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

Good morning, everyone, and welcome to the Trulieve Cannabis Corporation Fourth Quarter and Full Year 2022 Financial Results Conference Call. My name is Betsy, and I will be your conference operator today. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Christine Hersey, Vice President of Investor Relations for Trulieve. You may begin.

Thank you. Good morning, and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer; and Alex D'Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for Trulieve. Following their prepared remarks, we will open the call to questions. Steve White, President, will also be available to answer questions. This morning, we reported fourth quarter and full year 2022 results. A copy of our earnings press release and PowerPoint presentation may be found on the Investor Relations section of our website www.trulieve.com. An archived version of today's conference call will be available on our website later today. As a reminder, statements made during this call that are not historical facts constitute forward-looking statements and these statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A, Risk Factors of the company's Annual Report on Form 10-K for the year ended December 31st, 2021. Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will also discuss certain financial measures that are not calculated in accordance with the United States Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for 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. 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 pleased to report fourth-quarter and full-year results and provide an overview of our 2023 outlook. Since inception, Trulieve has embraced a strategy-driven approach to building a sustainable and scalable company. This winning philosophy has been a key contributor to our long track record of profitable growth. In 2022, revenue surpassed $1.2 billion, a huge milestone considering our very first sale was just 6.5 years ago. In order to achieve such remarkable growth, a lot of things had to go right and the team had to make a lot of intelligent decisions along the way. Our success is attributable to operational excellence, well-timed capital raises and legal and regulatory victories, all by design and a byproduct of thoughtful intention. Initially, Trulieve was primarily focused on market development within Florida. Our commitment and investment in our home state was a driving force of our success from that very first sale in 2016. In 2021, we meaningfully expanded our reach, completing 7 acquisitions, including the largest completed transaction in U.S. cannabis history. With this change, our company transformed into a diversified multistate operator with a leading retail cannabis footprint in the world. The timing of this major expansion at Trulieve coincided with the reversal and favorable economic trends brought about by the unwinding of COVID-related tailwinds in a decade-long period of global excess liquidity. The goal of 2022 was to digest and integrate harvest, while transforming the company into a scaled multistate operator. Following a series of strategic planning sessions in mid-2022, our ongoing merger integration efforts evolved into a broader set of actions designed to bolster our business resilience while improving our competitive positioning for the long term. The 2 objectives that we have for 2023 are: One, maximize cash generation and preservation and; two: make strategic investments to support future growth. Efforts to boost cash generation began in earnest in 2022 and will continue this year. The net result of these actions is meaningful improvement with anticipated operating cash flow of $100 million, up from $23 million in 2022. We expect higher operating cash flow, combined with at least 50% lower capital expenditures will yield positive free cash flow. We are targeting annualized gross cost savings of approximately $100 million, partially offset by investments in strategic growth initiatives. Actions taken to date include shuttering of margin and cash dilutive assets, adjustments of production mix and capacity utilization and inventory and expense reduction. As a result of the elimination of redundancies and the harvest integration, we've reduced wages by approximately 20%. Last year, we jettisoned selected California retail assets, exited the Nevada market, shuttered duplicative production assets in Florida and adjusted Canopy to align with current demand. As we fully ramp our new 750,000-square-foot indoor facility in Florida, we plan a pullback additional canopy at legacy sites continuing to make capacity for future use. The new facility utilizes state-of-the-art automation and a proprietary design, which we expect will yield efficiencies and cost savings as the facility ramps throughout the year. Lower production costs should lead to lower cost of goods sold as inventory from legacy sites is reduced and more product from this facility is sold through our retail network. Production mix adjustments and targeted promotional activity were utilized in the fourth quarter to accelerate inventory reduction and generate cash. Inventory was reduced by $4 million, representing a meaningful shift compared to the inventory build of $32 million in the third quarter. We are prioritizing inventory reduction throughout 2023, which will pressure gross margin but increase cash generation. In December, we closed $90 million in loans with an average fixed interest rate of 7.5%, which is lower than our overall interest rate of 8.2%. With our strong financial profile, including additional unencumbered real estate and anticipated free cash flow, Trulieve has significant optionality and access to capital at attractive rates. Given our financial strength and operational flexibility, our team is well-equipped to navigate the current economic climate. While industry headwinds have persisted into 2023, we believe industry growth will resume a cyclical trend inevitably reverse and numerous catalysts come to fruition. Turning now to our results. Full year revenue of $1.24 billion increased 32% compared to 2021. Contribution from the Harvest acquisition, new market expansion and new store openings in existing markets drove top-line growth. Adjusted EBITDA of $400 million or 32% margin increased 4% over 2021. Full-year adjusted EBITDA reflects integration and repositioning activities following the Harvest acquisition and shift in the economy and competitive dynamics across our markets. Fourth quarter revenue of $302 million was up slightly with 2% growth in retail revenue. Adjusted EBITDA was $85 million or 28% margin, representing our 20th consecutive profitable quarter. Fourth quarter adjusted EBITDA reflects margin pressure due to inventory flow-through and miscellaneous one-time year-end accounting true-up and investments in new markets and accruals. Fourth quarter operating cash flow was $55 million and free cash flow was $21 million. We exited the year with $219 million in cash. The only near-term debt maturity is $130 million due in June 2024. Beginning in July, this debt can be prepaid without penalty. With our cash balance, cash generation and access to capital Trulieve is well-positioned to retire this step. Our strong capital position affords Trulieve the luxury of continuing to make thoughtful investments during the cycle when many cannabis operators are fighting for survival with expensive debt maturities looming within this tighter capital market environment. These growth opportunities include the Florida adult-use ballot initiative, new market and retail development, M&A, and technology to drive success in an integrated commerce environment. The most impactful upcoming opportunity for Trulieve is the potential launch of adult-use sales in Florida. As such, Trulieve intends to continue financial support of the Smart and Safe Florida campaign for an adult-use ballot initiative. Campaign efforts are ongoing to collect the 890,000 validated signatures required for inclusion on the November 2024 ballot. As of mid-February, the campaign gathered over 1 million raw signatures and the state of Florida just reported that 420,000 of those have been validated. With 22 million residents and 138 million annual tourist visits, we believe Florida will be a top legal cannabis market, reaching $6 billion in annual revenue, given our leading and out sized market share in Florida, the adult-use opportunity will be a very meaningful contributor to financial performance in the near term. Today, we announced the opening of our 184th store in Palatka, Florida. Alongside retail expansion in core markets, we will continue to invest in new market development. In Georgia, we began production at our Adel facility last year, and we expect to launch sales at our first 2 medical dispensaries, pending regulatory approvals. In Maryland, discussions are ongoing with the legislature to define [ codify ] rules for the launch of adult-use sales this year. In Connecticut, we launched adult-use sales at our Bristol dispensary 3 weeks ago and are pursuing opportunities to expand our presence. We are encouraged by recent developments in Pennsylvania, where just yesterday, Governor Shapiro, included adult-use cannabis in his budget proposal. Beyond our existing operational footprint, we plan to pursue organic growth opportunities across the Southeast. Within our existing network, we are allocating resources to further advance our competitive position. Our proprietary customer data platform, SAP enterprise software and technology platforms to analyze and actionize insights provide a meaningful competitive edge versus peers today. As one example, because of our data insights last year, we explained the availability of premium and value-branded products such as Cultivar Collection, Muse, and Roll One. We employed these timely data-driven adjustments to optimize assortments and depth of inventory, ultimately meeting evolving customer preferences and fostering customer loyalty. On the M&A front, we believe constricted capital markets in the face of significant near-term debt obligations will spur industry consolidation and yield opportunities to acquire stand-alone and distressed assets. While Trulieve has significant flexibility and access to capital, we will remain patient and evaluate potential opportunities against our stringent criteria. As the cannabis industry evolves, we believe investments in technology and data will gain importance. The next major industry phase, which we call Cannabis 2.0 will likely be triggered by meaningful regulatory reform. While the precise timing and exact outcomes are unknown, we believe the next wave will be defined by a more open and diverse competitive landscape, including age-restricted access structures and/or direct-to-consumer models. Ongoing investments in scale, distribution and technology favorably positioned Trulieve to excel within a more robust industry ecosystem, an increasingly sophisticated marketplace while providing significant optionality. Our capacity and scale to provide flexibility to quickly ramp up production as demand increases. We believe in a more open environment, the ability to produce and distribute branded products at scale will be an important competitive differentiator. Trulieve's industry-leading retail platform provides an opportunity to directly connect with the customer, build brand equity, [ claim ] valuable insights into customer segmentation and test methods to define and protect the customer journey. We're investing in retail and technology platforms in 2023 in order to provide a competitive edge today while building the foundation for Cannabis 2.0. The long-term prospects for cannabis have never been brighter. Trulieve is uniquely poised to bolster business resilience through a relentless focus on cash alongside targeted investments for the future. I've never been more confident in our ability to emerge from this period as a leaner organization ready for the many opportunities ahead. At this time, I'll turn the call over to Alex to discuss our financial results.

Thank you, Kim, and good morning, everyone. We delivered record full-year revenue of $1.24 billion, an increase of 32% compared to $938 million in 2021. As Kim highlighted, exceeding $1.2 billion in revenue last year is a significant milestone for Trulieve. Full-year retail revenue increased 33% to over $1.1 billion, representing 94% of revenue. During 2022, we opened 25 new stores, exiting the year with an industry-leading retail footprint of 181 dispensaries. 32% of our retail footprint is located outside of Florida. Company-wide in 2022, customers visited our stores on average 2.5x per month with an average basket size of $86. In medical-only markets, average basket size was $99. Fourth quarter revenue of $302 million was up slightly sequentially. Retail sales increased by 2% to $289 million. We opened 5 new stores in Arizona, Florida, and West Virginia. Fourth quarter retail results exhibited typical seasonal patterns with higher traffic and promotional activity around holiday events. We continue to see strong demand for premium products and some shift from mid-tier to value products. Fourth quarter customer retention was 66% company-wide and 76% in medical-only markets. Full year GAAP gross profit was $682 million or 55% margin compared to $568 million or 61% margin in 2021. Fourth quarter GAAP gross profit was $150 million or 50% margin compared to 56% during the third quarter. GAAP gross margin was impacted by inventory reduction measures, lower margin wholesale revenue, and year-end true-up of various accounting estimates. We expect planned inventory reduction will pressure gross margin but generate cash throughout 2023. Gross margin will continue to fluctuate quarter-to-quarter depending on product and market mix and inventory flow through. For the full year 2022, SG&A expenses were $455 million or 37% of revenue versus $316 million or 34% of revenue during 2021. The SG&A expenses in the fourth quarter were $126 million or 42% of revenue compared to $114 million or 38% during the third quarter. SG&A expenses included ramp of new markets and reclassification of expenses associated with idle capacity from cost of goods sold, partly offset by lower payroll expenses. Excluding nonrecurring charges, fourth quarter SG&A was $95 million or 31% of revenue, flat on a percentage basis to $92 million or 31% in the third quarter. We have taken steps to reduce core business expenses while purposely investing in technology and growth initiatives this year. Net loss was $246 million for the full year 2022 compared to $18 million net income in 2021. The net loss would have been $30 million in 2022, excluding nonrecurring charges, asset impairments, disposals, and discontinued operations associated with the Harvest acquisition and the strategic repositioning of assets to improve cash flow. Fourth quarter net loss was $77 million compared to a net loss of $72 million for the fourth quarter of 2021. Fourth quarter 2022 loss per share was $0.41, an improvement compared to a loss of $0.49 in the fourth quarter of 2021. Excluding nonrecurring charges, fourth quarter loss per share would have been $0.18. Full year 2022 adjusted EBITDA was $400 million or 32% compared to $385 million or 41% during 2021. For the fourth quarter, adjusted EBITDA was $85 million or 28% compared to $99 million or 33% during the third quarter. Fourth quarter adjusted EBITDA margin reflects onetime charges, idle capacity and inventory reduction primarily associated with optimization efforts designed to increase cash flow. We ended the year with $219 million in cash and $648 million in debt. Fourth quarter operating cash flow was $55 million. We expect to realize improved operating cash flow in 2023 through a combination of expense and inventory reduction. Capital expenditures totaled $165 million in 2022, including $34 million in the fourth quarter. Free cash flow was $21 million in the fourth quarter. Turning now to our outlook. We expect 2023 results will be influenced by factors, including macroeconomic conditions, including pricing pressure within our core markets. Based on the current environment and limited visibility, we anticipate first quarter revenue will be down slightly. Full-year gross margin will be pressured by inventory reduction. Factoring in continuing optimization efforts to improve cash generation, we expect the impact of margin pressure will be partly offset as we realized lower production costs and lower core operating expenses. This year, we are targeting operating cash flow of $100 million, inclusive of 5 tax payments as the December federal tax payment was deferred due to Hurricane Ian. We expect 2023 CapEx will be at least 50% lower than 2022. We are investing in retail expansion, the Florida ballot initiative, new markets such as Georgia and technology to support next phase of industry growth. We plan to open 15 to 20 new dispensaries and relocate up to 6 stores this year. We anticipate improved operating cash flow and reduced capital expenditures will yield positive free cash flow in 2023. Throughout 2022, we made a series of strategic pivots to reposition assets, streamline operations, lower expenses, and improved cash generation. Throughout 2023, we will take additional measures to further gain efficiencies and boost cash generation. As we continue to optimize the business, we are prudently managing expenses while continuing to strategically invest in long-term growth opportunities. And with that, I'll turn the call back over to Kim.

Thanks, Alex. Overall, cannabis continues to become increasingly mainstream, gaining popularity across all demographics, greater acceptance among millennials and Gen Z consumers on top of expanding usage to displace alcohol and pharmaceutical products, bodes well for long-term adoption. U.S. legal cannabis sales are expected to triple by 2030, reaching an estimate of $75 billion as additional markets open and expand. These market forecasts assume that no federal reform occurs by 2030. While meaningful federal reform has not yet been enacted, increased levels of discourse, lobbying and attention from the President and Congress are encouraging signs for the industry. In October, President Biden announced a directive to issue pardons and reexamine, the Schedule 1 status of marijuana, reinforcing our view that meaningful reform is on the horizon and would likely occur before 2030. Although expectations for reform in 2023 are muted, we will continue to advocate for a meaningful change at the federal level. As layers of probation are removed, we intend to be at the forefront of change. For example, last month, Twitter with approximately 400 million users, became the first major social media platform to allow advertising by U.S. cannabis companies. Trulieve is proud to be the first cannabis company to advertise on that platform. When regulatory change eventually allows for a potential up listing to a major stock exchange, we believe Trulieve will be well positioned given its current S3 registration and track record of financial reporting under U.S. GAAP. Our diverse and experienced Board of Directors lent additional depth and credibility to our organization, their collective experience across agriculture, alcohol, hospitality and retail industries provides critical insights that inform our overall strategy. As a Champion race car driver once said, you cannot overtake 15 cars in sunny weather, but you can when it's raining. Trulieve has the scale, strategy and capital necessary to weather the storm, along with cash generation to invest strategically while others focus on survival. Thank you for joining us today. And as I always say, onward.

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] The first question today comes from Matt McGinley from Needham.

Yes. The Jefferson County facility will be critical to sustaining your gross margin, but you mentioned in the prepared remarks that inventory depletion will pressure the gross margin. When should we expect that older inventory to be depleted and for the newer lower-cost Jeff Co inventory to flow through COGS? And as we look at that gross margin rate of 54% that you achieved in the fourth quarter, will price compression push that below the 54%? Or could you still get above that as Jeff Co becomes operational? How should we think about the puts and takes on the production versus the lower cost [ Jeff Goldman tour ] that potentially could improve your gross margin rate?

Matt, so we call out the 3-dimensional puzzle that we have in front of us. And so you have 3 main factors which you actually just touched on, right? You have, of course, consumer behavior, which really is more pressure on wallet and what products and at what rate these consumers were coming in to buy products in Florida specifically, coupled with, of course, our legacy facilities and the inventory that's been built from those facilities, which is at a higher cost than the product that's coming through our Jefferson County facility. It's not, and as I think you're indicating a simple -- we sell through all of the legacy and then switch over to Jeff Co as we're producing now out of Jefferson County. I can tell you that early indications are that the Jefferson County efficiencies are on point and are absolutely contributing to a lower-cost inventory. That is combining, of course, with the inventory on hand from our legacy facilities. And really, it's going to fluctuate throughout this next year as that combination that mix shift changes over time, right, as we're pulling those legacy facilities off-line, naturally, there will be more of a shift towards and a greater weight towards that lower cost inventory from the Jefferson County facility. And of course, all the products that we produce, each SKU, each subcategory has different velocity levels, etcetera. So a little hard to forecast precisely. And as I said, I wish that there was just a simple, okay, we're going to hand it off from point A to point B, but that's just not business reality. But what I can tell you is that there was out sized margin pressure this quarter and given the impact of some one-time things that we will not have going into Q1. And so while we will have, to your point, the additional noise around the inventory sell-through and the pressure there, you won't have the onetime. So there will be [ and we ] would anticipate a pickup in Q1.

Great. And on the cash flow guidance for the year, to get to that $100 million, you need about $75 million in improvement to hit that target. Where do you expect to be -- where you hope to be at year-end in terms of inventory turns or inventory dollar levels? And you also made the comment on the 5 tax payments. Do you expect to fully pay off that $50 million tax payment -- tax balance you had at year-end into '23?

Yes. So as we mentioned, there was a tax -- a tax deferral and that will be paid in Q1. So in the prepared remarks, we talked about 5 tax payments in this next year, which we're contemplating and still able to achieve even with those 5 tax payments, importantly, operating -- significantly improved operating cash flow of $100 million plus free cash flow into 2023. And as it relates to the time on hand, we certainly, again, in terms of our initiatives for 2023, primary will be to balance out that inventory and to pull up Jeff Co sell-through and right size capacity in Florida specifically. So we would expect to exit the year in a more balanced and favorable inventory position, again, with the key focus throughout this year on cash generation and cash pro ration importantly, to offset, however, somewhat by strategic investments and foundational growth initiatives.

The next question comes from Russell Stanley with Beacon Securities.

Maybe just on Florida and the adult use work and the efforts there congrats on the -- on that gross signature count. Just wondering what the next steps are. You're well over the valid count required for the Supreme Court review. Can you remind us as to what happens next on that front?

Sure. So the next step is -- signatures will continue to be gathered. We do have, I think the campaign has incredible momentum now, which is a testament, I think, to the overwhelming support by Floridians of the ballot initiative and their desire to see adult use on the ballot in 2024. The Supreme Court has from now until April of next year to decide when they would take up the review of the language, which is a standard process in the state of Florida. If they do not hear it by April of next year, then the language is deemed approved. But there's not any requirement for them to hear it sooner rather than later. So really any time between now and April of next year, we would expect to be notified that the Supreme Court has scheduled a time to review the language for both single subjects and lack of ambiguity. And so that would be that step. And however, I don't believe that the campaign intends to slow down on signature gathering between now and then to ensure that the again, momentum continues and that, that threshold of signatures to get on the ballot is reached in time for the 2024 election.

Great. And for my follow-up on Georgia, you mentioned -- you mentioned during the prepared remarks that I guess remind us as when you expect sales to occur given you're waiting on some regulatory approvals and maybe map out than you can, how quickly you might build that on the retail front there?

Yes. So Georgia continues to be a market that we're really excited about. And we certainly feel that we're in a great position given proximity to our headquartered operations in Florida, lots of economies of scale and efficiencies to be shared with that state and with leadership teams and shared resources. We expect and hope that within the next, I'll call it, 60 days, and we have a clear path to retail opening, we certainly are ready to open our first 2 retail locations there. And all indications are that the state is continuing to push forward and wants us to open those sites quickly as well since we have patients in Georgia that have been waiting 6-plus years for products to be available. And as a reminder, Georgia, there is an active program today with over 25,000 patients currently registered. And we can and do plan to open additional stores quickly once we are able to and have the green light to begin dispensation, but we'll start with those first 2 and then are in various phases of build-out permitting, etcetera, for additional retail locations throughout 2030.

The next question comes from Kenric Tyghe with ATB Capital Markets.

Kim, your prepared remarks called out continued strong demand for premium, but I wonder if you could speak to the pricing dynamics in premium. What has been the extent of the reset or the market clearing price rather for premium flower in Florida specifically? And how should we think about the evolution of the pricing for premium product given the current environment?

Sure. So I mean, as we, I think, call out in the prepared remarks and then also I would point everyone which I'm sure you're aware of the PowerPoint in the deck that's also filed along with our K and our press release, and there's some additional information there as usual. But premium -- demand for premium, we actually saw an increase in units sold across all of our cornerstone markets in the fourth quarter. And we actually did not see significant discounting quarter-over-quarter, and again, company-wide from Q3 to Q4, which is I think where your -- the question may be centered. And we certainly do see some trade-down with the biggest shift from mid-tier to value, not necessarily on the premium side. But as a reminder, the way that the stack has historically been built and I think continues on is that you have certainly that premium category, there's a barbell, right? It's premium and high-level stickiness on premium and then value has been growing with the change in economic climate as more folks shift from that mid-tier down to value. So you see that when we talk about our -- our basket being pressured, but frequency being up. I think one of the most important metrics for us and definitely a strategic focus of our organization is customer retention. As we think about, right, and the cycle and the opportunity to learn and gain customer insights, I mean, we've never been through a cycle like this in cannabis. And so it provides and we're choosing to look at it as an opportunity set to really understand, again, shifting consumer patterns. We certainly had a front-row seat into what those shifting consumer patterns look like in a robust growth environment when we had COVID, and we had out sized demand due to a number of factors and also increased available spend. Now it's right our opportunity to learn and to meet customers where they are during the kind of the flip or the reversal of that and a more pressured or wallet-tightening environment. And so for us, our value products are continuing to have strong growth and are resonating. But our premium products, I would say, are continuing to hold with, again, the most notable shift from mid-tier trading down to value in cornerstone markets. Again, very proud of our customer retention metrics. We believe that if we can retain that customer through this cycle, when there's a reversal and they do have more available dollars to spend as we've seen in the past, they'll flex back up into that mid-tier and even grow at a more robust rate in the premium category.

Great color. If I could just switch to Maryland quickly. That's the pace at which it appears to be transitioning to adult use, there's certainly a potential silver lining on 2023. Truly as one of the best, if not the best position operator in that market. Can you speak to and just contextualize the 2023 opportunity in Maryland for Trulieve, particularly with a potential adult-use stock date now being pulled forward to as soon as July of this year?

Sure. And thanks for that. Maryland has been a great market for us. And we have been really dialing in or -- and focusing on the quality of our indoor production there. And the team has been hitting it out of the park recently. I think I actually just posted some pictures on Twitter as you just the beautiful flower that's being grown out of our Maryland facility and agree, I think, that our product mix, we've also been dialing in and ensuring that we've got great variety of SKU and a great variety of some different tiered products and as well as our internal brands and increasing the availability of our internal brands there ahead of rec. And so we certainly look at Maryland as an opportunity for this year and the team is very focused on making sure that we've got a fantastic launch when recreational sales become available.

The next question comes from Aaron Grey with Alliance Global Partners.

So would just love to get color in terms of expectations for average sales per store. I know you don't give a lot of granular color on that, but maybe some broader dynamics, just some implied numbers do say there'd be some pressure on that. So if you can talk about how much of that might be from the overall pricing pressure and average ticket versus some traffic? And then just the anticipation particularly for Florida, as operators continue to open up stores in the state given the current medical market and in anticipation of the adult-use market. I know you have some planned openings of your own. Just how you're thinking about the average sales per store, particularly for the state of Florida.

Yes. I mean, again, I'll point you to the deck that was filed as well. We've got some good information in there for you also. But really, again, when we look at as a company-wide, right, we had a visit of 2.5x per month for the year in Florida, specifically really combined with other medical-only markets were 75%, 76% customer retention. We had an increase, of course, in Q4 through our retail network an increase of 2% quarter-over-quarter. So we did see some growth in our retail network. And really, that was traffic increasing. So traffic is up as a whole, 5% basket pressured by 3%. And so -- which, of course, that leads you to your 2% growth number. So again, folks coming back more frequently, which I think is -- makes sense, right. When you take a step back and you think about the macro environment, and you've got wallet pressure, right, it's that I have $20 in my pocket, and I'm going to have $20 disposable income this pay period and I'll have another $20 available next pay period. So we're seeing a smaller spend per visit, but increase frequency across the network. And in Florida, in particular, it was a very similar story in Florida. And as far as positioning in Florida, we do believe that there are still some markets like today, we opened a store in Palatka, and feel really great about that store. It's the right size footprint for that particular market. This isn't all stores or the same size, no matter what the geography or market demand that we're projecting could be. So we think it's the right size store for the market, it's positioned well. It's in a [ white ] space for cannabis in general and certainly for Trulieve and our portfolio. And so we'll continue to identify and look for those particular opportunities for us. And that would be true and hold true regardless of whether there's recreational or not in Florida. So we believe that, that continued investment is warranted.

Okay. Great. That's a really helpful color. And then just a second one for me quickly. In terms of the 750,000 facility and the ramp-up of that, it sounds like that's going well. Could you just talk about as you're now trying to kind of bring down inventory. You imagine a lot of that's in Florida. How do you think about the timing of the ramp-up of the 750 and then maybe being flexible in terms of how much you're bringing on in terms of the other facilities that you have in the state have -- [ have been ] down there. It seems like you do have a lot of ability to kind of turn some off and turn some on in a rather quick manner. So talk about how you're looking to kind of transition through that as you ramp up the 750,000 can then also work down some of that inventory?

Sure. So we look at that very regularly. We actually look at our productivity, which includes the combination of factors, including yields, of course, but also on [ THC ] levels, terpene levels, really a bunch of quality metrics as well, which matter depending on, of course, the protein -- the product mix that you're shifting that inventory into. So for example, if you've got higher quality flower with higher levels of terpenes and your flexibility as far as being able to transition on in a fresh frozen and hydrocarbon premium product vis-a-vis a crude oil product, etcetera, there's maximum flexibility, right, the higher quality flower that you are able to grow. And so early indications, as I mentioned, are incredibly strong out of that 750,000 facility. And so as we're monitoring those metrics, we're also doing calculations in terms of how that will impact our overall wind-down plans for our legacy sites. And you saw it in 2022, move forward with taking some of those sites offline and would anticipate that, that will continue as we work to match what -- and better be in a position to better predict with more harvest behind us, the quality and the efficiencies that we're able to gain out of that 750,000 facility. So it's not going to balance completely overnight. But I do believe that those efforts have started and you will continue to see that work happen again with the goal of exiting 2023 in a, call it, run rate stable state.

The next question comes from Derek Dley with Canaccord Genuity.

This is Pulkit on for Derek. Just a couple of questions on our end. Just wanted to learn a little bit more about West Virginia. I believe you guys are up to 9 dispensaries. So could you provide some color on how sales and medical patients are progressing in that market?

Sure. So we actually opened our 10th store in West Virginia here recently. So we do have our full 10 retail stores built out along with our cultivation and production facilities to support those 10 locations. Sales in West Virginia have been strong, and we also recently launched our brand partner, the Bellamy Brothers in West Virginia, which is the premium flower brand that we have, and those sales are also -- have been exceptionally strong as well. So West Virginia continues to evolve as we're able to bring new form factors and new innovative products to market there. And there's also a conversation happening in West Virginia about potentially an adult-use initiative. And so look for that market to continue to be a solid contributor to our portfolio today and then potential growth catalysts ahead in the future.

Okay. That's great. And then just on the CapEx. Just wondering, where would this be directed to over 2023? Is it mostly new store builds? And then if you could characterize in what particular states that would be great as well.

Yes. So I mean, we're not going to break out state by state, but we make strategic investments as we always do. Keep in mind that a good portion of that will go to retail new store builds, repositions, also investments in new markets, and our continued investment in technology as well.

Yes. I think that what you're going to see is a shift whereas I think prior, right, we talked about the fact that we're coming off of a multiyear investment cycle primarily focused on building a supply chain and distribution capacity, that's really coming to an end. And so aside from the caveat and the abstracts of what's required in new markets, right? But even in Georgia, right, the supply chain footprint is in a good spot. And obviously, depending on [ wanting ] to meter that up with growth in that market as it occurs, just like other markets were a modular there. So that's -- we'll pace along with market growth. So the bulk of investment is shifting, as Alex said, to the retail side of the house, along with repositioning and then, of course, investments ahead of catalysts and new markets.

The next question comes from Pablo Zuanic with Cantor Fitzgerald.

Can I just go back to the ballot initiative questions? Just specifically regarding the State Supreme Court, you said they can review the text now from here to April. But I guess, 3 questions. One, do they have to wait first for the 190,000 signatures to be validated? Two, can you remind us what was the issue they had with the last tax that was proposed for the ballot? And then three, we know for sure, they have to opine before April. And you made it sound like if they don't make any comments by April it means they have approved it, but is that necessarily so could they actually maybe say that we haven't finished reviewing this. So it's expired and we're not going to do it. Can you give more color on that, please?

Sure. So the first question, no. There's a lower signature threshold for Supreme Court review. So that number is just south of 300,000 signatures Pablo and that has been achieved. So as soon as that signature number has been achieved, that's what triggers Supreme Court review. The second question around previous initiatives. There -- it was struck down on a lots of single subject. So there was an initiative that introduced a concept that included distribution requirements along with [ home grow ] and adult use, which was deemed to be more than a single subject. In addition, the Supreme Court gave guidance that because there was not explicit language signaling to voters that this still is federally illegal, but that was problematic as it relates to the ambiguity and tier, so both of which have been addressed in the current draft language. And finally, it is true that the Supreme Court is required to review language by April. They cannot not review it. And then -- in other words, it's not a -- no news equals, it goes on the ballot. So if they decide not to -- they then waived their ability to opine if they have not opined by [ end -- date starting ] in April. So there's not a situation where they can say we haven't gotten around to it, so you can't be on the ballot, but that's not how it's written in Florida law. So hopefully, that helps.

That's helpful. And just a follow-up there. So after that, assuming that they approve the wording of the ballot initiative, there are no other impediments from there to November 24 to being on the ballot? Or could there be other issues with the legislature or governor or other steps. I'm not saying things that going to be predicted that could just happen, but I'm talking about other steps that need to be completed. In other words, would they say the wording is fine, it goes straight to a ballot. And a follow-up on that, if I may. Once it's on the ballot, I've heard that you need to have 50% approval per county, not in total per the state, if you can clarify that?

Yes, sure. So it's -- so I think we're -- so a lot in there. Let's take it one at a time. There is no additional impediment as long as the total number of signatures have been achieved and it passed the Supreme Court review by the process laid out in Florida law, then that measure is certified for inclusion on the 2024 ballot. So there is no interim review steps or authorized review step by the legislature or the governor. Again, this is a citizen's ballot initiative process. So it's meant to allow for the citizens to have more direct access to initiatives or policy and to be able to go directly on that policy. And so I think that was the first question. The second question, as it relates to 50% of the vote, that is the threshold in the state of Florida for all ballot initiatives. As a reminder, the medical cannabis ballot initiative passed by the highest percentage of any ballot initiative ever in the history of the state of Florida with over 70% of the vote. Currently, adult-use cannabis is pulling over 70% as well. So we have a high level of confidence as it relates to acceptance by the people of the language and of adult-use cannabis in general in the state. And the Bi-County is actually refers to the signatures, not the vote. So for the signatures, the signatures, the 890,000 signatures have to be distributed state wide in proportion to population. And so that's one of the reasons why you see the disparity between raw signatures and when we talk about raw signatures versus validated signatures. So that's part of that calculation. And then we always use a rough number that about 65-ish percent of raw signatures typically will be converted into actually valid counted signatures. And so that's part of the whole calculation that leads to the signature threshold, not the approval threshold on the ballot.

The next question comes from Andrew Partheniou with Stifel.

Maybe first, thinking about Florida and inventory here. It seems like your Florida volumes were up low double digits quarter-over-quarter, but retail revenues overall were up 2%. You talked about gross margin a little bit under pressure while you're reducing inventory. Just wondering if you can provide a little bit more color on the main drivers behind your retail performance in Florida. And if you can quantify the impact of monetizing inventory levels, how that impacted your sales or margin? Any additional color there could be helpful on how we think about this year.

Sure. So as we've stated, right -- well, a couple of things, just to level set, right? In Q3, you had a lot of noise in Florida, and you had a lot of noise in the Florida numbers. And as a reminder, for folks in Q3, we had a hurricane, we also had the dosing limitation guidelines come out from the OMMU and there was, again, kind of a lot of confusion in the market, which, I believe, anyway, depressed those numbers in Q3. So it looked like there was a significant up tick, if you will, in Q4. In Q4, what we talked about, right, is the fact that there was a shift and certainly pick-up in the value category. And as a reminder, the data that you guys have, and I know it's the only data that's available, so we have to use it, but the data that's available through the OMMU is volumes only. And so when you have shift to value, right, and it's not a one-for-one. In other words, you can't necessarily draw a straight line from, oh, this is, call it, pre-inflationary environment Q1, this is how that translated into revenue, that product mix and the way that those sales are being generated today because the consumers, right, mid-tier consumers shifting to value, it's just a different -- so consumer may be the same, but product mix, basket mix different. So I think that's where some of the challenges are for you guys as you try and correlate right, the volume numbers into dollar amounts. And I think that's going to be across companies that operate in Florida in particular, as we see and some companies are coming out with large-scale large-format products at value pricing. So there are numbers on the OMMU may look significantly better. But again, it's -- the question is really what's that dollar per milligram that's pulling through and how is it reflected in their product mix and the spending patterns of that particular consumer subset.

Appreciate that additional color. And just thinking about your operational expenses. It seems you pulled back a little bit on marketing in the quarter, but that was offset by higher G&A costs, if you compare it to Q3. Could you talk a little bit more about the main drivers behind those movements and how we should think about normalized levels this year? Should we expect marketing to pick back up or G&A to level out here?

Yes. So we -- I mean, as you noted, we had a reduction in sales and marketing quarter-over-quarter. We mentioned kind of cutting from our core operating expenses, and you see that come through there. On the G&A side, there's a couple of things going on there. We see an increase, and that's primarily related -- we talk about this cash generation and preservation strategy and inherent in that is the taking off-line of capacity and idling some of our legacy production facilities. And when you do that and you're not producing out of them, those costs -- continued costs are classified or re class that have kind of cost of goods sold and into SG&A. So we have that in the quarter, and we'll continue to have that throughout 2023. We're focused on reducing our core operating expenses, as we noted in our opening remarks, and that will be partly offset as we kind of because we can and the position we've built for ourselves, continue to strategically invest in growth opportunities and initiatives. So you'll have lots of puts and takes through the SG&A line throughout the year, a little bit of lumpiness depending on the timing of the investments.

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

Can you help us quantify how much of that 750,000-square-foot facility is ramped right now? And then just clarifying, by the end of the year, do you expect to have all of these old higher-cost facilities shuttered? Or are you perhaps looking at some of those remaining as part of that stable run rate outlook going forward?

Yes. So we absolutely expect that by the end of the year, again, we'll be at an anticipated stable steady run rate as it really -- and that would include right, and the balance, if you will, of facilities between the 750,000 facility as well as the legacy format, I guess, is what I would call it, facility. That doesn't necessarily mean I just want to say, just so we're all talking in the same language here. When we're saying legacy, I don't want to imply that, that necessarily means that they're older in age or what have you. We're talking about really the footprint and the design of the facility. So it's really the legacy design facility, not necessarily legacy, I guess, in a traditional kind of aged vernacular. So -- but yes, I would tell you that by the end of the year, we expect that to be balanced in the state of Florida.

Okay. And are you able to quantify how much of that newer facility is ramped right now?

Yes. I mean it partially ramped and it will continue. Really, I think that your question is not necessarily around how much of it is ramped, but how much of it is actually flowing through to inventory and what the mix is, right, and what the rate of mix is between what's contributing with the lower cost contribution from that facility vis-a-vis the historical right cost of the legacy production facilities. And that's what I'm saying that blend will shift, but it also depends on what the product mix is because certainly, certain products that we make have different levels of velocity. I mean we just talked about, right, the shift to value and flower continues to have pretty high turn for us. So it becomes a complex question very quickly and that is not going to necessarily be smooth and really throughout this sort of ramping and off-ramping period, if you will.

The next question comes from Ty Collin with Eight Capital.

With respect to the outlook you provided for 2023, obviously, you refrained from providing full-year sales and EBITDA guidance as you have in the past. I'm just wondering if you could remark on that decision and maybe give some broad color on what full year revenue expectations are embedded in that $100 million cash flow target -- operating cash flow target? Could you get there with flat sales, for example?

Yes. No, Ty thanks. I mean, I think that really we pride ourselves in transparency and being communicative to the market. And as it relates to our strategic priorities. And as outlined this morning, our strategic focus for 2023 is cash, cash generation, cash preservation, right, coupled with very targeted and strategic investments and specific growth initiatives. And so given that, we felt that the most meaningful metric for us to focus on and for us to really be communicative on our cash driven. And so -- and quite frankly, right, given the murkiness of the current environment, there is uncertainty, right? I mean read the Wall Street Journal yesterday. It's the recession that's 6 months away always, right? And it's been that way for the last year. So again, with uncertainty on the macro environment, we have chosen to focus on the things that we can control, which again, is the notion of cash generation and cash preservation and wanted to make sure that we were transparent in giving color around those metrics.

Okay. Appreciate that. And just for my follow-up question on the Arizona market. Obviously, that's one that's been under a lot of pressure from a price perspective, sales have kind of stagnated or been declining on a year-on-year basis. But it is a market you continue to invest in during 2022. I'm just wondering, is that somewhere you expect to deploy more capital in 2023 and maybe how your view of that market has evolved since the Harvest acquisition, for example?

Yes. I'm not sure that the -- our view on the market has changed since the Harvest acquisition. I mean the primary opportunity in the state of Arizona is on retail. For our organization, however, there is an opportunity to maximize the output from our market-leading retail footprint, and that is by increasing the amount of internally produced product that we sell through that retail footprint and then increasing the efficiency with which we make those products that we sell through that retail footprint.

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

In the past, you've noted that the majority of excess inventory has been in Florida, and I presume that continues to be the case. However, we've seen a kind of multi-quarter decline in wholesale opportunities in other states. I'm wondering if you're seeing any of that slowdown in wholesale opportunities having caused inventory builds beginning to spread to other markets? And if you are seeing those inventory builds kind of recurring in other states, what are you doing to address that?

Yes. I mean, as you, I think, correctly point out, right, it's primarily in Florida. And again, I just want to make sure that we're just all in the same page. That was intentional in nature, right, and we were ramping Jeff Co. We knew that we were going to have inventory build. I wanted to make sure that Jeff Co is stable and that we're comfortable and confident in the output there. So we had parallel facilities running through 2022, primarily in Q2 and Q3. And then as Jeff Co has come online felt confident enough to [ begin to ] pull off, again, that legacy style and footprint. So yes, there was inventory build, but yes, we also were expecting partially, right? If there wouldn't have been inventory build, that would have meant that Jeff Co actually was not doing what we thought that it was going to do, which would have -- I call it kind of champagne problems as it relates to where we are today. And now right, again, according to plan, we're focused on getting Jeff Co fully ramped now that we're confident in the ability to achieve that lower cost per gram and quite frankly, higher quality out of that facility and focusing on selling through and generating cash from that inventory build that happened in 2022. As it relates to wholesale, certainly, and I don't think we're going to be alone in the in this commentary, it continues from last quarter and that in certain other markets, there absolutely is, and we'll continue to believe -- I believe, pressure on wholesale for truly an organization. Wholesale is not an overly significant part of our business portfolio and so that impact has been relatively minimal to our overall business as we've continued to be able to focus on. Again, our world-leading retail footprint and again, pushing and having the ability to sell our branded products through branded retail throughout the U.S.

Great. And my second question would be on EBITDA margins. I know much of the discussion has been on the gross margin line so far. But I guess with the EBITDA margins, you've got the additional lever of being able to dial back operating expenses as well. Q4 was the first quarter where we've seen that dip below the 30% level. Could you maybe comment on whether you believe you could recapture that 30% fall sometime before the end of 2023 or in 2024? And how are you thinking of kind of the EBITDA margins going forward relative to where we saw them in Q4?

Yes. So I mean, in Q4, right, we -- as you indicated, EBITDA is going to be impacted by your -- the inventory and the puts and takes that we just talked about as it relates to the inventory wind down throughout the year. In addition, EBITDA is also impacted by Alex's previous comments about the reclassification of expenses that were previously capitalized into COGS that now are pulled through into G&A. And so as the sites continue to be idle that certainly will pull through as well. That being said, right, we do believe that the inventory wind down with the contribution of increased mix from us from our 750,000 square foot facility will have positive impact, -- and on that margin line and will pull through all the way down to our adjusted EBITDA line as well. So I would say, obviously, we're not in a position because all of this is predicated as we know, on, again, consumer demand and where that lands in the next year. But again, as an organization, feel good in terms of our ability to control and meter and manage our core business expenses as well as our continued management of inventory throughout this year, but expect it to be somewhat nonlinear.

This concludes our question-and-answer session. I would like to turn the conference back over to Christine Hersey, for any closing remarks.

Thank you, everyone, for your time today. We look forward to sharing additional updates on our progress during our next earnings call. Thanks again, and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.