Trulieve Cannabis Corp

Good morning everyone and welcome to the Trulieve Cannabis Corporation third quarter 2023 financial results conference call. My name is Danielle 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, Vice President of Investor Relations for Trulieve. You may begin.

Thank you. Good morning and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer, and Ryan Bluss, 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. This morning, we reported third 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.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 An archived version of today's conference call will be available on our website later today.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 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, as well as our periodic quarterly filings. 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'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 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. We are excited to share our third quarter results and provide an update on the considerable progress made on our plan for 2023. Before diving in, I want to emphasize what an incredibly exciting time this is for the industry and for Trulieve. Several significant catalysts are on the horizon, including potential rescheduling of cannabis to Schedule III, progress on broader federal reform, and adoption of adult use programs in markets such as Florida, Ohio, and Pennsylvania. For Trulieve, the timing of these developments couldn't be better. Just as the outlook for U.S. cannabis has brightened, all the steps we have taken to strengthen our competitive position are driving a meaningful improvement in financial results. Initiatives this year are focused on three pillars— cash generation, cash preservation, and investments to support long-term growth. Third quarter results clearly demonstrate the efficacy of our approach with better than expected revenue, lower expenses, reduced inventory, and improved cash generation. Our team has done a phenomenal job prioritizing efforts to deliver on our plan and set the stage for future growth. Third quarter revenue of $275 million exceeded guidance. Gross margin at 52% improved by 2%, demonstrating a balance between increased branded products through branded retail, promotional activity, cost reduction, idle capacity costs, and inventory reduction initiatives. GAAP SG&A expenses were further reduced this quarter, reflecting the benefit of multiple cash preservation initiatives across the organization. Adjusted EBITDA was $78 million, or 28% margin, representing our 23rd consecutive profitable quarter. Our relentless focus on cash drove third quarter operating cash flow of $93 million and free cash flow generation of $87 million. Company-wide efforts to improve efficiencies, lower expenses, and reduce inventory resulted in tax-adjusted cash flow from operations of $184 million year-to-date. Before we move on to our balance sheet, I'd like to touch briefly on our tax position and strategy. Following Hurricane Idalia, based on our location, we were granted an extension to make estimated tax payments for Q3 and Q4 in February 2024. In a separate development, Trulieve filed amended federal tax returns for several entities in October for the years 2019, 2020, and 2021, claiming a total refund of $143 million for taxes already paid. The amended returns are supported in part by a challenge to Trulieve's tax liability under Section 280E of the tax code. While the refund claims are under review, Trulieve intends to make tax payments as a customary U.S. taxpayer without tax liabilities associated with 280E. Turning now to our balance sheet. Cash at quarter end was approximately $200 million. With significantly improved cash generation, we have proactively taken steps to reduce debt. During the third quarter, we completed an open market purchase of $57 million of our 2026 notes at a 16.5% discount, for 47.6 million. Yesterday, Trulieve announced the planned early redemption on December 1st of $130 million in senior notes due in 2024. With this combined reduction in debt, we expect to realize savings of approximately $20 million in interest expense that would have been paid through maturity. Trulieve remains aligned with our shareholders and is committed to strengthening our balance sheet with non-dilutive measures while investing in growth initiatives. Investments to support growth have been designed to provide customers with access to legal cannabis products while delivering exceptional customer experiences. The investments made over the years to support this mission have positioned Trulieve as the largest legal cannabis retailer in the world. Investments made today are reinforcing our leading retail position while preparing for significant growth in traffic, units sold, and customers served. These investments are focused on three primary areas. One, perfecting the customer experience. Two, delivering high-quality products. And three, expanding access and distribution of legal cannabis. One measure of customer experience is customer retention, which remains steady quarter over quarter, with 65% of customers company-wide and 74% in medical-only markets returning. Trulieve aims to build lasting brand equity for the retail platform and branded products across the loyal customer base. In the coming months, we are launching new customer-facing initiatives, including a revamped website designed to prioritize mobile access and direct-to-consumer convenience, as well as effortless product exploration, position discovery, and store location assistance. In addition, we look forward to launching our revamped loyalty program, beginning with Arizona, before year-end. Another area that Trulieve continues to invest in is our data platforms. Maintaining great customer relationships requires clear and effective messaging regarding products and promotions. Over a year ago, Trulieve began utilizing a proprietary customer data platform for targeted outreach and tailored messaging to customers. With this tool, we are able to make specific product recommendations based on prior purchasing behavior. The CDP also identifies the best time of day for messaging based on prior customer interactions and response rates. With embedded machine learning and artificial intelligence capabilities, as the platform continues to expand, the tool is learning to provide more sophisticated approaches and solutions. As traffic and customers served across our network increase, the platform becomes more useful in helping to refine and advance targeted outreach. A second key driver for customer satisfaction is consistently having high-quality branded products available in the right place at the right price. Trulieve sells the highest volume of branded products through branded retail in the U.S., reaching over 11 million units of internal products sold, excluding wholesale, during the third quarter. We continue to see growth in overall unit demand across our markets, supporting our thesis that cannabis continues to gain mainstream acceptance and adoption. In the current economic climate, mid- and value-tier brands Modern Flower and Roll One have gained popularity, contributing to higher sales of internal branded products. Interestingly, demand for premium products has remained relatively steady, reflecting the strength of our premium brand portfolio. We continue to meet evolving customer preferences, including production of our best-selling brands, while introducing new form factors and sizes across our markets. Following years of investment in production, Trulieve has amassed over 4 million square feet of supply chain capacity. Our capacity is not currently fully utilized in all markets, providing significant flexibility to meet growing demand with minimal capital investment today and in the years ahead. With major investments in production capacity largely completed for the near term, our team is focused on driving efficiencies and yields at our existing sites. Our new state-of-the-art 750,000 square foot indoor cultivation facility in Jefferson County, Florida is fully built out and continues to ramp. Refinements to improve production will continue through year end. Progress made to date has been fantastic, with current yields outperforming expectations by 10%, making this our top-performing facility company-wide. In addition, the cultivation team has been killing it, with average potency at this site currently coming in at 28% THC. As a reminder, as this facility has ramped, some legacy capacity was temporarily idled to align production with demand. Given the progress made in our inventory reduction plan in Florida and continued growth in the medical market, we have restarted some idle capacity during the fourth quarter. Higher yields at the new site and increased capacity utilization will help meet year-end holiday demand. Finally, at Trulieve, providing customers with access to legal cannabis products is at the heart of what we do every day. Investments to expand our retail and wholesale distribution network while opening new markets are ongoing. Today, Trulieve has the largest retail network of 190 dispensaries, representing market-leading positions in Arizona, Florida, Georgia, Pennsylvania, and West Virginia. Our growing retail network provides customers with greater convenience and ease of access to our high-quality branded cannabis products. In the third quarter, we added new locations in Florida, Georgia, and Ohio, and launched recreational sales in Maryland. Investments made by Trulieve in Georgia exemplify our commitment to expanding patient access to cannabis products. We opened our fifth Georgia medical dispensary in September. Outreach and education efforts across the state are ongoing to raise awareness of the program and patient enrollment. Last week, we launched product distribution through independent pharmacies, with our fifth pharmacy commencing sales today. Early progress on this initiative has been encouraging and we are optimistic that this unique distribution channel will provide Georgia patients with more convenient access to products. With the launch of recreational sales in Maryland, wholesale revenue doubled compared to the first quarter. While in retail, third quarter traffic increased 235% and sales per store increased 175% sequentially. Our team did a fantastic job managing the increase in traffic while serving medical patients and adult use customers. In the third quarter, we increased production at our Hancock facility to meet the increase in both retail and wholesale demand. In Ohio, Trulieve opened its first medical dispensary in Columbus in July. Just this week, Ohio voters passed a ballot measure to permit adult use sales. Pending final regulation and regulatory approvals, we plan to serve adult use customers at this location, marking our fifth adult use date. At Trulieve, our commitment to advocacy is central to our mission. We are proud to be a driving force within the industry, working diligently to expand access to cannabis for medical patients and recreational consumers in new and existing markets. Over the next couple of years, we expect to realize significant growth as state-level catalysts continue to come to fruition. Two of our top three markets, Florida and Pennsylvania, may launch adult use programs by 2025. In these markets, Trulieve currently operates 149 medical dispensaries and has over 3 million square feet of production capacity. Given our scale and leading retail positions in both markets, alongside our financial strength, we are uniquely situated to accelerate growth when adult use launches. With federal and state catalysts on the horizon and improved performance across the organization, we are carrying recent momentum forward. As we approach year end, our team remains focused on our three primary objectives, cash preservation, cash generation, and investments to support growth. Our industry-leading retail network, scaled operations in attractive markets, and balance sheet place Trulieve in an enviable position as the industry moves forward towards the next phase of accelerated growth. With that, I'll turn the call over to Ryan.