seeing shortages.
And the market.
Well.
Okay appreciate that and just one more on my end just switching over now to sort of the M&A outlook and what Youre seeing maybe more on the private sector. You know clearly the MSL evaluation and all candidates valuation for that matter have been under pressure for the better part of a year or so have the private valuations at least what these may be single state operators are expecting is that followed suit or is there a bit of a high watermark.
Based on some of the purchase price acquisition from a few years ago, and just how <unk> thinks about balancing maybe not wanting to give away or invest you know.
Purchase price consideration your share at current prices, but also wanting to conserve cash for capex and other growth opportunities organically. Just how are you sort of balance those two things.
We are going to become the bloom transactions, even though we thought it was a great price at around 455 times.
EBITDA that was negotiated much earlier, the triad transaction also Montreal and when valuations were at different right now, we're taking a wait and see look we personally think that the private market needs to come way down in terms of its valuation expectations.
If you look at it even a month or two months ago. It still wasn't doing that now I think it's starting to work we're seeing in the secondary market I'm sorry, the private marks you'd come under tremendous pressure, they're not able to raise financing and so we think that the.
M&A opportunities and consolidation opportunities aren't going to become you know quite exciting for the bigger operators, we think that not only will there'll be private market consolidations, but we actually think some of the.
The smaller public companies public companies are also going to be struggling.
In these markets and so we think they'll be I think 'twenty, two we'll see quite a bit of of consolidation in the marketplace.
Okay. Thanks.
The next question will come from Owen Bennett with Jefferies. Please go ahead.
Even in Jan So Paulo, well and I'll just keep it to one question and just around the additional SG&A spending in 'twenty. Two so you mentioned with the savings from Chad said, Hey, you can now invest more behind brands is it possible to quantify and how much of additional spend you can put behind brands because.
And those savings and then also and just went back to New Jersey, So about placed.
Why it to support a market like New Jersey, when it turns on although he's giving you mentioned you're going to have to spend to convert and unless it uses in the early quarters. Thank you.
So all entered New Jersey, I'll, let Ron Jon So the first part of the question.
When I said, it's going to take us, it's really time that money I mean the <unk>.
People are going to come to the stores. We've seen this in every market that converts from medical to adult use they all come even those customers that use the illicit market. They all eventually come to a curiosity gets them going and they come in obviously as the store is very far away and there's not enough stores right now in New Jersey that does create a.
A little bit of a problem, but for the most part in the first year first year and a half we don't anticipate any real marketing spend in order to get customers to our stores, particularly purely we sit on the border of Pennsylvania on all three of our stores do I mean, one of our stores is literally 10 minutes out of central Philly, it's in the Philly suburb, but I'm, the New Jersey side.
We anticipate massive massive massive crowd.
And demand for our products, we think we're very very well very well position that given that you know.
Pennsylvania, It doesn't have an adult use market.
A variety of products available on the New Jersey side, it's going to be so much more tremendous than we have.
Sure.
Pennsylvania, and so we do think we'll get good business there and we don't think we'll have to do any marketing in the early years in order to get customers into the stores in New Jersey and the other question Roger I think I'd leave that over to you.
Oh, you know you might have heard Joe talk about creating billion dollar brands and uninstall before right.
We're really starting to embark on that journey back to investing 200 basis points incremental in marketing and branding spend in FY 'twenty two versus 21, and that's really coming from leveraging shared services. So doing all that in.
Creating more EBITDA margin, but then continue to invest in future. So that we can really create the billion dollar brands.
Great very helpful. Thanks, guys.
The next question will come from Thai Colin with eight capital. Please go ahead.
Hey, guys. Thanks for taking my question I'm, just wondering if you could describe the areas of the business, where you're seeing the most inflationary pressure right now whether that's in retail labor in the construction side of things energy costs and any specific actions that youre going to take on in 'twenty, two to offset that beyond sort of general efficiencies.
And then just as an add on to that I'm wondering how those inflationary pressures were kind of factored into the EBIT guidance for this year.
So theres definitely been inflationary pressures on construction construction materials and construction services and since we're still in it.
Fairly high.
Capex mode, we're definitely feeling it on that side, there's not much you can do except to be as efficient as we possibly can we're also not rushing construction anymore. So that's one thing we did notice that if you're a Russian construction your costs go up much more so it's slowed down some of the projects given that a lot of the projects that we have now.
Are there too to scale up existing operations that we have in those states given the cure of leaps and a lot of location.
And so that's one of the things we're doing to mitigate that we'll also try to be more efficient in the way we do things Likewise now.
Purely for the latest footprint down nationally and we have enough capacity almost in every market to supply the demand that we have we're really focused now on being as efficient as we possibly can and so we're really the major programs that Joe maybe you don't want to talk about I'm, making I'm focusing on our Cogs and making sure that we are as efficient.
As we possibly can in terms of our operations in the fitness.
And you know obviously on the retail side, yes, there is definitely some level of.
There is some level of.
Hum.
Inflation on the employment side, obviously, but you know we you know we couldnt, obviously, we can't match it.
Right.
Seven 5%, we had a we had a eight 3% obviously that was a hit because we had a 3%.
Across the board.
Our increase in pay.
Sure.
To deal with the inflation.
But you know what inflation is running at seven and a half. So you know obviously, we could we werent going to we weren't going to try and match that kind of a number and so we're trying to be as prudent as possible and you know I think that that's one of the reasons. We're at 28 and we're not at 30% I mean, you know this.
Combination of them, but one of the reasons right now as you know, we're very happy with the 300 basis point improvement from 25 to 28, I think we're gonna be the only M. S. O. This year that will have an expansion of our of our margins, but obviously that some of the inflationary pressures are definitely hit our ability to get to that 30%. This year, although as Ron just said.
We will be there probably by the fourth quarter, but.
But you know.
We could get there earlier due to some of these pressures that we're facing in the marketplace.
I appreciate that color that's it for me, thanks, and congrats on the quarter.
Thank you.
Our last question will come from Spencer Hanus with Wolfe Research. Please go ahead.
Good afternoon, there call it under 700 basis points margin drag from the investment markets, which was really helpful. But can you talk about how much of a drag you work in new Jersey or in margins just given the lack of adult use sales there in system infrastructure that you've built because it seems like those would be the most near term seem to get resolved here and then when you think about the assets on the West coast.
When the industry and you're seeing a lot of irrational players is there a more capital light way that you can glean insights from those markets. It doesn't result in such a drag on on EBITDA margins. Yeah. So let me start with the West coast. So what we did on the West Coast. As you know we were incorporating our new technology called Ace, It's an extraction technology, which.
So much more efficient than any current extraction technology in the market. Obviously production costs are a big part of the cost base. The other thing. We've done is we've gone to outdoor grows and a lot of those like Los Angeles acquisition.
California, obviously, the biomass market that's come down in price dramatically, so together with our new production.
Acknowledging we feel that every quarter, we're going to be improving those margins, but one needs to understand.
Those markets, California, Colorado, Oregon.
Michigan, they're never going to have the 30 plus percent EBITDA margins at least not in the foreseeable future.
The best we can do in those marketplaces, I was going to be somewhere between 20, and 25% bought together with our east coast operations, where we're seeing margins of well over 40%. That's why we're going to get to the blended 30% margin, which was our target.
Going into 2023, one needs to also remember that the European operations that are still very early stage or are taking around 1% or 100 basis points off of our all of our EBITDA and so but we're very but we really want to be that we think that's going to be a very large market, but we're very excited about it as I said in the call I was.
Just there and it's been a couple of them almost three weeks traveling around Europe meeting with our teams working on our plans, we're very excited particularly about Germany and the U K those are immediate opportunities that U K is growing it's probably the best medical law, but I've ever seen we think that can be a very large market.
Germany.
Moved a lot faster than we thought and moving towards improving adult use we think that program is going to get launched in early 2020.
Early 'twenty four.
And it takes about two years to prepare for that so obviously those markets have taken up a little bit of investment.
Number from us when they are weighing a little bit on the EBITDA margin, but we think that that is going on.
More than pay off as those markets launch over the next couple of years and so on the East Coast, New York and New Jersey, you know definitely I mean, but you know there is still our highest.
Both of those markets are highest.
Both gross margin EBITDA margin states.
But you know a lot of the customers have gone either to the black market or new jerseys case of just stopped renewing cards because they expect the program to get launched any day. So you definitely saw the medical program in New Jersey shrink you saw competition build from the original six operators to what I think is now 16 or 18 operators. So we definitely saw some competition.
It didn't see new you didn't see new customers enter it in the market because everybody is awaiting the adult use market to get launched and so the fact that launches I think the better it is going to be for all the operators and in New York.
They are we started investing a little bit later than in New Jersey, and so we feel like we will.
Gonna be probably completed on all of our expansions right in time for right in time for the adult use market to launch in 'twenty three.
We feel good about the New York situation.
Haven't seen although the black market has proliferated in New York, we haven't seen as big of an impact as we saw in new Jersey on our numbers, although they definitely have flattened out growth has definitely slowed in New York, but the margins are the best in the industry and that's our best state in terms of margins.
The country.
Got it that's really helpful. And then can you talk about what Youre seeing in Florida from a pricing standpoint, and how the new stores you've built the share are performing relative to expectations and then as he looked at 'twenty. Two how are you thinking about investing both in new stores in that market, but then also on new capacity.
Kind of equivalent the hardest in Florida has been a great market materially since last year, we had a slow start there in 19 and 20, but we really got our our ourselves going in 'twenty, one and we're going into 'twenty, two very strong as well we had a small pickup in January around Covid, where we lost about half of our operational staff in our growth.
Facilities and that that hurt us a little bit on packaging and getting products out to the market, but that problem been completely alleviated and as you saw last week, we had a record week in Florida in terms of our total milligram sales also Florida. Finally, we've installed finally after many years of development, our Ace technology, our first products coming.
After that we'll be hitting the market I believe is at March 10th of March 11th.
That's gonna be not only a very high margin product now, but more importantly, it's going to be a different product a much higher end product for the market is going to be alive, rosin product, which nobody has that.
And nobody can produce at the price levels that will be it will produce a lot of new technology. So we feel very good about Florida into 'twenty, two and we are opening up minimum of 11 additional stores. We've opened up this year already.
We might go with $5 65 to 60 stores and we will be adding some cultivation capacity there.
Preparing ourselves for the adult use market as well so we feel good about Florida, we're very excited about it we continue to go from strength to strength there.
This concludes our question and answer session I would like to turn the conference back over to our executive Chairman Boris Jordan for any closing remarks. Please go ahead Sir.
I'd just like to thank everybody for attending the call and we look forward to this year and we look forward to the calls with.
With analysts still here over the next couple of days as well. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.