Q1 2024 Curaleaf Holdings Inc Earnings Call

Yes.

[music].

Speaker Change: Good day and welcome to the Cura leaf Holdings' first quarter 'twenty 'twenty four conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's presentation.

Speaker Change: Patients there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Camilo Lyon Chief Investment Officer. Please go ahead.

Camilo Russi Lyon: Good afternoon, everyone and welcome to <unk> Holdings first quarter 2024 conference call today, I'm joined by Executive Chairman, Boris Jordan, Chief Executive Officer, Matt Darin, and Chief Financial Officer, Ed Kraemer.

Camilo Russi Lyon: 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 nature involve 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 are out.

Speaker Change: Comes 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.

Speaker Change: 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 further 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 SEDAR and Edgar.

Speaker Change: During today's conference call in order to provide greater transparency regarding <unk> 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 U S GAAP and.

Any non-GAAP financial measures presented should not be considered an alternative to financial measures required by U S. GAAP should not be considered measures of purely for liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies.

Speaker Change: 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, Dr. Shirley Dot com with that I'll turn the call over to executive Chairman Boris Jordan Force.

Boris Alexis Jordan: Thank you Camilo good afternoon, everyone and thank you for joining us to discuss our first quarter results.

Boris Alexis Jordan: The decision last week by the DEA to reschedule candidates to schedule III is one of the game.

Boris Alexis Jordan: <unk> changing catalysts, we've been eagerly anticipating for nearly 10 years I believe it is long overdue change will create a seismic shift for us and the industry and we're grateful to the by the administration for moving it forward imports.

Boris Alexis Jordan: Important medical researchers the plant can finally proceed unencumbered a crucial development for consumers seeking alternatives to opioids and other pharmaceuticals. Most immediately for us of course, it means an end to the punitive to 80 E tax, which is the largest beneficiary could save us over $150 million.

Boris Alexis Jordan: 24 taxes.

Boris Alexis Jordan: But there is more work to be done to put cannabis on the same plane as other consumer products. The industry still lacks proper access to banks and credit cards seasonal service providers and established stable technology stack. All of this can be remedied its leadership in Congress moves to pass the safer banking, but the process continues to move forward.

Boris Alexis Jordan: Albeit more slowly than we would liked however, the rescheduling news strengthens the case, we're expediting safer.

Boris Alexis Jordan: On the issue of tax relief is further reviewed its legal counsel with legal counsel the basis for filing federal tax returns on grounds of section 280, <unk> of the tax code does not apply to its business subject to completing that review currently anticipates that we'll file is it normal taxpayer for 2023 and 2024.

Boris Alexis Jordan: Also anticipate amending certain prior year returns to claim refunds of excess federal income tax that was paid based upon application of section 200 <unk>.

Boris Alexis Jordan: I'd like to provide an update on custody solutions. We recently added another global custodian euroclear to our list of financial institutions or custody hour shifts euroclear as the custodian of the international investment community with be unwind Mellon State Street and now you're unclear. We have three of the top four largest custodians in the world able to.

Boris Alexis Jordan: Hold our shares this in concert with our T. S X listing makes <unk> eligible for index inclusion, specifically msci's woke up Canada as in Pts like small cap and the FTSE, Canada indices based on the parameters set by these indices. We believe we meet the necessary criteria for inclusion this leads.

Boris Alexis Jordan: Meat to our first quarter highlights we started the year off on a good note consistent with our expectations first quarter revenue grew 2% to $339 million compared to last year's first quarter revenue of $333 million.

Boris Alexis Jordan: With our facilities fully operational our first quarter gross margin improved by 120 basis points from the fourth quarter, we're making solid strides on our objective of achieving our stated 2020 for gross margin target of 50%.

Boris Alexis Jordan: Adjusted EBITDA margin was 23% representing year over year margin expansion of 40 basis points. We ended the first quarter with $105 million of cash on the balance sheet and generated operating cash from continuing operations of 46 million and free cash flow of 33 billion. We are deploying some of this cash into reducing leverage on our balance sheet and will do.

Boris Alexis Jordan: Thus our efforts in greater detail.

Boris Alexis Jordan: So the teams execution of my strategic vision has evolved from an MSL to an M. C. L. A multi country operator as the loan U S. M. C. O. This descriptor more accurately represents our global vision and business that today spans over 15 countries across the world. Our ambition is to leverage the expanding global platform.

Boris Alexis Jordan: We have created with the distribution of our brand portfolio with agents doing quarter, we will create further separation from our peers as a result of the global strategic lens through which we operate and we expect our European growth catalysts to emerge more fully in the second half of the year and into 2025.

Boris Alexis Jordan: These strategic investments have been made over the past few years are beginning to pay off in the first quarter, our international business grew 59% year over year, and 12% sequentially and remains on track to hit $800 million in revenue this year.

Boris Alexis Jordan: We are seeing solid gains in our key markets of the UK, Germany and Poland.

Boris Alexis Jordan: In the UK, we are benefiting from strong patient reception of our recently introduced edibles and Vapes and Poland. We acquired Canfor med a highly regarded pharmaceutical distributor with a population of 38 million people Poland is proving to be a strong market for us much like Germany as demand for indoor flower continues to out.

Boris Alexis Jordan: The spot.

Boris Alexis Jordan: On April 1st Germany enacted its pillar, one legislation, which decriminalize cannabis by removing it from the Cogs list the benefit of which is far greater access.

Boris Alexis Jordan: To medical cannabis for all its citizens and the first month since the law took effect, we have seen a substantial increase in patient counts entering the marketplace. These increases have surpassed expectations and while still early the signs are very promising for what this market will also contribute to cure.

Boris Alexis Jordan: To further bolster our position in Europe in late March we announced the acquisition of Northern Greene, Canada, H E. B M. P certified producer of high quality indoor flower not only is N. G C transaction accretive to our international gross margins, but it also ensures the stability of our supply chain into Europe.

Boris Alexis Jordan: Added benefit from this transaction is the ability to study to other high growth medical cannabis markets and Juicy currently sells into Australia, and New Zealand. This acquisition represents another key pillar and the development of our global brand strategy, we welcome <unk> to the purely samples.

Boris Alexis Jordan: Returning stateside I was encouraged to see the Florida Supreme Court decided in favor of putting the recreational cannabis measure on the November ballot.

Boris Alexis Jordan: Active contributors to the smart safe campaign, we are deeply committed to helping them amendment three past, the 60% threshold and acting as a United industry Coalition, we believe there's ample support for it.

Boris Alexis Jordan: In fact, we are moving forward with our capacity expansion and new store build out plan to meet the expected surge in demand that could increase the market two to three times to $5 billion to $6 billion.

Boris Alexis Jordan: The expected time of adult use launch in 2025 shareholders will have the necessary cultivation capacity and retail footprint in place to compete for the leadership position in Florida.

Boris Alexis Jordan: In Ohio, we are actively preparing for adult use conversion that could come in the next few months.

Boris Alexis Jordan: Adult use market shows great growth potential.

Boris Alexis Jordan: Seventh largest state in the U S by population with an Underpenetrated medical market. We are excited for Ohio, and the potential $2 billion market opportunity that will come after adult use sales trends.

Boris Alexis Jordan: Our long term strategic success rests unexpendable, our brands into as many points of distribution as possible. We have spent a good deal of time exploring the hemp category and we feel it is important to enter the hemp derived THC market would say tested products, which by some estimate is as big as a regulated cannabis market.

Boris Alexis Jordan: As such we will begin shipping a fully compliant wind of hemp derived THC beverages and edibles under our select brands in the second half of the year like our foray into Europe. This is another long term growth driver that will unfold and develop over the coming quarters and years.

Boris Alexis Jordan: Taken together all of the investments we have made domestically and internationally set the foundation for accelerated growth and market share gains and 25 and 26 and beyond.

Boris Alexis Jordan: Lastly on our outlook, we are reiterating our full year guidance. We continue to expect revenue to grow in the mid single digits and adjusted EBITDA margin to be in the mid 20%.

Boris Alexis Jordan: I'd like to end my remarks by thanking all the members of our team around the world that contribute to making <unk>. The global leader in cannabis. We are very encouraged by the recent catalysts that are providing an important inflection point to our industry and our company our success in the future potential would be possible without our entire team who believe in the mission.

Matt Bottomley: And bring them to life every day with that I'll turn the call over to our CEO Dr. Matt.

Matthew S. Darin: Thanks Boris.

Matt Bottomley: As the cannabis market continues to develop distribution of our brands across all channels becomes increasingly important.

Matt Bottomley: To this point, we are laser focused on expanding the global reach of our brand portfolio.

Matthew S. Darin: With select <unk>.

Matt Bottomley: Grassroots pure leaf and for 'twenty and Europe, leading the way.

Matt Bottomley: In a seasonally slower first quarter, our team came together and executed well to gain 33 basis points of total market share across all BDSI states.

Matt Bottomley: Specifically, we expanded our share in some of the largest markets throughout the U S, specifically, Arizona, Pennsylvania, Nevada, Illinois, and Massachusetts.

Matt Bottomley: Select was again the number one vape brand in the first quarter, a testament to the quality and innovation, we continue to bring to the category with brick still driving outsized gains eight months after its market debut.

Matt Bottomley: We will continue to build on the select platform to further extend our lead in the U S. While also taking the brand abroad to our key European markets over time.

Matt Bottomley: In flower, we have made significant strides in improving all key metrics, including screened diversity average potencies yields and Bud can trim ratios.

Matt Bottomley: These efforts are gaining traction as evidenced by grassroots and find flower holding two of the top five brand position in the category. According to BDSI.

Matt Bottomley: We have great talent across our cultivation and operations teams and through research and development and iterative process improvements I have no doubt, we will further increase our quality and efficiency metrics.

Matthew S. Darin: Flower continues to drive the market and winning in this category is our north star.

Matthew S. Darin: I'm confident we're on the right trajectory with our relentless focus on quality and innovation, but there is still so much opportunity in front of us.

Matthew S. Darin: One such opportunity is infused flower and pre rolls both of which are helping to mitigate pricing pressure as these products command higher prices and are showing significant incremental growth in the flower category.

Matthew S. Darin: Demand for these innovations and insatiable and our operations team is quickly moving to increase supply.

Matthew S. Darin: For instance, our grassroots infused pre rolls are instant sellouts in New Jersey, Nevada, Arizona, Maryland, and Illinois success.

Matthew S. Darin: Success will be replicating as we roll out these product lines across more states.

Matthew S. Darin: By channel consistent with our expectations, our domestic retail sales were down three 6% sequentially impacted by seasonality and accelerated independent dispensary opening <unk> in Illinois.

Matthew S. Darin: To catalyze our retail growth, we are leaning into our product assortment industry, leading rewards program and customer service.

Matthew S. Darin: We continue to evolve our retail experience both in store and online, especially through our mobile App, which has gained significant traction and is approaching 200000 downloads.

Matthew S. Darin: In our domestic wholesale segment, we generated three 2% growth, which help curb the retail decline.

Matthew S. Darin: The wholesale growth was broad based with nearly all states showing solid sequential growth.

Matthew S. Darin: This is a primary focus as more dispensaries open in key markets, such as New York, New Jersey and Illinois.

Matthew S. Darin: Pricing at retail is showing signs of stabilization with some of our states showing sequential increases.

Matthew S. Darin: The most impactful lever, we can pull to stabilize and drive prices higher in innovation.

Matthew S. Darin: We are seeing this play out in real time, with our infused flower and pre rolled program and we saw at earliest break our two grabbing.

Matthew S. Darin: On a per gram basis flower pricing increased versus the fourth quarter we.

Matthew S. Darin: We attribute this to improve strain diversity greater consistency of our flower production and more targeted pricing and promotional strategies.

Matthew S. Darin: In <unk> the rate of decline has moderated from the fourth quarter. However, we are yet to see pricing turn overall positive.

Matthew S. Darin: Digging deeper into key states. Despite many of the headlines and New York Adult use market is open for business with over 100 approved dispensaries.

Matthew S. Darin: We were pleased with our first full quarter of adult use sales in New York as our Newberg store has ramped very well and is performing to our expectations.

Matthew S. Darin: We are finalizing the site for our next two adult use dispensaries that we expect will be high volume stores.

Matthew S. Darin: In wholesale we saw a 51% sequential surge in growth as we were diligent and adding key wholesale accounts every month.

Matthew S. Darin: Surely that shelf space in the most productive independent stores in the state.

Matthew S. Darin: And with more licenses being issued we are excited about the continued growth that will come from this 5 billion plus market opportunity.

Matthew S. Darin: As I alluded to earlier the story in New Jersey, and Illinois is a tale of two channels.

Matthew S. Darin: With over 100, new dispensaries open in each state in the last few quarters retailers face increasing pressures. However, we have been pleased with the strength of our wholesale business that is served to offset much of the declines.

Matthew S. Darin: With respect to New Jersey, we have replanted, our belmar cultivation facility in order to meet demand from the growing population of independent doors in the state.

Matthew S. Darin: Arizona deserves another mentioned.

Matthew S. Darin: Despite the market contracting in the first quarter, we held sales stable from the fourth quarter and as a result grew market share by 125 basis points.

Matthew S. Darin: Arizona is a core market for us with 16 high performing dispensaries and a growing wholesale business.

Matthew S. Darin: Our teams on the ground are performing well week after week, yet they are hungry for more gains.

Matthew S. Darin: We've been busy on the international front and the foundation, we have built procure lead got stronger in the first quarter.

Matthew S. Darin: We rebranded our sapphire clinics in the U K securely clinics and the power of the purely brand has been on display with the positive feedback we've received from patients.

Matthew S. Darin: We announced the strategic acquisition of a key supplier Northern Greene, Canada that cements, our supply of high quality indoor EU GMP certified flower for our key European markets, while also enhancing our margins done in an accretive purchase price.

Matthew S. Darin: We also announced the acquisition of can permit a distributor in the rapidly growing Polish market. It is already paying dividends.

Matthew S. Darin: We are taking the many learnings from the U S and applying them to Europe, including how we enter new markets and how we go about building our supply chain. So that we can realize greater success earlier.

Matthew S. Darin: Okay.

Matthew S. Darin: The expansion and development of our Portuguese cultivation and processing facilities is progressing according to plan.

Matthew S. Darin: We anticipate we will begin shipping EU GMP flower from Portugal to Germany, and Poland in the third quarter, which will complement our NGC indoor flower, thus rounding out our product portfolio.

Matthew S. Darin: We are the only truly global operator, with a vertical supply chain and we will continue to press our advantage to drive further market share gains.

Matthew S. Darin: As a leader in the global cannabis industry. We believe it is imperative to have our brands available to consumers in both physical and digital channels.

Matthew S. Darin: <unk> with this view, we are entering the hemp derived THC business with an expanded assortment of select edibles and select zero proof beverages ready to launch by the third quarter.

Matthew S. Darin: We are launching these products the same way we've done in state regulated cannabis programs over the past decade through safe compliant third party tested properly labeled products that consumers can trust will deliver a positive experience.

Matthew S. Darin: The home category continues to grow at a rapid pace and this new channel opens the door to a much wider audience than those currently shopping and dispensaries.

Matthew S. Darin: We will start small and learn how consumers interact with our brands outside of our dispensaries.

Matthew S. Darin: Our team has a continuous improvement mindset and we are constantly adapting to the ever evolving cannabis landscape.

Matthew S. Darin: Our unique exposure to the most significant catalysts on the horizon.

Matthew S. Darin: Expansion of the New York market expansion expansion of pillar, one in Germany, Ohio, Florida, and Pennsylvania don't use.

Matthew S. Darin: Sets us up for robust growth, especially in 2025 and beyond.

Matthew S. Darin: The global cannabis industry is still in its infancy, and we have built a foundation for long term success.

Speaker Change: I'll close by thanking all our team members across the organization, who are instrumental in making our results possible.

Matthew S. Darin: Their tireless effort and commitment to win is felt by our loyal customers.

Matthew S. Darin: With that I'll turn the call over to our CFO Ed Kraemer Ed.

Edward Kremer: Thank you Matt today I'll review, our Q1 2024 results and provide additional color on our outlook.

Edward Kremer: Total revenue for the first quarter was $339 million, representing a year over year increase of 2%.

Edward Kremer: Growth was driven largely by strength in Maryland, Connecticut, New York, Arizona, and 59% growth in our international segment.

Edward Kremer: By channel retail revenue was $268 million compared to $271 million in the first quarter of 2023 down 1% year over year, while wholesale revenue increased 16% year over year to $70 million and represented 21% of total revenue.

Edward Kremer: Looking at our consumer metrics transactions increased 1% year over year in the first quarter, but were down 4% sequentially due to normal seasonality.

Edward Kremer: Average order value was down 4% compared to the first quarter last year, largely driven by a 6% decline in units per transaction that.

Edward Kremer: That said <unk> have been steady for the past three quarters and AUR was flat year over year.

Edward Kremer: Adjusted gross profit was $161 million, resulting in a 48% gross margin sequentially Q1, adjusted gross margin increased 120 basis points compared with fourth quarter, largely due to improved absorption costs as we planted more rooms to meet demand.

Edward Kremer: SG&A expenses were $104 million in the first quarter, a decrease of $6 million from the year ago period, Despite investments in new stores and our international growth initiatives.

Edward Kremer: The year over year decrease in SG&A, primarily reflects continued focus on operating efficiencies and lower professional fees.

Edward Kremer: SG&A as a percentage of revenue was 31% in the first quarter, an improvement of 240 basis points compared to the year ago period.

Edward Kremer: Our first quarter SG&A included approximately $4 $5 million of add backs, resulting in our core SG&A expenses of $100 million.

Edward Kremer: One or 29, 5% of revenue an improvement of 100 basis points year over year.

Edward Kremer: First quarter net loss was $48 million or <unk> <unk> per share and we ended the first quarter was 736 million fully diluted shares outstanding.

Matthew S. Darin: Adjusted EBITDA for the first quarter was $77 million compared to $74 million last year, a 4% increase resulting in an EBITDA margin of 23% and 22% respectively.

Matthew S. Darin: Sequentially, our adjusted EBITDA margin decreased by 140 basis points from the fourth quarter due to seasonally lower sales base and increased payroll expenses, we achieved our Q1 EBITDA margin. Despite a drag of 180 basis points from international for.

Matthew S. Darin: For the year, we expect the international drag to improve to 130 basis points as international sales growth will continue to outpace the U S.

Matthew S. Darin: Now turning to our balance sheet and cash flow.

Matthew S. Darin: We ended the quarter with cash and cash equivalents of $105 million.

Matthew S. Darin: Inventory increased $3 million or 1% sequentially compared to the fourth quarter driven by normal seasonal build into the 420 holiday season.

Matthew S. Darin: Net capital expenditures in the quarter with $13 million, we expect 2020 for capex to be approximately $50 million to $70 million or $10 million increase to the higher end of the range dependent on the timing of our Florida expansion initiatives ahead of adult use.

Matthew S. Darin: We generated operating and free cash flow from continuing operations of 46% and $33 million respectively.

Matthew S. Darin: Our outstanding debt was $580 million net of unamortized discounts and deferred financing fees of which 82% is not due until December 2026.

Matthew S. Darin: Yeah.

Matthew S. Darin: In an effort to reduce leverage on our balance sheet subsequent to quarter end, we began buying back our December 2026 notes in open market transactions.

Matthew S. Darin: To date, we have repurchased $15 million of our bonds at a 775% discount which combined with our interest savings will save the company approximately $4 million that would have been paid through maturity.

Matthew S. Darin: We will continue to be opportunistic with future bond purchases.

Matthew S. Darin: As Boris mentioned coordination with counsel surely is investigating its options for seeking refunds of federal income tax paid on the basis that internal revenue code section to AE does not apply to its business activities. If supported by legal Vice generally anticipates it will file as a normal taxpayer.

Matthew S. Darin: <unk> for 2023, and 2024 and amend certain prior year returns.

Matthew S. Darin: We're off to a good start and the many growth catalysts. We have are beginning to materialize with more coming over the next few quarters, while macro pressures on the consumer continue to be felt particularly on the lower income demographic. We are reiterating our fiscal 2024 guidance of mid single digit revenue growth.

Matthew S. Darin: We continue to expect full year adjusted EBITDA margins to be in the mid 20% range and for the second quarter, we expect revenue to grow low single digits versus the first quarter.

Matthew S. Darin: Excluding any benefit the company would receive by filing as a normal taxpayer, we still expect to generate operating cash flow in excess of $100 million.

Speaker Change: And with that I'll turn the call back over to the operator to open the line for questions.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Speaker Change: You are using a speakerphone please pick up your handset before pressing the keys and if at any time. Your question has been addressed and you would like to withdraw. It. Please press Star then two we request that you limit yourself to one question only at this time, we will pause momentarily to assemble our roster.

Speaker Change: Okay.

Speaker Change: Our first question comes from Aaron Grey of Alliance Global Partners. Please go ahead.

Aaron Grey: Hi, good evening.

Aaron Grey: And thank you for the question so.

Aaron Grey: So for my question I wanted to touch on Germany, obviously still early days of cannabis reform that effective April one, but if you could give me color.

Aaron Grey: What youre seeing in terms of initial demand of additional physicians telemedicine more pharmacy, starting to dispense our candidates and also the patient growth. So I know just five weeks in but any color you can provide and then also on your initiatives you have to increase education for both physicians and patients there. Thank you.

Speaker Change: Thank you for that and I'll take that so we have through our relationships with.

Speaker Change: The largest telemedicine platforms in Germany, we can say that most of the telemedicine platforms have added more patients in April then they've added in their whole history and in the medical program in Germany. So that is definitely more ambitious and more aggressive than we had originally anticipated.

Speaker Change: So that's good news on that front, a cure leaf in terms of its revenue has also seen a stronger growth than we originally anticipated on on the business, but it's still from as you know small numbers.

Speaker Change: And growing so it's early for us to be able to say.

Speaker Change: What this program is going to look like but all the early signs are very very positive.

Speaker Change: Theres any impediments to the program, it's finding up the telemedicine platforms getting doctors trained and signed up so that they can write more scripts, we're definitely seeing excitement from the pharmacies more pharmacies are starting to order the only bottleneck with pharmacies that you these far but well see a reasonably small that don't have large packaging facilities.

Speaker Change: And so that could become an impediment.

Speaker Change: But they're all starting to invest in that area. So as we originally told everyone. We believed the German program will be very substantial in size. We're certainly seeing that early demand from patients. However, there are some things that the industry needs to get over.

Speaker Change: In order for that to bed to to flow through we anticipate seeing a at.

Speaker Change: At the end of this quarter being able to give more color in our next quarterly.

Speaker Change: Quarterly update in terms of how the industry is developing but all looks very very positive so far.

Speaker Change: The next question comes from Russell Stanley from Beacon Securities. Please go ahead.

Russell Stanley: Good afternoon, and thanks for taking my question just around the gross margin improvement congrats on that.

Russell Stanley: Im understanding assay utilization the big driver there.

Russell Stanley: 120 bps quarter over quarter, the press release notes that.

Russell Stanley: Reduced vertical mix was was a bit of a headwind in the quarter. So I'm wondering what the gross improvement was would be asked.

Russell Stanley: Utilization and what are you seeing in terms of third party product. Thanks.

Russell Stanley: Yeah.

Russell Stanley: Yes.

Russell Stanley: Russell I'll go ahead and take that this is Ed.

Edward Kremer: Did we did have some vertical magazine vertical mix was very very small and its and its decrease.

Edward Kremer: Most of the.

Edward Kremer: As you noted most of the increase did come from our rooms coming alive.

Edward Kremer: Through the first quarter, and we expect that to continue to yield improvement in subsequent quarters I can't give you the specific.

Edward Kremer: The impact from one to the other but in the aggregate.

Speaker Change: Do you see the utilization outpaced the decline of the of the vertical mix.

Speaker Change: The next question comes from Matt Mcginley of Needham.

Matt Bottomley: Please go ahead.

Matt Bottomley: Can you give us some color on what drove that $46 million in operating cash flow. We don't have a full balance sheet, our cash flow, but I think you mentioned that inventory was $3 million drag.

Matt Bottomley: I'm not sure like how should we think about that in terms of the guide that you gave last quarter for $100 million.

Matt Bottomley: Within the target or does some of this reverse in this this is more of an anomaly, where you generate more cash flow relative to what you're expecting for the full year.

Speaker Change: I think.

Matt Bottomley: Matt. This is Ed I think the way you should think about that in my comments of generating 100 over $100 million as a normal.

Edward Kremer: Under our current conditions I think that was benefited Q1 was the fact that we did not.

Edward Kremer: Make a full tax payment for the reasons the aforementioned on our position so that helped generate set.

Edward Kremer: Set of outsized operating cash in the quarter.

Edward Kremer: We are on track to just to put a pin in it we're on track.

Edward Kremer: According to our guidance as I gave that that we will still achieve our initial target as we mentioned over $100 million irrespective of any tax benefit.

Edward Kremer: Our next question comes from Matt Bottomley of Canaccord Genuity.

Matt Bottomley: Please go ahead.

Matt Bottomley: Good evening, everyone. This question is maybe more for Boris are already wants to jump in but just on some of the commentary you've given in this quarter in the past about increase.

Matt Bottomley: Custodial.

Matt Bottomley: Considerations of who's able to to hold the stock I'm, just wondering how that relates to cannabis still being as a schedule. One drug I mean is it going to be something that we really need to see a pen to paper on a schedule three or do you think the headlines with respect to.

Matt Bottomley: Just maybe a notice of a rule amendment with the D. A <unk> might be something that moves the needle I know this isn't a typical earnings question. It's more about your stock, but I'm just curious if you think.

Matt Bottomley: Some of the headlines that we might get in the coming months here to confirm what's been reported as of last week would be something that actually moves the needle with respect to more capital coming into this space.

Speaker Change: Yeah, I mean, thanks for the question. So I was referring specifically to pure leaf and our situations. So because of our T O flex uplift and because of our restructuring we've put in place at the end of last year and prior to the uplift to the T effects, we were able to achieve.

Speaker Change: The custody from both bank of New York Pershing State Street, and Euroclear that relates specifically to the actions taken by poorly I cannot speak for our colleagues at the other companies in terms of what their plans are but in our plans. We always wanted to create a situation where we could be held in and we could at least salt.

Matt Bottomley: The plumbing problem.

Matt Bottomley: We're holding currently stopped and so that problem. The last of the three which was zero clear. We received last week that was also important for us because of the inclusion into the global indices.

Matt Bottomley: Yeah. The two effects in the S&P indices are two Canadian S. P industries.

Matt Bottomley: We believe we have now met all the requirements to be able to be included in those indices are the first of which I understand is reviewing sometime over the next 30 days.

Matt Bottomley: And then the rest are probably sometime in September.

Matt Bottomley: But in terms of the industry as a whole I I think that we would need to wait and see.

Matt Bottomley: What the rule is going to look like and what the guidance from the from D. O J will be like on the back of research. One. The one thing is that we are highly confident that rescheduling is going to happen I know theres a lot of talk out there whether it will happen.

Matt Bottomley: Every information we have included.

Matt Bottomley: More information we have today is this rescheduling will happen from schedule one to schedule III now the important thing will be what will the Doj say on the backs of about will the D. O J come out with guidance, which then finfet will pick up on it and well since then come out on these things. These are things that are out of our control today to understand we need to see what the final rule looks like.

Matt Bottomley: And then we need to see where the Doj, whether there's going to be a Doj my ball in the backwoods, which we believe that will be but we don't know 100%.

Matt Bottomley: Based on that Doj memo, then we know that Janet Yellen position has been that she wants the sector bank. So our our view is is that it's more likely than not that the finfet will probably depending on this rescheduling will give positive guidance two financial institutions will that be enough for uplift thing.

Matt Bottomley: And full banking services, we don't know, obviously safer banking would really be the the sort of the solution to this problem, but safer banking definitely is not going to be as we all know now voted on here.

Matt Bottomley: In may with the FAA, which is what the original target was going to be there is conversation now between Mcconnell and as Republicans about doing something at the end of the year, but we don't really want to speculate on that so far the Republicans have been a big disappointment, particularly senator Mcconnell unsafe for banking. He is stepping down in November. So there is some ER optum.

Matt Bottomley: Ism that maybe in the lame duck, we might be able to get a safer banking, but again that's all.

Matt Bottomley: Conjecture, we don't know for sure, but obviously, we're not stopping our work in Washington to get it. So the short of it is we're hopeful that the.

Matt Bottomley: Might get some guidance out of since then and the treasury that will help the industry and either uplifting or getting better banking services.

Matt Bottomley: Yes.

Matt Bottomley: The next question comes from Scott Fortune of Roth and K M. Please go ahead.

Scott Fortune: Good afternoon, and thanks for the call.

Scott Fortune: Follow up here.

Scott Fortune: I just wanted to kind of follow up on Aaron's question about Germany, and provide a little color on that market as you called out. The total of medicine is demand is really adding a potential patients from that side of things.

Scott Fortune: But more importantly can you step us through the kind of the key for prescribing physicians or even consumer patients to kind of gravitate towards security brands as a leading option.

Scott Fortune: Any initiatives or marketing or education allocations that you need to really build your brand recognition for the doctors and consumers and you just kind of step us through that process to really garnering market share and therefore, the Kelly brand.

Scott Fortune: We're working very closely with all of the telemedicine platforms. We just signed an agreement last week with one of the largest telemedicine platforms in Germany.

Scott Fortune: <unk> to distribute our products and market our products on their on their marketplace a part of their sites. So they have both a telemedicine platform in our marketplace and purely for us.

Scott Fortune: Through its 420 brand.

Scott Fortune: Very much present on that clearly we will also start shipping at the end of June for the first time purely branded products, which.

Scott Fortune: Which will play in the different categories. So for 'twenty is playing in the premium category and for 'twenty, the absolute leader in Germany at the premium level and that will start to ship a purely products, which will play in the mid tier level, because there's a lot of volume going through and the mid tier.

Scott Fortune: A more price sensitive level off for the Ah patients in Germany. So we're working with telemedicine platforms. We're working with doctors, we're working with I mean, we have a very large effort in infrastructure in Germany to promote our brands, we know that being early and being aggressive is the way to win brand loyalty and have superior products.

Scott Fortune: These are all things that we're doing trying to stay on the edge of it and we think we have a pretty strong position at the moment and we're seeing that reflect in the numbers that are coming across albeit still not at the very high level not at central level, but the growth rates are impressive.

Speaker Change: Our next question comes from Gerald Pester Rally of Wedbush Securities. Please go ahead.

Speaker Change: Great. Thank you good evening I.

Speaker Change: I just had a question on hemp derived the hemp derived product commentary.

Scott Fortune: Yes.

Speaker Change: What like why now what drove your decision to enter into hemp derived products I assume that you believe that they are having where they will eventually have a meaningful impact to traditional cannabis sales. So just looking to confirm.

Speaker Change: The why now aspect of that and then I apologize if I missed this but as you look to roll out. These products initially or are there certain channels that youre going to look to prioritize. Thank you. Yes, yes. Thank you for that so.

Speaker Change: I wanted to make it clear that purely if did not approach. The slightly we have spent the better part of three years you might remember that I mentioned about three years ago that are currently looking at a new line of business and this was the one that we spent an enormous amount of time.

Scott Fortune: On developing a supply chain, which was fully compliant with the.

Scott Fortune: Early efforts of doing that we ran into certain problems in that.

Scott Fortune: The supply chain the relief that we're fully compliant under federal law that we put in place had a higher cost than a lot of these synthetic products that are being produced by the small operators around the around the country, we cannot afford to go to the market without a fully compliant fully tested product.

Scott Fortune: Which reflects the same standards that we sell our other products.

Scott Fortune: And so we took a breather about a year and a half into the process, where we could not figure out a way to come up with a compliant.

Scott Fortune: Uh huh.

Scott Fortune: Rather cost effective commercial cost effective supply chain, we have now been able to do that and so because of the fact that we have been able to put a supply chain together for two specific products, which is our.

Scott Fortune: Our soldiers as well as our edibles because of that we've made a decision to start a process of launching these products. We've done some test cases around the country very small at the moment, but now we're gonna go more wide and we're going to work with your traditional national distributors and we'll have more.

Scott Fortune: Information on that in ensuing months on who we're working with and what we're doing but we're gonna be distributing as an omnichannel around the country only in those states where.

Scott Fortune: These products are compliant with <unk>.

Scott Fortune: Very very careful in making sure that we don't step outside the line, but we believe this is a very large market segment. We believe it's growing at a very very fast pace.

Scott Fortune: We believe that not being part of that is the largest cannabis company in the world. It would be a mistake and so we took three years to prepare for this and we finally were able to launch products that will be competitive and safe for our customers.

Scott Fortune: Okay.

Scott Fortune: The next question comes from Pablo <unk> of Atlantic and Associates. Please go ahead.

Pablo: Thank you.

Pablo: Just to follow up on that last question when you talk about the eligible.

Pablo: With an.

Pablo: On the idea of the size of it sort of addressable market.

Pablo: And if I may separately regarding protocol.

Pablo: Do you wait until then to start on capacity and adding more stores or do you do it now.

Pablo: Talk about how well the industry is working together.

Pablo: Some pain to get the bottle with past thank you.

Speaker Change: So I'll address I believe your connection wasn't great, but I'll address the first part of the question Battle dropped the second I believe your first part of the question was on Hampton, what the addressable market is there we think that the addressable market and hampered us probably somewhere around aware the cannabis sector. The regulated cannabis sector is now it may be a little.

Speaker Change: Maybe a little bit more but we think it's about the same so its a its definitely a multibillion dollar market and more importantly, it's one where you can distribute centrally so the cost of distribution in that market is going to be substantially more efficient lower for instance, we only have to build one bottling plant instead of numerous bottling plants in order.

Speaker Change: Two and which we have done we have our own bottling lines in order to deliver in order to deliver these products. We're also going to be working with third parties on that as well in terms of our co Packers and things like that so we've been able to as I said created supply chain now that is commercially viable in a safe and we think that will attract a lot of customers.

Speaker Change: Because a lot of the products that are on shelf. Today are are have a lot of synthetics in them that are not desirable or not necessarily.

Speaker Change: Tested or or regulated and our products are going to be very similar if not identical to the product that we would be selling and adding other highly regulated market with that or handle the florida issue he's leading that.

Speaker Change: And so on Florida, we're moving forward with plans to continue to add cultivation capacity and to fill out our store portfolio that was already in the works. We had built out the shell of a building that we were able to on a modular basis build out grow rooms to meet the demands of the market today.

Speaker Change: Today, we got a very efficient operation with the capacity that we have in the store locations that we have open. So we have opportunity just in the medical market to continue to.

Speaker Change: Invest there, which we're doing but the way we're doing it is in the unlikely event that November does not go well, we have every ability to kind of throttle back.

Speaker Change: And there is a slowdown in the pipeline of new stores. So we're keeping optionality, where we're moving things forward.

Pablo: We have need for it.

Pablo: But depending on the results of that in the event that.

Pablo: The amendment does not pass we will not be over extended there.

Pablo: The next question comes from Frederico Gomez of ATB capital markets. Please go ahead.

Speaker Change: Hi, This is Dan on for Federico. Thank you for taking our question, saying something about being bullish about the international business and the continued strategic expansion, so that definitely seems to be shaping up well and bearing in mind that certain segments as the international business will be more or less marked an accretive I just wanted to get some color on where you see that being said.

Pablo: These are the levers that can be pulled to narrow the international segment's margin track.

Pablo: Yes.

Pablo: I think that on the international the issue is is is volume and.

Pablo: And scale.

Pablo: No.

Pablo: We're going to reach a little bit.

Pablo: <unk> to a 100 plus million this year.

Pablo: And we will we will at.

Pablo: At the end of this year, we'll take a look at how that growth is developing.

Pablo: But as you've seen we've been growing at you know.

Pablo: 100, or 50 or 60% on annualized basis from a small scale when we bought the business.

Pablo: And now we will take a look at the end of this year on how the German, particularly the German and Polish businesses are developing.

Pablo: The U K business is pretty easy to model out the German in Poland business is a little bit more difficult because they are brand new in their early stage.

Pablo: So I think that by the fourth quarter will have a pretty good idea of how we're looking at next year, but if you look at the comparable to other medical markets like Florida, and others that got launched this is gonna be a very large market and so far the results as I said that we've seen in the first five weeks have been very impressive and above our own.

Pablo: And I think the industry knows I've been very bullish on Europe, and it's been above our own expectations. So we're hopeful our.

Pablo: Going into the latter part of the second part of this year that we'll be able to make it much more accurate predictions about growth going into 2025.

Pablo: And look from a from a margin standpoint, I would just add.

Pablo: We're building a vertical supply chain very similar to what we've done in the states that are.

Pablo: We've been in a leading market share position. So that was part of the rationale behind the northern Greene acquisition, which was the supplier.

Pablo: Flying high quality GMP flower to Germany, now, bringing that captive into our supply chain is good.

Pablo: And to increase margins give us more certainty more control of the supply chain.

Pablo: A playbook that we've found to be very successful and that we're seeing a lot of opportunity in Europe.

Pablo: In additional countries.

Pablo: This concludes our question and answer session I would like to turn the conference back over to Mr. Matt Darren for any closing remarks.

Matt Bottomley: Thank you everyone for joining and we'll look forward to seeing you next quarter.

Matt Bottomley: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Matt Bottomley: [music].

Matt Bottomley: Yeah.

Matt Bottomley: [music].