Curaleaf Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 9 Aug 2021

[Operator:]

Good afternoon and welcome to the Curaleaf Second Quarter 2021 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Carlos Madrazo, Head of Investor Relations. Please go ahead.

[Carlos Madrazo:]

Good afternoon, everyone and welcome to Curaleaf Holdings, Second Quarter 2021 conference call. Today we're joined by Boris Jordan, Executive Chairman, Joseph Lusardi, Executive Vice Chairman, Joe Bayern, Chief Executive Officer, Neil Davidson, Chief Operating Officer, and Ranjan Kalia, Chief Financial Officer. Before we begin, I would like to remind you that comments on today's call will include forward-looking statements within the meaning of Canadian and U.S security laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions. Including the successful integration of acquisitions on our 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 forecasting sort of 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, where there is a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the Company's filings and press releases on SEDAR and the Canadian Securities Exchange. During today's Conference Call, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as adjusted EBITDA, the definitions of which may be found in our earnings press release. Please note that all financial information is provided in U.S. dollars unless otherwise indicated. With that, I'd like now to turn the call over to Executive Chairman, Boris Jordan.

[Boris Jordan:]

Good afternoon, everyone. And thank you for joining us today for our Second Quarter earnings results call. Before I begin, I want to welcome Ranjan Kalia, our new Chief Financial Officer. Having held multiple financial positions at CPG and technology companies, Ranjan brings a breadth of experience to the team and we're very happy to have him join the Company. I also would like to thank Michael Carlotti, our former CFO, for all of his contributions. We wish him a prompt and speedy recovery. Our record second-quarter results reflect the continued success of Curaleaf 's strategy of unrivaled reach, scale, and strategic positioning in the U.S.-Canada's market as we once again delivered all-time high levels of sales and adjusted EBITDA profitability. We also acquired an unmatched presence in Europe, which provides us another major long-term growth lever for our business and establishes Curaleaf as the global pure-play cannabis market leader by revenue and geographic reach. During the second quarter, we delivered on our guidance with total revenue rising to 312 million, equivalent to a sequential growth of 20% and year-on-year growth of 166%. Excluding our new Curaleaf international business, which we started consolidating for the first time this quarter, our revenue increased to $307 million. In terms of driving profitability, we posted record results here as well. Our group adjusted EBITDA margin reached 27%, increasing approximately 300 basis points sequentially. And our core U.S. business, our adjusted EBITDA margin expanded to 28% up 400 basis points sequentially, as we benefited from our leading scale and captured operating efficiencies. Not only are we delivering impressive margin gains, but we remain focused on growth and the major opportunities that lie ahead. Executing our national strategy, we have built a deep operational capability on the ground in all the key U.S. state Cannabis markets. And we are early entrants into many more that will become relevant contributors to revenue and profitability over time. Today, we operate in 5 states that contribute at least 100 million in annualized revenue and 2 more will be joining this group in the next several months. The other 16 states are markets with tremendous potential where we have established a solid presence and where medical and adult-use Cannabis programs continue to evolve. To further strengthen our U.S. business, in May, we agreed to acquire Los Suenos, a 66-acre outdoor grow operation in Colorado to help us better serve the 2 billion+ annual medical and adult-use cannabis market in Colorado, the second-largest market in the U.S. today. Upon closing this transaction, we'll significantly expand our cultivation capacity, boost our profitability in the state, as well integrate vertically and position ourselves as the leading low-cost producer in the U.S. We expect this transaction to close soon. At the federal level last month, Senator Schumer introduced the long-awaited Comprehensive Federal Cannabis Bill. Curaleaf has led industry efforts to push for sector reform, including expanded access to banking, stock exchange uplisting, sensible taxation, and regulation, and social equity initiatives. There is unprecedented support for Cannabis reform across the political spectrum and by multiple industries and minority groups. They should provide strong motivation for Democrats and Republicans to negotiate and agree to a final version of the bill. We expect plenty of debate around the details in the coming months and believe some level of reform which will minimally include banking and investor safeguards will be passed before the midterm elections. The wide scope of the bill underlines the importance of having a long-term flexible strategy in place, taking into account the various potential outcomes. Our long-term strategy and multiple plant horizons have very much taken this into consideration. For example, our investment, the Los Suenos cultivation facility, provides us with a very low, cost-efficient, high-quality supply of biomass for both our needs and those of wholesale customers in the state today. But it's ultimately capable of supplying biomass on a regional scale in the event of full interstate commerce. Also at the federal level, last month, Congress approved the removal of roadblocks to scientific research into cannabis, noting the potential therapeutic effects of the plant, and maintained an existing provision that shields state and medical marijuana laws from intervention by the Justice Department. Just as importantly for near-term growth, state-level regulatory liberalization trends are accelerating. In New Jersey, we anticipate that adult-use sales will begin in late 2021 and to fully ramp up into early 2022. We look forward to seeing the draft regulations for adult-use sales this month and have been preparing to address this market with a full suite of products. Our new cultivation and processing facilities harvesting regularly, and we intend to maintain our leadership position in the state. We also look forward to opening our 3rd dispensary in Bordentown, just south of Trenton this month. In Connecticut, we anticipate adult-use sales will begin in the second quarter of 2022. We have commissioned a significant expansion of our cultivation and manufacturing facilities are in the process to secure additional retail sites in advance of the adult-use program commencement. We look forward to addressing a new customer set and maintaining our leading position. In New York, we expect adult-use sales to begin by early 2023. We are waiting for the Senate to confirm appointees to begin working on the regulations. The whole flower long demanded by New York patients and expected by future consumers is on the Governor's desk awaiting approval. It's codified into law so it's not a matter of if, but when. We have commissioned another 110,000 square feet to our cultivation complex and will ramp up additional capacity as we get a clearer view of the regulations and timing. The combined tri-state region where we have a leading market presence has a population of 32 million, receives 100s of million tourists every year. And as a potential estimated annual market opportunity of around 8 billion. Given our robust capacity, retail network, and strong brand identity, we're uniquely positioned to address this combined market. The potential in the Northeast also expands beyond these 3 states. By 2023, it is estimated that Pennsylvania and Maryland, we're purely a strong presence will likely be among the next major states in the region to approve adult-use cannabis with a combined population of around 19 million. Once these additional states become adult-use, they are estimated to represent another incremental 3 billion annual market opportunity. And the 6th largest Northeast market, according to forecast data from BDSA, Curaleaf has today the number 1 market share and will be one of the main beneficiaries of these markets ramp up. Looking beyond our market-leading U.S. presence, another major milestone during the second quarter was Curaleaf's entry into the global Cannabis market with the successful completion in April of our acquisition of EMMAC, the largest vertically integrated, an independent Cannabis Company in Europe, which has now been rebranded and consolidated as Curaleaf International. We remain very positive about developments in Europe and their growth potential. Overall, we have never been more optimistic on the near and long-term outlooks for the business. Based on the trends we see today; we are on track to hit the midpoint of our full-year IFRS revenue guidance of 1.2 to 1.3 billion for our U.S. operations. Overall, Curaleaf is still in the early innings of an industry that has tremendous potential for growth. And we have high confidence that our national strategy and solid execution will seize the opportunity and create significant value for shareholders. With that, let me turn the call over to our CEO, Joe Bayern.

[Joe Bayern:]

Thank you, Boris, and good afternoon, everyone. What can I say? It was a great quarter for Curaleaf and the cannabis industry as a whole. We are extremely happy with our record results for the quarter as it is definitive proof that our strategy is working. I'm also incredibly excited about the significant advances we're continuing to make in product commercialization and research and development. Our capabilities in these areas are unmatched in the industry and will continue to act as one of our pillars of long-term competitive advantage. I'll provide more detail on some of our most exciting initiatives later in the call. Let me start my walk-through at the retail level. We continue selectively expanding our market-leading U.S. footprint. As we move into our next phase of retail expansion, we continue to focus on quality over quantity and are only adding premium and flagship stores in the right locations. We opened 5 new dispensaries in the quarter including 2 in Pennsylvania, 1 in Illinois, the second location in New Jersey, and our first adult-use store in Maine, followed by another opening in Wells, Maine on July 23rd, bringing our total U.S. dispensary count to 108 as of today. During the remainder of 2021, we expect to open an additional 8 new Curaleaf retail dispensaries across Arizona, Florida, New Jersey, and Pennsylvania. We have steadily gained market share in Florida and we plan to build on this with new store openings and expect to have a total of 60 dispensaries in this state by the end of 2022. As we've mentioned in the past, we are also in the process of rebranding all of our dispensaries to reflect a more contemporary but welcoming look, which we believe is relevant to our legacy medical patients, as well as adult-use consumers. We expect the rebranding to be complete by the end of September. Our operating and financial metrics on the retail side were very positive, with second-quarter retail revenue growing 18% sequentially. Including both adult-use and medical use, the total number of transactions was up 17% during the second quarter. On the medical side of the business, the total number of patients continues to grow, expanding during the month of June by 7% from March, while maintaining average order value. At the wholesale level, we grew the number of U.S. wholesale accounts by 9% during the second quarter to surpass 2,000 active accounts, which helped drive sequential revenue growth of approximately 24%. Our wholesale distribution platform is another of our pillars of sustainable competitive advantage. As a CPG-focused Company, we continue to believe in the power of brands and we continue to invest in a portfolio that reaches the widest array of Cannabis consumers. This quarter, we introduced the Rolling Stones Select partnership in Nevada and we launched the B Noble brand in Massachusetts and Maryland, leveraging strategic partnerships and relationships to drive Select and Curaleaf visibility and preference to new demographics. In terms of cultivation capacity, we began harvesting from our new cultivation centers in Florida, Arizona, Pennsylvania, Maine, and New Jersey. With these expansions, we have now brought online nearly 250,000 square feet of our expected annual expansion of 275,000 square feet of flower canopy during the first half of the year. We expect to commission an additional 40,000 square feet in the second half. This additional capacity will not only serve as a catalyst for accelerated growth but will also help improve our Operating margins in the second half of the year. We are also in the process of building additional capacity that will be commissioned in 2022 in a number of key states, including New York, New Jersey, Connecticut, Florida, and Pennsylvania. We are excited about our prospects for the balance of the year. For example, in Florida, we expect to continue gaining market share driven by the continued expansion of our cultivation and new store openings in the second half of the year. In New Jersey, our 3rd dispensary will open imminently, and our new cultivation site will help ramp up our wholesale business in the state. In Massachusetts, we expect that our wholesale business will continue to drive growth. And in Maryland, we're in the process of moving our dispensaries to superior locations and should benefit from a full quarter of a larger cultivation and processing site in this state. Moving onto product commercialization and research and development, we have a number of exciting initiatives underway. As we said in previous calls to investors, we are in the final stages of pilot testing our proprietary new extraction technology, which should substantially bring down our cost of production, which we expect to roll out in early 2022. This quarter we will launch our improved Classic Gummy and Nano Gummy utilizing innovative technology to provide consumers the ultimate choice and control over the way they enjoy their experience. Also, we continue to bring fresh innovation to the Squeeze line, including our latest proprietary nanotechnology, which is even faster-acting than our current nanotechnology, along with new flavors to add variety to the line. We have also been working on developing innovation formulations and unique delivery technologies and exploring the potential benefits of other cannabinoids, such as CBN, THCV, and CBG through multiple clinical studies. We expect to bring products to market that incorporate these cannabinoids in the second half of 2021. In addition, we are actively developing many innovative products within the vape, concentrate, oral, ready-to-drink beverage, and topical categories that will be launched in 2022. When we think of innovation, we think of terms of little innovation and big innovation. We've launched over 187 new products over the past 18 months. The majority of which were little i. Little I am products to fill out our portfolio assortment across our footprint, improving flavor, texture, and so forth. Squeeze was our first example of a big I, where we develop proprietary technology and packaging to bring a new product to the market. Now that we have ramped up our research and development capabilities our innovation funnel is full of exciting new technologies and form factors that will provide a steady stream of new products over the next 18 months. Moving on to our European operation, Curaleaf International, while still a small contributor to revenue, continues making important strides. In the United Kingdom, we launched our second strain of medical cannabis flower to meet the significant growth in patient demand. We have witnessed a 250% increase in patient numbers in the UK since the launch of our first medical cannabis flower product in March of this year. Also, as announced in June, we entered into a strategic partnership in Germany with a pharmaceutical Company called Zambon, a leader in the treatment of Parkinson's disease. We launched Uvigo, a co-branded medical cannabis product manufactured by Curaleaf International in Spain and distributed throughout Germany. The product was recently adopted by 3 specialized paying clinics. In Spain, our pharma lab and alchemy received additional EU GMP certification for the processing of medical cannabis flowers. It can now manufacture and distribute medical cannabis products for commercialization and investigational purposes. Beyond Europe, we exported 1.1 tons of medical Cannabis flowers to Israel. Only the second Company does so under the new regulation. The product has been very well received and is on track to being sold out by the end of August. Israel has over 100,000 patients currently and is adding a further 3,000 each month. Finally, Portugal and Malta are moving forward with their respective political processes around the possible legalization of adult-use Cannabis. Spain is moving forward with the discussion on the medical Cannabis program and the French Supreme Court gave a very important judgment establishing the legality of CBD Wellness products in France. I'd like to close with some important updates on other things we're doing as the industry leader in matters of social responsibility. In our initiatives to do business with Cannabis brands, and ciliary suppliers, and advocacy organizations from underrepresented communities. We ended the quarter with 63 partners. In addition, we launched our B Noble pre-rolls in July in Massachusetts and Maryland with a portion of sales dedicated to funding local organizations, dedicated to advancing social equity and providing opportunities to those directly impacted by the war on drugs. On the environmental front, I'm pleased to share that Curaleaf has hired Map-Collective, a female-funded Greentech startup to complete an audit of our carbon footprint. And we have assembled the task force to evaluate strategies for becoming carbon neutral. Now, let me turn the call over to Ranjan.

[Ranjan Kalia:]

Thank you, Joe. And thank you, Boris, for the warm welcome. And good afternoon to everyone. Boris and Joe mentioned, during the quarter, we achieved many financial milestones. Revenue reached a record $312 million, which represented sequential growth of 20% and year-over-year growth of 166%. We recorded retail revenue of $222 million, sequential growth of 18.4%, and year-over-year growth of 235%. Retail revenue represented 71% of total revenue. Our strong sequential growth was primarily driven by new customer acquisition and an increase in repeat customers. Additionally, we benefited from the opening of 5 new stores in selective locations and from increased e-commerce penetration. Wholesale revenue grew 23.7% sequentially and 168% year-over-year to 89 million, and represented 29% of total revenue. This growth was driven by the addition of new accounts and an increase in sales productivity. The gross margin increased to approximately 50%, increasing 669 Basis points year on year. On a sequential basis, the Gross margin increased 34 Basis points. This was possible due to an increase in yields of the existing cultivation facilities and new state of art facilities coming online during the quarter. We expect to continue benefiting from these trends in the second half of the year. SG&A expense was 88 million or 28.2% of consolidated revenue, a 259-basis points reduction versus 30.8% in the first quarter. Looking solely at our U.S. business, SG&A was 81 million or 26.4% of revenue, an even greater sequential reduction in SG&A of 435 basis points, as we work diligently to capture operating efficiencies across all business processes. Adjusted EBITDA reached $84.4 million, up 34.7% sequentially, and 201% year-over-year, primarily driven by strong revenue growth and increased operating leverage. On a consolidated basis, the adjusted EBITDA margin reached 27%, up 297 basis points sequentially. Our core U.S. business saw an even greater gain reaching an adjusted EBITDA margin of 28.1%, up 400 basis points sequentially. With regard to the full-year adjusted EBITDA margin for our U.S. business, we expect it to be in line with our prior guidance. In addition, Curaleaf International margins are expected to have a slightly diluted impact on consolidated margins, but we expect this impact to significantly decline in the fourth quarter. Provision for taxes in the Second Quarter was 42.6 million as compared to 30.7 million in the First Quarter, primarily due to higher gross profit. Consolidated Second Quarter Net loss allocated to Curaleaf was 7 million, which includes closing expenses and one-time charges related to the EMMAC transaction. The U.S. business Second Quarter Net loss significantly decreased from $17 million in the First Quarter to $1.8 million. We continue to maintain a strong balance sheet with cash and cash equivalents of $334 million up from $315 million in the prior quarter. At the end of the second quarter, our outstanding debt, net of unamortized debt discounts, was $338 million. We plan to explore opportunities to refinance our debt facilities at the first opportunity on January 22 and we expect to bring down the cost of our debt. Net capital expenditures during the quarter were $41.9 million. Investments were focused on expanding cultivation and processing capacity, as well as selectively increasing our retail presence in strategic markets. Capital expenditures for full-year 2021 are expected to be approximately $140 million as we continue to invest in cultivation, processing, and our retail footprint in order to prepare for continued strong revenue growth in '22 and beyond. In closing, we're pleased with our financial performance this quarter. On an organic basis, we delivered 18% sequential revenue growth and 400 basis points of adjusted EBITDA margin improvement. We expect this trend to continue in the coming quarters, which will help us drive operating cash flow in the second quarter of the year. Now, let me turn the call back to Joe.

[Joe Bayern:]

Thank you, Ranjan. In closing, I'd like to thank the entire Curaleaf team for their continued focus on execution. We remain committed to growing our top-line, expanding profitability, adding cultivation capacity, and developing innovative new formulations and form factors backed by science. And as always, with a focus on creating shareholder value. With that, I'll turn the call back to the Operator to open the line for questions.

[Operator:]

We will now begin the question-and-answer session. Our first question today comes from Pablo Zuanic with Cantor Fitzgerald.

[Pablo Zuanic:]

Thank you. Boris, I guess just one question first. You have spoken in the past of trying to get ready for interstate trade and you made that acquisition in Colorado. But at the same time, you're expanding capacity aggressively at the state level in the East. I think in the past you've said that in the long term, cultivation is to in Mississippi may not be so economical in a market of interstate trade. So, I'm just trying to put the two things together. You believe that by the mid-terms, we have a federal-level reform, but I'm guessing you don't expect interstate trade there to happen. It could still be four, five years out, so hence, you're expanding these. Can you just reconcile the two things? Thank you.

[Boris Jordan:]

I think, Pablo, you have it exactly right. We do anticipate having significant reform by April of next year. However, we believe that's going to be more around safe banking, tax reform, and social justice issues. We don't believe the federal government at this point in time is ready for full interstate commerce. I mean, it could happen. There's always a risk but we don't believe that's what's going to happen given that we're pretty close to the process and involved in it pretty intimately. That's where our thinking is at the moment. And given that, we have incredible demand that's about the come up on the East Coast, I mean New York. As we said in our report, New York, New Jersey, Connecticut, what we think will be soon Pennsylvania and Maryland, all of whom represent about 11 - 12 million to $12 billion of potential market demand, we need to be prepared for that. So, we are expanding in New Jersey. We have already expanded. We're expanding a bit more. We're expanding in New York. We're expanding in Connecticut. But the margins coming from those businesses are so great that we expect the payback on those growth facilities to be recently quickly. So, we are preparing for those markets. We have to be able to supply those markets. We want to maintain our market share. And we also believe that the interstate comp performance is unlikely to come in this next package.

[Pablo Zuanic:]

I think I just -- just one quick one. Just an update in terms of the competitive landscape in Florida and Pennsylvania. Because in Florida, we're hearing about some operators doing buy one gets one free type of promotions for more than a week. In the case of Pennsylvania, some retailers there are telling me that they've been able to buy in mainstream and lower end of the flower market at lower prices, right? This means that there's some pressure there in terms of supply increasing faster than demand. Just quick color in terms of Florida and Pennsylvania competitive landscape. Thank you.

[Boris Jordan:]

So, both of those markets are different. And that they are similar in that they're both medical. They're different in that Florida has more cultivation capacity at this point and is more developed than Pennsylvania. We have not seen pricing pressures in Pennsylvania at this point in time. We feel that that market continues to grow and continues to expand.

[Boris Jordan:]

However, even though Florida is growing, first of all, the summer months tend to be slower in Florida because a lot of people do leave the state and they do come back in the fall. And we have seen some pricing pressures in Florida. However, we continue to see very robust EBITDA margins out of our Florida business. It hasn't affected our margin at this point in time, but there's definitely competition for market share in Florida at this point in time. The 3 main operators, True Leaf, Curaleaf, and AltMed, and Surterra all seem to be competing for the top spot. But I do think that that isn't going to get out of hand in any way. And I -- again, I want to reiterate the margins are still very strong.

[Pablo Zuanic:]

Got it. Thank you.

[Operator:]

Our next question comes Vivien Azer with Cowen.

[Vivien Azer:]

Hi. Thank you. You guys work on optimizing your cultivation and putting these new processes in place. Can you just give us an update on how you're thinking about your gross margin progression from here? Obviously, very nice improvement in the gross margin in the quarter, but relative to some peers there is an opportunity, and in particular, given the novel approach to a low-cost methodology. Is there any -- any color over the medium-term that would be helpful? Thank you.

[Boris Jordan:]

Sure. Vivien, we are continuing to expand our Gross margin. We anticipate meeting the targets that we outlined at the beginning of the year which is a 30% EBITDA margin and about a 52% to 54% eventually Gross margin. Right now, we're just at 50%. One needs to remember Curaleaf, unlike some of our competitors, that has a much wider footprint. And now we have the European business. And so, it's just taking us a little bit longer to get there. But the sheer size and growth of the business really compensate for that. And so, at the end of the day, I've always stipulated that for me, growth is a priority. I believe that getting our brands out there on both a national and global basis is very important. But we are very, very comfortable that we will be operating at a 30+% EBITDA margin next year throughout the year.

[Vivien Azer:]

Understood. Thank you. And, Joe, my follow-up is for you, please. I believe I heard you say you're targeting 60 dispensaries in Florida by the end of 2022. You also commented on new door additions in the back half of 2021. Can you just offer any more color on the phasing of bridging the gap? I believe you have 37 doors in Florida today. Thank you.

[Joe Bayern:]

Yeah. I think as I mentioned in my prerecorded comments, we've really started to focus on quality as well as quantity of new store openings in Florida. As we've already alluded to on this call, it's getting more competitive and we want to make sure that we're preparing ourselves to compete as effectively as possible. And that includes higher quality products, the greater volume of product, but also locations of our retail stores. We expect to open somewhere between 4 and 6 new stores this year in Florida. And then the balance of those would be in 2022.

[Vivien Azer:]

Perfect. Thank you.

[Operator:]

Our next question comes from Camilo Lyon with BTIG.

[Camilo Lyon:]

Thank you. Good afternoon. So first, it's great to see the 20% quarter, very strong indeed. You kept the full-year revenue guidance intact. Anything you can help us -- any color you can give us to help us understand the cadence between Q3 and Q4, how that should unfold, and how he -- and how your cultivation projects will come online to catalyze the differences between Q3 and Q4?

[Boris Jordan:]

We anticipate continued strong growth into Q3 and Q4. I mean, historically, everybody knows that Q4 is Croptober. There is always pressure on the cannabis market with illicit cannabis coming out of mainly California and Oregon. And so, we're always a little bit careful to make sure that we don't overestimate what we can do.

[Boris Jordan:]

Also, there's one more factor, and that is the issue of New York. We just don't know when the whole flower's going to drop, whether it's going to drop in September, whether it's going to drop in the fourth quarter. We did think that it would get signed. We were told by New York authorities that it would get signed in early August, late July. It didn't, obviously. I think we all understand why. It's on the Governor's desk, but the Governor has got other issues to deal with at the moment, so Cannabis is probably not number 1. But as we said on the call earlier, it's not a question of if, it's a question of when because it is codified in the law. So, we will get the whole flower. And the whole flower obviously is going to be a big number for Curaleaf given that we're the largest supplier of flower in New York on the wholesale market, as well as to our own stores. We're just trying to be a little bit careful on how the fourth quarter -- third and fourth quarters work out. But we're very confident in the organic growth, which is why we guided at the beginning of the year between 1.2 and 1.3 billion of revenue. And we're very comfortable to say that we believe that we'll definitely meet the midpoint on our base U.S. business obviously with our European business being on top of that. And we're just trying to be conservative regarding where we come out on some of the factors that I raised. Otherwise, we still continue to see it. And in terms of cultivations, we've got a lot of new cultivation coming online, some of which is coming online to be honest, in the third quarter which really doesn't really start harvesting properly until December. So, this question about how much of that cultivation will actually hit the market in the fourth quarter versus the first quarter of '22. Obviously, we will recognize the fact that the supply chain is got some stress in it globally, and so some of the cultivation projects are obviously slightly held back, although I have to say the team a great job in none of them is delayed more than sort of a month. But that one month does change the picture in terms of the number of flowers that would come out of those facilities this year versus January of next year. So that's why we guided in the middle of the range. We're just trying to be cautious to make sure that we understand that we definitely can meet the numbers that we're outlining. That's why we came in there.

[Camilo Lyon:]

Yes. Thanks for the color. And then going back to the question I was asked earlier around your margins, I think last quarter, you kind of get the high level of margins progression for your more established markets. And in the more nascent markets, has anything changed on the established market? Grouping in terms of those margins that you're seeing? It seems like it's the younger more nascent markets are the ones that are starting to catch up, I just wanted to make sure that there wasn't anything that we're missing.

[Boris Jordan:]

No, we haven't seen any pressure in our more established markets. We still could see robust growth, like we had margin expansion in states like New York and New Jersey, which are markets that we've had for some time. And the smaller markets, as we bring on the cultivation, we just brought on a major cultivation store in Arizona, that's going to obviously expand our margin as we start to sell our own flower through our stores rather than keep stoning in flower from other growers. And so that's going to help margins as well. As I think Joe said, we just brought on a large facility, 2 facilities this year, 2 50,000 square feet The cannabis facilities in Florida, one that's already harvesting now and one that would be harvesting in the late fourth quarter. So, all of those things will continue to add to the margin. We have a new facility coming online in Pennsylvania and in Illinois, also in the third quarter that will be harvesting sometime in the fourth quarter. So, all of these facilities should add to margin expansion into the late fourth quarter, early third -- the first quarter of '22.

[Operator:]

Our next question comes from Andrew Partheniou with Stifel GMT.

[Andrew Partheniou:]

Hi. Thank you for taking my questions and congrats on the great quarter. You guys have a pretty unique footprint being the only one with a real national presence in so many different states. And one of the advantages is some interesting insights on the consumer level. I'm wondering, with COVID coming back, rather than restrictions easing and life coming back normal, could you talk a little bit about what you're seeing in terms of consumer behavior, whether it's consumption or purchasing behavior? Any high-level comments could be useful to understand the trends. Going into COVID, there was increased consumption and people were devoting more of their wallet share to cannabis and kind of looking forward, what do you expect?

[Boris Jordan:]

Listen, I think that COVID was obviously very good for Cannabis. It widened the customer base both on the wellness side as well as on the adult-use side. You definitely had some increased demand during the peak of the original COVID flare-up that we had in 2020. We definitely saw, and I think the BDS Analytics shows that we definitely saw 10 top states that BDS covers have a slowdown between -- from -- in May and June. If you look at the most recent numbers that have come out, you'll see that 10 of their states showed a slight decrease in sales. We don't think that that's a demand issue, a long-term demand trend. We think that that -- or too much competition, we think that was a share of wallet. People were cooped up in their homes for over a year and they started to venture out. They were going on vacations; they were traveling abroad. And so, people are moving around between states, so they couldn't use their cards on vacations. And so, we definitely saw a little bit of a change in habit, but nothing dramatic. Just a little bit of softness. And we think we've seen some green shoots in July. Illinois reported early numbers that showed a substantial increase in July. We'd like to see some of the other numbers before we can make a definitive view. But Curaleaf's view is that going into September and the fourth quarter, we should, as people start to come back home and go back to work, assuming the Delta variant doesn't flare up beyond sort of what happened in Europe, we think that demand should start to pick up again for Cannabis products and normalize into late third, into the fourth quarter. Obviously, if we get hit by a substantial COVID or God forbid another lockdown, that potentially could actually reflect very, very positive because we could get the same reaction that we got in 2020. So overall, we remain very positive. Back in May when I mentioned publicly that we saw a slowdown, we just felt that it's important to be transparent with the market. And we were proved to be right because the official statistics did show a slowdown in demand in all the key states around the country. And Curaleaf being the only operator that actually reflects in 23 states across the country was an early barometer of what then BDS was able to confirm. But as you can see, it did not reflect in our numbers. We were still able to meet our guide in the second quarter and we continue to feel that we're going to meet our guidance for the year.

[Andrew Partheniou:]

Thanks for that very detailed answer. Maybe switching gears on the call. You guys mentioned potentially refinancing your debt. In early 2022. Could you remind us where you're at now with that in terms of the cost of debt and where you might be targeting it? What kind of color are you seeing in the debt markets now? Could we see any potential traditional mortgages or are all of the substantial amounts of your real estate already in locked-in sale-leasebacks? Just a little bit of extra color there because I thought that was an interesting comment.

[Boris Jordan:]

Listen, we've always been very transparent about our debt position. We were the first to issue a non -- a 4-year -- a 2 - year non-call notes without any warrants back in January of 2020. We added another 50 million to that note at a substantially reduced rate. Our initial note was issued at 13% before at 10 in the quarter, back in January of this year. We've since seen even a further contraction in the Cannabis market, where -- there's a couple of deals in the market right now, 9%, and there are companies that are much smaller than Curaleaf. And given the substantial cash flow generation that we expect to see in the second half of this year, we think we'll be in a very strong position in January when we go to refinance our notes. I don't want to predict exactly what rate we're going to get, but obviously, we anticipate being in the single digits and more competitive than some of the other deals in the market today, given our size scale and creditworthiness. So that will obviously add a tremendous amount of cash flow to the bottom line. Because it's going to reduce the cost of our financing substantially. On the leaf side, some of our refinancing. So, we do have the ability at a certain point in time, the refinance. I don't have that information exactly here some of them are long-term notes that we can't refinance. But for the most part, Curaleaf refinancing’s were done at a lower level than most of our competition, so, we're not too fussed about it. We feel pretty good and for those that we can refinance, we certainly will do that when the time is up.

[Operator:]

We'd like to remind you to limit yourselves to one question and one follow-up. Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

[Eric Des Lauriers:]

Great. Thanks for taking my questions. Congrats on the strong growth in the quarter. So, you've talked a lot about your innovation pipeline. I appreciate the color there and your focus on derivative products with brands like Select. But while flower remains king in most markets and you guys are continuing to build out capacity, flower coming online in New York, etc., can you help us understand where you guys would love to compete with the flower? Are you guys focusing on premium quality, premium pricing? Is it good quality at a great price? Just any color on just kind of reminding us of your flower strategy would be helpful. Thanks.

[Boris Jordan:]

Hey, Joe, will you take that?

[Joe Bayern:]

Yeah. I think we are certainly continuing to not only improve the quality of our flower but the quantity and the yields of our flower. But as a large cultivator, we don't see ourselves as a niche grower who focuses on very boutique, high-end flowers. We're really targeting great flowers at a very reasonable price. And I think we've achieved that in most of our markets today. And in the markets that we haven't yet, we're on the way to achieving that. And I think that's really the cornerstone of our pricing strategy, is that we want to just produce a great value proposition to our consumers. Whether it's in flower or currently any other product format we're delivering, we see ourselves as somebody who has got the ability to produce great products at a reasonable price with high quality and high consistency, and that's the cornerstone of our strategy.

[Eric Des Lauriers:]

Okay, great. That's helpful. Appreciate that. And then my follow-up here, I guess a bit of a follow-up on the previous question. Boris, you mentioned, you expect some significant cash flow generation in the back half of the year here. Year-to-date, you guys have generated an impressive 147 million in EBITDA. But cash flow from operations seems elusive. You guys had a loss of 79 million. Can you just help us understand the difference there and what it's going to take to get you guys to cash flow positive? Thanks.

[Boris Jordan:]

Ranjan, do you want to cover that?

[Ranjan Kalia:]

Sure. Sure, thanks, man. So, you're right. I mean, for Q2, we did have a negative cash flow from OCF, but as the margins continue to increase in Q3 and Q4, where we're expecting our adjusted EBITDA margins to really cross the 30% mark for Q4. That's really going to drop down into the cash flows and also the Capex needs are also going to continue to go down. We did build a lot of Inventory in Q2 to really support the demand coming in the back half. That's not going to be that much needed for new Capex investments. So that's also going to help for cash flow from OCF. So, we believe in the back half, especially in Q4, we will start to be positive cash flow too.

[Operator:]

Our next question comes from Matt McGinley with Needham.

[Matt McGinley:]

Great. Thank you. My question is in regard to Capex. You said in prepared remarks that you expect new capacity in New York, New Jersey, Connecticut, Florida, I think it's TA in 2022 going to stop to guide Capex dollars today. But as you look at your asset base in your planned expansion, do you think we're at peak Capex with 140 million this year, or do you think that you're going to have continued projects? Are you going to have big amounts of Capex to redeploy to further the growth in '23 and beyond, or are we at, like I said, a peak Capex number this year?

[Boris Jordan:]

I think -- I'll start then I'll let Joe also continue in. But this year, the big Capex number for us this year was New York. And we have made a decision at this point in time to just expand to that limit that we at least now know that New York will definitely allow us to have, rather than go out and spend a tremendous amount of capital, building further demand -- further expansion facilities in New York, given that we don't think New York is going to get going really until January of 2023. If we hear from the State over the next several months as they put the commission in place, that they will allow us to have more than call it 150,000 square feet of canopy, then we'll go out and build that. We've secured the sites. We have all the locations where we have drawings. We're ready to go but we've just decided that at this point in time, why to go out and build as well as the fact that the state has been frowning upon people announcing that they're going to build capacity over and above what the state has indicated to everybody that they are going to probably award at this point in time. And so, in order not to upset the regulator to stay in good standing with them, we are building what we know that at the moment there is the discussion around a 150,000 canopy for the existing RO's. And then if that changes, we've got plenty of time and we've got the locations set up to build that. That number was around $50 million, which has taken our Capex down to the level where we are now.

[Matt McGinley:]

Okay. Thanks.

[Joe Bayern:]

I would say in the course of time -- sorry. To reinforce what Boris said. And I think the 150 million is a good proxy for our steady-state capital programs. But if we see accelerated growth opportunities in the marketplace, we're prepared to spend behind those opportunities. If New York allows additional cultivation capacity, we're going to build it.

[Joe Bayern:]

But I think you'll also see qualitatively a shift as we've talked about. We really look at our capital program across three-time horizons. We continue to build out our existing footprint in key markets like New York and New Jersey, even Arizona. But we also are spending on the central nationality of the business. So, we'll start seeing a qualitative shift in shorter-term capital projects, hopefully, to longer-term capital projects as those projects become more feasible in the marketplace. But I think the 150 is a good proxy for an annual spend.

[Matt McGinley:]

Thank you. And then maybe a big picture question on the production footprint and cost into '22 and beyond, I think Boris alluded to, but what are you hoping to achieve or learn from this low swing is that can be immediately applied to your other production facilities because I don't think you had anything like this facility today. On top of that, how much more of an opportunity is there to harmonize your purchasing costs across the national footprint to drive that unit costs down? Where is it more of an opportunity on driving cultivation costs down in these individual facilities where you get more of the upside over the long term?

[Boris Jordan:]

Greg -- Joe

[Joe Bayern:]

Boris, I'm assuming you want me to start with that one, and then I'll actually defer to Neil who is also -- Neil Davidson who is also on the call. But I think the -- what we're hoping to do with projects like Los Suenos as we've talked about is accomplish two goals. The first goal is, we are going to provide capacity, much-needed capacity in a market like Colorado, which is a big market, and we're under shared. And so, we're providing existing biomass for our formulated products in a market that we think is very attractive and we're under shared. On a longer-term basis, we're trying to blend our overall cost of cultivation to get to the lowest total delivered cost. That includes where we have facilities, primarily in-door, capable of producing high-end, high THC flower with greenhouse, which is primarily used as feedstock for certain types of products and biomass. And then, of course, outdoor, which is primarily biomass for formulated products. And by creating the right blend of those technologies, we're hoping to get to the total delivered -- the lowest total delivery cost in the marketplace. We will do that in Colorado by providing our current needs. We'll use that technology of outdoor scale and cultivation to be able to lower our total cost of delivery. And we're also perfecting genetics that can potentially then be used on an outdoor basis across the U.S. So, for us, it's a very strategic opportunity to make a step-change in our business. And we're very excited about the ability to work with Los Suenos to do that.

[Operator:]

Our final question today comes from Matt Bottomley with Canaccord Genuity.

[Matt Bottomley:]

Good evening. And congrats on the continued success and all. Just wanted to pivot back to some of your commentary on what Chuck Schumer had put out there as draft discussion. I know it's not fundamental to the business and you guys have more important things to focus on day-over-day, but I'm just curious on and maybe Boris if you wanted to comment on what you think potentially needs to be put into that bill or taken out of that bill in order to pass. And also, any thoughts on the taxation there that's a lot of the feedback I've been getting from investors is the impact of a potential 25% federal tax net of the removal of 280 EAN if that were to stay as is, how does that look in your view to the fundamentals on the tax line?

[Boris Jordan:]

I think it's very early to discuss what this loss is going to look like, right? So, it was a wish list that was put down on paper from the 3 senators and it was discussed internally quite extensively. And I think it's got all the right pieces in it. I think it's going to go into negotiation now. Obviously, a federal tax rate of 23% to 25% would be very, very good for the industry. More importantly, just the fact that we can write off our expenses will be very, very helpful. I mean, today the average company is paying well over 50% taxes, 55 to 60 call it because of the 2 ABU status. It's going to bring down the cost dramatically. I think the bigger question is, what is the excise tax going to look like? And how is it going to be structured? And that's something that's going to be up for discussion, negotiation. I suspect it will look a lot like alcohol, where the higher alcohol content is taxed at a higher rate, lower alcohol levels are taxed at a lower rate, which is very similar to cannabis. So, I think that that's going to be the discussion that's going to be had. Outside of that, as I said, I think that the law is more going to be focused on -- I think the interstate commerce issue is going to be the biggest problem at this point in time. I just don't think that a lot of the Republicans are ready for that at this point in time. But I do know that we're very, very good with votes in the Senate for safe banking law. So, there is bipartisan support, basically now. I don't want to say it's 100% but I would say it's the closest we've ever been to approval if that came to the floor to get past. I think that's a huge, huge accomplishment that's been done by the whole industry and its lobbying as well as Senator Schumer widened by -- and the booker that submitted this law, really put a lot of pressure. Basically, a lot of Republicans are saying, "Hey, we're really comfortable with the SAFE banking we're not quite yet ready for interstate commerce." I think the democrats can get comfortable with a law that allows a state to determine what laws they want. And we've seen that gambling. That's the structure under which gambling operates in the U.S. I don't see that -- why that couldn't be the same for Cannabis. And so, I just think it's a matter of negotiations as everything is. But the good news is, I don't know if everybody has noticed this, but we're starting to see some bipartisan work in DC. We're seeing it on infrastructure. I think we're going to see it on the debt ceiling and on the budget. So, it's good. We're going into a nice environment, where once we're through infrastructure and the budget and the debt ceiling, the next big law -- the next big issue is Cannabis. And so, the bipartisan work that's being done on those laws, I think is going to benefit the work on Cannabis.

[Matt Bottomley:]

I understand and appreciate that. And then just a follow-up on -- more on the core fundamentals here, 2 markets, in particular, just Arizona and New York. So, Arizona, any commentary on how that ramp is going? Seems to be pretty healthy with respect to the onboarding of recreational use, just given the fact that the existing medical market seemed very friendly to those types of product forms. And the other just being New York. You mentioned flower hoping to come online there. And I'm just curious about what your expectations are on potential magnitude there, maybe relative to Florida or other markets where you've experienced that. Just given that the locations, at least the ones I've been to in New York, feel more like clinics. They're not really your typical dispensaries. Clearly, not that many in the state overall. So just wondering if you think the addition of flowers will be a material driver to new customers coming into the legal channels.

[Boris Jordan:]

There's no question that flower will change the picture. It has in every state where the whole flower has been approved. It's very consistent throughout the country when flour is introduced in the bud and whole flower form, demand really picks up quite dramatically. People still rather buy, let's be honest, in a store than on the street for the most part because they know what they're getting into. They are getting a safe product that is laced with something or something like that. So, from a safety perspective, it does help. Obviously, direct legalization would help it even more because it would increase the number of stores throughout the state. The biggest problem right now is you've got 10 operators each with four stores. And so that's quite limiting in terms of access but we do expect a substantial pickup in demand. And to be honest, for the most part, it would be Curaleaf because Curaleaf has the largest cultivation operations in this state. And as Ranjan mentioned earlier, one of the cash flow issues is that we have been building products in New York and New Jersey, and other states getting ready for what's going to be a big change, right? In New Jersey, of course, it's going to be a wreck in November, and New York, it's going to be the whole flower in -- as soon as the Governor signs it. And the good news is that, if Cuomo is either impeached or resigns, it is our understanding that the Lieutenant Governor who will be taking his place is very favorable towards Cannabis and is very likely to sign the law pretty quickly after coming into office. We're pretty comfortable that this is going to happen. We're unfortunately stuck in what is becoming a regular routine in the country, and that is scandals around Governors and Congressmen and Senators, or in the middle of with right now and it's quite understandable that he does really have time to focus on the Cannabis issue. So, that's one of the things that we think there's probably going to get pushed them into the fourth quarter over September but it could happen much faster if you reside.

[Operator:]

This concludes our question-and-answer session. I would like to hand the call back over to Carlos Madrazo for some closing remarks.

[Carlos Madrazo:]

Thank you all for joining us today. I'd like to note that we will be participating in a number of upcoming virtual conferences and events, including our flyers side chat with Boris, through Canaccord Virtual Cannabis Conference tomorrow at 9

[Operator:]

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