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

Good day, and welcome to the Curaleaf Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Carlos Madrazo. Please go ahead.

Good afternoon, everyone, and welcome to Curaleaf Holdings' Third Quarter 2021 Conference Call. Today, we are joined by Boris Jordan, Executive Chairman; Joe Lusardi, Executive Vice Chairman; Joe Bayern, Chief Executive Officer; Neil Davidson, Chief Operating Officer; and Ranjan Kalia, Chief Financial Officer. Before we begin, I would like to remind you that 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 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 adjusted EBITDA, the definitions of which may be found in our earnings press release. Please note that all financial information is provided in U.S. dollars unless otherwise indicated. With that, I'd like now to turn the call over to Executive Chairman, Boris Jordan.

Thank you, Carlos. Good afternoon, everyone, and thank you for joining us. Let's begin with an overview of our third quarter results. We delivered record revenue of $317 million in quarter 3, representing 2% sequential and 74% year-over-year growth. Note that our sequential growth was all organic. Our adjusted EBITDA was $71 million, representing a 22.5% margin, and we generated positive operating cash flow of $52 million. While we faced some transient challenges in the third quarter mainly related to legislative headwinds in the Northeast and some onetime costs largely associated with integrations, we continue to execute well against our strategic initiatives. As a result, we expect to achieve our $1.2 billion to $1.3 billion annual revenue guidance, albeit at the lower end of the range, growing over 90% year-over-year. Despite the headwinds we faced in quarter 3, the U.S. cannabis market remains extraordinarily strong and is primed for significant growth over the next several years, projected to increase from $25 billion this year to over $43 billion by 2025. In this context, I think it's important to reiterate our long-term strategy and market differentiation and why we are so excited about the future of this company. Our strategy has always been to build the largest cannabis company in the world, both organically and through M&A, selling our nationally recognized, trusted brands across the widest distribution footprint. We are still in the early innings of our industry's growth and believe the right strategy for all our stakeholders is to focus first and foremost on gaining market share. We believe this is what makes Curaleaf unique and what will enable us to be the winner in this industry. Of course, in order to achieve this goal, it's critical that we have a presence in all of the largest U.S. markets. And today, we operate in 23 states, representing the broadest footprint in the industry. Many of our markets like those in the Northeast are more established and generate very strong margins for us. Others are newer, like California, Colorado and Michigan, which we refer to as our investment markets. While our investment markets naturally generate lower margins today, they are critical to Curaleaf's long-term growth as they are some of the largest in the country with massive upside potential. We have a clear path for profitable growth across all our markets. And as we continue to execute, improve our operations and gain scale, our margins in our investment markets will inherently expand toward those in our more established states. We are making strong progress against this initiative, which we believe will result in a strong '22 and beyond for Curaleaf. Our third quarter results reflect our strategy. We kept our foot firmly on the gas pedal by investing in our global distribution, brands and products, enabling us to gain share and further position Curaleaf to capitalize on the significant growth opportunities we see coming. We expect our margins to improve in the fourth quarter and to achieve an adjusted EBITDA margin of 25% for the full year. Longer term, we are targeting steady annual margin accretion as we prioritize growth coupled with ongoing operational efficiencies. Let me now provide you with a little more detail into what we are seeing in the market and how we are executing against our strategy. As we previewed on our last earnings call in May, we witnessed a general slowdown in the cannabis market in the third quarter, which we believe was largely a factor of the broader softening of U.S. consumer spending. Personal consumption expenditures increased just 1.6% in quarter 3 according to recent GDP estimates compared to a 12% increase in the second quarter. We believe the cannabis industry followed a similar path. According to Headset and BDSA, the U.S. cannabis market was essentially flat sequentially in the third quarter compared to an increase of between 14% and 15% in quarter 2. While the slowdown was greater than we expected, Curaleaf posted total revenue growth that exceeded BDSA and Headset numbers, and we gained market share in several of our key states like Arizona, Pennsylvania, Michigan, Florida and Maryland. At the state level, I mentioned earlier some legislative headwinds in the Northeast. In New York and New Jersey, the time gap between the approval of adult-use in these states and the formal rollout of their adult programs would effectively allow the illicit market to proliferate. This has reduced new medical card applications and renewals more than previously anticipated. In addition, New York did not approve whole flower in the medical market until just last month versus our prior expectation for sales to begin in the third quarter. While the timing of legislative impacted our results, looking ahead, there are several meaningful near-term catalysts in the Northeast that will have positive effects on our business. In New York, the Cannabis Control Board has approved the sale of whole flower to the medical market, and we began selling on October 26. We witnessed strong whole flower results in our first week of sales, which gives us increased confidence it will be a catalyst to our revenue in the state beginning in quarter 4 and into 2022. With respect to adult-use, we continue to expect this program to begin in 2023, and we are making strategic investment in anticipation of this significant growth opportunity. We greatly appreciate Governor Hochul's decisive actions so far in advancing the implementation of adult-use program in New York. We also have line of sight to New Jersey commencing its adult-use program in the first quarter of 2022. With our leading market share of the strategic location of our dispensary near the border with Pennsylvania and the investments we have made in building our inventory and capacity, we are fully prepared for New Jersey adult-use. We expect to benefit significantly from the upcoming growth of adult-use sales in New Jersey, a market which is estimated to expand in aggregate to approximately $2.1 billion. In Connecticut, we believe the adult-use program could be up and running by 2023 and are making investments in our operations and expanding our capacity to be ready for this event. Overall, as we have discussed, the combined tri-state area has a potential annual market opportunity of $8 billion, and we believe we have the right tools in place to win a significant share of this market given our leadership position in these states. We also continue to believe Pennsylvania and Maryland, where Curaleaf has a strong presence, will likely be among the next major states in the Northeast to approve adult-use cannabis. These states are estimated to represent another approximately $4 billion annual market opportunity. In California, as you know, the market is facing a supply/demand imbalance and increased competition from illicit players. Similar to what transpired in Colorado and Oregon, we expect this dynamic to continue to play out over the next 12 to 18 months. As a result, we recently divested our Eureka growth facility to rationalize our supply chain and improve our margins. We are also working on a more comprehensive strategy for our California operations, and we'll communicate that to the market in the next couple of months. We are confident that we will not only continue to win share but improve our margins in the state and deliver profitable results in California in 2022. In Colorado, we closed the Los Sueños Farms acquisition in October, adding over 2.5 million square feet of outdoor cultivation capacity and 2 retail dispensaries. With Los Sueños, we are now one of the largest wholesalers in the state. We believe this acquisition will help us drive significant market share gains in Colorado, and our vertical integration will contribute to margin expansion in the market beginning in the fourth quarter and into 2022. I would also like to touch on Florida, not only because it's an important market that gets a lot of attention, but because it's a great example of how our strategy leads to strong results. In Florida, our focus has mainly been on expanding our cultivation footprint and improving our genetics and quality. As a result of our efforts, we have doubled our market share in the state to approximately 15% since the beginning of the year and continue to gain share at attractive profit margins. We see significant future growth opportunity in Florida and will make the necessary investments to continue gaining incremental share at appropriate margin levels. As I mentioned earlier, we will continue to advance our growth strategy, both organically and through strategic acquisitions that add to our top line and are accretive to our margins. In that regard, we are very excited to announce today our agreement to acquire Tryke Companies, a vertically integrated MSO operating in Nevada, Arizona and Utah. Tryke brings to Curaleaf an extensive and highly complementary vertical portfolio of retail and wholesale distribution licenses and cultivation assets. Tryke owns and operates 6 highly trafficked dispensaries under the Reef brand with 4 retail stores in Nevada and 2 in Arizona. The company's products are also sold in over 50 additional locations across its wholesale distribution network. This is a highly strategic acquisition for us. By combining Curaleaf and Tryke assets, we will substantially bolster our already leading position in Nevada, Arizona and Utah. We will also gain vertical integration in Utah, which will be a positive for our margins in that state. And Tryke's overall business has a very attractive financial profile. Upon close, the acquisition is expected to be immediately accretive to Curaleaf's margins and cash flow. We anticipate the deal to close in 2022 pending approval from the Nevada Cannabis Compliance Board. In addition to the progress we are making at the state level in the U.S., we are also cautiously optimistic that positive changes are forthcoming at the federal level. There are multiple avenues for cannabis reform in both chambers, including Senator Schumer's comprehensive reform bill and the SAFE Banking Act. The safe banking language has now been passed through the House of Representatives multiple times and most recently was attached to the National Defense Authorization Act, which passed through the House in September. This month, we expect the House Republican-led Coalition to introduce a common sense reform bill that would legalize cannabis. This is yet another strong signal that cannabis is not a partisan issue, and there is broad support across both parties to resolve the federal conflict on cannabis. The USCC, along with our government relations team, is in constant contact with our elected leaders and their offices, and we feel we are very well positioned to have a legislation addressing cannabis passed by the end of this legislative session. Looking to our European business, we saw several positive developments in the third quarter, particularly on the regulatory front. In Germany, the largest European market for medical cannabis, we believe adult-use legislation could be part of the new government's overall legislative agenda. Also, Portugal and Spain continue moving forward with political processes around possible legalization of recreational use. We are encouraged by these recent developments in Europe and believe Curaleaf is well positioned to capitalize on the long-term growth opportunities in a market that has the potential to be twice as large as that of the U.S. Finally, I'd like to touch on our 2021 outlook. Based on our third quarter results as well as the market factors I discussed earlier, we currently expect to deliver full year revenue of approximately $1.2 billion, within our guidance range initiated back in March. In addition, we expect our full year '21 adjusted EBITDA margin to be 25%. With that, let me turn over the call to Joe Bayern.

Thank you, Boris. As Boris mentioned, we faced some headwinds in the third quarter, but we continue to successfully execute our strategy for long-term growth with a focus on strengthening our 4 pillars of competitive advantage: research and development, product commercialization, national distribution and marketing and brand building. And our strategy is leading to positive results. In the third quarter, we gained share in 7 of the 11 states tracked by Headset and BDSA, namely Arizona, Florida, Illinois, Maryland, Michigan, Pennsylvania and Oregon. In Florida specifically, as of the week ending October 23, our market share based on state release data of milligrams dispensed was approximately 15%, double our market share of 7.5% at the end of January. This was done with minimal additional store openings. Most notably, our Florida state margins continue to stay above our company targets. We see strong growth potential in the Florida market and expect continued share gain by staying focused on the fundamentals of our business, providing high-quality flower with a growing variety of strains, introducing new and differentiated products like Squeeze and Cliq and providing industry-leading customer service. As mentioned on our last call, we expect to reach a total of 60 dispensaries in Florida by the end of 2022. In terms of our third quarter EBITDA margin, as Boris pointed out, we faced some legislative headwinds in the Northeast, which impacted our revenue growth in these higher-margin states. We also incurred some nonrecurring costs that Ranjan will discuss in more detail. In addition, we made increased investments in new store openings and in our marketing efforts to support the growth of our new product rollouts. Pricing was only a small piece of the overall impact in Q3. Looking forward, we expect the headwinds we faced in Q3 to begin to reverse in the fourth quarter and into 2022. The addition of whole flower in New York and adult-use in New Jersey will accelerate our growth in these higher-margin markets, and our new store openings and product rollouts will begin to bear fruit. We are now vertically integrated in Colorado, and we divested our Eureka, California Grow, which will improve our margins in these states. In addition, we have rationalized our head count for recently completed M&A. All of these factors will contribute to stronger performance into next year. Moving to our distribution platform. At the retail level, we continue to strategically expand our leading U.S. footprint with a focus on quality over quantity. We opened 2 new dispensaries in the third quarter, including 1 in New Jersey and 1 in Maine, and added 2 additional dispensaries in Colorado through our Los Sueños acquisition in October, bringing our total U.S. dispensary count to 111 as of today. During the remainder of 2021, we expect to open an additional 6 new Curaleaf retail dispensaries across Arizona, Pennsylvania and Florida. From a financial perspective, our retail revenue grew 1% sequentially and 66% year-over-year in the third quarter. Including both adult-use and medical use, our total number of retail transactions remained healthy, growing 80% year-over-year. In addition, the total number of patients continued to grow, expanding by 7% from June through September. At the wholesale level, our revenue grew 3% on a sequential basis and 105% year-over-year driven primarily by expansion of our distribution platform. We grew our number of U.S. wholesale accounts by 6% sequentially during Q3, exceeding 2,100 active accounts at the end of the quarter. In California, we reached a record high 430 wholesale accounts. In our Central U.S. states, we grew our wholesale active accounts by a strong 12% sequentially, and we currently expect to exit 2021 with approximately 2,400 wholesale accounts in total. In terms of cultivation capacity, we are on track to meet our prior guidance to organically add 275,000 square feet of flower canopy by the end of the year. Unfortunately, we have not yet received Illinois state approval to open our Litchfield expansion despite its completion, but we're hopeful that we'll receive approval by the end of the year. With the acquisition of Los Sueños, we've added our total cultivation capacity by 2.5 million square feet to approximately 4.4 million square feet in total. This additional capacity will enable us to support our growth plans both in the near term and the long term as Los Sueños provides us with a platform to serve the U.S. market on a national scale once interstate commerce is allowed. As Boris mentioned, in anticipation of adult-use in New Jersey and New York, we continue to make strategic investments to capture more than our fair share of the market. In New Jersey, we tripled our cultivation capacity with our new Winslow facility in June and expect to double our capacity again with a nearby facility in the next 12 to 24 months. In New York, we are in the process of expanding our Ravena, New York facility and expect to add over 100,000 square feet of new capacity before the end of next year. Furthermore, we're already looking at additional real estate for new retail locations in the state. Curaleaf is by far the leading provider in New York, and we are one of only 2 MSOs with the cultivation capacity to effectively supply the market. So we expect to see a disproportionate benefit from both whole flower sales in the near term as well as adult-use once the program starts. Moving on to product commercialization and research and development. We successfully launched new products across several markets in the third quarter, driving new customers and product interest across our retail and wholesale operations. In Q3, we continued to introduce our Select Squeeze product in several new markets, including Michigan, New Jersey and New York. We also introduced our new Bites and Nano Bites gummy product lines, which feature improved taste and faster onset times. And we have seen strong early traction in key states like New Jersey, Arizona, Michigan, Nevada, California and Maryland. In September, we launched our Cliq by Select vape system. This unique hardware design feature proprietary pod and stainless steel encasing that uses premium oil. We introduced Cliq in California, Oregon and Nevada and Arizona in Q3 and plan to roll this out to several additional markets by year-end. In October, we further expanded our suite of innovative products with the launch of Select Snooze Bites in Arizona and Nevada. This product combines a unique one-to-one ratio of fast-acting THC utilizing our Nano-emulsion technology and long-lasting CBN to help our customers experience a more restorative sleep experience. We will continue to roll out Snooze Bites in additional markets throughout Q4 and into 2022. Our focus on R&D is a key differentiating factor for Curaleaf. So far this year, we have introduced 113 new products in our markets and approximately 11% of our year-to-date revenue has been generated by new products launched in the last 12 months. We will continue to invest in new innovative products to ensure our position as an industry pioneer. Lastly, on the marketing and branding front, in October, we introduced Grassroots premium flower brand, complementing our Curaleaf brand for health and wellness and Select brand for adult-use. We also continued to roll out our B NOBLE co-branded products to dispensaries in 6 additional states, including Arizona, Illinois, Maine, Michigan, Nevada and Oregon. Since introduction in July 2021, B NOBLE is now available in 8 states. We were also pleased to announce last month the expansion of our co-branded Rolling Stone by Select line to additional markets across the U.S., including California, Arizona, Massachusetts in early 2022. Moving on to Curaleaf International. We are pleased with the progress we continue to make scaling this business. In the U.K., we generated revenue growth of 40% sequentially. We sold just over 1 ton of cannabis flower to Israel in Q3 and anticipate increasing our sales to Israel sequentially in Q4. And in Germany, we secured our GDP or Good Distribution Practices certification, which allows Curaleaf to now release our products directly to the German market. Finally, on November 1, we rebranded EMMAC to Curaleaf International, establishing the Curaleaf brand in the European market. With that, I'd now like to turn the call over to Ranjan to discuss our financial results in more detail. Ranjan?

Thank you, Joe. Let me start by summarizing the results of our third quarter 2021. Revenue reached a record $317 million in the third quarter, representing sequential growth of 2% and year-over-year growth of 74%. Our Q3 revenue came in below our expectations, primarily due to performance in some of our Northeast states. Retail revenue was $225 million, an increase of 1% sequentially and 66% year-over-year, representing 71% of total revenue. Our year-over-year retail revenue growth benefited from new customer acquisition and increase in repeat customers as well as opening of 17 new stores in the last 12 months and an increase in e-commerce penetration following the revamp of our digital marketing tools. Our wholesale revenue grew 3% sequentially and 105% year-over-year to $92 million and represented 29% of total revenue. Our year-over-year wholesale growth was driven primarily by the addition of new accounts and an increase in sales productivity. At the end of Q3, we had over 2,100 wholesale accounts, more than double our accounts from the same period last year. Our gross profit was $144 million for the third quarter of 2021, an increase of 61% from $90 million in the third quarter of 2020. Gross profit margin was 45.6% compared with 49.6% in the prior quarter and 49.7% in the third quarter of 2020. The sequential change in gross margin includes a onetime loss on inventory related to our Eureka, California cultivation divestiture as well as a write-down on inventory in 2 of our other states. Our gross margin in the quarter was also impacted by revenue change at higher-margin Northeast states and a fire incident at our main cultivation facility, partially offset by ongoing cultivation and process efficiencies. Excluding the onetime impacts and unprecedented incident, which totaled approximately $6.6 million, our third quarter gross margin was 47.7%. While we expect our gross margin to increase over time, it may fluctuate periodically based on our investment cycle as we focus on top line growth. SG&A expense reached $102 million in the third quarter, primarily driven by increased headcount in support of new store openings, higher travel costs as revenue-facing travel resumes and marketing support -- and marketing in support of new product rollout. SG&A as a percentage of revenue was 32% compared with 28% in the prior quarter and 40% in the year ago period. Our third quarter SG&A also included approximately $13 million of onetime expenses, primarily comprised of accounting and professional fees, bad debt write-off and employee severance costs mainly related to the Eureka, California facility divestiture and our Grassroots acquisition. Excluding these onetime costs, SG&A represented 28% of total revenue in the third quarter. Adjusted EBITDA was $71 million for the third quarter of 2021, an increase of 69% from $42 million in the third quarter of 2020. The year-over-year increase was primarily driven by our revenue growth. Adjusted EBITDA margin was 22.5% compared with 27% in the prior quarter and 23.2% in the prior year period, primarily reflecting the change in revenue at our Northeast states, the unexpected fire incident, SG&A in support of new store openings and other marketing initiatives aimed at future revenue growth. In the third quarter, we recorded $39 million of other expenses, up from $19 million in the prior quarter and $7 million in the year ago period. Other expenses primarily included $16 million of net interest expense, $10 million of interest expense related to lease liabilities, $5.7 million of impairment charge related to the Eureka intangibles and a loss of $5.6 million on asset dispositions. Provision for taxes in the third quarter was $60 million compared to $43 million in the prior quarter and $19 million in the year ago period. The increase in income tax expense was primarily due to an increase in gross profit subject to 280E tax treatment, a higher state income tax and certain discrete items totaling $10.6 million. Discrete items included the write-off of certain California net operating losses and the year-to-date accrual for late tax payment. Consolidated third quarter net loss allocated to Curaleaf Holdings was $57 million compared to a loss of $7 million in the prior quarter and $9 million in the year ago period. On a year-over-year basis, our bottom line was primarily impacted by $42 million of higher tax expense, $25 million of higher other expense and $8 million of higher interest expense. Turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of $317 million as of September 30, 2021. At the end of the third quarter, our outstanding debt net of unamortized debt discounts was $342 million. We have engaged a set of financial advisers to help us refinance our current debt facilities and expect to reduce our cost of debt materially. In preparation for our growth opportunity over the upcoming quarters, we continue to build our inventory. In Q3, our inventory reached $346 million, an increase of $42 million sequentially, inclusive of $20 million of biological assets adjustment. Therefore, our business inventory grew by $22 million. Our Q3 cash flow from operations was $52 million as we continue to manage our net working capital. We currently expect to be operating cash flow positive in Q4 as well as for the full year. Net capital expenditures during the quarter were $44 million. Our investments continue to be focused on expanding cultivation and processing capacity as well as selectively increasing our retail presence in strategic markets. Capital expenditures for full year 2021 are expected to be approximately $160 million as we continue to invest in cultivation, processing and our retail footprint. Turning to our acquisition of Tryke. As announced today, we have agreed to acquire Tryke Companies using a combination of cash and Curaleaf common shares. The acquisition is structured as $115 million in cash and 17 million Curaleaf shares, both payable over the next 3 years with the share payments commencing in 2023. $40 million of the cash component will be paid at closing with the remaining $75 million payable over 3 years. Additionally, the deal includes an incremental earn-out payable in shares in 2023 based on Tryke's business achieving certain EBITDA targets. We expect Tryke to be accretive to Curaleaf margins upon close. The exact timing of closing is contingent upon regulatory approval expected in the second half of 2022. Looking beyond 2021, by continued focus on our strategic objectives, we expect to grow faster than the market organically, along with adjusted EBITDA margin expansion and positive operating cash flow. In addition, we will continue to pursue strategic tuck-in acquisitions. With that, I will turn the call back over to the operator for questions. Operator?

[Operator Instructions] Our first question will come from Vivien Azer with Cowen.

So I appreciate the color that you guys offered not only around your retail account presence currently, but then your target for wholesale accounts by year-end. I was wondering if you could offer some context around that. In traditional CPG parlance, we would talk about ACV or all channel volume. Obviously, that doesn't just represent the number of doors that you would want to access. There's obviously some SKU math around that. But if we just kind of think about the target for 2,400 or the current 2,100 today, presumably you don't want to be in every dispensary. So what percentage of attractive dispensaries does that 2,400 get you to? And how are you thinking about that for 2022?

Yes. Vivien, this is Joe. You're right. We're used to managing business through ACV where we're trying to get our SKUs in the most important outlets. It's a little hard to measure that in our industry. So I've seen statistics of anywhere from, I think, 8,000 dispensaries in the U.S. So that would put us at slightly over 25%, 30% of the dispensaries. I don't think we can weight that on ACV. I mean I'm just not sure how you would do it in our industry. But obviously, we'd like to get the highest level of ACV as possible. And our ultimate goal is to try to be in every dispensary we can. So it's a little bit -- I think it's a little bit different than it would be in traditional CPG because just the scale of the number of outlets that you'd have to call on to get to a 50%, 60%, 70% ACV weighting. But for us, there are key markets that we're going to focus on like California, which has a large number and growing number of outlets. New Jersey, New York are going to, I think, impact that number dramatically over the next couple of years. If they go out and build even 1,000 or 1,200 dispensaries in each one of those markets, we want to have a high penetration in those outlets. But it's a great question. I'm just not sure how we would measure it on a traditional CPG basis because there is no weighting of -- now what we are seeing, as you know, are more multi-store operators popping up in the industry. And that's a good thing for us because as we work with multi-store operators, not only are we getting increased distribution, but I think we're getting a different level of professionalism on how we do merchandising standards, promotion, pricing that could be coordinated with one call point as opposed to 10 individual call points. So I think it's happening in our industry. It's just pretty early on to try to -- at least for us to draw that analogy.

Understood. And I appreciate the transparency around that. If I can just squeeze in a related follow-up. Understanding that ACV is clearly not the perfect definition as you well explained, Joe, but how do you philosophically kind of think about your portfolio penetration in third-party doors? Like is it by category or by SKU? Because flower is just so fragmented, right? Is it flower, check the box and then really focus on those novel form factors? Or are there a targeted number of flower SKUs that you would want to see present in third parties? Just trying to get a philosophical understanding.

Yes. No, I think you have to look at both. I think you have to look at which categories that we have presence in and then how deep or what is your SKU count in each one of those categories, right? So we're always looking, as you know, to get not only horizontal distribution but vertical distribution in those accounts because obviously, it's more effective to sell more into your existing accounts than try to go out and get new accounts. So we want to be in the most important categories. I think we're excited about launching Grassroots flower because that's going to be -- we believe that will be a potentially better wholesale opportunity than Curaleaf flower, which by and large, is sold through our retail outlets and a couple of different third-party outlets. But I think having a branded flower brand like Grassroots will give us distribution opportunities for sure in flower. And then we want to continue to innovate in important segments like vape. Obviously, that's a big category, edibles. And eventually, we're keeping an eye on beverage because it will be big one day, but it's still an emerging category. So as we look at distribution goals, we have targets just like you would in traditional CPG, which is we want to be in 25% of our accounts in the first 30 days, 50% of our accounts in the first 60 days, and that's how we manage our wholesale distribution rollouts. And so we're trying to bring a traditional approach to getting distribution across the marketplace.

Our next question will come from Camilo Lyon with BTIG.

Boris, you and the team mentioned the impact of New Jersey and New York on the business in the third quarter. I was wondering if you could give some context in other states that you've seen the expectation for onset of adult-use and how that transpired with the medical patients and how quickly those markets recover. I can't imagine that medical patients would likely wait a year for reupping their medical cards for New York to commence its program, but I'd love some context on how you think about those programs starting to recover. And then how do you think about the acceleration of whole flower in that market, if that could actually recharge and catalyze the market for you?

So New York and New Jersey kind of hit the -- what I would call the perfect storm, right? You had a reduction because of share of wallet across the country. And we saw that, as I said, BDSA and Headset together show like a 0.5% decline quarter-on-quarter between second quarter and third quarter. And we've been telling the market this since last May, that this was happening, and it accelerated in the third quarter, obviously. And then on top of that, you had the both of these states announce these adult-use programs. They decriminalized, and so with decriminalization, medical patients instead of having to spend $100 or $150 depending on the state for their medical card, they're just going to the street because now they can have their cannabis, particularly flower. They can buy their flower, and they don't have to carry a medical card and the additional cost of carrying a medical card. And so we definitely saw this in Massachusetts. Massachusetts is a very good example because it's the only state that had a long transition period from the time that the ballot initiative was passed to the time they actually launched the adult-use program. It was almost 3 years. And so we definitely saw the same thing. We saw a rapid falloff in medical patients in the stores. We saw -- the illicit market is very efficient. So the cannabis immediately heads to that state from California and Oregon and starts supplying the state. I mean in New York, you could go to almost any bodega, anywhere on the street, any -- there's trucks driving around New York, and you can buy every single brand you can think of right now, and nobody is stopping them because it's been decriminalized. And so that's the phenomenon we're facing. So the longer we wait, the more ingrained the illicit market becomes. Now that's the bad news. The good news, of course, is that as we saw in Massachusetts, the minute they allow us to open up our businesses, we do see a pretty fast recovery because people do actually prefer to go to dispensaries where they can get cannabis for -- that's tested and that's safe. And so they prefer to buy it in a store that's regulated than a store -- than an outlet that's not regulated. And so we did see a very fast recovery once Massachusetts engaged. New York and New Jersey, for instance, in New York, the minute we got a whole flower, we definitely saw patients start to come back as well. There was a dramatic increase in activity in our stores on the back of whole flower. That shows you, again, that they'd rather buy it in a dispensary than on the street. But if they can't get it in the dispensary, they're going to go to the street, especially now that it's decriminalized. So listen, that's why I'm calling this a transitory quarter for us because we are -- we saw the New York effect with whole flower. Our traffic increased quite dramatically in our stores. Our revenues in the first couple of weeks almost doubled in those stores on the back of whole flower. So that's a very, very positive development. But in New Jersey, we have line of sight. We believe adult-use is going to be in the first quarter. That's the latest information we're getting from the regulators there. We don't have any reason to believe that, that's not true. We know they want to get the program off the ground. In New York, we saw whole flower increased traffic. Now obviously, I think New York is going to be more delayed on adult-use. I think that it's going to be early '23. So we'll have to live with whole flower. But we all saw what happened in Florida when they introduced whole flower. Medical -- the medical business did increase quite dramatically. And so we're kind of bullish on New York next year. We're very bullish, obviously, on New Jersey next year, but that was the real hit to our numbers -- was New York and New Jersey. I mean if you look at -- as Ranjan goes through the numbers in detail later on with all the analysts, he will show you that, that was the bulk of the decrease in -- particularly in margin and in revenue in our business, was the East Coast, the Northeast, specifically.

That's great color. And then just segueing into Florida. You've been very vocal. You've talked about the market share gains that you've seen there. You've been investing in market share through gross margin. Can you just give us your views on what is the target share that you're thinking about? What's your end goal here? Was this more of a onetime sort of quarterly experiment in terms of how much traffic you could drive? Or is there a persistent strategy here that is going to be in place for some time to come from the investment...

Yes, this is a very long-term strategy. Our gains have been quite even over the 3 quarters. It started in January, we kind of called it -- we told everybody on the fourth quarter -- in the fourth quarter that we were going to start launching our new growth facilities and our new products. So we saw very steady growth in the first quarter, second quarter and third quarter. So there was no change. I know there's been a lot of talk about price competition. I will tell you it's one of our strongest gross margins and one of our strongest EBITDA margin in all of our states. So all of this talk that the margins in Florida are getting decreased because of Curaleaf's market share gains is absolutely not true. We actually have very, very strong, above-average margins, well over 30% on the EBITDA side in Florida, and we're very happy with those margins. And when we continue to grow our share largely -- and we're doing it on 1/3 of the stores of some of our competition. So we're just being very, very efficient in Florida. And we mapped out that strategy last year. We televised that strategy to the market, and we executed on this, this year.

Our next question will come from Bob (sic) [ Pablo ] Zuanic with Cantor Fitzgerald.

Boris, if I may, regarding the Nancy Mace draft, I mean, you touched on the -- your expectation that reform will happen before this congressional term. But I'm sure your team has had a chance to look at her draft. If you can just comment on common areas between the draft and the Schumer draft and the big differences. And then related to that, what gives you confidence that there will be an agreement? And as part of all of that, it's interesting that both drafts have the feature of interstate commerce. So if you can comment on that in general.

Yes. So listen, I think that what we like about her draft -- I'm not going to go into the details right now, Pablo. I'm happy to do it later, but her draft, what we think is much more business-oriented and much more concise. We think the Democratic bill was kind of a basket of everything thrown in without a lot of transparency. We like the approach of the, what I would call the moderate Republicans on this issue. They've got both, obviously, social justice issues. They've got tax issues. They've got interstate commerce issues in there. They are moving a little bit faster on import than we would like to see. However, we think that this is also going to be negotiated. But the real sort of positive on this, Pablo, is that the Republicans are trying to seize the one issue that's the most popular issue in advance of the midterms. And that's cannabis. It is the biggest bipartisan issue in this country. Both the Republicans and the Democrats want legalization. They all want safe banking on this thing. And the Democrats got elected a year ago and basically have done nothing except talk. And the fact that we're seeing now the moderate wing of the Republican party step in and start to push cannabis legislation, we believe, is going to force the Democrats to also start to push this because if the Democrats go into the midterm elections without cannabis legislation, they're going to pay dearly. And as it is, they're having a rough time right now. And so it's my personal opinion that this bill coming out of a conservative South Carolina Republican Congresswoman is a major deal in Washington. And I can tell you, I got off a call today at noon. And the talk is very, very rampant in D.C. right now, and there's no way that Democrats are going to want the Republicans to run away as the leaders on cannabis reform. And so I think this is all very, very good for the industry, the fact that you've got both parties now pushing legislation and both parties wanting to be seen as leaders in reforming the cannabis sector. So this is probably the most -- as you know, I'm very cautious usually on these things. This is probably one of the most positive things I've seen happen. And this is going to push Schumer, Wyden and Booker to move on their legislation as well. And so I think we could get a compromise. How it's going to happen, whether it's going to be in the NDAA or is it going to come as an attachment to something else, I can't tell you right now. But I can tell you the talk in Washington right now is definitely on cannabis. And we've been told by the Democrats that as soon as they can get reconciliation done, this is going to be -- this and voting are going to be their 2 highest priorities for the spring of next year. So with now the Republicans coming in on the back of it, I think it's a very big positive for the industry.

And just a quick follow-up on the same topic, and I'll pass it on. So obviously, both parties want interstate commerce, right? So it seems that, that's a definite and it could come sooner than most people were expecting. But I assume when you talk to investors, what matters is that you have capacity that you can export from state to state in the right place like Los Sueños, you have the brand portfolio and the distribution network, right? But just again, [ handicap, ] is it fair to assume that interstate commerce is pretty much a done deal?

Yes. I think my gut on this, Pablo, is that even if we get interstate commerce, it's going to take years before it's put into effect, right? They're going to have to write the rules. They're going to have to come up with how they're going to do it. And I personally think the compromise is going to be where -- I think if one thing that gets compromised on will probably be in the short-term interstate commerce because of pressure from the states, governors and attorney generals to keep it isolated in the states. So I still think that even though I'm not opposed to interstate commerce, there are many that are. I'm not opposed to it. I want to make that point clear. I don't think that, that's going to be -- that's probably one issue that could get negotiated out of the bill. I believe we have a better chance now of getting a bill by April of next year than we did a week ago because of this. But I still think interstate commerce is the one thing -- that and import -- that's probably going to get negotiated out of the bill.

Our next question will come from Owen Bennett with Jefferies.

I just had a question relating to share trends. So you highlighted the 7 states where you are performing well. I was just hoping maybe you could talk about some of the key states where trends are not going as well as you would like and perhaps some of the issues that you're facing in those states.

Yes, that's an interesting question because in many states, we don't have a data source like BDSA or Headset to measure share. So when we referenced the shares that are growing in those 11 states, it's really because that has measured data. But that doesn't mean we're not growing share in other states, which we believe we continue to do. And I think the key to that growth is new product innovation and better distribution of our products. So I think it's pretty fundamental in how we look at the marketplace. I think some of the challenges in other states have been supply. We've just got to make sure that we're getting the right supply in every market, and we are -- we've got the right supply chain in every market. I think Colorado is a good example where we haven't had tremendous share gains in '21, but we feel it's going to be a great market for us in '22 now that we have Los Sueños. We have vertically integrated supply chain. We have the right cost of biomass going into our products. We're looking forward to grabbing significant share in markets like Colorado for next year. We've gained share in Michigan, but we think there's a lot of head space in Michigan to gain share if we get our supply chain right there. And as we alluded to, we've got to get our supply chain right in California. Although we had share gain -- slight share gain in California, it's nowhere near our expectations of what we want to do in that marketplace. So we -- and we've alluded to the fact that we want to come back with a holistic view of what we want to do in California to gain significant share there. I think those are the big potential markets for us. And then, of course, New York and New Jersey, we're optimistic about that for '22. I think the one market that we still have some work to do here, and it's really just building out our capabilities, is Massachusetts -- another opportunity, I think, to grow our wholesale business there. We've sold -- because we were selling primarily bulk goods in Massachusetts over the last 12 months, we haven't really built out the same type of wholesale distribution system for branded products that we have in other states, but we're building that out now. So there's no reason to believe we can't have the same level of performance in a market like Massachusetts as we do in the other states and...

Yes. And we were supply constrained in Massachusetts and now we're not. So you'll see Massachusetts on the wholesale side really start to accelerate into the second half of the fourth quarter and into the first quarter of next year as we've now built out the capacity in order to be able to supply the market fully.

Our next question will come from Max (sic) [ Matt ] Bottomley with Canaccord Genuity.

Just wanted to take a step back. I know we talked about Florida a bit, but maybe some of your key markets in absolute dollars. Just to name a few, you have Florida, Illinois, Pennsylvania. Can you give any color on the dynamic you're seeing, particularly on the pricing side? So putting aside the fact that you still have strong margins, what are you seeing at the retail level in terms of pricing? And is some of the flatness we've seen in the market data just a function of lower consumer spending? Or is there more competition, whether it's illicit channels or just more retail stores opening in some of those places?

I think it's twofold. It's what I said in my comments earlier. I think one is that we definitely saw a reduction in consumer spend. We saw it in alcohol. I mean don't forget the difference between cannabis and alcohol, which are quite similar, is that alcohol in-store sales obviously dropped like a stone. We saw that in a lot of the alcohol company earnings. But their consumption in restaurants and bars really went up, right? Because they have that outlet. In cannabis, we don't have that outlet, right? We're only in stores. And so you definitely saw a reduction in activity in the stores. I indicated this again last May. Many people thought that I was off my rocker when I was saying that. But we -- having a 23-store footprint, we saw that happening in May of last quarter, and it accelerated into the third quarter. There was no question about it. And I think that, that was probably the main driver, was share of wallet. We didn't see -- a lot of people are talking about price competition. I have to say we are not really noticing it except really and heavily in California. There's some price competition in Florida, but I think, again, as I said, when you're -- I don't have any problem selling product at a 30-plus percent EBITDA margin. And so I don't consider that price competition in Florida. The only thing that happened in Florida is that margins come down from 45%, 50% EBITDA margins down to 30% to 35% EBITDA margins, which we think are totally acceptable in terms of growing your market share. And as I said, we've doubled our market share in Florida. On the East Coast, it's just a reduction of the amount of customers coming into stores in New York, New Jersey and Connecticut, largely driven by the fact that all 3 states have announced adult-use programs -- have decriminalized but haven't launched the adult-use program. So the illicit market is very, very strong in those 3 states, and it's definitely taking customers away from the stores to the street, as I'd say it. But as I said, I think it's very transient. We're already starting to see an improvement in the numbers in the fourth quarter. We think that going into the first quarter, we'll see even more improvements. I mean the other problem typically in fourth quarter is what we call Croptober, right? You have all the illicit cannabis is harvested in end of September and into October and is usually sold in the fourth quarter and the beginning of the first quarter. That obviously creates substantial competition for regulated players because that cannabis is sold at a discount to the price that is charged by regulated players. And then we see that dissipate late into the first quarter. And definitely, there's a shortage of product always in the second and third quarters. And so I really do believe we had heightened use of cannabis during COVID. We saw a slight change in that practice in the second -- end of the second and third quarters. And now I think we've gotten back to a normal base, and we'll start -- all of us will start growing from that base as the customer base and the products improve and the customer base expands to new customers in the sector. And as states like New York, New Jersey, Connecticut go to adult-use, Maryland, Pennsylvania, which we think are next on adult-use, Florida, that will increase the TAM in the marketplace. And so again, we think this is a 1.5-quarter thing and will start to recover into growth going into the fourth and first quarters. And we're already seeing that if you look at our October numbers.

I appreciate those comments. And then just one more question on my end, just maybe pivoting over to Tryke. Just wondering if you can comment on the growth post plus the prospects of that entity, particularly Nevada and Arizona. Certainly after closing, it's going to be integrated into your national platform. But $110 million, I believe, in the press release for this year is pretty impressive from a 6-store footprint and then, I guess, penetration with 50 others. So could you just comment on what those prospects are, particularly in Nevada, and then maybe the share between retail and wholesale? I guess that 110 is -- assuming you're allowed to say anything.

So we're very -- we have to be very careful because the deal is not closed yet. Obviously, it's a binding agreement side, but we have to go through regulatory approvals. And usually, the reason regulatory approvals are a little bit longer term is because Nevada is notoriously slow in terms of its regulatory approvals. Most deals take anywhere from 6 to 9 months to get approved. And so that could slow the process of integration of that deal [ or all. ] We were talking to the company about how to best run it as we speak. But we're anticipating those markets to grow at somewhere between 20%, 25% next year. We're pretty comfortable with those numbers. And what's really good about this transaction, again, is that it really fits in. We have a business in Nevada. We have a business, a large business in Arizona, and we have a very, very good store in Utah. Now we're vertical in Utah because they're providing us a grow. We're adding 2 great location stores from them into our Arizona business. So there's a lot of synergy there. And in Nevada, it's very synergistic, right? Because we have a large-scale outdoor grow. We had a very small indoor grow. We're going to expand their indoor grow, almost double it in size. We're going to build a very large store across the way from this -- from where they have their store now. It will almost create a large cannabis corner with Planet 13 and Curaleaf right next to each other. We think that's going to be very exciting. This is going to be a very big really sort of a destination store that we're going to build right there. And so we're very, very bullish. We think that that's probably, as I said, a 20% growth business on the back of our already existing platform plus the synergies that we'll get from combining all of those businesses with our existing businesses. So it's -- and the structure of the deal was very good, too. So we're very pleased with that transaction as I think are the owners of Tryke.

And at a very good multiple. I mean it's going to be immediately accretive to our earnings. So we like this transaction a lot.

Our last question will come from Matt McGinley with Needham.

You affirm that you'll be at the lower end of the guidance range of around $1.2 billion in 2021. But if you actually hit $1.2 billion, that would imply that revenue could actually be down sequentially in the fourth quarter. Is that kind of what you're alluding to? Or are you off to a strong enough start that the momentum and the trend that Boris talked to about in October would make the third quarter more of an anomaly and the fourth quarter look better in terms of the revenue growth?

I think we'll definitely have growth in the fourth quarter. But given everything that's been going on in the third quarter, we're trying to be cautious with our numbers. But you're going to see growth in the fourth quarter.

Okay. And based on the new production capacity that you added in the first half, you should have had a substantial decline in average unit cost that would have pushed gross margins higher in this quarter. And I know you stated that gross margin -- or rather promotion wasn't the big driver of that gross margin decline, and it was more of New York and New Jersey. But either way, when I look at that top line and margin rate reported in the third quarter, whatever happened here doesn't appear to be an effective strategy from where I sit. You mentioned that whole flower in New York would be a driver of margin into the fourth quarter, but you also have these expansion projects underway in New York and New Jersey and Connecticut and I think a couple of other states that will likely press your margins until those assets become operational in 2022. So I'm kind of wondering like what are the big drivers that get the gross margin higher into the fourth quarter and into '22? And I know you guys didn't provide formal guidance on gross margin, but you've alluded to 52% to 54% would be kind of a normal range. Is that still a viable target? Or is that no longer something you could hit given what you're seeing broadly in the market and the strategy that you're pursuing?

Yes, Matt, I think the mid-50s gross margin target continues to be a viable target. Look, in Q3, we've got to understand there were a couple of onetime events that have happened. There's the impact of the Northeast states. These are high-margin states. When you have a revenue decline or a revenue change in there, that disproportionately impacts the gross margin. And I think Boris is trying to make you understand that, look, once that picks up with the New York flower coming back up, that's going to help gross margin. That happened in Q3. You had the Eureka divestiture in the quarter. That's not going to repeat itself. So that's really going to help the gross margins coming back up in there. We had some other inventory write-offs. We do a really a good cleanup in our inventory records. We did that this quarter. That really impacted it. It was very unfortunate in our main facility, we had a fire. So we had a couple of different events, onetime events that took place in our gross margin this time. You kind of back those out -- really, there was a change in gross margin quarter-over-quarter. I look at that to be only at about like 200 basis points. So we really need to climb back 200 basis points, not necessarily the 400 basis points that actually shows on the gross margin line item. And we believe climbing that back is really New York flower coming back, Massachusetts revenue coming back. That in itself is really going to help that over and above...

New Jersey.

New Jersey.

In New Jersey over and above the operational efficiencies. Actually, even in the Q3 quarter, which is getting masked and we really don't really talk about, in the Q3, we have cultivation operational efficiencies that happened in Q3. They're just getting masked by a lot of these downsides right now. You will start to see them in Q4, Q1.

Yes. And Matt, we had -- listen, we had old CBD write-offs in our Kentucky facility tied to the old CBD business that we were in. We were holding that for some time, hoping we could use some of that product as the states liberalize. We decided to take a write-off on that -- on that product. We had product with our Eureka facility in California that we shut down because we can now buy flower at a fraction of the price in the supply chain that we could do it there. So we had some inventory write-offs there. We had a substantial total loss fire in Massachusetts in our main grow facility there, which we're now rebuilding. That obviously took a hit on the gross margin side. So there were onetime events that took place in this quarter that we applied that hurt the gross margin. But we fully expect to start that recovery between the fourth quarter and first quarter. And listen, New Jersey, you have to understand that once adult-use -- if adult-use gets launched like they're saying in February, with our inventory buildup and our position in that marketplace, you're going to see not only growth in revenue, but you're going to see a dramatic expansion in margin as well on the back of that. And we've seen that in every state that transforms from adult-use -- from medical to adult-use. You start to see particularly underserved states like New Jersey, you see not only substantial revenue growth, but you also see expansion of margin. The last thing I will tell you is that we also have a very large brand-new built facility in Illinois. You probably have heard this. I believe some of the other MSOs are having the same problem: the regulator's slow-moving approval. I mean the facility is fully functioning, open. At least in our case, we didn't actually plant flower. As we understand, one of the other MSOs actually fully planted the facility, and the government came in and ripped the plants out. And so there is the Illinois situation as well that we have to deal with. That's a regulatory issue. We are working with the regulators to get that approved, but they're definitely slow crawling the approval of -- and that's a very large facility. That would double the size of our Illinois business overnight. But it hasn't been approved. It's fully open. It's ready to go. It was approved. All the plans were approved by the state. But for some reason, they're slow moving with the approval of these things.

This concludes our question-and-answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.