Curaleaf Holdings, Inc. (CURA) Earnings Call Transcript & Summary

Good day, and welcome to the Curaleaf First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Senior Vice President, Head of Investor Relations and Capital Markets, Carlos Madrazo. Please go ahead.

Good afternoon, everyone, and welcome to Curaleaf Holdings' First Quarter 2021 Conference Call. Today, we're joined by Boris Jordan, Executive Chairman; Joe Lusardi, Executive Vice Chairman; Joe Bayern, Chief Executive Officer; Neil Davidson, Chief Operating Officer; and Christine Taylor, Senior Vice President of Finance and Accounting. 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 or certain material factors or assumptions that were applied in drawing a conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press 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 pro forma revenue, adjusted EBITDA and managed revenue, 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.

Good afternoon, and thank you for joining us. Before I begin, I want to take a moment to welcome Christine Taylor, our Senior Vice President of Finance and Accounting, to the call today. Christine will be handling the financial review discussion this quarter, stepping in for our CFO, Michael Carlotti, who is currently out on a medical leave of absence. We wish Mike all the very best for a prompt recovery. In our full year 2020 earnings call, we shared with you our strategy for the company, which is centered around 3 key growth pillars: first, extending our U.S. leadership by continuing to build our national platform and winning brands; second, building the foundation and infrastructure to accelerate growth by capitalizing upon the potential federal legalization; and third, taking this growth strategy to the rest of the world as the global leader in cannabis. During the first quarter, we continued executing across this strategy, delivering record financial results and achieving a number of key milestones. Starting with our financial results. We exceeded our guidance and achieved record revenue of $260 million, a growth of 170% year-over-year. Also, we posted record adjusted EBITDA of $63 million, equivalent to a growth rate of 213% year-on-year and a margin of 24%. We are very excited about the platform we have built across the country and the increased opportunity for further margin expansion as many of our new markets continue to develop. We have a track record of successful execution, and we are putting our expertise and discipline to work in the states where we recently started operating. For example, in the 10 states where we have had a presence for at least 2 years, for full year 2020 we generated a combined gross margin of 54%. These 10 states accounted for 71% of our total revenues last year. The other 12 states, which are newer for us, such as California, Colorado, Michigan and Utah, had a combined gross margin of 32%. These newer markets accounted for only 29% of combined revenue in 2020, but they're the ones that present us with the biggest opportunity for margin expansion in the next 1 or 2 years as they develop sufficient scale, as we integrate vertically in some of them, as we optimize the retail/wholesale mix and as we increase our product offerings. In January, we raised $290 million from a common stock offering and revolving credit facility. We ended the quarter with a strong position of liquidity to pursue additional organic and inorganic growth opportunities. Also, in January, adult-use sales began in Arizona, just weeks after voters approved legislation faster than anyone anticipated. We were able to rise to the challenge, launching adult-use sales across our 8 current Arizona dispensaries and benefit from the rapid increase in demand. Our Northeastern presence is one of our main points of key competitive advantage. In New Jersey, Curaleaf already has a market-leading position with over 30% medical market share, and we continue to anticipate that the state will open for adult-use sales by the fourth quarter of 2021. We're investing heavily ahead of this launch of adult-use sales and help meet expected demand in a state expected to be a $2.1 billion market opportunity. In the coming weeks, we will double our canopy square footage and open 2 additional dispensaries, giving us 3, the maximum allowance of dispensaries and the largest growth capability in a state with only 12 current licensees. In New York, adult-use cannabis was legalized on March 31, and as sales are expected to begin in 2022, this represents another game-changing catalyst for Curaleaf and a significant milestone for the cannabis industry. Today, Curaleaf is the #1 cannabis company in New York, which has immense room for growth. For a state with 20 million people, it has a medical program of just $150 million due to significant restrictions on obtaining medical patient licenses versus other medical markets but an illicit market of close to $5 billion. New York is not only important in terms of revenue generation, but also brand building. With its population, New York will become the second most populous adult-use state behind California. In addition, in 2019, a record-high 244 million tourists visited New York. And New York City, in particular, is one of the most influential cities in the world for brand visibility and value creation. Vertically integrated operators will be able to wholesale and distribute their products to any retailer and open 4 additional stores for a total of 8 stores, 3 of which can be colocated with medical and adult-use sales. Currently, we are working with regulators and other operators to bring whole flower into the medical program. With our installed capacity to supply whole flower, we are better positioned than any other MSO to benefit from flower sales in the medical market, for which there is considerable pent-up demand. In April, we established Curaleaf as the global pure-play cannabis market leader by revenue and geographic reach as we closed the acquisition of EMMAC and simultaneously established Curaleaf International. In parallel with the closing, we successfully raised $130 million through a strategic investor, $50 million of which were directed in funding the entire cash portion of the EMMAC acquisition. The remaining $80 million will be used to fund our European investment plan. Overall, the acquisition was completed for under 3% of our market capitalization, resulting in minimal dilution to our shareholders. This transaction has provided Curaleaf with a strong presence into a potentially $230 billion European market that is just beginning to develop, and we're very excited about the future there. As stated last quarter, the acquisition of EMMAC will not detract from our focus on the U.S., as EMMAC's leadership team will remain intact, allowing our U.S. employees to focus on our home market. Also in April, we received regulatory approvals in Illinois, which enabled us to rebrand all 10 of our locations acquired in the Grassroots deal in the state as Curaleaf stores. Welcome to all of our team members in the state. Finally, earlier this month, we optimized our footprint in Maryland to strengthen our position as the leading cannabis operator in the state. We now have 55,000 square foot co-located cultivation processing facility and dispensary. We also completed the sale of our interest in a cultivation and processing facility in Frederick, Maryland for USD 27.5 million. Moving on to the federal landscape. In late April, SAFE Banking Act passed the House with a high degree of bipartisanship and is now in the Senate. The bill will expand cannabis industry access to banking and can potentially include other stipulations such as removal of 280E, safe harbor language for institutional investors, and the ability to uplist to major U.S. stock exchanges. Senate Majority Leader Schumer is moving ahead to introduce an all-inclusive federal cannabis reform, which goes beyond the SAFE Banking Act and which is expected to be released soon. Schumer has stated that he believes SAFE Banking would pass. However, because he thinks he has one shot at this with Republicans, he wants to introduce a broader bill to capture the full window of opportunity for meaningful cannabis legislative change. While the industry continues to pursue the SAFE Banking Act on its own, Schumer's more comprehensive cannabis legislation bill will achieve everything expected from SAFE Banking in terms of access to banks and capital markets and the removal of 280E and more. Finally, we are increasing our guidance for the second quarter to $305 million to $315 million, which is above consensus based on the performance of our business during April and the beginning of May. Thus, we remain on track to meet our full year IFRS revenue guidance of $1.2 billion to $1.3 billion and an adjusted EBITDA margin of approximately 30%. This past week, we achieved another milestone by becoming not only the largest cannabis company in the world in terms of revenue but also the most valuable in terms of its market capitalization. I would like to thank our investors for continuing to recognize our work. We will remain focused on enhancing shareholder value. I also want to thank our extraordinary leadership and each and every team member who has contributed to Curaleaf's growth and success. We truly appreciate the hard work, dedication and passion to our business. With that, let me turn the call over to Joe Bayern.

Thanks, Boris, and good afternoon, everyone. I am pleased to announce another quarter of record revenue and earnings as we continue to build out our national platform. We are progressing well towards building an omnichannel distribution platform with both a very extensive wholesale operation and a successful high-margin retail business. We also remain intensely focused on execution as we drive scale through our cultivation and operations. Our team continues to effectively manage the inherent trade-offs between geographic mix, channel mix, product mix and pricing to achieve our goal of further expanding our presence while maximizing our margins and building scale. Based on the breadth of our platform, the strength of our balance sheet and our experienced management team, I believe we are uniquely poised to take advantage of the explosive growth ahead as the industry continues to grow to $100 billion and beyond. At the retail level, we continued our national expansion by opening 6 new stores, ending the quarter with 102 retail locations. We have since opened an additional 4 locations to bring our total to 106 and have an additional 32 licenses available to us for further development. Our retail footprint now covers 42% of the U.S. population and processes close to 20,000 transactions per day. Including both adult use and medical use, the total number of transactions was up 12% during the first quarter. On the medical side of the business, the total number of patients continued to grow, expanding by 17% quarter-over-quarter. And during the month of March, the average order value among our patients grew 7% from December. We continue to see strong momentum across our entire footprint, but here are some notable highlights. In Arizona, we swiftly met the demands associated with the early launch of adult-use sales 2 months ahead of the anticipated rollout date. Sales and foot traffic grew substantially when compared to the prior quarter. In Pennsylvania, we opened 1 new store during the quarter, and shortly thereafter, we opened an additional 2 stores, bringing our count to 12, all of which are now Curaleaf-branded. In Illinois, we opened our 10th site in the first week of April, the maximum allowed by the state, and all stores are now branded as Curaleaf. In Florida, sales continued to expand with improvement in inventory and product assortment, and our market share in the state grew during the first quarter by 360 basis points according to the Florida Department of Health. In New Jersey, we are building on our market leadership in the state by adding 2 large new retail locations, which are now in full construction mode and have expected openings this summer. These new locations will position us to address the anticipated surge in demand from pending adult-use sales later this year. And just this month, we opened our first adult-use store in Maine. During the quarter, we continued to make operational improvements. We implemented successful pricing and promotional strategies to drive customer traffic. We are leveraging technology to support the customer journey and our operations, and we are making better use of data analytics to design promotions and ensure our pricing is competitive. As a result of all of the above, retail revenue grew by 14% sequentially and 231% year-over-year, representing 72% of our total revenue. At the wholesale level, we closed the quarter with just shy of 2,000 wholesale partner accounts and are on track to surpass this number in the coming weeks. We saw strong growth in the western part of the country due to the acceleration of Arizona recreational sales, the beginning of a rebound in our Nevada business and the introduction of several new Select products, including Select Squeeze, Essentials and Fresh. Squeeze is a game-changing beverage enhancer. Essentials is a high-potency oil with terpene from our most popular strains, and Fresh is a premium distillate oil with bold fruit flavors targeted at new entrants into the category. The introduction of Squeeze is to date the widest cannabis product launch in the nation, available already in 14 states and growing to 17 by the end of May. Demand has been strong, and the product continues to fly off the shelves. But more importantly, Squeeze is the first example of an end-to-end product launch, where we identified a white space in the market, then developed proprietary packaging and science through our Nano-emulsion technology and flavor systems and leveraged our marketing capabilities to launch a national product. Through the launch of Squeeze, we have built the processes, the expertise and the infrastructure to continue launching formulated products on a national scale. Just last week, we were notified that our Nano products, including Squeeze, earned an honorable mention from the Fast Company's annual Life-Changing Ideas (sic) [ World Changing Ideas ] list in the consumer products category, further evidence of the increasing consumer confidence in cannabis. In addition to the growth in the West, we recognized growth from the continued expansion of the Select brand in key strategic markets like Massachusetts, New York, New Jersey, Maryland, Illinois and Pennsylvania. We are confident that as cannabis acceptance continues to scale across a variety of demographics, cultures and geographic regions, we will have a product solution to fit the various needs of our consumers, and we're incredibly excited about that. We will remain focused on developing highly formulated products based on science and distributing them widely. This is one of our key differentiating factors relative to our peers. During the quarter, wholesale revenue represented 28% of total revenue, a sequential growth of 12% and 254% growth year-over-year. In terms of our cultivation, our footprint is on track to grow by 275,000 square feet in 2021 as guided. This includes important new capacity coming online in Arizona, Florida, Massachusetts and New Jersey during the second and third quarters, all helping fuel the growth trajectory towards our year-end targets. In New Jersey, our Winslow cultivation facility is now online, more than doubling our current canopy to this supply-constrained state heading into adult-use sales later this year. Also, we are actively working on plans to expand our cultivation footprint to the 150,000 square feet canopy limit allowed by the state. In New York, the expansion of our current cultivation facility is underway, adding 200% to the current amount of canopy ahead of adult-use sales. We are working with regulators to determine the optimal expansion that will be allowed and needed to support a new adult-use market. We are being thoughtful with our investments in cultivation and expansion, not only considering the immediate opportunities in places like New York and New Jersey but keeping in mind that interstate commerce will eventually be allowed. Moving on to research and development. During the quarter, we continued developing a range of delivery and extraction technologies. In addition, we formalized national and international relationships with top universities to perform clinical testing of our formulations, providing real data on efficacy for a number of high-value therapeutic areas. We will continue to aggressively grow our R&D capabilities by bringing in cutting-edge technology and a multidisciplinary team of world-class scientists. Finally during the quarter, we continued adding talent with over 1,100 people joining Curaleaf and bringing the number of team members to over 4,200 by quarter end. Today, that number is over 4,800, which comes from the regulatory approval that integrated nearly 350 Grassroots employees in Illinois as well as additional hires across the company. New hires are coming from pharma, biotech, media and CPG, all with significant experience in their fields. Now I'll turn the call over to Christine Taylor.

Thank you, Joe. Good afternoon, everyone. As reflected in our first quarter financial results, we started 2021 on solid footing by posting our eighth consecutive quarter of record revenue and record adjusted EBITDA through our continued focus on driving incremental shareholder value. I will start by sharing some highlights. We achieved record revenue of $260 million, up 170% over last year and 13% sequentially. We made this significant improvement despite some tough weather conditions in several of our markets. First quarter year-over-year retail and wholesale revenue grew nearly 240%, fueled by acquisitions as well as a robust 75% increase from organic revenue growth. We also saw sequential revenue growth in several markets, including Arizona due to the approval of adult use, and in Florida due to increased market share and cultivation capacity. In addition, retail and wholesale revenue continued to grow in the Massachusetts, New York, Pennsylvania and Illinois markets. Although we continue to feel the impact from COVID-19, many of our fourth quarter revenue headwinds improved in the first quarter. After distribution of stimulus checks, we saw an increase in consumer spend on our products. As the economy continues to open across the country, we expect to see ongoing strong demand for our products across the board. Our gross margins from cannabis sales continued to improve with a year-over-year increase of 638 basis points to 49.3%. The increase represents a 100 basis point improvement over the prior quarter. The margin growth was primarily due to better efficiencies and increased operating capacity in our cultivation and processing facilities. We expect cannabis sales gross margins to trend upwards as we continue with numerous initiatives focused on expanding margins and fully integrating acquisitions. However, we foresee some level of quarterly fluctuations in those margins that will smooth out over time. SG&A, excluding nonrecurring items as a percentage of total revenues, decreased significantly, reaching 29% compared to 36% in the first quarter of 2020. SG&A for the quarter totaled $80 million, including $6 million in nonrecurring expenses, as compared to $46 million in the prior year and $68 million in the fourth quarter. We expect SG&A to decline further as a percentage of revenue as we continue to grow and scale our operations, as we capture additional cost savings through targeted initiatives and as we realize additional synergies from acquisitions. I would also like to note that, as we guided last quarter, share-based compensation expense returned to third quarter 2020 levels at $4.9 million in the first quarter. We reported record adjusted EBITDA of $63 million in the first quarter, up 213% versus the prior year and 16% sequentially. The improvement in sequential adjusted EBITDA was primarily driven by higher gross margins across several states, most notably in Florida, California, Pennsylvania, New York, Ohio and Utah. First quarter adjusted EBITDA margin reached 24%. As previously noted, we continue to focus on improving adjusted EBITDA margins through initiatives specifically targeted to improve overall operating efficiency. First quarter net loss was 7% of revenue compared to 16% of revenue in the prior year. We believe adjusted EBITDA continues to be the best measure of our performance, as it excludes the impact of noncash charges related to biological assets, depreciation and amortization, share-based compensation as well as nonrecurring expenses incurred during the quarter. As in previous quarters, a reconciliation of net loss to adjusted EBITDA is included in our earnings release. Cash and equivalents grew to $315 million at the end of the first quarter from $74 million in the prior quarter. The first quarter cash balance was positively impacted by the debt and equity raises we completed in January, which excludes the $80 million in cash that will be held at Curaleaf International to support future growth and investment. Capital expenditures during the quarter were $31 million, and we continue to expect 2021 full year capital expenditures to total approximately $125 million. Now let me turn the call back over to Joe.

Thank you, Christine. I'd like to close with some important updates on other things we're doing as the industry leader. We, as a mission-driven company, remain deeply committed to each other and to our communities. As such, Curaleaf views social responsibility as an integral part of our culture. For example, our Rooted in Good initiatives was launched in February following 9 months of intensive internal assessments as to how Curaleaf can be most impactful. One of the essential components of our Rooted in Good initiatives is our goal of having 10% of hires in 2021 coming from communities directly impacted by the war on drugs. Also, with our Executive Roundtable initiative, we are the first cannabis company to match C-suite executives with protégés from underserved communities to provide mentorship upon entering the industry. I'm happy to report that the Executive Roundtable kicked off this month with Curaleaf executives meeting with their counterparts and engaging in discussions about how to improve the industry and provide opportunities. And I'm pleased to report we've just launched our internal sustainability task force to explore ways to reduce our carbon footprint and work towards building a more environmentally responsible industry. Finally, we have also pledged 420x25, a mutually supportive initiative to partner with 420 local communities and small businesses by 2025. We have already established 60 new community partnerships on route to our larger goal. I'm incredibly proud of the work of all of our team members across the country, and I'll reiterate what I tell them every day: there has never been a better time to be in cannabis, and there's no better place to be than Curaleaf. I truly believe that, and I'm incredibly excited about our future. In closing, we are happy with our results of the first quarter and excited for the continued momentum in the second quarter and the opportunity ahead. With that, I'll turn the call back to the operator to open the line for questions.

[Operator Instructions] And the first question comes from Pablo Zuanic with Cantor Fitzgerald.

Congratulations on the quarter. Can I just ask for more color, if you can, regarding Florida and Arizona? What type of growth do you see in Arizona between your medical business and reg? In the case of Florida, you talked about 320 or 360 bps of market share gains. If you can give more color there in terms of product formats and what type of growth that you saw there sequentially.

Yes. I'll take that. This is Joe Bayern. In Florida, I think the share gains were primarily based on our accessibility of flower. As we've talked about before, we've had supply constraints throughout 2020. And with our new grows coming online, we now have more flower in the marketplace. So we've basically held share on our formulated products, and we've grown share on flower. And in Arizona, the growth was primarily coming through our adult-use clientele. We've seen almost a doubling of patients over the time since the program was launched, and most of those are coming through adult-use sales.

Can I ask just a quick follow-up and maybe just a broader theme for Boris? There's a lot of talk in the industry about the lobbying power of the MSO industry, and we hear that the alcohol and tobacco lobby are much stronger at the federal level. I wonder if you have any thoughts on that in terms of benchmarking MSO lobbying power versus tobacco and alcohol. I know it's a very general question. But if you can give color, it would help.

Yes. Thanks, Pablo. I will tell you that the MSOs are organized in Washington. We're working together through the USCC, and we recently tried to get the MSOs together on a very specific initiative around SAFE Banking. We're in the process right now of having separate calls. We've had several group calls. We're now having separate calls. We're raising money in order to create a fund in order to continue our lobbying efforts in Washington. I think we've got one shot before the midterms. As soon as Schumer's law drops, we've got really one shot to get this through. And I want to make sure that the sector is very well prepared for it, so we're currently raising funds in order to be able to make sure -- this is outside of the normal funds that we use to fund our efforts there. This is additional funds to make sure that we can try to get regulatory change in Washington. Now as I said in my overall statements, Schumer believes that if he puts SAFE Banking, which surprised us a little bit, but if he believes that if you put SAFE Banking to a vote in the Senate, it would pass. But he wants to get much more than just SAFE Banking. He thinks he's got one shot at this with the Republicans. And so he's putting a much broader bill. The reason for the recent holdup, we learned today, is that Schumer is in discussions with the FDA about what their role would be in a federal legalization. And so that's what's currently holding it up. But we do expect that law to drop sometime in May, at least that's what we've been told by his and Booker's and Wyden's people.

The next question comes from Vivien Azer with Cowen.

Just to follow up on the comment that was just made about availability of flower, I was curious if you could offer some detail around what your total portfolio mix looks like today in terms of flower versus vapes and other form factors.

I don't have the exact numbers. This is, again, Joe. This is Joe. But I don't have the exact numbers in front of me, but I think we're broadly around a 55-45 split of formulated products versus flower. We've -- again, we've brought our new online grow -- new indoor grow online this quarter, and we're seeing good productivity out of it and good quality. So we fully expect to continue to grow share in Florida, and we continue to look to flower to be able to help us do that. So we're creating a balanced portfolio, and we feel pretty optimistic about not only the second quarter but the full year in Florida.

Got it, Joe. That's helpful. And then just as a follow-up, with Select Squeeze, recognizing it's early days and it's not fully distributed through your system, but can you share with us any targets you might have in terms of portfolio mix for that product over the next year or 2?

Yes. I think it's -- generally speaking -- I'll start with just our new product targets -- we're targeting -- last year, we did about 15% of our revenue through new products, and I think we'll probably be able to get somewhere between 10% and 15% again this year. That's just one of several products that we launched. It's a new category. As you said, it's early days. Beverages is still a very, very small piece of consumption in the U.S. cannabis industry. So we don't expect it to be a huge part of our overall mix for 2021. But I think it is a growing segment, and it is something that's differentiated and unique in the marketplace. I think it will take some time to build traction behind the product. We've gotten great early feedback from both trade and consumers, but it is a new form factor, so we'll have to educate consumers. And of course, they have to start shifting over to beverages as a form of consumption. So somewhere in the low single-digit mix of our products.

The next question comes from Andrew Partheniou with Stifel.

Congrats on the quarter. In March, we had some strong spending, from what we hear in the industry, from stimulus checks. Just wondering if you could give a little bit of color, I don't know if you're able to quantify that or maybe talk about it qualitatively. And tying that into your Q2 guidance, which suggests an acceleration of growth, at least in dollar sales, from Q1, how do you see that when taking this stimulus spending into account and obviously the 4/20 holiday? Do you think that some of the stimulus spending fell through into Q2 and that drove some of the growth? Or is this really all driven by production expansions that you expect to come online in Q2?

Yes. I'll take this, Joe. We definitely saw an increase in sales in the second half of March when we did our call, if you remember in early March, our last earnings call. We hadn't seen the increase in sales based on stimulus at that point in time. We really started seeing it right after that. We saw it right through -- into the first couple of weeks of April. And then I'd say that we started seeing a tapering off after 4/20, of sort of those robust stimulus-type checks. However, in our case, we always expected, and I think we always told everyone, that we thought that the second quarter would be an inflection point for Curaleaf, largely because of the heavy investment that we did in expansion and going deeper in our existing key states. And so, for instance in Florida, we launched a brand-new 50,000 square foot indoor facility in the fourth quarter that now is fully harvesting. We also are building a second one that's going to launch in the third quarter in addition to the 250,000 greenhouse. We also just are doing our first outdoor harvest in our Homestead facility down south. So a lot of the investment initiatives that we had come on during last year are now starting to produce significant production in terms of flower and vapes as well as other products. Same thing in Arizona. We added 50,000. We added 50,000 in Massachusetts. We added about 120,000 New Jersey. All of these facilities are starting to harvest in the second quarter. So you will see a pretty robust second quarter and going especially into the third quarter. But we're now sort of trending at about $100 million a month run rate. That's where the industry is going. We don't see that tapering off unless there's some kind of major economic shift. Demand is quite strong at this point in time.

Great color. And maybe switching gears and talking about cash deployment and your balance sheet and M&A. You obviously just discussed a number of projects that you have ongoing. And with your wide national presence, there's, for sure, plenty of additional projects that you guys could be thinking about, especially in New York. How do you think about cash deployment here? Does M&A play a role, or do you feel like you have enough organic opportunities to keep your plate full?

I think that we will continue to do M&A, I think, shortly, but we'll be announcing some things. We have a lot of initiatives going on, mainly around those 3 initial strategic points that I outlined. But most of the M&A we're doing falls in 2 categories: either expansion in existing states where we feel that we can still expand beyond our existing capacity and where the regulators are allowing us to do it; and secondly, strategic acquisitions, those focused around our focus on what will happen after federal legalization. You'll see some activity in that category shortly as well. So we're being very tactical right now about where we do our M&A, and most of our money right now is going into broadening our base in the states of operations. So we have construction projects and cultivation and processing in Illinois and Pennsylvania, as we said, in New Jersey, in Arizona. We're doing a lot of outdoor facilities that we're setting up. We had great success in Florida with our new outdoor facility in Florida with our recent harvest. So we're starting to expand our outdoor capability, which brings down our costs dramatically for the product that we're growing. And so we're really focused now on -- we're not taking off -- our foot off the pedal in terms of growth, but we're also focused on making sure that we can expand our margins and meet those targets that we made for the year at 30%. So that's really a focus of ours. Likewise, we're doing -- we had some good news in Europe. We've got Israel looking to go adult-use; as I said, Switzerland. France just came out with a recommendation just last week, a parliamentary committee, to approve adult-use cannabis in France. And so we're starting to look at expansion of our facilities there. As I said, it's a much more CapEx-light model there because we can grow all of our product in Portugal and process in Spain and then distribute throughout Europe. So we're being very, very tactical in terms of what our M&A, but most of our capital right now is being spent on capital projects and expanding our existing capacity in the states where we operate.

The next question comes from Camilo Lyon with BTIG.

I'll add my congrats as well. Boris, you talked about New York. I'm wondering if you have an update on when the state will allow whole flower sales to begin in the medical market this year, what you've done to prepare for that. And also, how you're thinking about that longer-term kind of head start that you're being given, or that you will likely be given in this market, and what can that lead to from a share perspective? And I have a follow-up.

So I'm going to let Joe answer the question on when we think it'll get going. Let me just give you the big picture, though, that the opportunity is enormous. The pent-up demand is very, very significant. As you know, we currently sell ground flower and are the leader in that category in the state. And I can only say that once the state does allow us to sell ground flower, we think it will be quite substantial. We are the largest providers of flower in the market. So we have a very large inventory on hand right now that we could go out and sell if that happened, and that we anticipate that we would sell all of it. And I'm talking tens and tens of millions of dollars of inventory ready to go to the market once the state allows us to do it. And so I'll let Joe, though, address, because I know he had a call, I think as early as yesterday or today, with regulators in New York about when that might happen.

Yes. I would, first of all, just echo what Boris said about our readiness to service the market. I think we've talked in the past that in most of our key states we're supply constrained. New York is the one that -- where we actually have supply, and we're constrained by the size of the market and the patient size. So we're very eager to get whole flower into the marketplace. We were working with regulators as recently as today, thinking about the timing. I think it boils down to testing protocols that we're trying to work through with them. So I can't give a definitive time line, but they're keenly interested in getting product into the marketplace. And we're just trying to overcome some technical hurdles around the testing protocols for whole flower versus ground flower. But I can assure you that everybody is anxious to get whole flower into the medical program, and we're working very closely with regulators to do that.

Just a follow-up on that. Is whole flower sales in New York contemplated in your guidance? And then my second question is just more on the federal legislation movement. Boris, you talked -- gave some great detail on the Schumer plan. Is there a risk that the Schumer plan starts to kind of drown out the individual SAFE bill from working its way through Congress? Do we need to rely on the Schumer plan getting through for any sort of legislation to get through? Is it all or nothing?

I think that what Schumer is really trying to do is throw in everything into this bill and present that and then negotiate it in committees down to a bill that could pass Congress and the Senate. That's where he is. He wants to put pressure on the Republicans, and I think he wants to try to attach it eventually to something that the Republicans really want. He's very confident he's going to get something done. I will be honest, I have a healthy dose of skepticism about anything much broader than SAFE Banking at this point in time. But the Senator knows his Senate better than I do, that's for sure. And he is very, very, very positive that he can get something done. And I think one of the reasons he's taking his time is he wants to make sure it's a comprehensive bill that is well thought through and doesn't have huge gaps and holes in it and addresses some of the issues that Republicans have regarding product quality and testing and, as Joe said, that New York has testing protocols and regulations about what kind of products can be issued. So I think that that's what he's going -- the process is going through now. So I do think it will be a comprehensive bill. Whether or not -- what he can get through the Congress is literally -- I mean, I can't predict that in any single way. I can only say that he is very serious about it. This is not something like the MORE Act, where they just threw it in in order to put pressure on Republicans. This is something that they're really working on. They've got big teams working on this. They're going through it page by page and making sure that the bill is comprehensive. And so we are pretty much waiting, all of us, in anticipation to see when this comes out. We've been told most recently that, as I said, the FDA is -- there's a slight holdup in it because they've now gotten themselves involved in it. And we'll see what happens here over the next couple of weeks. But we've told that it should drop in May, and that gives us plenty of time. We've always been telling people this is going to take some time. If it was SAFE Banking, we thought they could do it in 6 to 9 months. A more comprehensive bill, we think, is a year-end to first quarter-type situation. It could happen faster. A lot of things are happening, but I would be a little bit more careful in predicting the speed of which this gets done. But listen, if he can actually get a more comprehensive bill done that's actually better for the overall industry. We can probably wait for that.

Agreed. And just that whole flower question, is that included in your guidance?

No. We -- so I wanted to make sure that -- none of our European revenues, none of New Jersey or New York rec and none of whole -- none of these things are in our guidance. Our guidance only includes in it what we have in the market today.

The next question comes from Matt Bottomley with Canaccord Genuity.

Congrats again on the quarter. I just wanted to stay on this topic on the federal legalization. Maybe I'll start with Boris, or whoever. But one of the questions that I get quite a bit, it sort of relates to sort of 3 particular elements within what investors are looking at with respect to this market eventually opening up in a more organic sense. And that's the ability to cross state lines with product, the ability for MSOs like yourself to uplist and then the impact of potential 280E. So within those categories, what types of levers do you think has to be in the Schumer legislation to allow any or all of those to pass? Many think the SAFE Banking Act in itself won't be enough to really move the needle on any of those items, with the exception of maybe 280E. So if you could just give me any sort of color on what you would hope, what the wish list is with respect to what's in Schumer's legislation that might allow for any of those 3 categories to sort of open up more than they are today?

Well, Matt, in our conversations -- and we can only talk about conversations at the moment because we haven't actually seen any pieces, they're keeping it very close to their chest. In our conversations with staffers as well as the Senator on these issues, they claim that all of the things that you mentioned are in the law as we speak. So that's -- all those things are going to be in there. So they're not only addressing social justice issues, which is what they're mostly talking about, but they're also addressing all the business issues, including tax. We've had numerous conversations with the people writing the law. They understand fully that you can't do social justice issues without dealing with the tax issue, without dealing with the cost of capital, without dealing with the uplist. So these are -- I mean, when you've got workers, plain line workers having their bank accounts shut down at Chase and Citi because they work for a cannabis company, that's a real problem. How can you finance entrepreneurs or licenses on the social justice side if they can't even open up a bank account? So -- or if the cost of capital in the industry is north of 10%. So these are the things that they claim are all in this law. But again, we have to go with what they're telling us. We haven't actually seen it, but they do say that all these things are covered in the current law that's going to be put forward. And I think that there's no question that what the Senator really wants to make sure is that the business issues are also tied to some of the inequity issues that have happened, whether they be social justice or decriminalization or prison reform issues. These are all issues that he wants addressed in this law. So I don't think the law will get passed strictly on business issues. It will get passed with a mixture of some of these very, very important social justice issues together with the business issues.

Great. That's very helpful. I just want to ask one other question, pivoting here, on EMMAC. So just with the capital that's sitting in that subsidiary, you mentioned Israel and Swiss and some other countries, but I'm wondering if there's any near-term opportunity to deploy that. It sounds like it's not a capital-intensive initiative. So within the $80 million that's there, I'm just curious as to what you think the, I guess, the population is of potential? Is there M&A targets or other greenfield initiatives? And maybe certain business models that you think that would work. I know there's a Canadian company, a Canadian LP, that owns actual pharmacies in I think it's Germany. Is that a model that makes sense when you talk about distribution? Or is it more partnerships with various countries and legislators in order to continue to expand?

So Matt, we are going to address the European expansion in our third quarter call. As you know, we only closed the transaction in April. We are getting on top of that business and working with management, and I feel that I'll be a lot more comfortable in addressing these issues. I can only say to you that, at the moment, we're focusing on the expansion of our existing capacity in both Portugal, the upgrade to -- and we'll have -- you're going to hear about this over the next couple of days. We're going to have some press reports on some of the new products and stuff that we're coming out and some of the regulatory issues that we're dealing with there, all positive, by the way. But in terms of our real strategy on our M&A and expansion in Europe, we're going to really address that in the third quarter when we feel comfortable that we've gotten on top of the issues and we know how to deploy and where to deploy the capital. For the time being, what we're doing is expanding the existing facilities that we have there, and we're in discussions in various of these countries regarding expansion opportunities. Regarding places like Israel in terms of, like you mentioned, pharmacies, we do have that kind of distribution in the U.K. That's how we distribute product right now in the U.K. But we are mostly looking at working with local distributors in terms of distribution of the product, including potentially acquiring distribution companies in some of these countries in order to continue to distribute our products.

The next question comes from Matt McGinley with Needham.

Your second quarter revenue guide implies a $45 million to $55 million sequential increase in revenue, which would mean you would only need about $20 million revenue increase in the third quarter and then again $20 million in the fourth quarter to hit the midpoint of your full year guide. So I have 2 questions on that. Is it retail or wholesale driving your second quarter revenue increase? And then second, given you had these big -- or you have these big cultivation expansion projects in Arizona, Florida, Massachusetts and New Jersey that wouldn't really contribute until the back half, is there something I'm missing about why the dollar growth would slow in the back half? Or are you just being conservative with not updating the full year guide?

Well, Matt, given that we've historically, as you know -- and everyone has different issues with regulators in getting these things online, and sometimes the first harvests don't come out as strong as you'd like in terms of -- so we're trying to be careful. But I will tell you that -- for instance, I'll give you an example, we had a very successful outdoor harvest completely unexpected in Florida, first time that we grew outdoors in Florida, very harsh climate. We had an incredibly successful harvest there. We're getting very, very good harvests out of our Florida facilities on our indoor facilities. We have more facilities that are getting launched. We have another 50,000 square foot indoor, and we're building 2 more on top of that in Florida. But we have another 50,000 launching in the third quarter of this year. So we just don't know exactly when that will come on. If that comes on a little bit earlier and we get great early harvests, then these numbers might be a bit better. But if the harvests are a little bit weaker, then we try to be careful in the way we forecasted our numbers. But at the moment, we are very comfortable, which is why we try to give overall guidance for the year. But we're giving quite firm guidance for the second quarter. We're seeing the numbers really, really strong. And as I've said, we're running at sort of $100-plus million months at the moment.

Okay. Boris, just to follow up on that. Is it retail or wholesale growth driving the second quarter revenue?

So they're both. It's both. It's both. We're getting retail, obviously, which gives us more margin because we're selling our own product through our stores. So as, for instance in Arizona, you'll see an expansion of margin in the second quarter because we'll have a lot more of the product in our stores will be our own, coming out of new cultivation facilities. Same thing in Florida and other places, and in other states like New York and others, where we're starting to really build the big wholesale business coming out of our facilities as well. So it's a mixture of both. I don't know, Joe B., if you want to add anything to that.

It's a slight weighting towards wholesale when you look at the total mix, but just [indiscernible].

And then my second question is on the proceeds from asset sales. Can you give us an update on the proceeds you expect to generate from the asset sales? I think you had $30 million that you highlighted you would get from the Maryland reorganization last week, but you had asset sales pending in a number of other states. You had originally assumed, I think it was, $65 million to $75 million in proceeds last year. I'm just wondering if there's any update on the overall range that you have given.

Yes. So the main -- yes, the main asset sale that we have coming up is the sale of the Illinois stores -- the extra Illinois stores to Parallel. That transaction needs to be approved by the regulators. And so we're waiting for regulatory approval to execute on that transaction. We did a little bit better on that sale than we originally anticipated. So I think the number is $10 million to $20 million above what our original forecast was.

The next question comes from Aaron Grey with Alliance Global Partners.

First one for me, Boris, you mentioned on potential M&A that could set you up for eventual federal legalization. So just wondering if you could provide some further color in terms of how you might think about whether or not there'll be cultivation in a low-cost state or otherwise. Like where are you thinking about that would be the best place to set you guys up? And then also, whether or not you would wait for such an acquisition until you got further color on which federal bill was getting momentum and just better -- better in terms of timing of when that would come, too?

Look, obviously, the acquisitions are focused around not only -- we're trying to make sure that they're actually good for our current business as well. So yes, they will be -- some will be around cultivation. I don't want to give too much because the transaction I'm speaking about specifically hasn't closed but will close shortly. And at the time that it closes, we really want to spend some time explaining it because it is going to be a bit of a game changer on the cultivation side for us and will fundamentally transform the sort of cost of what we do. And so I want to spend some time on that. This is not something that's much further away. I mean, it's -- we're talking a week or so away, and we'll inform the market once that's complete.

All right. Great. We look forward to that then. The second question for me, just [ sitting ] along the lines of cultivation, so for New York, the canopy limit, that's one thing that we're still not quite sure on. Joe, you mentioned that you were just meeting with regulators and you had a conversation. So just wondering if you could give any more incremental color in terms of how New York is thinking about the potential cap limit on cultivation and then how you guys are thinking about potentially adding cultivation. In New York, you've seen some of your peers kind of take a step ahead and kind of already purchased some greenhouses or otherwise, still not knowing the canopy, potentially using it for some other purposes, social equity or otherwise. So just wondering in terms if you have any incremental color on potential canopy limits and whether or not you would make -- look to make a purchase ahead of actually knowing that?

Yes. I think the...

Go ahead, Joe.

Well, I was going to say, I think the overarching premise with New York is they want to roll out a balanced but a robust marketplace, and they realize that the ROs have to play a role in that. The question becomes how quickly the program will scale up and how large they think it's going to be, and then therefore what kind of foundation they need the ROs to provide to ramp up the industry. So -- but I think they are looking at trying to create a balanced portfolio of MSOs and ROs that are coming into the marketplace, existing as well as new MSOs that might come in, and providing opportunity for other people to participate in all aspects of the marketplace. So it's hard to put a number on where we think the canopy limits will be. But I think the good news is we have a very constructive dialogue going on, thinking about how quickly the market will develop, how big we think the market will be, how many different types of players we think will be entering the marketplace. And I think they're open-minded to those types of discussions to create a program that's going to be responsible for everybody. As far as our willingness to invest ahead of the limits, yes, I mean, we are willing to do that. But we're not going to do it irrationally. We've been very clear in our calls with this group as well as with our discussions with the New York regulators that we want to be a good partner in New York. We have a leading share there. We're the leading player in New York. It's our -- one of our core markets, and we want to make sure that we're working with the regulators to be able to ensure that there's going to be a smooth transition to adult use. And if that means that we need to invest ahead of demand, we're willing to do that. But we just need to do it in concert with the regulators.

The next question comes from Scott Fortune with ROTH Capital.

Real quick, just kind of following up on Grassroots. Are the synergies fully integrated now or optimized, or there's still some room for efficiency there? And leading to that, you continue to expand aggressively to build out and capture scale from that standpoint. But step us through kind of the cadence level to get to that 30% adjusted EBITDA margins that you're looking towards the end of the year through scale and reduced cost, kind of the comfort level getting there by the end of the year here.

Scott, it's all about scale, right? So as we bring online these large cultivation processing facilities, as we get better in what we're doing, you're going to start seeing them. As I said in my opening remarks, in the 10 states that we've been in for 2 to 3 years, we're there. We're already over 30% EBITDA margins in all those states. But some of the newer states that we came in where we weren't vertically integrated, like California, where we have a very large wholesale business, Colorado, Michigan, some of these states, we're not yet fully vertically integrated. We are integrating. We are doing our best to do that, and we will get there over the next couple of quarters. But those states are running at slower -- at not particularly high EBITDA margins at the moment. But they will get there, just as all the other states got there eventually. And one has to understand that I think today's transaction that took place in the market is that it really justifies our strategy historically. Our strategy historically has been to build out the footprint, to get into these states, and then we've been building out the infrastructure in these states. And so we're starting to see the benefits of that. You'll start seeing them in the second, the third, the fourth, going into next year, you'll start seeing substantial benefits from this. And we think that we will reach those EBITDA margins and at the same time maintain our growth, which is very, very important to us. We think it's a -- this is very much of a growth industry. We think it's important to get growth under our belt and get in all these states. And as we integrate these various cultivation facilities and processing facilities, we start to get the economics up. So we're very comfortable we're going to get to the target that we're -- that we outlined to everybody this year, and we'll also meet and hopefully beat the growth targets that we put out to the investment community.

Okay. No, I appreciate the color. And then a real quick follow-up on EMMAC. I think you guys mentioned you want to get breakeven towards end -- early 2022. Are you seeing kind of COVID? It seems like a lot of sales in the international side have been difficult this year. But -- and was there a base level? I know that's not in your guidance, a base level that you guys were looking for for the revenue side for the next couple of years from EMMAC?

We have -- our revenue from EMMAC, as we said this year, is $35 million to $40 million with a flat to a small, insignificant loss on a net income basis. We really don't want to give any guidance yet for '22 and '23. As I said, we will address that issue in the third quarter call.

This concludes our question-and-answer session. I would now like to turn the conference back over to Carlos Madrazo for any closing remarks.

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 a fireside chat with Boris through Canaccord's Virtual Cannabis Conference tomorrow at 9:00 a.m. Eastern Time. Boris will also be participating in an interview through Prohibition Partners on May 20. For the latest information on Curaleaf's conference participation and events, please visit the Events section in our Investor Relations website. We look forward to updating you all further on our progress on these events as well as on our second quarter 2021 financial results call. Stay well and safe.

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