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

Good morning, ladies and gentlemen, and welcome to the Trulieve Cannabis Corporation First Quarter 2021 Financial Results Conference Call. My name is Chris, 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, Ms. Lynn Ricci, Director of Investor Relations for Trulieve. You may begin.

Thanks, Chris. 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 Alex D'Amico, 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 statements we make during this call that are not statements of historical fact constitute forward-looking statements and that 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, uncertainties described in the company's periodic reports filed with the Securities and Exchange Commission and those related to the completion of our transaction with Harvest. Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will also discuss certain financial measures that are not calculated in accordance with United States generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or a substitute for Trulieve'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 quarterly report on Form 10-Q filed today with the SEC and can be found in our earnings press release on the Investor Relations section of our website. Lastly, at times in our prepared comments or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. This morning, we reported results for the first quarter of 2021. A copy of our earnings press release may be found on the Investor Relations section of our website, trulieve.com. In addition, webcast today's conference call will be available on our website later today. Now I will turn the call over to our CEO, Kim Rivers.

Thanks, Lynn, and Good morning, everyone. I'm sure our recently announced agreement to acquire Harvest is at the top of everyone's mind, but I want to first highlight our solid start to the year. For the quarter, we achieved revenues of $193.8 million, a sequential increase of 15% quarter-over-quarter and 102% year-over-year. Our 2021 adjusted EBITDA of $90.8 million represents an EBITDA margin of 47%. With 13 consecutive quarters of record revenues and adjusted EBITDA, we are entering our fourth straight year of profitability. On Monday, we announced that Trulieve and Harvest had entered into an agreement whereby Trulieve will acquire Harvest, which would create the most profitable cannabis company in the world. Harvest announced a fantastic quarter, beating consensus by a wide margin with revenue of $88.8 million and adjusted EBITDA of $26.9 million or 30%, tripling their adjusted EBITDA from Q4. On a combined basis, with our results of operation, we would have revenue of approximately $282.6 million and adjusted EBITDA of approximately $117.7 million which we anticipate would be the strongest performance, both top and bottom line of any U.S. cannabis company. Our performance, along with the strong results just reported by Harvest demonstrates how transformative the acquisition would be for both Trulieve and the cannabis industry as a whole. Let me share a little more about the acquisition and what it means. Harvest would provide diversification across our combined platform with continued focus on core markets. Harvest is a company that has built a strong brand presence and operates across 9 states with 39 operational dispensaries supported by nearly 880,000 square feet of active cultivation. On a combined basis, if the deal were to close today, Trulieve plus -- the Trulieve plus Harvest platform would consist of 126 operational dispensaries and 3.1 million square feet of cultivation and production. Together, we will be diversified across 11 states, with operations in some of the most attractive markets in the nation. The transaction would bring Harvest first-mover advantage in Arizona, which would establish Trulieve's southwest hub in a big way. More on that in a moment. In the northeast, Harvest would add to our Pennsylvania company to complement our footprint. We would also enter a new northeast market, Maryland with 3 dispensaries and 122,000 square feet of cultivation and production. In the southeast, Harvest put out retail locations in Florida and approximately 330,000 square feet of indoor grow and production. Our financial discipline and measured approach to expansion positioned us to capitalize on this opportunity. The pending acquisition of Harvest checks the boxes for a strong management team with local expertise, similar core values with a customer-centric approach, strong brand awareness and an accretive deal that delivers shareholder value. The focus by Harvest over the last 2 years of identifying and investing in core markets is in line with the Trulieve philosophy of going deep in markets to create brand and customer loyalty while maximizing efficiency and supply chain, resulting in increased profitability. The addition of Harvest operations would establish a true southwest hub. We would be entering Arizona where Harvest has executed on its first-mover advantage. Arizona operations include a state leading 15 operating stores as well as a significant cultivation footprint with 185,000 square foot indoor and 144,000 square foot outdoor grow as well as production facilities. Arizona is an exciting market, and Harvest is well-positioned to continue to capitalize on their established presence as the market leader. Our southwest hub would be further expanded with the additions of Harvest, Nevada, Colorado, Utah and California operations. The addition of Harvest presence in Pennsylvania and Maryland, coupled with our recent acquisitions in Pennsylvania, our initial operations, our initiation of operations in Massachusetts, entering the West Virginia market and our outperforming dispensary in Connecticut would firmly solidify our northeast hub. This is our first full quarter of operations in Pennsylvania, and performance has been robust. Our expanded cultivation and processing facility is state of the art and ready to start harvesting high-quality flower for the supply-constrained environment. On the dispensary side, we continue to grow our customer base and the store performance of the 3 dispensaries in the Pittsburgh area has been strong. In addition, we look forward to closing our previously announced acquisition of Keystone Shops with 3 dispensary operations in the Philadelphia area. Pennsylvania is a critical state for our northeast hub strategy. Our operations in Massachusetts are finally underway. We have plants in the ground at our Holyoke facility and anticipate opening our first dispensary this quarter. It is an exciting time for our team who have worked hard for this to become operational. We're also expanding the northeast hub by establishing operations in West Virginia. Through our successful application wins and the recent closing of Mountaineer Holdings, we have cultivation, processing and dispensary permits. This combination allows us to enter the state as a first-mover vertically integrated operator. Turning to our southeast hub. We've maintained our leadership in our home state of Florida, opening our 80th and 81st store on 4/20 and opening our 82nd Florida store last week. With over 0.5 million patients in the state or a 2.5% penetration rate, we continue to grow. Patients onboarding into the program were at approximately 4,800 per week during Q1. More recently, over the last month, that patient growth has increased to approximately 6,000 per week with 7,000 patients out of the week of 4/20. At these phenomenal growth rates and our consistent outperformance, we are striving to keep ahead of demand and provide access to this growing patient base. On 4/20, we had our largest revenue-producing day to date topping $3 million in Florida. Our 2021 dispensary plan calls for 114 stores in the country by the end of the year, with many of those targeted for Florida to keep up with the exciting patient demand. The fast pace store growth requires rapid development of cultivation and production facilities to keep our stores stocked. We have approximately 2.1 million square feet of cultivation in Florida and continue to build out new cultivation and production facilities. We plan to add 24,000 square foot growth monthly and are launching our newest cultivation location in Madison County, where we plan to have 850,000 square feet of cultivation. We commenced our Tampa distribution and warehousing operations to handle our ever-growing footprint. To help feed the overwhelming demand for edibles, we are building a 35,000 square foot kitchen, which is about 3.5x our current kitchen and our midway facility. That will produce a lot of Trulieve and brand partner edibles. We're executing on our national expansion strategy, growing our southeast hub and firmly establishing our northeast and southwest hubs. Before I turn the call over to Alex, let me briefly update our key retail metrics for the first quarter. We share our customer retention rate quarterly. And comparing the fourth quarter with the first quarter of 2021, we had a customer retention rate of 84%, exemplifying loyalty strength across a growing platform of retail locations. Another metric that reveals customer loyalty is the number of visits in their basket size. In Q1, active customers visited Trulieve stores on average 2.8x per month, consistent with the full year average, with an average basket size of $113. This is an increase over our Q4 average of 2.8 visits per month with a basket size of $112. We use the traditional same-store sales metric to track these loyal customers at a store level. For the 59 locations that were opened in Q1 2020 and Q1 2021 for the entire quarter, the same-store sales increased by 39%. Now let me turn the call over to Alex for more details on our first quarter results.

Thank you, Kim, and Good morning, everyone. As Kim has noted, the Harvest acquisition will be transformational for Trulieve and for the industry. I would like to outline a few details of the transaction before I jump into our Q1 results. Harvest would strengthen our financial profile. On a combined basis, 2020 revenue would have been approximately $753 million with $266.3 million of adjusted EBITDA. Based on 2021 consensus, we would combine for revenue of approximately $1.24 billion and an adjusted EBITDA of approximately $461 million. Harvest reported their adjusted EBITDA margin for Q1 at 30% on Monday and updated their 2021 revenue guidance to $400 million, which has yet to be fully included in the consensus numbers. We look forward to their continued performance in 2021 as they're focused on rightsizing the business and executing on fundamentals becomes apparent in their numbers. This combination would easily create the most profitable U.S. MSO based on adjusted EBITDA. For additional details, including specific transaction points, please see our press release issued May 10, 2021. Stepping back to Trulieve, 2020 was a pivotal year for the organization as we converted to a U.S. reporting company and established the infrastructure necessary to support our regional hub strategic vision. 2021 will be the execution of that strategic plan as we enter a new phase in the company's evolution. The M&A transactions announced since the back half of last year as well as organic expansion are a testament to the executional capabilities across all of our functions. Throughout the year, we will be rolling our new markets and partners into our broader organization, and we'll continue to look at additional strategic opportunities as well as work toward all regulatory approvals necessary to complete the Harvest transaction. Q1 was a fantastic start to the year, and we are proud of what we have achieved. As Kim covered at the top of the call, we had record revenue of $193.8 million, an increase of 15% sequentially over the $168.4 million of revenue achieved in the fourth quarter. This is reflective of our first full quarter with our Pure Penn and Solevo Pennsylvania acquisitions that closed midway through Q4 of 2020. Our quarterly revenue was $97.8 million higher than Q1 2020, an impressive 102% growth year-over-year. As I have noted in the past, Trulieve is managed on a consolidated basis, and we do not report nor do we plan to report any of our financial metrics on a segment basis. The company achieved gross profit of $135.3 million or a gross margin of 70% in the first quarter compared to $119.9 million or 71% in the fourth quarter of 2020. Similar to what we reported in Q4, our margins in our core operations remain in line with historical trends. In Q1, we continue to have the fair value of the acquired Pennsylvania inventory flow through cost of goods sold. As mentioned last quarter, all assets and liabilities of acquisitions are fair valued at deal close. This includes inventory, which flows through cost of goods sold at fair value as opposed to cost. This dynamic has downward margin impact until this inventory is sold and new inventory is capitalized at cost. All of the initial inventory from our Pennsylvania acquisitions have been exhausted, and we will have inventory capitalized and flowing through cost of goods sold at cost in subsequent periods. As a reminder, there is downward pressure on gross margin as we enter new markets without full vertical integration as we have in Pennsylvania through the earn-out period in 2021 and as we ramp operations in new markets before revenue is earned, like we have to date in Massachusetts. In general, as we have shared in the past, our gross margin in all markets can fluctuate a few basis points in either direction from quarter-to-quarter depending on inventory flow through and product mix. I will now turn to expenses. SG&A expenses in the first quarter, excluding depreciation and amortization, were $57.3 million or 30% of revenue compared to $52 million or 31% in the fourth quarter of 2020. We expect increases in operating expenses throughout 2021 as we continue to add dispensaries, enter new markets and ramp our infrastructure to support our growth initiatives and go forward compliance. Still, we do not anticipate a material change as a percentage of revenue. Our operating income for the quarter was $72.6 million, a 14% increase over the $63.9 million earned in Q4 2020. Net income was $30.1 million for the quarter compared to $3 million for the fourth quarter of 2020. We generated earnings per share of $0.24 on a fully diluted basis. Turning now to adjusted EBITDA. We believe adjusted EBITDA, a non-GAAP measure, provides valuable insight into our performance. Adjusted EBITDA excludes from net income as reported, interest, tax, depreciation, noncash expenses, COVID-related expenses, share-based compensation, acquisition and transaction costs, fair value step-up of inventory from acquisitions and other income. We report adjusted EBITDA to help investors assess the operating performance of our business. For the first quarter of 2021, adjusted EBITDA was $90.8 million or 47% compared to $81.4 million or 48% for the fourth quarter of 2020. This is in line with expectations and is reflective of the margin impact from the ramp in Pennsylvania and Massachusetts operations. The company delivered $60.4 million in cash flows from operations for the quarter due to our continued quarter-over-quarter profitability and record revenue. We ended the quarter with a cash balance of $162.4 million. Our strong cash position allows us to quickly leverage the foundation we have built to capitalize on expansion opportunities, organic growth and to go deeper in the states where we operate. Subsequent to the end of the first quarter, we paid approximately $33 million in federal taxes in April. In addition, we successfully completed an underwritten equity offering, adding approximately $219 million, ending April with a cash balance of approximately $355 million, providing us the ability to accelerate our growth and quickly capitalize on strategic opportunities as they arise. At the end of Q1, we had a total of $103.9 million of inventory. This compares to $98.3 million of inventory at the end of Q4 2020. As discussed earlier, the inventory that was captured at fair value for our Q4 2020 Pennsylvania acquisitions has been exhausted as of the end of the quarter. Company-wide CapEx spend for the quarter averaged just over $16 million per month, inclusive of all markets and was in line with the plan. We continue to build out stores and cultivation facilities as well as a new distribution and processing center in the southeast. In addition, we will build out our West Virginia operation throughout the year. We will continue to invest heavily in CapEx throughout 2021 to support our expansion efforts and add depth in the southeast hub as we capitalize on the positive patient trends we are experiencing. Lastly, before we close, I want to reiterate the guidance issued on our Q4 earnings call. For the full year 2021, we expect revenues in the range of $815 million to $850 million, with adjusted EBITDA in the range of $355 million to $375 million. Our 2021 views on adjusted EBITDA reflect expansion into new markets and new revenue streams such as wholesale. We will not update our guidance until we close on the Harvest deal or have a catalyst that changes our outlook. 2021 is off to a great start, and we have an exciting year ahead. We look forward to the opportunities that await us. With that, I will turn the call back over to Kim.

Thanks, Alex. I would like to take a moment here to say a heartfelt thank you to each of our Trulieve employees. I am so proud and thankful to be partners with you in this business and appreciate your commitment to our customers and to each other, which has made Trulieve the company we are today. With the pending acquisition of Harvest, we will be bringing together 2 leading cannabis companies who by joining forces would create one of the world's largest cannabis companies by operational retail and cultivation footprints and the most profitable public cannabis company in the world. In closing, this transaction is not just about today, but more importantly about our future. As a combined company, our platform for growth would exponentially increase. Coupled with our strong balance sheet and profitability, we would have the resources to take full advantage of catalysts within our combined markets as well as those that occur as a result of federal change, and our combined teams would have the depth of operational expertise to execute on these catalysts. In short, I could not be more excited about our position for the future. Thank you for joining us today. And as I always say, onward.

Operator, we can now open it up for questions.

[Operator Instructions] The first question comes from Derek Dley of Canaccord Genuity.

And congrats on the strong results. I wanted to just talk about Pennsylvania for a second. Can you just -- and I get it's early days, but can you just talk on how Pennsylvania has performed relative to your initial expectations? And then I guess just more specifically, the recent increase in cultivation, how do you expand the leverage of that throughout the state?

Yes. Good morning, Derek, and thanks for joining us. So Pennsylvania has been an incredible addition to our portfolio and certainly has been performing as expected for us in Q1. We just got the additional square footage online on the cultivation side with that additional 45,000 or so square feet. That's planted, and we're excited to get quality flower into the market. As we stated previously, that facility was designed specifically to be able to produce premium indoor flower. And of course, with growing premium indoor flower, you'll also have great terpene-rich biomass to make additional products with as well. So excited to have that come online and contribute to operations throughout the year.

And when we think about the I guess the wholesale market within Pennsylvania, from -- we hear from others that there's a big supply constraint. Are you continuing to see that? And do you see sort of any -- given that you've added some capacity or cultivation capacity, do you see any incremental relief coming there? Or is it going to remain supply-constrained for the foreseeable future?

It certainly -- it's supply-constrained currently. I think it's interesting because you're definitely seeing, like you do in a lot of markets, right, an evolution of product mix. So Pennsylvania started as an oil-based-only program, very similar to Florida. And so we're very well aware of how those trends at least have played out over time in the Florida market, and we think that Pennsylvania will be very similar. So with the onboarding of flower as a product, again, similar to Florida, we've seen a ramp in flower demand that's exponential and has been very rapid and the market now is trying to catch up with that supply. I mean, if Florida is any comparison on that front, we still have increasing, what you see in the numbers, right, week over week. We've had surges in flower demand, and that doesn't look to be slowing down. So we do think it's going to be very, very important to have flower, and again, quality flower across multiple different value propositions available for our customers in Pennsylvania, whether that's at our -- in retail locations, whether it's through the wholesale distribution channel.

Okay. And then just one more, if I could. Just in terms of what you saw in terms of sales cadence throughout the quarter, again, from others, we've heard January was a bit of a softer month with some more COVID restrictions and then we saw a decent acceleration, particularly in March. I think part of it was related to permits. Did you guys witness something similar within -- I guess predominantly within Florida?

Yes. So we didn't have the -- as big of an impact as maybe some of our peer set who have operations heavier -- more heavily concentrated in the north. So in Florida, we don't quite have the snow. So there's no impact that others may have experienced. So we saw a fairly steady growth. Certainly, with stimulus checks coming in, in March, there was a bit of a spike on the positive side in March. But I would say relatively steady pace in line growth in January and February.

Your next question comes from Matt McGinley of Needham & Company.

Can you discuss the product mix shift that you're seeing in Florida? Specifically, how is the overall mix changed in Florida or rather in flower between value and premium product and extracted product, how would the dollar share look compared to the volume share given the rollout of edible? When you look at the OMMU data, it looks like you've lost a little volume share in the quarter, but I'm not convinced that that's necessarily the case on a dollar basis. If you could speak to that a little bit as well.

Yes, absolutely, Matt. So certainly, we're seeing across categories, as I mentioned last quarter, Q3 to Q4, we saw a continuation of that Barbell Effect with premium actually outpacing value from Q3 to Q4 on about 2:1. In Q4 to Q1, we're seeing -- we saw a greater impact actually in value, still an increase in premium, but a bit of a move from mid-tier I'll say to value. A lot of that, honestly, have to do with our product mix internally and what we have available to folks. And so we're constantly evaluating and resizing, if you will, our product mix based on consumer demand. I think it makes sense when you think about, again, the stimulus kind of coming in and where folks are spending dollars. On the oil side, edibles, we're seeing continued demand increases in edibles. And so that is -- and has been taking a larger percent of our oil demand. And as a reminder, edibles are limited by statute in Florida to the amount of milligrams per package. And so those are going to be a lower milligram. So when you see on that oil report, you may see some -- it may appear, but in terms of a per unit basis and then, of course, on a margin flow-through basis, we love to sell more edibles and it's a strong category for us. Hence, the reason that we're building out that larger facility in Tampa that will be coming online later this year.

Great. And on the CapEx, I never thought I'd be excited about higher CapEx spend, but I love what that's doing for your top line. You talked about the big projects you have underway, but I'm not sure how to reconcile that with the cash CapEx. Is this the right level of spend to assume over the course of this year or pending any additional projects you may have. But should I -- should we think about this kind of $45 million you spend is the right trend rate to model out for the remainder of the year?

Yes, Matt, thank you. So as we said at the end of last year and kind of on the call today, we're going to invest heavily in CapEx throughout the year. I wouldn't exactly run rate that, right? So we're going to -- it's going to ramp kind of over time and throughout the year. And the timing of those will shift with market demands and the build-outs in new markets. That could shift over time. So it could spill into the new year hit in Q4. So I wouldn't run rate that. But I would say it would be at least what you saw in Q1 for the remainder of the year.

Your next question comes from Russell Stanley of Beacon Securities.

I guess my first one, just a bit of a follow-up perhaps on an earlier question, but what can you say at this point about new patients coming into the Florida market at this point relative to new patients that you were onboarding a year ago? And I'm thinking with respect to demographic characteristics or product references. Obviously edibles are playing a role, but any additional color there?

Yes. As we mentioned in the call, Russ, patient growth has been exploding, quite frankly, and I don't think that's an overstatement in Florida. I mean when you look at where we exited 2020, it was approximately 2,500 patients a week. And as we said, I mean, the week of 4/20, we had 7,000 patients enter the market. I mean, on a regular basis, we're seeing -- it's not unusual for us to see numbers in the 6,000 mark on a week-over-week basis. So certainly, those rates have continued to be very, very strong. Our demographics have actually remained relatively stable. And I think that that's partially, I think, as a result of the fact that we haven't necessarily seen any change, new changes from a form factor perspective or other instances. So we had shifted down a little bit in age and the Florida market, specifically with the onboarding of flower when that happened. But again, it's just hovering around average age of 49, 50 years old and split about evenly male/female. And so again, as we mentioned, edibles is a really strong category for us. Right now, it's been steadily increasing with our product mix to come in line with national averages. Flower, of course, is also a very, very strong product category for us. And as I mentioned before, we're seeing continued kind of barbell action with respect to price preferences. So no real surprises, but just additional accelerated growth across all categories.

Great. Maybe if I could just change gears to West Virginia. Congrats on closing the acquisition of the additional licenses there. I'm wondering if you can elaborate on what your growth plans are in this market in terms of time lines for opening doors and the retail development plan there?

Sure. We're going to approach West Virginia like we do everything else here at Trulieve, we're going to go really fast, and we're going to get as many locations open as we can so that we can provide true access for patients in that market. We're a big believer in doing what we said that we're going to do, and we've made a commitment to the people in West Virginia that we're going to be there in a meaningful way, and we plan to do that. So look for more news on West Virginia from us as the year goes on, Russ, but you can certainly expect us to get operational there as soon as we can.

Your next question comes from Vivien Azer of Cowen.

My first question is a housekeeping one, please. It looks like in your 1Q '21 press release, you guys restated adjusted EBITDA for the December 31 period, up to 81.4% from 78.2% for your 4Q '20 press release. Can you just offer some color on that, please?

Yes. We decided we added back COVID-related expenses to adjusted EBITDA. We did that in Q1 of this year. And then we reflected that in the comparative period as well.

Okay. Understood. And just to follow up on the commentary, please, Kim, on edibles. Can you offer any more granular color on what you're seeing in the category from a form factor perspective, gummies versus chocolates? And as you think about a more than 3x increase in your own edible capacity, are you orienting with the market? And as well how are you thinking about dosing? Are you seeing any bias from consumers on high dose versus low dose edibles?

Yes. Thanks, Vivien. So on the high dose, low dose, again, we're constrained by statute here in Florida. And so no edibles package can be over 100 milligrams and each piece is up to 10. So certainly, I mean, some flexibility there in terms of if you're going to go 10, 5, 2.5 on that front. I would say that to date, folks are certainly leaning towards that 100 milligram, 10-milligram per piece formula. With respect to specific form factors within the edible category. Certainly, not surprising I think to anyone, gels, as we have to call them here in Florida or gummies is the clear leader in that category. We've offered those in a variety of, of course, flavor profiles, but also ratios. We just actually launched a CBN, CBD gummy that's gotten pretty positive results. And then we also have our gummies in our nano formulation for folks who are looking for something with a little bit more of a predictable or faster onset. So that's certainly the leader. I would say followed and again, not surprising for anyone, I don't think, is chocolates after gummies and -- but again, really strong growth across the portfolio on edibles.

Our next question comes from Andrew Partheniou of Stifel GMP.

And congrats on the good quarter. I wanted to maybe just talk about seasonality. You obviously have a strong hoop house platform in Florida. Last year introduced a little bit of less seasonality because of planting. Just wondering this year, how do you see your inventories? Do you expect to fully plant your hoop houses especially given the context of expanding edible production? Do you see any seasonality this year obviously, excluding Harvest? Any color you could provide in terms of what to expect on seasonality could be useful.

Yes. So certainly, out of our greenhouse footprint, we will be planting this year, and we would expect that to contribute. However, I think at this point, with our continued investment on our expanding indoor footprint, I think that, that takes a bit of the "seasonality" in terms of what customers might experience, we believe will neutralize that to a large extent. And so clearly with the -- again, as I mentioned before, with our second production facility coming online in Tampa and it should be noted that's not just a kitchen. That's also going to include additional production activity in that Tampa location. Certainly, having additional biomass material for that facility will be needed. And again, given our internal forecast of increasing our store counts, along with the robust patient demand and patient onboarding into the Florida program, we've got a good plan to be able to meet that demand across the remainder of this year.

Great. And I realize you might not be providing segment basis, but just wondering if you could give a little bit of extra color on organic versus inorganic growth this quarter? Any color around that could be useful.

Yes. Andrew, as I think Alex was pretty clear, we're not going to break out by segment. Clearly, you know which markets that we have that are organic with, of course, Florida being 100% organic growth. So clearly Florida continues to be a high performer for us. But as I mentioned, Pennsylvania also contributed for a full quarter this quarter. And we have, I would say, it's going to be a bit of a hybrid there, right, because we have, of course, the M&A of the original platform, but then invested in the cultivation expansion there on a more organic basis. So it's going to be a blend anyway going forward as we continue to expand out our footprint there on the cultivation and production side and to try and meet what we believe is significant unmet demand in that market.

Your next question comes from Camilo Lyon of BTIG.

I have a couple of questions. First on -- Kim, on the Florida cultivation in response to a prior question, it sounds like you ran out of premium flower inventory, and that skewed the pricing mix a little bit lower given that consumers only buy what they have available. As we think about the future harvest that are coming online, are you shifting more towards premium production or [indiscernible]? And should we expect a pricing pickup as a result of that? Or is pricing going to flow the way you kind of experienced in Q1?

Yes. So we constantly are evaluating demand. And I mean, the thing to remember, which I have to remember -- remind folks often is that these are plants. And so you can't -- in order to make an adjustment, it does take time for that to come through the system. But certainly, we're always monitoring customer demand and making adjustments as a result. I mean, I think that one thing that became very clear, we launched our cultivar collection, which is our ultra-premium canna connoisseur strains in our flower category. And it was -- that -- those skews have been met with incredible, incredible demand. And so we certainly are looking to increase the strain profiles available in that category. That being said, we do have extremely high-quality standards for that particular line. It has to meet a number, especially a 5-step criteria in order to qualify for inclusion in that category. And so we also have to be very mindful of making sure that we deliver on the value proposition that we're -- that we've set out for that particular category. But to answer your question broadly, I would say, certainly, we're constantly monitoring consumer preferences and then making adjustments. But in the flower category, particularly, it does take a little bit of time for those adjustments to catch up. So -- but the answer -- the short answer I guess is yes.

Okay. Got it. And then, Alex, can you tell us what the margin impact was from the Pennsylvania step-up in inventory and the composition of forthcoming harvests. Kind of a similar question as the Florida question, you just said that that's more of a premium product that would elevate the margin profile or kind of keep it at kind of at a more kind of mid-tier type product where pricing is probably more consistent with where it was even with the inventory impact in Q1?

Yes. So on the margin, like again, we're not going to -- we're not breaking out by state or reporting on that by state. But I will say that the fair value step-up of that inventory is fully exhausted, and you won't see that again in Q2.

Yes. And then in terms of our kind of philosophy as it relates to the planting in Pennsylvania, we do think it's important to have a value mix of products. However, we are going to be -- we want to make sure that when we're presenting flower for the first time to the Pennsylvania market that we've got a strong -- strong products that we're presenting to the market to make kind of our introduction, if you will, into the flower category in a meaningful way. And so I would say that we're leaning on the side of premium although again, being cognizant that we do need to have various price points to be able to make sure that consumers across the spectrum can take advantage of and enjoy our products.

Your next question comes from Kenric Tyghe of ATB Capital Markets.

Kim, could you just speak to how we should think about the evolution of your average basket as edibles track sort of penetration rates similar to that of other markets? And perhaps just to sort of build on that, how effective is your use of loyalty data being to date in driving both profitability and share in edibles? And how can we look to see that evolve over the course of the year?

Sure. So again, I mean, in terms of our average basket, we saw it was relatively in line, right, from Q4 to Q1. On an average basis, what we're really seeing, again, is that the volume of patients onboarding into the program. So I would say that that's more of what we're seeing from a trend perspective. In terms of product mix, as I mentioned, we did see growth in the edibles category quarter-over-quarter and are approaching in line with national averages on the edibles category. We're still a little bit behind but are rapidly catching up on that front. And then as far as the loyalty program goes, we have broad participation in our loyalty program, and that's been a -- it's been a very strong -- strongly adopted program for years now quite frankly. We are going to be making some changes and you can look for some changes to that loyalty program coming soon and some enhancements with the onboarding, as we've mentioned, of our SAP ERP platform, coupled with our Magento platform. We've got some additional visibility, and we'll have the ability to -- we'll have the ability to offer some additional features for our customers, which I think they're going to be very excited about. But I think that when you look at our customer loyalty and our retention rate, which really I think is a kind of maybe subset, if you will, from our -- our loyalty program is one thing that contributes to that, right? You look at going from Q4 in the low 70s to Q1 in the 80s. I think it's indicative of -- we're doing a good job of keeping folks happy, having the right product mix on the shelf and listening to our customers and our patients, right, and making sure that we're making adjustments where we see them and that we're answering their requests in the market.

And then just a quick 2 parts on the regulatory and outlook. Could you provide any insights or color on the recent rulings on the recreational use ballot initiative? And then secondly, could you just touch on the mechanics and hurdles of rolling acquired stores onto your license in Florida and how to think about that, any potential considerations around that?

Sure. So the ballot initiative, as we know, Supreme Court did strike down the ability for one of the proposed ballot initiatives to get on to the ballot for 2022. There is another initiative that is still pending or ruling. So we're waiting to hear on that. In addition, there is conversation around taking the lessons that were given from the Supreme Court in their ruling. They made very clear things that would need to be included in the language for them to consider it appropriate for inclusion on the ballot and crafting a new initiative. So I would say it's still in the works. I think that we're hopeful that the Supreme Court will make a ruling one way or the other on the second pending initiative. And then depending on how that goes, right, we'll have to take it from there. And then in terms of stores in Florida, Florida has a very specific and well-documented asset transfer program, if you will, and several companies have successfully transferred assets from one company to another. So we'll be working with the regulator on utilizing that protocol to transfer assets from one company to the other. Of course, as we know, there is absolutely no need in Florida to have more than one license and that is prohibited. So there would necessarily be a divestiture of the actual license. And again, we're in touch with the regulator here and plan to work hand-in-hand with them to effectively effectuate both the asset transfer and then the licensing -- the actual license divestiture.

Your next question comes from Eric Des Lauriers of Craig-Hallum Capital.

Congrats on the strong quarter. I was wondering if you could shed some more light on what we can expect from your wholesale versus retail strategy in markets where you can do both? Should we expect virtually 100% first-party product mix in your retail stores? Or do you plan on including significant third-party brands in your retail stores? And then how should we think of the difference in your retail versus wholesale product mix here?

Sure. And it's a very timely question, of course, as we are poised to launch Massachusetts and have been having a lot of conversation and strategy sessions around that internally. So I would tell you that it's going to be dependent on the market to some extent and it's going to be dependent on our footprint and our capacity on the supply chain side of the business, right? So certainly, we know that the more vertical the platform, not only from a margin perspective, but also I think something that's maybe not talked about as much, but is very, very important is quality control and brand awareness and stickiness when you're able to completely have a say on how that product is presented, the way in which it's shown on store shelves and the way that it's explained to patients or customers. Certainly, we believe that can lead to a stronger customer retention and customer loyalty rates. So we're motivated for sure to ensure that we have good quality branded products on our shelves in all markets that we operate in. That being said, we do believe that in some instances, there will not be the ability, whether it's due to canopy constraints or other constraints of us to be able to provide a full -- in Florida, we have over 600 SKUs that we produce, again, with a 2 million square feet of cultivation platform, right? We're not going to necessarily have the ability just due to regulatory constraints to replicate that exact platform in other markets. And so in those instances, right, we'll be -- we're going to make sure we've got what we consider truly staple products that we'll be making sure that we have available to our customers on our shelves, along with some very special items that folks will only be able to find in our stores. But then, of course, a very also robust platform of very specifically identified wholesale products that we'll be providing to the market. So there will be a mix of course of us externally wholesaling and then also on our shelves, inbound wholesaling to make sure that at the end of the day, the customer needs a good depth of products. They need a good experience. And we have a couple of things here at Trulieve is that you always want to just say yes and you want to stop the no. So we want to have good variety, good depth so we don't run into a no or give them a reason not to visit us. And then once they're in our store, we want to have a great environment for them by creating a customer -- the customer is always right mentality of just saying yes to make sure that we delivered that exceptional customer experience.

Okay. Great. That's helpful. I appreciate that. And then on Massachusetts here, could you just help us understand the pace of the ramp here in Massachusetts? It has been in the works for a long time. Should we still think of that as sort of a slow normal ramp? Or do you anticipate sort of hitting the ground running with wholesale sales here?

Yes, it has been a long time coming. I joke and say that I think any operator in Massachusetts, we should all have "We survived" T-shirts made. And so I would tell you that you're going to see a flurry of activity from us in Massachusetts this year. So we are a little gun-shy of giving any specific time lines or ramp projections because really we want to get there, we want to get operational, we want to start making sales. We've had a lot of time to lay a solid foundation, which we certainly have. And we're working on and have been working to secure additional biomass and products and whatnot so that we can begin processing Trulieve-branded products across various SKUs, again, both for our retail and then also to support our wholesale operations there. So more to come on that. But certainly I would say that you'll -- you should expect contribution from Massachusetts in 2021.

Your next question comes from Graeme Kreindler of Eight Capital.

I wanted to follow up on some of the comments that were made prior in the call regarding some of the demographic and patient trends seen in Florida. My understanding is that the patient penetration rate is close to about 2.5% of the population. And in mature -- more mature medical markets, we've seen that penetration rate go closer to 4%. And in some states like Oklahoma, that is closer to 8%. I was wondering, just to expand on those previous comments, is there any sort of internal targeting or the way you think about where that patient penetration rate might go? And maybe independent of any sort of potential for adult-use to come into Florida? Do you see it falling in line with some of those more mature markets? Or do you think Florida has a strong case to potentially be an outlier to the upside there? I would appreciate some thoughts.

Yes. I mean what I can tell you is that, as we've said, there is absolutely -- it's been an incredible growth rate so far this year, with no signs of slowing down. I think given the population, again, Florida is the third most popular state with over 20 million residents as well as that's growing, by the way, leaps and bounds. Florida is a very popular, I'll call it post-COVID destination from a residency perspective. So I would expect our population to continue to grow. And then if you look at the demographics of that population, again, trending slightly older from, again, from a financial capabilities perspective as well. So I do think that there's a strong case for Florida to certainly surpass I would call market average as it relates to medical penetration. And certainly, the numbers are indicating that it would -- that we're headed in that direction, right? The other thing to consider, of course, is we are still waiting for hydrocarbon rules here in Florida, which we're expecting really any time now, which would allow for a whole new onslaught of high-end concentrate products, which it will be interesting to see if -- when that -- it's already in statute. So we're just waiting on rules kind of similar to where we were with edibles previously. It will be interesting to see what that product category, how or if the demographics shift, one would expect that when you are able to see those really higher end CanaConnoisseur concentrate category open up that we may see some shift down in age from a demographic perspective. And so -- and then, of course, I'm also curious to see how that affects male/female ratios as well. So I don't see -- there hasn't been any indication that we're slowing down in Florida as it relates to patient growth, and I do think that given our particulars as a state, we very may well see an outlier on the higher end.

Your next question comes from Scott Fortune of ROTH Capital Partners.

Kind of follow-up on that kind of high level, as you look at the branding side of things here from a local level in each of the different regions. Obviously you have new southwest region. You've done very well kind of local branding. But how should we look at from the strategy, wholesale building out a national brand as you build out these different regions?

Sure. So certainly, brand and connectivity to consumers is something that has always been top of mind for Trulieve across the years. Certainly, we're constrained in markets. We have to make sure that we're first and foremost always compliant. That being said, we have recently under -- actually completed brand architecture work as we think about kind of what that national brand portfolio will look like and how it will be positioned across markets and across regions. And so we're so excited, again, about -- with respect to our Massachusetts launch and then our continued development in Pennsylvania to have the ability to really showcase brands in a way that we may be somewhat limited on doing in Florida as an example, because of packaging requirements and constraints on naming, et cetera, that exist. And we always have to keep that in mind, market to market. Another thing that I think we've been very consistent on, and we plan to continue, is finding and embracing local brand partners to really highlight the regionality of the market that we're entering. And so certainly, in Florida, we've been very, very successful with our local brand partners with Black Tuna, Sunshine Cannabis, et cetera. And also, of course, our more national brand partners that continue to build out our portfolio such as Blue River, which we're going to be excited to enter Massachusetts with them as a partner as well. And so always cognizant of the portfolio mix and cognizant of how our brands are positioned in the marketplace. You will see some truly internal brands coming to shelves in the very near term, again, as we launch that portfolio in Massachusetts and then as we integrate those brands across the northeast. So stay tuned. We've got some exciting things to come on that front.

Great. I appreciate the color. And just real quick, and just a follow-up on the federal legislation side. It seems like SAFE Banking is going to be lumped in with more the comprehensive side. Any updates, thoughts on the federal side of things? It seems to be getting pushed out here.

Sure. So I'm not sure if Center of Tumor has tweeted today or not, but right, I think it's -- there's -- it's "soon." So I -- it's the same -- we're monitoring it. We're in contact through -- in D.C. through resources there. And I think it's consistent with what everyone is seeing in that certainly, we're in a different place than we were a year ago. I think it's the positive, whereby folks are wanting, right, and are very motivated to have cannabis policy and significant cannabis policy happen at the federal level. Now it's just a matter of to what degree and what's included, whereas a year ago, right, or 2 years ago, we were all just hoping for something. So it's sort of the opposite side of the coin, if you will. But similar to what you all are hearing, Schumer continues to work on his comprehensive bill. There certainly have been talks with other agencies and he's consulting other agencies to get their input ahead of time, which will be interesting. He's holding it very, very close to the vest in terms of what all will be included. However, we do believe and have word that SAFE Banking, of course, as well as some level of social equity incremental justice reform will necessarily be included. But in terms of other items, it's a little bit of a wait and see. Of course, we saw the Republicans, I believe it was yesterday, introduced a measure in the House, which was interesting, right, and included a reduction in scheduling and some other items, including SAFE Banking. So I think all kind of -- all signs are pointing to something coming out. I think all of our hope is that it just -- it doesn't get too heavy, right, and that we're able to actually move something out. And that's really going to be what we're going to be watching after it's introduced, which we would hope would be within the next short while.

Your next question comes from Aaron Grey of Alliance Global Partners.

Just one for me. Congrats on the quarter. So just wanted to ask about average basket, right? So it was up a little bit sequentially, it looks like still down year-over-year. Wondering if you saw any boost from the stimulus at the end of the quarter? And then what impact you've seen from the edibles that have now been rolled out for a little bit on the overall basket? How you look for that to kind of trend over the next couple of quarters?

Sure. Yes. I mean, again, I think as it relates to basket, as we said previously, we're seeing fairly pretty consistent from -- on the basket side. But we are seeing, of course, a rapid increase in patients. So when you think about 2,500 end of the year to 6,000, that's a significant increase in a very short period of time. And so with that, we are seeing -- we're seeing folks come in that are new patients. And -- but again, that basket size is fairly flat as it relates to stimulus. And certainly, we saw some increases around stimulus. It was pretty identifiable those days when stimulus checks hit. And so it wasn't a protracted -- I will say, it wasn't a protracted period where stimulus was affecting or therefore, skewing baskets. I think maybe part of the question is, okay, well, should we assume then the baskets are going to decrease in Q2 because maybe stimulus was increasing or creating a bump in Q1. That's not the case. So I think that, again, as we can tell right now, things are fairly consistent. Again, edibles is increased Q4 to Q1. And as I said, is coming in line or beginning to come in line with those national averages that you see in product mix.

Your next question comes from Andrew Semple of Echelon Capital Markets.

And congrats on the quarter. Based on your plans and the pace of additional production capacity expansions currently being built out in Florida, I just wanted to clarify whether you feel supply-constrained today or whether that's in anticipation of future medical cannabis demand? And perhaps you could comment to whether any of those build-outs might just be a potential buffer for potential use.

Yes. So we certainly try to pace, right, our cultivation and production with growth in markets, and we'll do that nationally across our entire platform. I will say -- I'll be candid and say that the increase from 2,500 patients to 6,000 was not necessarily anticipated. So we are playing a bit of catch-up in Florida, specifically around our cultivation. And so -- which is, look, that's a great problem to have. But we -- from a patient perspective, we take it very, very seriously in having, again, depth in category and depth in product is one of our hallmarks. So it is very important for us to make sure that we've got the right mix for folks. And we were running a little thin in Q1 because that -- just that surge in patient demand took us a little bit by surprise. So I would say it's a little bit of a mix, right? We've accelerated plans that we had in place for 2021, and we brought some of those forward to make sure that we are keeping up. And then we'll continue that again until the market signals that we need to do -- we need to either throttle back or accelerate even further. It should be noted that we are building, of course, in the latter half of the year, specifically as we approach the end of the year, right, then that goes towards really our 2022 plan. So again, cultivation specifically has to be built, and it has to be planted and then it has to be harvested, et cetera. So it's not an immediate -- when you have it online and when you plant it, it doesn't immediately come through from a revenue perspective. So we always try and stay one step ahead. Q1 demand in Florida got a little ahead of us. So we're catching back up. And I think in Alex's comments, he mentioned, right, the rate at which we're going to be bringing cultivation online on a go-forward basis. So exciting times and lots and lots of growth ahead.

Understood and agreed, a very nice problem to have. Just moving on to the next question here. I understand there's a fair amount of cash on the balance sheet today. But I would like to get your updated thoughts on whether you continue to monitor potential debt capital for potential opportunities to maybe lower the business' overall cost of capital?

Yes. So I mean, certainly, we're going to be -- continue -- as we just talked about, right, we're going to continue to reinvest into the business. And certainly want to make sure that we're prepared to take advantage of opportunities as they present themselves. One thing we haven't really talked about on the call today is new markets from an organic perspective coming online through applications. And certainly, there are plenty of those opportunities that are going to be coming to fruition that we hope to participate in over the year. And in addition, as I mentioned, being able to go deeper in markets that we're already established. And so obviously, we clearly do that in Florida. We're in the process of doing that in Pennsylvania. You'll see us do the same in Massachusetts, West Virginia, of course, coming online. And then there's, like I said, plenty of other markets, particularly in the southeast that we hope to have, again, the problem of spending cash to build CapEx so that we can build off those new platforms. So lots of uses of cash. And again, just couldn't be more excited in terms of the prospects of growth that we have ahead of us for '21 and 22.

There are no further questions at this time. I will now return the call to Ms. Ricci for closing remarks.

Thank you for joining us today. We look forward to updating you all again next quarter. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.