Trulieve Cannabis Corp

Good morning, everyone, and welcome to the Trulieve Cannabis Corporation second quarter 2022 financial results conference call. My name is Vaishnavi, and I will be a conference operator for today. All participants will be in a synonymous. 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 touchtone phone. To withdraw your questions, please press star, then two. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Christine Hersey, Director of Investor Relations for Tralee. You may begin.

Thank you. Good morning, and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer, and Alex D'Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for Trulieve. Following the prepared remarks, we will open the call to questions. Steve White, president, will also be available to answer questions. This morning, we reported results for the second quarter of 2022. A copy of our earnings press release and an accompanying PowerPoint presentation may be found on the investor relations section of our website, www.trulieve.com. An archived version of today's conference call will be available on our website later today. As a reminder, statements made during this call that are not historical facts constitute forward-looking statements, and these statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filing with the Securities and Exchange Commission, including item 1a risk factors of the company's annual report on form 10k for the year ended december 31st 2021 although the company may voluntarily do so from time to time it undertakes no commitment to update or revise these forward-looking statements whether as a result of new information future events or otherwise except as required by law during the call management will also discuss certain financial measures that are not calculated in accordance with with the U.S. Generally Accepted Accounting Principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for Trulie's financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that are exhibits to our current report on Form 8K that we furnished to the SEC today and can be found in the investor relations section of our website. Lastly, at times during our prepared remarks or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future. I'll now turn the call over to our CEO, Kim Rivers, Please go ahead. Thanks, Christine.

Good morning, everyone, and thank you for joining us today. We are pleased to report second quarter results delivering top-line growth and margin improvement. I am so proud of our team for managing through the rapidly evolving economic environment and staying focused on our core operating plans. Successful execution of our strategy requires constant evaluation and periodic adjustments to improve performance. We pay close attention to results across the organization, the broader economy, and the competitive dynamics within the markets we serve. Based on recent trends and the impact of proactive measures we are taking to improve profitability, this morning we adjusted our revenue outlook by 5% from the prior guidance. Our updated guidance incorporates strategic changes across our business while accounting for the impact of inflation on consumer spending, softness in wholesale markets, and the lack of visibility in the economy. We are rationalizing activities that are weighing on margins and resources and channeling efforts towards our core business drivers. We have identified selected non-core assets for potential divestiture closure that would allow our teams to concentrate on more impactful elements of our operating plan while reducing expenses in these non-core markets. In July, we decided to discontinue wholesale operations in Nevada. Our limited presence in Nevada was too shallow to justify given the bandwidth and resources required. Without sufficient depth and scale, the performance did not meet our criteria. Similarly, we have made the decision to close select California retail locations. Jettisoning non-core assets and activities allows our teams to concentrate on more impactful areas of our business. Across our retail platform, we are focusing on performance within our high conviction markets, adding dispensaries in our core states, increasing the sale of branded products through branded retail, and utilizing data to meet evolving customer preferences. In wholesale, we are taking specific action to address recent weakness. Where appropriate, we are reallocating products from the wholesale channel to our retail footprint and further refining our production mix. We will continue to evaluate and revise our plans as necessary to manage through evolving industry and economic conditions. In classic Trulieve fashion, we will communicate any changes to our outlook as they arise. Just as we revised our guidance upward, when consumption accelerated during the pandemic, We are modifying our outlook now as those trends unwind. Trulieve has always had a strong balance sheet with a focus on cash flow and profitability. Our Fortress balance sheet has been a source of differentiation since inception. We will continue to optimize processes, teams, and infrastructure and fully expect tighter market conditions will yield chances to acquire distressed and undervalued assets. As we sort through the opportunity set, we will be patient and adhere to our strict criteria for M&A. As we move through the remainder of the year, our team is committed to meeting customer needs, delivering improved performance in core markets, managing cash wisely, and streamlining operations across the organization. Trulieve has the capital, discipline, and experience to navigate this environment and emerge as a stronger company. We are focused on preparing for many impactful catalysts that still lie ahead. As an example, just this week, a campaign was launched to legalize adult use marijuana in Florida. The best is yet to come. Turning now to our second quarter results, Trulieve achieved second quarter revenue of $320 million, up 49% year-over-year, and ahead of guidance for flat top line results. Revenue increased by 1% sequentially, following an increase of 4% during the first quarter. Growth was primarily driven by higher organic retail sales in our core markets. Second quarter gap gross margin was 57%, up from 56% last quarter. Adjusted EBITDA increased by 5% to $111 million, or 35% margin, representing our 18th consecutive profitable quarter. As expected, second quarter operating cash flow was negative due to the timing of tax payments. However, we expect strong operating cash flow for the remainder of the year. We exited the quarter with $181 million in cash. Turning now to our retail operations. Retail sales grew by 3% sequentially to $299 million, accounting for 93% of second quarter revenue. I am so proud of our team for delivering this organic growth in a challenging macro environment. Our retail platform grew to 168 locations with market-leading positions in Arizona, Florida, and Pennsylvania. During the second quarter, we opened six new stores in Florida, Massachusetts, Pennsylvania, and West Virginia and relocated one Florida dispensary. Last week, we opened our first Truly branded dispensary in the Roosevelt Rope neighborhood of downtown Phoenix. The grand opening celebration last Friday had a phenomenal turnout, capped off by the declaration of August 5th as Truly Day by the mayor of Phoenix. This new dispensary marks a major milestone in our plan to expand and rebrand in Arizona. We look forward to continuing our rebranding efforts across Arizona over the next year. We are on track to meet our guidance of 25 to 30 new store openings and up to six store relocations in 2022. As of today, our industry-leading U.S. retail network has grown to 175 dispensaries. Across our markets, we see different trends emerging as customers respond to this macroeconomic environment. Within this backdrop, we are monitoring customer needs and behavior to inform product allocation, production mix, and new product development. In the second quarter, overall traffic increased 6%, while basket size decreased 3%, with those trends accelerating in June. Units per basket were flat to slightly up across all markets. Overall promotional activity was flat. Customer visits per month increased to 2.6 visits overall and 2.7 visits for medical-only markets. Customer retention was in line with first quarter metrics. Diving deeper into data from our cornerstone markets, traffic was up in Florida and Pennsylvania each month in the quarter, while traffic declined in Arizona. Discounting was flat in Florida, up 1% in Pennsylvania, and up mid-single digits in Arizona. Performance in Arizona exhibited typical seasonal patterns with declining traffic and sales alongside the rise in hot summer temperatures. Within our top three markets, distribution patterns varied across premium, mid, and value tiers, partly due to our actions to match products mixed to demand. In Florida, unit sales of premium products increased as we produced more differentiated and premium products. In Pennsylvania, sales of value products increased, driven in part by new value tier product launches. In Arizona, the percentages of units sold in premium and mid-tiers increased. However, value tier products still drove the highest unit sales. These trends continued into July as basket value increased in Arizona and Florida and decreased in Pennsylvania. We are tailoring our product offerings in response to shifting customer needs in our core markets, further influencing these directional trends. Since inception, Trulieve has been committed to meeting our customer needs. We often say that we are a customer-obsessed organization. In order to deliver exceptional customer experiences, we must have the right products at the right price in the right place. We mine transaction data and feedback to meet evolving customer preferences and inform our product development, production mix, and product allocation. Data trends are telling us that in certain markets, a segment of our customers are increasingly price sensitive and searching for value products. We have responded to this need by expanding production and availability of value-branded products such as Roll 1. For example, in Pennsylvania, Roll 1-branded ground flour and mini products launched in February and quickly rose among the top-performing brands within our portfolio. While we are seeing higher demand for value products, we continue to see strong demand for premium products, particularly among flour and concentrates. In Florida, Muse-branded premium concentrates are among our top-performing branded products. We recently launched Muse products in Arizona, Pennsylvania, and West Virginia. We can further enhance customer satisfaction by using hyper-personalized marketing techniques. Our data capabilities are expanding, allowing for targeted outreach based on past purchase history, personalized product recommendations, and multi-channel messaging delivered at optimal times. We're able to run targeted campaigns and compare outcomes relative to general marketing efforts. Several of our campaigns this year clearly demonstrate the efficacy of personalized outreach. For example, we use geo-targeting to identify patients who live near new store openings. These campaigns resulted in 50% to 75% higher revenue. Another campaign targeting customers over a certain spend threshold resulted in nearly three times higher revenue per click versus generic campaigns. We expect to roll out targeted marketing efforts in additional markets over the next year. Turning now to our supply chain. Distribution across our retail and wholesale network is supported by over 4 million square feet of cultivation and processing capacity. Second quarter production increased 79% year-over-year to 10 million units. This output supports new store openings, new branded product launches, and new markets such as West Virginia. Our depth and scale within cornerstone markets afford us the ability to increase efficiencies and reduce costs while adapting to changing market dynamics. Given the modular nature of expansion and because we have significant capacity already, we can pull back or ramp up utilization as demand fluctuates. For example, in Florida, during our analytics event in June, we showcased our new 750,000 square foot state-of-the-art automated indoor cultivation facility. While we are still in the process of ramping and optimizing this new facility, once fully utilized, the 750K grow will have significantly lower production costs than our standard indoor 24K and 46K buildings. As this facility ramps, we have the ability to temporarily reduce utilization of legacy production capacity until it is needed. Similarly, in Pennsylvania, we have the flexibility to focus on supplying our affiliated retail operations until wholesale demand picks up. In Arizona, the acquisition of cultivation capacity in February provided an opportunity to quickly ramp production of branded premium indoor flower. The addition of this capacity eliminated the need for new construction at an alternate site, reducing capital expenditures this year, and condensing the time to bring new supply online. Turning now to our wholesale operations. Revenue declined 22% sequentially to $22 million. Wholesale markets in Arizona, Massachusetts, and Pennsylvania softened as both supply and inflationary pressure on consumers increased. Weaker wholesale trends accelerated in June, further validating our approach to prioritize retail sales with branded products through branded retail and to use wholesale channels primarily to expand distribution of branded products. In Pennsylvania, we are reducing production and allocation to the wholesale channel. Our concentration in retail provides an outlet for supply chain production, access to customer data, and higher margins. Looking ahead, we are laser-focused on execution to meet our goals. We are working diligently to situate our teams, assets, and operations appropriately ahead of significant future catalysts, including adult-use sales in markets such as Connecticut, Florida, Maryland, and Pennsylvania, and the opening of new markets such as Georgia. Progress towards expanding these markets is happening as we speak. On Monday, the Smart and Safe Florida campaign launched a political action committee with the ultimate goal of legalizing adult use marijuana in Florida through a ballot initiative. The campaign is targeting a voter initiative for the November 2024 election. Trulieve supports this initiative to expand access to cannabis for all adults in Florida. We've made an initial financial contribution to the campaign, and we plan to provide future support. As an industry leader, we embrace our responsibility to advocate for adult rights for personal consumption. We're optimistic that other industry leaders in our home state will join us and support this effort. With numerous catalysts and significant growth potential ahead, the long-term opportunity for U.S. cannabis remains attractive. We are doubling down on our core financial discipline and sharpening our focus on the fundamental drivers of our business. We will continue to adhere to our strategy and our disciplined approach to profitable growth with an eye towards long-term shareholder value. With that, I'll turn the call over to Alex for more detail on our second quarter results.

Thank you, Kim, and good morning, everyone. Second quarter revenue of $320.3 million increased 49% year-over-year compared to $215.1 million during the second quarter of 2021. Second quarter revenue increased 1% sequentially compared to $318.3 million. Trulieve ended the second quarter with 168 dispensary locations. As of August 10th, Trulieve owns or operates 175 dispensaries supported by over 4 million square feet of cultivation and processing capacity. In the second quarter, reported gross profit was $182.2 million or a gross margin of 57% compared to $178.2 million or 56% during the first quarter of 2022. Gap gross margin improved sequentially driven by greater sales of internally produced products the strategic shutdown of duplicative cultivation facilities, and the benefit of the Pennsylvania vape recall reversal, partially offset by the costs associated with ramping newer indoor cultivation facilities in Arizona and Florida, including our new 750K facility. Excluding the impact of transaction-related and non-recurring charges, second quarter adjusted gross profit was $183.4 million, or adjusted gross margin of 57%. The delta between GAAP and adjusted gross margin has narrowed to 40 basis points as the impact of acquisition and integration charges have continued to roll off. We expect gross margin will continue to fluctuate quarter to quarter depending on product and market mix and inventory flow through. Turning now to SG&A expenses. SG&A expenses in the second quarter were $108.9 million or 34% of revenue compared to $106.4 million or 33% during the first quarter. Second quarter expenses included approximately $17 million of transaction and integration-related charges, inclusive of a $5.2 million earn-out payment associated with the indoor cultivation capacity in Arizona acquired in February. Excluding these charges, second quarter SG&A was $91.9 million, or 29% of revenue, compared to 30% in the first quarter. As we continue to invest for future growth, We expect quarterly fluctuations in SG&A expenses as investments are made ahead of increases in revenue. As Kim mentioned, we are strategically exiting underperforming markets and assets, which may impact SG&A moving forward. Net loss was $22.5 million for the second quarter compared to net loss of $32 million for the first quarter of 2022, an improvement of 30%. Second quarter net loss included $11.8 million in transaction and integration related charges a $5.2 million earn out I just referenced, $4.3 million in asset impairments associated with the closing of redundant cultivation assets in Florida, and a loss of $700,000 due to the repurposing of a development stage production site in Arizona. Excluding non-recurring charges, net loss would have been $1.1 million. Second quarter loss per share was 12 cents compared to loss per share of 17 cents in the first quarter. Excluding non-recurring charges, second quarter loss per share would have been one cent. We anticipate transaction and integration-related charges will continue to impact reported EPS throughout 2022. Turning now to adjusted EBITDA. For the second quarter, adjusted EBITDA was $111 million, or 35%, compared to $105.5 million, or 33%, during the first quarter. As expected, we realized improved margin performance as part of our ongoing efforts to increase efficiencies and streamline operations. Moving on to our balance sheet and cash flow. We ended the second quarter with $181 million in cash and $552 million in debt. Second quarter operating cash flow was negative due to the timing of two tax payments. We are actively managing the cash conversion cycle and expect to realize positive operating cash flow during the second half of the year. We expect to generate positive free cash flow in 2023. Capital expenditures in the second quarter totaled $45 million. The majority of expenditures were comprised of investments in supply chain and retail assets. After lowering our CapEx plan by over $50 million, we currently expect third and fourth quarter investments to be comparable to the second quarter. We have tremendous flexibility in our cornerstone markets to quickly ramp capacity to meet future demand. Turning now to our outlook and guidance for 2022. In recent months, we have made the strategic decision to jettison lower quality revenue and markets to focus on core business drivers. At the same time, accelerating inflation has weighed heavily on consumer sentiment and disposable income, leading to a lack of visibility in the second half of the year. Based upon these combined factors, we are adjusting the low end of our 2022 outlook by 5%. As such, we are targeting 2022 revenue of $1.25 to $1.3 billion and adjusted EBITDA of $415 to $450 million. We are reiterating our longer-term target of 60% adjusted gross margin and 40% adjusted EBITDA. In summary, we delivered another strong quarter while managing through changing conditions in the broader economy. I am so proud of our team, and I look forward to further building upon the progress we've made thus far. We have significant optionality to navigate the current environment while preparing for future growth. And with that, I'll turn the call back over to Kim.

Thanks, Alex. Six years ago, we made our very first shale in Tallahassee to a customer that had to be medically transported from two hours away because there were no ordering physicians in the area. Fast forward to today, and there are over 740,000 patients and 2,400 physicians within the Florida Medical Marijuana Program. It's important for us to keep sight of how far we've come so we can stay focused on where we need to go. As cannabis becomes increasingly mainstream, we have greater opportunities to address critical issues for our industries. Two weeks ago, a Senate subcommittee held a hearing to explore federal decriminalization of cannabis. State banking recently passed the House for the seventh time, and signals from Washington indicate some compromise legislation may advance before year end. At the state level, efforts continue to expand medical and adult use programs. In Florida, a campaign has launched for an adult use ballot initiative in 2024. In Maryland, voters will consider a ballot initiative for adult use sales in November. In Connecticut, we expect adult use sales will commence early next year. We are committed to advocating for change at all levels. Factoring in adult use sales within our markets, we estimate the Northeast, including Connecticut, Maryland, and Pennsylvania, can double to approximately $4 billion in market size. In Florida, We estimate the market could reach up to $6 billion following expansion to include adult use sales. Trulieve is incredibly well positioned to capture a significant portion of these growth opportunities. I've never been more optimistic about the future. We lead with strategy, follow with execution, and go deep in markets like our profitability depends on it. We will continue to do what we say we are going to do, tuning out the noise and staying true to form. Our focus on serving the customer remains our guiding light while we are building a sustainable and scalable company. Trulieve is poised and ready to define the future of cannabis. Thank you for joining us today, and as I always say, onward.

At this time, Kim Rivers, Alex D'Amico, and Steve White will be available to answer any questions. Operator, please open up the call for questions.

Thank you. 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. At this time, we will to a similar roster. Our first question comes from Derek Lee with Canaccord. Please go ahead.

Hi, thanks and good morning everybody. Kim, I just wondered if you could talk a little bit about what you're seeing in terms of the differences between branded retail performance and wholesale. I know you gave some numbers there just in terms of what you're seeing on the wholesale side, but on the retail side where it clearly appears much more of your focus is going to be on that higher margin branded retail. Can you just talk about what you're seeing and what some of the trends are within that important segment?

Sure. Thanks, Derek. As I mentioned on the call, there certainly was weakness in the wholesale market across the portfolio with noted weakness in the Pennsylvania market. In terms of branded products or branded retail, we are very encouraged that our organic growth was strong. this quarter and, of course, coming off of a very strong Q1. We are seeing, interestingly, which is why we're trying to give some more specific color on the call, a bit of mixed patterns across the portfolio. Overall, though, and I think it's echoing I think others' sentiment, is that we're seeing baskets on a per visit come down slightly, again, in some cases higher than others. However, we're seeing, you know, number of transactions increasing. And so, which indicates, right, potentially it could indicate more of a, I'll call it paycheck to paycheck, or more of a sort of regulated or rationalized spend on a per consumer basis. I think, you know, again, what we are seeing is we're seeing, you know, traffic up. Again, on a quarter-over-quarter sequential business or basis, so that's encouraging as well. But I think that, again, what's interesting, too, is that we've got the premium category up and contributing very strongly in Florida. Also, we saw a rise there in Arizona as well. But then, you know, again, kind of in a mixed view, in Pennsylvania, we saw a premium down but again, value significantly up. So it is a bit of a mixed bag, but trends, we believe, are stable in terms of traffic, which is encouraging as we move to the back half of the year.

Okay, great. That's really helpful. And then, you know, when we think about the guidance that you've updated, I mean, I don't think there's any real surprise there, just given that, you know, the dynamic, let's call it retail and consumer spending environment that we're seeing. I just want to focus on that CapEx a little bit. So if my math is right, you're sort of reducing your CapEx by about $50 million in the back half of the year. When we think about CapEx, do you feel like you have adequate capacity given some of the major investments you've made? You alluded to Jefferson Park, which we all saw. a few months ago. And then second question on that is just when we think about CapEx for next year, just given, you know, some of the more streamlined focus that you mentioned, should we expect a different run rate than what we saw in the front half of this year for next year?

Yeah. So, you know, CapEx strategically for us has been an area of focus as we've really evaluated trends coming into the back half of the year. As you noted, we made investment in the 750K facility in Florida, which should be significantly more efficient than our legacy sites. And that'll do a couple of things. We should note that that site is not fully optimized and it's not fully online. So a decent portion of the back half spend is gonna be to continue to get that site online, as well as to finish projects that were started earlier in the year, as well as, of course, our continued investment into our retail platform across our markets. So with the onboarding of that fully optimized 750K facility, what we'll be able to do is we'll be able to take down legacy, less efficient sites in Florida, but have those basically as a stable of CapEx investment, if you will, that we can bring back into market as demand warrants. So that will certainly help the spend with CapEx going into 2023. So again, we're being very strategic in terms of how we're investing, yet at the same time, and I think that this is an important point, continuing to make sure that we are pacing and staying slightly ahead and in line with markets so that when trends reverse, which as we've seen in the past can happen also very quickly, that we're not left behind and we're able to capture growth that we do believe will come back into the market once we work through this period of time.

Okay, great. Thank you very much.

The next question comes from Matt Megan Lee with Needham.

Please go ahead.

My first question is on the GNA. You continue to manage those core GNA dollars well with the net dollars dropping from the first quarter to the second quarter. The question is two parts there, I guess. How much opportunity do you have in terms of optimizing that with the harvest integration? Is there still more to be done there or are you basically at the end of that? And then relative to the revised growth outlook, how should we expect those core dollars to grow into the back half?

Hey, Matt. We'll have continued opportunities to rationalize SG&A going forward. We've done a good chunk of that already. As you see, we've come down. We came down in Q1. We came down again in Q2 on an adjusted basis. Just keep in mind, in terms of whole dollars, we're constantly building out new markets ahead of revenue, so we'll kind of always have that flux. So there will be a flux quarter to quarter with that as we invest it ahead of revenue dollars. But in terms of harvest in particular, that's still ongoing. There's still some more opportunity there. But again, it could be mitigated as we invest in other markets ahead of revenue.

Yeah, and Matt, the only other just call out there, and I know you focused on core dollars, which I appreciate, but clearly as we do continue to rationalize the portfolio and lean into defining what our core business markets and strategies are, which then means jettisoning lower performing markets or assets. And that obviously would have potential impact on SG&A as well. And then just we do have that Watkins earn out that is flowing through SG&A for the remainder of the year. So that'll, of course, burn off, which is, you know, in our core market of Arizona.

All right. Okay. And the second question is on the inventory. I know there's probably some seasonality in that build, and work in process was clearly a component of that growth. But relative to the revenue outlook for the back half, do you think that inventory, as you see it right now, is aligned with the sales expectations? Or I guess how should we think about that build and inventory relative to what you assume will come through into the back half in terms of sales?

Yeah. Of course, inventory is something that we actively manage. You know, I think that we should – Note that it is, of course, a required build ahead of store openings. Noted that we've already added seven new locations in Q3, which is an increase in terms of pace compared to the previous two quarters. So we are and do need to have appropriate inventory on hand for those store openings. We also have inventory in Florida, which we cycle through. at an appropriate pace. And, of course, building product launches in new markets requires a little bit of inventory build as well. So there's going to be natural fluctuations, as we've communicated in the past, on inventory from a quarter-to-quarter basis. But we do feel that we're at an appropriate level. We expect to continue to sell through that and, again, have the right mix of products available. to sell and to pull strategic levers again.

Okay. Thank you.

Our next question comes from Spencer Hannes with Wolf Research.

Please go ahead.

Great. Thanks for the question. Just wanted to dive into the wholesale market for a minute. Could you talk about what's driving the acceleration and weakness in June? And then do you expect more of that business to be rationalized over time? And with the actions that you've taken so far in Nevada and some other places, what should be the margin benefit from exiting some of these non-core business lines?

Yeah, thanks, Spencer. So, you know, we're obviously will give additional color in terms of decisions made in Q3 on the Q3 call. But what I'll say is that in markets such as Pennsylvania, where it appears that there's been a bit of a higher inflationary pressure on the consumer, we certainly saw companies just pull back in terms of what they were comfortable holding in vaults moving into the quarter. I think also right in a market like Pennsylvania, we did have additional supply come online across the market, ourselves included. Again, I think it's important to note that in Pennsylvania, we are and do have the leading retail presence, so I feel like we're prime positioned to be able to minimize impact there by increasing distribution of branded products through branded affiliated retail channels in Pennsylvania. In Pennsylvania, to your point, which of course leads to higher quality of REV in that market. Question in terms of will we be able to absorb 100% of that offset? I think that's a bit unclear. Again, will depend somewhat on continuation of that inflationary pressure on consumer spend. So hopefully that provides some color for you.

Yeah, that's really helpful. And then just to move to Florida, you mentioned that discounting was flat there. Do you expect that to continue into the second half? One of your biggest competitors down there is targeting 60 stores by the end of the year, and then there's a couple new smaller operators that are starting to scale finally down there. So just curious how you're thinking about the discounting environment in Florida.

Yeah, I mean, I think that, look, I mean, in Florida – This line of questioning isn't something that's new to us. I think we've been answering similar questions since 2018. You know, we're very comfortable in a competitive environment in Florida. We're not sitting still. You know, we've got, again, increased efficiencies and increased capabilities with, again, the new facilities that we have coming online. We're continuing to bring into market interesting and innovative products that have received exceptionally well responses from the consumer base uh and so i think we have increased optionality in florida and again and that you know when you think about it right i mean that 750k building is i believe the largest indoor facility in the united states of america uh that we're we're standing up and so we'll have again incredible incredible optionality as that facility ramps and contributes to productivity in the state of Florida. So we continue to feel very confident about our home state. And of course, we're very excited about the future of Florida with hopefully with the adult use sales coming into market and feel that we're best prepared to capture increased demand as that comes through as well.

Great. Thank you.

The next question comes from Andrew Portino with Stifel. Please go ahead.

Good morning. Thanks for taking my questions.

Maybe digging a little bit deeper on the guidance here, if you could provide some more information on your assumptions. Are you thinking about perhaps less benefits from increasing vertical integration than initially expected, or perhaps this is a timing issue with production benefits flowing more into Q1 of 2023 as well? What kind of price compression assumptions are you factoring in the second half from current levels?

Yeah, I think that as we attempted to communicate on the call, I think there's a few things happening simultaneously. So one, there was absolutely a proactive strategic decision, several strategic decisions that have been made as a result of looking and taking a hard look. And this was a strategic goal of ours that we set at the beginning of the year, is to evaluate the assets within our portfolio and and make determinations as to which we were going to be, you know, core contributive business drivers. These would be those that we needed to either, you know, close or sell or jettison. So, that work has begun. And, you know, it's interesting because, of course, with the macro environment on top, it provides perhaps greater visibility and it becomes more clear. in terms of which makes sense for us to go ahead and make those decisions on. So that's absolutely happening, and we believe should happen in order for us to have a more streamlined and higher, again, higher quality portfolio on a go-forward basis. At the same time, right, we have this unprecedented opportunity macro environment in terms of pace in which it came on board. When you rewind to when we issued guidance to today, there have been significant changes in consumer behavior that happened very quickly. We are also taking that behavior into account and really we see that as pressure on the wholesale, as we mentioned, the wholesale side of the business and therefore pivoting supply and leaning into and again feel very good about the fact that we have the leading industry leading retail platform with 175 locations across the US at which we can pivot into and so I would not say that it's any type of you know reduction as it relates to the vertical strategy that we have. We believe that branded products through branded retail absolutely does deliver the highest potential margins. I think that's why you see that theme now being repeated across the peer set. And we also believe and continue to believe, which we always have, that that's also a way to ensure that we have strength of customer relationships and durability of customer relationships, which again, show up in our loyalty metrics, you know, across the platform. So, this is, you know, it is a combination of things happening at the same time. We feel it's important to be transparent in terms of what we see as of today. Certainly, there could be shifts going through the back part of the year. I think that the holiday season will be very instructive in terms of, you know, where we see those trends and how we see those trends potentially continuing.

Thanks for that, and maybe continuing a little bit here, could you give some high-level comments or perhaps quantify where your level of vertical integration is now versus your target?

No.

It's not something that we have in a metric that we're prepared to share. As I said, we are absolutely focused on the core strategy of branded products through branded retail. We will be continuing to evaluate assets and markets across the portfolio and weighing the contributive relevancy of those markets and assets throughout the upcoming months. So even if I were to give you something today that doesn't necessarily mean that that would be where we are at year end.

I appreciate that. I'll get back in the queue. Thanks.

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

Hi, good morning and thank you for the questions. So first question for me, and apologies if I'm missing the prepared remarks, but can you give an update on, you know, store openings that you have embedded in the new guidance? I know previously I believe it was 25 to 30, roughly half baked in, expected from Florida. So can you go give us an update on that number with the new guidance and then just how you're feeling about the store outlook within Florida more long term, particularly with the current environment? Thank you.

Sure. Yeah, as we said in our prepared remarks, we're still on track. So that piece has remained unchanged, Aaron. And we feel that actually it's more important maybe now than ever in terms of increasing our portfolio as it relates to being able to execute on our strategy of branded product through branded retail.

Okay, great. Thank you. And then diving into the gross margin. So definitely understand how there can be some volatility quarter over quarter. Bruce wants some incremental color. As you guys still see, 60% longer term. Just kind of the timing of when you think you might be able to shift into that, especially as you get more vertical in PA, but still look to defend yourself within Florida and you're seeing some of the pressure on the consumer wallet and shifting to some value brands. How do you think about the timing of when you start to see that margin improvement back to that 60% plus over the next couple of quarters? Thank you.

Yeah, so, I mean, our 60-40 is definitely couched as long-term, right, a long-term target, which we've set as two to three years. We're certainly, you know, happy with our incremental improvement in margin as we ramp to those numbers. You know, I would say that the larger maybe piece on margin that we're seeing right now is, again, you've got a 750,000-square-foot facility that is ramping. And, you know, again, I do believe that's the largest indoor facility in the U.S. And so that will take time to ramp. And so we have the initial rooms on board now. Keep in mind that the entire support structure for the fully built-out facility is also included in phase one. So that's not fully utilized and won't be fully utilized until the entire facility is online. So that's coming through. And in addition, we've got a cultivation facility in the Watkins deal in Arizona that we're also ramping. So that 750,000 square foot facility will continue to increase incrementally through the end of the year. And we'll continue to provide color for you guys as that does ramp. Exciting initial results out of that facility in terms of improved yields. and improved efficiencies over our legacy model. So it's exciting to have that come online, but it will take a little bit of time to get a facility that large fully optimized and contributed.

Thanks for the call.

I look forward to seeing the facility come online more, and I'll jump back in the queue. Thanks.

The next question comes from Pablo Zlanek with Cantor Fitzgerald. Please go ahead.

Good morning. Kim, can you expand on this new ballot initiative and maybe provide some context in terms of what's new, right? This was attempted for 2022. It didn't work. There weren't even attempts to make it unconstitutional. So why is this different? And on the same subject, If you had to handicap the odds of Florida or Pennsylvania going direct first, which of the two would you say goes first? And then a separate question maybe for Alex. Alex, you know, what we've done, I mean, we're quite impressed with your 3% retail growth. We assume, you know, Florida has to be around there, if not slightly higher. That probably means that you kept or gained dollar share. We've seen prices come down, at least menus. So, you know, it says a lot about your franchise. But if you can just give more color, Alex, in terms of on the question on pricing, you If you guys, you know, in terms of discounting were flat, you know, what do you think happened with the market in the quarter? That would help at least understand the strength of the franchise. Thanks.

Great. So, I mean, I could talk about the Florida ballot initiative for a long time, so I'll try and keep this concise. But Florida is an interesting process, and we have very specific requirements in Florida that are state specific in terms of what it will and will not be accepted as it relates to language and that can be approved by the Supreme Court so in Florida there are two signature thresholds the first to get to the Supreme Court and the second to get actually on the ballot and they can run those signature gathering efforts typically run simultaneously So the previous initiative that you mentioned, there were a couple. One was struck down due to a lack of compliance with the single subject rule. In Florida, it is a requirement that a ballot initiative does need to be narrowly tailored to a single subject to avoid compound issues in potentially approving an initiative that has more than one issue embedded in it. The second initiative that you mentioned failed for the second reason that a ballot initiative can fail in Florida, which is that it was deemed to be misleading to voters because it did not clearly articulate the fact that a change in state law does not absolve someone from potential violation of federal law. And the court deemed that to be an important distinction that someone may not realize that if they purchased in Florida and then for example, maybe traveled across state lines or, you know, got on an airplane, right, that they would potentially be in violation of federal law. And so those were the two specific reasons that the court struck down previous initiatives. This initiative has been extremely narrowly tailored and does leave implementation of policy to the legislature, which is another, I'll call it political challenge that previous initiatives have had. In addition, it clearly states that there is no automatic absolve of federal potential liability for an individual if they purchase under a adult use program here in Florida. So I do believe that this initiative does adequately address the issues that the court has raised in the past. I think that it incorporates the court's comments and I do believe has a significantly better chance than previous initiatives of actually passing and which is why of course you saw an initial investment from us and our partners are very much involved as well and we would expect and hope that other uh folks particularly those who would like to also be leaders in this industry in the florida market would step up and participate as well um and we'll be providing updates on that as um as that as that group continues to come together and as a result to pa versus florida That's a tough one. I mean, I think in Florida, we've got a date certain with, you know, a potential ballot initiative coming in November of 2024. The question is, right, if the legislature in Pennsylvania, who has signaled, I would say, more of an appetite or more of an opportunity to potentially get something done on the legislative side, as opposed to just a ballot initiative side, decides to lean in and take up the issue now that we see surrounding markets in the Northeast launch. So I'm hopeful and would love to say that I would love a one-two punch with Pennsylvania coming perhaps slightly in front of Florida, but obviously that's very political and remains to be seen.

And Pablo, I'll just add additional color on your Florida question. So we mentioned in our prepare and march how our revenue increase was driven by retail pickup. We see pickup in Florida. Obviously, we don't segment our business and get the exact amounts per state, but we do have a pickup in the Florida market in the quarter.

Thank you.

The next question comes from Russell Stanley with Beacon Securities.

Please go ahead.

Good morning. Thank you for taking my questions. First one is just around plans to sell more branded products to your own retail. Just wondering how much room you think you might have to do that when you consider the need to balance, you know, having a variety of products from third parties in those stores in order to drive traffic. How much, you know, how do you think about that and how much more room do you have, do you think, to expand branded sales in that context?

Yeah, I mean, I think that clearly in Florida, right, it's 100% required per the market. So we don't have any room in Florida. In our other markets, we do have room, and we are seeing incremental increases in branded products through branded retail. There was actually some pretty good pickup recently in Pennsylvania where Again, as we strategically shift away from wholesale and are focusing on putting, again, some of those really strong performing recently launched brands in through our affiliated retail channel there. In Arizona, there absolutely is opportunity as that capacity comes online. And as we launch brands effectively from the combined portfolio, through Arizona. So even though our combined portfolio does include, of course, Legacy Harvest brands, there wasn't as much of a focus on, I would call it, skew refreshing and, you know, really ensuring that those brands had the product placement and the education and availability to customers in those Arizona retail locations as we think is appropriate. in that market. And so I would say that there absolutely is incremental improvement in both of those markets, as well as in Maryland, where we are focusing as well ahead of adult youth launching in Maryland to, again, connect with customers over and through our branded product portfolio.

Great.

And just my second question, and I think I ask this on every call, but can you give us an update on Georgia and how you think the licensing situation can play out and what the timelines might be? I know it's a crystal ball, but got to ask. Thanks.

Yeah, no, absolutely. We remain very enthusiastic about Georgia. We are happy that the protest period has officially concluded. And so now we are, that part of the process, if you will, should be behind us as we wait for direction from regulators. We are moving forward in Georgia to be prepared both on the cultivation and production side of things as well as site location and dispensary positioning. So, you know, very much looking forward to launching in that market as soon as we're able to.

Great. Thanks for the color. I'll be back in a few. Yeah.

Thanks, Ross.

Our next question comes from Scott Fortune with Ross Capital Partners. Please go ahead.

Yeah, good morning, and thanks for the question. Just a little bit follow-up on Arizona and addressing that market can provide a little more color. Now that you have full production, although you're not adding capacity there, but it's a very suitable market to influence the California market. black market over there and pricing side. But you mentioned you have a number of ways to go as far as bringing your own brands into the house. But now you shift over kind of to the brand and selling there. Can you provide a little more color there? on the margin profile for Arizona in light of your long-term margins targeted for that state and with the pricing going on in Arizona? How do you see kind of you ratcheting up the margins within that state with Harvest and the Trulieve brand? So that would be helpful.

Sure. This is Steve. What I would say is the opportunity exists to shift. the percentage of internally produced product that is sold through our retail platform. And the reason why that opportunity exists and why that's an opportunity that we want to capitalize upon is because when you, I mean, it's obvious, but if you are selling your own internally produced products, the margins tend to be higher. The methods that we would use to increase that percentage is really include how we're launching those products and how we're speaking to consumers as we bring those online. Part of all of that is the investment that we've made previously in additional capacity, and we continue to make in additional capacity. And so all of that flows through in conjunction with our marketing efforts in order to ultimately raise margins in that market.

Okay. I appreciate the comment. And then maybe provide a little color on what you're seeing on the, you know, with the tougher macro environment and tight capital in the cannabis industry here. What type of valuations or opportunities are you seeing on the M&A front? And, you know, there's other companies digesting assets there. Just kind of a quick update on kind of the M&A opportunities from an overall market standpoint.

So we're obviously monitoring activity or opportunities in a number of different markets. For us, we have a pretty strict criteria about what meets something that makes sense for Trulieve. We haven't shifted that criteria, nor will we shift that criteria. We are starting to see better opportunities, and we are starting to see some distressed assets. And that's aided by continued pressure in the capital markets and the inability for operators to raise capital. We'll continue to provide opportunities for folks like us who have the ability to make acquisitions. We will continue to see those opportunities, and sooner or later we will see some opportunities that make sense, and we will close on them.

Thank you. I'll jump back in the queue.

Our next question comes from Vivian Ather with Cowan & Company.

Please go ahead.

Hi, thank you. Good morning. I wanted to turn back to the guidance revision, please. Looking at the back half of the year, your comps are obviously very different between the third quarter and the fourth quarter. So, Alex, can you please dimensionalize how you're expecting the shape of the back half? Thanks.

Yeah, I mean, as we said, you know, lack of visibility into what the back half will bring. And Kim mentioned that the... the holiday season will be a leading indicator. But given at this point in time and where we are year to date, we thought that the revision was appropriate. We'll continue to monitor that, hoping for some pickup naturally. But it's really the basis really monitoring consumer trends and the lack of what the second half will be, particularly around the holiday season.

Okay. Let me follow up. Go ahead. Sorry, Kim. No, go ahead. Well, I just wanted to follow up on what Alex just said, hoping for a pickup nationally. So maybe you guys can talk a little bit about how much more degradation you expect to see either from a price deflation standpoint, from a negative mix standpoint, because there's a real possibility that you don't grow your top line in the fourth quarter.

Hey, Vivian. So a couple of things. Number one, as I mentioned, I think a couple of times now, there are a couple of things happening. So we've also got on top of this the fact that we are strategically making pivots within the portfolio that we believe are the best for our business, not just now, but for the long term from a positioning perspective. So you have that happening, which, of course, will have revenue impact, right? We're taking, you know, less than optimal, if you will, from a flow-through perspective, assets and markets and jettisoning them, which, of course, we won't have then the top line, even though in some cases they were negative contributors through the rest of the flow. So we have that happening, right, on top of the fact that we have what we would call, I think along with most retailers in America, would call an uncertain macroeconomic overlay. What we are seeing and what we are encouraged by, as we've said, is that we are still seeing strength in Florida, which of course is an outsized contributor to our portfolio. We're also continuing to see opportunity for higher quality of earnings in our other core markets. And so I would say that, sure, there could be, I guess, on both sides of the equation, I think we're managing strategically through those and it was illustrated in the fact that, look, I mean, we had strong organic growth in both Q1 and in Q2. Of course, our state mix is different than others and, you know, but again, I think that, you know, timing is interesting and we're setting up for catalysts that we think will be outsized opportunities for us as we look ahead. in other markets that are going to be coming online and either coming online or transitioning to adult use in the, call it near to midterm. So, you know, again, feel good about where we are in terms of our team's performance, feel good about our connectivity to our customers, feel good about being able to shift, mix in response to customer demands and the realities of what our customers are facing. One note that I will say is that I don't think, and maybe this is a bit different from other segments, that I think sometimes there is this idea that a value-branded product has significantly lower margin than a premium-branded product. That's not always the case. So, you know, I think that, again, we feel that proactively managing mix and, again, making sure that we're also being respectful of where our customers are, we have the best optionality to be able to respond to those trends across our platform. Okay. Fair enough.

Our next question comes from Eric DeLauriers with Craig Callen Capital Group.

Please go ahead.

Great. Thank you for taking my questions. So on the wholesale front, obviously reallocating to retail in a big way certainly makes sense. For the business that you are keeping in the wholesale channel, how should we think about the mix of bulk versus branded? And of branded sales, can you help us understand your thinking of which brands you sell in wholesale versus reserved for your retail stores? Thank you.

Yeah, thanks, Eric. The answer to that question does depend on market a bit. As you can imagine, demand for certain products is stronger depending on what folks are seeing across that particular market and where customers are, what brands and what segments customers are responding to. Certainly, I would say significant focus on finished good products vis-a-vis bulk on a wholesale channel going forward. We do have strategic allocation with respect to, you know, it's not necessarily a complete branded product, but we will allocate, for example, certain strains, we'll reserve certain releases, et cetera, for our retail locations. to give, again, a more elevated experience and a reason for folks to come through our retail to get first dibs, if you will, of desirable SKUs and desirable products. In Pennsylvania specifically, I can tell you that we absolutely are considering and we'll be executing on a strategy there to have certain high-performing SKUs exclusively available at our retail locations in that market strategically through the back half of the year.

Okay, that makes sense and helpful. Last one from me. So just along these lines of increasing the mix of vertical, you know, certainly makes sense. And from what I'm hearing, this is basically the expectation for, you know, the foreseeable future. But as we kind of look at longer term at the wholesale opportunity, especially in states where the number of retail stores is capped, how do you think about the tradeoff between the sort of EBITDA margins and then growth in absolute dollars? And maybe just to ask directly, what would it take for Trulieve to materially increase volumes through the wholesale channel down the road? Thanks.

Yeah, I think that, you know, we're just looking at, I mean, we're going to be looking at trends and tracking behavior, right? Certainly, right now, we believe that given the fact that we are the market leader in these markets, vis-a-vis our retail platform, it makes sense given current macroeconomic environment to shift more branded products through branded retail. That being said, we always have, and it's important for us strategically to have optionality within our platform. So when we talk about having the ability to dial up production capacity, when we talk about the continued investment in R&D and innovation, I think it's important to note that we have over a thousand SKUs that we're manufacturing and that we have the ability to bring into market. So, again, our ability to pivot into segments that are showing strong growth patterns exists. We absolutely will be able to do that. We are and have always been very focused on having a modular growth trajectory. And what that means is that we have additional capacity kind of waiting in the wings, if you will, that we can ramp up very quickly so that we can be in a more proactive position or posture when trends begin to begin to reverse. So, you know, again, we are, I think, a company that looks strategically at what the markets are presenting to us. And certainly when you overlay the fact that we, along with all cannabis companies, have additional pressures, 280, et cetera, it's important for us to have that optionality and that ability to pivot and be responsive to market to market trends while not getting too far over our skis, just given you know, the dynamics that are specific to the cannabis industry.

Very helpful. Thank you.

The next question comes from Ty Cullen with Ape Capital.

Please go ahead.

Hi. Thanks for taking my question. I'll keep it to one in view of the time. It looks like patient growth in Florida has slowed down quite a bit in Q2 and particularly in recent weeks in Q3. I know there's some ebbs and flows and maybe some seasonal influences there, but do you think the market is getting closer to saturation here? And is that a leading indicator for sales growth into, you know, 2H and 23? And I'm curious what your sort of embedded expectations are in terms of patient growth for the second half and the updated guidance.

Yeah, no, thank you for the question. It's something obviously that we monitor very closely. And hypothesis is that that may be an area that we're actually seeing inflation show up in terms of pressure on wallet in Florida. It is approximately $200 to get a medical card in the state of Florida. That being said, as you mentioned, it's been very recent in terms of two, three weeks in terms of a trend. a little early to see how much we should extrapolate into back half, but certainly something that we are continuing to keep an eye on. The other thing that I would say is that the team continues to do a fantastic job of gaining more than our fair share of new patients and initial patients into our stores in Florida. But obviously that patient growth number is an important number for us to continue to monitor and to back off.

Great. Thanks, Ken. Yep.

This concludes our question and answer session. I'd now like to turn the conference back over to Christine Hersey for any closing remarks.

Thank you all for your time today. We look forward to sharing additional updates on our progress during our next earnings call in November. Thank you again and have a great day.