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

Good day, and welcome to the Curaleaf Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Camilo Lyon, Chief Investment Officer. Please go ahead.

Good afternoon, everyone, and welcome to Curaleaf Holdings' Second Quarter 2023 Conference Call. Today, we're 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 the 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 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 release 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 other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP financial measures 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.cureleaf.com. With that, I'll turn the call over to Executive Chairman, Boris Jordan. Boris?

Thanks, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our second quarter 2023 results. In the second quarter, we delivered revenue of $339 million. That's up 4% compared to last year's revenue of $327 million. Adjusted gross margin was 44%, which was negatively impacted by intentional inventory reduction efforts, pricing pressure in Florida and New York and 80 basis points of additional expenses we reclassified into COGS from SG&A. Adjusted EBITDA margin was 21%. We ended the second quarter with $85 million in cash in the balance sheet and generated $8 million in free cash flow from continuing operations. That's after making tax interest and acquisition-related payments that totaled $77 million. My vision has always been to build Curaleaf for long-term global growth by ensuring the company was positioned to capture the significant demand the cannabis industry was poised to garner. Over the past 4 years, this strategy drove our rapid expansion in infrastructure investments across the country and into Europe in anticipation of forthcoming growth catalysts that would unlock healthy demand, many of which materialized and some of which have been delayed due to politically motivated regulatory bodies disinterested in the development of the free market. In response to these delays, we have taken steps to aggressively reduce inventory, idle excess capacity and close older facilities, actions that at the moment are weighing on our margins but are necessary in today's normalizing growth environment. That said, some of our current capacity is levered to the markets in which we anticipate significant catalysts will yield step function growth, Florida, New York, Pennsylvania, Germany. I am confident we will scale into our footprint in these states and Europe as the conversions to adult use or expanded medical consumption unfolds over the next several quarters. We are also cognizant of the need to balance investment and cash generation. With the majority of our U.S. cultivation investments largely completed, we took actions in the quarter to reduce our inventory in idle excess capacity. To this point, the story in quarter 2 is one of controlling the controllables. We successfully prioritized our brand portfolio in our dispensaries as evidenced by our 65% vertical mix. We also reduced our inventory by 6% from quarter 1 as we intentionally focused on cash generation at the expense of near-term margins. A step-up in the promotional landscape in key states like Florida and New York also had an impact on our margins. Despite this price compression, we continue to manage our expenses tightly, reining in costs and generating 300 basis points of year-over-year expense leverage. Rest assured, we are scrutinizing all aspects of our business and making the necessary improvements to create a global platform that will deliver significant operational leverage; when, not if, the many growth catalysts we see turn on. Thus far in 2023, we have eliminated $80 million of annualized expenses, doubled our initial $40 million goal, while reducing inventory by $17 million from Q1, and we are adopting COGS reducing automation in our Tier 1 facilities. That said, price compression has been the only reliable mechanism for clearing excess supply this year. I'm encouraged by the amount of excess inventory the industry has worked down and supply that has exited the market. However, we are likely to see price compression remain a recurring theme through the end of the year despite modest green shoots we see forming in select markets. Our International segment continued to produce impressive growth as evidenced by the 93% year-over-year increase in quarter 2 revenue. Europe is growing quickly but still represents a continued 150 basis point drag on our AEBITDA margins. International was once again driven by our 2 key markets, the U.K. and Germany. The U.K. experienced robust growth of 76% despite a patient acquisition process that remains lengthy and cumbersome. Curaleaf has a dominant share position in the U.K., and we are well positioned to continue organically growing the market through education, innovation and technology. With a population of 67 million people and modest penetration, the U.K. promises to be a significant contributor to our business over the coming years. In Germany, we are leading with our 420 brand. We are preparing for the country's medical market expansion under the Pillar 1 proposal. All indications from the German health minister pointed the expanded program commencing in early 2024. In fact, yesterday, we got more positive news out of Germany that stated that the proposed legislation will be presented to the cabinet on August 16, with the final vote in the Bundestag slated for the fall. Pillar 1 would significantly expand patient access to medical cannabis by removing it from the narcotics list and allowing telemedicine prescriptions. Simply put, the hurdles that exist today in the patient's journey would effectively be removed, and we are there and we're ready to capitalize on this liberalization of demand. Recall Germany's population is equivalent to 4x that of Florida, with the current patient count roughly at just 200,000 people. Under Pillar 1, we estimate the patient count would conservatively quintuple to 1 million patients, although historical medical market adoption rate suggests total patients could be closer to 3 million or 4% of the 84 million person population. There seems to be some confusion around the impact of social clubs will have on the German market. In our view, social clubs do not present a risk to the medical market as they will be nonprofit, have highly restrictive zoning laws and have a limited number of members allowed to join. Also, the cultivation and overall operating costs would be too prohibitive thus making them economically unviable. Most cannabis consumers will use the established network of 20,000-plus pharmacies to access their cannabis prescriptions or rely on delivery something social clubs cannot do. Among the many growth levers we're anticipating in the U.S., Germany could very well be the single largest growth driver in our business for the next 3 to 5 years, one that is exclusive to Curaleaf among the U.S. MSOs. While the opportunity in the U.K. and Germany is massive given the combined populations of 150 million people, what's more exciting is the expectation that other E.U. nations will follow Germany's lead putting cannabis on a globally accepted trajectory. In fact, we've already made our first Wholesale shipment into Poland, a country with a population of 40 million people. [ Betterly ] in the U.S., we continue to work hard and devote resources to getting safe over the finish line. It is encouraging to hear Senator Schumer call it a priority, and I expect positive movement to resume in September when Congress returns to session. On rescheduling, we see an encouraging path for cannabis to get to Schedule III, even despite hurdles that remain with getting the DEA on board. The next 9 to 12 months could be very exciting for the cannabis industry. However, we are not running our business on the assumption that anything will change. We continue to evaluate a potential TSX uplisting and have had constructive conversations with the Canadian regulators for this effect. While in parallel, taking the necessary steps to prepare for this potential move, we have been studying the benefits of such a move and are encouraged by the recent actions taken by several U.S. financial institutions to open up custody solutions and trading for other TSX-listed cannabis operator. We believe a move from a venture exchange like the CSE to a major exchange like the TSX would benefit Curaleaf's shareholders by broadening our shareholder base to global institutional investors that require greater liquidity, thus providing increased stability and less volatility in our share price. We will have more updates on this topic over the coming months. Finally, regarding our outlook, we are reiterating our low to mid-single-digit revenue growth outlook and annual AEBITDA margin of mid-20s. However, given the heightened level of promotions in a few markets, we now expect to come in towards the lower end of the AEBITDA range. With that, I'll turn the call over to CEO, Matt Darin. Matt?

Thanks, Boris. I have a clear and singular vision of solidifying Curaleaf's position as the global leader in cannabis. In the second quarter, we made solid progress toward these objectives. We grew revenue 4% while our expense base shrunk by 7%. We increased our vertical mix to 65%, and we reduced our inventory by $17 million versus the first quarter. That said, we had 2 distinct opportunities in the quarter we are actively addressing; Wholesale and Florida. Wholesale contracted 4% sequentially due to our intentional actions to reduce inventory and reduce sales to partners with increased credit risk as evidenced by our stable account receivables. Also, regulatory delays that continue impacting new store openings in Illinois, New Jersey and New York have not helped expand the market. Between these 3 states, there are roughly 80 new stores that have opened this year for a combined population of 42 million people. While we're having success selling into many of these independents, the pace of openings needs to accelerate. Regardless of the regulators inaction, Wholesale remains a priority and one we can get back on track quickly. We have reorganized our sales team and with the benefit of an expanded product portfolio focused on quality, we are confident we will return Wholesale back to growth in the back half of the year. Second, price compression in Florida accelerated throughout the quarter, thus impacting our sales and margins disproportionately. While Florida is an important and a highly productive state for us, we chose not to match the discounts we saw emerge in the market dollar for dollar. Rather, we have taken proactive measures to organically increase our store traffic through an expanded product assortment and targeted marketing initiatives. While we're only 1 month into the third quarter, I'm pleased to report that these measures are yielding positive results. Florida is a key growth driver now and when it converts to adult use, and we prefer winning customers on lasting drivers of demand and loyalty such as quality, innovation and customer service. Innovating around our brand and product portfolio remains a priority and distinguisher. At the end of the quarter, we launched Brick, our revolutionary 2-gram base into 6 markets, including New York, Florida, Arizona and Maryland. Brick has been in market for 5 weeks and sales have far exceeded our initial targets. Without doubt, Brick has been our most successful product launch to date. We are rapidly increasing supply to accommodate robust retail demand and Wholesale reorders. What's more, Brick has been incremental to our select baseline. Over the coming months, we are bringing Brick to 4 more states. JAMS, our new edibles line launched in Arizona, Florida and New Jersey with an assortment of gummies, tarts and chocolates. Jams is now in 3 states with 10 more coming in short order and proving very popular with our customers. In our premium flower line Grassroots, we launched diamond infused pre-rolls in Arizona, Illinois, Maryland and Nevada, a favorite among the seasoned cannabis enthusiasts. We also just launched our first liquid diamond base in Florida to our VIP customers, and tomorrow, it will be available in all of our Florida stores. This is our proprietary water-based extraction base for our premium focused customer that we've been working on for some time, and the early reception has been strong. These innovations serve as the lead product we will leverage not just across our domestic markets, but also our International ones. Consumer demand remains robust, particularly for Curaleaf products in our stores. Retail transactions were up 27% year-over-year, underscoring the efficiency of our dispensaries, aided by leveraging technology and our mobile app to provide a best-in-class customer experience. This traffic strength was partially offset by average order values that were down 14%. While we continue to feel price compression to varying degrees by market, with some states like Florida worse than others, we believe the clearing of supply is healthy and necessary. In fact, some markets have shown signs of stabilization. Separately, we've been very pleased with both our Connecticut and Maryland adult-use conversions this year. In Connecticut, we had 2 of our 4 stores opened for adult use during the quarter with our third location in Groton that began adult-use sales last month. Our fourth location in Manchester got approved for adult use last week. We continue to see a solid ramp in demand as consumer awareness grows and expect a robust contribution from Connecticut through year-end. I'd be remiss if I didn't congratulate our team members that made the Maryland launch highly successful. Not only did our operations team execute to meet surging demand of Wholesale orders prior to the July 1 adult-use launch dates, but our retail and marketing teams created strong activations at our 4 stores, which had long lines and healthy demand throughout opening weekend far surpassing our lofty sales expectations. We continue to see strong demand in this market and expect it will be a solid contributor to the business for the balance of the year. On the International front, we are laser-focused on ensuring we are prepared for the massive market expansion slated to come next year in Germany. Through strategic agreements, we have secured ample supply of high-quality, high potency THC strains. In the U.K., we will be the first to launch gummies this quarter with vapes coming shortly thereafter. We are leveraging our U.S. marketing and R&D assets in Europe to accelerate brand awareness. Heading into the second half of the year, it's clear we're doing more with less. We've taken aggressive actions to rightsize our inventory, our expense base, our headcount and our facilities. Specifically, we've reduced annualized payroll hours by 13%, an increase of 300 basis points versus our prior reduction earlier this year. We are also focused on driving COGS down through automation. We've already seen a jump in productivity and efficiency metrics in the first 3 states where we've installed more advanced automation, boding well for the next round of states coming online next month. Overall, we expect to see the COGS benefit begin to materialize towards the end of this year and more fully in 2024 as we work through existing inventory. As Boris said, we are controlling the controllables. The investments we are making in the U.K. and Germany, coupled with state catalysts in Florida, Pennsylvania, New York and more recently, Ohio, will provide us an unparalleled advantage as we build, leverage and scale our global cannabis platform. There is certainly more work to be done, but I'm excited about what our future holds. We are not running our business based on expectations from Washington, but I do believe that when seismic growth catalysts like Germany, rescheduling and safe unlock the potential of this industry, Curaleaf will be incredibly well positioned to lead globally. With that, I'll turn the call over to our CFO, Ed Kremer. Ed?

Thank you, Matt. Today, I'll review our second quarter 2023 results. Total revenue for the second quarter was $339 million, representing a year-over-year increase of 4%. Growth was driven by strength in Nevada, Arizona, Connecticut, New Jersey and Massachusetts as well as a 93% growth in our International segment. By channel, retail revenue was $277 million compared to $251 million in the second quarter of 2022, up 10% year-over-year. Wholesale revenue decreased 20% year-over-year to $60 million and represented 18% of total revenue. This decrease was in line with our expectations as we prioritize sales of our own product portfolio, worked down inventory as we spoke about in our last call and reduced sales to accounts with increased credit risk. Looking at our customer metrics, transactions remained healthy in the second quarter and were up 3% sequentially from Q1, partially offset by a 2.6% decline in average order value. Our second quarter gross profit was $147 million, resulting in a 43% gross margin. Adjusted gross profit was $150 million or 44%. Sequentially, Q2 adjusted gross margin decreased 360 basis points compared to the first quarter due to the following factors: Price compression in Florida and New York and higher discounts around 420, intentional actions to reduce inventory through a reduction of our cultivation and production utilization in New Jersey, Florida and Illinois and 80 basis points of reclassified expenses into COGS. These factors were partially offset by a 510 basis point sequential improvement in our vertical mix. We believe the second quarter was the low point on gross margin with modest improvement expected as the year progresses, setting us up for a strong rebound in 2024. SG&A expenses were $110 million in the second quarter and increased $2 million from the year ago period. Core SG&A was $96 million, a decrease of $7 million from the prior year. The year-over-year decrease in our core SG&A primarily reflects tight expense controls and headcount reductions, partially offset by expenses associated with the addition of Tryke, 420 pharma and new store openings. SG&A as a percentage of revenue was 32.5% in the second quarter, down 40 basis points compared to the year ago period. Our second quarter SG&A included approximately $14 million of add-backs versus $5 million in the prior year, with increase driven by consulting and legal fees associated with the GAAP conversion and expenses associated with acquisitions. Our core SG&A rate in Q2 was 28%, a decrease of 300 basis points year-over-year due to a further acceleration of expense cuts we began implementing at the start of the year. Second quarter net loss from continuing operations was $69 million. Net loss per share from continuing operations was $0.10. Adjusted EBITDA for the second quarter was $70 million or 21% compared to $87 million or 20% last year, a 20% decrease resulting in an AEBITDA margin of 21% and 27%, respectively. Sequentially, our adjusted EBITDA margin decreased by 100 basis points from Q1 due to gross margin contraction, partially offset by expense leverage. Our International segment was 150 basis point drag on our AEBITDA margins as we invest ahead of our future growth catalysts in the U.K. and Germany. Turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $85 million. Inventory decreased $17 million or 6% compared to the first quarter. We will continue to stay laser-focused on managing down our inventory balance through the year-end, progressing toward our goal of reaching 15% of sales by year-end. As previously mentioned, we held our accounts receivables stable from Q1 due to a concerted effort to reduce credit risk from select Wholesale partners. Net capital expenditures in the quarter were $9 million. This included an $8 million contribution from asset sales associated with our discontinued operations. Consistent with our prior outlook, we expect CapEx spend will slow in the second half of the year and continue to anticipate spending approximately $70 million in capital projects this year. Our outstanding debt was $574 million, net of unamortized debt discounts of which 83% is not due until December 2026. We ended the second quarter with 719 million fully diluted shares outstanding. We generated $13 million of cash flow from operations. Excluding a $3 million use of cash from our discontinued operations, cash flow from continuing operations was $16 million in the quarter and $37 million year-to-date. Free cash flow from continuing operations during the quarter was $8 million after having made tax, interest and acquisition-related payments that totaled $77 million. We remain comfortable with our ability to fund our growth initiatives and pay all of our obligations. We continue to expect our cash balances will build through the remainder of the year, consistent with the cadence we discussed last quarter. With respect to guidance, we are reiterating our revenue guidance of low to mid-single-digit revenue growth compared to $1.3 billion last year, which excludes discontinued operations. Given the promotional backdrop in some states, we expect AEBITDA margins to come in at the lower end of our mid-20% guidance range, we still expect to generate $100 million in operating cash flow and be free cash flow positive with a precise amount dependent on costs needed to fund the German market expansion coming early next year. And with that, I'll turn the call back to the operator to open the line for questions.

[Operator Instructions] At this time, we will take our first question, which will come from Aaron Grey with Alliance Global Partners.

So my question, I want to go a little bit towards the guidance specifically on the EBITDA, so the lower end of mid-20s. Notice as we look at it towards the first half, you did about 21% EBITDA margin. So even if we get to the lower end of mid, call it, 23% still implies a nice uptick in EBITDA margin in the back half. You talked about gross margins being up modestly in 2 ways. So if you could help us in terms of SG&A expectations? And maybe just give us more color in terms of the gross margin expectations within that so we can get to that lower end of the mid-20s for the full year and what that implies for the back half?

Aaron, this is Ed. I'll take that question. Look, we did mention the margins are going to expand. We have underutilization that impacted the second quarter, it will continue to impact us to some extent. We do expect our Wholesale sales to rebound, thereby increasing our throughput on that end of the margin curve. Our SG&A will continue to be levered. We've made additional cuts to our expense structure, as I mentioned in my prepared remarks, and some of that will be flowing through our COGS structure as well. So we believe where the sales are going to continue to ramp in the third and the fourth quarter as we sort of reiterated that guidance. We have enough leverage coming out of the organization to get to the lower end of the range. Now obviously, dependent on where sales fall in and what market conditions are, but from where we are today, we believe that trajectory is achievable.

And our next question will come from Matt McGinley with Needham.

So excluding that reclassified expense and gross margin, how much of that 3 point decline was driven by price compression versus the intentional efforts to reduce inventory? And how long do you expect that pressure from the inventory reduction to last? And then with that reclass, I think it was 80 basis points, but was that the first and second quarter all jammed into the second quarter. So that headwind is this naturally 40 basis points into the third and fourth. Is that -- am I thinking about that right? Or is that an 80 basis point headwind from that reclassification in the back half as well?

Matt, it's Ed. Your -- let me take the second part first. Your assessment is exactly right. It was the first half of the year into the second quarter, 40 bps a quarter is about the right way to think about it, good pick up. On the gross margin erosion, listen, it was multiple areas, right? I mean, price compression certainly had a large impact on that given Florida is our single biggest contribution to the business. And you did have capacity utilization that will persist to some extent through the balance of the year, though it will be offset by some of the firming the pricing that we're seeing and the increase to growth in Wholesale. So it's probably somewhat of a balanced decline in margin, though I would say pricing had an outsized impact to it. And then we also obviously decreased inventory in a healthy manner for the quarter by $17 million as that production slowed down, that obviously had an effect.

And our next question will come from Russell Stanley with Beacon Securities.

Maybe if I could, around automation, you mentioned 3 states where you're already seeing benefits there, understanding the margin benefits will take some time to see. But can you elaborate, I guess, on what you've done in which markets and which markets are prioritized next for similar upgrades?

Russell, it's Matt. So we're certainly prioritizing our Tier 1 markets, as we call them, where we're really heavily investing in automation led by Florida, but some of our other large markets as well, including New Jersey and Arizona and Illinois. So those are some of the markets that we're really investing heavily in what I would call more advanced automation. We've had various aspects of our supply chain that have been automated, but now with some of the advancements that are available in terms of whether it's vape filling or edibles manufacturing, packaging of various varieties. We're seeing a lot of opportunity to continue to get more efficient and to bring down costs, increase efficiencies and make automation investments where the ROI is in months, not years. So we view that as very good capital investments to make, and we're continuing to roll that out with a real focus on our higher volume states.

And our next question will come from Matt Bottomley with Canaccord Genuity.

Mine just relates to the potential for incremental capital, if it's needed. Just wondering if you can give any sort of indication whether it's through sales and leasebacks or whether it's through increased delays in 280E payments at the federal level, if needed. What are the avenues that you think incremental capital could be accessed if we -- this environment in the MSO U.S. operator world sticks around for longer than anyone's anticipating?

Well, let me take that. At the moment, we don't foresee any reason to raise capital. Obviously, everyone knows that we may have to do a small -- if we decide in the end to do an uplift on the TSX. We may have to do a mandatory small raise for that, similar to what TerrAscend had to do. But there is no intention at the moment to do any significant capital raises. We feel the capital build in the second half of the year is more than adequate to pay our bills for the company. And we feel very strong as we're going into next year that we'll continue to, on that trajectory as all the steps that Matt and Ed laid out continue to operate. Obviously, that doesn't leave us any substantial capital to go in and do any kind of significant M&A. And given where prices and market caps are here, it's not -- unless it's a very, very attractive share deal, we wouldn't do it. And so really, for the CapEx that we have requirements on CapEx, requirements on debt service that we have right now, we feel very comfortable with the business and its trajectory is such that we don't need to raise any additional capital. However, we have constant offers for capital, both from lenders and from obviously equity investors at these levels, but we have refrained from doing that. We do have around the $50 million revolving credit facility that's available to us to the extent that we need it. We haven't had to tap it.

And our next question will come from Scott Fortune with ROTH MKM.

Can you just dig a little bit deeper on the pricing, obviously, different state by state. I'm kind of hearing mix out there where some were starting to see stabilization. But for the most part, it sounds like, in your guys prepared remarks, you'll see price compression throughout the year here. And the kind of more digging into really Florida, specifically there, the discounting and the promo-ing on there. Is there a lot of this heavy, I think, price spreads coming from the inventory reductions or kind of distressed operators or just pure supply. Just kind of touch us through kind of the pricing side, if you’re seeing stabilization and more specifically the Florida market, that’d be great.

Scott, it's Matt. So I would say on a national level, at a high level, we are definitely seeing firming in some markets. So we're seeing stabilization. Prices are not going down further in many markets. But I think it's too early to say that they're rebounding too heavily, but we are definitely seeing firming in a lot of different markets. Florida has been a market that we have continued to see increased promotional activity as we've had more players come online, more supply into the market and a lot more dispensaries that have opened up for that medical market in advance of adult use. So we've seen a lot of aggressive promotional activity really across the board. And as we said, we really held the line on our promotions activity there in Florida. But that is a dynamic that we're seeing. And there's some other markets as well, I would say that certainly, there's still some oversupply that needs to get worked through. But we think that's healthy and it's all kind of underway, and we're going to hopefully continue to see stabilization and rebounding occur.

And our next question will come from Frederico Gomes with ATB Capital Markets.

Just on Germany, I think you mentioned a potential 5x increase there in that market with the new regulation. So how fast do you think that rent can occur with the new legislation going to [ evolve ] in the second half?

Yes. That's a very good question. We don't think that this is an overnight thing. We do think the program will most likely launch on time. Germans tend to hold to their schedules. And so far, they've been ahead of schedule on this launch. So we do think that it will launch around January 1. We do think, though, that at least the preliminary ramp will probably take some time. We anticipate sort of a 12- to 18-month period to move the market to what we think will be the $1 billion mark. And then we think it will take very similar to the sort of Florida ramp, it will take over 4 years to get to the sort of 3% to 4% penetration that we anticipate will eventually happen with the medical light model. The models are very similar. I mean there's 20,000 pharmacies. So the distribution is there, and it's already in place for the medical market. We're taking this off the narcotics list, the patient journey is going to be very, very easy for German patients. They won't have to go specialized doctor. They can go to their GP, which is going to make the process very, very simple. And telemedicine will become very simple. They'll be able to issue you a medical card and medical prescription through telemedicine. So we think it will be a very similar market to Florida in terms of its development. And therefore, we think it's going to develop on a very similar line. Again, it's just a much bigger market with 84 million people. And if you look at the Florida market, it's about a $3 billion market. You can imagine over a 5- to 6-year period what the German market could become. Curaleaf has a 23% share. We're the largest operator in that market today, and we hope to build on that over the next several months as we go into January 1 and the adult use rent. Sorry, the medical rent.

And our next question will come from Ty Collin with Eight Capital.

This one's for Ed. Ed, earlier in the Q&A, you mentioned your expectation that sales and I think particularly Wholesale will accelerate into Q3 and Q4. Could you maybe elaborate on what gives you confidence in that scenario, given the ongoing price compression and macro pressures on the consumer and what you see the key sources of that growth being?

Todd, it's Matt. I'll take this one. So look, I think in Q2, as we said in the prepared remarks, we've made some intentional moves to scale back the Wholesale business, really prioritizing, moving inventory through our vertical retail channel, where the cash conversion is the quickest and we're able to maximize margin there. Look, we also had concerns about the credit quality of some of the medium and smaller players that there's been some collections risk associated with that. We're seeing -- getting on the other side of much of that. So I think that's a dynamic that we don't necessarily see persisting in the back half of the year as much. And so -- and we are seeing real opportunities, whether it's the Maryland adult-use launch, Connecticut increased opportunities. And a number of different markets, frankly, where as we continue to round out our product and brand portfolio and launch new products, such as our new edibles line jams and a number of other things, we're seeing a lot of opportunities to grow that Wholesale business. So we think there's -- we're at a base that we're going to really continue to build on, but we're also cognizant of the environment as well.

And our next question will come from Eric Des Lauriers with Craig-Hallum Capital Group.

I'm wondering if the EBITDA margin guide, the updated guide here, if that assumes sort of stable pricing from either Q2 or current levels or if that assumes continued pressure in markets like Florida for the second half?

I'll take that. We're assuming pricing is somewhat stabilized at this point. I think there's been a tremendous amount of compression year-to-date, our belief and with some of the comments that have been made by Boris and Matt is the pricing has reached a level where we think we can rebound from largely. Now that will ebb and flow between different markets. But on balance, we believe our market -- we're baking in, I should say, that our pricing is going to be relatively stable.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Matt Darin for any closing remarks.

Thanks, everyone, for joining for the call today. We look forward to speaking to you again after the third quarter. Thank you.

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