Trulieve Cannabis Corp

Good evening, everyone, and welcome to the Trulieve Cannabis Corporation third quarter 2022 financial results conference call. My name is Jenny, and I will be your conference operator today. 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 Trulieve. You may begin.

Thank you. Good evening, 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 afternoon, we reported results for the third quarter of 2022. A copy of our earnings press release and 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 An archived version of today's conference call will be available on our website later today.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 fact 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 filings with the Securities and Exchange Commission. including Item 1A, Risk Factors, of the company's annual report on Form 10-K for the year ended December 31, 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 United States 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 TRULY'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 is an exhibit 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 evening, everyone, and thank you for joining us today. We are pleased to report third quarter results and provide an update on our business. Before I discuss our results, I would like to briefly address Hurricane Ian and Tropical Storm Nicole. First and foremost, I would like to say a special thank you to all of our employees who worked tirelessly during Hurricane Ian to serve patients and restore our business operations. especially those who contributed to recovery efforts despite being personally impacted by the storm. Our team's experience and disaster preparedness plans, coupled with our sophisticated logistical and technological capabilities, contributed to the effective management of operations before, during, and after the hurricane. Cross-functional teams assembled to monitor storm developments and dispatch response efforts. We deployed mobile tech and operational units to provide cell service, deliver power generators and fuel, and make necessary repairs to get stores back online to serve patients with minimal disruption. Through the hard work and commitment of our team, within six days, we were able to reopen 59 of the 64 stores that were closed, resulting in a $3.3 million impact to revenue in the third quarter. In support of recovery efforts, we rolled out several initiatives, including a roundup campaign and a volunteer program to aid communities across Florida, and an assistance fund and supply relay program to support employees. Trulieve has committed to matching contributions from both programs. We are fortunate to be in a position to provide resources to our employees and the communities we operate in during this time of need. As we sit here today, Tropical Storm Nicole is making landfall on the east coast of Florida. We closed 16 locations earlier today in advance of the storm and will be working diligently to restore normal business operations while prioritizing employee safety. Updates on store closures and reopenings can be found on our blog, available at trulieve.com. Moving on to last night's midterm elections. We would like to extend congratulations to the citizens of Maryland for successful passage of recreational cannabis. We are looking forward to serving recreational customers in the state through our vertical operations, which include three retail stores, showcasing our full suite of internal brands. Turning now to our third quarter results. Trulieve achieved third quarter revenue of $301 million, up 34% year over year. Revenue decreased by 6% sequentially, impacted by macroeconomic conditions, foregone revenue due to the strategic shuttering of non-core assets, regulatory changes in Florida, and the impact of Hurricane Ian. Third quarter adjusted gross margin remained relatively flat quarter over quarter at 57.1% compared to 57.6%. Adjusted gross margin remained strong despite lower revenue due to increased utilization at our new Florida indoor cultivation facility and flat promotional activity company-wide. Adjusted EBITDA was $99 million, or 33% margin, representing our 19th consecutive profitable quarter. Operating cash flow was negative $22 million in the third quarter, an improvement of $23 million compared to the second quarter. We anticipate operating cash flow will be positive in the fourth quarter, and we will generate free cash flow in 2023. We exited the quarter with $114 million in cash. Truly's strong financial profile remains a key differentiator within the cannabis industry. In the current environment, access to capital at attractive rates is a strategic advantage, truly within an enviable position among peers with term debt at a weighted average interest rate of 8.3% and no significant current debt maturities. We recently secured a commitment for $70 million in real estate-backed financing at a favorable rate compared to our existing debt. We expect this financing will close before year-end. Even with greater access to capital versus peers, We will continue to exercise restraint with prudent allocation of capital in accordance with our long-term strategy. We have clearly demonstrated our ability to safeguard capital by avoiding costly investments in markets like New York that offer little line of sight to delivering returns. At the same time, we are willing to divest duplicative and cash-dilutive assets where appropriate to maximize long-term cash flow. We will continue to focus on executing while tuning out the noise. Looking ahead, we are prepared to uplift to a U.S.-based exchange once allowed. We are nearing our two-year anniversary as an SEC-registered company with financials prepared in accordance with U.S. GAAP, having completed an S-1 registration in early 2021 and then advancing to an S-3 registration earlier this year. In addition, we believe our diverse board of directors, with expertise across a variety of sectors, including beverage, consumer, and hospitality, is well-equipped to provide sage advice as we navigate the transition to a U.S. exchange. We expect the U.S. listing would afford Trulieve significantly greater access to capital, increased liquidity, and broader reach among investors. Moving to our retail operations. During the third quarter, our industry-leading retail platform grew to 176 locations with market-leading positions in Arizona, Florida, Pennsylvania, and West Virginia. We opened 11 new stores in Arizona, Florida, and West Virginia and relocated one Florida dispensary. We closed two underperforming locations in California permanently and and closed one dispensary for relocation in 2023 in Pennsylvania. We are on track to meet our guidance of 25 to 30 new store openings and up to six store relocations in 2022. Retail sales declined by 5% sequentially to $284 million, accounting for 94% of third quarter revenue. Generally, trends observed exiting the second quarter continued with tightening economic conditions influencing retail results in different ways across our markets. Retail performance in Florida faced outsized pressure this quarter due to a number of factors. First, lower net patient growth, followed by the implementation of rolling dosing limits, and finally Hurricane Ian. Net patient additions declined to approximately 1,500 per week in the third quarter, bottoming at the end of July and rebounding somewhat at the end of the quarter. Decelerating patient growth reflects the reversal of COVID-related trends where program enrollment spiked due to greater access through telemedicine, coupled with an increase in consumption hours and household income bolstered by stimulus dollars. We estimate the total cost to obtain a medical card through renewal or initial entrance is approximately $200, which may be high given the current inflationary pressure on household spending. Since quarter end, net patient growth has since rebounded to approximately 2,100 patients added per week. Second, at the end of August, daily dosage and 70-day supply limits took effect. While only a low single-digit percentage range of patients were estimated to be affected in practice by these limits, patients adopted a scarcity mindset, pulling back on purchases to reserve supply capacity for the future. Following the implementation of the new limits, TRULY rolled out an online tool to provide patients with real-time data showing available milligrams under each category as items are added to online shopping carts. We also worked with physicians to ensure that they understood the new limits and how to set exceptions to limits for patients where appropriate. Slower patient growth and rolling dosage limits added pressure on volumes dispensed in early September on top of an already stressed economic backdrop. In response to the market slowdown, several competitors began aggressively discounting to drive traffic, offering mass discounts of 50% and higher storewide. Initially, Trulieve also increased promotional activity, but as a result of our ability to mine data and glean insights from customer behavior, we quickly adapted our approach. Data revealed areas for improvement to our strategy, and we were able to quickly incorporate this data feedback, doubling down on brand and product segmentation to reinforce our value proposition in lieu of indiscriminate store-wide discounts. We reset our focus on delivering clear and consistent messaging for each product tier while maintaining a disciplined approach to discounting. For premium customers who are interested in new and innovative products, we push information on the timing and availability of new and exclusive product drops. Within our mid-tier segment, we pulse promotional activity, offering periodic discounts on specific products to highlight brands or move inventory. For value customers, we offer high-quality products at everyday low prices, affording customers consistency without having to hunt for deals or wait to time purchases. As an example, in September, we reintroduced Roll 1 Indoor Flour with an everyday low price of $20 per eighth. Utilizing this multi-layered strategy, we are able to meet value customers where they are while preserving brand integrity for mid- and premium-tier products. At the same time, we improve the overall customer experience with greater transparency on quality and pricing. Following these changes in mid-September, our retail performance began to stabilize and improve. Just as these changes were beginning to yield positive results, Florida was hit by Hurricane Ian. As I noted at the top of the call, our advanced capabilities and depth of experience allowed us to quickly reopen stores closed due to the storm. While our team was working to restore operations, we provided timely updates on store openings, modified business hours, and alternative store locations specifically to customers in affected areas utilizing targeted messaging. Subsequent to quarter end, our retail performance has been steady in Florida, aided in part by improved patient growth, patient and physician acclimation to new supply limits, and our refined promotional strategy. We are currently positioning for the holiday season, which historically has seen larger volumes and higher promotional activity. Within the current macroeconomic environment, visibility is limited into year-end. Trulieve has garnered an outsized market share in Florida, with an average of 50% market share in flour over the past three years. While our size and exposure in our home state of Florida negatively impacted third quarter results, we expect our market leading presence to be a major driver of outperformance in the years ahead. Florida remains the largest growing medical market in the U.S. with tremendous future potential. Including adult use consumption, Florida is poised to be the largest legal U.S. cannabis market with 22 million residents and 130 million tourist visits per year. Truly remains an active supporter of the Smart and Safe Florida campaign to add an adult use initiative to the November 2024 ballot. The campaign has already gathered over a quarter of the total signatures required, which once validated by the Florida Division of Elections, will trigger a review by the Florida Supreme Court prior to ballot placement. Signature gathering efforts are ongoing and thus far have tracked ahead of anticipated timelines. Assuming success, we estimate the Florida market could reach up to $6 billion following expansion to include adult use sales. Given our unrivaled scale in production and retail footprint, we are poised to retain our leadership position in this massive market. Turning now to Pennsylvania. As we highlighted during our second quarter call, our customers continue to shift towards value products. In the third quarter, sales of premium products were flat, while mid and value tier units increased. Throughout this year, we have been increasing our production of branded products, including several value products with the RO brand. With these efforts, branded products revenue almost doubled in the third quarter compared to the first quarter of this year. We will continue to expand our distribution of branded products through branded retail in Pennsylvania and expect to realize improved performance as these brands gain traction in the market. And finally, in Arizona, third quarter retail results declined sequentially due to both a seasonal slowdown and pricing pressure across the market. Over the hot summer months and into the fourth quarter, Trulieve increased promotional activity to sell through legacy inventory within this challenging backdrop. We successfully depleted the bulk of legacy inventory and promotional activity has been reduced in time for a seasonal uptick in traffic ahead of the holiday season. Concurrently, we began a broad initiative to increase the sale of internally produced products through our retail platform. Since August, we have opened three new Trulieve branded dispensaries. Early performance at these new locations has been encouraging. Recently, we rebranded a dispensary in Glendale and will continue to rebrand Arizona retail locations and launch branded products over the next year. In wholesale, revenue declined 24% sequentially to $16.5 million, continuing declining trends from the second quarter. During the third quarter, we made the strategic decision to exit wholesale operations in Nevada, where the footprint was not efficient and the previous harvest operation was cash dilutive. Wholesale markets generally remained under pressure as weaker trends persisted throughout the quarter. Consequently, wholesale customers are carefully managing working capital and inventory levels due to softer market conditions. We will continue to manage production mix and product allocation to the wholesale channel across key markets such as Arizona, Massachusetts, Maryland, and Pennsylvania. Focusing now on supply chain. Distribution across our retail and wholesale network is supported by over 4 million square feet of cultivation and processing capacity. In Florida, none of our cultivation, manufacturing, or processing operations were affected by Hurricane Ian. During the third quarter, we continue to ramp production at our state-of-the-art indoor 750,000 square foot cultivation facility. We expect the facility will be fully planted at the start of the year, with initial harvest and optimization efforts continuing into the spring. As we ramp this new lower-cost production facility, we have begun to pull older and less efficient capacity offline. This banked capacity will remain available to ramp again as needed to meet future demand. During the third quarter, we produced 9 million finished good units, compared to $10 million during the second quarter. During the fourth quarter, we are further lowering production and capacity utilization across markets to match current demand more closely and reduce inventory. Given the lead time required for changes in production to take effect, we expect the majority of these efforts will be realized downstream in Q1 and Q2 of 2023. In Maryland, we are well positioned to serve recreational customers without significant capital expenditures. We continue to make progress expanding our branded product portfolio in Maryland with the launch of Roll 1 concentrates and Modern Flower Vapes in the third quarter. In September, Trulieve was awarded one of only two Tier 1 production licenses in Georgia. Production commenced following receipt of the award, and we expect to complete our first harvest within the next few weeks. We look forward to opening dispensaries and serving patients in early 2023. And just last week, we were awarded a cannabis cultivation license in Connecticut, which allows for two adult use dispensaries. We plan to expand our operations in Connecticut in 2023, including the relocation of our Bristol dispensary ahead of recreational sales. Looking ahead, as the industry matures, we believe the strongest companies will continue to separate from the pack. We believe the next industry phase, which we call Cannabis 2.0, will be triggered by regulatory reform and defined by a more open and diverse competitive landscape spurring the need to build meaningful and lasting customer relationships. We expect these changes will provide an opportunity for Trulieve to differentiate itself within a more robust industry ecosystem. Operators with scale, distribution and technology will be better positioned to meet the needs of an increasingly sophisticated marketplace. Trulieve has been preparing for this next phase of industry development for several years. Our regional hub structure, anchored by leadership teams within cornerstone markets, provides a solid foundation. Our experience building scale and depth has yielded best practices to achieve lower production costs and greater efficiencies throughout our supply chain and retail operations, as evidenced by our 750K facility, which we began designing in 2019. Trulie's expansive distribution network, anchored by our industry-leading platform, provides an opportunity to directly connect with a customer, create brands, glean valuable insights into customer segmentation, and test methods to define and perfect the customer journey. Our technology platforms and scaled solutions are essential to strategic growth initiatives, including developing omnichannel capabilities and enhancing digital platforms. One concrete example includes our successful implementation of SAP in 2020, a world-class ERP system that we are continuing to optimize while adding modules for warehouse management, integrated business planning, and human resources. We will continue to expand these capabilities with the advent of Cannabis 2.0 in mind. While the third quarter presented various challenges, our team was able to adapt as necessary to course correct and stabilize the business headed into year end. Despite short-term headwinds in the economy and core markets, we believe the long-term prospects for cannabis have never been brighter. With increasing mainstream support and meaningful regulatory reform on the horizon, tremendous growth opportunities lie ahead for legal cannabis in the U.S. As our industry continues to evolve, I believe our long-term strategic focus and commitment to investing in cannabis 2.0 will further differentiate Trulieve among peers. With that, I'll turn the call over to Alex for more details on our third quarter results.