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

Good afternoon, everyone, and welcome to the Curaleaf Holdings, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Camilo Lyon, Chief Investment Officer. Please go ahead.

Good afternoon, everyone, and welcome to Curaleaf Holdings First Quarter 2023 Conference Call. Today, we are joined by Executive Chairman, Boris Jordan, Chief Executive Officer, Matt Darin; and Chief Financial Officer, Ed Kremer. Before we begin, I'd like to remind everyone 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 very 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, in order to provide greater transparency regarding Curaleaf's operating performance, we will refer to certain non-GAAP financial measures and non-GAAP financial ratios that involve adjustments to GAAP results. Such non-GAAP measures and ratios do not have a standardized meaning under U.S. GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by U.S. GAAP, should not be considered measures of Curaleaf's liquidity and are unlikely to be comparable to non-GAAP financial measures provided by the other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP financial measure under the heading Reconciliation of non-GAAP financial measures in our earnings press release issued today and available on our Investor Relations website at ir.curaleaf.com. With that, I'll turn the call over to Executive Chairman, Boris Jordan. Boris?

Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2023 results. Since it has only been a few weeks since our last earnings call, we will take a slightly different tack today. Given all the negative sentiment around the industry, a lot of which is not really justified. I want to focus on the many catalysts we envision both internationally and domestically. There are exciting things happening right now and many more on the horizon, and these secular growth drivers often get lost in all the noise around federal reform and the challenging operating environment we are currently in. Today's equity valuations do not appropriately reflect the opportunity in cannabis as this is still a dynamic and fast-growing industry with a long and bright future. Matt will then discuss the myriad of operational initiatives we are implementing to improve efficiency and reduce costs. We know that expanding our margins during these tougher times will leave us with well-positioned for highly profitable growth as the industry normalizes. Ed will close with a review of our quarter 1 results. Despite our commitment to efficiency, Curaleaf is very much a growth company, and our solid start to 2023 is evidence of just that. I'm pleased to report first-quarter year-over-year revenue grew 14% to $336.5 million compared to $296 million last year, beating our guidance of low double-digit sales growth. Adjusted gross margin was 48% and adjusted EBITDA margin was 22%, both exceeding consensus estimates. Based on the productivity and efficiency measures we have implemented across the organization, we anticipate margins will expand throughout the year. We ended the first quarter with $116 million of capture in our balance sheet and generated $31 million in operating cash flow from continuing operations. Also, Curaleaf has access to approximately $50 million in secured financing that can be used to bolster our working capital should the need arise. Since our fourth quarter call 2 weeks ago, I've been in Europe meeting with our international team analyzing the business and contemplating new opportunities. Curaleaf is the only MSO that has embraced the massive European market, initially investing in a leading platform 2 years ago. It's enormously gratifying to see that the market is now rapidly advancing as we envisioned as evidenced by the 130% year-over-year growth in quarter 1 registered in our European operations. I'm even more excited about the revenue and profit of our International segment will contribute to Curaleaf over the next 3 years. This remains meaningfully underappreciated by the investment community, but I suspect that as Germany launches and other countries follow suit, we will get more credit for these bold moves. While still evolving [ Curaleaf ] draft regulations entail a 2-pillar system pillar with Pillar 1 focused on expanding the medical market and Pillar 2 aimed at the adulting market. Pillar 1 is setting up to be a Goldilocks scenario for the established players like our recently acquired brand 4 20 Pharma. Currently, 2/3 of the German market is comprised of just 5 players, one of which is our company 4 20 Pharma with a roughly 15% to 20% share. There are an estimated 200,000 medical cannabis patients in the country out of a population of 84 million people. However, many more citizens have applied for access only to be denied by the high barriers to getting prescriptions from a doctor. Under the current draft, Pillar 1 would immediately eliminate this friction for patients by removing cannabis from the narcotics list, thus allowing doctors to more freely prescribe while also giving consumers the comfort of knowing they are not part of a monitored national database. This proposal would also allow digital telemedicine appointments and faster delivery times, simplifying patient access compared to the cumbersome in-person and paper-based process mandated today. Removing these hurdles would undoubtedly accelerate patient enrollment just as we have seen in the U.S. when medical states expand the list of qualifying conditions. As we assess and plan for how this market may develop, we look at Germany and compare it to established U.S. medical markets such as Florida, which has a current penetration rate of 3.8%, Assuming a similar participation rate in Germany implies a total patient population of over 3 million people, which would be a 15-fold increase from today's levels. We are conservatively assuming total patient growth of 3 to 5x, which still implies a EUR 1.5 billion market opportunity over the next 2 years. We are investing ahead of this massive opportunity to drive share, and we intend to leverage the 4 20 brand, which is known for consistent high-quality, high-THC potency. Given that medical patients are eligible for insurance reimbursements in Germany, these assumptions may well prove quite conservative. Building a well-recognized brand in the medical market ahead of adult-use will give us an advantage when the program is ultimately launched. In addition, our production coming out of Portugal, we have augmented our supply chain with an exclusive multi-year partnership with the leading Canadian supplier of high-end flower to ensure we provide the market with consistent high-grade products as the market accelerates. The U.K. market grew 75% year-over-year in quarter 1, and we continue to streamline the patient funnel process by incorporating technology and software, helping remove friction from the customer -- from customer acquisition. We are also bringing our latest product innovations from the U.S. to this market. Over the coming months, we will introduce our newly formulated edible and medical vapes to the U.K., and there is nothing comparable to these products available there today. This should further cement our line in this high-growth, yet still nascent market and established Curaleaf is the most well-known and trusted brand from day 1. We are investing prudently today throughout our international segment, setting the stage for robust growth in '24, '25 and '26 as cannabis adoption accelerates across Europe. I could not be more excited about this opportunity and feel highly confident that this will be a huge strategic advantage that we will ultimately pay big dividends for our shareholders. We also have many exciting growth drivers domestically and Curaleaf is well-positioned to capitalize on near-term, medium- and long-term state-level catalysts. In Connecticut, our 2 adult-use stores continue to ramp nicely, and we expect our other 2 stores to be approved within the next 30 to 60 days. In Maryland, we are equally awaiting the July 1 launch of adult-use program with 4 highly productive stores and a robust wholesale presence. Merlin will be a very good market for Curaleaf. New York is another important opportunity. This is a market where we have a long held the #1 share position. Draft regulations came out last week. And while the OCM has offered some concessions to the existing ROs, the industry is demanding more. The current regulations are hurting the hem farmers and card license recipients they were designed to help. These arbitrary rules only benefit the illicit market, which is driving in the absence of legal competition. We, along with other market participants are steadfast in our legal position and look forward to a quick resolution to the legal market can grow equitably and drive. We are hopeful that we can begin selling into the adult-use market by quarter 4 and some form, which will be an important step towards elevating New York into a $5 billion market and the pinnacle of East Coast Canada. Over the next 2 to 3 years, important Curaleaf states, including Florida, Ohio and Pennsylvania, are likely to convert to adult use. According to BDSA, these 3 markets combined are estimated to generate over $8.5 billion in sales by 2027, and we will be ready to capitalize. Beyond that, we have applied or will be applying for licenses in Texas, Alabama, Kentucky and North Carolina, which represent further growth opportunities that we are eagerly anticipating. We are committed to efficient expansion and highly profitable growth and believe that we are just beginning to tap into the possibilities of this rapidly emerging industry. We continue to expect 2023 revenue will grow low to mid-single digits compared to '22 revenue of $1.3 billion and projects solid adjusted EBITDA margins in the mid-20% range, resulting in free cash flow generation of $50 million to $60 million after anticipated investments of $70 million into our business. With that, I'll turn the call over to our CEO, Matt Darin.

Thanks, Boris. Over the past 12 months, we have made significant strides in streamlining our business. Since I moved into the CEO role 1 year ago, we've moved decisively and with urgency to maximize opportunities in high-growth markets while scaling back from structurally unsound markets. We are laser-focused on operating efficiencies in every aspect of our business, including our cultivation and processing operations, retail store productivity, and shared services, both in the U.S. and Europe. Exiting unprofitable states was the first step, but certainly not the last. We are establishing a lean asset base from which we will drive operating leverage, margin improvements and cash generation. I will touch on 3 operational initiatives that are underway and that are already contributing to productivity and efficiency gains that will build throughout the year. These 3 initiatives are inventory management, automation, and genetics. First is inventory management. While our inventory increased slightly from the end of 2022 as we ramped up for 4 20 spring season and the launch of JAMS, our new edibles brand, we are taking a number of actions to rightsize our inventory. We are in a strong position to execute on this critical priority with the strength of our retail business and ability to further leverage our own branded products. We are successfully increasing vertical mix in the battleground markets of Illinois, Pennsylvania, and Arizona. We are at or approaching the 40% regulatory limit in Illinois in most locations and are now exceeding 50% vertical mix in Pennsylvania with room to grow. There are catalysts on the horizon in the wholesale business as well with new dispensaries opening in New Jersey and Illinois, growth in new adult-use markets such as Connecticut, positive trends in Massachusetts and Missouri, and the pending adult-use launch in Maryland. Strong inventory management starts with an excellent sales, inventory and operations planning process. We've invested in systems and personnel that enables us to forecast demand and plan inventory production with greater precision. Our ERP implementation is progressing state by state and when complete, will be the first system with real-time inventory data direct from all seed-to-sale systems. We continue to refine our cultivation methods to focus not only on overall yields but the ratio of bud-to-trend with a focus on high quality, high potency bud, and reduced trim output. I am pleased that both our potencies and bud-to-trim ratios are the best they've ever been, with more opportunity for improvement. We are also reducing redundant or inefficient capacity to further optimize our cost structure. We closed our Amesbury facility in Massachusetts, our Bellmawr facility in New Jersey and our Homestead outdoor grow in Florida, 3 older sites that have been replaced by newer, more efficient facilities. We will be continuously evaluating each site to ensure they are earning their cost of capital. While we have more work to do, I am confident in our plan to reduce inventory and to match demand to production. Second, we continue to invest in automation equipment in our Tier 1 markets where the return on investment is measured in months, not years. The landscape of automation options has improved significantly over the past several years, and we have automated numerous processes in our supply chain from cultivation, pre-roll vape and edible production and packaging. We have migrated to mylar bags for most products and will continue this move to reduce costs and environmental impact. In Florida, we're already seeing the benefits of a state-of-the-art vape filling and capping machine, and we'll be rolling this out in Massachusetts and Arizona soon. In New Jersey, we've automated gummy filling and packaging in anticipation of the launch of the JAMS edible line in early third quarter. In aggregate, the savings to our COGS from automation is estimated at $15 million over the next 12 months. That's over 100 basis points of gross margin contribution. Third is our focus on genetics and strain diversity. We are centralizing our breeding process for greater efficiencies around our new genetics program and also introducing new high-potency strains with unique proprietary genetics. We have a very robust pipeline of new genetics that are in production would have not yet hit the market, some of which are unique cultivars exclusive to Curaleaf. We are using the same innovative approach we pursued in other product categories and applying it to cultivation. This effort will reduce our third-party purchases as we create a more diverse rotation of flowers trains, something we know our consumer likes. These actions are central to achieving operational excellence. And while changes will happen over the course of the year, investments we are making today create a solid foundation that positions us for long-term success. I would like to address our progress on cost savings and expense controls. We exceeded our cost savings initiative of $60 million and continued to reduce expenditures in COGS and SG&A. We are leaving no stone unturned as we attack every expense category from travel and entertainment to third-party lab testing and more. With that said, we are continuing to invest where needed. We are spending considerable time and money advocating for our industry in Washington, D.C. as we inch closer to federal reform. While this comes at a cost, this is what industry leadership looks like to us and it's the right and necessary investment to make for the advancement of our industry. We call on the other leaders of our industry to step up and do their part as well. Shifting gears, I want to briefly touch on a few state highlights during the quarter. We are seeing strong trends in our retail business. We completed 3.33 million transactions in the first quarter, serving 934,000 customers and sold 10.3 million units. Despite the challenging macro environment and continued pressure on pricing and average order values, we are seeing positive movements in a number of key markets. In Arizona, we had a record-breaking quarter and are exceeding our internal projections. AUR for Curaleaf increased mid-single digits, while market pricing according to BDSA was down sequentially. We are seeing strong performance in a number of Northeast markets. New Jersey increased 55% year-over-year. We launched grassroots and fine to a strong reception, and our Bordentown location continues to ramp well since opening in November. In Connecticut, we converted 2 of our stores to adult use with our remaining 2 set to open over the next 30 to 60 days. Adult-use sales in this state also continued to show a solid ramp as awareness increases and we expand our product assortment. In Massachusetts, AUR for Curaleaf bucked the market trend increasing in Q1 compared to the overall market that continued seeing sequential price declines. We attribute this to the introduction of grassroots as demand for high-quality flower is strong and selling out. We see many positive indicators in our business that reinforce our growth-focused strategy. Coupling this with the work we are doing to tighten up all aspects of our operations, including retail, wholesale, cultivation, and production, will propel us down the path of higher profitability and cash generation over the coming quarters and years. The future is bright for Curaleaf. With that, I'll turn the call over to our CFO, Ed Kremer. Ed?

Thank you, Matt. Today, I'll review our Q1 2023 results and provide an update on our outlook. Total revenue for the first quarter was $336.5 million, representing a year-over-year increase of 14%. Growth was driven by New Jersey adult-use, Arizona retail strength, the addition of Tryke new store openings in Florida and 53% growth in our International segment. By channel, retail revenue was $273 million compared to $225 million in the first quarter of 2022, up 21% year-over-year. Wholesale revenue decreased 11% year-over-year to $62 million and represented 18% of total revenue. Looking at our consumer metrics, transactions remained healthy in the first quarter and were up 14% sequentially from Q4, partially offset by a 7% decline in average order value. Our first quarter gross profit was $161 million, resulting in 48% gross margin. Adjusted gross profit was $162 million. Sequentially, Q1 adjusted gross margin decreased 80 basis points compared to the fourth quarter, largely due to price compression in certain markets. SG&A expenses were $112 million in the first quarter and increased $12 million from the year-ago period. The year-over-year increase in SG&A primarily reflects operating expenses associated with the addition of Tryke, 4 20 Pharma and new store base. SG&A as a percentage of revenue was 33% in the first quarter, down 60 basis points compared to the year-ago period. Our first quarter SG&A included approximately $8 million of add-backs versus $6 million in the prior year, with the increase driven by consulting and legal fees associated with our GAAP conversion process and expenses associated with acquisitions. Our core SG&A rate in Q1 was 31%, a decrease of 110 basis points year-over-year as we are beginning to realize some of the benefits of the expense reduction actions we began taking in November, coupled with leverage on stronger sales. First quarter net loss was $56 million, which included $10 million of losses from discontinued operations. Net loss per share from continuing operations was $0.06. Adjusted EBITDA for the first quarter was $73 million compared to $76 million last year, a 4% decrease, resulting in EBITDA margin of 22% and 26%, respectively. Sequentially, our adjusted EBITDA margin decreased 60 basis points from Q4 due to gross margin contraction. Turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $116 million. Inventory from continuing operations increased $20 million or 8% compared to the fourth quarter, largely driven by a build ahead of 4 20 and the launch of JAMS, our new edibles life. Net capital expenditures in the quarter were $26 million. We expect CapEx spend to be front-half loaded and then decelerate in the back half of the year. As Boris and Matt mentioned, we are prudently investing today in the future growth opportunities we see across the international and domestic landscape. We continue to expect 2023 CapEx to be approximately $70 million or half of last year's expenditures. Our outstanding debt was $594 million net of an amortized debt discounts, of which 80% is not due until December 2026. We ended the fourth quarter with 718 million fully diluted shares outstanding. We generated $14 million of cash flow from operations, excluding a $16 million use of cash from our discontinued operations, cash flow from continuing operations was $31 million. Free cash flow from continuing operations was $5 million. While we are comfortable with our ability to fund our growth initiatives and pay all of our obligations, the company has access to approximately $50 million of secured financing that can be used to bolster our working capital should the need arise. We are off to a good start for the year and demand for cannabis remains robust, but the current operating environment still presents its share of headwinds such as elevated promotional activity in various states. We are well equipped to navigate these bumps in the road, yet we're also mindful of the pockets of distress in the market. As such, we are reiterating our fiscal 2023 guidance of low to mid-single-digit revenue growth versus comparable $1.3 billion revenue base in 2022, which excludes discontinued operations. We continue to expect full-year adjusted EBITDA margin to be in the mid-20% range. For Q2, we are comfortable with the current consensus estimate of approximately $340 million in revenue, which represents comparable year-over-year growth of 4% versus Q2 of 2022 revenue of $327 million, which excludes discontinued operations. We continue to expect to generate over $100 million in operating cash and $50 million to $60 million in free cash flow this year with inventory work down being a key driver of overall working capital improvement. To this point, we expect to see inventory as a percentage of sales to improve to 15%. Lastly, I want to reiterate that the cadence of our cash flows will trough in Q2 after making tax payments and paying the balance associated with this year's Bloom obligation. Then cash will begin rebuilding in Q3 with Q4 representing the largest cash-generating quarter. And with that, I'll turn the call back over to the operator to open the line for questions.

[Operator Instructions] Our first question today comes from Aaron Grey from Alliance Global Partners.

First one for me, I want to ask a high-level one, Boris. In the past, we've spoken towards the balance of market share and top-line growth, which we had been big on and then a little bit more of a shift to margin just because of what's happened in the marketplace. So obviously, we've seen this shift more recently, as you exited some investment markets and increased fertilization. I want to get some more confidence of how you look to balance that in your existing markets going forward to drive market share gains, particularly from more of a wholesale perspective as the states start to normalize and would that be more comfortable doing that just given the current dynamics?

I will give a macro picture and then I'll hand over to Matt to speak about the business day to day. What we've done is we've just made an alignment given market circumstances to focus right now on building up our margins in order to generate cash. Cash is important in the current environment. And as we said, we intend to finish the year with $50 million to $60 million of free cash after all were relatively heavy obligations during this year on both tax and some of the acquisitions we made. So we think that's a good result of getting to that mid-25 level. However, as I started the call today, we're really focused on growth. And the growth opportunities materially going into '24, '25 and '26 were quite substantial. And so we still have significant CapEx that we're making this year and to the $27 million really focusing primarily on our European assets, but also continuing to build out in those markets like Arizona and Florida and others where we have significant market share where we feel we can grow our market share further. Matt, I don't know if you want to add to that.

Yes. So specifically on the wholesale side, we're certainly focused on some of our key markets where we are seeing new doors open, specifically New Jersey and Illinois and really focused on capitalizing on those opportunities and continue to be focused on rounding out our brand portfolio. That's why we've launched the JAMS edibles line and a number of other different products across the segment there. So I can also say we are seeing some real positive signs in a few markets that have had its challenges over the past number of quarters, namely Massachusetts. Massachusetts is a market that's got very oversupplied, but we're now seeing some really strong opportunities. When we have our grassroots flower when that hits the menu is sold out in a matter of hours. So seeing some real opportunities to ramp up into that, also see in markets like Missouri that has been a great success story, and we just see a huge wholesale opportunity in the Missouri market, as that continues to grow into a $1 billion market.

Okay. Great. And a quick follow-up for me, just in terms of New York rigs. So I know you mentioned in your prepared remarks, obviously, updated rates came out. It seems like you're not fully satisfied, it will open some stores sooner, still has a pretty high conversion fee. So how do you think about the timing of when we might get some type of resolution and have they been receptive towards that? And then how big of a factor would it be to their ability to crack that on the illicit market in terms of making it appealing for your decision to then participate and pay that conversion fee to come to the New York [indiscernible] marketplace?

I think that's playing a big role. That fee that they want to charge. From our perspective, there's no enforcement on the adult-use market. It's going to be very difficult to pay any fee in New York with the illicit market going crazy. So I mean we've seen some movement from the governor with new legislation regulations posted giving the regulator more rights to enforce. Frankly, we thought they had them from the very beginning anyway, we still do. And it's really a question of whether or not they're prepared to do that. The one good news is that at least on the East Coast, what we've seen is once the adult-use market gets going, the legal adult-use market, once there's a significant amount of penetration with good quality stores and good quality product, you do start seeing people migrating over to the legitimate market for a whole host of reasons, both the fact that they don't want to break the law, but more importantly, they want to have products that can be tested. You probably all saw recently, there's articles about cannabis out there being laced with fentanyl. You're not going to find that regulated stores. And so I do think that the more we see unfortunate things like that, you will see people mind right into the stores. Regarding the negotiation, yes, we're not pleased at the moment because the state isn't even fulfilling their legal obligations of the law that they passed. And so all we're asking the state to do is to actually abide by the laws that were passed in the state 2 years ago when the adult-use program was originally approved. And that's where we're having our issues. But we are making progress. We're negotiating with them. They've already made some moves here when they publish the rules. As you know, those rules are now in comment period. So we will be in negotiations with the state. We hope over the next month or so that we will come out with a program that we think hopefully between the state and ourselves that's equitable addressing issues the state has, addresses those issues that we have and will let us get into the market here in the fourth quarter. The state, New York needs wholesalers, I think that the state really needs companies like Curaleaf to get their products on the shelves because the quality of the products on the shelves today is very, very low because it's largely been grown in outdoor [indiscernible], and so it doesn't meet the criteria that the customers want and the state wants to. So I think there's impetus in incentive on both sides to try to get the program launch, but it's a process, and we're going through that process now. And as I said in the call, we do hope that [indiscernible] wholesale and a little bit of retail, but we should get going here in the fourth quarter assuming negotiations go well.

Our next question comes from Matt McGinley from Needham.

You already noted the drivers of the increase in the first quarter. But I just want to make sure that is the first quarter going to be the peak for those inventory levels. And then on taxes payable. Last year, I think your gross taxes were about -- your payments are about $108 million and your net taxes were around $60 million with the deferrals. So those amounts look similar this year.

Yes, Matt, thanks. This is Ed. The latter part of your question is yes. And the first part of your question is also yes. With the inventory levels are at their highest at the end of the first quarter, we believe, and we'll expect to unlock upwards of $40 million of working capital lift just from our inventory by the end of the year. So we've already seen it to start to come down in April, and we continue to take that down as we fit out our rooms as we reduce our inventory from the conversion to finished goods that we built up to support these launches, and we will continue to drive that inventory down. It's a key initiative, and we're already seeing those results.

Great. And assuming at the ballot initiative in Florida passes the Supreme Court review and will be on the ballot in 2024, what are you doing today or preparing to do to work in concert with the other operators in the state to build the support for that to pass? I know that one operator funded the entire signature campaign. And I guess I'm a little concerned that there isn't more of a group effort. I might not learn the lesson that it should be a coordinated effort until it fails on election day. So you noted the leadership you're buying at the federal level and the expense around that. What are you doing to further this to make sure that it gets through in Florida?

Well, I think, Matt, I'll start and I'll let Matt add to it. Obviously, we are very, very for adult-use launch in Florida. Curaleaf has historically taken the brunt of a lot of the lobbying not only at the federal level, but a lot of the state levels and our expenditures run very, very high compared to other companies. Obviously, Curaleaf is the largest operator in Florida that's taken the mantle in Florida. But we are definitely in coordination in terms of our support in terms of getting signatures to our stores. We are very supportive of everything that our team is doing. But we feel that we've borne at least from a financial perspective, that we have done a lot around the country. And if you add up everything we've done at state levels, whether it be New Jersey, New York and other places, we're leading in New York. We led in New Jersey. We were very aggressive in Illinois and obviously, Arizona. So we've done our bit to get a lot of these states and spend real dollars in those states as well as at the federal level. We have very significant dollars going this year again, at the federal level for spending. And so I think the industry, there are some players that are taking the mantle in one location, other in another location. But we are very, very supportive of everything that the team been doing, and we'll continue to support it through whatever means we can. But financially, our focus has been federal in other states.

Our next question comes from Scott Fortune from ROTH MKM.

I just wanted to get a sense for that segment, the emphasis there. And how much of that is spending for CapEx? You had a $7 million budget in CapEx for the year, but step us through the CapEx need to build that out ahead of primarily the 24 ramp in revenues from that standpoint. That would be helpful.

What we did to meet our obligations for '24 given the balance we expect, particularly in Germany, but also with the accelerated growth in the U.K. is that we did 2 things. The first is we're investing in our Portuguese facility. We will shortly be announcing a transaction in Portugal to increase our capacity particularly on the drying and processing side because we have to be EU GMP certified. So we are about to do something in that space, you'll hear from us. And we also just literally this week, signed a long-term agreement, a multiyear agreement with one of the largest providers of EU GMP certified flower coming into Europe now, and we find that on an exclusive basis. So there will be -- that will help us dramatically, will actually create a shortage for other players because up until now, they've been supplying many of the players, but we took the initiative to sign a deal with them. So that way, at least over the next 24 months, while we continue to build out our facilities in Portugal, we have supplied enough flower and product on about a 50-50 basis where we'll be providing about 50% of the product ourselves to our facilities, and we'll be bringing in 50% on a multiyear contract that we signed with one of the biggest providers from Canada. So we're fully ready for what we think will be a 3 to 5x increase in our market in Germany. As I said, the numbers could make that much bigger, but we're anticipating about a 3% to 5%, we're trying to be a [indiscernible] increase. And our U.K. business continues to grow over 100% per year, every year. So that's continuing to accelerate as well. So we feel like right now, we have the product supply, either it be through our contracts or through our facilities in Portugal to be able to supply the market.

Okay. And just a follow-up on that. The key has been the access. There seems to be the demand there. From a medical, you get a prescription, and you have to see a specialist to get that reimbursed, but you're saying the steps that you're taking for telehealth that you're going to be able to have more doctors with that education now to start prescribing and [indiscernible] for the medical side.