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

Good morning, ladies and gentlemen, and welcome to the Trulieve Cannabis Corporation's Third Quarter 2021 Financial Results Conference Call. My name is Jamie, and I will be your conference operator today. As a reminder, this conference call is being recorded. And at this time, I'd like to introduce your host for today's conference, Christine Hersey. Ma'am, please go ahead.

Thank you. Good morning, and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer; and Alex D'Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for Trulieve. Following the prepared remarks, we will open the call to questions. Steve White, President, will also be available to answer questions. As a reminder, statements made during this call that are not historical facts constitute forward-looking statements, and these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A Risk Factors of the company's Annual Report on Form 10-K for the year ended December 31, 2020. Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise these looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will also discuss certain financial measures that are not calculated in accordance with the United States generally accepted accounting principles for GAAP -- or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for 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 earnings press release that is an exhibit to our current report on Form 8-K that we furnished to the SEC today and can be found in the Investor Relations section of our website. Lastly, at times during our prepared remarks or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future. This morning, we reported results for the third quarter of 2021. A copy of our earnings press release and an accompanying PowerPoint presentation may be found on the Investor Relations section of our website, www.trulieve.com. An archived version of today's conference call will be available on our website later today. I'll now turn the call over to our CEO, Kim Rivers. Please go ahead.

Thanks, Christine. Good morning, everyone, and thank you for joining us today. We are thrilled to report our 15th consecutive profitable quarter, driven by continued outperformance and record revenue. As we approach the end of the most transformative year in our company's history, we remain firmly on offense with an unrelenting focus on executing our strategy. Just over 6 weeks ago, we closed the Harvest acquisition, the largest U.S. cannabis transaction to date. As we outlined during our call on October 1, this deal solidifies our position as the largest and most profitable public multistate cannabis operator in the U.S. On a pro forma basis, the combined company's third quarter results would have been approximately $316 million in revenue and $121 million in adjusted EBITDA, the strongest among any reporting MSO this quarter. On a stand-alone basis, Trulieve reported third quarter results of $224 million in revenue, representing an increase of 64% growth compared to last year. This growth was achieved with an industry-leading gross margin of 59% and adjusted EBITDA of $98 million. Trulieve operates in 11 states across 3 hubs, where we now have a total of 155 dispensaries, 40% greater than our nearest competitor. Importantly, we now operate 47 dispensaries outside of Florida compared to 2 just 1 year ago. Our industry-leading retail network is supported by over 3.5 million square feet of cultivation and processing capacity. With market-leading operations in Arizona, Florida and Pennsylvania, we are well-positioned to build additional scale and depth in our cornerstone states while redeploying profits to open and expand into new and emerging markets. While our teams are working to close the Harvest acquisition, we did not slow down during the third quarter. Trulieve alone opened 7 new dispensaries, closed the Keystone Shops acquisition in Pennsylvania; launched new products, including the first line of concentrates using hydrocarbon extraction in Florida; introduced a new brand portfolio with Cultivar Collection, Momenta, Muse and Sweet Talk lines; announced a pending license award in Georgia; acquired an additional retail license and launched wholesale operations in Massachusetts; and became the first operator to commence cultivation activities in West Virginia. Concurrently, the Harvest team opened 6 new dispensaries, purchased an option to buy license in Arizona; secured sale-leaseback financing for the Hancock, Maryland facility; and arranged the sale of the duplicative license in Florida for $55 million in cash. Since the end of the third quarter, we've kept the momentum going. In October, we opened a new affiliated retail location in Pittsburgh, Pennsylvania. In the past week, we were first-to-market in West Virginia, opening the first 2 medical dispensaries in the state, in Morgantown and Weston. In Florida, 14 legacy Harvest dispensaries reopened is Trulieve-branded locations throughout the month of October. Those dispensaries are carrying Harvest-branded products such as Alchemy, Colors, Modern Flower and Roll One, in addition to the extensive portfolio of Trulieve products totaling over 750 SKUs across a wide variety of form factors. For Harvest stores that were opened more than 1 month as Harvest and subsequently converted to Trulieve post acquisition, we have already seen a 35% increase in the revenue run rate thus far. With the conversion of Harvest stores in Florida completed, we are focused on additional locations. As of today, Trulieve operates 108 dispensaries in Florida, and we expect to open another 5 dispensaries by year-end. During the third quarter, Trulieve maintained the top position in our home state of Florida. Trulieve remains the largest operator in Florida as measured by every conceivable metric, including volume of products sold for flower and oil, number of SKUs, range of product categories sold, number of patients served, total employees, open retail locations, cultivation and manufacturing capacity, revenue and profit. According to data published by the Department of Health between July 2 and October 1, Trulieve alone sold over 32,000 pounds of flower and more than 1.1 billion milligrams of oil, respectively, amounting to more than 200% and 275% greater than our nearest competitor. While we are proud of our achievements and acknowledge these impressive statistics, we are committed to continually setting the standard for operational excellence while remaining focused on delivering exceptional customer experiences. We are forging ahead with a series of initiatives, centered around broadening access to cannabis products in Florida, capacity expansion and technology investments designed to further advance our leading position. First, we are proud to lead the way, further expanding access to cannabis products in the state of Florida with the first available concentrates manufactured using hydrocarbon extraction. Since the initial launch in September, these products have been very well-received, so much so that we recently quadrupled hydrocarbon extraction capabilities and are building out additional capacity that will come online through the beginning of 2022. In addition, we continue our cultivation expansion efforts while also adding manufacturing capacity across several other product lines. During the third quarter, we began operations at our new 55,000 square foot Tampa production facility, which includes a larger edibles kitchen. We expect the new kitchen will be fully ramped by year-end, freeing up existing space for increased production. As a market leader in Florida with roughly 50% market share for over 5 years now, we have collected and analyzed data for roughly half of the total transactions in the market to date. This data offers us valuable insights into customer preferences and behavior that informs our decision making. One point of differentiation for our organization is continued investment in technology, including our SAP enterprise software system and customer data and analytics platforms. These tools afford truly the ability to capture and utilize data company-wide, aid in SOX compliance and enable patient and customer appreciation and retention tools. We aim to maintain our position as the leading operator and purveyor of high-quality cannabis products with a customer-centric approach. We will continue to invest in Florida, adding cultivation, manufacturing and retail capacity so that we can deliver high-quality products and best-in-class customer experience to patients across the state. Florida remains one of the most attractive medical markets in the U.S., demonstrated by continued growth in 2021 on top of the accelerated growth experienced during 2020. Patient growth in the third quarter remained strong despite the end of telemedicine consultations in June with an average of over 2,600 patients added per week. Due to our existing scale and depth, additional investments in Florida continued to deliver fast and favorable returns that we can redeploy and invest in future growth opportunities ahead of catalysts, including adult use sales. Turning now to Pennsylvania. In July, we closed on the acquisition of Keystone Shops, adding 3 affiliated medical dispensaries in the Philadelphia area to our retail presence. As we indicated during the October 1 call, we were not required to divest any affiliated cultivation or retail assets in Pennsylvania as part of the Harvest acquisition. In October, one additional affiliated medical dispensary opened in Pittsburgh. Pennsylvania presents a significant growth opportunity, both within the existing medical market and with the potential future expansion to include adult use sales. As of mid-August, the Pennsylvania reported over 360,000 active patient certifications and more than $2 billion in cumulative dispensary sales since the program's inception. We remain optimistic that mounting bipartisan support will ultimately lead to legislative measures to allow adult-use consumption in Pennsylvania. Finally, rounding out the discussion of our key markets. Let's turn to Arizona, our Cornerstone state in the Southwest. The Arizona market continues to develop and has outperformed our expectations since the launch of recreational sales in January. Since Harvest reported second quarter results in August, the team opened our 16th dispensary in North Mesa, purchased an option to acquire a 20th license and made considerable progress on developing a new upcoming retail location, which will be the only dispensary in Downtown Phoenix. This market provides both an anchor to our operations in the Southwest and an opportunity to glean valuable insights in this growing recreational market. We are continuing to invest in Arizona and as the largest retail operator in the state, we are well-positioned ahead of the coming winter months and return of tourists and [snowboards]. Following the recent debt offering and repayment of high-cost and short-term Harvest debt, Trulieve has ample cash to fund our growth initiatives within this generational investment opportunity. Over the next few quarters, we will continue to invest in our cornerstone markets, adding depth in our retail reach and scale in our cultivation and production assets. By fortifying our leadership position, we will increase branded products through branded retail stores while continuing to build our wholesale channel, broadening our reach ahead of future catalysts. In the coming year, more than 20 locations will be rebranded Trulieve outside of the state of Florida, creating a consistent experience across markets. In addition, we will strategically invest in emerging markets that offer attractive returns. While we continue to invest in further developing assets across our existing hubs, we are open to completing additional tuck-in and expansive acquisitions. Our hub strategy allows us to add bolt-on assets in our operational hubs, supported by our existing teams and infrastructure. In new regions, our M&A activity centers around adding both teams and assets as we did with the Harvest acquisition in the Southwest. Again, we will remain disciplined with our M&A strategy, pursuing profitable growth where we have an opportunity to acquire strategic assets in attractive markets at an appropriate price. In addition, we will continue to pursue opportunities in new markets through organic license awards. We remain focused on markets with attractive regulatory structures that will allow us to achieve optimal scale with consistent supply, quality and branding as part of our commitment to delivering exceptional customer experiences while pursuing profitable growth. Our third quarter results and recent actions demonstrate our commitment to our strategy and to our goal of building a sustainable and scalable business engineered for success. As a reminder, our fourth quarter results will include the full quarter contribution for Harvest. Absent any contribution from Harvest, we remain confident in our 2021 guidance of revenue in the range of $815 million to $850 million and adjusted EBITDA in the range of $355 million to $375 million. we will provide the year 2022 combined guidance when we report fourth quarter results in March. With that, I'll turn the call over to Alex for more details on our third quarter results.

Thank you, Kim, and good morning, everyone. This has been a tremendous year so far, highlighted by significant progress along several fronts, including operational execution, organic growth and expansion initiatives and acquisition and integration efforts. We'll continue to build on this momentum through year-end and into 2022. As we fully integrate the Harvest acquisition, we'll be leveraging expanded capabilities across our organization, supported by a deeper bench to help successfully navigate the rapidly evolving landscape within our industry. We're proud of how far we've come and excited to keep it going into next year. As Kim highlighted earlier, we reported third quarter revenue of $224.1 million, an increase of 64% year-over-year compared to $136.3 million during the third quarter of 2020. Third quarter revenue increased sequentially compared to $215.1 million during the second quarter, further adding to outsized growth in recent quarters. Trulieve ended the third quarter with 101 dispensary locations. As of November 15, Trulieve owns or operates 155 dispensary locations. The company achieved gross profit of $154 million or a gross margin of 69% in the third quarter compared to $144.5 million or 67% during the second quarter. During the third quarter, we employed a targeted pricing strategy to preserve margin and retain the value of our brand and product offering. In addition, gross margin was positively influenced by increased flow-through of material to finished goods despite macroeconomic labor constraints and the onboarding of additional capacity in all markets. This was partially offset by increased third-party product sales and the inventory fair value step-up brought on by the acquisition of Keystone Shops early in the quarter. As stated in prior quarters, we expect gross margin will continue to fluctuate quarter-to-quarter depending on inventory flow through product and market mix. Turning now to operating expenses. SG&A expenses in the third quarter, excluding depreciation and amortization, were $79.9 million or 36% of revenue compared to $61.5 million or 29% of revenue during the second quarter of 2021. Third quarter expenses included approximately $16.1 million associated with onetime share-based compensation and transaction acquisition and integration costs. The increase in share-based compensation expenses related to the onetime exchange of outstanding warrants to restricted stock units. The transaction acquisition and integration costs were primarily related to the Harvest acquisition. Excluding these onetime costs, SG&A was 29% of revenue. As we continue to build scale and depth in cornerstone markets while expanding in new markets, we expect quarterly fluctuations in operating expenses as investments are made ahead of increases in revenue. Operating income for the quarter was $66.3 million compared to $76.3 million earned in the second quarter. Net income was $18.6 million for the quarter compared to $40.9 million for the second quarter. The sequential decline in operating and net income reflects the aforementioned onetime operating expenses and higher estimated tax provision for the third quarter. We expect quarterly fluctuations in estimated taxes, particularly within our high-growth industry. We generated earnings per share of $0.14 on a fully diluted basis. Absent onetime expenses, earnings per share would have been $0.26. We expect transaction and integration costs will continue to impact reported EPS for the next few quarters. Turning now to adjusted EBITDA. For the third quarter 2021, adjusted EBITDA was $98 million or 44% compared to $94.9 million or 44% during the second quarter. This is attributable to the flow-through of our increased gross margin, partially offset by the increase in sales and marketing expense associated with our growing retail footprint. We ended third quarter with a cash balance of $213.6 million, bolstered by $75.1 million in operating cash flow through the first 9 months of the year. Subsequent to quarter end, we completed a $350 million private placement of 5-year senior secured notes at 8%, representing industry-leading terms for U.S. plant-touching cannabis companies. We have retired $270 million of high cost and short-term Harvest debt and $18 million of Trulieve notes payable. Our strong cash generation and financial profile provides flexibility to quickly capitalize on expansion opportunities, invest in organic growth and go deeper in states where we operate. Company-wide capital expenditures year-to-date averaged just over $21 million per month in accordance with our plans. Expansionary CapEx investments will continue through year-end and throughout 2022 as we build scale and depth in line with market growth trends. Fourth quarter investments will include allocation of capital to newly acquired Harvest assets. In closing, I'd like to express how proud I am of the team here at Trulieve and how tremendous it has been to see firsthand the growth and continued evolution within the organization. I look forward to carrying this positive momentum into next year. With that, I'll turn the call back over to Kim.

Thanks, Alex. This has been an exceptional year-to-date at Trulieve, underpinned by the transformational acquisition of Harvest. We are exiting the year as a larger, stronger organization, well-capitalized and ready for the next phase of growth. While we have accomplished a great deal, it remains true that our story is just beginning. We are still in the early innings for Trulieve and the U.S. cannabis industry. The continued efforts to advance significant cannabis reform through legislation, such as the Safe Act, More Act and the newly introduced States Reform Act highlights the increasingly mainstream acceptance of the cannabis industry in this country by the broader population, business and political leaders. In our view, it is only a matter of when and not if change will come. Even as federal reform continues to build momentum, advancements at the state and local level are accelerating over time, broadening the opportunity set and delivering greater access to cannabis to an eager public. For reference, the U.S. legal cannabis market is expected to grow to $48 billion in 2026, up from $26 billion in 2021. The markets in which we operate today represent over 50% of forecasted sales and are expected to grow over 65% in the next 5 years. Within this context, Trulieve is uniquely positioned to meet the promise of this generational investment opportunity with an enviable combination of unmatched scale, operational excellence, strong financial profile and world-class team. Trulieve is poised and ready to define the future of cannabis. Thank you for joining us today, and as I always say, onwards.

At this time, Kim Rivers, Alex D'Amico and Steve White will be available to answer any questions. Operator, please open up the call for questions.

[Operator Instructions] Our first question today comes from Derek Dley from Canaccord Genuity.

Congrats on another set of strong results. I wanted to focus in on 2 states in particular. So one, let's start with Pennsylvania. We've been hearing from some others about price competition in Pennsylvania. From what I get namely on the value end, can you comment on what you're seeing within that? And then the second part of that question, just in terms of incremental capacity coming online in PA. Is your capacity online now? And I would assume that, that would focus on the higher-end cultivar side?

Sure. Thanks, Derek. So as it relates to pricing in Pennsylvania, I think to your point, there's been a lot of conversation around pricing. And what we believe and what I believe is that pricing in Pennsylvania started exceptionally high. And so what we're experiencing is the normalization of pricing that happens over time and should happen over time in any market. Certainly, value products appear to be more affected, which makes sense as, of course, quality separation occurs among pricing tiers. In Pennsylvania, historically through our acquisition of Pure Pen, we have been focused on premium products. And so we certainly have experienced, I believe, less pricing pressure than maybe some of our -- some of the peer set. Moving forward, we do plan to bring additional capacity online. And as noted, we weren't required to divest any of our -- any of the Harvest retail or cultivation affiliated assets in that state. And so really, the focus in Pennsylvania will be to bring increased branded products through branded retail over time. And we believe that, that will provide a significant upside as it relates to margin. in that state, along with, of course, increased product availability and -- that the customers are looking for from our brands.

Okay. Great. That's helpful in Pennsylvania. And then secondarily on Arizona and maybe Kim or Steve can answer this one. But as the markets entered adult use here, what are the typical consumption patterns of customers in that space? Are you noticing that there's a -- is there a material difference between new adult-use customers and perhaps the previous medical customers?

Thanks, Derek. They're generally the customers they had used customers look a lot like the medical customers. What you will see over time, and this is generally true, I think, of all markets that add adult-use sales. That the recreational sales, the basket sizes tend to be a little bit smaller than the medical sales. And over time, you see a transfer of customers from patients over to adult-use customers. In other words, the number of medical patients decreases as the recreational customers increase. We are seeing those patterns in the state of Arizona.

And our next question comes from Andrew Partheniou from Stifel GMP.

Congrats on the great results. Maybe thinking about Pennsylvania and Massachusetts, especially given you just entered Massachusetts wholesale market. If we leverage headset, we kind of see that the pricing in both markets at the retail level is similar. But at the same time, we are seeing some pricing normalization, I think, as you put it in Pennsylvania, but Massachusetts seems to be a little bit more stable even though it's on the limited license market there. I'm just wondering if you have any thoughts around that. Why do we see a kind of difference in trends in both of those states? And if you could provide any of your thoughts and color on that would be helpful.

Yes. Thanks, Andrew. So I think that, first, I would just caution against relying on any single data set as we certainly have found some inconsistencies there, but understand that we deal with the best available that we have. I think that it goes back to what my comments previously around the fact of where things started in Pennsylvania. And we may, in fact, be seeing a bit of a sort of pendulum swing there as, again, differences and tiers are established, whereby I do think in Massachusetts, there are already existing pretty definitive pricing as it relates to quality on a tiered basis across several categories in Massachusetts. So I think that it's a little bit of a case study in pricing strategy and in consumer behavior across both markets, but that's at least what we're seeing. And I think just to add a little additional color, we certainly are seeing the continuation right, of barbell patterns across both markets. But with Pennsylvania, I think part of that barbell is being established, right, which is a bit different than what we see in Massachusetts.

Appreciate that color. And maybe switching gears to new states and your outlook on that, ideas around New Jersey, New York, Illinois, other states in that area. In New Jersey, in particular, I believe, and correct me if I'm wrong, but you were among the 2019 RFA medical applicants. Wondering if you had any updated thoughts around entering New Jersey or any of those other states? Does M&A make sense with the increased visibility on REC legislation and how that market will look in New Jersey or New York?

Yes. I mean, as you know, we don't comment on any sort of specifics around M&A. We remain very bullish on the Northeast as a whole. We think and we like our position in the Northeast currently. We also, of course, as we noted in our prepared remarks, have very specific metrics around deployment of capital whether it's through organic growth or through M&A. Just for -- and this is in the Northeast, it's depending on how you draw your state lines. But West Virginia that we just opened this past weekend, I was at that grand opening. And I can tell you that there were -- there was an exceptional reception to the first store opening in West Virginia. We served over 240 customers on Day 1, lines around the block starting very early and going into the evening. So we're excited about our footprint. We are certainly poised to take advantage of additional opportunities as they become available and remain bullish on the Northeast as a hub.

Our next question comes from Russell Stanley from Beacon Securities.

I guess my first just around the integration progress. Congrats on the rebranding of Harvest dispensers in Florida. I just wanted to get your thoughts on how far through what must be an extensive process you are. I know you're only 6 weeks in. But I guess I wanted to get your thoughts on when you expect to be substantially complete.

Sure. I mean, I think from our perspective, and I'm going to let Steve comment on this as well. But from our perspective, integration is going extremely well. I think I've noted previously that Steve and I, when we first started having discussions about the possibility of a transaction, and we're in sort of the final wrap-up stages of the LOI, we set a priority of alignment across teams as really sort of a defining priority. In other words, if it's through the transaction, through diligence, if things started to get offside, we were going to have another conversation about whether or not it made sense to continue because that's how important we believe that alignment really is throughout the process. And I think that, that was well-served. Our teams have gotten shoulder to shoulder very quickly and are working together. And I think that the evidence there is in the fact that we haven't had any significant departures of what we have identified as key team members. In addition, as you mentioned, stores are being converted, product lines are coming through on a combined portfolio basis, which is, again, a key thing for us as we get through integration. We'll certainly have additional work to do through 2022, bringing systems together over 11 markets is no small feat, and we are certainly headed down working on that as we speak. And then, of course, in my prepared remarks, we talked about the fact that we're going to begin store conversions across that combined platform. And in addition, we'll be working through increased capacity to bring that branded product portfolio on a combined basis across the combined platform as well. Steve, do you have any other comments there?

Sure. I think, Russ, it's important to remember that just for context that we're actually months away from what the expected close was. In other words, we shouldn't even be having this conversation yet. But we did find a number of areas in which the 2 teams -- where we could bring the 2 teams together more quickly and we could actually get to the close faster. It's been a point of emphasis for both organizations, obviously, because it's a very big deal. So I would say across all aspects every way that you're going to look at the integration process, we're very much ahead of schedule and have demonstrated that the teams together are executing maybe even better than they were independently.

That's great. Maybe just 1 more, and I'll get back in the queue on Massachusetts. I think you've recently entered the wholesale market there. Just wanted to get a sense if you could share perhaps penetration numbers where you're at. And perhaps any targets on penetration, be it by year-end or H1 or whatever you can share on that front would be helpful.

Yes. Thanks, Russ. As you noted, we just launched our wholesale operations in Massachusetts. We have been focused on making sure that we have the right product mix with both truly branded products as well as our national partner-branded products. We recently brought to market both Bing and our partner, Blue River, which we think are 2 differentiators for us in Massachusetts, alongside our very well-received Cultivar Collection flower brand and our high-end concentrates brand, Muse. So we feel like we have the product mix where we want it at this point. And now we're ramping production scale to meet demand as we get to understand what those demand profiles look like for each one of those categories. I can say, and I'm not in a position to share particular numbers on this call. But I can say that we, in terms of number of doors, we are hitting our targets and are continuing to ramp as again, we bring that capacity online.

And our next question comes from Matt McGinley from Needham.

Based on the pro forma numbers you provided in the third quarter, it looks like Harvest revenue declined by about 10% quarter-over-quarter and EBITDA dollars would have been down a little bit as well. I assume that was probably mostly Pennsylvania and [indiscernible] Arizona, but can you talk about what happened in those states? And I guess how those trends fared in the fourth quarter overall with the Harvest business.

Matt, yes, keep in mind, when you do a pro forma, we're taking out the impact of intercompany. So -- and when you add that back quarter-over-quarter, Harvest was down just slightly over 1% actually.

Yes. And Matt, this is Steve. Specific to your questions about Pennsylvania and Arizona, what we can say is that we actually saw a quarter-over-quarter improvement in our retail sales in both of those markets. That the marginal decline quarter-over-quarter was mainly attributable to -- or entirely attributable to Nevada sales.

Okay. And on the gross margin side, how much of a headwind was labor inflation and labor availability in the gross margin in the third quarter? I know that, that was something you noted is a bigger issue in the second quarter, and it appears to have largely dissipated in the third. But I'm just kind of curious what that looked like overall. And I guess, more importantly, like what does that look like into the latter part of this year?

Yes. Thanks, Matt. So as we noted correctly in Q, certainly, that was a headwind for us in Q2. It was also there in the beginning of Q3. We compensated for it by increasing our overtime. And so the cost of labor for us did -- was elevated somewhat in Q3, we do see a normalization happen, that started occurring in the back side of Q3. And we would expect that to be back to a more normal rate and going into -- and certainly what we're experiencing now in Q4.

And our next question comes from Pablo Zuanic from Cantor Fitzgerald.

Steve, one question for you. I hear there on the commentary at the beginning that in Florida, the Harvest stores with the new assortment and changes, sales were up about 35%. Can you give more context about that? I thought the stores were just rebranded. Is there a number for a month, for a week? And is there a number that we should just lap on top of your Harvest stores in Arizona, Pennsylvania as you get the benefits of the Trulieve [indiscernible]. And then a second one for Kim, if I may. So give me -- if I look at the Solevo numbers that were given at the time and our estimates, we think Keystone was about $10 million for the quarter. So it means that sales were about flat, right? And if I'm right, sales were flat and OMMU had said about 8% volume growth in Florida, that would mean that Florida price mix was down about 7 to 8 points quarter-on-quarter for you. Can you give some context there? I mean any color would help.

Thanks, Pablo, and I'll start with the Florida question that you had. So when the legacy Harvest stores, when they were required to be shut down and then opened again as Trulieve stores post close, with the addition of additional products and some additional renovations in the stores themselves. What we saw on an annualized basis is an increase of 35% between the numbers at the Harvest stores were showing prior to the close down and after. In other words, it's not just a bump that you saw that was temporary, the days that we calculated out and annualize those days. And so you saw a 35% increase there, mainly due to the increased product SKUs and some of the additional -- like the flow-through work that was done by the Trulieve team.

Yes, and I'm sorry...

But just to be clear on the numbers, if I may ask? Sorry, Kim, go ahead. I'm sorry.

No, no, no, go ahead.

No, I was going to say that 35% number, of course, is very impressive. But my question is more, was that something you calculated based on results of a week or a month. I mean, I'm just trying to think how we extrapolate that going forward? And is that 35% something that we should assume you will also see us a benefit in your stores in Pennsylvania and Arizona, Steve?

Yes, I don't know whether or not you could apply that pattern across other states or not but what -- specifically what we are looking at is we are comparing our August legacy Harvest numbers with the annualized numbers post flip over to Trulieve stores. Whether or not those -- I mean I don't know that you could extrapolate much further in other states because obviously, in the state of Florida, the Trulieve SKUs are quite expansive. So we'll see and we'll report what happens in the other states.

Yes. And I'm going to try Pablo to -- there was a few questions, I think, on the backside of that for me. But just to piggyback on what Steve said. Certainly, strategically, in the other markets, what we're going to be focused on near term, is while we will have additional capacity coming online, we are going to be focused on getting the product mix situated through our combined brand portfolio for each market and increasing production of branded retail -- or sorry, branded products into and through an expanded branded retail channel. And that certainly will be the primary focus in both Pennsylvania as well as Arizona in the coming months. And so while in Florida, specifically, we were able to come in and make an immediate impact by increasing not only product availability, but also, again, a more robust combined product portfolio of both Harvest, legacy Harvest and Trulieve products into those channels. We will plan to do some of the same in other markets, but of course, we'll also have a different product mix that's appropriate and acceptable, right, to customers in each of those markets moving forward.

Got it. And can you comment, Kim, on my question on Florida? I mean, if you want, I can repeat it, but do you want to repeat it?

Yes, I'm not sure. Yes, please repeat it.

Okay. So in the case of Florida, the question was based on my math, Keystone shops is about $10 million in sales for the quarter. So that will be in the quarter-on-quarter in organic terms, the business was flat. I mean nothing wrong with that in the current context, but the OMMU data for Florida have shown about 8% volume growth. So does that mean that the price/mix in the quarter was down about 8% sequentially? It would be consistent with all the talk that we are hearing about price competition there, but some color there would help.

Yes. So -- and I'm sorry, I'm trying to reconcile the comment as it relates to Pennsylvania to how it relates to Florida. What I can say around the Florida business is that certainly, we're very proud of our performance in Florida this quarter. We had increased inventory flow through into finished good products, which we felt was very important in order to continue to keep up with what we are seeing on the ground, right? So as we mentioned, there was promotional activity. However, I think we did a significantly better job this quarter, executing on strategic promotional opportunities while maintaining margin, which you saw come through in the results. And certainly, making sure that we are offering more targeted promotions across certain product categories. When you have promotional activity, it's important that we continue to have the ability to have increased scale because you have to have additional production to increase, right, because you're selling more units, obviously, at slightly lower prices. And so I think that this quarter, we really saw, again, a combination of our scale coming through, our production team firing on all cylinders and our sales and marketing team leaning into more specific strategic promotions that led to our outperformance on our peer set as it relates to Florida. And quite frankly, are maintaining, right, over 50% market share most weeks as reported by the OMMU.

Our next question comes from Aaron Grey from Alliance Global Partners.

So first question for me. I wanted to double back a little bit on the last one but kind of talk about between the lens of kind of retail versus wholesale. I know you haven't historically kind of provided the breakout between retail versus wholesale for the company starting to shift now with some of the acquisitions as well as Harvest coming through. So I just wanted to know maybe if during the quarter, you could kind of provide some of the breakdown or maybe if you don't want to do that, maybe some metrics you used to provide in terms of same-store sales visits basket. Just if you could provide some color on how that trended during the quarter. I think that could be helpful.

Yes. Thanks, Aaron. So obviously, historically, wholesale has been less of a relevant metric for Trulieve given our significant presence in the state of Florida, where wholesaling is not an option. However, to your point, we are starting to experience additional wholesale capacity as we expand outside of the state of Florida. Important to note that we're not necessarily managing the business this way currently. But we are, again, continuing to focus on that wholesale channel on a go-forward basis. I think it's important to note that in 2021, if you were to exclude Florida, about half of our business was via wholesale, and we do plan to double that business moving into 2022. However, I should again reiterate that we do believe that the best return is through branded product and branded retail, and that will remain a priority.

Okay. Great. And then just in terms of some of the competition within Florida and the promotional activity. And you talked about some targeted promotion yourself. Just based on some commentary from peers, if it does persist, we had talked about it on this call in the last quarter in terms of how long it would last, given the high margin profile within the state. So if it does persist in the state, what are you guys looking to do maybe in terms of expanding it beyond just more targeted promotion? Obviously, very healthy margins despite some of your [indiscernible] promotion during the quarter. So how are you now looking at the state and evaluating the competitive environment in the case of more heightened competition and promotion for an ongoing basis?

Yes. I mean, I think that, look, we've been, I think, very, very successful in maintaining static in terms of impact overall as it relates to pricing and promotional activity. However, what you saw from us this quarter again was an increase, right, as that flows through to our margins based on our strategic focus. Look, if I can put up [ 69% ] margin, I'll do that all day. And so I think that the proof is in the results and we like to rely on our results as opposed to go-forward statements. I should note that as it relates to investment in Florida, to be clear, we have the ability over the next 12 months to bring online an additional 1 million square feet of cultivation. And again, we'll be making decisions as to whether or not to actually bring that capacity fully online or not, depending on what we need to do and what we see in the competitive landscape. We're not taking our foot off the gas in the state of Florida. It's an incredible market with incredible continued returns as well as future upside as it continues to grow on the medical front. And of course, as we continue to position ahead of adult use.

Our next question comes from Camilo Lyon from BTIG.

Just going back, Alex, maybe if you could just help us on the Q3 gross margin and unpacking the moving parts. You talked about a few different puts and takes. Maybe if you could just quantify them to help us understand the magnitude of those buckets. And maybe just from a larger perspective or from a higher level perspective, how do we think about the buckets to consider into '22?

Yes. So just keep in mind what we're saying, we deployed that strategic and targeted discounting strategy in the quarter helps us preserve margin and protect our brands. So you could call that flat to Q-over-Q in that regard. In addition, just we continue to build our infrastructure and according to our CapEx plan. We bring on additional -- we onboard additional capacity in all markets this quarter, particularly in Florida. And we were able to, as Kim alluded to, navigate some of those labor challenges in our processing centers and increase the flow through of work in process to finished goods. We implemented some additional overtime to do that, and we end the quarter with a higher level of finished goods in the prior quarter. So those in conjunction. And that was partially offset by the inventory fair value step-up that we all know and love gating from with our Keystone shops. So those are kind of the buckets for margin.

Was the better pricing action, the bigger contributor? Or was it the higher level of finished goods?

I mean the higher -- as you bring on capacity, right? So it's a combination, it's a higher level of finished goods, increasing that flow through from WIP and then you bring on additional capacity as we were saying, and that was kind of a little bit backloaded in the second half, so we benefit from that.

Got it. Very helpful. And then as we look at '22, maybe if you could just remind us what your CapEx projects look like as you have coming online to support some of the market and store growth that you're talking about.

Yes. So we'll certainly give additional color on 2022 at the year -- on the year-end call. I think globally, what we are prepared to say today is that we're going to continue to invest in our cornerstone market, which we're defining as Florida, Pennsylvania and Arizona to bring on additional capacity, again, with the goal of having increased branded product through an increased and robust platform of branded retail stores. And so those investments a lot -- many of them are underway currently with additional expansions expected throughout 2022.

Our next question comes from Graeme Kreindler from Eight Capital.

We're going to enter what's expected to be a seasonally strong period in Arizona. So I was hoping you could discuss if you're seeing any shift as we're in the early stages of some seasonality here, what that's looking like as well as the inventory situation in the state given it was tightly managed earlier in the year at the onset of BRAC.

Sure, Graeme. So in Arizona, typically, what you see is a little bit of seasonal weakness over the summertime months. You see less people in the state of Arizona. And typically, what you see is that, that trend reverses or starts to reverse around October. In terms of the -- any supply constraints continuing in the state of Arizona, as you would expect, the supply -- or the wholesale market is less constrained than it was when we originally introduced adult-use sales. And so additional capacity has come online. And so we are starting to see less and less restraints there.

Then just as a follow-up on the Arizona market. We've seen some increased consolidation activity as of late. And I'm wondering if you could discuss what the opportunities in the landscape looks like potentially for further consolidation or where valuations are trending, particularly after it started off the year hot, and now we're seeing some more deals as of late. I appreciate that.

You bet. So Arizona, obviously, a cornerstone market and one where we'd be interested in adding to the retail portfolio, if the price was appropriate. The challenge has always been when the price is appropriate. When you saw the initial passage of the recreational initiative, you saw prices spike. And so you saw some deals that were -- deals that we are aware of and frankly, not interested in paying those prices. So it becomes for us, in a state like Arizona, more challenging to get deals done, but we will continue to be evaluating what opportunities are there. And if they hit our criteria for acquisition, then we will still execute on deals in the state of Arizona.

And our next question comes from Kenric Tyghe from ATB Capital Markets.

Can you speak to hydrocarbon extraction and it's a ramp both as a differentiator and a moat as you look to 2022 and the competitive dynamics in Florida. I'd be interested to hear any insights you may have there with respect to that ramp and that significance?

Sure, Kenric. So hydrocarbon extraction is an incredibly efficient extraction technique that yields significantly higher quality concentrate products than any of our previously existing extraction methodologies. And we are currently in the process of bringing on a number of new SKUs that will be new to the state of Florida that customers have been asking for that not only will we be able to make available, but we'll be able to make available in a very scaled way, which we believe is -- has always been part of our competitive strategy in the state of Florida. And products that we brought to market so far have among the highest velocity of products of any in our portfolio, and signal to us that we needed to quickly not just double down but quadruple down with respect to our output. And so that's what we have done. The capacity from that expansion is actually coming online as we speak. So products have been made and are in the testing cycle now. with the expectation that we'll have an expanded portfolio available going into the holidays. As I mentioned on the call, we are also -- we're not stopping there because our forecast indicate that we're going to need even more capacity to be able to effectively bring online the variety of products that we want to bring online coming through 2022. So we have additional investments in production equipment that will go into additional manufacturing facilities across the state through 2022. So that will continue to ramp first half of '22, but we're very, very excited about that particular market segment in the set of Florida.

Kim, and just not to mischaracterize it, but I mean it's obviously very useful tool with respect to availability, but it would be a fair characterization in the context of current promotional activity or potential price wars in Florida, this can and will also provide for a useful additional sort of arrow in your quiver so to speak?

Absolutely. I think it's also important to note that the efficiencies, and therefore, margin pull-through on those products are exceptionally high. And again, allows us significant flexibility as we think about positioning on a go-forward basis.

A quick final one for me. Just on Pennsylvania, what your mind are the risks of any supply imbalance or market sort of dislocation in the second half of 2022 with a number of players that yourselves potentially included adding and needing to add cultivation capacity ahead of adult use. How do we think about the potential pricing dynamics or the dislocation there if the market were to move into a position of supply imbalance in anticipation of adult use.

Yes. I mean I think that, again, it's important to note that not all supply is created the same, and not all brands or products are created equally. And that, coupled with -- so I like our positioning in Pennsylvania, as I've noted previously. And certainly, our -- the way that products -- legacy products resonate with customers has been and continues to be extremely well-received on the wholesale front. On the retail front, as we get more and more capacity availability and product availability that we can provide internally, through branded retail, we become, I think, in a more insulated position through 2022. So I feel strategically, I feel that we're in about as good of a position as you can get. As you look at, again, the combined affiliate footprint vis-a-vis our peers out there.

And our next question comes from Scott Fortune from ROTH Capital.

Kim, maybe a pretty good update on the legislative upfront first on the federal side with the Republicans narrative now in play, and we'll go more later today. But the seemingly pressure to get legislative reform ahead of midterm. We have an overflow of focus around safe banking and then color around that. And then also progress towards Florida and Pennsylvania movement ahead of adult use. What's kind of the keys as you see going forward with those 2 states? That would be great for an update there.

Yes, absolutely. I mean I think that I, along with probably everyone on this call, is very much looking forward to Congresswoman [indiscernible] update today at 2:00 on her proposed legislation. I, for one, am thrilled to see a female Republican take a leadership position in this conversation. I think that it is doing the job of refocusing the conversation in a bipartisan way, which hopefully will lead to something that is actually possible in both chambers, as you said before the midterm. So we're encouraged by the development. Of course, we also have our eye on the defense bill this week, and the opportunity potentially at least for safe thinking to be in the mix as that moves forward. So I think a lot of positive, at least, movement on the federal side. I mean -- but I think, look, I mean, importantly, our business remains successful and remains poised for significant growth as we have been growing over the last 5 years regardless of what happens at the federal level. There are a number of state catalysts ahead, and those provide significant opportunity for our business. And to your point, Florida, we are -- currently, there is a home grow bill that's making its way, which would crack the door, if you will, for legalization. Certainly, conversations continue around the posturing for an adult-use initiative coming down the pipe ahead of elections in 2024. In Pennsylvania, we similarly are encouraged by recent bipartisan legislation and think that the conversation in the Northeast as a region continues to accelerate with markets finally coming online in the adult use space, which, again, we continue to believe will be somewhat of a domino effect across the region.

Great. No, I appreciate the update. And then last question for me, kind of where we're at on the loyalty programs, kind of potentially help offset some of the discounting or pricing competition in Florida. Could you provide a little bit of update on the loyalty side of things in those initiatives?

Sure. I mean, so we certainly have a very widely accepted loyalty program in the state of Florida. When we look at our loyalty metrics, which we review quite, often those remain exceptionally high. We're still around 78%, 79% of customer loyalty in the state of Florida. So our customer base is continuing to return to Trulieve over time to get products that they depend on and incorporate into their everyday lives. We're looking forward on a go-forward basis as we integrate our systems across the combined platform, the goal certainly is to have a unified loyalty program across the 11 markets that we are in today to offer again that consistent customer experience from branded retail to branded retail location.

Our next question comes from Eric Des Lauriers from Craig-Hallum Capital Group.

Congrats as well on the strong results. So I appreciate your comments on the price normalization trends that you're seeing in Pennsylvania and some other markets. Florida does seem to be a bit different, mostly retailer discounts here. Can you comment on some of the pricing trends that you're seeing in Florida across product categories or across the premium value spectrum? And then are any of these price normalization trends that you're seeing impacting your planned production or branding mix with comments on hydrocarbon and Cultivar Collection? It sounds like there might be an increased mix towards premium, but just would love to get your color there.

Yes. Eric, thanks for the question. So we're continuing to see barbell patterns hold true in Florida quarter-over-quarter with certainly increased growth on both the value and on the premium side of the business. What we are seeing is we're seeing a high -- a little bit of an increase in that mid-tier as well simply because with certain promotional activity and certainly with the strategy that we deployed this last quarter, margins actually are -- tend to be a bit better in that mid-tier. And so when you discount that mid-tier category, right, that value customer is unable to purchase into mid-tier. So there's a little bit of a blended pickup on that front. But overall, I would say that really, when we look at premium quarter-on-quarter, it's very, very consistent. And when we look at value, again, with just that color that I gave as it relates to just a slight uptick in the mid-tier, we're seeing value continue along existing trends as well. So in terms of how we're thinking about product mix moving forward, certainly, we want to make sure that we have an adequate and robust supply on the premium side of things and that we are continuing to focus on efficiencies and product quality, which, thankfully, the hydrocarbon setup allows us to excel in both of those through those product offerings.

And our next question comes from Andrew Semple from Echelon Capital Markets.

Congrats on the results. Hoping for some insights on Pennsylvania retail dynamics in recent months, inclusive of the Harvest business there. Has the pricing normalization we've seen at the wholesale level increased transactional volumes at the stores? And assuming that might be the case, has that volume uptick perhaps been enough to offset pricing? And then secondly, where you have seen wholesale price compression, have you seen retail margins expand at all? Or has those price savings been mostly passed on to the consumer?

Yes, I'm going to give some general color, and then I'll let Steve take it as it relates to the legacy Harvest portfolio in the quarter. So what I would say is that I think, in general, right, we're seeing a lot of that pricing flow through to the customer. And again in Pennsylvania, I'll just reiterate the fact that it's not universal, right? We certainly are seeing different segments that have a different level, if you will, of a bifurcation on pricing. And I think that again, that's really the establishment of more clearcut tiers of product, which is again very normal in really every other market that we participate in. So we think that it's healthy in terms of how the market is responding to create, again, clear cut tiers of products across different lines. I don't know if you want to speak to the Harvest legacy.

Sure. There was, as I mentioned earlier, in a response to a question from Matt McGinley. We did actually see an increase quarter-over-quarter in the legacy Harvest stores at the retail store front. And in fact, it was one of our larger increases on a percentage basis across the portfolio. So we aren't seeing or haven't seen significant pressures at the retail level.

Great. That's helpful. And just a second question, if I may, on the guidance. If I look at the upper end of that guidance range for the full year for the Trulieve business, it would seem to imply maybe even a slight sequential decline even at the high end of that. I just want to see if you would comment on whether you expect to see any pressures to growth within Q4. I know there's a lot of moving pieces potentially even in your company revenues. But just want to see if there's any potential pressures to the pace of growth heading into the fourth quarter.

Yes, thanks. So we -- as we've said over time, it truly does not -- we're not going to change guidance on a quarter-by-quarter basis, absent some significant or material change in the business. We thought that it was important to indicate that we are very confident and remain confident in our ability to hit previously stated guidance, especially given the sort of this quarter as it relates to our peer set with many folks changing or, in some cases, withdrawn guidance. So we felt that it was important to comment on it. But again, it's just to be consistent with our previous practices and that we're not going to necessarily update it in any given quarter. And then again, just a reminder, we will be giving, of course, combined guidance on a go-forward basis in the next quarter -- next quarter call.

Our next question comes from Vivien Azer from Cowen.

This is Harrison Vivas on for Vivien. I know there's been a lot of discussion about pricing, but we'd love to get a better sense of how the pricing environment informs your philosophy around incremental cultivation capacity. So with the little evidence that these dynamics are reversing in the near term, have you had to reevaluate your expansion plans in any legacy Trulieve lead markets or any of the newly acquired Harvest markets?

Yes. No, thank you. Look, our model and our decision-making metrics are -- have a number of inputs, and we've built the company to be very bottoms up in terms of how we model and how we look at the business. And certainly, as we think about our forward-looking plans, we are evaluating not only, of course, pricing. But again, we're looking at growth in the market. We're looking at increases in our customer bases. We're looking at our flow-through and our current customer metrics at our store levels. So there are a number of inputs to our model. I would say that again, as we look at the future, we believe that in all of our markets, additional capacity is warranted. We are looking at a very robust, and we think forward-looking growth cycle ahead through 2022 on and now a much more significant platform. So we see a number of opportunities for growth that absolutely would indicate that we need to make additional investments in those markets. And again, we think that really one of the big takeaways for 2022 will be that capacity coming through into branded product and branded retail that will provide not only top line, but again, additional margin pickup across the platform as we continue to integrate and optimize this incredible platform that we now have.

And our next question comes from Owen Bennett from Jefferies.

This is actually Derek Margiotta calling in for Owen. Again, most of my questions have been answered about Florida and Pennsylvania, but I just wanted to touch on the Georgia market. You guys have received the [ tenth ] of the award for the Class 1 Production License there, 1 or 2 licenses, [indiscernible] licensing environment. I was just wondering if there's any update on time line that market is going to come online and kind of comment on the potential of that market. And then I guess the second question would be plans within our mature markets like Colorado and California where your footprint isn't as robust as, obviously, Florida, Pennsylvania, Arizona. But what are plans there with, obviously, it's a much -- they're much more mature and in competitive markets. So any color would be great.

Sure. We remain very, very excited on the Georgia opportunity. Very normal post license award for there to be a period of -- a pause period as regulations are developed, and it's also very, very typical for there to be protest period, et cetera, that's happened in, I think, every market that I'm aware of. And so that's the period that we're in right now in Georgia. We would hope that by -- within the next 12 months that we would have greater clarity. We certainly have plans in place, are ready to hit go as soon as we're able to. And as soon as we receive the green light from the state there, Georgia looks a lot like the Florida market looked at its inception with a big differentiator in the fact that there are already over 18,000 patients registered in the seat of Florida, awaiting for products to come online. And so in addition, right, as we think about the other markets, to your point, California and Colorado, what you'll see from us in the next year as you will see in California, the rebranding of a number of stores into Trulieve locations. In Colorado, we're continuing to evaluate that market. we have made some smallish investments in Colorado to ensure that our product mix there on a wholesale basis is properly positioned as we think about, again, that brand-products portfolio and getting that into as many customer hands as possible moving into next year.

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Thank you for your time today. We look forward to providing additional updates on our progress during our next earnings call. Have a great day.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.