Trulieve Cannabis Corp

Good morning, everyone, and welcome to the Trulieve Cannabis Corporation fourth quarter and full year 2023 financial results conference call. My name is Rocco, 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 Wes Gettman, 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 fourth quarter and full year 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 An archived version of today's conference call will be available on our website later today.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 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 31st, 2023, 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 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. This is an incredibly exciting time for Trulieve. We entered 2024 in a position of significant strength, just as the outlook for meaningful catalysts brightened. By the end of this year, we will have greater clarity on two of the biggest events for our industry, rescheduling and Florida adult use. The DEA is expected to make a recommendation on the classification of cannabis any time now. In Florida, the adult youth initiative is awaiting a court opinion for inclusion on the ballot this November. Either of these catalysts alone would be significant. Given our cash position and outsized market share in Florida, we are best positioned to realize a tremendous potential upside. However, it should be noted that without any catalysts, our base business remains strong and we are poised to build upon recent momentum. Having completed the lion's share of inventory reduction and optimization efforts, We are operating more efficiently, making higher quality products, elevating performance in retail, and generating more cash from our existing core business. In 2023, we cut SG&A expenses by 14% to 34% of revenue. Full-year adjusted EBITDA of $322 million, or 29% margin, underscores our operational strength, alongside full-year cash flow from operations in excess of $200 million, driven by a significant boost in cash flow in the back half of the year. The fourth quarter was exceptionally strong, the best quarter of the entire year, underpinned by substantial improvements in revenue, gross margin, and adjusted EBITDA. Revenue increased 4% to $287 million. Strong holiday sales in the last six weeks of the year contributed to outperformance. Gross margin of 54% improved 2% due to lower production costs, targeted promotional activity, and reduced pressure from inventory reduction efforts. Adjusted EBITDA margins improved to 31%, representing our 24th consecutive profitable quarter. Fourth quarter operating cash flow was $131 million, and free cash flow was $122 million. In addition, we recently added two seasoned executives to the leadership team, CFO Wes Gettman and COO Marie Zhang, and we are already benefiting from their contributions. We exited this year as a much stronger company and have carried that momentum forward into 2024. where we will continue our relentless focus on incremental improvement. Before we dive deeper into results, I want to discuss state catalysts starting with Florida. To date, Trulieve has been the primary financial supporter of the Smart and Safe Florida Adult Use Campaign. We are proud to be at the forefront, driving this opportunity to expand access to cannabis in our home state. Currently, we are awaiting a decision by the Florida Supreme Court to allow the initiative on the ballot this November. The court has until April 1st to make a determination or the initiative will automatically be included. Once on the ballot, the initiative requires 60% voter approval in order to pass. We anticipate a robust voter education and awareness campaign will be required to ensure success in November. Legal cannabis in Florida could be a $6 billion market opportunity, effectively tripling from today's medical-only market. With 22 million residents and 138 million annual tourist visits, we believe Florida will be the best cannabis market in the world. Adult use in Florida would be the largest conversion in U.S. cannabis history, and our team is working diligently to prepare for this monumental event. Trulieve maintains outsized market share, with 21% of stores in Florida selling over 115% more flour than the state average, eclipsing all competitors. Given our ability to ramp idle capacity and fund additional investments, we expect to build upon our leading position at launch in May of 2025. From a production standpoint, we are positively thrilled with the performance of our new 750,000 square foot state-of-the-art cultivation facility in Florida. The site is fully ramped and consistently producing high-quality, high-potency products at scale with lower costs. We are realizing an average potency of 28% THC and 3% terpenes, alongside a 30% reduction in cultivation costs. This strategic asset continues to outperform our internal expectations, and we believe additional benefits may be unlocked as we continue to dial in production. In 2023, we idled legacy capacity as we ramped this new facility. During the fourth quarter, we brought a portion of our idle capacity back online to support increased customer demand. As demand increases alongside the Florida built-use opportunity, idle capacity will be restarted. Turning to retail, we were able to support higher traffic through a combination of increased staffing, additional points of sale, increased online orders, and express lanes. During the fourth quarter, we added four new stores in Florida, including our first dedicated express pickup location in Crawfordville. This efficient store concept is designed to provide customers with quick and convenient access to pickup orders. Early performance at this location has exceeded expectations and we will be opening more Express Pickup locations this year. Throughout 2024, we will be adding new locations in Florida, expanding our retail network to serve the growing medical market. Moving now to other adult use opportunities. A few weeks ago, the governor of Pennsylvania called for the state legislature to pass adult use legislation as part of his budget overview. The governor is aiming for an accident by July of 2024 with adult use sales launching on January 1st, 2025. Trulieve remains the leading operator in Pennsylvania with 20 affiliated dispensaries supported by three production sites. We are actively monitoring the progress in Pennsylvania and expect momentum will continue to build as nearby states adopt recreational programs. In Ohio, final regulations for the adult youth program are expected later this year with sales launching as soon as this fall. Trulieve operates one medical dispensary and may gain additional assets pending the outcome of ongoing litigation. We have reached a preliminary settlement agreement and expect our store count to expand with both operational and potential dispensaries. We will be in a better position to share additional information pending a final settlement agreement and adult use program details in Ohio. Shifting back now to our results and the current business climate. In 2023, we added 17 new locations in Arizona, Florida, Georgia, Ohio, Pennsylvania, and West Virginia, and launched recreational sales in Connecticut and Maryland. Today, Trulieve has the largest retail network of 193 dispensaries, serving as the primary conduit for our strategy to distribute branded products through branded retail. This year, we will complete the rebranding of all retail locations in Arizona to the Trulieve brand. In 2023, we sold approximately 45 million branded product units and gained traction with several of our brands, most notably Modern Flower and Roll One. From an operational standpoint, today we are running more efficiently with optimized assets streamlined processes, improved inventory levels, and lower production and operating costs. Adding to our strength from our improved competitive position, consumers are showing greater resilience. While it is too early to call a definite trend, signs of improving consumer health are emerging. Spending accelerated into year end with higher basket, trending up into higher price tiers, and greater trading up into higher price tiers, and greater willingness to participate in buy more, save more style promotions. This was evidenced by December traffic, which exceeded third quarter average traffic by 100,000. In addition, baskets were up in December in every market compared to every other month in the quarter, and BQ3 averages in total by 5%. Units sold during the fourth quarter increased by 4% sequentially. As our customer base continues to grow, we are adapting how we approach customer service and how we continue to motivate employees to maintain high service levels. During the fourth quarter, we piloted a revamped bonus program in Florida for our store general managers to incentivize favorable customer experiences. By rewarding specific outcomes for metrics, including net promoter score, overall satisfaction, wait time, and fulfillment times, compensation is appropriately aligned with our team's ability to deliver positive customer experiences. Based on the early success of this program, we're implementing this structure across our retail network this year. Our focus on the customer experience contributes to customer retention. During the fourth quarter, customer retention held steady, with 66% of customers company-wide and 74% in medical-only markets returning to stores. We aim to improve the customer experience and retention, reinforcing lasting brand equity for the retail platform and branded products across the loyal customer base. In January, we launched a new website in several markets built upon more advanced technology, which we call Web 2.0. This new web architecture provides greater functionality for users while supporting higher traffic and enhanced data capabilities. Building upon this upgrade, our revamped loyalty program rolled out in Arizona and Maryland and will be launching in other markets, including Florida and Pennsylvania soon. With a simplified reward structure, tiering designed to reward repeat purchases, and portability across markets, we expect this new program will attract and delight loyal customers. We plan to have all markets migrated to the Web 2.0 platform and refresh loyalty program this year. We remain committed to investing in infrastructure, technology platforms, and talent. These critical elements are necessary to solidify our competitive position today and ensure readiness for long-term success in this rapidly evolving industry. In summary, last year we successfully executed on our plan to reposition Trulieve ahead of the next growth cycle, just as we said we would do. We created a leaner organization that is ready to meet the opportunities ahead. With that, I'd like to turn the call over to our new CFO, Wes Gettman. Please go ahead.