John Schroyer
Curaleaf (CSE: CURA) (OTCQX: CURLF) is one of the largest cannabis companies in the world thus far, but as the saying goes, heavy is the head that wears the crown.
The company posted hundreds of millions of dollars in financial losses in recent years as it pulls back from its original business plan of go-as-big-as-possible, instead focusing on more targeted expansion. But company leadership is bullish, in part thanks to the recent developments in New York, a market where the cannabis titan is poised to become a major player in the supply chain as a wholesaler.
Curaleaf CEO Matt Darin, who’s been leading the company since May 2022, sat down recently with Green Market Report to talk about how he sees the company moving into profitability and what impacts he sees on the way from federal marijuana reforms that appear to be on the horizon.
In part 2 of this interview, which will run tomorrow, Darin address the opportunities in the New York market.
This interview has been edited for length and clarity.
What should our readers know about Curaleaf’s priorities these days?
Darin: The last 18 months, since I’ve been in this role, has definitely been an interesting time in the industry, and for our company, as well. The strategy that worked for prior years in terms of hypergrowth didn’t necessarily make sense in a world where capital markets are tough.
We, as an industry and as a company, are seeing the light at the end of the tunnel and getting on the other side of some of this, whether it’s the crazy oversupply that occurred in a lot of the markets, the pricing compression dynamics that happened, some of the the illicit market, which is not going away, but maybe going to have some more enforcement in places like New York.
It’s been this optimization process, to basically take this entire footprint, this entire team, and figure out how do we continue to evolve it for the future? How do we get leaner and meaner?
We did 14 or 15 acquisitions, so finding where the efficiencies are takes time. We also had several facilities (in certain markets) where we’d rather have one singular, really efficient facility.
So, a combination of exiting some markets, mostly on the West Coast, and really focusing on the markets that are profitable. And where we have scale, that we’re able to really operate the playbook that we have found to be successful.
Also we’ve been really focused on cost savings initiatives. This hypergrowth led to a lot of opportunities to reduce costs out of the system. But I’m pretty proud of some of the decisions that we’ve made that resulted in close to $100 million of cost savings, between SG&A and COGS. We’ve done a lot of the right things.
We also really focused on bringing out our inventory the last couple of quarters, selling them through our own stores, rationalizing our wholesale business, and getting out of selling SKUs that were not profitable.
We’ve chopped a lot of that wood at this point and feel very good where we’re at from that standpoint.
Part of what we did in conjunction with that was idling capacity, just shutting down grow rooms and facilities, not populating for harvests until we got our inventory in balance. And now we are turning back on capacity in a bunch of these markets. That’s going to be a big boost to our margins, which we’ve been super focused on improving.
New York, obviously, has been a hot topic. That market is near and dear to our heart. We’re based in New York. And we’ve had like 43% market share in the medical market. So we’ve had the most to gain and the most to lose with this stalled adult-use program. It’s certainly been difficult, but I’m really happy that everything got resolved, and that the regulated market is moving forward.
Our Toronto Stock Exchange uplisting, that’s going to be a big lift for us. We let TerrAscend be the guinea pig event and see how it went for them. And so far, it’s been quite positive, just in terms of the liquidity and some of the new investors that are now able to invest in these companies versus being on the (Canadian Securities Exchange).
There’s some major benefits to hit in terms of trading volume and liquidity, but also the custody issues. It’s a game changer for the ability for foreign institutions and private equity to invest that had really had a problem having custody issues on the CSE.
And then obviously, the federal reform catalysts, both rescheduling and SAFER Banking, it’s a roller coaster for sure.
The bottom line is that Curaleaf has lost more than $700 million since January 2021. What do you think went wrong in the early days that led to such enormous losses for Curaleaf? And what has to happen for Curaleaf to start reporting net income every quarter instead of net losses?
Darin: You’re not wrong, in terms of where those net losses have been reported. I think it’s really been somewhat of a byproduct of the strategy to go really wide, and in some cases really deep, quickly and gain that first mover advantage and to penetrate markets throughout the country.
In many ways, that strategy has proven to be very successful, with Curaleaf being the most valuable company in the industry. But it does lead to a situation where, through a lot of those investments and acquisitions, there’s been a lot invested. And when you add in depreciation and amortization, all those different things that go into a net income calculation or loss calculation, there’s a lot of that.
The good news, I would say, is that we have the most favorable debt in the industry, with a 2026 maturity at an 8% rate, which is looking better and better given where interest rates are at today.
While net income is obviously the ultimate goal here, this has been a high-growth industry, and playing for net income versus continuing to grow not only revenue, but market share and footprint and investing and all the different elements of the business, we view it as still a long-term game that you have to invest in the business, and some of those investments ran counteractive to net income.
I’d also note, our guidance is $100 million-plus of operating cash flow from the business, positive free cash flow, even after we continue to invest. So when you look at it from that standpoint, the operations of the business are generating cash. That to us has been a big focus.
What has to happen for Curaleaf to get into the black? Rescheduling, for instance: How much would tax savings from 280E nullification help?
Darin: In places that where we’ve invested, as those markets develop, and we’re able to fully utilize the capacity that we built out and get to the maximum efficiency and utilization out of everything that we have, that’s a lot of the path that gets you to a different profitability profile.
The markets that we exited, (some of those) were a drag on the business. And so we haven’t really fully seen all the benefits of not baking in the losses from a California or Oregon. So when you look at our pro forma financials and focus on this core business of the 17 states that we’re in now – and our European business, which will be profitable next year from an EBITDA standpoint – I think we’re getting there.
We’re also one of the biggest, if not the biggest, beneficiaries of removal of 280E. It’s $150 million annually of 280E. The entire financial profile of us, along with the other MSOs, changes immediately when we have $150 million of free cash flow, in addition to what we’re already generating.
That’s huge. That’s how much Curaleaf would save annually if the Biden administration moves marijuana to Schedule III and 280E no longer applies?
Darin: $150 million a year. Imagine what we can do with that to pay down debt, to invest further in new markets. We’ve been very cautious as of late on the acquisitions in the M&A side, as the entire industry has, because of financing. That’s going to change the landscape of the industry.
Aside from nullifying 280E, what’s your take on the practical ramifications of rescheduling for the U.S. marijuana industry?
It is definitely going to open up quite a bit more ability to do clinical research, which I think will be a great thing and has been really hampered in the U.S.
From a financial market standpoint, there’s a lot of conjecture, in terms of of, will that be enough for U.S. exchanges? Will it be enough for more U.S. banks to get involved in financing the industry? I think a lot of that’s conjecture and kind of to be determined.
And the same thing is true on, what’s the role of the FDA and other agencies in terms of getting involved in regulating this industry? The government hasn’t fully addressed all of these issues in terms of how that will work, so there’s definitely some unknowns in terms of what that is going to look like.
It’s not going to include interstate commerce. From that standpoint, it’s going to continue to be a state-by-state regulated business, not unlike some other industries out there that still have different state-level regulations.
