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 An archived version of today's conference call will be available on our website later today.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.