Curaleaf Holdings, Inc.
Q1 2022 Earnings Call Transcript

Published: 9 May 2022

[Operator:]

Good afternoon, and welcome to the Curaleaf Holdings First Quarter 2022 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jacob Feinstein, Manager of Investor Relations. Please go ahead.

[Jacob Feinstein:]

Good afternoon, everyone, and welcome to Curaleaf Holdings first quarter 2022 conference call. Today, we are joined by Boris Jordan, Executive Chairman; Joe Lusardi, Executive Vice Chairman; Joe Bayern, Chief Executive Officer; Neil Davidson, Interim Chief Financial Officer; and Matt Darren, President of Curaleaf U.S. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States 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 or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were implied in drawing a conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press 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 to now turn the call over to Executive Chairman, Boris Jordan.

[A - Boris Jordan:]

Good afternoon, everyone, and thank you for joining us for our first quarter 2022 earnings call. I am pleased to report that Curaleaf had a strong first quarter with year-over-year revenue growth of 20% to $313 million, and year-over-year adjusted EBITDA growth of 16% to $73 million, generating strong operating cash flow of $57 million. This good news comes from three quarters of operating in a challenging macroeconomic environment with the various disruptive cycles of the pandemic and reductions to discretionary spending, factors affecting everyone, not just our industry. It's no secret that the first quarter was tough for the entire sector with BDSA and Headset noting industry growth of just 1% year-over-year, yet Curaleaf's growth far outpaced that rate. Despite a challenging environment, a lack of COVID stimulus checks and the usual first quarter seasonality of cannabis, Curaleaf once again outperformed the broader market, a trend we first saw and one we intend to maintain. After a difficult start to the year, by March, things were already looking brighter. We have posted a robust recovery in March and April total revenues growing 22% over January and February. Heading into the second and third quarters, we have additional catalysts teed up to keep the momentum going. In Illinois, we completed the first harvest from our Lichfield facility with products being rolled out this month. And in New Jersey, we now have adult-use sales in Belmar [ph], a store which is approaching an annual run rate of nearly $100 million, and our other two stores will begin [indiscernible] sales later this quarter. And as one of the largest suppliers in the state, favorable wholesale prices in New Jersey have enabled us to take full advantage of the adult-use market. In Florida, where we continue to steadily gain share, we have five new store openings in the second quarter. In Pennsylvania, we are substantially increasing our Canopy square footage, which will start to deliver product later this year. These investments are consistent with our strategy to drive revenue growth in high-margin states. Given those powerful catalysts fueling the next several quarters and the strength of our expansive footprint, in total, we continue to expect sequential quarterly revenue growth to resume in the second quarter, and for our adjusted EBITDA margins to expand throughout the rest of the year. We are very confident about our current position. The recent wave of consolidation and investment in the industry are only validating securely singular strategy of going wide early. As we now have the footprint, our peers are trying to meter, we've spent wisely yet responsibly to build scale and infrastructure, and we are now benefiting from those early investments. These were long-term decisions, businesses are not built on quarterly strategies. Unlike our competition, the task before us now is simply to further scale our operations rather than establish them. We stuck towards strategic plan, and we are now ahead of the game and setting the pace. Looking at California, Colorado and Oregon [ph], although they've had a tough start to the year, we see these investment markets as violator [ph] long-term growth and brand building strategy since they represent $7 billion in market opportunity, and in stark contrast to many of our peers, we are uniquely positioned to take a long-term view and withstand the market volatility and pricing pressure in these markets. With that, we remain confident in our guidance of $1.4 billion to $1.5 billion in full year '22 revenue, and expect adjusted EBITDA margins of around 28%. On the legislative front, we are still cautiously optimistic that immersion of state banking will pass during this legislative session with a higher likelihood coming in the lame-duck [ph] session. I do want to say that it is a tragedy that it has taken the shooting depth of several young people working in dispensaries for the urgency of this bill to be recognized. Additionally, it is also critical to pass safe banking to help social equity dispensary owners gain access to capital so they can secure loans without the predatory interest rates. It is no secret that change will be incremental, but we continue to push aggressively for reform and remind Washington that the American voters have made clear repeatedly that they favor cannabis legislative change. Along these lines, the launch of adult-use sales in New Jersey is incredibly exciting and came before our May 1 projection. We had lines around the block and hundreds of very happy consumers, and this trend continues to grow as we launch edibles and more new products. We believe New Jersey is the catalyst for other Northeast states to accelerate their efforts towards adult use, especially as they begin to witness the tax revenue in New Jersey is generating. In particular, New York and Connecticut are ripe to implement their previously passed adult-use programs, which we believe will happen in the near future. We expect to be the biggest operator in these markets, important markets, and just as we demonstrated with our early preparation in New Jersey, we are rigorously planning ahead. We are on-track to complete the expansion of our New York facility, tripling our Canopy square footage and setting up -- setting us up perfectly for the new adult-use market. We are ready for this critical transition in the Northeast. Going abroad, Europe continues to show exciting progress. Revenue across all markets with the United Kingdom at the forefront increased 70% year-over-year. In the United Kingdom, we saw 42% quarter-over-quarter revenue growth. We completed the acquisition of Sapphire Clinic, the country's first private clinic specializing in cannabis. By 2024, the United Kingdom is expected to have a $1.3 billion medical market with nearly 340,000 patients according to Sytesa [ph]. With a population of 70 million people in the United Kingdom’s room for growth in medical and beyond immense, and we are the leading player. In Germany, the Health Minister recently expressed support for its stepped-up schedule for adult-use cannabis legislation, pushing for the summer legislative agenda rather than this fall. We believe Europe is the next frontier of cannabis, which we estimate has a $229 billion TAM, and Curaleaf is the only MSO with a meaningful presence. While other operators will be scrambling for years to acquire licenses and paying elevated prices to enter the market, Curaleaf will already be operating throughout the continent and strengthening our platform. Our early investment in Europe is evidence again of our long-term strategy paying off. Overall, I'd like to reiterate that the future is indeed bright and the best is yet to come. We are still in the early innings, and we remain bullish on the future of cannabis and its potential to become a $320 billion plus global industry. You've all heard me say size matters; that's never been truer than at this moment in our still emerging industry. With Curaleaf's innovative products, the broadest distribution platform and strong brands, there is no other operator more prepared to seize this moment. We have planned for it, and we are right where we want to be. Finally, today, we announced that Matt Darin, currently President of Curaleaf U.S., will be assuming the role of CEO of Curaleaf, effective today. I've asked Joe Bayern to head up a new division for Curaleaf for his experience as a brand builder, and CPG leader will be instrumental for a major new initiative. This move position us well on several fronts; we will benefit from Matt Darin’s leadership and experience of running day-to-day operations, commercialization, and driving executional efficiencies, and we will tap Joe Bayern’s considerable expertise driving CPG strategy to launch our new division. I have the utmost confidence that this change is the logical next step in Curaleaf’s journey as the leading global cannabis company serving both, adult-use and health and wellness markets. In fact, we have never been more confident about our future. With that, let me turn the call over to Joe Bayer.

[Joe Bayern:]

Thanks, Boris. We had another exciting quarter to start the year for Curaleaf. In fact, this quarter marks the 17th consecutive quarter of retail revenue growth and our 12th consecutive quarter of positive adjusted EBITDA. Turning to some business highlights and updates beginning at the state level. As Boris mentioned, in Illinois, we had our first harvest on April 13 from our expanded Litchfield campus, which more than doubled our canopy square footage. This increased capacity will enable us to continue to maximize our vertical mix of curled products in our own stores as well as grow wholesale operations as we continue to ramp this new capacity. Even prior to the Litchfield expansion, Curaleaf gained market share quarter-over-quarter, and we expect that to continue. Overall, Illinois is a top market for us, and we will have a step function in growth once the states award the 185 licenses resulting in more points of sale. In Pennsylvania, we have seen 4 consecutive quarters of market share gains as a result of increased production from our manufacturing facilities and several new store openings with 2 more on the horizon in 2022. In addition, we have significant cultivation capacity coming on throughout the rest of the year. Because of the strength of our vertical platform and the quality of our products, we will continue to drive scale. With a population of 13 million, a 40% greater addressable TAM than New Jersey, the opportunity in Pennsylvania is massive. And with adult-use legislation on the horizon, we could not be more excited about our position in the state. In Florida, we have continued to execute successfully on our business plan, scaling our operations and becoming the solid number two player. We are best-in-class in terms of volume per store and have consistently increased our market share. At the end of Q1 2021, Curaleaf had 9% market share for both flower and oil products. At the end of Q1 2022, Curaleaf had 14% market share for flower and 13% market share for oil. To further put this into perspective, flower sales have increased 129% year-over-year, and oil sales have increased 102% year-over-year being done with only 8 new store openings. Our increased product variety and the recent launch of Live Ros in vapes and concentrates Select XBites and Blue kudu chocolates has led to further output through our dispensaries with milligrams dispensed per store growing 68% from March of 2021 to March of 2022. The capital spent on expanding capacity during the height of the pandemic and last year are seeing strong returns and operating efficiencies are increasing by the day. I would also like to note that this was done without a full quarter of SKUs from our 8 extraction system, a proprietary technology that produces our first solvent list products and the cleanest oil on the market. Overall, Florida is a model of how prudent capital allocation and operational diligence, which have led to strong share gains in a battleground market. Regarding research and development, in the first quarter, 17% of our revenue came from products launched within the last 12 months. For reference, for the full year of 2021, that statistic was 11%. We are confident we invest more than anyone else in R&D in the industry. And the fact that nearly 1/3 of our revenue came from recently launched products is a good indicator as to the return from those investments. On top of this, our new products are bringing customers back to the stores. According to Shopify, a good repeat purchase rate is 27%. With that in mind, Click has a repeat purchase rate of 53%, Select Essentials has a rate of 47%, and our classic BiTEs 2.0 has a rate of 44%. We -- we believe highly formulated products backed by science of where the true value is, and our customers are trusting purely for those choices. Turning to retail; we saw a January and February slowdown, but March turned out to be a record month for Curaleaf with transactions up 18% from February. At the same time, despite the macro environment and increased retail competition, our average order value remained steady quarter-over-quarter. April also showed strong results, which included a record 420 with a net revenue increase of 45% year-over-year. Encouragingly, we have seen retail revenue increase monthly from the beginning of the year, and we see continued strong momentum heading into the rest of the year. We added 11 new stores during the quarter, 4 in Arizona, 4 in Pennsylvania and 3 in Florida to end the quarter with 128. The 4 stores in Arizona come from the first quarter closing of Bloom. As of today, we have opened 3 stores to 131, and there are more to come as the year progresses. Looking at wholesale, we ended the quarter with over 2,200 independent wholesale accounts across the country, an increase of 10% year-over-year. We saw good momentum with our wholesale business heading into the new year, but because of the macro environment experienced in January and February, reorders were substantially down, leading to a decline in wholesale over the fourth quarter. Despite that, I am encouraged by the strong year-over-year growth in some of our key markets. This includes Pennsylvania, where we had 127% year-over-year growth; Maryland with 126% year-over-year growth and Michigan with 51% year-over-year growth. Michigan stands out given it's one of our investment markets and with PDSA projecting a state to be nearly in $3 billion market in 2026, we are pleased to see the proliferation of our wholesale operations there. We also expect tremendous growth in our wholesale business in New Jersey for the next several years as the adult-use market develops. Between our geographic reach, our own retail footprint and access to 2,200 independent dispensaries across the country, our distribution footprint remains unmatched, and we'll continue to invest in it to build competitive advantage. With that, I'll turn the call over to Neil to discuss our financial results in more detail. Neil?

[Neil Davidson:]

Thank you, Joe. Now let me provide some details on our first quarter 2022 results. Total revenue for the quarter was $313 million, representing year-over-year growth of 20%. Retail revenue was $226 million compared with $188 million in the first quarter of 2021, representing 21% year-over-year growth. Retail revenue came to 72% of total revenue, in line with the 2021 period. Wholesale revenue grew 19% year-over-year to $86 million, representing 27% of total revenue. Sequentially, retail revenues were up slightly, while wholesale revenues declined 9%. The decline in our wholesale revenues resulted from the low reorders we experienced in January and February, as Joe discussed, and pricing discipline, we continue to observe in both California and Colorado, resulting in lower overall sales for the quarter. Our gross profit on cannabis sales was $154 million for the first quarter, an increase of 20% year-over-year from $128 million. Gross profit margin was 49.3%, the same as the first quarter of 2021. Sequentially, gross profit margins declined 40 basis points due largely to the state mix of revenue during the quarter. SG&A expense was $100 million in the first quarter compared with $100 million in the prior quarter and $80 million in the year ago period. The year-over-year increase in SG&A primarily reflects increased headcount in support of new store openings, the impact of annual merit increases and higher travel costs as revenue facing travel resumes. SG&A as a percentage of revenue was 32% compared with 31% in both the prior quarter and in the year-ago period. Our first quarter SG&A included approximately $6.5 million of adjusted EBITDA add-backs versus $9.5 million in the prior quarter. Excluding the add-backs, our SG&A represented 30% of total revenue in the first quarter and 28% in the prior quarter. Adjusted EBITDA for the first quarter was $73 million, a 16% year-over-year increase. Sequentially, adjusted EBITDA declined $6.7 million or 8%. The decline over the prior quarter was attributable to the 40 basis point decline in gross profit margins as discussed and approximately $3.5 million in margin dollars related to the decline in wholesale revenue. Additionally, SG&A, excluding add-backs, increased by $2.5 million, resulting from approximately $1 million related to annual wage increases and approximately $1.5 million related to store openings in Pennsylvania and Florida as well as the acquisition of Blue. Our investment markets, including Europe, impacted our consolidated adjusted EBITDA margins by approximately 570 basis points versus 770 basis points in the fourth quarter. Now turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of $243 million as of March 31, 2022. At the end of the first quarter, our outstanding debt was $584 million, net of unamortized debt discounts and debt issuance costs. As mentioned on our last call, in preparation for the upcoming growth in several markets in 2022, we are building up our inventory. In Q1, our inventory increased $43 million sequentially, inclusive of $24 million of biological asset adjustments. Therefore, our business inventory grew by $19 million, primarily due to inventory buildup from our New Jersey facilities in preparation for adult use, an increase in Arizona related to the acquisition of Bloom and increases in Illinois and Pennsylvania as we increase production capacity. We see this decreasing as the New Jersey adult-use market ramps. Our wholesale increases in the second quarter and beyond and we opened additional stores. Net capital expenditures during the quarter were $30 million. Our investments continue to be focused on expanding cultivation and processing capacity as well as strategically increasing our retail presence. First quarter cash flow from operations was $57 million. We continue to expect to generate positive operating cash flow for the full year 2022. Most importantly, we believe our current cash position as well as the operating cash generation this year is sufficient to fund our operations and CapEx plans, which, as a reminder, will be approximately $150 million for the full year 2022. Finally, to recap our 2022 guidance. We remain confident in full year revenue of $1.4 billion to $1.5 billion, with where we fall in this range being largely dependent on the macroeconomic environment and the timing of regulatory approvals. Our growth in 2022 will be driven by the expansion of our retail footprint in Florida, Pennsylvania and Arizona, the expansion of wholesale accounts closing of try and the performance of our recently closed acquisitions of Losuagnios and Blim. We continue to expect adjusted EBITDA margins of around 28%, with margins expanding sequentially in the remaining quarters of 2022 as we leverage our SG&A further and drive revenue growth through our vertically integrated markets like Florida, Illinois, New Jersey and Pennsylvania. 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. [Operator Instructions] Our first question will come from Camilo Lyon with BTIG.

[Camilo Lyon:]

Thanks, and good afternoon, everyone. It’s great to hear about the acceleration that you saw in March to April. Borsen, maybe for you, I was hoping to get some more color on New Jersey. And specifically, I think last call, you talked about an expectation wholesale markets in your business, in particular, to turn on in the back half of the year, but given how strong sales have been, I’m wondering if there’s an updated outlook on your wholesale opportunities…

[Boris Jordan:]

That's very true. Camilo. Yes, we thought that with the buildup of inventory that there would be enough inventory to handle the 12 to 13 stores that are opened up now or will be opened up between now and the end of the quarter. However, what we've seen is the demand has been very, very strong, and there hasn't been the inventory we originally anticipated in the marketplace. So Curaleaf is definitely a port of call for most of the operators looking for inventory. However, we've had to be very careful in managing that because just our Belmar store, as I indicated in my talk earlier, is running at $100 million run rate at this point in time, and we're about to open up Edgewater and Bordentown over the next few weeks. And so with those opening up, we are wholesaling, but we're also being very careful to make sure that our stores are fully stocked as we capture the full margin of the chain by selling to our stores. But we are -- we are selling in the wholesale market. And I think you'll see Curaleaf products in almost all stores around the state at this point in time.

[Camilo Lyon:]

And can you talk about the flow of your product pipeline into the stores? I know that there's been some choppiness with getting everything ready on day 1. So for everybody, for all the operators. So maybe just help us understand when you think about that $100 million run rate, is that just because of what you're seeing today, in addition to the added products that you'll also have coming on? Or is the added SKU count going to reach that? How do we think about that dynamic?

[Boris Jordan:]

Look, I think the first thing we only to recognize is that new tours is massively underserved in terms of products. So demand is going to outstrip supply dramatically for the foreseeable future. It's probably one of the few states that I've seen in 8 or 9 years in the sector that's so skewed towards not having enough product. And so I don't think the existing players are really going to have an issue with selling their product. So almost anything you put on the shelves at the moment is going to sell. But you're exactly right. One of the problems is the launch happened so fast that a lot of the products were not approved yet or were not -- we weren't able to package yet or we weren't able to get the right packaging for them because the state was making changes up until the last minute. And so there was a slower start in rolling out, for instance, edibles or in the case of pure lead squeeze, quickly sold out. So now we're starting to ramp up there. I think our edibles lines are starting to reach or getting close to starting to reach the capacity. So I think we're going to get much more edibles out, and that's the one that's really in demand right now. I think also squeeze is coming back on the market, and then we'll start to see more and more SKUs. I mean the biggest issue in New Jersey is testing, obviously. There's only a few testing labs that are available and demand is very high. And so we have to get the testing protocols in New Jersey of change, where now you have to get everything tested, whereas under the medical program, you didn't -- and so that's the one worry. At the moment, we're not seeing a huge problem there. But as time goes on, the more operators have more product available to them, I think you could start seeing a little bit of a backlog because of the testing labs. We also hope more test and labs will open. But I think you're going to see a lot more SKUs, a lot more product offerings coming out of both Curaleaf and our competitors into the marketplace. But again, this is one of those unique situations where we can sell everything we can produce and then some.

[Operator:]

Our next question will come from Vivien Azer with Cowen.

[Harrison Vivas:]

This is Harrison Vivas on for Vivien. So just on international, can you provide maybe specifically what international sales were in the quarter and how that business is trending in terms of profitability? And then just stepping back a bit, Boris, you talked about Germany's Health Minister announcing plans to accelerate legalization. So can you kind of just frame up the opportunity you see in Germany specifically and maybe offer some color around your competitive positioning in the market today?

[Boris Jordan:]

Yes. Yes. So actually, after we recorded our call today, the Justice Minister in Germany came out and said he wants to push it even earlier. So we now have 2 different ministers coming out and trying to push the adult-use legislation. He wants it in '23. -- whereas we anticipated that would come out in '24, Again, we still think it's probably more like a 24 program, but there seems to be a tremendous amount of pressure in the German market to launch adult your sales. I mean the medical market in Germany is still very small. It's 100-some-odd thousand patients. It's a small market. We, together with about 5 or 6 other players are participating in that marketplace right now. The...

[Harrison Vivas:]

Even the U.K. market...

[Boris Jordan:]

Right now, the U.K. market seems to be growing even faster than the German medical market. But the German market overall is expected to be -- I just listened to the presentation today, approximately a EUR 12 billion market. It's bigger than California and Canada put together. Those 2 markets right now are running at around USD 14 billion. And so we anticipate that, that's going to be a very, very big play, and it's coming right down the pipeline. And you really have to be there in advance. You have to register your products. We're going through all that now. You have to register your SKUs, it's a much more difficult process than in the U.S. to get into that marketplace. And so we feel very good about the decision to be there. Germany is going to be an absolute game changer. I actually think Germany will be adult use legal federal adult use before the United States.

[Harrison Vivas:]

Great. Super helpful. And then, I guess just doubling back on the profitability. I think you talked about international operating at a gross margin kind of in line with the company average. But can you talk about the operating like EBIT profitability trends in the international business...

[Joe Bayern:]

Yes. It's a very small business today. So it doesn't -- I mean it impacts our numbers by about 1% negative effect on the EBITDA line. So -- sorry, the 100 basis points of negative EBITDA, we're running at around $8 million first quarter revenue run rate. So it's still a very small business compared to where we expected to be in '24. The whole purpose of this exercise was to build up our business going into 24%-25%. However, the surprise to us, there were 2 surprises at the fast rate of growth in the U.K., where we're growing at 45% quarter-over-quarter. -- and in the medical market, and there's very few players that were by far the largest operator. And as we said, we expect that market to be around $1.3 billion to $1.4 billion market in '23, '24. So that's going to be tremendous growth for Purely. And obviously, then I go back to that German. So those are really the 2 markets that we're focused on right now in terms of registering our products, getting everything into place so we can take full advantage of.

[Operator:]

Our next question will come from Matt McGinley with Needham.

[Matt McGinley:]

My first question is on the gross margin rate. Do you expect that increase this year to mostly come from greater scale in all markets? Or would that be driven more by single state drivers like New Jersey with the adult use opening there. And how do you think about overall risk to your gross margin rate from pricing as the year progresses? Do you think that, that is more of a heavy factor on the gross margin early in the year? Or do you think that, that will persist throughout the remainder of the year?

[Boris Jordan:]

So thanks, Matt. So I think it's a combination of things. The first, as you've seen, we're starting to improve the profitability, as Neil pointed out, in our investment markets. So we've gone from 700 to 550 basis point hit to our overall number in those states. So that's California, Oregon and Colorado. So as we integrate Lasanios as we convert the raw material to oil and start to launch the Select brand in that state like we did in Michigan, where we're now, I believe, the number one brand for oil sales in the wholesale market. that will start to bring up our gross margin. And as we said to you, we expect to operate somewhere between the 50% and 52% gross margin for the year. And we feel very comfortable in that number. So obviously, New Jersey will help because New Jersey is a very high-margin market at the moment with where the pricing is coming; so New Jersey will contribute. But Florida of all things is running at a much higher level than we originally -- when we spoke last, we were running at around a 34% EBITDA margin in Florida, we first closed the first quarter at close to 40%. So we're starting to see, as our scale comes into place, we're starting to see improvements in Florida. We're starting to see improvements, obviously, New Jersey in our investment markets and across the full footprint. I think the one place we still probably won't see improvement is in Europe because in Europe is very much in investment mode at the moment, and we continue to probably see pressure and maybe additional pressure there. But we will definitely see increase in gross margin across the U.S. platform at scale over the next several quarters?

[Neil Davidson:]

Boris, I would also add what the benefits of our vertically integrated markets, and we've mentioned capacity coming online in Illinois. I also mentioned in my prepared remarks, some capacity coming on in Pennsylvania later this year. One of the benefits is our in-house brands and our vertical market allow for higher margins. So even if there is some pricing pressure in those markets, it impacts our margins less so.

[Matt McGinley:]

Great. And my second question is probably for you, Neil. Your income taxes payable balance was at a historical peak in the first quarter. What do you expect your cash tax payments to be into the second quarter?

[Neil Davidson:]

Yes. The $180 million, I think you're talking about, that obviously has both our full year and Q1 accrual in it. Our tax payment will be a little bit north of $100 million.

[Operator:]

Our next question will come from Owen Bennett with Jefferies. You may now go ahead.

[Owen Bennett:]

Evening gents, hope all is well. First question, I was just hoping you could please just give me some more color on the new CPG division, what it will be looking to achieve exactly and how you think it may differ yourselves and peers, thanks.

[Boris Jordan:]

We're not going to be able to do that at this stage. It's still in progress. However, we will be making announcement probably around July or the first week of July on that division and what it will be doing as we finish up the legal work as well as Board approvals at the company level for the establishment of that division. But it's been something that's been a work in progress for some time. We're very excited about it. We think it could become a major, major part of Curaleaf. But we do have to hold back until we get final approvals until we can make that announcement.

[Owen Bennett:]

Okay. Thanks and then just a follow-up on the ASIC extraction. You mentioned at year-end, you were hoping to be running store inventory in Colorado through that in early April. And then as the Colorado rollout in California. I was just wondering, did you manage to hit those time lines and kind of any early feedback if that's the case? Or if you're running slightly behind what sort of date can we expect that to be in Colorado and California now?

[Boris Jordan:]

Matt, do you want to take that? Or Joe?

[Joe Bayern:]

Yes. This is Joe. I'm happy to do that. Well, the good news is we have it up and running in Florida and is performing very well. So it's actually better than we expected. In Colorado, we have equipment all in place, but we've been having some permitting problems, not with ACE [ph] itself, but just closing on a transaction there to get the permits that we need for the build-out. So we think we've gotten that squared away. As you know, it's not the first time we've come across delays based on regulatory delays and some bureaucratic issues that we're dealing with. But we feel pretty confident we'll be able to get that up and running in roughly the next 60 days if we get the permits. All the work that's been done, the equipment is there. We just have to literally get the stamps. And the California equipment is being delivered over the next 4 weeks. And as soon as we finish for Colorado, we're going to go right to California.

[Operator:]

Our next question will come from Aaron Grey with Alliance Global Partners.

[Aaron Grey:]

Hi, good evening. Thank you for the questions. So first one for me, I just wanted to touch on Pennsylvania. I believe you said 2 store openings also planned for more cultivation coming on later this year. So just given some of the pricing pressure that we've seen in the market, just how you think about the degree of quote patient that you look to have. Obviously, you have more stores come online. You've had a number of store openings. Neil, I think you just alluded to potentially having more on brands sold to the store, which could help. But just in terms of how you're looking at the Pennsylvania market, the degree of cultivation expansion amid the pricing pressure, but also for the prospects potentially of adult use coming on board too.

[Boris Jordan:]

Joe, do you want to get that?

[Joe Bayern:]

Yes. I mean, listen, we couldn't be happier with Pennsylvania, as we said in our statement, we do have somewhat of a supply constraint in the marketplace, we're able to keep our pricing. But we also have a well-known brand, especially the grassroots brand, which is performing really well. So we need to get more capacity in the marketplace. At some point, there'll be an oversupply. But at this point, we continue to grow share. We continue to build revenue. So we're going to continue to build, not only for our vertical integration, but we have a very robust wholesale business that we can't supply 100% of the demand today. So we're excited about Pennsylvania. We'll continue to expand there. I think as we look at rolling out our new products, which haven't hit the market yet. Hopefully, the market will become a little bit more receptive to different product formats over time, and we'll get some of our new technologies in there. But as you said, we believe that adult use is on the horizon in Pennsylvania. So we're going to continue to ramp up and be ready because when that happens, as we said in our script, we think that Pennsylvania could be even larger than New Jersey. And if that's the case, it's going to be undersupplied for years. And I think it's a good time to invest in Pennsylvania.

[Boris Jordan:]

Yes. And I'd just like to add that we haven't seen -- as we said in the last quarter, we haven't seen the pricing pressure at Curaleaf. I know that sounds strange given that almost everybody else has said they have. But we have not seen pricing pressure for particularly from Pennsylvania at this point in time.

[Aaron Grey:]

All right, great. Thank you so much for that color. And then second question for me, just on overall consumer trends. I believe you said ticket roughly flat, just given the broader consumer backdrop, have you seen any kind of differences maybe in trade down or maybe consumer activity? And then maybe if there's a difference between the medical and adult-use markets in terms of overall consumer trends just amid inflation and rising gas prices?

[Joe Bayern:]

Do you want to take that, Boris? I'm happy to do that.

[Boris Jordan:]

Go ahead.

[Joe Bayern:]

Yes. I mean, I think -- listen, it's not a surprise that we're seeing some pressure on the consumer front is they just have less disposable income. There are a lot of economic headwinds that we're facing, and we're seeing that in our store. I think broadly speaking, it's -- to your point, it's more consistent on the medical side as far as spending because they have a routine and a regimen of how they consume their products and they don't want to deviate from that. I think medical is -- I mean, adult use is a little bit more discretionary. So we see a little bit more fluctuation there. But we believe that we continue to get foot traffic through the door. We're increasing the number of transactions. And as we bring new consumers into the cannabis category, we think we're going to continue to see growth. So we're very bullish on the back half of the year, as Barra said in his prepared remarks. We think it's going to be a strong back half in a recovery. So we want to be prepared. We want to make sure we have enough supply. We want to make sure that we're moving people through our retail operations with the right experience and helping people make the right choices around products, which is part of the hallmark of what we do well. And we're excited about the back half of 2022.

[Operator:]

Our next question will come from Spencer Hanus with Wolfe Research. You may now go ahead.

[Spencer Hanus:]

Great, thank you. Can you talk about how much of a benefit M&A was in the sequential sales performance in the quarter? And then what do you think from a pricing standpoint in 1Q and heading into 2Q for the industry?

[Boris Jordan:]

Neil, do you want to take that?

[Neil Davidson:]

Yes, I can answer the first question. The first question, Bloom, which closed January '18, contributed about $10.9 million of revenue.

[Spencer Hanus:]

Great. And what are you seeing from a pricing standpoint as you look from 1 to 2 period you're seeing any stabilization added seasonality in the pricing over the last few months?

[Joe Bayern:]

I can take that. Listen, I think we are -- as we said, we're going to get -- we're going to continue to see some pricing pressure for sure. But what we've been doing as we always do to counteract that is to try to increase the quality of our products and increased differentiation. And that's what we've been doing. And an example of that is in Florida, where we launched live rosin, which isn't being sold as they sound because the discount because of a unique product in the marketplace, xFi coming into the market, which drive premium pricing. So like always, we're trying to focus on the quality of our products, the differentiation of our products to be able to mitigate any kind of pricing pressure we feel. But at the same time, we're driving scale. And I think that's the important part is even as we see pricing pressure, we're getting expanded margins because we're continuing to drive scale across our business. That's something I think that uniquely positions us in the category or in our industry is that we will continue to drive top line, but we're also going to get margin expansion. We're going to get that because we're growing scale based on investments we've made over the last 2 or 3 years. And now we're seeing the benefits of that. And that's why Again, I think I sound report, but I'm very excited about the back half of 2022 because I see a lot of the investment we've made, a lot of the programs we put in place are now starting to reap the benefits. And we could see that pipeline. And that's what's driving our enthusiasm.

[Operator:]

Our next question will come from Matt Bottomley with Canaccord Genuity. You may now go ahead.

[Matt Bottomley:]

I just wanted to go back to New Jersey. Boris, you had mentioned in the last earnings call that you're expecting to ramp, I don't know if you or modest, but just sort of tapered expectations given the limited infrastructure. So can you give any color or maybe orders of magnitude as to how the -- close to $100 million run rate of your store is in adult use relative to what it was doing in medical and maybe what we should expect in terms of the lift in Q2 now that adult uses on?

[Boris Jordan:]

Yes. Listen, I think that we were running just trying to remember who we're probably running at about a little bit less than half that as a medical. Now that was our best store in our system for a long time in the medical program. And so we were running at a little bit less than half of that number. But that number keeps picking up every single day as we're introducing more products. And there's a demand builds and education around the state as well as Pennsylvania, which is 10 minutes away from that store, get educated in the fact that, that store is open and adult use is open. So we anticipate continued growth, not stabilization, but actually continued growth in that store moving forward. And I fully expect that, that store will reach that $100 million run rate. How the other stores do in our other stores is just still a question. I mean I think our Board on Tonstr, which is our largest store in the system, I think it's over 12,000 square feet. -- with almost 30 registers, that one will hopefully open up in June. And that one is closer to trend. So that will be addressing a different group of customers. And we hope that just the size and the fact that we have a lot more product than anybody else will attract a lot of people to that store as well. And then Edgewater, we think maybe a couple of weeks, hopefully, will be open. And that store is about 20 minutes away from Delmar. So we're still open to see how that behaves versus -- or does it cannibalize Belmar or does it actually add? We suspect it will add because the lines around Denmark is still quite long. And I think we're the only store that still have substantial lines around it. And so we think that, that will take a little bit away from -- it will take -- it will help us out a little bit managing the amount of patient flow going into Belmar. And obviously, when there are lines around stores that turns patients and customers away. So we're trying to get away from the line so that we can process more of those customers. And obviously, on the wholesale side, it's what I said earlier on the wholesale side. A lot of the other stores are starting to ration products. And so we see quite a bit of demand on the wholesale side. And pricing is at the top level. I mean pricing is to $4,500 a pound to $5,000 a pound level, which is what we saw in Massachusetts, for instance, when that state converted from medical to adult use. We saw that in Illinois and in the other states. But this particular state, the problem here is that it's just going to take years to build the infrastructure in order to be able to start supplying. I mean, I think there was 5 or 10x the amount of stores or at least the amount of stores in Illinois when that market got launched. And certainly, there was at least 5x of that sometimes the cultivation capacity and what we're seeing that we have in New Jersey. So we think that this market will be supply constrained for some time going forward.

[Matt Bottomley:]

Great. Appreciate all that. And then just my other question has to do with just the wholesale segment. So you mentioned reordering patterns and a little bit of pricing in some of the western states, I think California, Colorado. Can you give any color on what the sort of the split is between what contributed more to the decline? And then any color, particularly on the Eastern markets or northeastern markets. I know you mentioned Pennsylvania seems to be holding in well on the pricing, but just any sort of trends that we could see in some of the more robust markets in the Northeast.

[Boris Jordan:]

Yes. Listen, I think that Massachusetts is definitely starting to see some issues with demand. Margins are still okay, but we're definitely starting to see some pricing pressures in Massachusetts. Obviously, California is going through a massive, massive decline and massive pricing pressures at the moment. And so that's a market where we are definitely not expanding our sales at the moment and keeping them in trying to keep a nice position in the marketplace but not expand that business at all. Colorado is a market that went through some pricing pressures as well this year. We anticipate and we're starting to see some firming into the end of the year. We hope that, that will help going into next year as well. So we hope that, that will be a better market than next year. So -- and obviously, Nevada has -- now we don't have a very large wholesale business in Nevada, but definitely, we've seen watching the market that there's been some pricing pressures in Nevada as well. Arizona is staying very, very good. Pennsylvania is very good for us. Illinois is just a great market for us. Florida is just going from strength to strength. Obviously, we're now adding New Jersey, Maryland is very good for us. So we have plenty of states where we're still feeling very, very good. And obviously, the adult use onset in Connecticut, New York and potentially in Maryland over the next 12 to 18 months, we think it's just going to add to that. So we're very excited about New York and Connecticut coming online at the end of this year, early next year. And then obviously, we think Pennsylvania and Maryland may be coming on within 12 months as well. So there's a lot of activity on the East Coast, which we think will just add to our business.

[Operator:]

Our next question will come from Eric Des Lauriers with Craig-Hallum Capital Group. You may go ahead.

[Eric Des Lauriers:]

Great. Thanks for taking my questions. I was wondering, first, if you could just expand on what kind of inflation expectations you guys have built into your margin guide? Thanks.

[Boris Jordan:]

Neil, do you want to do that?

[Neil Davidson:]

Yes. I mean I would say we have some elevated discounting built in. But when looking at -- so going into Q2, the biggest drivers there are really adult use in New Jersey and continued market share in Florida. Looking in the back half, you have a macroeconomic is a piece of it, but also regulatory timing.

[Joe Bayern:]

Yes. And I'd just add to that, I think maybe part of the question was relating to our raw materials. But the -- we've talked about the fact, even though we're seeing some pricing pressure, inflation pressure on raw materials, we're actually buying at a consistent price and getting scale. So the scale is offsetting any kind of inflation we're seeing on our packaged goods or raw materials. So we continue to see the benefit of scale, and we continue to see the benefit going into the back half of 2022. So we don't think there's going to be a major impact for us on COGS because it's being offset by better utilization and leverage in each of the...

[Eric Des Lauriers:]

Okay, great. I appreciate that color. And then maybe just kind of tacking on to the previous question that was asked. On your wholesale accounts, so I guess just kind of focused on accounts versus pricing here. Could you just expand a bit more on where you saw some of that quarter-over-quarter decrease in wholesale accounts? And then maybe how we should think about that number trending throughout '22 across your different markets?

[Joe Bayern:]

Yes. First, I'll take that, if you don't mind. I mean we've always said that building out the strongest distribution platform in the cannabis industry is one of our key pillars of competitive advantage, and we continue to invest in that. So we'll see expansion, we believe, throughout the rest of 2022. We did make a choice to reduce the number of accounts in Oklahoma. So that brought our number down, but we quickly made that up in other states. So I think we're a little over 2,200 today, and we'll continue to build out in key markets. As we said, in Illinois, when they launched the 185 new licenses. We want to get our fair share of those accounts. We want to build accounts in existing markets. We really haven't tapped into the Colorado market yet. So I think that is a big growth area for us on a wholesale basis, and that's obviously key to our plan for 2022. And then obviously, New Jersey. As that market ramps up, I think we're going to be aggressively expanding our wholesale footprint in -- so we can't give an exact number, but we're going to continue to build out distribution because we think that is one of the keys to long-term success in the industry.

[Boris Jordan:]

Yes. And I would not forget -- I would not guys lose track of New York. New York is going to be a massive wholesale market, right, the state of sponsoring 200 licenses, then obviously, all of the existing operators' licenses. So New York could open up with almost 240 licenses on the retail side. And obviously, Curaleaf is the largest wholesale supplier of product in New York State. So that's going to be a very, very big market for Curaleaf. And the other operators, if they actually do launch in early next year, there's virtually nobody that can catch up. I mean, some of our competitors.

[Operator:]

Our next question pardon me. Our next question will come from Glenn Mattson with Ladenburg.

[Glenn Mattson:]

Hi, thanks for taking the question. I wanted to just hit on the Europe opportunity a little more as that seems to be picking up steam quickly. Boris, maybe can you help us understand for those of us who are less familiar with the legislative process if something gets introduced this summer, just kind of how quickly that could turn on, first of all? And then second of all, your presence there is to kind of -- as big compared to the other MSOs, but small in real terms. Can you give us a sense of what kind of investment would be needed over what kind of time frame? And then just to your competitive position versus some of the other people that are -- have gotten a decent presence in Europe, such as some of the Canadian players.

[Joe Bayern:]

I'm not sure if we lost Boris, you got cut off on my end.

[Boris Jordan:]

I just came back. So I -- so I came back to is the question. So go ahead...

[Glenn Mattson:]

Yes, Boris, I'll repeat it. Sorry. Just a question about the Europe opportunity, the timing of how long you think it would take for real changes to take place just for those of us that are less familiar with the legislative process in Europe, number one. Number two, what kind of investment do you think is needed and over what kind of time period and third? Could you just kind of flesh out more the competitive position in relation to some of the other guys who are bigger in Europe such as the Canadian LPs...

[Boris Jordan:]

Yes. So the Canadian LPs definitely have a head start on Curaleaf, particularly Tilray. To be honest, Canopy and Aurora largely are out. I mean, Arora has a bit of a business in Germany. A Canopy basically left the region. So it's really Tilray and Aurora that are participating there. There's some other small players that are exporting to Europe as well, but it's largely white labeling, they're not pushing their own brands. Our strategy is very different. We have our own cultivation. We're fully vertical. We have our own manufacturing. We're currently expanding both of those cultivation and manufacturing to meet the demand for both the medical program in the U.K. as well as the adult-use program in Germany. As I said earlier in the call, the German government is trying to accelerate approval of the adult-use program. It could come as early as '23. We think it's going to be 24, early '24. But just today, the Justice Minister came out and indicated that it may be as early as '23. So I mean that's a very, very large market. Just consider that to be California and Canada put together in terms of slides, that's 83 million people, and it's a 28% to 29% cannabis penetration use market. So we see that as a huge growth opportunity for us. And it could be -- that business over several years could be the size of our U.S. business. So the U.K. medical market, we anticipate being about a $1.3 billion market in 2 years. We're the largest operator in that market today. In the German market, we're a little bit behind because we just entered it. But we fully anticipate that by the time the adult-use program goes, between some M&A that we have in the works as well as our organic build-out that will be one of the larger players in that marketplace. That's our goal is to be within the top 3 players in Germany as the adult-use market gets launched.

[Glenn Mattson:]

Great. That's great color there. And one quick one just on Michigan. I think in the previous call, you talked about Michigan has included Michigan as one of the investment markets. I don't think it was today. Was there some change there or just...

[Neil Davidson:]

No. No.

[Boris Jordan:]

It's definitely one of our investment markets in terms of the fact that we are expanding our wholesale business there. It's growing at Select, I think was the largest vape brand sold in the state as of, I think, last quarter. And we are -- however, we are not vertical in that state yet. We're still trying to make our mind up as to how we build our supply chain in order to improve our margin profile in the state. And so that's something that's still under consideration within Curaleaf at the moment. In Colorado and California, we've made those decisions, and we're starting to incorporate that, and we're starting to see improvements in margin, whereas in Michigan, and we have not yet made up our decision as to whether we will be. But we will make that decision shortly. And maybe by the next earnings call, we'll be making some announcements.

[Operator:]

Our next question will come from Pablo Zuanic with Cantor Fitzgerald.

[Matthew Baker:]

Right. This is Matthew Baker on for Pablo. Thank you for taking our question. Given where stocks are right now, would it make sense? And would you consider taking it? Or is that something that out of the question? Thanks.

[Boris Jordan:]

Would we consider doing what, taking the company private?

[Matthew Baker:]

Yes.

[Boris Jordan:]

No, I don't think that we'd be considered taking the company private at this point in time. We think the capital is better used in this growth market. The businesses continue to expand. The business continues to go to strength to strength. We anticipate a very strong year this year. The fact that the equity markets haven't caught up yet, it's just a matter of time. They will catch up. I'm not at all worried about that. And my job is to continue to build out the business. And I think the capital is better used in building the business and taking the company private at this point in time.

[Matthew Baker:]

All right. Thank you for the color.

[Boris Jordan:]

Jakob, I think we have to jump through the calls, right?

[Jakob Feinstein:]

Yes. We do.

[Boris Jordan:]

So anticipate the rest of the call on the analysts, we have to complete the call.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to A - Boris Jordan for any closing remarks.

[Joe Bayern:]

I think Boris might have signed out. So this is Joe. I'd just like to reiterate that despite the headwinds we faced in the first quarter, we couldn't be more optimistic about where we are with the business, with our business plan and what we're building as far as the strategic platform to be continually successful for the next few years. We have a lot in the pipeline going into the back half of the year, including New Jersey, which is certainly going to be a tailwind for us. I think our ACE extraction technology as well early on is already proving to be very effective for us, and we continue to build out of our platform like nobody else in the marketplace. So we're very excited about where we are in the industry, and we are looking forward to a great back half of the year.

[Neil Davidson:]

Thank you.

[Operator:]

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