Q1 2023 Curaleaf Holdings Inc Earnings Call
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All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two.
Please also note today's event is being recorded.
At this time, I'd like to turn the floor over to Camilla Lyon, Chief Investment Officer.
Please go ahead.
Good afternoon everyone and welcome to Curie Leaf Holdings first quarter 2023 conference call. Today we are joined by Executive Chairman Boris Jordan, Chief Executive Officer Matt Deren and Chief Financial Officer Ed Kremer.
Before we begin, I'd like to remind everyone that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their very nature involve estimates, projections, plans, goals, forecasts and assumptions, including the successful integration of acquisitions and the implementation of the Canadian and United States securities laws.
and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements 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.
risk factors can be found in the company's filings and press releases on CEDAR and the Canadian Securities Exchange.
during today's conference call in order to provide greater transparency regarding chair elite's operating performance.
We will refer to certain non-GAAP financial measures and non-GAAP financial ratios that involve adjustments to GAAP results.
Such non-GAAP measures and ratios do not have a standardized meaning under US GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by US GAAP, should not be considered measures of cure lease liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by the other companies.
Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable US GAAP financial measure under the heading Reconciliation of non-GAAP Financial Measures in our Earnings Press Release issued today and available on our Investor Relations website at ir.cureleaf.com.
With that, I'll turn the calls over to Executive Chairman Boris Jordan. Boris? Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2023 results. We'll be right back.
Since it has only been a few weeks since our last earnings call, we will take a slightly different tack today.
Given all the negative sentiment around the industry, a lot of which is not really justified, I want to focus on the many catalysts we envision, both internationally and domestically. There are exciting things happening right now and many more on the horizon, and these secular growth drivers often get lost in all the noise around federal reform and the challenging operating environment we are currently in.
Today's equity evaluations do not appropriately reflect the opportunity in cannabis, as this is still a dynamic and fast-growing industry with a long and bright future. Matt will then discuss the myriad of operational initiatives we are implementing to improve efficiency and reduce costs.
We know that expanding our margins during these tougher times will leave us with well-positioned for highly profitable growth as the industry normalizes.
And we'll close with a review of our Quarter 1 results.
Despite our commitment to efficiency, Curaleaf is very much a growth company and our solid start to 2023 is evidence of just that. I'm pleased to report first quarter year-over-year revenue grew 14% to $336.5 million compared to $296 million last year, beating our guidance of low double digit sales growth.
Adjusted Gross Margin was 48% and Adjusted EBITDA Margin was 22%, both exceeding consensus estimates.
Based on the productivity and efficiency measures we have implemented across the organization, we anticipate margins will expand throughout the year. We ended the first quarter with $116 million of cash in our balance sheet and generated $31 million in operating cash flow from continuing operations.
Also, Curaleaf has access to approximately $50 million in secured financing that can be used to bolster our working capital should the need arise.
Since our fourth quarter call two weeks ago, I've been in Europe meeting with our international team analyzing the business and contemplating new opportunities.
Curleif is the only MSO that has embraced the massive European market, initially investing in a leading platform two years ago.
It is enormously gratifying to see that the market is now rapidly advancing as we envisioned, as evidenced by the 130% year-over-year growth in quarter one registered in our European operations.
I'm even more excited about the revenue and profit of our international segment, will contribute securely over the next three years. This remains meaningfully underappreciated by the investment community, but I suspect that as Germany launches and other countries follow suit, we will get more credit for these bold moves.
While still evolving, some of these draft regulations entail a two-pillar system, pillar
with Pillar 1 focused on expanding the medical market in Pillar 2 aimed at the adult use market.
Pillar 1 is setting up to be a Goldilocks scenario for the established players like our recently acquired brand 420 Pharma.
Currently, two-thirds of the German market is comprised of just five players, one of which is our company 420 Pharma with a roughly 15 to 20 percent share.
There are an estimated 200,000 medical cannabis patients in the country out of a population of 84 million people. However, many more citizens have applied for access only to be denied by the high barriers to getting prescriptions from a doctor.
Under the current draft, Pillar 1 would immediately eliminate this friction for patients by removing cannabis from the narcotics list, thus allowing doctors to more freely prescribe, while also giving consumers the comfort of knowing they are not part of a monitored national database. This proposal would also allow digital telemedicine appointments and faster delivery of cannabis onOOOOOOOO
As we assess and plan for how this market may develop, we look at Germany and compare it to established US medical markets such as Florida, which has a current penetration rate of 3.8%.
Assuming a similar participation rate in Germany.
implies a total patient population of over 3 million people.
which would be a 15-fold increase from today's levels. We are conservatively assuming total patient growth of 3 to 5 times, which still implies a 1.5 billion euro market opportunity over the next two years.
We are investing ahead of this massive opportunity to drive share and we intend to leverage the 420 brand which is known for consistent high quality high THC potency. Given that medical patients are eligible for insurance reimbursements in Germany, these assumptions may well prove quite conservative.
Building a well-recognized brand in the medical market ahead of adult use will give us an advantage when the program is ultimately launched.
In addition to our production coming out of Portugal, we have augmented our supply chain with an exclusive multi-year partnership with the leading Canadian supplier of high-end flour to ensure we provide the market with consistent high-grade product as the market accelerates.
The UK market grew 75% year over year at quarter one, and we continue to streamline the patient funnel process by incorporating technology and software, helping remove friction from the customer acquisition.
We are also bringing our latest product innovations from the US to this market. Over the coming months, we will introduce our newly formulated edibles and medical vapes to the UK. And there is nothing comparable to these products available there today.
This should further cement our lead in this high-growth, yet still nascent market. An established Curaleaf is the most well-known and trusted brand from day one.
We are investing prudently today throughout our international segment, setting the stage for robust growth in 24, 25, and 26 as cannabis adoption accelerates across Europe . I could not be more excited about this opportunity and feel highly confident that this will be a huge strategic advantage that we will ultimately pay big dividends for our shareholders.
We also have many exciting growth drivers domestically and Pureleaf is well positioned to capitalize on near-term, medium and long-term state level cattle.
In Connecticut, our two adult use stores continue to ramp nicely and we expect our other two stores to be improved within the next 30 to 60 days. In Maryland, we are eagerly awaiting the July 1st launch of adult use program. With four highly productive stores and a robust wholesale presence, Maryland will be a very good market for cure-all.
New York is another important opportunity. This is a market where we have long held the number one share position. Draft regulations came out last week and while the O.C.M. has offered some concessions to the existing R.O.s, the industry is demanding more.
The current regulations are hurting the hemp farmers and card license recipients they were designed to help. These arbitrary rules only benefit the illicit market which is thriving in the absence of legal competition.
We, along with other market participants, are steadfast in our legal position and look forward to a quick resolution so the legal market can grow equitably and thrive. We are hopeful that we can begin selling into the adult use market by quarter to four in some form, which will be an important step towards elevating New York into a $5 billion market.
the pinnacle of East Coast cannabis. Over the next two to three years important curalee states including Florida, Ohio, and Pennsylvania are likely to convert to adult use.
over $8.5 billion in sales by 2027 and we will be ready to capitalize.
Beyond that, we have applied or will be applying for licenses in Texas, Alabama, Kentucky, and North Carolina, which represent further growth opportunities that we are eagerly anticipating.
We are committed to efficient expansion and highly profitable growth and believe that we are just beginning to tap into the possibilities of this rapidly emerging industry.
We continue to expect 2023 revenue will grow low to mid single digits compared to 22 revenue of $1.3 billion and project solid adjusted EBITDA margins in the mid 20% range resulting in free capital generation of 50 to 60 million.
after anticipated investments of $70 million into our business. With that, I'll turn the call over to our CEO , Matt Darin.
Thanks, Boris.
Over the past 12 months, we have made significant strides in streamlining our business.
Since I moved into the CEO role one year ago, we've moved decisively and with urgency to maximize opportunities in high-growth markets while scaling back from structurally unsound markets.
We are laser focused on operating efficiencies in every aspect of our business, including our cultivation and processing operations, retail store productivity, and share services, both in the US and Europe .
Exiting unprofitable states was the first step, but certainly not the last.
We are establishing a lean asset base from which we will drive operating leverage, margin improvements, and cash generation. I will touch on three operational initiatives that are underway and that are already contributing to productivity and efficiency gains that will build throughout the year.
These three initiatives are Inventory Management, Automation, and Genetics.
First is inventory management. While our inventory increased slightly from the end of 2022 as we ramped up for 420 spring season and the launch of JAMS, our new edibles brand, we are taking a number of actions to right size our inventory. We are in a strong position to execute on this critical priority with the strength of our retail business.
and ability to further leverage our own branded products. We are successfully increasing vertical mix in the battleground markets of Illinois, Pennsylvania, and Arizona.
We are at or approaching the 40% regulatory limit in Illinois in most locations and are now exceeding 50% vertical mix in Pennsylvania with room to grow.
There are catalysts on the horizon in the wholesale business as well, with new dispensaries opening in New Jersey and Illinois, growth in new adult use markets such as Connecticut.
positive trends in Massachusetts and Missouri, and the pending adult use launch in Maryland.
Strong inventory management starts with an excellent sales, inventory, and operations planning process.
us to forecast demand and plan inventory production with greater precision.
Our ERP implementation is progressing state by state and when complete will be the first system with real-time inventory data direct from all seed-to-sales systems.
We continue to refine our cultivation methods to focus not only on overall yields, but the ratio of bud to trim, with a focus on high quality, high potency bud and reduced trim output.
I am pleased that both our potency and bud-to-trim ratios are the best they've ever been with more opportunity for improvement.
We are also reducing redundant or inefficient capacity to further optimize our cost structure. We've closed our Amesbury facility in Massachusetts, our Belmar facility in New Jersey, and our homestead outdoor grow in Florida, three older sites that have been replaced by newer, more efficient facilities.
We will be continuously evaluating each site to ensure they are earning their cost of capital.
While we have more work to do, I am confident in our plan to reduce inventory and to match demands to production. Once again, thank you for your audience andBye.
Second, we continue to invest in automation equipment in our Tier 1 markets where the return on investment is measured in months, not years.
The landscape of automation options has improved significantly over the past several years and we have automated numerous prophecies in our supply chain from cultivation, to the
pre-roll vape and edibles production, and packaging. We have migrated to Mylar bags for most products and will continue this move to reduce costs and environmental impact.
In Florida, we're already seeing the benefits of a state of the art vape filling and capping machine, and we'll be rolling this out in Massachusetts and Arizona soon.
In New Jersey, we've automated gummy filling and packaging in anticipation of the launch of the JAMS edible line in early third quarter. In aggregate, the savings to our COGS from automation is estimated at $15 million over the next 12 months. That's over 100 basis points of gross margin contribution. Third is our focus on genetics and strain diversity.
We are centralizing our breeding process for greater efficiencies around our new genetics program and also introducing new high potency strains with unique proprietary genetics.
We have a very robust pipeline of new genetics that are in production but have not yet hit the market, some of which are unique cultivars exclusive to Curaleaf.
We are using the same innovative approach we pursued in other product categories and applying it to cultivation.
This effort will reduce our third party purchases as we create a more diverse rotation of flower strains, something we know our consumer likes.
These actions are central to achieving operational excellence and while changes will happen over the course of the year, investments we are making today create a solid foundation that positions us for long-term success. I would like to address our progress on cost savings and expense controls.
We exceeded our cost savings initiative of $60 million and continued to reduce expenditures in COG and SG&A.
We are leaving no stone unturned as we attack every expense category from travel and entertainment to third party lab testing and more.
With that said, we are continuing to invest where needed. We are spending considerable time and money advocating for our industry in Washington, D.C. as we inch closer to federal reform. While this comes at a cost... Selected by Marley
This is what industry leadership looks like to us and it's the right and necessary investment to make for the advancement of our industry.
We call on the other leaders of our industry to step up and do their part as well.
Shifting gears, I want to briefly touch on a few state highlights during the quarter.
We are seeing strong trends in our retail business. We completed 3.33 million transactions in the first quarter serving 934,000 customers and sold 10.3 million units. Despite the challenging macro environments and continued pressure on pricing and average
We are seeing positive movement in a number of key markets.
In Arizona, we had a record breaking quarter and are exceeding our internal projections. AUR for cheer relief increased mid-single digits while market pricing according to BDSA was down sequentially.
We are seeing strong performance in a number of Northeast markets.
New Jersey increased 55% year over year.
We launch grassroots and find to strong reception.
And our Bordentown location continues to ramp well since opening in November . In Connecticut, we converted two of our stores to adult use with our remaining two set to open over the next 30 to 60 days.
Adult use sales in this state also continue to show a solid ramp as awareness increases and we expand our product assortment. In Massachusetts, AUR for Curly bucked the market trend increasing in Q1 compared to the overall market that continued seeing sequential price declines. We attribute this to the introduction of grassroots.
as demand for high quality flower is strong and selling out.
We see many positive indicators in our business that reinforce our growth-focused strategy. Coupling this with the work we are doing to tighten up all aspects of our operations, including retail, wholesale, cultivation, and production, will propel us down the path of higher profitability.
and cash generation over the coming quarters and years. The future is bright for Curalease. With that, I'll turn the call over to our CFO Ed Kremmer. Ed.
Thank you, Matt. Today, I'll review our Q1 2023 results and provide an update on our outlook.
Total revenue for the first quarter was $336.5 million, representing a year-over-year increase of 14%. Growth was driven by New Jersey adult use, Arizona retail strength, the addition of trike, new store openings in Florida, and 53% growth in our international segment.
By channel, retail revenue is $273 million compared to $225 million in the first quarter of 2022, up 21% year over year.
Wholesale revenue decreased 11% year over year to 62 million and represented 18% of total revenue.
Looking at our consumer metrics, transactions remained healthy in the first quarter and were up 14% sequentially from Q4, partially offset by a 7% decline in average order bound.
Our first quarter gross profit was $161 million, resulting in 48% gross margin. Adjusted gross profit was $162 million. Sequentially, Q1 adjusted gross margin decreased 80 basis points compared to the fourth quarter largely due to price compression in certain markets. SG&A expenses were $112 million in the first quarter and increased $12 million from the year-ago period.
The year-over-year increase in SG&A primarily reflects operating expenses associated with the addition of Trike, 420 Pharma, and new store openings. SG&A as a percentage of revenue was 33% in the first quarter, down 60 basis points compared to the previous quarter.
The year-over-year increase in SG&A primarily reflects operating expenses associated with the addition of trike, 420 Pharma, and new store openings. SG&A as a percentage of revenue was 33% in the first quarter, down 60 basis points compared to the year-ago period.
Our first quarter SG&A included approximately $8 million of ad-backs versus $6 million in the prior year, with the increase driven by consulting and legal fees associated with our GAAP conversion process and expenses associated with acquisitions.
Our core SG&A rate in Q1 was 31%, a decrease of 110 basis points year over year as we are beginning to realize some of the benefits of the expense reduction actions we began taking in November coupled with leverage on stronger sales.
First quarter net loss was $56 million, which included $10 million of losses from discontinued operations.
Net loss per share from continuing operations was 6 cents. Adjusted EBITDA for the first quarter was $73 million compared to $76 million last year, a 4% decrease resulting in an EBITDA margin of 22% and 26% respectively. Sequentially, our adjusted EBITDA margin decreased 60 bases.
or 8% compared to the fourth quarter, largely driven by build ahead of 4.20 and the launch of JAMS, our new edible slide.
Net capital expenditures in the quarter were $26 million. We expect Kepec's spend to be front half loaded and then decelerate in the back half of the year. As Boris and Matt mentioned, we are prudently investing today in the future growth opportunities we see across the international and domestic landscape.
We continue to expect 2023 CapEx to be approximately $70 million or half of last year's expenditures.
Our outstanding debt was $594 million net of amortized debt discounts, of which 80% is not due until December 2026. We ended the fourth quarter with 718 million fully diluted shares. Outstanding!
We generated $14 million of cash flow from operations. Excluding a $16 million use of cash from our discontinued operations, cash flow from continuing operations was $31 million. Free cash flow from continuing operations was $5 million. While we are comfortable with our ability to fund our growth initiatives, we are also comfortable with our ability to fund our growth initiatives.
and pay all of our obligations, the company has access to approximately $50 million of secured financing that can be used to bolster our working capital should the need arise.
We are off to a good start for the year and demand for cannabis remains robust. But the current operating environment still presents its share of headwinds such as elevated promotional activity in various states. We are well equipped to navigate these bumps in the road, yet we are also mindful of the pockets of distress in the market.
As such, we are reiterating our fiscal 2023 guidance of low- to mid-single-digit revenue growth versus comparable $1.3 billion revenue base in 2022, which excludes discontinued operations.
We continue to expect full year adjusted EBITDA margin to be in the mid 20% range.
For Q2, we are comfortable with the current consensus estimate of approximately $340 million in revenue, which represents comparable year-over-year growth of 4% versus Q2 of 2022 revenue of $327 million, which excludes discontinued operations. We continue to expect to generate over 100...
that the cadence of our cash flows
We'll trough in Q2 after making tax payments and paying the balance associated with this year's Bloom obligation. Then cash will begin rebuilding in Q3 with Q4 representing the largest cash generating quarter. And with that I'll turn a call back over to the operator to open the line for questions.
Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one on a touch-tone telephone.
If you are using a speakerphone, we ask that you please pick up the handset before pressing the keys.
To withdraw your questions, you may press star and two. We also ask that in the interest of time, you please limit yourselves to one question and a single follow-up. Yes, we'll see what we do.
At this time, we'll pause momentarily to assemble our roster.
Our first question today comes from Aaron Gray from Alliance Global Partners. Please go ahead with your question. Hey, good evening and thank you for the questions. So first one for me, I want to ask a high level one. In the past we've spoken towards a balance of market share and top line growth.
to drive market share gains, particularly from more of a wholesale perspective as these states start to normalize. And what it gets you more comfortable doing that just given the current dynamics. Thanks.
I will give a macro picture and I'll hand over to Matt to see if he runs the business day-to-day. What we've done is we've just made an alignment given market circumstances to focus right now on building up our margins in order to generate cash. Cash is important in the current environment. As we said, we intend to finish the year with $50-$60 million of free cash after all the years.
what are relatively heavy obligations during this year on both tax and some of the acquisitions we've made. So we think that's a good result of getting to that mid-25 level. However, as I started the call today, we're really focused on growth and the growth opportunities for curly going into 24, 25, and 26 are quite substantial.
significant capex that we're making this year and to the tune of seven million dollars really focusing primarily on our European assets but also continuing to build out in those markets like Arizona and Florida and others where we have significant market share where we feel we can grow our market share further. I don't know if you want to add to that.
Yeah, so, you know, specifically on the wholesale side, you know, we're certainly focused on some of our key markets where we are seeing new doors open, specifically New Jersey and Illinois and, you know, really focused on capitalizing that on those opportunities and, you know, continue to be focused on rounding out.
you know, namely Massachusetts. Massachusetts is a market that's got very oversupplied, but we're now seeing some really strong opportunities. When we have our grassroots flower, when that hits the menu, it's sold out in a matter of hours. So, seeing some real opportunities to kind of ramp up into that. Also seeing markets like Missouri that has been a great success story and we just see...
huge wholesale opportunity in the Missouri market as that continues to grow into a billion dollar market. Okay, great, thanks for that, Kyler. And quick follow up for me just in terms of New York Rakes. So I know you mentioned your prepared remarks. Obviously, updated Rakes came out. Seems like you're not fully satisfied. It will open some stores sooner. Still has a pretty high conversion fee, so.
you know, how do you think about, you know, the timing of when we might get some type of resolution and have they been receptive towards that? And then how big of a factor would it be to their ability to crack down on the illicit market in terms of making it appealing for your decision to then participate and pay that conversion fee to come to the New York Adultees Marketplace. Thanks.
I think that's playing a big role, that fee that they want to charge. From our perspective, there's no enforcement on the adult use market. It's going to be very difficult to pay any fee in New York with the illicit market going crazy. So we've seen some movement from the governor with new legislation regulations posted giving the regulator more rights to enforce.
Frankly, we thought they had them from the very beginning anyway, we still do, and it's really a question of whether or not they're prepared to do that. The one good news is, is at least on the East Coast, what we've seen is once the adult use market gets going, the legal adult use market, once there's a significant amount of penetration with good quality stores and good quality products.
you do start seeing people migrating over to the legitimate market for a whole host of reasons, both the fact that they don't want to break the law, but more importantly, they want to have products that can be tested. You probably all saw recently, you know, there's been articles about cannabis out there being laced with fentanyl. You're not going to find that in regulated stores. And so I do think that the more we see unfortunate things like that, you will see people migrating to the stores.
Regarding the negotiation, yes, we're not pleased at the moment because the state isn't even fulfilling their legal obligations of the law that they passed. And so all we're asking the state to do is to actually abide by the laws that were passed in the state, you know, two years ago when the adult abuse program was originally approved. And that's where we're having our issues. But we are making progress. We're negotiating with them. They've already made some moves here.
When they publish the rules as you know, those rules are now in comment period so we will be in negotiations with the state We hope over the next month or so that we will come out with a program that we think hopefully Between the state and ourselves that's equitable addresses the issues The state has addresses those issues that we have and will let us get into the market here In the fourth quarter the state New York needs wholesalers
I think that the state really needs companies like Curaleaf to get their products on the shelves because the quality of the products on the shelves today Is very very low because it's largely being grown in outdoor hemp farms And so it doesn't meet the criteria that the customers want and the state wants it So I think there's impetus and the set up on both sides to try to get the program launched But it's a process and we're going through that process now. And as I said in the call we do hope that
inventory plan for the year. You already know the drivers of the increase in the first quarter. I just want to make sure that is the first quarter going to be the peak for those inventory levels? And then on taxes payable, last year I think your growth taxes were about – your payments were about $108 million and your net taxes were around $60 million with the deferrals. So those amounts look similar this year.
Yeah, Matt, thanks. This is Ed. The latter part of your question is yes, and the first part of your question is also yes. With the inventory levels are at their highest at the end of the first quarter, we believe, and will expect to unlock upwards of $40 million of working capital lift just from our inventory by the end of the year.
and we're already seeing those results.
And assuming that the ballot initiative in Florida passes the Supreme Court review and will be on the ballot in 2024, what are you doing today or preparing to do to work in concert with the other operators in the state to build the support for that to pass? I know that one operator funded the entire signature campaign and...
I guess I'm a little concerned that if there isn't more of a group effort, you all might not learn the lesson that it should be a coordinated effort until it fails on election day. So you noted the leadership you're providing at the federal level and the expense around that. What are you doing to further this and make sure that it gets through in Florida? Well, I think, Matt, I'll start and I'll let Matt add to it. Obviously, we are very, very for adult use launch in Florida.
Curaleaf has historically taken the brunt of a lot of the lobbying, not only at the federal level, but a lot of the state levels, and our expenditures run very, very high compared to other companies. Obviously, Trulip is the largest operator in Florida that's taken the mantle in Florida.
But we are definitely in coordination in terms of our support, in terms of getting signatures to our stores. We are very supportive of everything that Kim is doing, but we kind of feel that we've born, at least from a financial perspective, that we have done a lot around the country. And if you add up everything we've done at state levels, whether it be New Jersey, New York, and other places, we're leading in New York.
I think the industry, there's some players that are taking the mantle in one location, others in another location. But we are very, very supportive of everything that she's been doing and we'll continue to support it through whatever means we can. Financially, our focus has been federal and other states.
Okay, thank you. Our next question comes from Scott Fortune from Roth and KAM. Please go ahead with your question.
Yeah, good afternoon and thanks for the questions. I appreciate the color on the international side for us, but I just wanted to get a sense for kind of that segment, the emphasis there, and how much of that is spending for CAPEX, you know, you have a $70 million budget in CAPEX for the year, but how, kind of, step us through the CAPEX need to build that out ahead of, you know, primarily the 24-year
a transaction in Portugal to increase our capacity on the particularly on the drying and processing side because we have to be EUGMT certified. So we are about to do something in that space from us.
And we also just literally this week signed a long-term agreement, a multi-year agreement with one of the largest providers of EUGMP certified flower coming into Europe now and we signed that on an exclusive basis. So there will be, you know, that will help us dramatically. We'll actually create a shortage for other players because up until now they've been
supplying many of the players, but we sort of took the initiative to sign a deal with them. So that way at least over the next 24 months while we continue to build out our facilities in Portugal, we have supplied enough flour and product on a about a 50-50 basis where we'll be providing about 50% of the product.
The numbers could make that much bigger, but we're anticipating that a three to five We're trying to be conservative percent increase and are your and our UK business continues to grow it You know over a hundred percent per year every year. So that's continuing to accelerate as well so we feel like right now we have the product supply either be through our contracts or through
our facilities in Portugal to be able to supply the market. Okay. Just to follow up on that, the key is in the access. There seems to be the demand there. From a medical, you get prescription and you have to see a specialist to get that reimbursed. But you're saying the steps that they're taking from telehealth.
that you're going to be able to have more doctors with that education now to start prescribing, you know, in a sense, a pseudo-rec for the medical side. You can't step up to those two. Yeah, the amount of doctors that are going to be prescribing is going to, you know, quintuple compared to what it is now. But more importantly, I think that there was a couple hundred thousand patients that were diagnosed with the COVID-19 vaccine.
that got rejected by the program because of the restrictions on the program today. Those restrictions are being lifted.
So there's only 300,000 patients period. Those restrictions will be lifted. So even without further marketing or awareness, you're gonna get almost a doubling overnight because of all the people that have been rejected by the program that obviously went to the illicit market because of the difficulty in getting a prescription in Germany today.
So we're very confident that between the increase in doctors and telemedicine, Erthol will be fully digital. You won't need physical documents anymore. And there are several companies that are already up and going, like AlgiaCare in Germany, that are already operational today on the basis of what the government is regulating.
very very difficult to get a lot of product failures etc which is why we've really focused the last two years especially the last six months since we since legislation started to be discussed in making sure we have the supply chain to meet that demand. Those companies that are going to have the product are going to be the ones that are going to win and and what we're really doing is trying to make sure our brand is front and center.
so that as we move into adult use in 26 and 27, our brand will be very well recognized in that very large market. Thanks, I really appreciate the color. I will jump into the queue. Our next question comes from Yu-Won Kang from Canaccord Genuity. Please go ahead with your question.
Yeah, good evening everyone. This is Yewon Kang on for Nap Bottom. Thank you for taking my question. I just wanted to start talking about with the results of this quarter. On a sequential basis wholesale revenues came down by 8%. And now that the wholesale operations have been pulled out of some of the unprobable states like California, Colorado and Oregon.
I guess could you comment on which markets contributed to the overall sequential decline? And if the trend of declining wholesale revenues continue, do you foresee more pullbacks from additional states in the future? So as it relates to the wholesale business, as we've talked about previously, one of our top focuses is...
vertical mix in our retail stores and really working behind the strength of our retail business, which we continue to see really positive signs in terms of traffic and different trends. So that continues to be a top priority in an environment where many of the wholesale markets are still working through oversupply in a bunch of other markets.
starting to happen in some of our strongest markets, places like New Jersey and Illinois as two examples. You know we're also looking forward to some catalysts on the horizon with Maryland and you know really exciting wholesale opportunities as that adult use market comes online on July 1st and continued opportunities in places like Connecticut as well with that adult use market that continues to ramp up.
Okay, if I could just follow up to that question with regards to the margins, especially with the balance of the year. In relation to the gross annualized run rate savings of $60 million, could you speak on the split of this number between SG&E and COGS? I guess just wanted to...
gain some insight there in terms of how we should think about the margins going forward for the rest of 2023.
Yeah, I'll take that. Thank you for the question. Look, there's certainly savings above the line and below the line. I think you should think about it in terms of probably more like one-third above, two-thirds below, give or take, in terms of sort of the breakdown of where the cost savings are coming from.
And that's just on a run rate basis, right? We obviously have additional expenses associated with the acquisitions that we brought on.
Thank you for the caller. I will jump back into the queue. Thank you.
And our next question comes from Andrew from SPEAPO-GMP. Please go ahead with your question. Hi, good evening. Thanks for taking my question. Maybe continuing on the margin, focusing on gross margin here, you've got a few moving parts, the inventory monetization, cost savings. Can you use the
maybe more sales in higher margin states. So wondering if you can kind of compartmentalize this or maybe discuss, you know, how should we think about this? Could your cost savings potentially offset the...
the potential any potential pressure from from inventory monetization and And then you know more sales in Illinois and New Jersey higher margin states
could give you that margin lift? Or is there another way that we should be thinking about this and then maybe more specifically about Illinois and New Jersey, if you could talk about how many new stores do you think could open this year? Yeah, let me take the first part and I'll let Matt answer the part around the store growth.
that vertical mix upsetting obviously the wholesale softness. We're also investing part of the capex that we mentioned in automation, right? So there's a lot of automation coming on board that's going to continue to unlock gross profit above the line. So some mitigating certain, obviously offsetting things there that will improve.
as the year goes on, but really it's a vertical mixed story and our geographic diversity of footprint that allows us to do that. But I'll let Matt answer the second part. And the second part, look, in Illinois out of 185 new licenses, I think there's approximately 20 that have gotten open so far. So there's many more that are in various stages. Obviously the delays from...
you know, working on building out locations and, you know, finishing doing that pre-work. So I would expect, you know, continue to see that ramp up as we as we get into the year and, you know, those are many people that we've been working on discussing supply and, you know, kind of being able to make sure that we can, you know, service their shelves as they get open. So, you know, I do anticipate we're going to see, you know, quite a bit of new things.
number and thinking about how that could translate to a net number considering that you're still investing in growth markets, you still have some cost that you're taking on from new acquisitions or recent acquisitions.
I'm just wondering how should we think about, for example, the SG&A line, where we can see cost savings there. Is there potentially any color that you can provide on synergies from...
from acquisitions that you've recently closed? Yeah, I mean, Andrew, again, on the SG&A line, you should see the improvement that's already happened in Q1, and that's going to continue to build. I mean, we levered our SG&A by about 110 basis points, improved it over the fourth quarter sequentially. So you can see it start to flow through.
I'm sorry year over year not sequential I apologize year over year, but you could see it starting to flow through Already and that's going to continue to build. You know, obviously we didn't have the full impact of that in the first quarter as Some of the cuts that we undertook really was you know towards the end of January beginning of February And so you're going to see a full quarter benefit in Q2 and on so you know what the deal
we expect to continue to improve on those. Thanks for that, I'll get back in the queue. Thanks Andrew. Once again if you would like to ask a question please press star and one.
Our next question comes from Eric Deloyer from Craig Hallam Capital Group. Please go ahead with your question. Great, thank you for taking my questions. I'll try another question on the margins first. Just as we think about EBITDA margins expanding throughout the year and ending the year at that mid-20s, I'm just wondering if there's any...
Mark is driving that, that would be helpful. Thanks.
I think it runs with a gamut, especially kind of what we call our tier one markets, where as we continue to leverage our ability to showcase our own products in our stores, markets like Arizona where we have 16 high performing locations, and a lot of opportunity to continue to increase vertical mix.
as we continue to focus on that piece, along with identifying operating efficiencies. I mean, those are the markets that we are most investing in automation, where we've really centralized operations and have found more cost savings and with more to come, and that we're really driving a lot of margin.
As you utilize that to help plan inventory and whatnot, I'm just wondering how you're expecting your mix of premium versus value products to trend throughout the rest of the year. Can you McGregor make a share in your future connections?
The ERP project's ongoing. We're continuing to roll that out really in phases. As we mentioned, it's the first ERP that's live with each of the seed to sale systems. So a lot of work has gone into and continues to go into that piece. So we're continuing to roll that out here. It's going to continue over the next three quarters.
a huge focus on the value segment. People continuing to trade down and looking for value offerings and that's why we're seeing really positive results with the fine brand that we've launched and continue to launch in a number of different states. Select Essentials, which is our more value-oriented vape offering, which has been one of our most successful products in our portfolio. So continued attention on the value offering, which we're seeing consumers want to continue
to expand into those and that premium consumer that is willing to pay kind of a very strong price as long as the quality is there. So I think both are opportunities on each end of the barbell for us to continue to build on. Thank you.
those and that premium consumer that is willing to pay a very strong price as long as the quality is there. So I think both are opportunities on each end of the barbell for us to continue to build on. All righty. Thank you very much.
And our next question comes from Mike Regan from – actually, with that we'll be concluding today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.
Thank you everybody for listening on the call and we'll look forward to speaking to you at the end of the second quarter.
With that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your line.