Q2 2022 Curaleaf Holdings Inc Earnings Call
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Good afternoon, and welcome to the <unk> Holdings second quarter 2022 conference call.
All participants will be in listen only mode.
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I would now like to turn the conference over to manager of Investor Relations.
Jacob Feinstein Jacob Please go ahead.
Good afternoon, everyone and welcome to <unk> Holdings second quarter 2022 conference call. Today, we are joined by Boris Jordan Executive Chairman, Joe Lusardi, Executive Vice Chairman, Darren Chief Executive Officer, and Neil Davidson Interim 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 and are subject to risks and uncertainties that can 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 statement, whether as a result of new information future events or otherwise, except as required by applicable law additional information about the material factors and assumptions forming the basis of the forward looking statements and risk factors can be found in the company's filings and press releases on Cedar and the <unk>.
Median securities exchange.
During today's conference call <unk> will refer to non <unk> measures that do not have any standardized meaning prescribed by EIOPA risks such as adjusted EBITDA 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 Jacob good afternoon, everyone and thank you for joining.
I am pleased to report that clearly had a record breaking second quarter with revenue growth of 8% to 338 million quarter over quarter.
Our momentum coming out of the last quarter continued with strong performance in quarter to adjust.
Adjusted EBITDA grew by 18% to $86 million gross margins increased by 267 basis points to 52% and we were able to raise adjusted EBITDA margins by 223 basis points to 26% a.
Our performance demonstrates the power of the purely platform in 22 States plus eight countries in Europe 136 retail locations in 2200 wholesale accounts and the right time.
We are realizing on our early investments in vertical integration scale and strength in core markets.
We are also seeing the benefits of our continuing focus on product leadership and operational excellence that map will tell you about later.
Currently platform our size scale cash flow and balance sheet are competitive advantages among the multistate operators, we have historically raised capital at the lowest cost in the industry, allowing us to build operations organically, while picking up assets at accretive rates to extend the reach of our business.
Our long term debt financing plus our future cash flow generation positions pure leaf to be selectively opportunistic to continue our growth strategy and the wave of consolidations that will inevitably as has the industry.
We are and always have been focused on long term value creation and our original vision of global cannabis leadership has arrived cannabis legislation is now a global story and today purely as the leader in this emerging global industry.
We built our leadership in the U S. Not just don't scale, but with early investments in product innovation brands quality and safety Legislative reform effort CSR initiatives and talent development.
<unk> established a strong presence in Europe , and intend to take that purely model to emerging markets around the world.
To this point Europe is undoubtedly the next big opportunity is an estimated 229 billion market with the medical and adult use making headway in several countries, most notably in Germany with a population of 80 million, Germany economic powerhouse of the EU and is leading the way in Canada's reform with adult use.
Graham expected in early 2024.
Our early focus on Europe has given purely a formidable strategic asset a strong foundation and one of the industry's critical global markets, We see Europe as a major driver of our growth in 2024 and beyond in fact, I'm spending more time on Europe and traveling the content to ensure we are best positioned to leverage this enormous opportunity.
It clearly.
Clearly if international continues to build our platform in eight markets and we are engaged with governments at all levels across the continent with regard to illegal reform and regulatory oversight and emerging medical and adult use markets, we expect to make some exciting announcements soon.
In the U S. We are feeling optimistic about the prospects for meaningful Legislative reform as Washington is increasingly being pressured to act with the introduction of the candidates the administration and opportunity Act in July Congress can shift from a fully legalization proposal to one that has a better chance of garnering the 60 votes necessary for Beth.
We are all energized by fast moving support for safe and the bipartisan desire to finally passed meaningful legislative reform for our industry we have.
Increasing bar partisan support for safe banking.
Just lastly, extending that Cory Booker of New Jersey, who was considered a major obstacle to the bill went on the record and supportive safe plus calling it a very important piece of legislation.
Another bullet starting or industry advocacy is having an impact in Washington, The ski report is closer than ever.
Also the house just passed the medical marijuana and cannabinoid research expansion.
A significant bipartisan bill to allow federally sanctioned scientific study of the users efficacy and the effects of cabinets. This research is critical for the future success of legalization purely as a leader of our industry's lobbying we remain confident that meaningful change can come to our industry. This year.
Our new business ventures spearheaded by Joe Bear as we put the final piece of this business in place ahead of our launch we are very excited this opportunity maybe bigger than we originally expected we look forward to providing details soon but meanwhile, I'll leave you with this cannabis will sooner than later become an omnichannel CPG category.
And purely because aggressively exploring the winning operational sales distribution strategies of the next generation of global vertically integrated multichannel cannabis companies.
All of US securely are pleased with our record breaking results this quarter, especially considering the uncertain macroeconomic backdrop with equity and debt markets contracted interest rates rising record inflation and recessionary conditions, putting pressure on all businesses that said purely just not spending idle we are preparing for a recessionary environment.
By appropriately tightening our belts.
Oh Super about cost savings improving supply trends, we are pursuing opportunities to reduce cost and withstand pricing pressures primarily in the west coast markets and we are closely we're looking closely at head count travel and all controllable expenses to continue our performance in any economic environment.
An example actions we have taken to improve our profitability improved rationalizing low margin states, such as California and Colorado.
While having a presence in these markets is critical to long term brand building, we see no need to participate in irrational pricing behavior and prefer.
To preserve cash and wait for these markets to complete their natural rebalancing.
In light of the macroeconomic trends coupled with regulatory delays that have impacted the opening of our board and town store in New Jersey, and a proactive decision to rationalize wholesale and lower margin states. We now expect to be closer to the bottom end of our one four to $1 5 billion revenue guidance.
I have experienced the highs and lows and the doubters and the drivers of emerging market's been over 30 years of building successful businesses.
And right now where we are today with purely I couldnt be more excited about what's in store.
Otherwise I would not still be working this hard for our team members our customers and our shareholders. After all these years I believe in this business in the future of cannabis and it's the most exciting global growth opportunity and the generation I also believe that clearly it was the first company in the world poised to leverage the massive opportunity in front of us both domestically.
In international.
Accomplishments that will reward our shareholders with growth and profitability for years to come.
Finally, a key distinguishing factor why I believe purely how's the wind in our sales is that we have assembled the best leadership team in the industry on that note I'm pleased to introduce mapped out to make some exciting announcements we view on the impact of his first 90 days as CEO and share some highlights for the quarter.
Thanks for us.
I'd like to begin with some exciting news for all of us securely Besides a record breaking quarter.
When I assumed the CEO role 90 days ago, I focused on three key areas leadership and culture operational excellence and delivering quality product and scale.
We know that successful organizations are built on leadership and culture over.
Over the past three months, we have reorganized purely for long term success and stability by assembling an executive leadership team that is second to none in the industry to near rivers joined US in May as our first Chief people officer and she has made an impact in day one.
Today, I am pleased to announce and welcomed three outstanding additions to our executive leadership team, Ed Kraemer Camilo Lyon and.
And Mitch here.
Ed Krammer will be joining <unk> as chief financial Officer.
Ed brings a wealth of experience as a public company CFO and leader at companies, such as <unk> and beats by Dre as well as the background of the cannabis industry, including a recent U S GAAP conversion and SEC registration process.
Neil Davidson will be staying on for a transition period to help onboard at in his new role.
I want to thank Neal for his continued partnership and dedication to carefully.
<unk> has joined <unk> as Chief investment officer from <unk>, where he most recently worked as a managing director covering the global consumer and candidate sectors.
Miller brings deep knowledge and relationships to the role and I am thrilled to have him lead the capital markets and Investor relations function.
MS Harrington joined as Chief strategy Officer.
Which is a seasoned strategist and dealmaker with years of experience on Wall Street and in cannabis will be a dynamic leader for our M&A International and R&D functions.
With these hires we have added significantly securely capabilities in finance investment and strategy.
Very excited to have Ed Camillo and Mitch joined the team that's building the leading vertically integrated multichannel cannabis company in the world.
My second area of focus as CEO has been building a culture of operational excellence and continuous improvement throughout the organization.
We have made this a key priority of the executive leadership team with a focus on execution building scalable global enterprise processes and systems and using data to make informed decisions.
We've delivered on several key initiatives already.
Air leases executed business optimization strategies to consolidate operations invest in automation.
Outsource non value add functions and reduce costs.
Especially in the mature markets were more advanced supply chain set for them.
These strategies have contributed to our 52% gross margin in the second quarter, a sequential 267 basis point increase.
We have integrated retail wholesale and planning teams to enhance communication and business strategies speed decision, making and increased discipline and inventory management.
We've made exciting strides in using data analytics to optimize labor productivity, a major cost area for our business. Our team is producing increasingly sophisticated reporting.
<unk> retail cultivation operations and shared services leader with enhanced visibility into performance.
Our presence and scale in key markets in both retail and wholesale channels throughout the U S provides purely put the biggest window on consumers.
Preferences and behaviors.
We're rapidly developing a strategic asset and our ability to apply our proprietary market intelligence and insight across the company in R&D commercialization marketing and strategy.
Another focus of my first 90 days with products and brands I am very excited about our current suite of products and brands as well as our pipeline of innovations.
These early investments in R&D and quality standards are paying off with industry, leading innovation and commercialization.
Let me highlight a few key areas.
We are building select into the number one vape brand in the world by leveraging the power of our distribution platform and investing in innovative extraction technology hardware and product development.
We have successfully taken a regional west coast brand in four states and have now expanded into 19 states with more to come including Europe , achieving revenue growth approaching 400% since acquisition.
In flour, we are executing on our plan to expand the premium grassroots brand known for high quality indoor flower and premium concentrate to markets throughout the us.
Our launch of grassroots and two new market, Massachusetts, and Nevada is going extremely well.
More key markets around the way, including California, and Florida.
Additionally, our farmer select program in California has been a great success.
Partnering with licensed legacy and diverse farmers in northern California, and a testament to the power of the industry working together.
Small players and welcoming of legacy talent into the legal ecosystem, we're very very proud of these partnerships.
At the premium end, we launched wide rosin in Florida, using our proprietary solvent list Ace extraction system and continue to grow this product line.
We plan to launch in Colorado later this year.
Our select Essentials line is resonating with the value focused consumer and has built strong consumer loyalty in the seven states, where it's available with more on the horizon.
We launched our innovative click pod system in three new markets in the second quarter, making it now available in 16 states, where it enjoyed the greater than 50% repeat purchase rate. This is a very strong platform or building on in the coming months.
All told we are very pleased with the return on investment and continued performance of the select brand.
Purely roots are in health and wellness and we have introduced a new product line with many more opportunities to come.
<unk> taken line is designed for specific wellness category with low dose THC combined with minor cannabinoids.
The high absorption shell is a first of its kind and we expect plant per se is going to be a popular favorites with a variety of consumer segments.
Beverages category, we expect will grow in the coming years and in May we launched our enlist co seltzer product to serve the market.
Analysts coast had a very successful pilot launch and sold out at all the countries, we expect to rollout Emerald coast in more states in the coming year.
Neil will take you through the second quarter numbers in a few minutes, but before I turn it over I'd like to step back and share some highlights of the quarter.
New Jersey has been one of the industry's bright spots since adult use sales launch on April 21, our new Jersey business already doubled year over year, and we are the largest cannabis retailer and wholesaler in the state.
Generating outside returns with more growth on the horizon.
Our Belmar dispensary is the number one destination in the state with the best customer service and experience.
The launch of adult use in New Jersey with also a testament to the strength of our organization.
Basically a huge day, one demand and a booming market thereafter with transactions more than doubling quarter over quarter.
<unk> stepped up and executed exceptionally well delivering high quality product and a great experience to customers in New Jersey.
Our strong execution continued in Florida during the second quarter.
We opened our 51st Dispensary last week in Tampa and expect to approach 60 operating expenses by year end.
Our performance in Florida is best in class.
Our dispensaries are the most productive in the state and we are gaining market share by focusing on providing customers what they want high quality products with an assortment that meets all needs supported by exciting innovative product launches.
We have a solid and growth share position and continue to be very profitable in Florida.
Our new dispensaries or opening up pop retail locations throughout the state and we've broken ground on an expansion of our cultivation facility as we continue to invest there.
In Illinois, we are seeing the benefits of the expansion of our Litchfield manufacturing facility.
We have doubled the vertical mix in our retail locations since the beginning of the year with continued expansion of select and grassroots in Illinois.
We're encouraged by the 7% sequential market growth we've seen in the adult use market in July and have continued opportunities to drive growth margin expansion, there and in other key markets as we scale production and launch new products.
We're also pleased that an additional 185 social equity licenses have been issued and we are building relationships with these owners to serve their wholesale needs in advance of openings, which we expect in early 2023.
We have some significant catalysts coming in the northeast with the expected launch of adult use in Connecticut, and New York.
We are preparing in advance of these opportunities and continue to invest in both states.
We've seen strong momentum in Connecticut, with 9% quarter over quarter growth versus Q1.
And we are already the largest established player and the market leader in New York, which represents an estimated $4 billion market.
Our retail business showed significant improvement over the last quarter.
We added seven new dispensaries closing the second quarter with 135 retail locations nationally.
Retail revenue was up 11, 4% quarter over quarter, our 18th consecutive quarter of growth.
The focus on our vertical mix is paying off we saw 500 basis point improvement this quarter alone.
As important 65% of our retail product consists of purely brands. We think this is a significant competitive advantage.
On the wholesale side, we are focused on growing profitable market share in our core states and improving margins.
This has come at a small cost to top line as we saw a 2% reduction in revenues during the quarter largely as a result of continued price rationalization in California and Colorado.
Offsetting these declines new Jersey, let our growth rates with wholesale revenue, increasing 220% quarter over quarter.
Finally on international purely as international revenue was up 50% year over year with UK up 320% year over year, 18% quarter over quarter.
We see Europe is the next frontier for growth in the cannabis industry and are leveraging the experience and resources. We developed in the U S to be first movers as major European countries legalize cannabis for medical and eventually adult use.
Across the continent, we are executing on plans to bring our industry, leading products and brands to Europe to fully established purely as the global leader in Canada.
In the UK, our recently acquired Sapphire clinics have seen an 800% increase in patient counts in the U K as a market ripe for expansion.
In Germany, we're building a larger presence in advance of adult use with a focus on supply chain and distribution.
Germany will be the driver for Europe , and we are investing considerable time and resources to capture leading market share in advance of adult use legalization with more announcements to follow suit.
In Portugal, we've driven capacity expansion and operational improvements at our cultivation campus and a growing high quality flower to export through Europe .
Our Portugal campus as a strategic asset for our European footprint, and we are continuing to invest in all aspects of operations there.
We secured two additional licenses at our Spanish EU GMP facility and have increased production capacity by 20 times for extraction of manufacturing of our products and brands into Europe , and other markets, including Israel, the largest medical cannabis market outside of North America.
Overall, the fundamentals of our business remains strong despite macro pressures on the consumer however in the current environment of inflation and economic uncertainty we are seeing some distinctive shifts in customer behavior that we are optimizing.
Our pivotal customers are coming in more frequently which is driving more traffic to our dispensaries with transactions, increasing 20% quarter over quarter.
But theyre spending a little less each visit.
This aligns with the partial shift to the paycheck cycle driven behavior consumer brand see in times of economic uncertainty.
The other good news is that current customer behavior indicates that our business is a recession resistant staple.
We've seen that despite disruptions in the economy politics and culture people want their cannabis.
In some markets, we are even seeing premium products, showing stickiness with repeat buyers and.
And we continue to meet the customer where they are with value oriented products strategic promotions and best in class service.
While I'm very pleased with the quarter's results I'm, even more excited about <unk> future.
Focusing on our leadership and culture operational excellence and.
And delivering quality products and brands at scale.
We will continue to grow and improve our margins and drive profitability.
There is simply no other cannabis company with the power of our platform, our commitment and resources to execute our long term strategy.
And the leadership drive the cement this industry is a powerful force we know it will be for years to come.
Now I'd like to turn the call over to CFO Neil Davidson.
Neil.
Thank you Matt.
First I want to welcome Ed to the role of CFO and most importantly, I want to thank everyone at <unk> for one of the best experiences of my life I've met some amazing people since joining in 2019 and I'm proud to have played a role in the company's continued.
Success.
A quick update on our accounting firm.
As part of our planned transition to U S. GAAP no later than the first quarter of 2023 and in connection with an eventual listing on a senior U S. National stock exchange, we will be transitioning from the Pks Calgary office of our accounting firm to the Pks, New York office as such I wanted to.
Thank the PK F in Terry's team for all their hard work over the years and welcome Pks O'connor Davies on board.
With that let me provide some details on our second quarter 2022 results.
Total revenue for the quarter was a record $338 million representing quarter over quarter and year over year growth of 8%.
Retail revenue was $252 million compared with $222 million in the second quarter of 'twenty, 'twenty, one representing 13% year over year growth.
Wholesale revenue decreased 6% year over year to $84 million, representing 25% of total revenue.
Retail revenues were up 11%, resulting in our 18th quarter, a sequential retail growth while wholesale revenues declined 2%. A result of continued rationalization of our wholesale business and lower margin states.
Our gross profit on cannabis sales was $175 million for the first quarter, an increase of 13% year over year from $155 million.
Gross profit margin was 51, 9% compared to $49 six in the year ago period.
Sequentially gross margins increased 267 basis points from 49, 3% to 51, 9% due largely to the increase in vertically integrated products sold in our dispensaries in the mix of revenue and higher margin states.
Moreover, despite a 2% decline in wholesale revenue, both gross margin and gross profit on cannabis sales from wholesale revenues improved sequentially.
SG&A expense was $108 million in the second quarter compared with $100 million in the prior quarter and $88 million in the year ago period.
The year over year increase in SG&A, primarily reflects increased head count in support of new store openings and the launch of adult use in new Jersey higher travel costs as revenue facing travel resumes and higher levels of expenses related to research and development activities and sales and marketing spend during.
In the quarter.
SG&A as a percentage of revenue was 32% in the current and prior quarter at 28% in the year ago period.
Our second quarter SG&A included approximately $5 7 million of adjusted EBITDA add backs versus $6 5 million in the prior quarter.
Excluding the add backs our SG&A represented 30% of total revenue in the current and prior quarter.
Adjusted EBITDA for the first quarter was 86 million, a 2% year over year increase.
Sequentially, adjusted EBITDA increased $13 million or 18%.
The increase over the prior quarter was attributable to the 267 basis point increase in gross profit margins as discussed.
Offset by SG&A, excluding add backs, increasing by $8 6 million for the reasons previously mentioned.
Our investment markets, including Europe impacted our consolidated adjusted EBITDA margins by approximately 517 basis points.
<unk> 515 basis points in the first quarter.
Turning to our balance sheet and cash flow.
Our balance sheet remains strong with cash and cash equivalents of 187 million as of June 32022.
At the end of the second quarter, our outstanding debt was $587 million net of unamortized unamortized debt discount and debt issuance costs and had a weighted average interest rate of seven 3% with almost three quarters of our outstanding debt not due until December 2020.
Six.
Net capital expenditures during the quarter were $30 million, bringing our year to date total to $60 million.
Our investments continue to be focused on expanding cultivation and processing capacity as well as strategically increasing our retail presence.
As a result of evaluating a number of our projects and prioritizing certain investments. We now expect our full year capital expenditures to approximate $125 million.
We remain focused on our cash position as well as on generating positive operating cash flow this year and beyond in fact for the six months ended June 32022, our cash flow from operations was positive $12 million.
Inventory this quarter declined 5 million contributing to working capital and to operating cash flow expansion.
Excluding inventory and biological assets as well as the expected tax payment made during the quarter working capital was neutral to our operating cash flow.
We expect these trends to continue and expect to generate substantial positive operating cash flow for the full year, 2022, which will be sufficient to cover our current obligations and anticipated capital expenditures.
On the margin front, we continue to increase our vertical mix in our retail stores.
Overweight retail revenue growth and higher margin states.
<unk> wholesale markets and lower margin states and monitor our SG&A expenses.
As a result, we expect to see further leverage and expanding adjusted EBITDA margins sequentially in the remaining quarters of 2022.
Yeah.
Finally, we initiated full year 2022 revenue guidance of $1 4 billion to $1 5 billion in March of this year with where we fell in this range being largely dependent on the macroeconomic environment and the timing of regulatory approvals.
Given what we know today, we still expect to be within this range, albeit at the lower end with third quarter revenue up flat to low single digits sequentially in the fourth quarter accelerating as we expect to close trike.
With that I'll 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.
To withdraw your question. Please place. Please press Star then two.
Again, please limit yourself to just one question.
At this time, we will pause momentarily to assemble Iraq's day.
Okay.
Okay.
So.
Okay.
Yes.
Our first question today comes from Vivien <unk> of Cowen.
Please go ahead.
Hi, Thanks. Good afternoon, you guys are clearly being very proactive about balancing a lot of puts and takes and managing your margin outlook.
Clearly commendable I was just wondering if you could unpack a little bit.
That margin intention here.
I think California, and Colorado, which is great, but certainly you've got a lift from new Jersey. So if he can help us think about that and I'm sure that as we think about those different levers in the back half of the year I think that would be great. Thank you.
Sure Matt.
Matt you wanted to take the I'll take that yeah. So.
But I think we are very focused on continuing to drive growth in our high margin States New Jersey is certainly one of those and has been a major catalyst.
In the second quarter, and we see a lot more upside.
Our board and Tom Dispensary, opening and continued wholesale opportunities, but there's a number of other high margin markets. We continue to really focus on places like Florida, and Illinois, and Arizona in those so I think it's really a diversified mix of high margin states that.
We're really focusing on.
Continuing to drive growth in those markets and you're on the some of the other west markets.
Where it has been a bit more challenging.
Being judicious with the way, we're managing our wholesale business, our customers et cetera to ensure that we are maximizing margin.
Even given some of the headwinds that exist and so that's a lot of what we've been doing that are that you're seeing fall through in the margin profile here that's improving.
The next question comes from Andrew part Anyhow.
Stifel G. P. M. Please go ahead.
Yes.
Hi, good evening, congrats on the strong quarter and thanks for taking my questions.
Yeah.
Just.
Looking at your your guidance could you could.
Could you detail what are your major assumptions embedded in 2022 and your sales and.
And.
EBITDA as well guidance, namely when do you think the board in store could open in New Jersey correct.
And do you expect to try to contribute fully in Q4.
Thanks.
Go ahead Neal Yeah, So I would say looking at.
Guiding towards the bottom end of our range largely has to do with rationalizing our wholesale revenues, which as <unk> seen the benefits are already showing in our margins.
The second piece.
Being a little bit more conservative with respect to New Jersey border town, that's simply a regulatory approval.
So that we really are expecting a full benefit in Q4, and then just some general assumptions about what everybody seen around the macro around the consumer so that kind of all bundled together led us to thinking of Q3 as a.
Flat to low single digit increase at core soft a robust 8% growth in Q2.
And then going into Q4, I think the big.
Step function. There is obviously trike, which we do expect a full quarter of and then board in town, which we do expect a full quarter of <unk>.
The next question comes from Matt Mcginley of Needham. Please go ahead.
Great. Thank you.
Maybe it's too that all bundled together and Capex and taxes payable you mentioned that the new dropping their capex from $1 45 to $1 25.
My question is is that a shift related to the timing of projects are you reassessing our need for capital investment in some states and then the taxes payable and it looks like you only need about $60 million in cash tax payment in the second quarter, but youre still sitting on an overall balance about 125 million.
Do you have the cash on hand, and your and your confidence in your ability to generate cash flow why not pay on time and save yourself the penalties going forward.
Yes, so the first one with respect to Capex.
We've always looked at the return on investment on some of those capital expenditures and given this environment. We've just scale back on some of the one of haves versus some of the things that are going to impact growth.
The immediacy or in 2023, so we've just taken a slightly different lens and been able to carve it down to $125 million.
With respect to the cash tax payment I think once you see our 10-Q filed tomorrow.
Our next payment is actually closer to $110 million.
We are reassessing quarterly tax payments.
But I think what you're including in the number that you provided is the current quarter's provision as well. So we did make a $110 million tax payment and still even with that generated positive $12 million cash flow for the full year.
But for the six months sorry.
Yeah.
The next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
Good evening, all congrats on the strong quarter, just wanted to pivot back to some of the commentary on the decisions around your wholesale contribution and obviously safeguarding your margin I'm just curious because you know when you look back to before buying select you know that was a brand that I guess anecdotally you are starting to see everywhere in front of the Pacific West Coast I'm, just wondering how you balance the.
Between you know near term margin.
You know mitigation on the decline versus overall brand building do you view theres a risk of <unk>.
Of tapering back your exposure with some of your wholesale contribution in the short term given that some markets arguably like like like California will be beneficial for long term brand building. So no question. The decision just wondering how you balance those two those two elements.
Matt.
Sure Yeah. So look I think as we touched on in.
In the call.
Brought select.
From four to 19 states. So in terms of the growth of the select brand.
Focus on that growth and very focused on continuing to.
To launch new products under that brand and I think have really executed well on that as it relates to markets like California, we are.
Taking a closer lens.
Kind of how we're managing.
Hundreds and hundreds of different accounts to ensure that we are continuing to focus on margin, especially in the near term here Youre right. We are certainly focused on continuing to keep the brand exposure and the distribution of select in our other brands in these large markets.
And so that is a focus of ours and we're continuing to do that but we're in 'twenty 200, and counting doors throughout the country and soon to be more in Europe .
But I think we are also really focused on making sure that we're properly servicing the high value accounts and the large customers in that overall.
The next question comes from Aaron Grey of Alliance Global Partners. Please go ahead.
Hi, Good evening and thank you for the question. So just on the guidance just shifting over to the fourth quarter right. So three key you know flat to up 3% send them by you know about.
<unk> 50 million dollar increase in <unk> just wanted to know in terms of your expectations for trike. It was 110 million I believe in 2021 can you comment at all in terms of how those sales have trended.
Maybe some expectations that you might have in terms of the contribution to <unk>, because I would think about the organic.
Same thing on top of the acquisition closing thank you.
Yeah, we're expecting approximately $20 million contribution on tried to in the fourth quarter. So you can extrapolate that.
The growth on the organic side.
The next question comes from Scott Fortune of Roth Capital. Please go ahead.
Good afternoon.
Little more can you if you can dig in a little bit more in new Jersey. The cadence here is a little bit better than you originally thought abortionists side, but you're still waiting to open one more store and youre getting real good strong wholesale sell through kind of step us through the end of 2022 into 2023 your positioning from New Jersey.
Z and the opportunity to continue to be the leading wholesaler there and the opportunity overall for new Jersey going forward here, a little more color on that that'd be great.
So obviously with more store openings, we anticipate the market.
To grow and so we will have much more wholesale opportunity.
We are the largest wholesalers in the market, although we have some competition as well.
With two other players having extra capacity for wholesale purposes.
As more stores open up and we anticipate more stores will be opening up every single quarter.
The opportunity on the wholesale side will grow obviously, the big one for US also will be the opening of Gordon onboard in town knows it very strategically located store on a major federal way in New Jersey. It's.
It's our most northern stores. So it's close to very large population centers like threaten very easy to get access to and it's also our biggest stores. So I think it's a 14000 square foot store.
31.
POS stations and so we're able to process a tremendous amount of people through that store and it's north enough from our Belmar store that it won't cannibalize the business in Belmar. If you look at Belmar and Edgewater. Those two stores are quite close to each other and so there's a small level of cannibalization there about 20 minutes apart what is this.
It's much more north and so it won't be cannibalized and it's a very very good very good stores. So we have the opportunity of both board and town as well as additional stores.
Stores opening it up on the wholesale side purely to invest very heavily in cultivation early on and so we have not only do we have good inventory, but more importantly, we have great capacity to continue to expand our ability to provide product to the marketplace and so we're very excited about new Jersey, We think that New Jersey is a $2 billion market. It's early days.
In terms of its start.
We think it will continue to grow as stores open up every single quarter.
The next question comes from Thai Collyn of eight capital. Please go ahead.
Hi, there my question's on care leaf International I'm wondering if you can help us understand what level of additional investment would be needed in Europe to supply a major adult use market.
And Susan are there any pieces missing from a talent or facilities perspective or is it basically plug and play at this point.
So.
We're going to devise our supply chain capacity.
Based on the rules come out of Germany in October So we're expecting the first pieces of a draft legislation on the adult use market out in.
And in early or mid October at that point in time, we'll be able to make a.
A a educated guess just terms of what capacity, we're going to need to do anything on that program.
We are already expanding capacity based on our current demand coming from the U K, Israel and Germany, obviously with adult use we anticipate that that capacity will have to be double if not tripled in order to meet that.
We have some.
Information coming out about our European business very very shortly so we'll we'll give more transparency on that but we are anticipating that the German adult use program will be a.
$1 billion.
Increase in the first year moving to over a four year period to about a $5 billion market. So it's a very large market with very significant penetration and so we do anticipate that we will have to grow our current ability.
250000 square feet to probably triple that in order to be able to supply that market place.
But the good news is it's capital light to the extent that we don't need to build the.
Facility in each one of the German state so anywhere we can build in Portugal and export to Germany from there. So we are however, waiting for the final rules are final Lauder come out or the draft, Florida come out to see what the rules are going to be in terms of imports and that point in time, we'll make the assessment.
And make the investment we have had all of our teams out there in the last two months.
And seeing whether or not we have enough power enough land and et cetera in order to build the facilities, we're going to need to supply the German adult use market.
Yes.
The next question comes from Eric Deloria of Craig Hallum Capital Group. Please go ahead.
Great. Thank you for taking my question.
My question is on the on the wholesale side.
So understand that you are rationalizing your wholesale sales in markets, like California, and Colorado with the pricing there but.
But you also commented that pretty extensively on the <unk>.
Increasing mix of vertical sales could you help us quantify how both impacted wholesale growth. This quarter and then maybe help us identify some of the markets where you expect continued total growth in terms of retail plus wholesale, but maybe we could see some flattening wholesale as you either focus on increasing the vertical.
Or maybe just experiencing some some pricing there as well that'd be great. Thank you.
Yeah, Let me let me give you one quick tidbit, and then I'll hand, it over to Matt, but I said in my prepared remarks, we saw.
Decrease of about 2% on wholesale revenues, but our gross profit increased.
I'll also tell you gross margin dollars increased slightly so hopefully that helps you modeling, but basically you think of it as a 2% decline in revenue.
About the same contribution or gross margin.
You want to comment on growth.
Yeah. So look certainly vertical mix has been a focus as I've mentioned, our vertical mix for Q2 was 65% across our 135 retail locations and we continue to see that as an opportunity, especially in some of our larger retail markets. We also see tremendous opportunity on the wholesale side.
In many of those same markets and some different ones.
Really prompted by a few different catalyst one is just additional new dispensaries that are going to be opening in places like New Jersey and Illinois.
In key markets like that so those are all new customers for us to be able to to.
The service and we've invested in capacity and then to product innovation in things in anticipation of that knowing that there was going to be more wholesale customers coming online in and many of those markets certainly adult use on the horizon in play.
Places like Connecticut, and New York are also going to create a number of other wholesale opportunities as well. So we're focused on being very prepared for those as well.
The next question comes from Bill Kirk of M. K M partners. Please go ahead.
Thank you so forgive me if I missed it but do you have any early thoughts on the Florida initiative filed for the 2024 ballot.
Okay.
We've just recently been introduced to it Matt had a meeting with the CEO of <unk>.
Truly from about a week ago. They discussed it so we're still looking at it a word.
We like the fact that there are some initiatives too.
To get this adult use program going in Florida, We think it's not going to be a cheap exercises can be very very expensive. So we need the whole industry the chip in to do it in.
In the past however, my efforts and getting the industry to chip in on Washington efforts has been more difficult I'm, hoping.
The CEO of truly will have better luck in getting everybody together certainly clearly it would be very supportive of a program to get the adult use in Florida.
Seeing no more questions in the queue. This concludes our question and answer session.
I would now like to turn the conference back over to executive Chairman Boris Jordan for any closing remarks.
I'd like to thank everyone for joining our call we're delighted with the quarter.
Any other questions investors may have.
D I must reach out to our IR department. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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