Q2 2023 Curaleaf Holdings Inc Earnings Call
[music].
Good day.
And welcome to the <unk> second quarter 2023 earnings Conference call.
All participants will be in a listen only mode and should you need any assistance. Please like doing conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note that this event is being recorded today I would now like to turn the conference over to Camilo Lyon Chief Investment Officer. Please go ahead.
Good afternoon, everyone and welcome to <unk> Holdings second quarter 2023 conference call. Today, we're joined by Executive Chairman, Boris Jordan, Chief Executive Officer, Matt, Darren and Chief Financial Officer at Kramer.
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 involves estimates projections plans goals forecasts and assumptions, including the successful integration of acquisitions and are subject to risks and uncertainties.
That could cause actual results or outcomes to differ materially from those expressed in the forward looking statements 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 release on SEDAR and the Canadian Securities Exchange.
During today's conference call in order to provide greater transparency regarding <unk> operating performance, we'll 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 U S. GAAP any non-GAAP financial measures present.
It should not be considered to be an alternative to financial measures required by U S. GAAP should not be considered measures of chili's liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies.
Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U S. GAAP financial measures 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 at <unk> Dot com with that I'll turn the call over to executive Chairman.
Boris Jordan Force.
Thanks, Camilo good afternoon, everyone and thank you for joining us to discuss our second quarter 2023 results in the second quarter, we delivered revenue of $339 million, that's up 4% compared to last year's revenue of $327 million adjusted gross margin was 44%, which was negatively impacted by intentional.
Inventory reduction efforts pricing pressure in Florida, and New York and 80 basis points of additional expenses, we reclassified into Cogs from SG&A. Adjusted EBITDA margin was 21%. We ended the second quarter was $85 million in cash on the balance sheet and generated $8 million in free cash flow from continuing operations, that's after making tax.
Interest and acquisition related payments that totaled $77 million. My vision has always been to build purely for long term global growth by ensuring the company was positioned to capture the significant demand the cannabis industry was poised to garner over the past four years the strategy drove a rapid expansion of infrastructure.
Across the country, and then to Europe in anticipation of forthcoming growth catalysts that would unlock healthy demand many of which materialized and some of which have been delayed due to politically motivated regulatory bodies disinterested in the development of the free market in response to these delays we have taken steps to aggressively.
Inventory idle excess capacity and close older facilities actions that at the moment are weighing on our margins, but are necessary in today's normalized growth environment.
That said some of our current capacity is levered to the markets in which we anticipate significant catalysts will yield step function growth, Florida, New York, Pennsylvania, Germany, I'm confident we will scale into our footprint in these states and Europe as the conversions to adult use or expanded medical consumption unfold.
Over the next several quarters.
We are also cognizant of the need to balance investment and cash generation with the majority of our U S. Cultivation investments largely completed we took actions in the quarter to reduce our inventory and idle excess capacity to this point the story in quarter. Two was one of controlling the controllable we successfully prioritized our brand portfolio.
Dispensaries as evidenced by our 65% vertical mix, we also reduced our inventory by 6% from quarter. One as we intentionally focused on cash generation at the expense of near term margins a step up in the promotional landscape in key states like Florida, and New York also had an impact on our margins. Despite this price.
Compression, we continue to manage our expenses tightly waning in cost and generating 300 basis points of year over year expense leverage.
Rest assured we are scrutinizing, all aspects of our business and making the necessary improvements to create a global platform that will deliver significant operation operational leverage when not if the many growth catalysts, we see turn off thus.
Thus far in 2023, we have eliminated $80 million of annualized expenses double our initial 40 million goal, while reducing inventory by $17 million from Q1, and we are adopting cogs, reducing automation and our tier one facilities that said price compression has been the only reliable mechanism for <unk>.
Clearing excess supply this year I'm encouraged by the amount of excess inventory. The industry has worked down and supply that has exited the market. However, we are likely to see price compression remain a recurring theme through the end of year. Despite modest green shoots we see forming in select markets.
Our international segment continued to produce impressive growth as evidenced by the 93% year over year increase in quarter. Two revenue Europe is growing quickly, but still represents a continued 150 basis point drag on our EBITDA margins.
International was once again driven by our two key markets the U K and Germany, the UK experienced robust growth of 76%. Despite a patient acquisition process that remains lengthy and cumbersome purely has a dominant share position in the U K and we are well positioned to continue organically growing the market through education and a.
Nation and technology with a population of 67 million people and modest penetration the U K promises to be a significant contributor to our business over the coming years.
In Germany, we are leading with our core 20 brand, we're preparing for the country's medical market expansion under the pillar one proposal all indications from the German health Minister appointed expanded program commencing in early 2024 in fact yesterday, we got more positive news out of Germany that stated that the proposed legislation will be poor.
Added to the cabinet on August 16, with the final vote in the Bundestag slated for the fall.
Although one would significantly expand patient access to medical cannabis by removing it from the narcotics list and allowing telemedicine prescriptions simply put the parnell that exists today in the patient journey would effectively be removed.
We are there and ready to capitalize on this liberalization of demand.
Recall Germany's population is equivalent to four times that of Florida with the current patient count roughly just 200000 people under pillar one we estimate the patient count would conservatively quintuple to 1 million patients, although historical medical market adoption rates suggest total patients could be closer to $3 million or 4%.
Of the 84 million person population.
There seems to be some confusion around the impact of social clubs.
We will have on the German market in our view social clubs do not present, a risk to the medical market as they will be nonprofit have highly restrictive zoning laws and have a limited number of members are allowed to join also the cultivation of overall operating cost would be to prohibited.
Making them economically unviable, most cannabis consumers will you use the established network of 20000, plus pharmacies to access their cannabis prescriptions or rely on delivery something social clubs cannot do.
The many growth levers, we're anticipating in the U S, Germany could very well be the single largest growth driver in our business for the next three to five years, one that is exclusive to purely.
Among the U S msos, while the opportunity in the UK and Germany is massive given the combined population of 150 million people. What's more exciting is the expectation that other EU nations will follow Germany's lead putting cannabis on a globally accepted trajectory in fact, we've already made our first wholesale shipment.
Poland, a country with a population of 40 million people.
Federally in the U S. We continue to work hard and devote resources to getting safe over the finish line. It is encouraging to hear Senator schumer called it a priority and I expect positive movement to resume in September when Congress returns to the session on.
And rescheduling, we see an encouraging path for Canada to get to schedule III, even despite hurdles that remain with getting the DEA onboard.
The next nine to 12 months could be very exciting for the cannabis industry. However, we are not running our business on the assumption that anything will change.
We continue to evaluate a potential PSX uplifting and never had constructive conversations with the Canadian regulators to this effect.
While in parallel taking the necessary steps to prepare for this potential move we have been studying the benefits of such a move and are encouraged by the recent actions taken by several U S financial institutions to open up custody solutions and trading for other tsi explicit cannabis operator, we believe a move from a venture exchange like the CSC to a major exchange.
The PSX would benefit <unk> shareholders by broadening our shareholder base to include global institutional investors that require greater liquidity, thus, providing increased stability and less volatility in our share price. We will have more updates on this topic over the coming months.
Finally regarding our outlook, we are reiterating our low to mid single digit revenue.
Growth outlook and annual EBITDA margin of mid twenties, however, given the heightened level of promotions in a few markets. We now expect to come in towards the lower end of the EBITDA range.
With that I'll turn the call over to CEO , Matt deck that.
Thanks Boris.
I have a clear and singular vision of solidifying <unk> position as the global leader in Canada.
In the second quarter, we made solid progress towards these objectives.
We grew revenue, 4%, while our expense base shrunk by 7%.
We increased our vertical mix, the 65% and we reduced our inventory by $17 million versus the first quarter.
That said, we had two distinct opportunities in the quarter, we are actively addressing wholesale and Florida.
Wholesale contracted 4% sequentially due to our intentional actions to reduce inventory and reduced sales to partners with increased credit risks as evidenced by our stable account receivables.
Also regulatory delays that continue impacting new store openings in Illinois.
New Jersey, and New York have not helped expand the market between these three states. There are roughly 80, new stores that have opened this year for a combined population of 42 million people.
While we are having success selling into many of these independents the pace of openings needs to accelerate.
Regardless of the regulators inaction wholesale remains a priority and one we can get back on track quickly.
We have reorganized our sales team and with the benefit of an expanded product portfolio focused on quality. We are confident we will return wholesale back to growth in the back half of the year.
Second price.
Price compression in Florida accelerated throughout the quarter, thus impacting our sales and margins disproportionately.
While Florida is an important and highly productive state for US we chose not to match the discounts we saw emerge in the market dollar for dollar.
Rather we have taken proactive measures to organically increase our store traffic through an expanded product assortment and targeted marketing initiatives.
While we're only one month into the third quarter I am pleased to report that these measures are yielding positive results.
Laura is a key growth driver now and when it converts to adult use and we prefer winning customers on lasting drivers of demand and loyalty such as quality innovation and customer service.
Yeah.
Innovating around our brand and product portfolio remains a priority and distinguish here.
At the end of the quarter, we launched bricks are revolutionary two gram based into six markets, including New York, Florida, Arizona and Maryland.
Rick had been in market for five weeks and sales that far exceeded our initial targets without doubt brick has been our most successful product launch to date.
We are rapidly increasing supply to accommodate robust retail demand and wholesale reorders.
What's more brick has been incremental to our select baseline.
Over the coming months, we are bringing brick to four more states.
James Our new Edibles line launched in Arizona, Florida, New Jersey, with an assortment of Gummies Tarzan chocolates jams at now in three states with 10 more coming in short order and proving very popular with our customers.
In our premium flower line grassroots, we launched diamond and fees pre rolled in Arizona, Illinois, Maryland, and the Nevada, a favorite among the season candidates enthusiasts.
We also just launched our first liquid diamond based in Florida to our VIP customers and tomorrow. It will be available in all of our Florida stores.
This is our proprietary water based extraction base for our premium focused customer that we've been working on for some time and the early reception has been strong.
These innovations serve as the lead product, we will leverage not just across our domestic markets, but also our international ones.
Consumer demand remains robust, particularly for <unk> products in our stores.
Retail transactions were up 27% year over year underscoring the efficiency of our dispensaries aided by leveraging technology and our mobile app to provide a best in class customer experience.
This traffic strength was partially offset by average order value that were down 14%.
While we continue to feel price compression to varying degrees by market with some states like Florida worse than others.
We believe the clearing of supply is healthy and necessary in fact, some markets have shown signs of stabilization.
Separately, we've been very pleased with both our Connecticut, and Maryland adult use conversions this year.
In Connecticut, we had two of our four stores open for adult use during the quarter with our third location in Groton. The began adult use sales last month.
Our fourth location in Manchester got approved for adult use last week.
We continue to see a solid ramp in demand as consumer awareness grows and expect a robust contribution from Connecticut through year end.
I'd be remiss, if I didn't congratulate our team members that made the Maryland law highly successful.
Not only did our operations team execute to meet surging demand of wholesale orders prior to the July one adult use launch date.
But our retail and marketing teams created strong activations in our four stores, which had long lines in healthy demand throughout opening weekend far surpassing our lofty sales expectations.
We continue to see strong demand in this market and expect it will be a solid contributor to the business for the balance of the year.
On the international front, we are laser focused on ensuring we are prepared for the massive market expansion slated to come next year in Germany.
Brewster strategic agreements, we have secured ample supply of high quality high potency THC strains.
In the U K, we will be the first to launch gummies this quarter with names coming shortly thereafter.
We are leveraging our U S marketing and R&D assets in Europe to accelerate brand awareness.
Heading into the second half of the year, it's clear we're doing more with less.
We've taken aggressive actions to rightsize, our inventory our expense base, our head count and our facilities.
Specifically, we've reduced annualized payroll hours by 13% an increase of 300 basis points versus our prior reduction earlier this year.
We are also focused on driving Cogs down through automation.
We've already seen a jump in productivity and efficiency metrics in the first three states, where we have installed more advanced automation boding well for the next round of states coming online next month.
Overall, we expect to see the Cogs benefit begin to materialize towards the end of this year and more fully in 2024 as we work through existing inventory.
As Boris said, we are controlling the controllable.
The investments we are making in the UK and Germany, coupled with state catalysts from Florida, Pennsylvania, New York and more recently, Ohio will provide us an unparalleled advantage as we build leverage and scale our global candidates platform.
There is certainly more work to be done, but I am excited about what our future holds.
We are not running our business based on expectations from Washington, but I do believe that when seismic growth catalysts like Germany, rescheduling and safe unlock the potential of this industry.
<unk> will be incredibly well positioned to lead globally.
With that I'll turn the call over to our CFO Ed <unk> Ed.
Thank you Matt today, I'll review, our second quarter 'twenty three results.
Total revenue for the second quarter was 339 million, representing a year over year increase of 4%.
Both was driven by strength in Nevada, Arizona, Connecticut, New Jersey, and Massachusetts, as well as a 93% growth in our international segment.
By channel retail revenue was $277 million compared to $251 million in the second quarter of 2022.
10% year over year.
Wholesale revenue decreased 20% year over year to $60 million and represented 18% of total revenue.
This decrease was in line with our expectations as we prioritize sales of our own product portfolio worked down inventory as we spoke about in our last call and reduced sales to accounts with increased credit risk.
Looking at our customer metrics transactions remained healthy in the second quarter and were up 3% sequentially from Q1, partially offset by a two 6% decline in average order value.
Our second quarter gross profit was $147 million, resulting in a 43% gross margin.
Adjusted gross profit was $150 million or 44%.
Sequentially Q2, adjusted gross margin decreased 360 basis points compared to the first quarter due to the following factors.
Price compression in Florida, and New York and higher discounts around 420 <unk>.
Intentional actions to reduce inventory through a reduction of our cultivation and production utilization in New Jersey, Florida and Illinois.
And 80 basis points of reclassified expenses into Cogs.
These factors were partially offset by a 510 basis point sequential improvement in our vertical mix.
We believe the second quarter was the low point on gross margin with modest improvement expected as the year progresses, setting us up for a strong rebound in 2024.
SG&A expenses were $110 million in the second quarter and increased $2 million from the year ago period core SG&A was $96 million.
A decrease of $7 million from the prior year.
The year over year decrease in our core SG&A, primarily reflect tight expense controls and henkel and head count reductions, partially offset by expenses associated with the addition of <unk> for 'twenty pharma and new store openings.
SG&A as a percentage of revenue was 32, 5% in the second quarter down 40 basis points compared to the year ago period, our second quarter SG&A included approximately $14 million of add backs versus $5 million in the prior year with increased driven by consulting and legal fees associated with our GAAP conversion.
And expenses associated with acquisitions.
Our core SG&A rate in Q2 was 28% a decrease of 300 basis points year over year due to a further acceleration of expense cuts we began implementing at the start of the year.
Second quarter net loss from continuing operations was $69 million net loss per share from continuing operations was 10 sets.
Adjusted EBITDA for the second quarter was $70 million or 21% compared to $87 million or 20% last year, a 20% decrease resulting in an eight EBITDA margin of 21% and 27% respectively.
Sequentially, our adjusted EBITDA margin decreased by 100 basis points from Q1 due to gross margin contraction, partially offset by expense leverage.
Our International segment was 150 basis point drag on our EBITDA margins as we invest.
Ahead of our future growth catalysts in the UK and Germany.
Turning to our balance sheet and cash flow.
We ended the quarter with cash and cash equivalents of $85 million.
Inventory decreased $17 million or 6% compared to the first quarter. We will continue to stay laser focused on managing down our inventory balance through the year and progressing toward our goal of reaching 15% of sales by year end.
As previously mentioned, we held our accounts receivable stable from Q1 due to a concerted effort to reduce credit risk from select wholesale partners net capital expenditures in the quarter were $9 million.
This included an $8 million contribution from asset sales associated with our discontinued operations consistent with our prior outlook. We expect we expect capex spend will slow in the second half of the year and continue to anticipate spending approximately $70 million in capital projects. This year.
Our.
Ending debt was $574 million net of unamortized debt discount of which 83% is not due until December 2026, we ended the second quarter with 719 million fully diluted shares outstanding.
We generated $13 million of cash flow from operations, excluding a $3 million use of cash from just from our discontinued operations cash flow from continuing operations was $16 million in the quarter and $37 million year to date free.
Free cash flow from continuing operations during the quarter was $8 million after having made.
Tax interest and acquisition related payments that totaled $77 million.
We remain comfortable with our ability to fund our growth initiatives and pay all of our obligations. We continue to expect our cash balances will build through the remainder of the year consistent with the cadence we discussed last quarter.
With respect to guidance, we are reiterating our revenue guidance of low to mid single digit revenue growth compared to $1 3 billion last year, which excludes discontinued operations.
Given the promotional backdrop in some states, we expect EBITDA margins to come in at the lower end of our mid 20% guidance range, we still expect to generate $100 million in operating cash flow and the free cash flow positive with a precise amount dependent on cost needed to.
<unk> the German market expansion coming early next year.
And with that I'll turn the call back to the operator to open the line for questions.
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.
Before we begin we also ask that you. Please limit yourself to only one question on today's call.
At this time, we will take our first question, which will come from Aaron Grey with Alliance Global Partners. Please go ahead.
Okay.
Hi, good evening and thank you very much for the question Tonight.
So my question wanted to go a little bit towards the guidance specifically on the EBITDA. So the lower end of mid twenties, you'll just as we look at it towards the first half you did about 21% EBITDA margin. So even if we get to the lower end of mid you know call it 23% still implies a nice.
Chicken EBIT margin in the back half you talked about gross margins being up modestly in two ways. So if you could help us in terms of SG&A expectations, and maybe just give them more color in terms of the gross margin expectations within that so we can get to that.
Lower end of the mid twenties for the full year and what that implies for the back half. Thank you.
Aaron This is Ed I'll take that question.
Look we did mentioned the margins are going to expand we have underutilization that impacted the second quarter. It will continue to impact us to some extent, we do expect our wholesale sales to rebound and thereby increasing our throughput on.
On that end of the margin curve, our SG&A will continue to be Levered, we've made additional cuts.
To our expense structure as I mentioned in my prepared remarks, and some of that will be flowing through our through our.
Cogs structure as well so we believe where the sales are going to continue to ramp in the third and the fourth quarter.
As we're sort of reiterated that guidance.
We have enough leverage coming out of the organization too.
Yes.
Get to the lower end of the range now obviously dependent on where our sales sales fall in and what market conditions are before where we are today, we believe that trajectory is achievable.
And our next question will come from Matt Mcginley with Needham. Please go ahead with your question.
Thank you so excluding that the reclassified expense and gross margin how much of that three point decline was driven by price compression versus that intentional efforts to reduce inventory and how long do you expect that pressure from the inventory reduction the lap and then with that reclassify I think it was 80 basis points, but was that the first and second quarter all Camden.
The second quarter. So that headwind is this naturally 40 basis points into the third and fourth does that.
And I'm thinking about that right or is that an 80 basis point headwind from that reclassification in the back half as well.
Hey, Matt said.
Sure Let me take the second part first your assessment is exactly right. It was the first half of the year through the second quarter 40 bps a quarter is about the right way to think about it.
Pick up on the.
Gross margin erosion listen there was.
Multiple areas right I mean price compression certainly had a large impact on now given Florida is our single biggest contribution.
To the business.
And you did have capacity utilization that will persist to some extent through the balance of the year, though it will be offset by some of the firming of the pricing that we're seeing in the increased to growth in wholesale.
It's probably somewhat of a balanced.
About balanced.
The decline in margin, though I would say pricing.
It had an outsized impact to it and then we also obviously decreased inventory health.
In a healthy manner for the quarter by.
By $17 million.
Is that is that production slowed down but that obviously had an effect.
And our next question will come from Russell Stanley with Beacon Securities. Please go ahead.
Good afternoon, and thanks for taking my question, maybe if I could around automation you mentioned, the three states, where you're already seeing.
Benefits there understanding the margin benefits will take some time to time to see but can you elaborate I guess on what you've done in which markets and which markets are.
Prioritize next for similar upgrades.
Hey, Russell it's Matt.
So we're certainly prioritizing our tier one markets as we call them, where were really heavily investing in automation led by Florida, but some of our other large markets as well, including New Jersey, and Arizona and Illinois. So so those are some of the markets that we're really investing heavily in what I would.
All of our advanced automation and we've had various aspects of our supply chain that have been automated but now with some of the advancements that are available in terms of whether it's David filling or edibles manufacturing and packaging of various varieties, we're seeing a lot of opportunity to continue to get more efficient.
To bring down cost increase efficiencies and make automation investments, where the rois in months not years. So we view that as very good capital investments to make and we're continuing to roll that out with a real focus on our higher volume states.
And our next question will come from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good evening, everyone. Thanks for taking all these questions of mine just relates to the potential for incremental capital if needed. If I'm. Just wondering if you can give any sort of indication whether it.
You know through sales and leasebacks or whether it's through increased delays and 280 E payments at the federal level if needed what are the avenues that you think incremental capital can be accessed if we this environment in the NSO.
Operator world sticks around for longer than anyone anticipated.
Well, let me let me take that at the moment, we don't foresee any reason to raise capital obviously, everyone knows that we may have to do a small if we decide.
He had to do a uplift on the TSS, we may have to do a mandatory small.
As for that similar to what <unk> had to do but there is no intention at the moment to do any significant capital raises we feel that capital build in the second half of the U S more than adequate to pay our bills.
For the company and we feel very strong as we're going into next year that will continue on that trajectory as all of the steps that Matt and Ed laid out continued to operate obviously that doesn't leave us any substantial capital to go in and do any kind of significant M&A and given where prices market capsular here, it's not unless.
It's a very very attractive share deal we wouldn't do it so.
For the Capex that we have requirements on capex requirements, but that service that we have right now we feel very comfortable with the business and its trajectory such that we don't need to raise any additional capital.
However, we have a constant the offers for capital both from our lenders.
And from obviously equity investors at these levels, but we have refrained from doing that we do have a around the $50 million revolving credit facility thats available to us to accept that we need it we havent had the tablet.
And our next question will come from Scott Fortune with Roth M. Kim. Please go ahead.
Yes, good afternoon, thanks for the questions.
Can you dig a little bit deeper on the pricing obviously different state by state.
What are you hearing mixed out there where some were starting to see stabilization, but for the most part of it. It sounds like you guys prepared remarks, youll see price compression throughout the year here.
And then it kind of more digging into really Florida, specifically, there the discounting and promoting going on there and there are a lot of the.
I mean credit spreads to come from the inventory reductions.
Or kind of distressed operators are just pure supply this kind of.
Such as through kind of.
The pricing side, if you're seeing any stabilization and more specifically in the Florida market that'd be great.
Hey, Scott it's Matt.
So look I would say on a national level at a high level, we are definitely seeing firming in some markets. So we're seeing stabilization prices are not going down further in many markets.
But I think it's too early to say that they are rebounding.
Two heavily but we are definitely seeing firming in a lot of different markets, Florida has been a market that we have continued to see increased promotional activity as you've had more players come online more supply into the market and a lot more dispensaries that have opened up for that medical market in advance of adult use so we have.
Seeing a lot of aggressive promotional activity.
Across the board and as we said, we really held the line on our promotions activity there.
In Florida, but that is a dynamic that were seeing and theres. Some other markets as well I would say that.
Certainly there is there still some.
Of our supply that needs to get worked through but we think that's healthy and that's all underway and we're going to hopefully continue to see it.
Stabilization in rebounding occur.
And our next question will come from Fred recall Gomez with <unk> capital markets. Please go ahead.
Hi, Good evening. Thanks for taking my question just on Germany, I think you mentioned a potential buybacks increase there in that market with the new regulations. So how fast do you think that that ramp.
Ramps can occur.
The new legislation.
In the second half thank you.
That's a very good question.
We don't think that there's an overnight thing we do think the program.
Most likely long term time Germans tend to hold to their schedules and so far they've been ahead of schedule on this launch. So we do think that it will launch around.
January one we do think though that.
At least the preliminary ramp will probably take some time.
Anticipating sort of a 12 to 18 months period to move the market to what we think will be the one.
Billion dollar Mark.
And then we think it will take you know very similar to the sort of Florida ramp up will take over four years to get to the sort of four 3% to 4% penetration that we anticipate will eventually happen with the medical light model. The models are very similar I mean, there was 20000.
20000 pharmacies, so the distribution is there.
And it's already in place for the medical market.
Taking this off the narcotics list that patient journey is going to be very very easy for German patients. They won't have to go to specialized doctor that can go to their GP, which is going to make the process very very simple.
And telemedicine it'll become very simple there'll be able to issue a medical cart and medical prescription through telemedicine. So we think it will be a very similar market to Florida in terms of its development and therefore, we think it's going to develop very similar a lot and again, it's just a much bigger market with 84 million people and.
Look at the Florida market is about a $3 billion market you can imagine over a five to six year period, what the German market can become purely by over 23% share with the largest operator in that market today.
We hope to build on that over the next several months as we go into January one and the adult use right.
Sorry, the medical Rep.
And our next question will come from Thai calling with eight capital. Please go ahead.
Hi, and thanks for the question funds as for Ed Ed earlier in the Q&A you mentioned your expectation that sales and I think particularly wholesale will accelerate into Q3 and Q4.
Could you maybe elaborate on what gives you confidence in that scenario given the ongoing price compression and macro pressures on the consumer and what you see are the the key sources of that growth being.
Thanks, Matt.
It's Matt I'll take this one so look I think in Q2.
As we said in the prepared remarks, we made some intentional moves to scale back the wholesale business really prioritizing moving inventory through our vertical retail channel, where the cash conversion is the quickest and we're able to maximize margin there.
We also had concerns about the credit quality of some of the medium and smaller players that theres been some collections risks associated with that we're seeing.
Getting on the other side a bunch of that so I think thats a dynamic that we don't necessarily see persisting in the back half of the year as much and so and we are seeing real opportunities.
Whether it's the Maryland adult use launch, Connecticut increased opportunities in a number of different markets, frankly, where as we continue to round out our product and brand portfolio and launched new products.
Such as our new Edibles line jams, and a number of other things, we're seeing a lot of opportunities to grow that wholesale business. So we think there is we are at a base that we're going to really continue to.
Build on but we're also cognizant of the environment as well.
And our next question will come from Eric Dey Laurier with Craig Hallum Capital Group. Please go ahead.
Thank you for taking my question.
Mine is just I'm wondering if the EBITDA margin guidance. The updated guide here if that assumes.
Sort of stable pricing from either Q2 or current levels or if that assumes continued pressure in markets like Florida for the second half. Thank you.
I'll take that.
We are assuming pricing is somewhat stabilized at this point I think there's been a tremendous amount of compression year to date, our belief and with some of the comments have been made by board and Matt is the pricing has reached a level, where we think we can rebound from largely now that will ebb and flow between different markets, but on balance we deliver we believe.
By market.
We're baking in I should say that our pricing is going to be relatively stable.
And this concludes our question and answer session I'd like to turn the conference back over to Matt Darrin for any closing remarks.
Thanks, everyone for joining for the call today, we will look forward to speaking to you again after the third quarter. Thank you.
The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect your lines.