Curaleaf Earnings Special w Boris Jordan | TTB Powered by Dutchie

Good. How are you?

Yeah, listen, I think that we're starting to stabilize the US market. Obviously, that's the biggest part of our business, represents about $1.3 billion of our $1.4 billion business. So that was the most important thing to do. That's why I stepped in last August. And I have to say that we're getting there. My first and foremost goal was to increase the quality of our product. We've done that because that's what sells, that's what people want. To add new products: we've done that in the form of Anthem and ACE, and we can talk about all that. And improve the quality of our operations. When I came in, we were growing at 50 grams a square foot. Now we're well over 100 grams a square foot. So all of these things were really important. We also brought in a strong team of managers to help me manage the consumer products part of the business. I brought in somebody from Albertsons, from Whole Foods, from Pepsi, and from McKinsey on the digital side. So I've been able to revamp the team and upgrade it. In many businesses I've built, there's a certain amount I can do, then you bring in people that can take the business onwards. I'm not stepping away at this point. I'm staying as a leader until this thing turns profitable. But right now I'm bringing in people that can help me get it to best-in-class. So okay, we're happy with the report. Europe is the strong point in the business from a growth perspective, but I think as we get into Q3 and Q4, you'll start seeing the US business, albeit not huge growth, small single-digit growth recovery for Curaleaf, and on top of that, the European business growing. That's really where the story is at Curaleaf. It was a drag on us for a long time and now it's really starting to come to fruition.

I think it's a lot of things, but let's be humble about it. We were messing things up at Curaleaf a couple years ago, and that was the reason I stepped into the business. I stepped in because I'm not going to be putting money into or investing in a business or being associated with a business that's not best-in-class. Every company, this is the sixth one I've built, we've always exited at the top of the market being the best operator in what we were doing. And I want to be the best operator. This is probably the last business I'm going to build in a long time. I want to be the best operator in the market. We were far from there and we're not there yet, but we're on the way, and I can promise you that.

and that's really what I'm here to do, and that's what I want to do, and I think we're on our way to get there.

Florida's the same thing for Curaleaf as everywhere else. It was about getting our act together, getting the supply chain in place, opening up stores, making sure our stores were properly assorted, having the right products in the right stores. As you know very well, living in Florida as I do, not all of Florida is the same. Different areas have customers with different preferences, what they want to use, how they want to use it, and the quantities. So you've got to be really good in managing your customer and your supply chain. That's something I've been focused on in Florida. We're getting there. We're not best-in-class yet, but I think Florida is probably the state we're closest to getting there soon. Give me a couple more quarters and you'll see. Our flower quality is improving, our new products are improving. We're about to launch ACE, which is a huge success in New York and Massachusetts. We're about to get permission from the state. We've got all the equipment installed, but it's a very complicated piece of equipment; it takes a while for the state to approve it. We're very close to launching that product. It's an absolute disruptor in the oil market and we think it will disrupt the Florida oil market as well. So I think it's all about execution and getting a better footprint. We're focusing on ourselves and not the competition at the moment.

Absolutely both. We invested about $100 million in capex last year. I'd say 75% of that went into Florida. So we've put a lot of money into Florida in automation, updating all our facilities to LED, putting in the best equipment, automation, upgrading products and stores. We're opening another 85 to 90 stores by the end of Q2 next year, up from 59 when I came in. We've changed the model from big stores to more express style stores. And really pushing the digital side of the business: 65 to 70% of our business is digital. We want to use the stores more as fulfillment locations and make the experience really digital.

I can't speak for my competitors, but that's what I'm doing. And what's good about that is it can put me into markets where I don't have verticality. So I can sell in California, Washington state, Oregon, Colorado, Michigan, but I don't have to have facilities there. Because if you build a good digital business, you can work with everybody's stores because they're happy to sell through you. I want to build the best digital retail experience in the country and I want to lead with that on Curaleaf. Look, Walmart did it. A lot of companies have done it and they can do it, and that's what we want to do.

You know, listen, that was really an experiment to learn about the hemp industry in Florida, how it behaves at a retail level. I don't think at least at the moment that that is something we're going to continue doing. Some experiments go well, some don't. I'll tell you why. We can't sell all the products. I can't sell the synthetic vapes and a lot of the stuff that's really popular because one, it's illegal, and two, it's unsafe. And that's what the customer wants today, and I won't sell it. So if you can't do 50% of the products available in the market, you might as well not be in the business. So we'll probably keep it open just to test our hemp products and see the behavior of the market because it's a small store and not a big cost, but it's not something that given the experience we've had we would go and replicate statewide.

We're super happy with the way that business is going. Obviously it's still small, a sub-$10 million business this year. But it's a start. We launched it in January. We're launching some new products I won't talk about yet. But we're also signing really cool deals with sponsors. I think you're going to see sports teams getting involved. So we've got some really interesting partnerships coming along around our drinks. We're going to go into the health side of hemp drinks using adaptogens and other things, and into the premium segment with nice bottles and getting into clubs. This is something we're taking seriously and we'll continue to expand it, but it's still early stages. This business is going to grow over the next five to ten years. As I always say, when we hit $100 million in revenue, that's when we'll break out those revenue lines and talk about it.

Anthony, Europe has been an incredible success story for Curaleaf. We've learned where we went wrong in the US and that we're fixing now. We don't have to fix those things in Europe. Our European business is very digitized. It's a very different business: it's not a consumer product business, it's really a medical business. We're doing human trials in the UK. We've just submitted results on phase one to the regulators, very successful on neuropathic pain medication. So it's a very different business in Europe than in the United States, but it's super attractive. It's growing very fast. The TAM is already equivalent to the US, between Turkey, Germany, UK, Poland, Australia, New Zealand. Now France is coming on board in Q4, Spain next year. Three to five years from now, our business in Europe will be bigger than the US.

We're doing it very differently. We're not spending enormous amounts buying, because we're so early that we're organically building our businesses in those markets. And it's also medical, so it's a very different sauce. For instance, there's no retail; we work with pharmacies. We distribute to pharmacies across the country. We own medical clinics. We work with doctors. We're doing trials. We're a pharma business. As a matter of fact, we're working with money center banks now that are working with us on capital raising and valuations. And I'll just give you the value of our European business: it's probably worth right now more than the whole market cap of Curaleaf. Which is scary and nobody understands that, but they will soon. And I talked about a potential spin-out. One of the reasons we could spin that out is if we can't get the value because of the restrictions in the US for that business, it would be stupid not to deliver the value we've made for our shareholders by spinning it out. I want to get it closer to a $400-$500 million revenue line before I do that. We think we can achieve that soon. But we're really excited about the European business. If we don't get rescheduling, if we don't get meaningful reform – it's not only rescheduling, it's the quagmire of three markets: illicit, hemp, and regulated, all competing against each other. It's a regulatory mess in the United States, and that is getting in the way of the pharma business we're building in Europe. That may be a reason for us to spin it out. We are starting to review different options, but we have not made any decisions. I'd love to keep it together, but US regulators need to get their act together or I'm going to have to do something to return capital to my investors.

This quarter. Yes.

Right now I would agree with you. Europe tends to be a bit more conservative. But if you remember, Anthony, probably before you got involved, when I started doing due diligence on this sector, the US sector was built on Charlotte's Web, on epilepsy. And it was mothers standing on the steps of state houses with their kids having a hundred seizures a day, saying the only thing that works is CBD from the cannabis plant. That propelled GW Pharmaceuticals and CBD and the cannabis sector. So we started as a medical sector in the US, but then states for different reasons liberalized the sector. We've probably over-liberalized it now, creating unfair competition with illicit, hemp, and regulated all competing. That's creating a lot of uncertainty and makes it an uninvestable sector until they fix it. Whereas in Europe, you basically have two markets: illicit and medical, but the medical market is not competing with illicit because patients are looking for highly tested products and require real prescriptions. It's a different market. So Europe is in a different place, and that's good for us because there's a moat around the medical market allowing us to expand and grow because it's hard for anyone to enter without capital.

It could be listed or it could be a strategic deal. We could partner with a pharma company, do a listing on NASDAQ, on the FTSE, on the DAX anywhere. But the most important part is not where you list. Everybody in the US thinks uplisting will save the industry. That's hogwash. I've invested for 35 years around the world, and it's not where you list – it's who can buy the shares. Our problem in the US is not the exchange. I'm listed on the TSX; frankly, it's hurt me. I have custody at Bank of New York, State Street, Morgan Stanley, some at Goldman Sachs. We don't have a custody problem. People can't buy these shares. So it's no different if you're on CSC or TSX. The reason the TSX works is it's easier to short Curaleaf because of liquidity and custody, so more people can play against the sector on the short side. But you can't buy the sector because it's not an exchange problem; it's that compliance departments, because of federal illegality, are not allowing these funds to buy these shares.

It's actually live in Florida, New York, Massachusetts, New Jersey, Illinois. And we are about to launch, which I honestly say is the best cannabis product I've ever tried: Anthem Bold, our infused product with both glass tip and wood tip, flavored. It's an incredible product; I think it's going to take over the industry. Our biggest problem so far is making enough of it. The equipment required for mass production is basically cigarette-style equipment and it's expensive, so it's limiting markets. But we can't keep it on the shelves – the minute we produce a batch, it's gone.

In New York, our problem has been supply chain. Getting our supply chain in order. We can fulfill all the demand we're seeing, but that's been a big problem. I think by the end of August, Curaleaf will have its act together in our grow facility in New York. We built our grow in the Catskills, a difficult area with drug problems. It's hard to get good quality teams, so we've had to bring in outside people. But New York is going to continue to grow. It's a $1 billion market, going to be $4-5 billion. Curaleaf is one of only two players in the state that has built out proper infrastructure to manage that growth – it's us and GTI. New York is doing very well.

If you look at our losses, about $48-49 million out of $50 million was depreciation and amortization. It's non-cash. It's all the plant and equipment and acquisitions. That's what happens when you build or buy businesses; you have to carry that D&A. Some companies built organically so they don't have as much. Curaleaf was built through acquisitions. But it's non-cash, and over time it will come down and we'll become much more profitable, especially with the removal of 280E. But right now D&A is 99% of the loss.

Oh yeah. I think it will happen sooner rather than later, especially if we get rescheduling. Don't forget taxes also go through the P&L. That will definitely take us into profitability, but also just becoming more efficient and managing the balance sheet. We've still got some acquisition debt. I'm paying it down every quarter.

Give you an example. I had almost 300 million of acquisition debt two years ago. We're going to be at zero by next June. On acquisition debt, as that debt comes down, my interest payments come down, that starts to flow right to the bottom line. So Curaleaf is working through the depreciation, amortization, and the acquisition debt that we have associated with all these transactions. And don't forget one thing that nobody has, and the reason our depreciation and amortization is bigger is nobody has Europe. Europe cost me $400 million of investment to build that infrastructure that's now really starting to perform. And that's why Curaleaf, hemp is a drag because I just built a bottling line in Kentucky, a canning line in Kentucky because I can can it cheaper than going to third parties, and they screw up the product also at third parties. So to do it myself, we did a long ROE calculation, it was going to be a lot cheaper. But that's capital investment, right? You have to build those things. So I have to say that I know that people look at, a lot of retail investors, Anthony, look at net income. Frankly, it's irrelevant at this stage of development of a business like this. If you look at Amazon, they had no net income for 30 years or 25 years, right? Look where they are today. I'm building for the future. I'm building infrastructure and cash is important. Cash generation is important, but net income is not important at this point in time.

I mean eventually we could look at that. I've seen the economics of doing that, but that's not our primary business. Our primary business is to make great products and sell them as branded products. That's our main business. But given what's going on in the cannabis sector, we have started a third-party business where, for instance, we're working with brands in our facilities where we have some extra capacity to manufacture, and they're paying us for that and giving us a piece of their revenue as a share. So we are starting to do copack type business, and we're doing gummies for brands, we're doing vapes for brands. That's not our primary business, but why am I going to have an absorption problem? I have facilities that are standing half empty because of the demand issue due to hemp in the regulated business. Why not use that capacity to help others and at the same time get paid my rent and get a share of the revenue? That is a smart business, and we're doing that now.

We don't have a debt problem. A lot of people like to talk about it, uneducated people. We have $460 million maturing next December. We'll have it refinanced at the end of this year. We've had a very good pre-marketing. Curaleaf has never had a problem with capital. We've always raised the cheapest capital in the industry. My relationships on the street, I myself have led every one of our debt deals with large tickets. Curaleaf has definitely benefited from that. So we don't have a debt issue. We're very comfortable. We're going to be refinancing at the end of the year. I think we'll do better than almost everybody in the industry on that refinancing. We've got a lot of flexibility. I like to run a tight, lean ship. Everybody looks at cash. For me, the only cash I want on my balance sheet is the cash to finance my working capital and finance my capex. Anything else I don't need. It's a waste of money because we're not getting paid interest on our cash because we're a federally legal business. So sitting on $400 million in cash right now is not of interest to me. I would be putting that cash to work and growing my business now rather than having it sit on the balance sheet.