CURLF - Curaleaf Holdings, Inc.

Operator: Good day, and welcome to the Curaleaf Holdings, Inc. Third Quarter 2025 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Camilo Lyon, the Chief Investment Officer. Please go ahead.
Camilo Russi Lyon: Good afternoon, everyone, and welcome to Curaleaf Holdings Third Quarter 2025 Conference Call. Today, I'm joined by Chairman and Chief Executive Officer, Boris Jordan; 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 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 EDGAR. 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 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 Chairman and CEO, Boris Jordan. Boris?
Boris Jordan: Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our third quarter 2025 results. The return to our roots plan we initiated 12 months ago, which is focused on enhancing product quality, driving growth, expanding margins and optimizing cash flow is delivering tangible results. Over the past year, we have completed significant foundational work to reset the business, leveraging our Dark Heart genetics program, investing in our supply chain and realigning our retail operations. These actions have positioned our domestic business for renewed growth while supporting rapid international expansion. I'm encouraged to report that we're seeing positive momentum across the organization despite ongoing macro pressure from price compression. In the third quarter, we generated $320 million in revenue, up 2% sequentially. Price compression continued to be a headwind consistent with last quarter, yet our domestic segment remained stable and achieved modest growth. Our International segment continued its strong trajectory, delivering 12% sequential growth and 56% year-over-year growth. Adjusted gross margins improved to 50%, an increase of 115 basis points, both sequentially and versus the prior year. Adjusted EBITDA was $69 million, representing a 22% margin, inclusive of a 200 basis point drag from our international and hemp businesses. Our balance sheet remains healthy with a quarter end cash position of $107 million after paying $28 million in principal and interest debt obligations. We generated $53 million in operating cash flow from our continuing operations and $37 million in free cash flow. Subsequent to quarter end, we made a $30 million in acquisition-related debt payments primarily to Tryke, thus completing our obligation and leaving approximately $70 million payable over the next 2 years. We also closed on an upsized $100 million revolving credit line with Needham Bank, giving us greater flexibility to manage our business and pay down more expensive debt. The U.S. segment grew modestly compared to the second quarter, reinforcing the stability we've achieved and positioning the business for a return to growth. Many of our markets delivered solid sequential growth, including Ohio, New York, Utah and Massachusetts, partially offset by seasonal softness in Arizona, muted tourism in Nevada and an ongoing pressure in New Jersey. We've made significant progress strengthening our supply chain, starting with cultivation. I can't overstate the improvement we've seen in our garden yields continue to rise across the network and potencies have steadily increased. This quarter, our average flower potency surpassed 30% for the first time in our history. That's a direct result of our team's focus, discipline and support from the Dark Hart Genetics team. Strong genetics, sound techniques and quality equipment form the winning formula we're now deploying across all markets. On the retail side, we've implemented data-driven analytics tools that are improving assortment planning, merchandising and inventory flow. With better data quality, our teams are operating with greater precision and stronger discipline, driving better connectivity throughout the supply chain. As a result, customers are finding the right product in the right place at the right time and price, which is leading to higher visits, stronger loyalty and greater lifetime value. To build on that momentum, we're leveraging our database of more than 2.1 million loyalty members to enhance customer engagement, deepen brand affinity and drive long-term sustainable demand. We're still in the early innings of this refreshed playbook with just 3 states onboarded, but the results are already starting to show. On the innovation front, our new Anthem pre-roll brand continues to gain strong traction with both customers and retailers. Since its April launch, adoption rates and customer feedback have been exceptional. In our initial launch states, the response was overwhelmingly positive, and in Illinois, Anthem Classic has already become a top 10 pre-roll brand according to BDSA. The brand is off to a fast start and continues to build awareness and momentum. To complement the Classic line, we introduced Anthem Bold, our infused pre-roll offering in September across New York, New Jersey, Illinois and Arizona. While early feedback has been outstanding, in Illinois, the addition of Anthem Bold to our in-store lineup has propelled Anthem to nearly 30% of total pre-roll sales while also expanding the overall category. We're seeing similar strength in other launch states. Given the success, our operations team is rapidly scaling production to meet growing demand and support continued momentum. ACE, our proprietary aqueous cannabis extraction oil launched last quarter continues to gain strong traction with consumers. The message of an ultra-clear, ultra-smooth oil with minimal plant extract is resonating, driving solid sell-through and reorders in New York. In Massachusetts, ACE is flying off the shelves, contributing to improved state performance. Next, we plan to introduce ACE in Florida, where we believe it has the potential to reshape the distillate market. Innovation remains at the core of our strategy and products like ACE are proving to be powerful drivers of traffic, customer engagement and sustainable growth. The Curaleaf International segment delivered another outstanding quarter with revenue up 12% sequentially and 56% year-over-year, driven primarily by continued strength in the U.K. and Germany. In the U.K., sustained patient growth in our Curaleaf Clinic, coupled with solid wholesale performance reinforced our #1 market share position. In Germany, demand for our brands remained robust despite near-term challenges tied to regulatory delays in lifting import permit caps. That issue has now been resolved as import caps were raised last week, allowing the market plenty of supply headroom for the next couple of quarters. In September, we launched the world's first medically certified liquid inhalation device, the QMID in the U.K. and Germany. Developed over several years in partnership with Jupiter Research, the QMID is currently the only Class IIa medical device of its kind available in the European market, offering patients precise and consistent dosing through advanced vaporization technology. Pharmacist feedback has been highly positive and adoption continues to grow across both markets. The device was recently approved for sale in Australia, and we expect continued momentum and strong patient uptake as awareness builds globally. Now turning to new international markets. We're seeing encouraging progress across several key geographies. In Turkey, the government continues to advance its medical cannabis draft law, which could be made public in the coming months. In concert with that, we've begun the architectural design phase of our facility and remain on track for this market to go live in the second half of 2026. In Spain, momentum is also building. In October, the Spanish Health Minister formally approved a measure authorizing the use of medical cannabis in hospitals. The government now has 3 months to publish a detailed monograph outlining the program parameters. We expect the market will initially focus on oil-based products, and we're well positioned for any outcome with our GMP-certified facility in Alicante, Spain and our strong partnership with the University of Alicante. We anticipate further clarity on next steps in early 2026. France is similarly advancing its medical cannabis framework, which we expect will follow a model similar to that of Spain, beginning with hospital distribution. Importantly, there is work being done to allow for insurance reimbursements, which we believe would quickly usher in many patients into the market. We could see the market go live in the first half of 2026 with the help of our in-country partner, we are well positioned to optimize on the French opportunity when the timing is right. Collectively, Turkey, Spain and France represent a combined population of more than 200 million people, offering a significant long-term runway for Curaleaf. While we're excited about the potential of these markets, we recognize they will take time to mature. As such, we do not anticipate meaningful revenue contribution commencing from these countries until 2027 and beyond. Turning to our hemp business. We added several new distribution partners during the quarter and are moving quickly to expand our beverage brand portfolio. We expect to share additional updates on our next earnings call. Overall, we continue to prudently scale this segment while we await federal guidance that will help shape the long-term trajectory of this category. With much of the foundational and restructuring work under our return to Roots program now complete, we are preparing to shift towards a growth mindset in 2026. We're cautiously optimistic that the early signs we're seeing today point to a strengthening domestic business. While we expect competition across our international markets to intensify, we're confident in the multiple growth drivers at our disposal to sustain robust performance next year. We also remain encouraged by the continued progress towards federal reform, even if the pace is slower than anyone would prefer. I continue to believe the administration will ultimately deliver on its commitment to reschedule cannabis to Schedule III on its own timetable, but the direction remains clear and positive for the industry. To our more than 5,000 employees worldwide, thank you for your dedication and hard work. The results we've shared today are a direct reflection on your focus, resilience and commitment to Curaleaf's mission. None of this would be possible without each and every one of you. We're energized by the opportunities ahead and remain steadfast in our mission to shape the future of cannabis responsibly and sustainably for patients, consumers and shareholders alike. With that, I'll turn the call over to our CFO, Ed Kremer. Ed?
Edward Kremer: Thank you, Boris. Total revenue for the third quarter was $320 million, a 2% sequential increase compared to the second quarter and 3% decrease compared to the same period last year. Strength in Ohio, our International segment, New York and Utah was partially offset by pressure in Arizona, Nevada and New Jersey. Our domestic retail metrics continued showing signs of stabilization in the third quarter as transactions increased 2%. That said, as consumers make trade up to larger value size formats, units per transactions and AUR decreased 2% compared to the second quarter. Price compression headwinds did not abate in the third quarter as all markets we operate in showed a low double-digit decline on average as compared to the third quarter last year. By channel, retail revenue was $226 million compared to $253 million in the third quarter of 2024, a decline of 11% year-over-year, partially offset by strength in wholesale, which increased 19% year-over-year to $90 million, representing 28% of total revenue, driven by broad-based strength across most of our states with particular strength in New York, Connecticut, Illinois and Massachusetts as well as international. By geography, domestic revenue was up slightly from the second quarter and declined 9% compared to the same period last year, largely driven by price compression as flower price per gram was down 10% and vape pricing was down mid-teens. Curaleaf International produced another robust quarter as revenue grew by 56% year-over-year, driven primarily by the U.K. and Germany businesses. During the quarter, we made strategic investments in our international supply chain, unlocking additional capacity at our NGC facility to support strong demand in Germany. In Spain, we tripled oil production to enable the launch of new QMID device. These high-return investments are strengthening Curaleaf's presence in these emerging medical markets, further establishing our position as the global leader in cannabis. Our third quarter adjusted gross profit was $160 million, resulting in a 50% adjusted gross margin, an increase of 115 basis points compared to the prior year period. The primary drivers of this expansion were cost reductions in our cultivation facilities, partially offset by continued headwinds of price compression and higher promotions. Sequentially, adjusted gross margin also expanded by 115 basis points. SG&A expenses were $110 million in the third quarter, an increase of $4 million from the year ago period. Core SG&A was $105 million, an increase of $3 million from the prior year. The year-over-year increase in our core SG&A was driven by an increase in payroll expenses as we added strategic new hires and retail labor for our new stores. Core SG&A was 32.7% of revenue in the third quarter, a 200 basis point increase compared to the prior year. Third quarter net loss from continuing operations was $54.5 million or a loss of $0.07 per share and adjusted net loss from continuing operations was $48.2 million or a loss of $0.06 per share. Third quarter adjusted EBITDA was $69 million, a decrease of 8% compared to last year, while adjusted EBITDA margin was 22%, a decrease of 115 basis points versus last year. Our International segment was a 120 basis point drag on our total EBITDA margin in the quarter. As expected, our hemp business weighed on margins by 80 basis points as we invest in marketing, brand building and product development. Now turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $107 million. Inventory increased $2 million or 1% compared to the same period last year, comprised of a 4% reduction in domestic inventory and partially offset by 61% growth in international inventory to support growth initiatives. Capital expenditures in the third quarter were $16 million. For 2025, we now expect capital expenditures to be approximately $60 million with the majority of the increase coming from incremental investments in pre-roll automation to support the strong demand for our Anthem pre-roll brand. In the third quarter, we generated operating cash flow from continuing operations of $53 million, bringing the year-to-date total to $104 million, driven by improved margins and continued improvements in working capital management. Free cash flow from continuing operations was $37 million in the quarter. Our outstanding debt was $544 million. During the quarter, we repurchased $3.2 million of our 2026 notes at an 8.75% discount, and we reduced our acquisition-related debt by $13 million. Subsequently to quarter end, we retired an additional $30 million of debt, the majority of which went towards paying the third and final tranche owed to Tryke. Last month, we closed on a $100 million upsized revolving line of credit with Needham Bank at an interest rate of 7.99%, which then resets to 8.99% upon the refinancing of our bond. This is a significant accomplishment given the challenges the industry has had attaining standard banking access and speaks to the confidence and continued support our partners have in our long-term strategy. We will continue reducing various components of our debt throughout the year while maintaining ample liquidity to support our operations and growth objectives. Consumer has been resilient this year. However, macro headwinds continue to pressure disposable income. That said, overall demand for cannabis remains robust, yet pricing pressures are not abating. As such, for the fourth quarter, we expect total revenue to be up low single digits sequentially from the third quarter. With that, I'll turn the call back over to the operator to open the line for questions.
Operator: [Operator Instructions] The first question comes from Aaron Grey with Alliance Global Partners.
Aaron Grey: Great to see the continued momentum, especially on the international side here. I want to kind of start with my question on that. How do you guys view the potential for this momentum you've had on the international front to continue in 2026? What do you see as a potential risk to disrupt some of the growth that you've been seeing? Would you see it more so in terms of the increased competition, which force you called out in your prepared remarks? Or maybe regulatory changes such as risk to German telemedicine or otherwise. Any type of color in terms of your outlook for continued growth for international would be helpful.
Boris Jordan: Aaron, thanks for the question. Well, all of the above, basically, there's always risk and regulatory in new industries like cannabis and especially early-stage industries like cannabis in Europe, where it's behind sort of U.S. and Canadian development by about 5 years. There can be regulatory changes. There's been rumblings in Germany, Australia and other markets. We know we had changes in Poland, which affected the market. However, at the moment, demand is very robust. It continues to grow. Supply chains are getting better. The government is clamping down on some of the illicit product that was hitting the markets. I think that all-in-all, we're pretty bullish on next year and the growth, but we have to look at it quarter-to-quarter because these things do change. We know -- as I said, we know there are changes coming in Germany and in other markets, but there's also new markets coming online. I think it's a mixed bag, but it's one that we're continuing to be quite positive on and continue to invest in.
Operator: The next question is from Frederico Gomes with ATB Capital Markets.
Frederico Yokota Gomes: Just regarding the improvement in potency and yields that you're seeing. Obviously, you mentioned all the price compression that we're seeing in those markets. Do you see any path here for substantial margin expansion in 2026 with that improved quality and improved product mix?
Boris Jordan: Listen, as you see, we've had substantial margin improvement this year, as we said to the market earlier in the year that we would end the year -- exit the year at a healthy 50% gross margin. It looks as though that's where we're going to end the year. Going forward, it's a very volatile market. I wouldn't want to make the prediction of where we're going to be next year, but I can say one thing. The company's metrics internally will continue to improve. We're going to continue to put pressure on costs. We're going to continue to be more efficient in the way we manufacture. We're putting a lot of automation equipment in order to bring down costs as well and become more efficient, but where we end up with price compression is nobody can predict at this point in time. There's a lot of things in the U.S., just like there is in Europe. There's regulations in the federal government right now in hemp. Obviously, if hemp gets shut down, that would have a massive improvement to both demand and margin. I believe in the U.S. If they do something in between, it could have different effects. It's a little bit early for us to say. I think in the first quarter -- in the year-end call, we'll probably take a look at that and make some forecast to that effect. Right now, I can only say what we can control. We can control our internal metrics. We're going to be better next year than we are this year.
Operator: The next question is from Russell Stanley with Beacon Securities.
Russell Stanley: Maybe just following up on Germany. You mentioned the import caps just lifted last week. I think in August, you were thinking that you might see pricing and margins normalize here in Q4, but it seems like the caps took longer to get lifted than perhaps you'd expected. How are you thinking about this now? Is that more of a Q1 event? Or might it take longer?
Boris Jordan: Listen, I think it's going to be difficult to tell. Again, as we all know, there is changes to German regulation coming. They may be very small. They may be large. We just don't know at this point in time. We're pretty close to the government, and we're pretty much involved in a lot of the changes that are taking place. What I can say now is that there's nothing that looks that would be catastrophic to the industry. I think that most of the changes the government looking at could even positively impact the business in terms of illicit product getting into the market and some of the dumping of product. That could actually be a positive. On the other hand, it could also have some negative consequences. It's a little bit too early to tell. We don't see any changes in the fourth quarter. We see robust demand in the fourth quarter. Basically, Curaleaf is in a slightly better position than most because we have been permitted to sell, for instance, vapes into the market because of our medically approved vape, and that is driving demand heavily here in the fourth quarter and will continue into the next quarter as we're the only company today that has a medically improved vape in Europe, which is helping us both in the U.K. and Germany. Soon, we've just got approved in Australia, and that is driving, and that's giving us a little bit of a head over everyone else and that other companies just don't have that product.
Operator: The next question is from Bill Kirk with ROTH Capital Partners.
William Kirk: Gallup had a pull out yesterday that showed, less Republican voter support year-over-year for cannabis legalization. If that's really the case, what do you think that means for state reform in places like Florida? Or what could it mean for federal progress on cannabis initiatives?
Boris Jordan: I don't know about Gallup's report. I don't believe in most polls anyway because according to those same polls, Trump would not be President, and he is. I'm not a huge believer. In terms of our own polling that we've done together with the administration, I can only say one thing that we pulled NAGA, which is the most conservative part of the U.S. population and cannabis held firmly at 65% on adult use and I think 69% on medical. It's got very strong support from the work that we've done.
Operator: The next question is from Kenric Tyghe with Canaccord.
Kenric Tyghe: Boris, in your prepared remarks, you called out the more pronounced seasonality in Arizona and Florida comments similar to what we've heard out of some of your competitors. Could you provide any indication on just how much of a drag Florida and Arizona were compared to their typical performance? Or alternatively, even just give us some indication around how those states have performed quarter-to-date, where you've seen some sort of normalization there or where they're performing as they more typically would?
Boris Jordan: Thank you for that question. Yes, we've seen substantial recovery in October and generally have had a very strong October. Florida for Curaleaf didn't have as much compression as we've had in previous years on cyclicality. Arizona, however, yes, we did. It's been pretty regular now. I think it's about 4 years in a row where, as we all know, Arizona tends to run exceptionally warm in -- with temperatures well over 100 degrees for most of the summer, and that tends to have an exodus of the population. But that -- we've seen a very strong recovery in the last 2 weeks of September going into October and October was very strong. It is cyclicality, is weather-based and it has recovered.
Operator: The next question is from Pablo Zuanic with Zuanic & Associates.
Pablo Zuanic: Boris, if you allow me, I'm going to ask you a 2-part question and both is related to hemp. Regarding hemp, in my opinion, and I could be wrong, it seems to me that Green Thumb has been able to move a lot faster in hemp because they bought Agrify and they bought the NASDAQ vehicle. They were more compliant on everything around hemp and they were able to distribute Señorita and a bunch of other hemp derivatives through that vehicle. Would that be something that you would consider buying a NASDAQ-listed vehicle that will allow you to move faster in hemp derivatives? Again, my assumption could be wrong. The second one that maybe is more important, in my interpretation, and again, I could be wrong, by reposting that video from the Commonwealth project into social, the President -- and there's a lot in that video. The President was pretty much also backing hemp-derived CBD, right? That were specifically mentioned in that video. Someone could say that backing hemp-derived CBD and perhaps other derivatives is not compatible with backing the THC cannabis industry. If they are making promises to 2 separate industries, how does that work out in the end? Does that maybe call for both the THC industry and the heavy industry maybe to work together in lobbying the federal government, which is something you've mentioned before. I'm sorry, I know there's a lot there, but hopefully, you can comment on all of that.
Boris Jordan: Well, let me answer the second question first. I think the President published a video. I can guarantee you he didn't watch it until the end. I'm not sure the President had full knowledge of full content in that video. Our view that CBD alone has virtually no medical properties at all. You have to eat almost 1,000 milligrams of it to have any impact in terms of anti-inflammation or anything, and so usually, it is mixed with other elements or other cannabinoids in order to get its effectiveness. Without those cannabinoids, CBD is largely useless, unless eaten or taken in very, very high quantities. I can tell you right now, at least the briefing papers that the President administration have received, both from the regulated industry, but also from the medical industry would show that CBD alone is not very effective, and we'll soon be publishing some results of our medical studies that we've done in Europe that we've recently submitted to the MHRA in the U.K. and hope to receive approvals on that will show that. I don't think he's sending a mixed message on there. I think that was a video generally supporting CBD and other cannabinoids for medical purposes in the United States. The President has made his position clear that he supports cannabis as far as it's concerned for medical reasons, not for recreational purposes. That's, I would say, on that video. On the other purpose, I don't comment on our competitors. Curaleaf is very comfortable, very happy with the positioning that we have in the hemp-derived products. I can promise you, we're doing just fine there and are not concerned about competition, especially because the industry is so young and so early stage that really whether or not somebody sells $1 million more than the other party at this point in time really makes no difference. We're looking at a multiple tens of billions of dollars of potential revenue out of this industry over the next 5 years, and that's really the prize that everybody is after.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Camilo Lyon for any closing remarks.
Camilo Russi Lyon: Thanks, everyone, for joining us tonight. We will talk again in 90 days. Have a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.