Trulieve Cannabis Corp. (TRUL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Trulieve Cannabis Corp. First Quarter 2020 Financial Results Conference Call. My name is Joanne, and I'll be your conference operator today. As a reminder, this conference call is being recorded. I would like to now introduce your host for today's conference, Ms. Lynn Ricci, Director of Investor Relations for Trulieve, you may now begin.

Thanks, Joanne. Good morning, ladies and gentlemen, and thank you for joining us today. On the call with me today are Kim Rivers, Chief Executive Officer; and Ryan Blust, interim Chief Financial Officer. Following our prepared remarks, we will open the call to questions. Before we get started, I would like to note that today's call is being recorded for the benefit of investors, individual shareholders, the media and other interested parties. Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Statements made on this call speak only as of today, and we assume no obligation to update any of this forward-looking information. Also our prepared remarks this morning reference non-IFRS financial measures in order to provide greater transparency regarding Trulieve. Any non-IFRS financial measure presented should not be considered an alternative to financial measures required by IFRS and are unlikely to be comparable to non-IFRS financial measures provided by other companies. Any non-IFRS financial measures referenced on this call are reconciled to the most directly comparable IFRS measures in the company's MD&A for the quarter ended March 31, 2020, as well as in the table at the end of our earnings press release. We believe that our profitability and performance are further demonstrated using these non-IFRS metrics. Please note that all dollar references are in U.S. dollars. This morning, we reported results for the first quarter of 2020. A copy of our news release, financial statements and MD&A may be accessed through the Investor Relations section of our website, trulieve.com, and were also filed on SEDAR. In addition, a webcast of today's conference call will be available on our website. Now I will turn this call over to our CEO, Kim Rivers.

Thanks, Lynn, and good morning, everyone. Thank you for joining us, and I hope everyone is staying healthy and well. I'd like to briefly cover our Q1 results and then offer a business update. Ryan Blust, our interim CFO, will give a financial overview of our Q1 results, and then I'll offer some closing thoughts and open the call to questions. For Q1 2020, we surpassed consensus for revenues and profitability, achieving $96.1 million in revenue, representing a sequential quarter-over-quarter increase of 21%. Our adjusted EBITDA was $49.4 million or 51%. We generated positive free cash flow, ending with cash and cash equivalents of approximately $101 million. Continuing our industry-leading profitability and maintaining a strong balance sheet are key components of our financial strategy. This allows us optimal financial flexibility to capitalize on both organic and expansion opportunities. Before I provide a business update, I want to share our gratitude for all of those on the front lines, especially our health care workers and all those providing essential services. Since we last spoke in April, we continue to focus on ensuring safe access for our Trulievers and providing a healthy work environment for our employees. We implemented special store hours for immune compromised patients, launched new offerings and pilot programs, started curbside pickups, dedicated certain locations to pick-up only and leveraged technology for scheduling and delivery. We have also recently introduced electronic payment capabilities across all of our dispensaries and for deliveries. When faced with the crisis situations such as COVID-19, having the strength of an uninterrupted supply chain, depth in a market and the scale to effectively adapt and respond is vital. Our ability to quickly pivot during COVID has been important because we didn't just have an extreme shift in how customers interacted and shopped with us, but a heightened demand for product as well. Analyzing the post-COVID environment, beginning the week ending March 13, Florida's demand over the last 8 weeks has increased by approximately 32% in oil and 39% in Flower compared to the weekly average for the 8 weeks leading up to COVID. Trulieve outperformed the competition by achieving 39% growth in oil and 59% growth in Flower during the same period. The ability to respond to a business disruption into our Trulievers need for access is what helps drive our market share increase from 50% to where we are today at approximately 54%. Prior to COVID, approximately 80% of our business was from walk-ins, with the remainder of our transactions via delivery and pick-up orders. In 4 weeks after March 13, as safety restrictions were imposed in response to COVID, we completely flipped how we fulfilled patient transactions. Walk-ins into reduced to the 20% range, deliveries increased to approximately 20% and pickups were approximately 60% overall. This shift makes sense given the stay-at-home and social-distancing orders. I'll also note that we experienced call volume increases at our call center, hitting a high of approximately 65,000 in one of the April COVID weeks compared to 25,000 calls on average. As Florida starts to reopen this month, patient walk-ins have also started to return. Over the last few weeks, walk-in business has begun to swing back to approximately 35%, deliveries settled back to just under 10%, and pickups have remained near-COVID levels in the 55% range. It is unclear at this point how far back that pendulum will swing. But what is clear is that Trulievers have accepted new ways to get the medication they need, and we've implemented processes and efficiencies to improve these experiences. It's difficult to say that there's a silver lining with COVID. But if there is, it would be the experiences we've gained by modifying processes, implementing new technologies and stretching ourselves. We've found ways to be more efficient and deliver better customer experiences, and this we believe, has not only helped us gain market share during this crisis, but will also continue to increase our capabilities and drive customer loyalty. We are already seeing those efficiencies strengthen our business. Last month, with the 4/20 industry holiday, with our preparedness in place for finished goods, optimized delivery routes, improved online ordering and shifts to pick up, we were not only able to achieve 2 record revenue days during the 4/20 week at approximately $2 million per day on April 17 and again on 4/20 itself, but we're also able to keep pace with heightened demand. During the 4/20 weekend, we accomplished record numbers, such as our highest number of deliveries with just under 1,400 deliveries completed in 1 day, our highest number of pick-ups with approximately 8,500 orders in 1 day and our highest number of transactions with approximately 15,000 orders placed. Importantly, we were able to handle the additional pressure of these record milestones within days of each other. In short, we have improved preparedness and are better equipped for growth ahead. The first quarter performance I just described, both on an execution as well as on a revenue basis is what sets Trulieve apart. The first quarter revenue growth and the cash generated on our balance sheet provides us with the strength to continue investing, growing and exploring expansion possibilities that few in this industry have the ability to actively pursue. Since we're talking about customer behavior and revenue performance, we should touch on retail metrics. Our current store count in Florida is 47, making us the clear leader in the state. Part of our operating strategy is to go deep in the markets where we want to operate. Having a sizable presence in any one market allows us to effectively benefit from economies of scale, helping us achieve our industry-leading profitability. Depth, scale and brand building in an evolving market has also given us a playbook that we can apply to other markets. On our last call, we introduced metrics to help investors compare what we are building in the cannabis industry with traditional retail metrics. Let me update you on our Q1 loyalty metrics and some trends we are experiencing in the second quarter. One metric that is traditionally used in retail to reveal customer loyalty is customer retention rates. And comparing the first quarter of 2020 with the fourth quarter of 2019, we had a customer retention rate of 74%. This is 2 points higher than our Q4 rate. A second loyalty metric we track is average active patient spend, which we monitor via number of visits and basket size. As we look across our customer purchases, we see a shift in purchasing pattern trends. At the end of March, we had on average, 2.7 visits per month by active patients with an average basket size of $125. When comparing the trend at the end of April for the previous 6-week period, visits held flat at 2.7, however, basket size improved to $127. A third metric tied to retail is same-store sales. This metric helps track growth at a store level. For the 22 stores opened in Q1 2020 that were also open for the full quarter in Q1 2019, we had same-store sales increase of 27%. Building responsive and authentic relationships with our Trulievers, including actively listening and building feedback loops is important to achieving customer loyalty, and this translates into loyal Trulievers. That's why we are also excited about new partnerships and innovations. We've been very active so far in 2020, announcing new and expanded partner brands. In April, we announced a local partnership with the Bellamy Brothers for their old hippie stash product line, we rolled out 2 new products from Blue River and released new strains in a flower collaboration with another local partner brand, Sunshine Cannabis. We've launched several new products from our R&D team since the start of the new year as well, such as TruPowder, TruTincture drops, TruWax and Ground Flower. And of course, we are also primed and ready for edibles. I still believe 2020 will be the year of edibles, and I'll keep saying it. When edibles are approved, our R&D team has Trulieve and partner-branded edibles ready to go. Along with the new additions just outlined for you, we continue to broaden and expand our TruPowder strains as well. The number of different strains we grow in order to keep an interesting variety available for our patients has been another important differentiator for us. The cultivation team was firing on all cylinders with new strain offerings from our indoor grow during the first quarter. Let me now spend a moment updating you on our greenhouse harvest and the resulting oil inventory. Maintaining a certain amount of oil inventory has always been a part of Trulieve's business continuity strategy. We have a focus on sound business frameworks and foundational practices, and we maintain response plans for business disruptions, such as COVID and catalysts, such as edibles. As such, with the inventory we have, we were ready to meet heightened market demand and are also prepared to supply the edible production for our Trulievers across the entire state of Florida when we get a word. This also means we can plan to stay ahead of demand by turning the dial up or down as needed when we decide to plant our next greenhouse crop. Based on large harvest last fall, we did not need to plan a spring crop and have not made a decision for planting this upcoming fall. The inventory levels will continue to draw down over the next few quarters until we reach steady state by year-end. Ryan will elaborate more on this point in his prepared remarks. As I just described, we continue to be excited about forest growth, but we're also excited to have 2020 be a year of expansion for us. We have previously disclosed that our internal goal is 68 stores in the U.S. by year-end. Soon, we will be opening store number 50 in Daytona. Our Daytona store will have one of the largest footprints in the Trulieve family of stores at 6,000 square feet with 14 POS systems and a 1,500 square foot showroom. Trulieve, as well as our Trulievers, are very excited about the Daytona location. Turning to Massachusetts. COVID has delayed our construction in Massachusetts. However, Governor Baker announced the Phase III opening in the state this week, and our crews are back on the job. Additionally, in April, our adult-use application was deemed complete, so we should have a clear indication of next step soon. We remain excited about our expansion into the robust Massachusetts market. Let me now update you on the other states with the Trulieve presence. In California, we believe we will be in construction mode through the fall and should have our remodeled store completed for Q4. We continue to be focused on curating the products we are offering to drive increased customer visits and improve sales results. In Connecticut, as a reminder, we are 1 of 17 dispensaries in the state. During COVID, the state has allowed an extension for patients with expiring certifications through June 1. As we reported last month, our store in Bristol has been completely rebranded as a Trulieve location, and feedback is that our patients are excited about the rebranding and the new Truliever programs that have been rolled out into this market. Lastly, on the applications front, we are starting to see some movement in the states where we have decided to pursue licensure, and we are hopeful as we begin to see businesses and regulatory bodies move forward again. I'll now turn it over to Ryan for our financial results and will return with the closing statement.

Thank you, Kim, and good morning, everybody. I'm happy to be here today as interim CFO. Let's move to the company's first quarter financial results. As Kim covered, we had a very strong quarter and start to 2020. Trulieve had record quarterly revenue of $96.1 million, which, as Kim mentioned, represents a sequential quarter-over-quarter increase of 21% and 116% increase from the same quarter last year. We achieved diluted EPS of $0.12. Before I move on to revenue less production expenses and cost of goods from third-party suppliers, I'd like to take a moment to touch on our cost of goods sold line item and how it is comprised. Our cost of goods sold line is not traditional cost of goods sold as you would find with GAAP. It contains more than that. It is the cost of goods sold plus other production costs, hence, the financial statement line item description. Production costs or pre harvest costs or expenses incurred are included in this line item. Part of this is the production costs related to unsold inventory. The additional costs added here and what differs from the line under GAAP, for those of you who are attempting to reconcile, are the production costs related to the unsold inventory, or said another way, what we call grow cost for unsold inventory. On a consolidated basis, production expenses in Florida and cost of goods from third-party suppliers in Connecticut and California totaled $28.9 million for the first quarter. Revenue less these production expenses and costs was $67.1 million for the quarter or 70% of revenue. This compares to $51.5 million or 65% in Q4 '19. If we were to account for grow -- for capitalization of grow costs, as we previously discussed under GAAP, GAAP adjusted margin would have been at 77% for the quarter. As we have implemented various process improvements, we would continue to see improved margins in Florida in future quarters. Part of production cost is cultivation. We continue to build indoor cultivation facilities as warranted by demand in the state of Florida. At the end of the fourth quarter, we had reportable cultivation of approximately 544,000 square feet of indoor cultivation and about 1.1 million square feet of greenhouse facilities. Combined, our cultivation footprint of approximately 1.7 million and had capacity of just over 63,000 kilograms annually. In the first quarter, we completed 72,000 square feet of indoor cultivation construction in Florida, with an additional 24,000 square feet of indoor cultivation completed in April, bringing us to a total of approximately 1.8 million square feet in capacity to produce of nearly 69,000 kilograms of material annually. Since we are discussing cultivation, this may be a good segue to our inventory discussion that Kim mentioned earlier. In Q1, we had a total of $228 million as inventory, which includes significant amount of fair value. On a quantity basis, this translates into approximately 5 weeks of Flower inventory and 24 weeks of oil inventory, including work in process. Inventory level is the question that we have been receiving regularly. We believe by testing the capacity of our greenhouses in 2019, we have gained greater insight into future planning needs, we're able to reduce cost of the oil we extracted and are well prepared in Florida for business disruptions like COVID and for business accelerators like edibles. We do, however, understand that investors are looking at inventory on a strictly financial basis, and we want to add some color on drawing down these inventories. In Q1, you will see the start in reduction in biologicals of approximately $25 million, offset partially from indoor Flower trim that gets converted to high-end concentrates. We would like to target about 3 months or quarter's worth of oil to ward off risk and prepare for catalysts. We expect we will hit that steady state amount as we enter 2021. I'll now turn to expenses. First quarter SG&A expenses were $28.3 million or 29% of revenue compared to $23.4 million or 29% of revenue in the fourth quarter of 2019. The operating expense line is predominantly dispensary related costs, and in the first quarter was flat as a percentage of revenue compared to the fourth quarter. Overall, keeping a high degree of financial discipline around expenses is one of our keys to profitability. Operating income for the company was $31.1 million this quarter compared to $82.5 million last quarter. Net income was $14 million for the first quarter, taken into account the net change in the fair value of biological assets required under IFRS accounting standards, versus $45.5 million last quarter. I'll point out the net income swing you see here is primarily driven from the significant fair value reduction in biologicals, offset by our business expansion. We believe adjusted EBITDA and non-IFRS measure provides valuable insight into our profitability and performance. Adjusted EBITDA excludes from net income as reported, interest, tax, depreciation, noncash expenses, RTO expenses, share-based compensation, other income, growing costs related to biological assets and unsold inventory and the noncash effects of accounting for biological assets. We report adjusted EBITDA to help investors assess the operating performance of our business. Adjusted EBITDA, excluding the net impact of biological assets for the quarter of 2020, was $49.4 million or 51% of revenue. Please note the capitalization of grow costs for biological assets and unsold inventory fluctuates as new facilities are brought online, as selling and marketing cost varies depending on new dispensary reopenings and inventory levels and as we enter new states like Massachusetts where the cost structure can vary. This primarily is a reduction of 5% in adjusted EBITDA, and we can expect fluctuations between quarters. We continue to believe our normalized adjusted EBITDA will be around 43%. Now turning to taxes. As a percentage of gross profit, including the net change in fair value of biological assets, our effective tax rate was 24% for this quarter. Turning now to our balance sheet. As of the end of the first quarter 2020, based on our continued profitability, our cash balance was $100.8 million, an increase of $9 million from the end of 2019. We are and expect to be free cash flow positive for the full year. Finally, I'll briefly cover our guidance. Last month, despite the uncertainties related to COVID-19, we reaffirmed our 2020 guidance of revenues in the range of $380 million to $400 million for the year, with anticipated adjusted EBITDA of approximately $140 million to $160 million. We plan to have growth CapEx investments to expand our store footprint and cultivation over the long-term by approximately 5 million per month in 2020. We feel very good about the momentum in our business. Thank you for this opportunity to speak with you today. I'll now hand the call back over to Kim for closing remarks. Kim?

Thanks, Ryan. Ryan has been the rock on our finance team and his efforts have assured a smooth transition to our new CFO, Alex D'Amico, who will be joining us in June. Before we end the call today, I would like to touch on how we are thinking about guidance and our current outlook. We had a very strong Q1 and a healthy start to Q2. However, with the unknown surrounding COVID and the uncertainty in the macro environment, we are not in a position to update guidance at this time. Should that view change, we will be sure to update our guidance accordingly. Our team's ability to quickly plan and adapt has led to new insights into our business. Our absolute scale, along with supply chain efficiencies are meeting the increased product demand we continue to experience. And while there is uncertainty around COVID, we continue to remain laser-focused on our growth strategy. Being able to pivot and apply our learnings will assure that we remain one of the top MSOs in the U.S. Florida is a very robust market that we believe is one of the best in the country and where we fully intend to maintain our lead. We've shown this with our continued customer loyalty, our current market share and the demand driving our planned store expansion during 2020. We will stay financially focused as we execute on our strategies. Healthy balance sheets and strong cash positions don't happen overnight. It takes a lot of forward-thinking, hard work and listening to your customers. The financial management decisions we have made to date have turned Trulieve into a consistently profitable company that delivers free cash flow and shareholder value. We will continue to deliver in 2020 and beyond. And lastly, before we wrap up the call this morning, I want to take a moment to thank our employees. They have been amazing through COVID, displaying not only their passion for helping patients every day by providing critical access to medical marijuana, but also truly understanding the importance of being an essential business. They really stepped up to the plate, and we wouldn't be able to do this without them showing up every day. And for that, we are truly thankful. Thank you so much for joining us today. And as I always say, onward. Operator, we can now open up for questions.

[Operator Instructions] Your first question comes from the line of Robert Fagan from Stifel.

Congrats on yet another strong quarter. I guess I had a question here about kind of the state level patient growth. And we've seen it still growing well, but a little bit slower, I think in Q2 than we've seen in Q1 and Q4 last year. And is that just a result of COVID restraining some of the patient movements? Or is that indicative of maybe just a slower trend in patient growth? And in light of that, the market volumes continue to outpace patient growth. So are patients going to continue to spend more as they have recently after COVID? Just get your thoughts on that would be great.

Thanks, Rob. So I would say a couple of things. Number one, the decline or relative dip in patient growth was to be expected, particularly in Florida because I would say, physician offices basically closed during COVID as a result of the stay-at-home order issued by the governor. And so we saw is that there was an order that allowed for existing patients to actually receive their recertifications via telemedicine. And so doctors were able to continue their practices by focusing on the telemedicine aspect of research. However, new patients have to physically go into a physician's office, and many of those offices were closed through COVID. So as we've seen in recent weeks, those numbers beginning to come back. Just simply, we think, correlate to the fact that those offices are now starting to reopen across the state with of course, locality still having some differences from market to market with respect to the pace of those reopenings. So I think that, that is the explanation that we have for the trend line, which of course, we're watching very carefully on patient growth, but we continue to gain confidence that, that's going to rebound and should rebound through the rest of the quarter. With respect to the patient spend, I would say that a TBD, right, we certainly saw, as I mentioned in our prepared remarks that the number of visits has not decreased, but the basket size has increased. And again, we think that, that's linked to just higher consumption patterns with folks, particularly during this time. So I think some of that will relate to the macro environment in terms of whether or not we see folks actually returning to offices or whether the work-remotely model stays in place and how that balances out. But also, of course, the metric that we keep a close eye on.

Great. Kim, that's great detail. And something else I wanted to ask is about kind of market share driver. At least the way that we look at it, it seems that dried flower growth and volume has outpaced that of extracts at the state level kind of since COVID hit and even in your data as well. So is it fair to say that flower is a bigger driver of market share versus the extract products or -- and that's explaining some of your nice gains recently? Or is that not what you see on your side?

Yes. Thanks, Rob. I mean I think that -- I don't know that I would say that it's the only driver of market share for sure. I think that having depth across all products has certainly been a key for our continued success with respect to market share. And being able to launch products in segments that we see are strategically available to increase market share has been -- I would just credit our operations team for their continued analysis around which segments of the market are available, right? To further penetrate. And so I don't think it's an -- we don't look at it necessarily as -- while it's important to look at macro in terms of flower versus oil, it really comes down to the specific product mixes and those market segments. And we've released products, for example, on the Flower side and both premium categories as well as in the value categories. And those 2 -- with those coordinated releases have continued to drive market share in the overall Flower category that you all see on a weekly basis.

Okay. That's helpful. Last quick one, if I could. And you guys have mentioned this before, normalized EBITDA margin in the 44%, 43% area. We haven't seen that low level of margin in over a year. So just wondering why you guys speak to that kind of margins being normalized and especially with the seasonality kind of impact from the outdoor grow? Like is that a bit low on the margin side, 43% for a normalized level?

Yes, Rob, I would say that if you look across most industries, I think that I don't know that 43% -- and certainly within our own sector, it could be considered low. I'm assuming you're talking about it relative to our specific company performance, which, again, I continue to just be really proud of our team for continuing to push the envelope in all areas and particularly EBITDA, which we've been focused on. I think that we recognize, right? That we have operational efficiencies, given our footprint in Florida. But we definitely we'll continue to see some fluctuations there, as we've mentioned, in Florida, depending on what we have happening on the growth side and inventories and so forth, as we've discussed. But then of course, as we look to expand into other markets, we think that there will be different margin profiles potentially particularly linked to regulatory restrictions and different ways that we may have to operate in those markets. And so I think that, that's what we mean when we say normalize, right? And certainly taking into account for the fact that we will see fluctuations even in Florida from quarter-to-quarter.

Our next question comes from the line of Derek Dley from Canaccord.

Congrats on another exceptionally strong quarter here. Just wanted to follow-up on that market share discussion. So clearly, products are -- new product introductions and your loyalty programs are helping drive market share. But can you talk about just the dynamic that you're seeing in terms of -- are you seeing new customers sort of come into the space and choose Trulieve first? Or are you gaining share from some of your peers? How is that sort of dynamic playing out?

Yes. No. Thank you, Derek. Appreciate the question. So it's a mix, right? It's always been a mix for us. But certainly, as we just alluded to in -- during this COVID time, we're certainly continuing to get, I would say, more than our fair share of initial patient visits, which is an important part of our strategy. But also -- again, the operations team has spent a lot of time really analyzing market segmentation and making sure that we have depth and available products where we've seen opportunity for us to gain market share from competitors. And so examples of that are both in the value segment as well as in the premium product segment. So when you look at our product releases that we spoke about on the call in the first quarter. So in the value segment, for example, we launched Ground, and then we increased our offerings in minis. And those, of course, are on the value segment of Flower. In addition, though, we launched TruWax, for example, TruPowder, in addition to our premium partnership with the Bellamy Brothers in the Flower category. So launching in both of those product segments where we felt that there was room for growth depending on the competitor that we were looking at on a week-over-week basis. And so it's, again, it's being strategic in terms of our product offerings and having product availability and product depth, products that speak to new patients, but also looking across the landscape and positioning vis-a-vis our peer group.

Okay. Yes, that's helpful. When you -- the breakdown that you gave in terms of customer consumption patterns, whether it be delivery curbside or walk-ins, are you seeing any sort of differences there in terms of basket size? Like I would assume maybe delivery might have a higher basket size, maybe not in this environment with no fee. Like how does that sort of look?

Yes. No, great question. So yes, I would say delivery does have -- I think you're right on, right? Delivery does have a bit of a higher basket size on average. What I would just remind folks of perhaps is that we did begin offering free delivery for customers over the age of 65 during COVID. However, we do charge a delivery fee, given the regulatory, again, restrictions in Florida. We have to have 2 people in a vehicle, and we do offer next-day delivery across the state. And so we do charge a fee for delivery. So it makes sense to me intuitively, right? That, that delivery basket would be a higher basket, right? You're going to order maybe less frequently, but have a higher basket, which is, again, kind of interesting when we think about the fact that even given that and that typical assumption, our rate, right? Our frequency rates still has maintained at approximately 2.7 visits on average per month. And so it's been sort of an interesting dynamic through COVID. But yes, to your point, we see a bit of a higher basket on delivery, less so on walk-ins, I would say, would be the lowest with respect to typical basket size.

Okay. That's helpful. And then just last one for me. Just in terms of your inventory position, I really appreciate all the color that you guys gave there in your prepared remarks, but you mentioned you'd like to bring the concentrate of the oil inventory down from sort of 24 weeks down to, call it, half of that. What about Flower? Is that 5 weeks of inventory sort of the target number that you'd like to have for Flower?

Yes. That's right. I mean, flower, again, that's more of a just-in-time product, right? We want to make sure that it's properly cared, but then it's getting into the hands of our customers. It's -- again, it's -- we think of it more of a kind of a fresh produce equivalent type product. And so we don't want to have more than, I would say that 5- to 8-week number on hand on flower just because there, I think, is a level of quality standards that we have in terms of getting that product to our customers.

Your next question comes from the line of Matt McGinley from Needham.

On the G&A sequentially, there wasn't much change in that rate and the dollars grew at about the pace of the business. But did you have any spike in expense at the end of the quarter? Or I guess, how did that trend for the organization as you reacted to COVID? And how should we think about that into the second quarter? And then, I guess, moreover, on the guidance side, is the $49 million in adjusted EBITDA in the first quarter comparable to the full year guide of $140 million to $160 million?

Thanks for the question, Matt. So let's talk about the expenses first. We started to see a little bit of expense in the back half or back really, I guess, 1/3 of Q1 related to COVID. You'll certainly see some of that continue to carry through on to Q2. However, I would say that, generally speaking, we haven't really -- we haven't seen that as a material amount and certainly has been primarily linked to personnel increases around, again, that delivery shift. So the demand, of course, more than offsetting, I would say, the increased expense there. So -- but you will see that to continue to flow through a bit into Q2. Related to, again, kind of going back to the guidance question, and I'll just say this, right? I understand, and we've gotten the question, and I'm sure we'll continue to get the question around guidance. The big thing for us is -- the last time we had a call was about a month ago. So we have about a month's worth of additional data. Yes, things look strong. However, to be clear, I don't think that anyone knows whether or not there's going to be a resurgence of COVID in the back half of the year. And if so, what regulatory responses will be to that. And whether we like it or not, we are a product of regulatory bodies and we're a product of those responses. And so in the event there is a round 2 and in the event that there is a, I'll call it, more severe response than there was initially, that could materially affect our business. And we're just not prepared without having any visibility there to make any material adjustments to guidance. We're going to continue to watch it. Obviously, we'll again have the same conversation around the table strategically as we look to next quarter. And if we're in a position then to update, we will. But that's really the thought process around where we are with guidance as we sit today.

And as far as new unit openings in Florida, I mean, given the unit economics are phenomenal and your market share is strong, why not push harder on those new unit openings? I mean, I understand the project development can take some time, but the expansion -- the expiration, rather, those dispensary caps, why not go harder on the mitigated openings in the back half?

So I would just -- I appreciate the question. I would just say that I think we're setting the pace, right? For the state. And just remember, it takes about 9 to 10 months to open a new location. And so we've got a lot of stores in the pipeline. We're continuing to build that pipeline all the time. But we also need to be thoughtful with respect to how realistic it is for us to open stores. And then in addition, right? We need to also make sure that the locations that we're choosing are strategic in nature. And so we don't open locations just for the sake of opening locations. There's a lot of research and analysis that goes on to each of those locations. So that, to your point, we can continue the phenomenal unit economics that we've had in the, quite frankly, folks like you expect from us, right? So it's a twofold, right? We want to continue to grow. We want to continue to grow at a certain pace, but we want to make sure that it's strategic in nature and that we're able to really stand behind those locations once we open them.

Our next question comes from the line of Eric Des Lauriers from Craig-Hallum Capital.

Congrats on another strong quarter. First one for me. Just touching back on those traditional retail metrics that you discussed at the beginning of the call. You mentioned that patient visits were flat from Q1 to April at 2.7, but that you did see a bit of an increase in basket size. Could you just repeat the basket size that you guys are seeing in April?

Sure. It increased from $125 to approximately $127.

Okay. Great. And then I may have just missed it, but last quarter, you guys mentioned a sales per square foot metric for Q4. Could you share that for Q1 if you haven't?

Yes, I think that we're sharing it on an annual basis. So that's an annual days open. So I do not have that calculation calculated for Q1.

Okay. Right. No problem. Next question for me, more on the Massachusetts side. Can you -- so obviously, we have a bit of a construction delay as it relates to COVID. Do you think that those facilities could still open up by the end of this year? Or is that looking like it could potentially be a 2021 thing at this point?

That's a bit of a crystal ball question for us at this point. We hope to get some additional clarity once we start to see inspectors actually out and about in Massachusetts. So construction is continuing. Again, will be ready. I think it's just a matter of the pace of those inspections and when those get scheduled. So as we -- certainly, as we progress through, as we have dates, as we get feedback, just like we did today, when we receive a notification that our adult-use application was complete, we'll continue to share those updates with you all real time. But -- so I would say that we're happy that the governor has, this past week, allowed for construction companies to get back to work. And certainly, it appears that the CCC has regained some level of activity. But I think TBD in terms of our particular time line.

Okay. Yes, that makes sense. Last one for me here. So you guys are obviously a very data-driven organization. Can you talk about some of the data insights you've gathered from your Florida operations and how those insights kind of give you confidence in building similarly efficient operations in Massachusetts and any other markets that you might enter?

Sure. I would say that if -- for anyone who would like to spend a day with our data team, there's lots and lots of models and insights that we have and that we look at on a very, very regular basis. We have dashboards and metrics for just about every segment of the business that we're continuing to evolve and refine. And so what it allows us to do is it allows us to understand because we're vertical in Florida, each of the different segments of the business. So when you look to Massachusetts and when we're building our footprint, we very much understand, for example, the 100,000 square foot canopy restriction that we have in Massachusetts, we certainly understand and believe that we have a real working knowledge of what -- how to build and how to lay out a footprint to make it the most efficient possible. Then when we go down to product mix, we understand exactly from X amount of yield on a particular plant. What the different product streams are, what the inputs are to those product streams and how to calculate returns on those product streams, whether or not we're pushing those products through our retail and our own vertical channel in Massachusetts, or whether or not we're peeling those off into a wholesale business. So I would say just having the understanding and the depth of knowledge in a real way and in a scaled way, and each of those value streams allows us to peel back and do bottom-up model building for each of these markets that we're attempting to go into.

Your next question comes from the line of Russell Stanley from Beacon Securities.

Congrats on the quarter. If I could start just around store openings. You just provided some color on the thought process that goes into it. I'm just wondering you've got a clear lead here in a number of your competitors have, of course, slowed down or very least paused or solve their retail build-outs. But that being said, I'm just wondering, are you finding any tougher-to-find good locations? Are you anywhere close to a saturation level in Florida? Or there's still a lot of prime targets, and it becomes more a matter of choosing the best options first?

Yes. No, thanks for the question, Russ. I would say that we're in a state of 21 million people, and we continue to see increases in the program. And certainly, of course, have our eye on future program expansion through potential recreational coming online in a couple of years. And so we're positioning both for today and then also with an eye towards the future. So we do believe that there are certainly opportunities to expand that remain. But that being said, as I mentioned previously, we are strategic about those locations and continue to look for locations that work both in today's environment and then also, in some instances, could be relevant for future regulatory changes as well. I mean in Florida, high level, just as a reminder, we're currently with our patient count at about 1.4% penetration rate, which we think certainly bodes well in terms of additional runway on future growth.

That's great color. Just one additional question at this point. You talked about product mix and having launched some Flower strains in both the value and premium segments that have done well. I'm wondering, more generally, when you look at the entire product setting, including oils, are you seeing any sort of shifts with the macro headwinds, any shifts in terms of customers coming a little more downmarket in lower-priced options at this point.

It's been interesting, certainly in Q1, Russ, we saw growth in both premium and in value. So it's a little bit on both ends of the spectrum is what I would say. And they're quite frankly almost balanced. So -- at least currently. Now whether or not moving into Q2, which is really more core of COVID and coming out of Q2 as we sort of shift back to a more "normalized pattern" at least in terms of customer behavior in Florida, whether or not those will shift more towards the value stream, that's something we're watching, right? I understand the thought there certainly and certainly has blended to the fact that we believe that we needed some additional depth, right? In that value segment. But for Q1 anyway, it was growth on both top end and lower.

That's great. I just -- I'll sneak in one last question. Just on the M&A front, especially given the free cash flow being positive in the quarter, congrats on that. Just wondering what your latest view is on M&A, which markets -- obviously, regulatory environments are a moving target, but what would be the current short list of the markets you like most? And has that shortlist changed at all over the last 3 to 6 months?

Yes. Thanks, Russ. So I'm not going to be able to give you a view, as you probably know, specific states or specific markets, although I always appreciate the question. Our metrics for looking at M&A certainly have not shifted. I mean we've been fairly constant with respect to our -- the way that we view M&A. I think that as we can probably all recognize and appreciate the types of M&A opportunities, we are starting to see some changes there with respect to an increase in, what I would call, distressed asset classes and becoming available for review. Again, I think with those, just like we do with any analysis, right? We look at what, not only is needed to purchase potentially to make the purchase, but also what is needed, both from a personnel and where synergies could be had and also what additional dollars would be needed to be invested to rightsize that particular business. So it's a fulsome analysis. And we go back to the stuff that the U.S. will evolve into regions and having hubs in those regions will be strategically important over the long term. So we're committed to building a business what we consider to be a disciplined way, so that we can make sure that when we enter, we're actually strategically building brand that we can grow over time as opposed to merely planting flowers that we then have to retrieve from.

Your next question comes from the line of Pablo Zuanic from Cantor.

Kim, if I may ask, just following up on the M&A question. What would you say to people, let's say, that Trulieve has been too conservative? And for example, today, the news broke that Ascend Wellness is buying one of a few dispensaries left in New Jersey. Obviously, Curaleaf bought Arrow in Connecticut, right? 3 stores, they are vertically integrated there. And here you are with your very little beachheads in 3 other states. So if you can, how would you respond to that comment that you guys have been too conservative and then maybe staying behind relative to other MSOs?

Yes. No, thanks for the question, Pablo. My -- I just point to our results. So if too conservative, leads to 51% EBITDA margin and to each its own, I guess. I think that for us to make sure that we're free cash flow positive, again, that we're being strategic in our expansions. Look, we're in -- still in early innings here. And I think that it's been proven now over the last, I would say, 12 to 18 months, that the land-grab strategy for most has not been successful. And that it's -- you have to operate these businesses very strategically and very focused on financial management, given the fact that we're dealing with [ 2 ADE ], and we're dealing with regulatory restrictions that really make it a state-by-state analysis. I think that -- and we'll continue to believe that Florida is the best state in the country to be in. We're sitting at over a 50% market share, which I think gives us a lot of flexibility as we consider the opportunities. I think my lucky stars daily that we did not complete M&A in 2019. I think the valuations, by large, were inflated. And I think, again, that's proving out as a lot of deals get either abandoned or renegotiated in 2020. So I feel like our model and our processes are proving out with respect to how we strategically analyze M&A. And I believe that when we make moves, they'll be, again, defensible, they'll be solid moves, and they'll be accretive to not only on the short term, but also for long-term shareholder value.

And just to stay on that point, in your prepared remarks, you talk about applications for licenses at the state level. So as you grow in other states, should we think it's going to be more, call it, organic in terms of getting new licenses as opposed to buying assets on the ground? Can you give some color there, how you're thinking about that?

Yes, sure. I think it's going to be mixed. I think there's a mixed strategy at play. We certainly have markets that are certainly -- that we would like to be in that we've launched an applications team around. We're not applying in every state that opens an applications process, right? I mean, it goes through the same rigorous analysis that we have for M&A opportunities. But we are and have been participating. And in some cases, right? Are participating in ground game in states prior to applications being launched. So the applications is -- can be a longer lead item. But again, we think can have a very important additive return on investment over the long term. So that's a process that will continue, and it's part of our strategy. But that's coupled with, and we remain active in M&A conversations as well.

And one more, if I may. I think last year, at some point, when you gave guidance for 2020, you had said that Massachusetts would be 20% of sales. I mean, correct me if I'm wrong, I realize that, that's more a 2021 story. But that number, on the $400 million, that's about, call it, $80 million a year. I mean, am I thinking right about that? Is that how you were thinking about that state once you were up and running?

Yes. I mean, I think that, that, obviously, is a viewpoint around Massachusetts. And quite frankly, the viewpoint around Florida has shifted in 2020 as Florida has remained very robust. And as we -- and as our team has done a phenomenal job in continuing to execute and, quite frankly, growing market share in a tough and increasingly competitive landscape. And so -- and then to your point, we do think that Massachusetts will be meaningfully contributive to both top and bottom line once we're able to get that up and running. So I think it's just a matter of when and how the timing works out. But generally speaking, you're correct.

Okay. I want to squeeze one more, if I can, please here. Just a quick update on the regulatory front in terms of what's happening with wholesale? And any color you can give in terms of when edibles could happen? I know, again, it's a crystal ball thing, but -- and also related to that, one question I get in terms of the risks, it's about purchasing power, higher unemployment, right? People on furlough salaries. Is that an issue for your demographic, 1.4% of population in Florida bio product?

Yes. No, thanks. So with respect to the furloughs and kind of -- we haven't seen, as we've said, right? All I can speak to is how the data is playing out in what we're seeing at the register. And so what we're seeing at the register, again, is basket size increasing from $125 to $127. So that's the most current information we have. So we haven't yet seen, right? That coming through. But I think as we said earlier, making sure that we have depth in both value and across specific product segments is going to be important. And it's always important to make sure that you're able to meet customers and provide that value proposition for customers where they are, right? And certainly appreciate and understand that different parts of our patient population are probably are experiencing different realities in their lives. And so again, making sure that we have products that can speak to them is important and remains an important part of our strategy.

And on the regulatory front in terms of any news on the wholesale and edibles...

I'm sorry. So no update there, right? We continue to be -- and I think it's -- if you're in -- if you're a cannabis executive in the U.S., right? And one of our key hallmarks is the fact that we have to have plans A and B all the way probably to G and H, right? So as we've said before, we certainly have strategies and plans around when or if wholesale becomes available in the state of Florida, certainly, again, speaking to our product depth, our inventory availability to turn cultivation up and down and have that flexibility around production is our important drivers there potentially. And then with respect to edibles, I continue to be assured that the process is moving forward prior to COVID hitting. So I do think that it's a question that's more linked at this point to COVID and resource allocation on the Department of Health side than not. And so I think that it's dependent on when they feel that they're sufficiently through that and have the bandwidth to release those rules. But I do feel optimistic and I'm still hopeful, as they all are, that it will be a 2020 event.

Your next question comes from the line of Jason Zandberg from PI Financial.

Kim, most of my questions have been answered, but I've got a couple here. I think I heard you say that same-store sales growth was 27% for the quarter. Do you have that data for just the last few weeks of March going into the COVID situation?

Unfortunately, Jason, I don't.

Okay.

But we'll report this quarterly. So -- and I can potentially pull that and happy to have a separate conversation for you.

Okay. Perfect. And then just on edibles. I think no one really knew how Flower would impact the industry before it was released as an acceptable product, and it's been an absolute success. I'm just wondering what your thoughts are on how you expect edibles to impact the Florida market? Do you get a lot of feedback from customers that are eagerly awaiting the launch? Do you expect to have some pretty strong demand once that's launched? Any thoughts would be great.

Yes. No, thank you so much for that question. We do have how folks ask about it very regularly. And currently, there is this cottage industry around recipe training and folks that are making their own edibles with our distillate products. And so we do believe that there is a strong market for edibles. Our internal projections, looking at anecdotal feedback I just gave you, along with other markets and statistics around edibles and demand, we would estimate internally that anywhere from 20% to 30% of product mix could shift to edibles. And we think it will be a combination of folks who perhaps were buying some products again to make their own shifting to finished-made edibles as well as additional add-ons to baskets, right? So we think that it's going to both grow the market in general, and then also shift a bit as well. But as you know, edibles are a fantastic product from a margin perspective, so we're very much looking forward to the additional product availability. And then finally, I would just mention that, that's been a strategic part of our business as well is making sure that we've got both the inventory from a raw material perspective and oil to be able to supply that edible segment when we don't know, right? How it will affect other business lines and also making sure that we've got the availability to have a full product line. So we've got 30-plus SKUs ready to launch across a variety of form factors and when edibles is available to sell in Florida.

That is all the time we have for questions today. I would now like to turn the call over back to Lynn Ricci. Please go ahead.

Thank you, and thank you for joining us today. We look forward to updating you on our progress again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.