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

Good morning, and welcome to the Trulieve Cannabis Corp. First Quarter 2023 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Christine Hersey, Vice President of Investor Relations. 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. This morning, we reported first quarter 2023 results. A copy of our earnings press release and PowerPoint presentation may be found on the Investor Relations section of our website, www.trulieve.com. An archived version of today's conference call will be available on our website later today. As a reminder, statements made during this call that are not historical facts constitute forward-looking statements, and these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A Risk Factors of the company's annual report on Form 10-K for the year ended December 31, 2022. 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 financial results. Please be advised that we may or may not continue to provide these additional details in the future. I'll now turn the call over to our CEO, Kim Rivers.

Thanks, Christine, and good morning, everyone, and thank you for joining us today. We are pleased to report first quarter results and share recent wins as we execute on our strategic plan. Before we dive into results, I'd like to briefly discuss the cannabis industry and the tremendous opportunity set ahead. Today, more than 80% of the U.S. population resides within states that have adult-use and/or medical cannabis programs. Adoption continues to rise with greater access to regulated and tested products. Consumers are increasingly turning to cannabis to deliver a variety of experiences, including relief from severe and chronic conditions, anxiety, insomnia, and pain as well as recreation. Over the next few years, we expect more states [ will enact ] programs that not only provide access to cannabis, but also create jobs and generate tax revenue. Barring any federal reform, U.S. legal cannabis sales are expected to reach over $70 billion by 2030, almost tripling from $26 billion in sales last year. Turning now to our results. First quarter revenue of $289 million was in line with our expectations and historical seasonal performance. GAAP gross margin improved to 52%, up from 50% in the fourth quarter. On top of margin improvement, the team delivered a $24 million reduction in SG&A expenses. Adjusted EBITDA was $78 million or 27% margin, representing our 21st consecutive profitable quarter. As we highlighted during the fourth quarter call, our near-term focus is on cash preservation and generation while leaning into strategic priorities that will continue to differentiate Trulieve in the years ahead. For the full year, we are targeting operating cash flow of $100 million. We expect to generate positive free cash flow in 2023. Cash preservation efforts are geared towards expense reduction and harnessing greater efficiencies across the organization. As I mentioned, this quarter, SG&A was reduced by roughly 20% as we further refined staffing and production levels to more closely align with current traffic and consumption. Adjustments to procurement processes and rationalization of vendors and duplicative services also contributed to lower expenses. These efforts will be ongoing. We generate cash through both scale and service. Since inception, Trulieve has invested heavily to build scale and develop world-class customer service. Those are true competitive differentiators, particularly within the current macroeconomic environment. Taking a closer look at our scale of operations. Trulieve has the largest retail network in legal cannabis with 186 dispensaries. This is supported by over 4 million square feet of production capacity. In addition to having significant capacity, it is also flexible, we can ramp up or pull back utilization as needed to align with shifting demand trends. The ability to increase volumes significantly and change production mix to match evolving customer preferences is a direct result of the flexibility built into our modular production. Our data and technology platforms enable quick adjustments to marketplace changes, providing an edge compared to peers. At various times, we have pivoted due to rapid change. For example, with accelerated growth during COVID when we quickly ramped production to meet higher demand. More recently, in light of economic conditions, value-tier products have represented the fastest-growing segment. In response, we have expanded offerings within our value brand Roll One product line. New launches include larger volume products such as 28-gram ground flower and super-size 4.5 gram eats as well as minis, pre-rolls and curd crumble wax and shatter. The ability to quickly pivot is a competitive advantage versus peers who lack sufficient capacity and capital to make impactful changes in this environment. With the current cycle inevitably turns and consumer preferences shift, we will be able to identify trends and adapt yet again to meet demand. Given our unique scale in our home state of Florida, there are opportunities to differentiate our position. 4 years ago, we set out to build a state-of-the-art indoor cultivation facility with automation and a unique workflow layout. The facility was designed to lower production costs while allowing higher touches for each plant. We began ramping production at this facility last summer, and we are just beginning to reap the rewards of the strategic asset. In the first quarter, output at this new facility exceeded our plan by 17%. Even with the outperformance of the new facility, inventory in the first quarter was flat as we executed our strategic plan to wind down inventory this year. We expect the site will be fully planted by the end of Q2 and fully ramped by the end of this year. Once fully ramped, output from the new facility will be the equivalent of roughly 30 legacy design buildings, but with reduced cycle time and labor cost and lower usage of electricity, water and fertilizer. Lower production costs at this site allow us to pass on a portion of savings to customers while protecting margin. As the new facility comes online, we continue to pull back utilization at legacy design sites, banking capacity for future use when demand accelerates. With these adjustments, indoor cultivation capacity represented the majority of our online capacity exiting the first quarter. We believe large-scale production of high-quality indoor flower is another meaningful differentiator relative to peers. Moving on to our second pillar for cash generation, service. We often say at Trulieve that we are customer obsessed. We know that providing exceptional customer service on a consistent basis is absolutely required to reinforce loyalty and attract new customers. Service standards are met through a combination of convenience, ease of transaction, branded product availability and promotion and attentive and knowledgeable staff. Data and technology are utilized to understand the customer journey and now their feedback that informs our approach. Clear delineation of brand segmentation and value proposition plays an important role in customer acquisition and retention. In-store customer education programs designed to expand product knowledge and empower the customer to take ownership of their cannabis journey, elevate our service. Success is measured through a variety of metrics, including customer retention. First quarter customer retention was 64% company-wide and 73% in medical-only markets. Later this year, we are relaunching our customer loyalty program with enhanced features, including a points-based rewards program designed to increase brand loyalty and customer retention. The power of our scale and service was evident during 4/20 with new records set for transactions and units sold across our branded retail network. On 4/20, we sold approximately 360,000 units and completed over 68,000 individual transactions up 10% and 9%, respectively, from last year. Our dedicated retail and customer service staff, wide-ranging product assortment, depth of inventory and data and technology infrastructure, all contributed to our success on 4/20. Alongside initiatives to optimize scale and service, we are making strategic investments to prepare for future growth. First, we are investing in new markets and expansion opportunities within our footprint. Second, we are allocating resources to build out critical infrastructure to provide a stronger foundation for our strategic plan. Near-term growth opportunities include new market expansion in Georgia and Ohio in Q2, the launch of adult-use sales in Maryland in July and adult-use sales in Florida in mid-2025. We recently celebrated the grand opening of 2 medical dispensaries in Georgia, the first to operate in the state. We plan to open 3 more this year supported by our production facility in Adel. The Georgia program is reminiscent of the initial market in Florida, and we look forward to participating in market development and growth. In Ohio, we will open our first medical dispensary soon, pending regulatory approvals. In Maryland, where Trulieve operates a production site and 3 retail locations, we are preparing for the launch of recreational sales on July 1. The adult-use opportunity in Florida is the most significant near-term catalyst for Trulieve. We continue to support smart and state Florida, an adult-use ballot initiative. As of early May, the campaign has gathered sufficient raw signatures for inclusion on the November 2024 ballot. With 22 million residents and 138 million annual tourist visit, we believe Florida will be a top legal cannabis market, reaching $6 billion in annual revenue. Trulieve's outsized leading market share of 40% eclipses the next 3 closest competitors at 10% to 12% market share. Given our leading market share, scale and service and ability to quickly flex up production with minimal investment, Trulieve is uniquely positioned for this opportunity. Turning now to our data and technology infrastructure. We are continuing to invest in expanding our capabilities this year. Driving improved customer experiences and retention are critical components of our long-term strategy. In-house data collection and analytics capabilities, enhance our customer outreach, providing a meaningful competitive edge. Hyper-personalized marketing, geo-targeting and strategically driven promotional activity are all made possible by our advanced data and technology platforms. We believe these investments are necessary to remain one step ahead in today's evolving landscape and set the foundation for a future defined by integrated commerce. In summary, our team is laser focused on cash preservation and generation as we set the stage for the next phase of accelerated growth. With our scale and service, operational flexibility and strong balance sheet, I'm fully confident in our strategic positioning and our team's ability to unlock the full potential of Trulieve. With that, I'll turn the call over to Alex.

Thank you, Kim, and good morning, everyone. Turning to our results. First quarter revenue was $289 million. Retail results were influenced by continued wallet pressure on consumer behavior. First quarter GAAP gross profit was $150 million or 52% margin compared to 50% during the fourth quarter. The impact of inventory reduction efforts was more than offset by fewer onetime expenses. Gross margin will continue to fluctuate quarter-to-quarter depending on product and market mix and inventory flow-through. SG&A expenses in the first quarter were $102 million or 35% of revenue, an improvement of $24 million or roughly 20% from $126 million or 42% during the fourth quarter. Reduced SG&A expenses are the result of ongoing efforts to lower core business expenses. First quarter net loss was $64 million compared to a net loss of $77 million in the fourth quarter. First quarter loss per share was $0.34 compared to a loss of $0.41 in the fourth quarter. Net loss includes noncash impairment charges of $30 million associated with our Massachusetts operations, including $27 million tied to the impairment of dispensary licenses. Excluding nonrecurring charges, first quarter loss per share would have been $0.11 compared to a loss of $0.18 in the fourth quarter. First quarter adjusted EBITDA was $78 million or 27% compared to $85 million or 28% during the fourth quarter. First quarter adjusted EBITDA reflects optimization efforts to maximize cash preservation and generation. We ended the quarter with $195 million in cash. Trulieve is well positioned to retire the only near-term debt outstanding of $130 million due in June 2024. This debt carries a 9.75% rate and can be repaid without penalty within 1 year of maturity. Absent an off-cycle cash tax payment, cash from operations would have been $47 million. In addition, cash generation would have been even higher if not for the outperformance at our new $750,000 indoor facility. In 2023, we expect to realize improved operating cash flow through a combination of expense and inventory reduction. Second quarter results will include 2 tax payments. Capital expenditures totaled $14 million in the first quarter. We expect 2023 capital expenditures will be at least 50% lower than 2022. We plan to open 15 to 20 new dispensaries and relocate up to 6 stores this year. Factoring in results quarter-to-date and limited visibility, we anticipate second quarter revenue will be down low single digits sequentially. While April included strong traffic around the 4/20 holiday, we expect continued wallet pressure on consumer behavior and strategic promotions to drive inventory reduction will impact revenue and gross margin. Given the complexity of our business and the timing of various initiatives throughout the year, we expect operational improvements, inventory reduction and cash generation will be nonlinear throughout 2023. And with that, I'll turn the call back over to Kim.

Thanks, Alex. With increasing adoption and expanding state level access, the industry is well beyond the tipping point. It is only a matter of when and not if meaningful federal reform will happen. Recent activity in Congress has been encouraging. 2 weeks ago, a bipartisan group introduced to safe legislation in both the House and Senate through a coordinated effort. Tomorrow, the Senate Banking Committee will hold a hearing on safe banking. Separately in the house, representative Nancy Mace secured a committee debate and vote on the States Reform Act. We believe that any reform represents a meaningful step in the right direction towards legalization. We continue to advocate for prohibition repeal and remain optimistic that eventually change will come. Tremendous growth opportunities remain ahead for companies that can successfully adapt within evolving landscapes. Trulieve has the strategy, scale and service and capital necessary to navigate the current climate while investing for the future. 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 comes from Derek Dley with Canaccord Genuity.

I just wanted to follow up on some of the commentary on inventory, which is flat quarter-over-quarter. And it appears like that was just mainly driven to some outperformance from Jefferson. But should we expect this inventory to move downwards or draw down over the balance of the year? And is that going to be a big portion or at least a portion of how you get to positive free cash flow in the back half of the year?

Yes. Thanks, Derek. Absolutely. Again, we were -- we call it a champagne problem here at Trulieve and having outperformance at our $750,000 facility at JeffCo, we were incredibly pleased with the performance of that facility. And I think that it obviously bodes very well for Trulieve's future as it relates to harnessing those efficiencies through the back half of the year as that facility continues to come online. Obviously, that needs to be balanced with our existing production footprint and that balancing will continue to occur. And yes, to answer your question directly, inventory wind down continues to be a core initiative for the organization throughout 2023, and will absolutely be a contributor to cash generation as we continue to execute against those plans. And would have been more evident in Q1, if not for, again, the overproduction of higher efficient capacity out of that $750,000 building.

Okay. So then in terms of the idealization of some of the legacy facilities, is that something that we would expect to happen more in the back half of the year as you get a little bit more comfortable with the production levels and capacity levels and efficiency levels at Jefferson. And have you started some of that already?

Yes. We have started that. That actually began in the last quarter or so of last year, and we'll continue as we're ramping JeffCo. Those facilities have correspondingly been idled up to our projected output. Again, we've exceeded that output. And so we are, of course, making sure that we're comfortable with that as an ongoing trend, not only for the existing footprint that's online, but of course, monitoring how the remaining footprint comes online and how that produces will take a little while to get that dialed in. It's a large facility, and there's significant output. And so we want to make sure that, again, we're confident as it relates to a trend line as we, again, meter down legacy capacity as a result. But yes, there's efforts -- that balancing effort, if you will, will happen throughout 2023.

Okay. That's helpful. And then just one more, just on the SG&A side, obviously, there was some significant cost savings. Should we think about this new level $102 million as an appropriate run rate for the balance of the year? Or do you think there's more to come on that front?

Yes, I think we're happy with being able to $24 million quarter-to-quarter. We talked about annualized cost savings, reduction of core business expenses at year end. We were able to make significant headway on that in the first quarter. We're always assessing our cost structure as market dynamics dictate. But yes, I mean, that's something we're always assessing. We're proud of where we are in Q1 and those savings should carry throughout the year.

The next question comes from Matt McGinley with Needham.

So, it's pretty unusual for you to see a quarter-to-quarter decline from the first quarter to second quarter given seasonality and promotion around 4/20. So, I have 2 questions on that. One is, should we assume that you have these modest quarter-to-quarter declines in revenue throughout '23? I think you'll likely have ongoing price compression in really only big offsets that I see are the store growth and the retail units that you'll add or the retail units that'll convert in Maryland and Connecticut to adult-use sales. And then to -- specific to the second quarter, if the revenue is down quarter-over-quarter how should we expect the EBITDA trend? Would this quarter look like the first quarter, or do you have more in terms of the G&A cuts or gross margin benefits that you may see in the second quarter relative to what we saw in the first?

So, I mean, look, we're in an environment where we're controlling the controllables, and that's really the theme of our execution focus for 2023. It's been widely reported. Obviously, there's pricing compression in the market. I think, what we're seeing that is a positive is the continued resilience of our customer base and the fact that we are retaining that base and they are coming back. But what we're also seeing is pressure on category and quite frankly, just wallet pressure and that they're spending less on a per visit basis. So, I would say that even with strong traffic on 4/20 and outperforming as it relates to transactions and units sold, right, it's not necessarily the same basket that we've seen in the past. And so, I think with that realization and reality, we're again focused on bringing those costs of production down, focused on efficiencies throughout the platform. As we go into the second quarter and throughout the remainder of the year, limited visibility as I'm sure you can appreciate throughout the remainder of the year. So not here today to stay that where we'll be throughout the remainder of the year. Certainly, I would say 4/20 is encouraging for us because it was a stress test in terms of us having the ability to move higher volumes throughout the combined platform of the company. And certainly, as we think about, again, consumer patterns and potentially -- well, not even potentially with value being the highest growth category currently being able to again, handle that volume and those number of units is really important differentiator in our platform. As it relates to margin, Matt, we certainly again will see the benefit of cost savings particularly as it relates to our cost program come through back half of the year as that $750,000 facility continues to ramp. Again, I think that going to be compounded or coupled with our inventory wind down efforts, which we'll be leaning into. And so, those things may offset a bit. And then, of course, we have to overlay consumer preferences. So, we need to make sure that we're making the products and that we're bringing to market those products at that value proposition that are -- that is attractive to today's consumer. So those 3 things work interchangeably and will have -- and will show up right in margin throughout the year.

Great. And then on the comment you get on the JeffCo facility ramping with the expectation I think you said by the end of the second quarter and then fully ramp by year-end, you're obviously going to bleed down that older inventory with that higher cost basis. When would you expect the peak of that inventory depletion to occur? I mean, is that something that you'd have to wait really until the fourth quarter to begin that when it's fully ramped? Or is that something we should see probably over the next quarter or 2 to see that higher rate of compression as you kind of work through the older stuff before the new lower-cost inventory is in the system?

So not all inventory is the same, right? So even though you have a single plant, if you will, that doesn't point us to that plant go into many different products. And so, those have different velocities and different, again, consumer absorption rates. And so, even today we're seeing some benefit from JeffCo, particularly on the flower side of the business. The oil inventory we believe will take a bit longer to work through. I can't sit here today and give you a prediction again because you have the consumer dynamic that's layered on top of all of this. But -- and that's why we're saying throughout 2023, we'll obviously give you all updates and you'll see it in the numbers as we work through it. And you're starting to see that now when you look at the table of what we have in raw material versus work in progress versus finished goods. So that's going to continue to progress, Matt. I can't sit here today and give you a definite on it, but obviously our goal is to work through as soon as possible so that we can begin to get full benefit, if you will, from that JeffCo facility. But it should be steadily increasing throughout the year.

The next question comes from Russell Stanley with Beacon Securities.

Congrats on the progress on the adult use front in Florida. I guess, I'm thinking about next steps, assuming it clears a Supreme Court review. I guess, what kind of further investments do you envision making in the campaign in order to build awareness before a potential vote in November '24?