Good day, welcome to the Curaleaf third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. 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.
Good afternoon, everyone, welcome to Curaleaf Holdings third quarter 2022 conference call. Today, we're joined by Boris Jordan, Executive Chairman, Matt Darin, Chief Executive Officer, and Ed Kremer, Chief Financial Officer. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements within the meaning of Canadian and U.S. 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 the 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, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as adjusted EBITDA, the definitions of which may be found in our earnings press release. Please note that all financial information is provided in U.S. dollars unless otherwise indicated. With that, I'd like to now turn the call over to Executive Chairman Boris Jordan.
Thank you, Camilo. Good afternoon, everyone, thank you for joining us to discuss our third quarter results. Today, I will touch on third quarter highlights, discuss our international progress, provide an update on the regulatory front, then hand over the call to Matt. I am pleased to report our third quarter revenue reached a record $340 million, growing 7% year-over-year and up 1% sequentially, meeting our guidance range of flat to up low single digits. Gross margin was 49%, up 280 basis points versus last year, and 50% year to date. While adjusted EBITDA was 25%, up 220 basis points versus last year. We generated a record $60 million in operating cash flow during the quarter and ended with $198 million in cash on the balance sheet.
Despite continued inflationary pressures on the consumer, amplified by unexpected headwinds in Florida and New Jersey that we faced in September, we delivered a solid Q3 result. For context, we estimate the arbitrary delay by regulators postponing our Bordentown adult use conversion, coupled with the impact from Hurricane Ian on our Florida retail stores, hurt third quarter sales by $3 million-$4 million or one percentage point, and our adj. EBITDA by approximately $1.5 million. I am proud of the effort our team members made to deliver these results in a challenging macroeconomic environment. We continued to execute on our growth strategy in the third quarter, as highlighted by our new product introductions, expanding our retail presence in Florida and Pennsylvania, and by our German acquisition of 420 Pharma, which firmly prepares us for the country's upcoming adult use legislation.
Since the end of the quarter, we closed on the landmark acquisition of Tryke, one I expect will further strengthen our position in Arizona, Nevada, and Utah. Tryke brings us six new dispensaries, an expansive product line, and an extensive portfolio of production licenses with 65,000 sq ft of total canopy cultivation and the capacity to expand to 80,000 sq ft. This strategic acquisition strengthens our already leading market position in Nevada, Arizona, and Utah, in addition to a flagship location near the Las Vegas Strip. We are thrilled to have been approved for adult use sales in our Bordentown, New Jersey location, our third in the state. We opened for recreational sales on November first, and early indications are that this will be another strong store for us, further bolstering our market-leading position in the Garden State.
We achieved close to a 30% market share in the third quarter with just two stores and a robust wholesale business and expect this strength to continue as Bordentown ramps up. We are acutely aware of the economic uncertainty our customers are navigating. We are taking appropriate actions to ensure we continue driving growth and margin expansion next year, irrespective of the economic climate. Our new leadership team has been assessing every aspect of the business for maximum productivity and efficiency gains. We are taking the steps to right-size our cost structure across all areas of the organization. We are tightening our belts, reducing store payroll hours, and eliminating unnecessary expenditures. While the U.S. economy is projected to see virtually no GDP growth next year, the U.S. cannabis industry is projected to grow 13% in 2023, according to Headset.
Let's not lose sight of where cannabis is in its maturity curve. I firmly believe cannabis is a multi-year, double-digit growth industry with many more long-term catalysts that will drive increased consumer adoption, and Curaleaf is at the center of it all. Our growth prospects are further enhanced by our European strategy and Germany's forthcoming legalization. Speaking of our international business, on August 9th, we added another significant piece to our European business when we announced our entry into the German market via the acquisition of a majority stake in 420 Pharma, one of Germany's largest cannabis operators. 420 is a key addition to our international platform that we will leverage as we continue building out our vertical supply chain ahead of German adult use sales, which we expect will commence in 2024.
With a strong brand known for high-quality flower, we plan to take 420 to the U.K. and across Europe as markets allow over time. Our primary focus now is preparing for Germany's adult use conversion. On this topic, we are very encouraged by the movement we are seeing from the German health minister in establishing a baseline regulatory framework from which negotiations can begin, and that the German Chancellor's Cabinet approved plans to decriminalize recreational cannabis consumption. The importance of Germany as a catalyst for the European cannabis industry cannot be overstated. With a population of 80 million people, Germany is a $10 billion market and is already estimated to be one of the largest medical markets in Europe. We expect the adult use market will be open to domestic and international suppliers of cannabis when the adult use program commences.
In the U.K., we grew our patient count by 176% and now enjoy 32% patient share, the number 1 position in the country. Our business continues to perform to plan as we build out this market by adding new patients, leaning on the power of social media to drive awareness, and leveraging our scientific research studies to educate and inform the patient and the doctor population. While international remains a small part of our revenue story today, we are investing in the long-term growth of Europe's cannabis future now and expect it to begin paying meaningful dividends in 2024 and beyond. On the U.S. legislative front, President Biden's announcement last month calling for a review of the current scheduling status of cannabis is a truly historic event, not only for the cannabis industry, but for the country.
I am hopeful that the HHS, DOJ, and FDA learn what we've known for years, that cannabis can help many people live better lives free from pain, anxiety, addiction, and sleep deprivation. The ultimate impact to cannabis operators and the industry at large has yet to be determined. However, it is undeniable that rescheduling cannabis to a Schedule III or lower would unlock massive potential for the industry. The burdensome 280E tax provision would be removed, U.S. capital would flow to the highest-returning assets, and the true benefits of the plant could be studied and applied for the betterment of all. For perspective, since 2021, we have paid a cumulative total of $208 million extra in taxes due to 280E. For this year, we estimate to have to pay an additional $140 million more in 280E taxes payable.
Over the last three years, this amounts to nearly $350 million in extra 280E taxes that we could have used to invest in the business and our communities for the benefit of all our stakeholders. With respect to the SAFE Act, we are the closest we've been in Congress passing this crucial piece of favorable cannabis legislation. I'm optimistic as ever about SAFE's chances in the lame duck session. Both Democrats and Republicans have put forth a tremendous amount of time and effort into crafting the right legislation necessary for the industry to thrive. My team is in full sprint for the next two months to ensure the ball is carried over the goal line. Regardless of SAFE's outcome, we are not sitting idle. Rather, we are exploring all available options with the exchanges.
We have had constructive conversations with Nasdaq and the TSX regarding the recently announced transaction and are preparing for multiple outcomes. We are relentless in our efforts to explore every option available that can increase liquidity and shareholder value. With each passing day, there is an increasing mainstream adoption and acceptance of cannabis by both American public and our congressional leaders. As we expect to see in tomorrow's midterm elections, cannabis is well on its way to becoming the United States' next great growth industry, and Curaleaf is positioned to lead. U.S. citizens will cast their votes tomorrow, and we believe they will vote resoundingly in favor of cannabis legislation. A few comments on new state and adult use catalysts coming next year, from which Curaleaf is uniquely positioned to benefit.
There are five states with adult use cannabis ballot initiatives, of which we are most excited about Maryland and North Dakota, given our already robust market presence in both states. As for 2023, we have two strong state catalysts in Connecticut and New York, both of which combine to represent a $5 billion-$6 billion market opportunity, and Curaleaf could not be better positioned to serve customers in these important markets. We believe Connecticut will have its adult use program kick off in the first half of next year. In New York, we are ready. We have the largest legal market share in the state, and we have just completed our facility expansion in preparation for the adult use program launch.
In September, I had a constructive conversation with Chairwoman Tremaine Wright of the Cannabis Control Board. Based on our discussion, I expect adult use regulations will be released by the second quarter, and I believe that the incumbent ROs will be grandfathered into the program with a significant role to play in adult use market as vertical operators with the ability to cultivate, process, and sell cannabis products. This should not be confused with the guidelines released two weeks ago meant for the card program applicants. We are working with the OCM to ensure a successful launch for all market participants and a pathway for the state to meet its social equity goals. While timing is still unclear, we could potentially see the state's adult use program go live in the second half of 2023.
On our fourth quarter outlook, Ed and his team have been working diligently to accelerate our GAAP conversion timeline and now expect to report our fourth quarter and full year 2022 results in GAAP one quarter ahead of plan. While I expect there will be a lot of moving parts in quarter four due to GAAP conversion, for revenue, we are planning to be in the range of $353 million-$355 million. As we approach the final two months of 2022, we have much to be excited about at Curaleaf, and many levers to pull to continue driving our business forward next year and beyond. With that, I'll turn the call over to CEO Matt Darin. Matt?
Thanks, Boris. I'd like to start by talking about resilience. Despite continued economic pressures all around us, cannabis is proving to be a resilient category as traffic trends continue to increase in our dispensaries, even as many of our consumers seek greater value options. Trade down among our mid-tier product is happening, while our premium end offering is holding steady. Importantly, trade out is not occurring, as evidenced by 7% quarter-over-quarter growth in transactions. Demand for cannabis is sticky, and we are meeting our consumers where they are, with the product and value proposition they seek. Curaleaf's diverse geographic and channel revenue mix is proving to be a key distinguishing factor driving our performance, one that allows us to absorb state-specific shocks while still enabling us to execute on our revenue targets. Despite these headwinds, we delivered 1% sequential growth.
Our global scale, our team members, our balance sheet, our access to capital, these are the competitive advantages we have built for the express purpose of giving ourselves the flexibility to succeed under multiple economic and regulatory scenarios. These are the advantages that will lead us in our next leg of growth. Speaking of growth, it's worth contextualizing what we've built. By the end of 2022, Curaleaf will have grown revenue at a staggering compounded annual growth rate of roughly 105% since 2018. Broad domestic reach across 22 states and 142 stores has led us to a point where we are comfortably transitioning from the asset accumulation phase to the asset optimization phase in our evolution. Importantly, we are at this juncture by choice, not market force.
For the most part, we are in the stage we want to be in, we have scaled accordingly, as such, we are nearing the end of our U.S. capital investment cycle, allowing us to allocate resources to further optimizing our operations. Our strategy is laser-focused on maximizing the opportunities in our core markets. It's important to note, in these core markets, our adjusted EBITDA margin was 30% in the third quarter. While these core markets drive our business today, we're also taking a long-term view on where cannabis will be tomorrow by investing in Europe and competing in our investment markets. Similar to last quarter, our investment markets constituted a 570-basis point drag on our adjusted EBITDA margins, with international representing roughly one-third of that drag.
In our West Coast markets, we have deployed plans to increase profitability by closing facilities, reducing overhead, and focusing on a lean sales and marketing structure driven by innovation. We are doing the work, while our strategic review is not yet complete, we have a line of sight to return to profitability in these markets, we should start to see traction in Q4. This strategic focus centers on three key elements that will drive enduring market share gains, improving margins, and strong cash flow generation: operational excellence, urgent execution, and our One Curaleaf culture. Let's discuss these in greater detail, starting with operational excellence.
Particular focus of mine has been increasing our cultivation productivity and flower strain diversity, which can have an immediate positive impact on our business by driving increased traffic to our stores and demand for our products in both our retail and wholesale channels, while at the same time boosting our margins. I will share more about our position on flower genetics and breeding programs on our Q4 call in March, but suffice it to say, I'm very excited for what's to come. Another example is the technology investments we are making. We continue to invest in our e-commerce platforms, and this strategy is paying off with a record-breaking quarter of nearly 2 million online transactions. We are relaunching our loyalty program to better leverage data and consumer insights across branding and marketing.
Also, we're launching a new ERP that will give us greater inventory visibility across the organization and improve our demand planning capabilities, both of which will yield faster response times to demand changes, thus leading to productivity and efficiency gains. Urgent execution is critical to our future success. Market dynamics change quickly in cannabis, and we need to adapt and lead the market just as quickly. This is why we are intently focused on R&D and commercialization of our innovation pipeline. We are on pace to increase new product revenue 75% year-over-year, led by the national expansion of Cliq, Select Classic, Nano Bites, and X Bites. Our Select Essentials disposable vape line is a great example of the team recognizing a consumer need and bringing an entry-level solution to market in four months. This product line is now in 11 states and selling well.
A few other product highlights during the quarter include our premium Grassroots diamond-infused pre-rolls that we recently launched in California, complemented by the launch of Find, our value line of flower and pre-rolls in Massachusetts, with seven more states on the way. While it's only been a few weeks, Find has been completely incremental to our business. To put some numbers around the launch, Find flower sales have increased total flower sales in Massachusetts by nearly 70%. What's more, Find has not impacted our premium Grassroots flower sales whatsoever. As Boris mentioned in his remarks, we are conducting a top-down, bottoms-up assessment of our cost structure. Our early actions have resulted in reduced payroll hours at retail, and early reads on these cost mitigation efforts are positive, as markets in which we have implemented these initiatives have not seen a change in revenue trends.
While we are still finalizing our 2023 budget, we are targeting at least $40 million in gross expense reductions next year. We are becoming more productive with less. In California, we are nearly complete with our restructuring efforts, lingering pricing pressures continued in Q3. However, I believe we could be nearing a pricing bottom in the state. After meeting with our California team and hearing feedback from our partners, I am confident that the actions we took to rationalize our distribution and institute a streamlined supply chain and manufacturing model are driving improvements that will begin to materialize this quarter. We have reduced our inventory, refocused our sales efforts to our top 80 accounts, and introduced new premium products into the market. The result has been rave reviews on our Grassroots diamond-infused pre-rolls, and more importantly, our Select brand is experiencing resurgence with both dispensary partners and customers.
This is yet another proof point that when we execute our plan with strategic urgency, good things happen. For the company of approximately 6,000 employees that has grown organically and through acquisition, creating the One Curaleaf culture has been top of mind since I took over as CEO two quarters ago. Our culture is a foundation from which we will build consistent, long-term, profitable growth. This doesn't happen overnight, but we are making significant strides to inspire all employees across the organization to achieve their highest potential. More importantly, we are aligning toward one common goal, understanding that each one of us has an integral part to play in the continued development of this industry, and that we cannot do it without the collaboration of every team member across the organization. We are seeing the benefits of the scale, breadth, and depth we have created.
We are not taking any of it for granted. Competition from our public and private market peers, as well as the illicit market, force us to get better and do more every day. I can confidently say there is no company better suited to meet that challenge than Curaleaf. Moving on to state highlights. New Jersey continued to be a bright spot for us, growing 21% sequentially. Our Belmar location remains our pinnacle store, generating 16% growth from last quarter. Remarkably, this location is on pace to exceed $80 million in annual sales this year. That's over $7 million of revenue per month. Not surprisingly, New Jersey is amongst our highest-margin states. That is why we are so excited to have received approval for adult use sales in our third store in Bordentown, which we open for recreational sales on November 1st.
On the product side, we continue to see success with our new product introductions with Select Nano Bites and Select Essentials selling incredibly well. In Arizona, we opened our Scottsdale store, which is off to a strong start. At the start of Q4, we also closed on the Tryke acquisition, which added two stores in Arizona and four premier locations in Nevada. We are particularly excited about the remodel plans we have in store for our new flagship dispensary near the Las Vegas Strip. Later this month, we will launch our Find value flower and pre-rolls in the Arizona market, with more states to follow quickly thereafter. In Florida, we opened two stores during the quarter, taking our total store count to 52 in the state. Sales were down less than 1%, driven entirely by the dispensary closures due to Hurricane Ian.
On the pricing front, we began reducing our promotional stance and have been pleased with the results thus far. As expected, sales initially dipped in the test markets, but quickly stabilized. Gross profit dollars grew faster than the sales decline. This is a particularly important development as we aim to bring higher premium Grassroots flower to the Florida market next year that should drive our AUR and margins higher. We continue to invest in Florida, targeting a few more additional dispensaries to open before year-end, and a further expansion of our indoor flower canopy scheduled to be completed in the first half of 2023. The vertical sales of our own brands in Q3 was consistent with Q2 levels.
Given the benefits of driving sales of our own brand portfolio, we have identified a significant opportunity to expand our vertical mix in three key states, Pennsylvania, Illinois, and Arizona, all of which are below our company average. We estimate that improving the mix of our own product in these three states would add over 200 basis points to our margins. This is a primary focus of ours as we set our plan for 2023. On the operations side, we continue our process refinement efforts in order to become more efficient. For instance, we will be switching our packaging to Mylar bags from boxes for our vapes. This change alone will save us an estimated $3 million, not to mention the benefit of improved labor productivity of our facility workers. We are also analyzing employing more automation across our cultivation facilities where feasible and cost-effective.
Similarly, we are assessing markets in which we can wring out excess supply where it is not needed, thus reducing costs while also helping to stabilize market pricing. The key message is that we are leaving no stone unturned. Overall, I am encouraged by the progress we are making across all aspects of our business. Every day, we are getting better at executing our objectives with purpose, confidence, and speed, but more work is needed to take our company to the heights I know we can reach. Curaleaf has a tremendous opportunity to continue forging the path forward for cannabis, both domestically and internationally, and that is a challenge my team has eagerly embraced. We take our leadership position seriously, and we are committed to building a world-class, multi-billion-dollar global cannabis business. I could not be more excited about our prospects.
With that, let me turn the call over to our CFO, Ed Kremer, who will walk you through our financials. Ed?
Thank you, Matt. I will now review our third quarter results and provide an update on fourth quarter trends. Total revenue for the quarter was a record $340 million, representing quarter-over-quarter growth of 1% and year-over-year increase of 7%. Retail revenue was $260 million, compared with $225 million in the third quarter of 2021, representing 16% year-over-year growth. Wholesale revenue decreased 14% year-over-year to $79 million, representing 23% of our total revenue. Sequentially, retail revenue was up 3%, resulting in our 19th consecutive quarter-over-quarter retail growth, while wholesale revenue declined 7% as a result of continued rationalization of our wholesale business in lower margin states. Looking at a few key metrics, we saw similar consumer trends carry over from the second quarter into the third, as transactions were up 7%, partially offset by a decline in average order value of 6%.
As Matt noted earlier, our customers are increasing the frequency of their visits while looking for more options to stretch their dollars. Our gross profit, excluding the impact of biological assets, was $165 million for the third quarter, an increase of 14% year-over-year from $145 million. Gross profit margin was 48.5% compared to 45.7% in the year ago period. Sequentially, gross margin decreased from 52.1% to 48.5%. Our gross profit margin net of add backs was 49.8% in the third quarter versus 52.3% in the second, down 260 basis points due to higher discounts as we worked through to clearing through aging inventory and additional reserves for inventory rationalization. SG&A expenses were $104 million in the third quarter, compared with $108 million in the prior quarter, and up $2 million from the year ago period.
The sequential decrease in SG&A primarily reflects decreased salaries and professional fees, partially offset by investments in our technology infrastructure. SG&A as a percentage of revenue was 30.6% in the third quarter, down 150 basis points compared with 32.1% in the prior quarter and year ago period. Our third quarter SG&A included approximately $6.3 million of add backs versus $5.7 million in the prior quarter. Net of these add backs, our SG&A rate improved 150 basis points to 28.7% of total revenue in the third quarter compared to 30.2% in the prior quarter, as we are already starting to see the benefits of our cost reduction efforts. Adjusted EBITDA for the third quarter was $84 million, a 17.8% year-over-year increase. Sequentially, adjusted EBITDA decreased $2 million or 2.5%. Adjusted EBITDA margin for the third quarter was 24.7%, compared with 25.5% in the second quarter.
The 80 basis point decrease in our adjusted EBITDA margin from the prior quarter was mainly attributable to the 260 basis point decrease in gross margin, as discussed, partially offset by SG&A decreasing by 150 basis points for the reasons previously mentioned. Our investment markets, including Europe, impacted our consolidated adjusted EBITDA margins by approximately 570 basis points versus 550 basis points in the second quarter. With California having nearly been reset, we should see an improvement in EBITDA materialize this quarter. On the margin front, we continue to prioritize driving our vertical mix higher in our retail stores, overweight retail revenue growth in higher margin states, rationalize wholesale markets in lower margin states, and tightly control our SG&A expenses.
While the third quarter was impacted from a combination of pricing pressure in certain markets, the delayed opening of Bordentown Adult Use coupled with store closures in Florida from Hurricane Ian, we achieved a vertical sales mix of 64%, slightly below but fairly consistent with the last quarter. I am encouraged by the many opportunities for margin improvement in 2023. Turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of $198 million as of September 30th, 2022, which increased by $11 million over the prior quarter, largely as a result of generating record positive cash flow from operations of $60 million. Our outstanding debt was $599 million net of unamortized debt discounts, of which almost three-quarters is not due until December 2026. Net capital expenditures during the quarter were $39 million, bringing our year-to-date total of $99 million.
Our investments continue to be focused on expanding cultivation and processing capacity, as well as strategically increasing our retail presence. For the full year 2022, we continue to expect CapEx to be approximately $125 million. Since we have almost completed our large-scale CapEx projects in the U.S., we expect our capital expenditures in 2023 to be substantially below the 2022 levels. We remain focused on our cash position, as well as generating positive operating cash flow for the year and beyond. In fact, for the nine months ended September 30th, our cash flow from operations was a positive $71 million. Working capital improved by $3 million year-to-date and improved $7 million in the third quarter alone. Excluding the impact of biological assets, inventory was up $5.7 million this quarter.
It's important to note that we improved the composition of our inventory as we cleared through aged goods, which impacted our gross margins as previously mentioned, offset by an increase meant to support new product launches, store openings in Florida and Pennsylvania, and our third adult use store in New Jersey. As Boris previously mentioned, my team has been working diligently to report our 2022 full year financials in GAAP, one quarter ahead of our initial plan. To prepare for this and a potential uplisting to a major exchange, we have bolstered our senior leadership team with the addition of Christine Taylor, our new Chief Accounting Officer, whom I am pleased to welcome back to Curaleaf.
With her 30 years of executive leadership and accounting experience in healthcare and the gaming industry, two heavily regulated markets, and her prior role as SVP of our finance at Curaleaf, Christine will continue to bring rigor, transparency, and compliance to our financial reporting. As I get to meet more of the analysts over time, you will see that cash flow optimization is my primary focus. To that end, we will continuously review the opportunities to reclassify operating expenses to cost of goods where allowable, and to maximize our tax savings, and as such, will begin to capture certain identified benefits in the near term. Having nearly completed my first 90 days at Curaleaf, I am thrilled to have joined the impressive management team Boris and Matt have assembled. We have accomplished a lot in a short amount of time, but there is more to be done.
We are implementing tighter financial discipline across the organization to drive expense leverage and will continue to be laser-focused on improving our operating results and cash flow generation. Finally, I would like to provide some color on how our fourth quarter is shaping up. Given the uncertain macro backdrop, we believe it is prudent to plan accordingly, and as such, expect Q4 revenue to be in the range of $353 million-$355 million, which is comprised of our current sales run rate to be down slightly from Q3, plus an approximate $18 million benefit from Tryke as that transaction closed just a few days into Q4. With the upper and lower bounds of the range I provided dependent on the adult use ramp-up of our Bordentown store. With that, I'll turn the call back over to the operator to open the line for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Vivian Azer with Cowen. Please go ahead.
Hi. Good evening. Thank you. Boris, you noted the Headset outlook for 2023 at 13%. I'm sure you're not yet ready to offer specific 2023 guidance, since you referenced that industry outlook, I was curious how you're thinking about 2023, perhaps excluding Tryke, as you're going to get a nine-month benefit there. On an underlying basis, do you expect to be a market share gainer? Thanks.
Yes. First of all, we think Connecticut and New York at certain points of time next year will actually start to sell, and obviously we have leading positions in both of those states. We think that Connecticut will likely be in the first half of the year and New York in the second half of the year, and that should give a very strong boost given our position in both of those states, where in New York we have almost a 50 share, if you count our wholesale business, and in Connecticut where we have a 25% share, we think that those will give a very strong boost. We also think that our European business continues to expand And although it's from this low basis, we do think that that will start to contribute to the growth numbers next year.
As Matt said, we also believe that we're seeing some small green shoots, and I want to emphasize small green shoots in California. We've taken our California business down dramatically this year, to the point where we virtually sold very little in the third quarter due to the profitability of those products. We're starting to see some of those pricing start to firm up a little bit in California, and as we ramp back up slowly, we could get some growth out of California as well. That's the background to our numbers.
The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening, and thank you for the question. Boris, I want to go back to your prepared remarks and talk a little bit more about international and your outlook for Germany. Some of the details on regulations from the health minister. Particularly, I believe you said that you expect it might be open to both domestic and international supply. Would love to get more color on that in terms of how you're looking at that, particularly in terms of importing and some of the details that the health minister provided. How do you feel like Curaleaf is best positioned, particularly with the majority stake that you guys just got from 420 Pharma, and how you're looking for that market to evolve within Germany and then implications for broader Europe? Thank you.
At the moment, we know that Germany is negotiating actively with Canada for an import agreement. The problem with imports and the thing that Germany has stumbled with is that you have to exit the UN treaty first. The only two countries that have exited the UN treaty for cannabis and then opted back in, but just exited for cannabis, were Canada and Uruguay. The European producers, until the European countries themselves go through the process of exiting the UN charter, they themselves cannot import into. They can operate in their own countries, but they can't import from the EU. We fully expect that Portugal and Spain, all these countries, will go through this process as Germany goes through it. To launch the program, obviously, they have nowhere near enough capacity. They basically, at best, can manufacture 15 tons of cannabis domestically.
They need multiples of that in order to launch the adult use program. Both Canada and Uruguay can import because they have exited for cannabis, the UN treaty. We do know that the Germans have been very actively negotiating with Canada for a bilateral agreement to be able to import from Canada, cannabis into the German market. Eventually, we do think that Europe will go away. We think Europe will be able to do it as well. We think that'll take 6 to 12 months. We do think that at the launch of the program, they will have to depend on Canada and domestic German production for that. We, however, think that there'll be more than enough capacity to be able to supply that market.
420 Pharma, which we acquired, has very strong supply agreements from Canada and has been supplying their 15% share in the medical market from the Canadian market. We feel very comfortable in our position as that program launches in January 2024.
The next question comes from Matt McGinley with Needham. Please go ahead.
Thank you. As you noted in your prepared remarks, you generated $60 million in operating cash flow this quarter, $42 million of that came from tax deferrals and inventory balances didn't improve. You noted you made some progress in some of those states, is that inventory still weighted to states like California and Oregon and Michigan, where the oversupply might limit the ability to sell that product? How would you assess the risk of these inventory balances resulting in write-downs in the coming quarters, just given what you've noted with sales guidance? I guess perhaps most critically, will you be able to drop that inventory level into the fourth quarter and use that as a source of cash, or is that more of a 2023 initiative?
We feel very good about our inventory levels. We did sell a substantial amount of older inventory. Interestingly enough, some of it came from California and Colorado. For the most part, we had some older inventory in Massachusetts and other states, and we made a decision that we wanted to convert that instead of losing it and having to write it off, we wanted to convert it to cash. That's what actually hit our gross margin in the third quarter down from the over 50% level. We do anticipate gross margins being above 50% in the fourth quarter. As far as the tax deferral, the tax deferral was a $30 million approximately tax deferral, which was paid in October.
The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good evening, all. Thanks for taking the question. Just on the guidance for Q4 within revenue, call the midpoint of $354 million. If you take your Q3 contribution, add $18 million for Tryke, then obviously Bordentown's going to be a bit of a tailwind for Q4 as well. Seems like there's a lot of ability to come in higher than that number. I understand a lot of other markets are seeing pricing pressure and other things that are weighing on results like inflationary pressures on consumer spending. I'm just wondering if you could point out some of the states markets or just the components that are going to lead to the headwinds that sort of get you to the range that you've provided. And then any other color on the differences between the IFRS and GAAP, particularly to your margin on EBITDA.
I know you're probably in the process of finalizing those numbers, but traditionally from a directional standpoint, adjusted EBITDA margins always come in lower just given some of the lease accounting. Any color on those two questions I asked would be great.
I'll cover the Well, actually, Ed, why don't you cover the accounting issue, and then we'll answer the first question.
Sure. Look, we're still in the process of determining the impact, so at this point, I can't really put a number on it, to be honest with you. We'll be able to communicate that with you guys when we report our fourth quarter numbers. There will be a small adjustment to EBITDA. We don't think it's going to be as material as, or as outsized as one would think. We're still doing the work.
Right. The first part of the question was regarding where we're seeing some pressure. Obviously, we're seeing pressure in Pennsylvania. We obviously see pressure in California, definitely in Colorado. We do anticipate the market has been more difficult, and so we're trying to be prudent, and we're guiding down slightly for our core business. Don't forget, we closed the Tryke transaction in the first week, so we lost several days, something like four or five days of the October month on the Tryke transaction that we can't consolidate. We had to take a little bit of money off of that. The Bordentown store, we want to be a little bit prudent to see how quickly that store will ramp.
We're just trying to be prudent, and we're anticipating that the core business before Bordentown and Tryke, as Ed said, is going to be down low single digits. Therefore, if you add the $18 million for Tryke on top of that and a little bit for Bordentown on top of that's how we get to the number of $53 million-$55 million, which is an up on the $340 million that we did this quarter.
The next question comes from Andrew Partheniou with Stifel. Please go ahead.
Hi, good evening. Thanks for taking my questions. Maybe just thinking about New Jersey here. You previously alluded to Bordentown potentially being the strongest store in your network. It seems like you're being a little bit prudent for expectations here, especially for the ramp. Just wondering, what's causing your cautiousness here? What's happening in the state overall in terms of ramp-up and expansion? In prior states, when we see rec turning online, the first 12 months is a rapid growth period, and it seems like this is a little bit slower than that. If you could give a little bit of color there. Perhaps this is supply related. We need more production online to be able to supply these stores, or is it something else?
No. Thank you, Andrew. It's a great question. I'll answer it a little bit, then Matt can answer as well. We've got more than enough supply. We're the largest supplier in the marketplace. There's no problem with Curaleaf and its supply. We always said it would be a strong store. We never said it would be the best. Obviously, it's very difficult to beat the Belmar store. The Belmar store is probably one of the highest grossing, if not the highest grossing store in the country today. It's the oldest store in New Jersey. It sits on the border of Pennsylvania, so it gets a lot of the traffic that goes across the border. Probably 30% of that store's business comes from Philadelphia. That is a very, very strong store, and our other two stores just could never meet those numbers.
However, the Bordentown store is our most northern store, closer to the more densely populated areas. We fully anticipate that to be one of our strongest stores, obviously in New Jersey, probably our second store after the Belmar store. It's going to take some time to ramp. When you launch new stores on an opening day of cannabis, those stores tend to ramp a lot faster because all the stores open up at the same time. When you launch your stores nine months into a program's launch or eight months into a program's launch, it takes time to educate the population of where that store is. Don't get me wrong, we think that store will do very well. We're just trying to be cautious to see how that store will ramp. We're not seeing any issues in New Jersey. New Jersey has been a great market.
As Matt said, we grew that business over 21% quarter-over-quarter. We don't anticipate any slowdown in the New Jersey market, not at this stage, at this point in time. Matt, I don't know if you have anything to add to that.
I'd just add, Bordentown is probably our best situated store for adult use in terms of parking, access, visibility, those types of things. Our Belmar and our Edgewater stores are relatively close to one another. We're not expecting any cannibalization coming from our existing two adult use stores. We're very bullish on Bordentown, but we're also being, I think, conservative with the early ramp in the next couple of months.
The next question comes from Scott Fortune with Roth Capital. Please go ahead.
Great. Thank you. This is Stefan on for Scott Fortune. My question's on Tryke, the closing of Tryke. How do you guys view the wholesale/retail mix in the Nevada and Arizona markets? Thank you.
Matt, you want to take that?
Sure. Very excited to get the Tryke acquisition closed here at the beginning of the fourth quarter. Tryke's got a really strong position in Nevada, where it's been since the inception of that market. Also really adds to our already strong position in Arizona and Utah. We're bringing on a great team with Tryke, as well as really strong market positioning. They've done a great job of having a strong vertical presence of their products and brands in their stores. We've got a really great opportunity to have a lot of synergies between our product mix as well as theirs and build on what they were already very successful at and combine forces here. It's a great addition in three markets that we're already very strong in, and that we're excited to add to our existing Curaleaf portfolio there.
The next question comes from Ty Collin with Eight Capital. Please go ahead.
Hi. Thanks for taking my question. I'm just wondering if you could break down in a little more detail the $40 million of expected cost savings next year, maybe how much of that is in the COGS line, how much will be in SG&A and labor costs specifically or any additional detail you can give on that. Thanks.
Matt, do you want to take that?
Yeah, I'll take that. Look, I appreciate the question. Good question. We are assessing that as we speak for next year's budget. I can tell you that if you look at our SG&A savings that we saw in the fourth quarter, we expect that to sort of I mean, the third quarter, I apologize. We expect that to ramp into the fourth. The savings that we are looking for are going to be across the board. They're going to come at our COGS line. They're going to come at our SG&A line. A lot of leverage that we're trying to get out of our retail footprint, where we have reduced some staffing across retail. We have run initial tests. We've seen very positive results, going forward with our productivity has significantly improved. We continue to leverage on that.
We are literally looking across the entire spectrum of our expense structure. Anything associated with those folks, T&E and other areas will all see some leverage into next year.
I would just add that when a company grows as fast as Curaleaf has over the last four years, I've grown many businesses in my life, you do tend to hire more. You tend to have a lot of inefficiencies. We're now at the phase where we've done most of the acquiring that we need. We finished most of the CapEx that we needed to do to build out our infrastructure to supply products. We now are moving, as Matt said, to rationalization. I think that we're going to start seeing quite substantial cost savings across the board as we become much more efficient in the operations across all areas of the business.
The next question comes from Glenn Mattson with Ladenburg. Please go ahead.
Yeah. Hi. Sorry I missed your comments, Boris, on SAFE. I'm curious, just a couple, 6, 8 weeks ago or so, I think confidence was growing that something would happen in the lame duck session. Now that we're a couple of days away, I think part of the caveat back then was barring some sort of significant crisis or whatever, like the war getting worse or something. We're out at the point, where I don't think there's any situation like that. I'm curious, the conversations you're having behind the scenes, different from what's being heard publicly or anything like that? Just as your confidence kind of growing, or do you get a little more cautious as you get closer to the potential for trigger for something to happen there?
Look, all I can say is that we are leaving no stone unturned in Washington. We are having 10 or more meetings every single day. We've got numerous lobby firms, numerous people on the ground. Cresco and Curaleaf have been incredibly active with pushing this process forward. We actually recently got investors to join in that process in pushing this. I believe we've never been closer to getting this piece of legislation. Republicans and Democrats on the staff side are talking very actively about SAFE right now. They haven't finished the negotiation yet. We hope that they will finish. The next couple of days will be difficult because of the elections and seeing the results. We hope that by the end of this week, we'll get back to those negotiations, and we hope very early into the lame duck session to have a deal.
The question is, what that's going to get attached to in order to get it through. I personally think that it almost doesn't matter whether it's a Republican sweep or whether we have a split Congress. I think the process has gone so far and there's so much commitment on both sides at this point that I would find it highly unusual that we wouldn't get something. I've been cautious to date. I'm getting more and more positive that we should get something. However, I want to caveat, it's Washington. You never know what can change. It's not a guarantee by any stretch of the imagination, I can only say to everybody, I've never seen more cross-the-aisle activity on a piece of cannabis legislation in the Senate than we're seeing now, and I think that's an incredibly positive sign.
I also want to remind everybody, we're getting more Republican senators with cannabis programs right now with Arkansas and North Dakota and a lot of these states that are coming in. I think we got out of the five states, I think we've got six senators that are Republican senators that are going to be joining the Senate into next year. They're going to have adult-use cannabis programs. If all of these five states pass it, I think we're at 24, 25 adult-use cannabis programs in the country. I think we've really got a lot of energy behind SAFE at this point in time, I'm very positive about it.
The next question comes from Eric Des Lauriers with Craig-Hallum. Please go ahead.
Great. Thanks for taking my questions. You mentioned increased verticalization in Pennsylvania and Arizona, among other markets. Certainly other MSOs implementing the same strategy amid these price pressures. Can you comment on some of the early impacts you're seeing to the wholesale dynamics in those markets, whether you're seeing a change in mix or limiting of number of doors or some other changes there, and perhaps any changes to retail traffic? Pretty much just looking to get any color on any second or third order impacts from the increased verticalization that you guys might be seeing or preparing for. Thank you.
Matt, you want to take that?
Yes. I think in the markets where you have large vertical players, take Pennsylvania as an example, we're certainly seeing a dynamic where those that have scale and have verticality and have the capacity to supply a large portion of their shelves are capitalizing on that. Us included, to be able to assort our stores with more of our products and brands in an environment where it has gotten more competitive and can be challenging. I think that is one of the strategic advantages, competitive advantages, for those of us that have built out a lot of capacity in that.
That's a part of the reason we're so focused on innovation in our products and brands, so that we can provide a great assortment to our customers across a whole portfolio of products and brands, why we talk about our new product innovations growing 75% year-over-year. That's such a big focus for us to continue to be able to do that. I think you have other markets like Illinois, for example. Look, we're excited to get the new dispensaries opened. That market has been very ripe for more dispensaries beyond the 105 or so that have been in that market. We're already well in front of those groups that are going to be opening even before the end of the year, that are brand-new wholesale customers, where we are going to be capturing a good amount of shelf space there.
We're going to see many more of those open up in 2023. I think in a market like Illinois, we have a lot of opportunity to continue to go more vertical in our stores. Additionally, there's a great wholesale opportunity to grow there because we're going to see a lot of new wholesale customers coming online.
The next question comes from Spencer Hanus with Wolfe Research. Please go ahead.
Great. Thank you for the question. If we can shift to Florida for a minute, you mentioned in the prepared remarks that since you've pulled back on promotions, you've seen market share hold. Curious what gives you guys the confidence that that's going to continue over the long term here. Then with the change in promos, how do you think your price gaps compare to the market share leaders in the state?
Look, I think we've seen Florida in general get more promotional across the market over time. I think part of what we've done is continue to get more strategic with the way we are promoting. We're able to offer a great value and a great everyday value for those consumers that are coming in and are more value-oriented. We're also launching new innovative products, like our live rosin that we are now selling in vape and concentrate form is doing tremendously well. We're really focused on continuing to launch new product coming out of our ACE system there in Florida, so we have more downstream product on the horizon. Those are the types of products that command a higher price, and we're able to not be discounting as much there. I do think we are finding success in continuing to rationalize some of that strategy.
As we continue to bring on additional capacity and new products in our pipeline, I think it's something that we're going to continue to be able to build on. As we get some more stores in our pipeline open up here into the end of the year and in Q1, it's going to give us more of an opportunity to continue to test and optimize those things.
This concludes our question and answer session. I would like to turn the conference back over to Matt Darin for any closing remarks.
Well, thank you everyone for joining us, we'll look forward to connecting again in March. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.