Trulieve Cannabis Corp

Good morning, everyone, and welcome to the TrueLeave Cannabis Corporation second quarter 2023 financial results conference call. My name is Jason. I will be your conference operator today. As a reminder, this conference call is being recorded, and I would now like to introduce your host for today's conference, Christine Hersey, Vice President of Investor Relations for TrueLeave. You may begin.

Thank you. Good morning, and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer, and Ryan Lust, Interim 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 second quarter 2023 results. A copy of our earnings press release and PowerPoint presentation may be found on the investor relations section of our website www.trueleave.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 An archived version of today's conference call will be available on our website later today.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 forecasts. 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 31st, 2022. 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 the 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 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 financial 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. Thank you, Christine. Good morning, everyone, and thank you for joining us.

First, I'd like to welcome our Interim Chief Financial Officer, Ryan Bless, to the call. Ryan joined Trulieve five years ago and has been an integral part of our team. Turning now to our results. Demand for legal cannabis remains strong. In the first half of the year, Trulieve realized record traffic and units sold, proving the durability of our products and loyal customer base. Throughout this economic cycle, we have successfully pivoted and adapted our business to meet evolving customer preferences and strengthen our competitive position. Back in March, we outlined our plan to streamline operations while simultaneously making targeted investments in long-term growth initiatives. Measures taken to improve cash flow from the core business and focus resources towards unlocking potential in attractive markets are reflected in second quarter results. Recent wins include fully planting our new 750,000 square foot indoor cultivation facility in Florida, opening the first medical dispensaries in Georgia, opening our first dispensary in Ohio, launching recreational sales in Maryland, and advancing the Florida Adult Youth Ballot Initiative. Our team has done a phenomenal job executing on our plan, and we are carrying this momentum through the remainder of the year. Second quarter revenue of $282 million is in line with our guidance. Excluding deferred revenue, retail revenue increased sequentially by $3 million, driven by increased traffic and volume, partly offset by price compression. In Florida, volume increased by 21% in oil products and 9% in flour, with Truly selling 130% more oil and 150% more flour per store in the second quarter than the average competitor, contributing to higher revenue. Gross margin of 50% declined by 2%, primarily due to the reclassification of idle capacity costs from SG&A to COGS, resulting in tax savings of $4 million annually. Building upon the progress made in the first quarter, both GAAP and adjusted SG&A expenses were further reduced this quarter. Adjusted EBITDA was $79 million, or 28% margin, representing a 1% increase in our 22nd consecutive profitable quarter. Across our platform, actions to bolster our business resilience and solidify our industry-leading position are gaining traction. Trulieve pays taxes owed on time, which is a differentiating factor among peers. Year-to-date, tax-adjusted cash flow from operations was $98 million. During the second half of the year, we expect to realize additional cost savings as optimization efforts benefit financial results. In June, we exited additional California retail locations and began to wind down operations in Massachusetts to preserve cash and direct resources towards more attractive markets. In Florida, we have mothballed legacy production capacity to offset greater output from our new facility, leading to increased efficiencies and ultimately lower costs. In Arizona, additional steps to streamline production and distribution to our retail network are expected to yield greater efficiencies and support the relaunch of several branded products later this year. Capacity utilization alignment across other markets to match current demand, combined with higher sales of internal products, are expected to further reduce core business expenses. Truly sells the highest volume of branded product through branded retail in the U.S., reaching 11.6 million units of internal products sold during the second quarter. With the largest retail network of 186 dispensaries, supported by over 4 million square feet of production capacity, we are able to realize the benefits of scaled vertical integration. Large-scale production and distribution of branded products remains a distinct competitive advantage for Trulieve, resulting in more direct consumer contact, greater efficiencies, and lower operating costs. The flexibility to increase throughput to meet spikes in demand is an important differentiator that allows us to capture the upside during peak traffic. The power of our platform was on display during record traffic on 4-20 and 7-10 holidays, up 10% and 54% respectively compared to last year. Inventory drawdown of $22 million in the second quarter contributed to improved cash generation. Throughout the back half of the year, we anticipate further inventory reduction as we approach normalized steady state inventory levels. Our new 750,000 square foot indoor cultivation facility in Jefferson County is an important strategic asset. Once production is dialed in, we expect to achieve lower production costs in Florida, which we can use to buffer margins and provide additional savings for our loyal customers. Cash generation should improve in the second half with lower expenses and conversion of inventory to cash. As such, we remain on track to achieve our target of $100 million in operating cash flow and generate positive free cash flow this year. Cash at quarter end was $160 million. Trulieve has one of the highest cash balances in legal cannabis and additional unencumbered real estate that can be mortgaged at attractive rates. In the current environment, our cash on hand, cash generation, and access to capital place Trulieve among top tier operators and provide significant flexibility to address our near-term debt obligations. Trulieve remains the top cannabis retailer in the world, anchored by industry-leading retail positions in Arizona, Florida, and Pennsylvania. In the second quarter, we added new retail locations in Arizona and Pennsylvania, relocated one store in Florida, and opened the first medical dispensaries in Georgia. While it is still early days, we expect our business to grow alongside the program as new patients enroll and eventually new qualifying conditions and form factors are permitted. As one of only two operators in Georgia, we are eagerly awaiting new rules to allow registered pharmacies to distribute cannabis products across the state. In July, we opened our first medical dispensary in Ohio, which has 370,000 registered medical patients. In November 2023, voters in Ohio will have the opportunity to decide whether to permit adult use sales. With almost 12 million residents, we estimate the market could reach $2 billion in annual sales. In Maryland, recreational sales launched on July 1st. Trulieve commemorated the occasion with celebrations and specialty products, including homegrown clones, product bundles, and blue crab cush flour. As expected, we realized a meaningful increase in traffic and sales at our three dispensaries, alongside an uptake in our wholesale business. Traffic increased 200% and sales per dispensary increased 150% during the first month of recreational sales. Our team did a phenomenal job maintaining customer service standards with a sharp increase in traffic. With the addition of Maryland, we now operate in five adult estates, providing an opportunity to learn more about customer preferences and consumption patterns. Currently, 161 dispensaries, or 87% of our retail network, serve only medical patients. We expect to significantly grow our business as more of our markets expand to include adult use sales. With scaled operations and attractive markets with meaningful adult use catalysts such as Florida and Pennsylvania, we are uniquely situated to increase our loyal customer base and serve a broader audience. In Florida, the campaign for adult use has surpassed the required threshold with over 1 million validated signatures. The Florida Supreme Court has received briefs regarding the Citizens Initiative. As a reminder, the court can issue an opinion anytime between now and April 2024. With 22 million residents and 138 million annual tourist visits, we believe Florida will be a top legal cannabis market, reaching $6 billion in annual revenue. Given our 40% market share, scale in service, and ability to quickly flex up production with minimum investment, Trulieve is ready to expand its leadership position with this opportunity. In Pennsylvania, a bipartisan bill to establish adult youth sales was introduced last month. We remain optimistic that enactment of adult youth programs in nearby states such as Maryland, New Jersey, and New York will spur action in the Keystone State. With almost 13 million residents, we believe the Pennsylvania market could reach over 4 billion in annual sales with adult youth consumption. In the meantime, we continue to optimize production and retail operations. In the second quarter, we further refined our production mix gain new product approvals, and open a new affiliated dispensary. The percentage of our own branded products sold through our affiliated retail network reached 50% in the quarter, aided by the popularity of Modern Flower and Roll One. We plan to further increase sales of branded products through branded retail in Pennsylvania. Our retail-led strategy enables close contact with the customer and the ability to define and control the customer experience from end to end. By providing the right products in the right place at the right price consistently, we're able to grow a large, loyal customer base and build lasting brand equity. Customer retention data shows the efficacy of our approach, with 64% of customers company-wide and 74% in medical-only markets returning in the second quarter. Our refreshed website is slated to launch before year-end, improving customer satisfaction as we approach the busy holiday period. As our customer base and retail network grow, we are enhancing our data analytics platforms and improving customer communications. In the Southeast, we are utilizing predictive modeling tools and AI-driven recommendations for product affinity and timing of outreach. At the same time, we are further defining buyer personas to improve targeted messaging with our customer data platform, paid media, social media, and search engine optimization tools. Investments in systems and infrastructure to support future growth are ongoing. Demand for legal cannabis remains strong, and we expect to realize meaningful increases in traffic and unit growth over the next few years as we enter new markets and catalysts come to fruition. In preparation, we are adding foundational elements required to support additional scale and significant volume expansion. Balancing increased demand while maintaining customer service standards requires both planning and insight into evolving customer preferences. We have expanded our ability to gather customer feedback and are utilizing the data to inform our processes and customer approach alongside data collection to inform product development and demand planning. These tools allow Trulieve to garner a competitive edge today while preparing for a future defined by integrated commerce. With meaningful catalysts on the horizon, our team remains focused on cash preservation and generation as we expand infrastructure required to manage accelerated growth. With our proven ability to operate at scale, adapt to evolving landscapes, and strong balance sheet, I am fully confident in our team and competitive positioning. With that, I'll turn the call over to Ryan.