Curaleaf Holdings Inc

CNSX:CURA

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and welcome to the Curaleaf Holdings Fourth Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Camilo Lyon, Chief Investment Officer. Please go ahead.

[Camilo Lyon, Chief Investment Officer]

Good afternoon, everyone, and welcome to Curaleaf Holdings' fourth quarter 2022 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 would 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 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 Investors Relations website at ir.curaleaf.com.

With that, I will turn the call over to Executive Chairman, Boris Jordan. Boris?

[Boris Jordan, Executive Chairman]

Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our fourth quarter and full year 2022 results.

Today, I will touch on our results, provide an update on strategic priorities for 2023, and discuss regulatory updates. I will then hand the call over to Matt.

2022 was another record year for Curaleaf that further solidified our leadership position in the emerging global cannabis industry. In the fourth quarter, we delivered year-over-year sales growth of 14% to $352.5 million, achieving a GAAP-adjusted gross margin of 47% and an AEBITDA margin of 21%. For the year, revenue grew 12% to $1.34 billion for a GAAP-adjusted gross margin of 50% and adjusted EBITDA margin of 23%. Importantly, this includes a 550 basis point drag from our investment markets, while the conversion to GAAP negatively impacted our quarter four and 2022 AEBITDA margins by approximately 200 basis points, due primarily to expensing of operating leases.

Curaleaf generated $46 million of operating cash flow this year despite spending $18 million on our international business and $71 million on our now-discontinued operations in California, Colorado, and Oregon. We ended the year with $163 million in cash on the balance sheet.

In October of last year, we initiated a thorough strategic review of all aspects of our business. We ultimately decided to exit unprofitable states in the West and focus our resources on high-margin, high-return opportunities, such as Florida and Arizona, as well as other markets like Germany and the U.K. that are earlier in their growth trajectory and largely untapped. Given the substantial price compression and continued lack of illicit market enforcement in Colorado and California, we could not justify investing more capital and time to build the more meaningful vertical presence that would be required to compete effectively in these -- in such an environment.

We are laser-focused on driving profitable growth and generating free cash, and this decision was the right course of action for our shareholders as the AEBITDA dragged from these states alone was approximately 300 basis points last year. In conjunction with these actions, we took a non-cash goodwill impairment and inventory write-down of $225 million.

After approving recreational use in July of 2021, Connecticut launched its adult-use program in early January and Curaleaf was ready to capitalize. We're the first out of the gate with wholesale sales and already have two of our four stores opened for adult-use. We are pleased with the initial demand we are seeing and expect the remaining two stores to convert to adult-use in the coming months.

In Maryland, we are encouraged by the legislature's goal of launching its adult-use program on July 1. We have four stores and a robust wholesale presence, so Maryland should represent a solid near-term catalyst for growth as well.

New York's adult-use program has gotten off to a rocky start and remains uncertain as to when it will open to the incumbent registered organizations. Without a doubt, the OCM's unwillingness to open the state's legal cannabis program to all participants, the existing ROs and new social equity entrants alike has significantly exasperated the illicit market and caused unfortunate, unintended consequences.

At this point, unregulated, unsafe, and untested cannabis products are freely available at over 15,000 illegal storefronts. In response, Curaleaf, in concert with other market participants, have launched a lawsuit against the state for its unconstitutional actions that are intentionally holding back the free market development of the program. We look forward to a speedy resolution and continue to believe New York, ultimately, will represent one of the strongest legal cannabis markets in the U.S.

Finally, our international business continues to gain share in our key markets of Germany and the U.K. In Germany, we are evaluating all available options for supply as we await more clarity from the regulators. We are encouraged by the continued progress the country is making to embrace cannabis and Curaleaf International will be prepared for whatever the final regulations are.

While still not finalized, the current proposal Pillar One recommends decriminalizing cannabis and removing it from the narcotics list, which should dramatically accelerate prescriptions issued by doctors, thus favoring established brands like Four 20. If these rules are ultimately implemented, we estimate the total market patient count could increase three to five times, putting us in a great position to rapidly increase Four 20's already strong brand awareness.

We remain confident that Germany will be a massive market opportunity with a population of 80 million, the medical cannabis market is estimated to go from €350 million this year to €1 billion relatively quickly. Over time, as the adoption curve increases and adult-use commences, we estimate the TAM of Germany could grow to over €10 billion, and we plan to leverage Four 20's leading market share to drive long-term growth in the country and across the continent.

In the U.K., our cannabis business grew 228% last year, as we extended our number one position in the country by increasing our patient share while weaker competitors exited the market. We now enjoy the leading share of patients in this exciting yet still underdeveloped market and remain focused on building awareness through consumer education, social media and doctor pharmacy community. We have exciting plans to accelerate adoption rates and generate another stellar year of robust growth in the U.K. through greater use of technology coupled with new product introductions like edibles in the coming months.

Next, I would like to discuss the audit. As previously announced, we have determined that a small number of transactions limited to the wholesale channel have been restated. The total revenue in question represented a minimal 0.8% over a two-year period and were largely confined to the fourth quarter of '21 and the first two quarters of '22. We have taken and continued to make the appropriate steps in our financial reporting to accurately present our results. More importantly, we have strengthened our internal controls to ensure best-in-class reporting, implementing an even more rigorous process that will result in consistent, transparent and accurate financial statements.

Onto some good news that made me incredibly proud of our entire Curaleaf team. On Monday, April 17, over 150 members of our New Jersey team along with our leadership group went to Trenton to protest the arbitrary non-renewal of our license by the CRC Board.

We mobilized our government relations, legal compliance, retail and communications teams to fight this decision, garnered incredible support from both our business partners and our customers, and less than 72 hours later, we were victorious in getting our license reinstated. I want to reiterate that we are and were in full compliance with regulators and we have no violations, which is why we were entitled to the renewal of these licenses.

This was a capricious and vindictive attempt by political appointees at the CRC Board and we showed with our swift response that Curaleaf will not be intimidated by [indiscernible] of regulators. The future is bright for us in New Jersey, and I'm happy to report that we had a record-breaking day on 4/20, where our sales grew 77% year-over-year, making our single highest day of sales in New Jersey ever.

There is a lot to be excited about this year. The SAFE Act was introduced by both the House and the Senate on the same day last week, a symbolic and important gesture, to me, shows a willingness and a commitment to getting much needed federal reform across the finish line.

We are also committed to facilitating improved institutional involvement and increased trading activity in our stock. To that end, we continue to prepare for a TSX listing and maintain a constructive dialog with our partners at the exchange, as we study this option for increasing our share liquidity in the event U.S. federal reform does not provide access to U.S. exchanges.

Also, new states including Kentucky, Alabama, Texas, and North Carolina, all of which would have seemingly unlikely candidates to adapt programs are now moving forward, further expanding the growth trajectory of cannabis within the U.S.

As we look to 2023, we are forecasting low- to mid-single digit revenue growth versus comparable 2022 sales of $1.3 billion, which excludes $39 million of revenue from the three states we exited. We expect a healthy mid-20% adjusted EBITDA margin.

We remain comfortable with our leverage and have ample cash to self-fund our growth initiatives, pay our taxes and service our debt. Growth and cash generation at Curaleaf are not mutually exclusive, and 2023 will be evidence of just that. As this year unfolds, we expect to throw off significant free cash. Curaleaf will be on offense while others play defense. Make no mistake, we enter 2023 with a cleaner inventory position, ample cash on hand, and we will be investing in our business, setting us up for years of market share expansion.

I've been building successful organizations for 30 years and have seen many business cycles. Cannabis has unique industry-specific regulatory challenges, but it is ultimately no different. We remain focused on optimizing our business and delivering compelling products and great service to our customers, because that is what will create lasting value for our shareholders. In fact, the growth opportunity I see for Curaleaf in this nascent industry over the next three to five years is tremendous.

With that, I'll now turn the call over to CEO, Matt Darin. Matt?

[Matt Darin, Chief Executive Officer]

Thanks, Boris.

My primary objective coming into the CEO role last year was to position Curaleaf for unrivaled long-term success, defined by driving consistent revenue growth through a strong brand portfolio, margin expansion and free cash flow generation. Investments in product development, coupled with swift actions we took in Q4 and Q1 to optimize our business, position us securely on this path.

We entered 2023 with a highly-productive and geographically-diverse retail dispensary network supported by one of the strongest brand portfolios in the U.S., led by Select, the number one selling vape brand in our operating markets. To illustrate just how productive our retail segment is, our organic transactions were up 24% last year, more than offsetting price pressure. Just in Q4, we completed 3 million transactions, while serving nearly 850,000 customers who bought 9.8 million units.

We plan to leverage this brand portfolio and strength the distribution to go deeper in our core markets and further extend our leading position through innovation across other categories like edibles while doubling down on our strain diversity to increase our flower position. With over $600 million in revenue coming from our own brands in our own stores alone, we'll continue executing on our strategy of creating a house of brands distributed nationally.

Continuing on this path requires a laser focus on operational excellence and inspiring urgent execution throughout the organization. The team's commitment to this fundamental premise has been unwavering and is manifesting itself in new ways every day, as we get better at servicing our customers with high-quality consistent cannabis products at scale.

With that, we accomplished a great deal last year. A few highlights include: 171 new products launched; three new brands introduced in the market: Find, Endless Coast and Plant Precision; 28 new stores added; completed six acquisitions; expanded our European presence by entering the German market; launched our Rooted in Good Social Impact Report; converted to GAAP accounting; and built out the management team with high-caliber talent.

We also made tough but necessary decisions to cease operations in unprofitable states, slimming down our organization for greater efficiency. We ran at full speed in 2022, and 2023 is shaping up to be no different.

We believe 2023 will present challenges to many in the industry as capital remains scarce and 280e will prohibit most of our competitors from generating positive free cash flow. We are not in that position rather, actions we've taken will enable us to drive our margins and pay our tax and debt obligations, resulting in robust free cash flow generation.

Getting here will rest on pushing harder on our core tenets of operational excellence and urgent execution, both of which can be seen in the strength of our retail business, which accounted for over $1 billion in sales last year. While wholesale will continue to face challenges this year, we will lean on our retail network to expand our brand portfolio offering across our diverse 19-state footprint.

On the operational excellence front, we are focused on driving our vertical mix, not only to increase our margins but also to protect against wholesale price compression. As we mentioned on our last earnings call, increasing the vertical mix in three battleground states, Arizona, Illinois, and Pennsylvania, would yield an incremental 200 basis points of margin to our business. I'm happy to report that we are making solid progress towards this goal and we should see consistent improvement throughout the year.

New product launches play an integral role in reaching our vertical mix targets and, in 2022, they accounted for 18% of our total company revenues. To this end, Find, our value flower brand offering, has been received incredibly well by our customers. We continue to see it as incremental to our business while also offering value-conscious shoppers a high-quality option at an affordable price.

Specifically, Find has driven sales and vertical mix increases in Arizona and Illinois. In Massachusetts, it contributed to 32% growth in our wholesale flower sales in Q4 compared to Q3. Currently in six states, we plan to rollout Find to another five more states over the next few months. Importantly, Find has not cannibalized our premium Grassroots flower offering.

Speaking of Grassroots, following our rebrand last October, we relaunched it in five states with a line that includes our best flower strains, diamond-infused pre-rolls and concentrates. Over the next few months, we plan to expand Grassroots to four more states.

Edibles is a significant opportunity for us as we fill in product gaps in our portfolio across our key markets. As of Q4, we held the number four share position in edibles, but see a massive opportunity to improve this year. In fact, at the end of March, we introduced our new edibles line called JAMS that includes gummies, tarts and chocolates.

In our relentless pursuit of innovation, we've enhanced the formulation and texture of our gummies and launched these in Arizona and Florida first, followed by a subsequent rollout in five more states in Q2. Tarts are a new subcategory of edibles in our assortment aimed at the micro-dose consumer. This is a great example of how we inherited a product line through an acquisition and improved upon it by adding our own science and technology to create a new product offering that we will distribute at the scale. This is the power of our platform in real-time.

Last is our focus on improving our strain diversity and flower quality. We know our customers want newness and variety, and so we have partnered with the top genetics and tissue culture libraries in the U.S. to expand our flower offerings. In addition, we have introduced proprietary Grassroots' genetics in multiple states to better segment our flower menus. We should begin to see the benefits of this initiative show up in the second half of the year and into 2024.

On the marketing and IT front, our teams have been hard at work preparing for the launch of our new mobile app that just went live last week. When paired with our loyalty rewards, our app is the only program unified by our proprietary national database that effectively travels across state lines when you do, tallying purchases made from Las Vegas to New York, syncing your loyalty points at every Curaleaf dispensary you visit.

The strides we've made in creating the backbone of this tech infrastructure will create what we believe is the best customer experience on the market, which should translate to higher customer retention and greater spend. In fact, analytics from the pilot test we recently performed in four states has shown exactly that, a significant increase in spend and return visit rates.

It's clear to us that our geographically diverse network of 152 retail dispensaries is a competitive advantage, particularly at a time when the wholesale business is under pressure. What's more, we're in the right markets with the right catalysts ahead of us. Last year, we had five states that generated over $100 million in sales each, a number we expect will grow as more states expand their adult-use programs. According to BDSA, we are in eight of the top 10 states that will drive two-thirds of the legal market growth over the next five years. That's $11 billion in sales we can go after with our current footprint in states like Florida, New Jersey and New York.

Let's talk about a few of our important battleground states. Arizona retail was a standout as customers served in our stores increased 18% from Q3. Not only do we have the additional stores from Tryke in Q4, we also relocated our Scottsdale store in October and demand has been strong since opening day. We now have a total of 16 retail locations in the state and the number one share position for our portfolio of brands led by Select, the number one vape brand and Curaleaf's number one flower brand in this important market.

In Florida, we opened three stores in Q4 and reduced our overall discount rates compared to Q3. After changes were instituted at our Mount Dora facility near Orlando, the team is delivering greater consistency of high-quality, high-potency flower of 25% to 30% THC to rave reviews. Further to this point, 50% of all [ACE] (ph) we sold in Q4 were in our higher potency tier, a significant increase from the 30% we realized in Q3.

In New Jersey, our retail business remains consistently strong and was boosted by the adult-use opening of Bordentown in November, our third store in New Jersey. In fact, December was our best month ever in retail sales in the Garden State as transactions were up 9% sequentially. Despite challenges in the broader wholesale market, we expect our wholesale business to be a significant beneficiary of the newly--issued dispensary licenses, many of which already have supply agreements in place with us.

In Illinois, we are seeing improving trends in our vertical mix after actions we've taken to improve our flower library. Our Q4 vertical mix improved 45% year-over-year, helped by the launch of Find flower, we have more runway ahead as we plan to introduce our new edibles line JAMS to this important market. It's important to note, we do not have any border stores with Missouri and thus we're not seeing any cannibalization from that market's adult-use program.

While we are focused on expanding our share in the largest markets, we're also investing in smaller markets with strong medical growth prospects like Utah and Ohio, both of which have adult-use conversion prospects in the future. In Utah, we are leveraging our fully vertical supply chain with the recently announced acquisition of Deseret Wellness. This adds three highly productive dispensaries, bringing our retail presence to four of the 15 in state. Investments in market like Utah, where the cannabis market grew 59% last year to $199 million, will pay dividends for years to come.

On our international business, when looking at population penetration rates and the accelerating adoption curve, the demand signals we see in Europe today reminds me a lot of the U.S. medical market five years ago. To this point, we are leveraging the know-how we have gained in the U.S. by applying these learnings abroad.

For instance, we are using technology to streamline the U.K. patient enrollment process and our U.S. R&D and cultivation teams are collaborating with their U.K. and German counterparts to bring the best product possible to market first. The early-stage challenges in Europe are similar to the ones we have dealt with here in the U.S., and our ability to navigate them early on is giving us a significant leg up on the competition, allowing us to capitalize on our first-mover advantage.

While regulatory hurdles and inflationary pressures will likely persist this year, demand for cannabis remains strong, as is our business. Based on BDSA, Select was the number one selling vape brand in the states we operate in, and the second best-selling vape brand in the U.S. in Q4. In 2023, we will invest behind the strength to further bolster our market position.

We have much to be proud of, but we are not resting. We have more to accomplish as we built Curaleaf into the preeminent global leader in cannabis.

With that, let me turn the call over to our CFO, Ed Kremer. Ed?

[Ed Kremer, Chief Financial Officer]

Thanks, Matt. I will review our Q4 and 2022 results, give an update on our cost reduction efforts, and provide color on our 2023 outlook.

Over the last several months, we completed the transition from IFRS to GAAP and made significant strides in streamlining the business for greater efficiency. We acted quickly to exit unprofitable states, enhanced our financial discipline and reduced costs across the organization. These actions will position the business for improved operating results as the year progresses.

As mentioned by Boris, although the inquiry conducted by management and our external advisors under the supervision of the audit committee resulted in a minor reduction in revenue for both 2021 and 2022, we decided to restate our '21 annual financial statements and Q1, Q2 and Q3 interim financial statements as we thought it was the right thing to do.

Management is committed to accurate and transparent financial reporting. Beginning in the fourth quarter of 2022 under the accounting -- under new accounting leadership, we have begun taking a number of remediation steps and are committed to taking additional steps to enhance our controls so that this situation does not repeat in the future.

Now moving on to our Q4 and '22 restated results, which I will refer to in GAAP.

Total revenue for the fourth quarter was a record $352.5 million, representing sequential growth of 4% and a year-over-year increase of 14%. Growth was driven by the Tryke acquisition, which closed in early October, new store openings in Florida, the conversion of our Bordentown, New Jersey store to adult-use, and our international segment, which contributed -- with contributions from Four 20 Pharma in Germany and our U.K. business.

By channel, retail revenue was $277 million compared to $226 million in the fourth quarter of '21, up 23% year-over-year. Sequentially, retail revenue was up 7%, resulting in our 20th consecutive quarter of sequential retail growth. Wholesale revenue decreased 10% year-over-year to $74 million, representing 21% of total revenue. Sequentially, the wholesale revenue declined 6% due to price compression and intentional reduction of low-profit bulk material sales, and a reduction in third-party orders after SAFE's failure to pass in December.

For '22, total revenue was $1.34 billion, up 12% versus prior year. Retail revenue of $1 billion increased 18% while wholesale revenue of $316 million decreased 6%.

Looking at our consumer metrics, organic transactions were up 1% sequentially in Q4 and up 24% in 2022. Average order value increased 1% sequentially in Q4, but declined 13% for the year. According to our internal data tracking, we believe the downward trend on consumer spending stabilized versus Q3 likely due to cannabis behaving more like a consumer staple.

Our fourth quarter reported gross profit was $78 million, resulting in a gross margin of 22%. After adjusting for $88 million of add-backs related to the inventory write-downs associated with our state exits and Tryke inventory step up, our adjusted gross profit was $165 million, a sequential decline of [0.4%] (ph) from $166 million. Our adjusted gross margin was 47% compared to 49% in the third quarter, a sequential decrease of 200 basis points.

The factors that impacted our adjusted gross margin include a full year allocation of $8.5 million of expenses that were reclassified from SG&A to COGS, which reduced our gross margin by 240 basis points and geographic mix, partially offset by increased operational efficiencies, the addition of higher margin Tryke business and improved international gross margins, helped by the addition of our Four 20 Pharma. Excluding the expense reclassification, our adjusted gross margin would have been 49%.

Increasing our vertical mix penetration is a key focus of ours in 2023. New product launches across all categories coupled with more strain variety in our flower menus and new store openings will be the driving forces behind our vertical mix improvements this year.

In Q4, our vertical mix was 62% with notable improvements in Pennsylvania, Connecticut and Ohio. For 2022, vertical mix was 63%.

SG&A expenses were $121 million in the fourth quarter compared to $109 million in the prior quarter and increased $17 million from the year-ago period. The sequential increase in SG&A primarily reflects operating expenses associated with the completion of Tryke and Four 20 Pharma acquisitions. SG&A as a percentage of revenue was 34.3% in the fourth quarter, up 220 basis points compared with 32.1% in the prior quarter, but down 60 basis points compared to the year-ago period.

Our fourth quarter SG&A included approximately $13 million of add-backs versus $6.3 million in the prior quarter, with the increase driven by expenses associated with our GAAP conversion and acquisitions. Net of add-backs, our SG&A rate was 30.6% of total revenue in the fourth quarter compared to 30.2% in the prior quarter, primarily due to increased labor expenses from Tryke and Four 20, and consulting and legal fees.

In November, we began implementing our cost reduction plan by reducing labor and overhead expenses across the organization. These actions continued into January, largely driven by our decision to cease operations in unprofitable states and further reduce our corporate overhead. In aggregate, we reduced payroll by approximately 10% and, when coupled with other expense reductions across the organization, we exceeded the $60 million in gross annualized expense savings we previously expected.

Fourth quarter net loss was $260 million, which included $225 million of non-cash goodwill impairment charges and inventory write-downs primarily related to our state exits. Full year 2022 net loss was $370 million and net loss per share was $0.52.

Adjusted EBITDA for the fourth quarter was $73 million, a 16% year-over-year increase. Adjusted EBITDA margin in the fourth quarter was 21% compared with 23% in the third quarter.

Now turning to our balance sheet and cash flow. Our balance sheet remains strong, having ended the year with cash and cash equivalents of $163 million. Net capital expenditures during the quarter were $39 million, bringing our full year total to $138 million due to accelerated investments in both our international business plus the acquisition of Four 20 Pharma and U.S. expansion. Our outstanding debt was $623 million net of unamortized debt discounts, of which three-quarters is not due until December 2026. We ended the fourth quarter with 715.7 million fully diluted shares outstanding.

We remain focused on generating cash to fund growth and pay our obligations, while also generating positive cash flow this year and beyond. In 2022, our cash flow from operations was positive $46 million. Inventory decreased $48 million or 16% compared to the third quarter, largely driven by actions we took to cease operations in unprofitable states.

Finally, I would like to provide some color on how we see 2023 unfolding. Given the macro backdrop, we are planning accordingly with an eye on both investing in growth and generating cash. As such, we'd expect 2023 revenue to be up low mid-single digits versus 2022 revenue of $1.3 billion, which includes up -- which excludes operations from California, Colorado and Oregon.

There are few puts and takes around our margins, which include exiting unprofitable states, improving our vertical mix, price compression and savings from labor and other expense reductions. When netting these things together, we expect our AEBITDA margin to be in the mid-20% range, inclusive of an approximate 200-basis-point drag from our international business, as we continue to invest in Germany.

Given these inputs, underpinned by the strength of our retail network and portfolio of brands, we anticipate generating operating cash flow in excess of $100 million, which includes an approximate $30 million negative impact from the IFRS to GAAP conversion for the treatment of operating leases. Now that we're four months into the year, the strong demand signals we're seeing in our business give us greater confidence to lean into the high-growth, high-return opportunities around us. As such, we anticipate our CapEx will be approximately 50% below last year versus a more conservative CapEx assumption we anticipated back in January.

With Germany progressing towards a significant expansion of its medical program coupled with increasing domestic opportunities, we believe it is prudent to invest ahead of our original plans to capture the rapid growth the market will experience. As such, we expect free cash flow to be approximately $50 million to $60 million depending on the timing of these investments.

I want to provide some color on the cadence of our quarterly cash flows. In Q1, we build inventory and have a large acquisition-related cash payment to make. Seasonal demand then accelerates in Q2, but we also make a large tax payment resulting in our lowest quarterly cash balance of the year. Then in Q3 and Q4, we begin building cash again. Our back-half cash build will also be boosted by the full benefits of our cost reduction efforts taken earlier this year. For Q1, we expect revenue to be up low double digits versus Q1 '22 like-for-like revenue of $296 million, which excludes sales from California, Colorado and Oregon.

And with that, I will turn the call back over to the operator to open the line for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matt McGinley with Needham. Please go ahead.

[Matt McGinley, Needham]

Thank you. So, my first question is on the revenue restatements. Were those restatements related to finished goods inventory or reselling bulk flower and purchasing bulk flower back from other operators?

[Ed Kremer, Chief Financial Officer]

Hey, Matt. Thanks. This is Ed. It was a little bit of both. So, there is -- there was some finished good inventory and some timing of that inventory, and some of the sales were related around bulk transaction.

[Matt McGinley, Needham]

Got it. And on the cost savings in G&A, so with the $60 million in run rate savings, how much of that do you expect to achieve in the first quarter relative to when you'll be at that implied kind of $15 million run rate in savings?

And then, on the core G&A, as you noted, it went up for a number of reasons, I think you said it was a $13 million impact, I think that puts it around $107 million in terms of the core G&A. Will that look around that same amount for the first quarter? Or will the cost-cutting that you put in place be able to reduce that overall G&A spend in the first quarter? Or is that something we should assume happens later in the year?

[Ed Kremer, Chief Financial Officer]

I think, Matt -- I think, look, I'm not going to comment on Q1 numbers at this point, but I do think you should think about it building throughout. We implemented some expense cuts, as you know, very late in 2021. We did another -- followed that up with another sort of cut if you will, and some of those expenses are going to roll through the first quarter. So, I think for your purposes, I think, the build of it would increase in Q2, Q3 and Q4.

[Matt McGinley, Needham]

Okay. All right. Thank you.

[Ed Kremer, Chief Financial Officer]

I'm sorry, '22 -- Q4 '22 and build into Q1 '23 and then get the more run rate benefit to '24.

[Matt McGinley, Needham]

Yeah, that makes sense. Thanks.

[Ed Kremer, Chief Financial Officer]

You bet.

[Operator]

Our next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

[Aaron Grey, Alliance Global Partners]

Hey, good evening, everyone, and thank you for the question. So, first one for me, kind of want to double off that last one. Just talk about the EBITDA margin, so obviously a lot of different levers you have currently in place with the structuring verticalization. So, just as we think about the year, the 21% in the fourth quarter and getting to mid-20%-s for the full year, how do you think about the cadence of the margins for the year? It seems from what you have from the prior question, may be more modest improvement with a bigger step up in the back half that kind of get you to the mid-20%-s for the year, so maybe high 20%-s to end the year. Any color on that would be appreciated. Thank you.

[Ed Kremer, Chief Financial Officer]

Aaron, I'll take that as well. I think you're thinking about it correctly. I think you'll see a fairly stable lower margin in the first half of the year, with a pretty aggressive build in Q3 and certainly exited Q4. Keep in mind, we did restate everything in GAAP and I think just for clarity, that's about a 2% impact on our SG&A and -- well, overall, our EBITDA expands, some of it is in COGS, some of it in SG&A. About 23% of it hits COGS, about 77% of it or so hits SG&A, but for the overall impact it's approximately 2% on a like-for-like numbers if you were to thinking about it from IFRS to GAAP. Everything has now been restated in GAAP obviously.

[Aaron Grey, Alliance Global Partners]

Okay, great, thank you very much. Second question for me. So, I know innovation has always been good to you guys. So, wanted -- talk a little bit more in terms of how you're thinking about innovation for the year? You talked a little bit about the tarts, but -- and I think about this developing more and more into a CPG category, obviously in terms of defensibility, sometimes they're shelf space, other ways they do a defensible innovation. So, I'd love to get more conscious of how you are looking to drive innovation and also make sure that it is defensible, and less so copycat within the category, especially within the pricing pressure. So, how you're thinking about innovation and driving them in 2023 would be greatly appreciated. Thanks.

[Matt Darin, Chief Executive Officer]

Yeah, I'll take that one. This is Matt. Hey, Aaron. It's a good question. So, as we talked about, innovation continues to be a key priority for us. It's really across the entire product spectrum. For example, our Plant Precision line focused on minor cannabinoids. That's an area that's been, I'd say, underserved in the marketplace. So far, we're seeing really strong demand from consumers as they get educated on the benefits from some of these minor cannabinoids, whether it's CBG or THCV. So, we're continuing to lean into that. It's one of those categories where you don't see as much offering available in most of our markets, and we see some real demand there.

I would also say there is innovation happening on the flower side as well. People think mostly on innovation as it relates to process products, but we see development of new proprietary genetics and new ways to cultivate as one area of innovation as we continue to see high-quality flower as an area of opportunity in virtually all markets that we operate in today.

[Aaron Grey, Alliance Global Partners]

All right. Great. Thanks. I'll jump back in the queue.

[Operator]

Our next question comes from Matt Bottomley with Canaccord. Please go ahead.

[Matt Bottomley, Canaccord]

Good evening, everyone, and thanks for taking the questions and all the color so far. Just wondering on the adjusted EBITDA reconciliation specifically for Q4, if you can provide any more granularity? You have some other add-backs of about $100 million and I know a lot of that probably relates to non-cash impairments and some of the goodwill and intangibles that were noted in the prepared remarks. But if you could just maybe give us a quick summary of maybe other elements in there that might be cash-based and just the components that comprise that balance?

[Ed Kremer, Chief Financial Officer]

Yeah, Matt, hey, thanks. The bulk of it is in fact the add-backs around the state exits. I would say that's the majority of it. I think there's some add-backs associated with obviously the closure of Tryke and other acquisitions, litigation -- one-time litigation expenses and certainly the conversion to GAAP that took quite a bit of an undertaking. So, some consulting and financial auditing fees and such. Those are the bulks.

[Matt Bottomley, Canaccord]

Okay. And then, just my other question would relate specifically to New Jersey. I think just given the timing of the new store coming online, it's probably not as appropriate to just look at the general macro trends into Q1 that we're seeing in the state. But I'm just wondering if you can comment on where we are in the cadence of how much the stores that are opened today can assume in terms of additional growth. It seems like Q1, overall state sales might be down a little bit. We don't have -- I don't think we have March data yet, but I'm just curious if you can give us a sort of state of the union on New Jersey and where it is in this growth profile, assuming that new stores are only incremental in the near term?

[Matt Darin, Chief Executive Officer]

We're seeing positive trend lines, Matt, in New Jersey. And as you mentioned, we only had a partial quarter in Q4 of Bordentown, so now seeing a full quarter in Q1 and continued ramp up of that location, we're seeing some positive signs. And I would say overall, we're still early in the New Jersey adult-use stories. So, I think as more dispensaries come online, as we mentioned in the prepared remarks, we're working with many of those dispensaries to supply them our full array of products. So, we see a lot of opportunity on the wholesale side of the business in New Jersey, as those stores open up and virtually none of them have vertical product and are looking to Curaleaf and others to supply their shelves. And we also see continued opportunity in our three adult-use stores there where the trends continue to be positive.

[Matt Bottomley, Canaccord]

And what about just -- sorry, one last one, I suppose, just on pricing in the state, has there been any meaningful change into what wholesale product, whether it's biomass or branded, finished goods are selling for in January and February versus the first three, six months of its rollout?

[Matt Darin, Chief Executive Officer]

I think on the finished product side, specifically, we are continuing to see strong pricing demand there. It may have ticked down a slight bit, but nothing material. I think, overall, as these new stores come online, we're seeing supply get absorbed quickly into the market. So, we see really strong prospects on the pricing side and our focus is really on the finished goods side of that business.

[Matt Bottomley, Canaccord]

Okay. Thanks, everyone.

[Operator]

Our next question comes from Andrew Partheniou with Stifel JMP. Please go ahead.

[Andrew Partheniou, Stifel JMP]

Hi, good morning -- good afternoon, thanks for taking my questions. I was hoping to talk a little bit more about cash generation, specifically the 2023. Could you talk a little bit about your working capital and maybe more specifically inventory, how that's going to influence cash generation? I think I see $250 million in your inventory at the end of 2022, which is roughly similar to the previous year. Does this include inventory in exited states? And if you could talk about how that could change as the year progresses?

[Ed Kremer, Chief Financial Officer]

Hey, Andrew. Yeah, this is Ed. Let me take that. Look, the inventory, $250 million at the end of the year is net of the write-downs associated with the states, so that is our core inventory at this point, which I'll notice from working capital standpoint, there'll be a little bit of pressure in Q1. We did build some inventory ahead of the Four 20 launch, and as we brought on the additional business that kind of rolled into that. You will see in our plans at least to take that inventory down throughout the year and continue to improve our inventory turns as we work towards the back half of the year with meaningful reductions in the second half of the year. So, cash generation is going to continue to improve sort of parallel with what I said earlier, in terms of our cadence of our cash generation, Q1, Q2 are pressured, Q3, Q4 we start to build cash.

From a free cash flow perspective, maybe this would be a good time to address this for everybody, frankly, on our -- the $60 million of sort of run rate savings, it's going to be a big boost to our cash generation. The fact that we cut CapEx in half versus prior year to $70 million, you got to pick up there. The closure of the states, which had a $35 million plus or minus AEBITDA impact on our business -- operating cash flow impact on our business frankly in '22 is now eliminated. And then, we closed some facilities associated with our outdoor grow in Florida, Belmar, New Jersey facility that we closed in the first quarter, and our Amesbury, Massachusetts facility that we exited. So, along with some operational automation that we've invested in part of our CapEx that we're spending this year, all of those things should be cash-generative efforts and help us build cash -- free cash flow in the back half of the year.

[Andrew Partheniou, Stifel JMP]

Thanks for that. And maybe continuing on that theme, I'm seeing about $150 million in current income tax payable on your balance sheet. Could you talk a little bit more about that? And how should we think about tax payments in 2023? I know you touched a little bit on it in your prepared remarks, but if you could go into a little bit more detail...

[Boris Jordan, Executive Chairman]

We see no change to our tax payments. Previous years, we pay everything within nine months of the April 15 date, and so we're not going to change our approach that we used in the last four years.

[Andrew Partheniou, Stifel JMP]

Okay. Thanks for that. I'll get back in the queue.

[Operator]

The next question comes from Scott Fortune with ROTH MKM. Please go ahead.

[Scott Fortune, ROTH MKM]

Yeah, good afternoon. Thanks for the questions. You can provide a little more color or update on the European business, with the expected, obviously, the guidelines coming out? And then what type of growth are you expecting kind of in Germany and European overall versus your guidance of low- to mid-single digit revenue growth from 2023? And then, just a little bit of unpacking the margin profile compared to the U.S. business, that'd be great for an update there from the EU side.

[Boris Jordan, Executive Chairman]

So, we expect -- this year, we expect about double of last year's revenue growth, so 100% revenue growth year-over-year, obviously, with small basis that we started with. However, going into '24 is when we start seeing significant ramp-up in the U.K. and Germany. U.K. for reasons of brand -- of market awareness and Germany, obviously, with the rescheduling of cannabis from what equivalent is scheduled, one that's de-scheduling in Germany, which we'll make take it off the narcotics list, we see an improvement of minimum three to five times our current revenues in the German market.

So, one of the reasons you heard of our free cash flow assumptions changing for this year is because we've made fairly sizable decisions to invest in the supply chain for Germany and that program and you'll be hearing from us shortly over the next several months about some of the moves we've made in Europe in order to make sure that we have a proper supply chain to supply the demand of both the U.K. market and its growth, as well as Germany with its de-scheduling of cannabis from narcotic level.

So, we do expect three to five times growth in [2004] (ph). In Germany, we expect 100% growth in our European business this year. And we're very, very happy with the investments we've made there because of the fact that we're largely the only U.S. -- we're the only U.S. player operating in Europe, but more importantly in the U.K., we're almost up to about 50% market share there.

[Scott Fortune, ROTH MKM]

I appreciate the color. Thanks, Boris. And while I have you, Boris, probably best to speak to kind of a new legislative action to introduce SAFE. It seems very coordinated, little different this time. Any thoughts on the sense of this potentially reaching the Senate floor? Or just kind of your thoughts around kind of overall the cannabis lobbying power versus [indiscernible] pharma working together as a group, we know there's some [minding] (ph) put in Florida. Just kind of your thoughts overall politically what we need to do to move incremental reform going forward here?

[Boris Jordan, Executive Chairman]

So, we obviously, the industry could do better. I think the U.S. CC has been reformed now in DC with Ed Conklin running that. Ed's a veteran of -- I think 20 years with McDonald's Corporation, and then later for four years at Curaleaf. He has now gone to run the U.S. CC. So, I think we have very strong management with our lobby group in Washington.

The U.S. CC is setting up a super-pack, which is going to be raising substantial -- we hope substantial funds in the U.S. in preparation for lobbying for SAFE Banking and other legislative interests of the industry. So that should be -- there should be announcements shortly on that. We think that [indiscernible] quite substantial amount of money because it will be able to target customers and individuals and we think that that will be very, very powerful given the massive popularity of legalization of cannabis. So, we think that that will put us on even par with some of the biggest operators in Washington in terms of having the money in order to be able to lobby. So, that's all good news.

On the political front, listen, I am very pleased to see the coordinated effort. I think that there is a lot of momentum in DC that finally get something done. However, we are out of the business of predicting anything in Washington. We've learned our lesson. Last year, we really thought we had it over the line here in December of last year. We worked so hard on it, all of us, and it didn't happen. So, we're not going to make any predictions. But I do think the fact is, what I'm hearing is they're trying to get it out of the Senate by July, and into the House in September with a vote in the House of Representatives somewhere in the fourth quarter and try to get a signature of the President going into the December, that's the target. Whether that happens or not I think is still up in the -- it's early stages, but the fact that it was coordinated in both houses and it seems to have a lot of bipartisan support, we're cautiously optimistic on it.

[Scott Fortune, ROTH MKM]

I appreciate the color. Thanks. I will jump back in the queue.

[Operator]

The next question comes from Ty Collin with Eight Capital. Please go ahead.

[Ty Collin, Eight Capital]

Hey, thanks for taking my question. Could you tell us what you're seeing today in terms of attractive M&A opportunities? And what's your appetite like at this point? And then which markets are you looking at more closely there?

[Boris Jordan, Executive Chairman]

Well, there's a lot of -- obviously, there's a lot of opportunity. I think I'd like to make a general statement in that. One of the issues that we're seeing in these markets is the mid-tier and a lot of the smaller players, a lot of whom are not public are really dumping products in order to raise cash. We're seeing that from some of the MSOs. We're seeing that from some of the mid-tier players, that's obviously having an impact on price compression.

I think this is going to lead to -- if we don't have any regulatory changes, this is going to lead to sort of a zombie company sort of situation in the sector where I think the first thing to go is people are just not going to pay their taxes and wait to see if they can renegotiate with the IRS. So, we'll probably keep them afloat for a while. But a lot of these companies are also understanding that they can have -- this as a long-term impact, and their shareholders are putting pressure on them to sell the businesses.

And so, we're seeing a tremendous amount of M&A opportunities in the market. However, we need to be very, very careful in doing transactions that are going to be good for our business and accretive for our business. So, for an example, a transaction like the one we closed in the first quarter in Utah was very, very good for us. We already had a decent-sized business in Utah. And now we acquired both the Tryke asset in Utah, they gave us vertical capability, and that -- bought three more stores, making us the largest retail and wholesale operator in the state, and it's a very fast growing medical high margin state. So, it reminds me a lot of New Jersey in the early stages. So that's the kind of acquisition I think you'll see us go.

We like Arizona. We might do some things in Arizona. In Arizona, we want to grow our footprint from 16 stores to over 20 stores. So, I think you'll be seeing us looking. But again we've seen a lot of opportunities. Pricing has not yet come down to where we'd like it. And so we're being very patient and waiting for the pricing to come to what we think is the right pricing for these assets.

So, you won't see Curaleaf running off and doing the historic type of deals we did, large transactions. You're going to see us do tuck-in acquisitions at the right prices when those prices come to meet our levels -- we're comfortable at. But if those transactions are good and add to our verticality, add to our market share growth in markets, we will certainly look at those.

[Ty Collin, Eight Capital]

Got it. Thanks. And Boris, while I have you, regarding the potential TSX listing, which you spoke to at the top of the call, that's something that we could maybe expect to see this year? And how big of an impact do you think that ends up actually having on trading [indiscernible] given the barriers to ownership that would still exist?

[Boris Jordan, Executive Chairman]

So, we went -- we're doing that analysis right now. So, we've made all the various -- we've been working with the TSX probably the longest of anybody, since we went public, basically in 2018. So, we are in discussions with them. Curaleaf qualifies under all the most important aspects to go public on or uplift the TSX, you have to have a substantial non-U.S. presence, Curaleaf has that. So, I think that's one of the biggest barriers.

We've gone through -- we're going through the application process as we speak with them. However, we are looking, because it is a cumbersome structure, and it's going to add cost to governance. We are making sure that that will add liquidity and be good for shareholders, and not the other way around. So, we are working with banks, we are working with investors, we're going out and doing our research before we pull the trigger on whether to do that.

Plus there is some discussion with NASDAQ and the New York Stock Exchange that some of the language tweaks that are being made to state may allow uplisting in the United States. And so, we want to be careful. Obviously, that's the ultimate prize. We want to be careful not to do something up in Canada if the U.S. allows us to go public here in the U.S. But we are definitely moving forward. We think the TSX is a much more reputable, much better exchange, much less manipulated. Definitely adds index funds, adds pension funds and adds more retail to the fold. So, we do think it would be helpful. And we are looking at it closely. But it does have some level of cumbersome governance attached to it, which is the one thing that's slightly worrisome, and we're looking at it now and having discussions with the TSX around it.

[Ty Collin, Eight Capital]

Got it. Thanks, Boris.

[Operator]

The next question comes from Eric Des Lauriers with Craig-Hallum. Please go ahead.

[Eric Des Lauriers, Craig-Hallum]

Great. Thank you for taking my questions. First one for me. So, you exited some of those Western states. Obviously, some well documented kind of headwinds in those markets. I know some of those were also markets where you're looking to implement the ACE extraction technology that you were hoping to realize some significant operational efficiencies from. Could you just comment on the ACE technology? Just kind of give us an update there? Were any of these decisions to close out of these markets due to anything related to ACE? If not, are you still expecting to roll out ACE into other markets? Just kind of give us an update overall with respect to ACE's contribution to your expected increased operational efficiencies? Thanks.

[Matt Darin, Chief Executive Officer]

Yes. So, look, ACE has been really a positive outcome so far in Florida, the first market that we have been working with it in. We actually recently received final approval for the entire ACE process through all the post processing work, and we're going to be launching kind of the full array of products of the ACE outputs here in the coming months. So, we'll have more to come on that on our next call.

No, the decisions in the West Coast had nothing to do with ACE. We're actually going to take the units that has been disposed there and going to move them to other really key Tier 1 markets of ours, so where we have a lot of demand and where we see great opportunity for those same products like we did for Florida. So, we're basically taking that same equipment and relocating it to other facilities mostly in the eastern part of the country. So, we're going to continue to build on that. We think it continues to be a really innovative [indiscernible] process that is unique and proprietary and going to continue to bring down costs and be able for us to launch some really unique products.

[Eric Des Lauriers, Craig-Hallum]

Okay. Well, look forward to getting your updates there. Second question for me, just kind of a higher level kind of strategy update. So, the industry is certainly changing in a lot of ways and we had expected over the past few years, I think sort of everyone in this industry. You're starting to see price compression, kind of start to eat into volume gains. And I'm just wondering, as you guys look out over the next several years, like how you're thinking of the outlook for potential market share gains? Like, if we take a step back, you and most of the other MSOs, you started out in these, kind of, high share, limited license states. You're seeing more licenses being issued. So, while the pie is growing, it's also being split into more pieces so to speak. So just wondering high level as you look out several years, where do you see the opportunity for continued market share gains?

[Boris Jordan, Executive Chairman]

Well, I think in case of Curaleaf, obviously, our European expansion is a big place where we're going see a significant growth in '24, '25 and '26. We always said that from the time we made the acquisition. It's one of the reasons we didn't lower -- we did -- our CapEx didn't come in further this year. We thought originally that our CapEx would be down about three quarters from last year, it's only coming in half, because of the accelerated CapEx that we need to build out the supply chain for the German and U.K. markets. And we're not doing that just for the sake of doing it. We're doing it, because we're starting to see substantial demand coming out of those markets. And so, I think that those markets will start to show significantly in our numbers in '24 and '25 in terms of growth. So that's the first thing.

Second thing is we're definitely continuing to see growth in new markets that are turning to adult-use. I think we're going to see that in Maryland. We're seeing it in Connecticut. But we're also starting to see older markets start to come around as they go through their shakeout. And that I think is really important, markets like Massachusetts where five months ago, it was very difficult to sell anything. And now, we're selling our flower product out within basically three days of post processing. So, once we get the product package, it's gone, whether it's wholesale or retail, it's gone right away. And so, we're starting to see markets like Massachusetts, and the reason for that is that the weaker undercapitalized players are starting to go out of business. We're seeing growth facilities closing down in Massachusetts. We're seeing stores closing down in Massachusetts. And that obviously plays to the stronger players.

And so, we think that that's a very, very positive sign, and I think that you'll see -- start to see that sign in other markets. I think you'll see that in places like Pennsylvania. Don't forget Pennsylvania is still a market that's expected to go adult-use probably in '25. We're seeing Florida. You probably saw the update today. Florida has, I think, almost 90% of the signatures that they required to put this on the ballot done. I think that, that will probably lead to an adult-use market in '25, '26 in Florida. That will be a step function growth and purely mid investing in the Florida market as well and continue to build out more capacity in time for that market to launch. So, we're not rushing with it right now, but we're certainly building out very, very slowly, but making sure we have the capacity when that market goes.

So -- and the last thing I'd say is, I do think that even though you have caps on consolidation, I think that you're going to see states being quite open to consolidation because of the fact that the undercapitalized players are not going to be able to survive. There'll be job losses and things like that. So, I think that you're going to start seeing that with our ability to go in and buy more assets in some of these states. And consolidation is going to be a major, major theme. The only reason it's slowed down recently has nothing to do with the fundamentals of the industry. It has to do with this unique situation where you basically without custody, you have very small pool of investors who can buy the sector. Let's be honest, the sector, it's owned less than 5% by institutions, it's probably owned around 50% by insiders and the rest is retail. And so, obviously retail is a very volatile sector. It's gotten burned very badly. And so the capital structures are not very stable. And therefore, you've seen this 96% to 98% volatility in the stocks. And it's very difficult to do -- use equity as currency in the current environment. So, I think you've seen some slowdown in consolidations.

But I do expect that as we go through this year, I think the top-tier cannabis companies are going to have fairly positive results. And because of that, I think you'll start seeing a more and more investor interest looking at the sector because of its valuation. And I think you'll start to see consolidation happen on the back of that. I mean, we're seeing deals where we can buy debt and start to convert that debt to equity. We're seeing a lot of interesting consolidation opportunities and Curaleaf has a very robust business development M&A team. We've closed every deal we've ever announced. We have a good reputation in that. And so, I think you'll start to see more and more consolidation. And consolidation will bring strength to margins again because there'll be less players in those markets.

[Eric Des Lauriers, Craig-Hallum]

That's very helpful. I appreciate you walking through that. Thanks.

[Operator]

This concludes our question-and-answer session. I would like to turn conference back over to Matt Darin, CEO, for any closing remarks.

[Matt Darin, Chief Executive Officer]

Thanks everyone for joining us, and we'll forward to connecting again in just a few weeks. Thank you.

[Operator]

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