Q2 2020 Trulieve Cannabis Corp Earnings Call
Good day, ladies and gentlemen, and welcome to that truly cannabis Corporation second quarter 2020 financial results Conference call.
My name is Marcellus and I'll be your conference operator today.
As a reminder, this conference is being recorded I.
I would now like to introduce your host for today's conference Ms. Lynn Ritchie <unk> director of Investor Relations for true you may begin.
Thanks, Marcella good morning, ladies and gentlemen, thank you for joining us today on the call with me today or it can remember Chief Executive Officer, and Alex Demicco, Chief Financial Officer. Following our prepared remarks, we will open the called questions.
Before we get started I would like to know that today's call is being recorded for the benefit of investors individual shareholders. The median other interested parties. Please remember that our discussion today may include forward looking statements that involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those board looking for.
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Statements made on this call speak only as of today and we assume no obligation to update any of these forward looking information.
Our financial results excited and I have her.
Also our prepared remarks. This morning reference non I have heard us financial measures in order to provide greater transparency regarding truly where applicable. We may also provide a comparison to GAAP and non-GAAP financial measures to assist investors any non I have for a financial measure presented should not be considering alternative to financial measures.
Required by ire for us and are unlikely to be comfortable to now and I have for us financial measures provided by other companies any non I have for us financial measures referenced on this call are reconciled to the most directly comparable I ever us measures and the company's mdna for the quarter ended June Thirtyth 2020 as wells in the table at the end of our earning.
<unk> press release, we believe that profitability and performance or further demonstrated using these don <unk> non <unk> metrics. Please note that all dollar references are to U.S. dollar.
This morning, we reported results for the second quarter 2020, a copy of our news release financial statements and Mdna, maybe found on the Investor Relations section of our website truly dotcom and we're also filed on SEDAR. In addition, a webcast of today's conference call will be available on our website. Later today now I will turn the call over.
<unk> CEO can reverse thanks, Lynn and good morning, everyone and welcome to today's call I Hope everyone is staying healthy and well actually just celebrated our fourth anniversary as I sit here today ready to start this call I just have to say Wow. We went from one store to 50 610 employees to 30 401.
He sent to 344000 Burger single quarter hundred million dollar Mark and this quarter are increasing free cash flow.
Exceeds our revenue for 2016 and 2017 combined we are proud to relieve is headquartered here in Florida, and we look forward to maintaining our lead in our home state. Thank you to relievers now I'd like to briefly cover our keep result, and review our accomplishments during the second quarter. Alex to me go we'll give a financial overview.
Discusses first two months is our new CFO and share our guidance update now for some closing thoughts on our outlook before opening the call. It a question I.
At a high level key to 2020 was an incredibly strong quarter truly have exceeded consensus for revenues and profitability achieving approximately $121 million in revenue, representing a sequential quarter over quarter increase of 26%. Our adjusted EBITDA was $60.5 million or 50%. This is our 10-K.
Order of consecutive growth and profitability last quarter. We were pleased to report positive free cash flow and we're happy to report, adding nearly 40 million in positive free cash flow this quarter, ending with cash and cash equivalents of approximately $150 million given the first half performance is evident the guidance for the second half of the year needs to be increase.
We are providing increased revenue guidance of 465 to 485 million EBITDA of 205 to 225 million for the year. There are still uncertainties in the market given cobot well, but we believe this updated guidance provides our best estimates based on trend information and business accessibility our expectations are based.
And our ability to.
To successfully leverage efficiencies continue our industry, leading profitability and maintain a strong balance sheet all of which are key components of our financial strategy that will allow us to capitalize on both organic and M&A expansion.
Having these operational and financial fundamental provides us with the right platform to go deep and expand organically and her home state of Florida truly but the only cannabis company in the U.S. to have achieved the scale of our cultivation operations plus our back and growing store footprint, all primarily through organic growth that earned experience and deep seated skillset provide.
The position of strength, while exploring potential strategic M&A opportunities to continue our expansion, we were disciplined and patient in 2019 as the capital markets changed during the first half of 2020 as Kobin further altered the market, but we've now built out of pipeline pipeline expansion opportunities that will continue to unlock our value truly.
Solid results this quarter, despite the heightened cabin environment I'd like to share with you some of the patient trends we saw through June thirtyth, along with recent trends this quarter. As this is still a very fluid situation.
When we spoke in May we were experiencing two significant indistinct patterns with respect to patient patient growth inpatient behavior. The number of new patients entering the system was on the decline in the spring. This was primarily due to the requirement pretty patients to be seen by Dr. for their initial medical marijuana card and doctors not open are available due to coated when doctors.
The opposite three up and we saw numbers increased sharply from a low of 180 patients in one week to a recent weekly high almost 7000, new patients and what's important to note is that these incredible numbers of extended passive seven weeks of Kobin driven slowdown with the reason recent averaged six week growth rate of 5200 patients per week.
Signaling sustained increased patient adoption rates second in May pay should behavior started to swing back towards previous norms, as Florida positioned itself or reopening patient walk ins were starting to return and had climbed from losing 20% to approximately 35% deliveries, we're settling back from highs of 20% to just under 10%.
And pick up over me had remained near cabinet level high 60 per se and we're in the 55% range.
We ended Q2 patient behavior continued trent trending towards previous norm walking increased to 45% delivery decreased to 7% and pick up decreased to 48% as cobot continues or if the state issues and stay at home order again, there maybe ever turn swing towards deliveries and pick up.
Customer behavior is of course major contributor to financial performance. So I'd like to now cover our retail metrics. We opened five stores in Florida during Q2 compared to three stores in Q1, ending the quarter at 52 stores in the U.S. today, we are 54 stores in Florida, and 56 nationwide with an additional store opening this week in Tampa.
With an aggressive plan for store openings over the next few months, we're comfortable we will meet our goal 68 stores by year end truly have also continues to maintain our market leadership in Florida with approximately 20% of the overall store count in Florida, we outperform or competitors by maintaining greater than 50% market share in both flower and oil we believe our bran.
The strength is primarily driven by superior product variety and quality, coupled with our customer centric execution and accessibility. This is illustrated by our true leavers engagement with us with over 85000, Facebook followers 10000, Instagram followers and more than 75% of our patients included in our true lever loyalty program our strong performance during.
He too well pivoting our business BRCA Bud is a credit to our talented team and our ability to leverage our capacity. Let me quickly now run through the metrics we share each quarter.
The first its customer retention rate a common retail electric easterby, all customer loyalty, our second quarter customer retention rate was approximately 76% compared to 74% in the first quarter second loyalty metric retract as average basket size and number of visits for the quarter patient visit at an average of 2.7 times per month within.
Average basket size of $125 as we ended the quarter baskets, we're beginning to settle at approximately $121. The third metric we share as same store sale. This metric trucks growth at a store level for the 26 stores opened in Q2. There were also open for the full quarter. In Q2 2019, we had same store sales increase of 30%.
Our patients are remaining moyle as demonstrated by our metrics in our ability to pivot draft crisis to provide not only access to medicine, but also deliver the authentic relationships and customer experience that are truly very could come to rely on.
Our industry, leading cultivation of processing facilities are key to our ability to meet our tree libors needs the growth in our cultivation and production footprint everybody's last few years and the scale of where we are now and where we're going to keep up with the demand I provided a number of lessons learned that have led to increased efficiencies I'd like to highlight some of our plan for product and cultivation growth.
Today, we're at 1.8 million square feet of cultivation about the size of 31 football field and only one field shy on the 32 NFL Stadium.
And we continue to grow with the current level demand at our expectation for patient growth that I mentioned earlier, we have a construction schedule for a number of new 24000 square foot buildings to be completed monthly between now and the ended the year at our Jefferson County location, and we expect larger buildings at that location to come online and 2021. This will not only meet current demand.
But positioned us for adult and other catalyst with the ability to capture a tourism market in Florida of over 130 million people per year, thus solidifying our leadership in our home state, having just shy of 2 million square feet in one state may seem staggering until you consider it in terms of business impact an opportunity.
The Florida market has grown at an incredible rate to illustrate this growth and according to reports from Florida office of medical marijuana used for the week of January 10th 2020. The market. Just spent 79.5 million milligrams of oil and 19000 ounces a flower comparatively for the week of July 31st the market to spend 100 and.
38.8 million milligrams of oil and 40.4 thousand ounces, a flower that represents a market growth of 74% for oil and 113% for flower truly dispensed 38.3 million milligrams of oil and 9.1 thousand ounces a flower during the week of January 10 versus 72.3 million.
Milligrams of oil and 20.4 thousand ounces a flower during the week of July 31st an increase of 89% for oil and 124% for flower almost doubling oil dispensation and more than doubling flower dispensations within seven months is extraordinary growth, particularly during the code environment. This is why we are growing.
The way, we are but what does it mean to the business. We're accelerating cultivation growth to continue Didnt meet increased demand you will hear more from Alex about how this group impact inventory levels. The more flower that has grown the more trim, we're adding to our oil inventory. So there's a real interdependency that needs to be understood as inventory levels are not a straight line lastly.
Accelerated demand as a driver for the increase guidance, we provided today and of course, we continue to prepare for edible with our own branded products as long as our partner brands I say it on every call, but we do expect out of both to happen this year.
All this work by our cultivation and production teams is vitally important to keep pace with demand and continue innovating and pushing ourselves forward to deliver the best quality products to our true labors.
I'll now turn the call over to Alex Demicco, our new CFO for commentary on his first two months, our financial results and an update to guidance before I return with the closing statement Alex. Thank you, Jim and good morning, everyone I'm happy to be here today is the company's new Chief Financial Officer before I review, the company's second quarter financial results I thought it.
Would be important to share some initial thoughts on my role I outlined for you my top initiatives for the remainder of 2020 in the first half of 2021.
Each first few months have been incredibly busy and exciting personally I feel like I'm, joining at a pivotal point and the company's history and I look forward to being part of a team that will drive changes needed to bring truly to the next level. The initial area of focus for me was to augment and expand our accounting and finance department by addressing people.
Processes and systems.
First and foremost with staffing I quickly built out a team of finance professionals with FCC and public company experience. We have more work to do in this area. We have the foundation in place for the infrastructure required to support the challenges and opportunities ahead of us.
Next with laying out a plan to build out the accounting and finance processes that will position us to become a U.S. reporting company and well file for deeper operational analytics and the strategic assessment of M&A opportunities.
Finally, we laid the groundwork for our future with improved systems, starting with an upgrade to our Sep platform and the identification of a number of tools that will streamline and layer on additional controls in areas such as reconciliations reporting leasing an equity.
One of our transformational projects since I've been on board has been triggered by our foreign private issuer status or FPI.
As announced in July our 20 20-F, P.I. testing showed that we have over 50% ownership of our equity shares held by U.S. investors. This means we have transitioned to a domestic issuer and will be subject to FCC reporting requirements as of January Onest 2021.
We are targeting registering with the FCC in a fourth quarter and we will move to a gap pieces of accounting starting with the issuance of our 2020 10-K.
Currently we are in the process of converting our historical financials from I. FRS to gap and prior to FCC registration, we will have an audit of those historical financials on a GAAP basis.
Moving to gap is something that many of our shareholders will appreciate but there's a lot of work that happens in the background and it will cause a subtle shift in how some of our financials are presented more on that in a moment.
More important than the registration process is the preparation to become an FCC reporting company.
Among a number of things this means preparing to become Sarbanes Oxley compliance.
We have engaged a firm to assist us with Sox readiness, which will include the preparation of process flows and narratives as well as the identification of key controls.
Readiness efforts will also require training throughout the organization in preparation for eventual Sox controlled testing.
You will note we brought on two new members of our board of Directors recently, Susan Thronson, and Tommy Millner, who each have substantial experience with the enhanced governance processes and procedures that will be required to support our sox efforts.
Lastly, I view finance as a strategic driving force within the organization as a department and as a team we lead M&A efforts and we are heavily engaged with each and every department across the entire organization.
My hope is that this involvement will continue the tremendous cross functional collaboration that exists within truly.
So now let's dive into the numbers for the second quarter.
As Kim covers the top of the call. We had a very strong quarter truly have had a record quarterly revenue of $120.8 million breaking that 100 million dollar mark and representing a sequential quarter over quarter increase of 26% and a 109% increase over the same quarter last year.
In regard to production expenses and cost of goods from third party suppliers I would like to remind all of you about something that was communicated on our prior call.
This line is not cost of goods sold as you would find under GAAP.
The cost of goods plus other production costs.
And accounting election under I FRS allows for production costs or pre harvest costs to be expensed as incurred.
Therefore, the additional costs added here and what differs from the cost of goods sold line under GAAP for those if you will who are attempting to reconcile our those production costs related to the unsold inventory or setting in another way, what we call grow costs for unsold inventory.
On a consolidated basis production expenses in Florida and cost of goods from third party suppliers in Connecticut, and California totaled $29.7 million for the second quarter.
Revenue less these production expenses and costs was $91.1 million for the quarter or 75% of revenue.
This compares to $67.1 million or 70% in the first quarter.
As you can see here, we are beginning to realize the benefits of our efficient production processes in conjunction with the fact that we did not do a spring greenhouse planting.
If we were to capitalize grow costs as is required under GAAP. The gap adjusted margin would've been 75% for Q2 as compared to 77% in Q1.
At the end of the second quarter, we had cultivation of approximately 1.8 million square feet and had capacity to produce just over 74000 kilograms annually.
As Kim alluded to we have a plan to bring on just under 100000 square feet additional indoor grow by yearend.
Since we are discussing cultivation I'd like to update you on inventory as this has been an important focus for our team.
Under I FRS in Q1, we had a total of $227.9 million of inventory, which includes a significant amount of fair value.
In Q2, we had a total of $219 million of inventory.
We also had $41.3 million of biological assets in Q1, and $33.3 million a biological assets at the end of Q2, which are also measured at fair value.
In Q2, GAAP equivalent would have been approximately $70 million to $80 million of inventory on a quantity basis at the end of Q2, we had approximately seven months of total inventory.
I want to take a moment on this because I believe it is important to understand the fluctuation to happen within inventory.
Last quarter, we said, we would start to drawdown on our greenhouse oil inventory this quarter and weve, reducing our overall inventory by $8.9 million. However, as we work toward reducing our greenhouse inventory reserves. We're also responding to the market growth in flower.
At the point of harvest, we have tremendous flexibility in terms of where we direct our inventory in regard to product lines.
Part of that decision will take into account market trends.
We have been ramping our indoor grow to keep pace with the higher demand for flower additional indoor capacity means more flower coming through.
For cultivation.
It's also means that the trim associated with that flower increases.
Which in turn is primarily extracted for oil.
This dynamic reducing our greenhouse oil reserves, while simultaneously, adding trim oil from our indoor grow is expected to continue in respect of our increased revenue guidance for the back half of 2020.
We expect to step down in our overall inventory to happen at a slower rate due to this interdependency.
Our oil inventory levels were advantageous for us during the first half of 2020, given the heightened demand we experience as a result of covidien, our ability to pivot and dial up or down harvests makes our greenhouse cultivation footprint a differentiator for us.
The greenhouse harvest has been completed and we do not have plans for a fall harvest however, with the uncertainties of Kobe and potential catalysts, such as edibles and wholesale we are prepared.
We are continuously maximizing efficiencies and evaluating inventory levels to be well position when an opportunity arises.
I'll now turn to expenses.
Second quarter, SGN, a expenses, excluding depreciation and amortization were $33.1 million or 27% of revenue compared to $28.3 million or 29% of revenue in the first quarter of 2020.
The operating expense line consists predominantly of.
Dispensary and other corporate overhead related costs and the second quarter was slightly down as a percentage of revenue compared to the first quarter.
Overall, keeping a high degree of financial discipline around expenses is one of our Keith the profitability.
Operating income for the company was $37.5 million this quarter compared to $31.1 million last quarter.
Net income was $6.6 million for the second quarter compared to $14 million in Q1, resulting in earnings per share of six cents per share.
For net income and EPS, it's important to note that if the fair value impact of biological assets were excluded net income would increase to $23.4 million or diluted EPS of 20 cents per share.
Net income is an area that will have visible changes with the conversion to GAAP, starting with our annual filing for 2020.
Focusing now on EBITDA, we believe adjusted EBITDA, a non IRS measure provides valuable insight into our profitability and performance adjusted EBITDA excludes from net income as reported interest taxes depreciation noncash expenses RTL expenses share base.
One other income growing costs related to biological assets and unsold inventory and the noncash effects of accounting for biological assets, we reported adjusted EBITDA to help investors assess the operating performance of our business.
Adjusted EBITDA for the second quarter of 2020 was $60.5 million or 50% of revenue compared to $49.4 million or 51% of revenue in Q1 2020.
The 11.1 million dollar improvement in adjusted EBITDA. This quarter is primarily due to the increase in revenue, partially offset by increases in operating expenses and the change in grow costs for unsold inventory.
Turning to taxes as a percentage of gross profit, including the net change in fair value of biological assets, our effective tax rate was 26% for this quarter.
Now for an area that we're very proud of this quarter, our balance sheet as of the end of the second quarter 2020 based on our continued profitability our cash balance was $150.3 million.
In Q1, 2020, we were free cash flow positive at $11.2 million, we added to that number this quarter with a free cash flow increase of $39.6 million and year to date, our free cash flow positive at $50.8 million.
I want to note that the tax payment for Q1 and estimated taxes for Q2 were deferred pursuant to the koby tax extension, resulting in a 45 million dollar payment made in July.
In addition, we expect our free cash flow for the second half of the year to be impacted due to scheduled capex payments discussed previously.
I'd like to share with you our updated guidance for the remainder of the year as Kim mentioned keeping in mind the uncertainties around Covidien, we were hesitant to raise guidance until we have more clarity. There is still uncertainty. However, our current guidance is no longer practical.
For the full year of 2020, we previously provided revenue guidance of $380 million to $400 million. We now expect revenues in a range of $465 million to $485 million, representing enterprise proximate increase of 22%.
Based on this revenue range, we anticipate adjusted EBITDA up approximately $205 million to $225 million approximately 43% from our previous range of $140 million to $160 million.
Full year 2020 revenue growth guidance is based on our current store footprint in Florida, California, and Connecticut and includes and expect the increase in number of dispensary as well as increased patient growth in Florida.
This guidance does not contemplate our Massachusetts operations generating revenues in 2020.
As previously discussed we anticipated capex investments of approximately $60 million this year to expand our store footprint and cultivation.
Based on Capex spend in the first half of the year and our accelerated build plans in the second half of the year, we estimate approximately $7 million per month of Capex spend in Florida for the remainder of 2020.
I will end by saying I'm excited to be fully onboard and I'm looking forward to the opportunities that lie ahead I'll now hand, this call back over to Kim for closing remarks, Tim. Thanks, Alex Cobrand was not what any of us could have predicted or wanted but we're happy to have the scale and strengthen our supply chain to execute well in our business to meet the demands.
It came with that all while providing stability for our employees during an uncertain time, we spent time over the last few months talking about the business continuity team. We originally established for Hurricane preparedness.
We also have created a dedicated retail response team that allowed us to quickly react and implement program more recently, we built upon our early safety and cleaning procedures implementing additional measures to maintain safe medical marijuana access for patients. While also providing a healthy work environment for our employees. In addition to sanitizing every facility weekly inside.
Plexiglas panels that registers promoting central distancing and implementing tech solutions. Our teams continue to roll out industry, leading health and safety procedures for the protection of our patients in staff. We've added medical grade have the air Scrubber scrubbers and every store in facility contact tracing protocols and our offering free rapid testing to our employees we have done.
Well it training for staff on health and safety policies increased communication that team level and have invested in a medical insurance upgrade to include a zero premium choice for our employees. So we can offer insurance that will drive a higher participation across the workforce I am proud of what we've accomplished it remains to be seen what the continued impact will be the the country.
And our overall health care systems, but I'm confident we're prepared to meet these increased demands and heartened to now we have taken a leadership position in regard to safety and support for our employees and our to relievers.
We will continue our high degree of focus on execution and expansion during the second half of 2020 now let's shift to developments in our other markets first our plans for Massachusetts are approaching the finish line. We're nearing completion of the cultivation and production phase one and first dispensary below is complete we have begun our initial inspections and once the inflow.
Action process. This final and we are approved we will enter into the Massachusetts medical and dental East markets. We are not slowed by regulatory approvals. We expect to begin sales in Q1 next year and although there is not anything new to report on our California Dispensary other than construction continues we believe Connecticut could eventually see the benefit of change underway with proposal.
In the state.
We're also targeting expansion through state application processes. Our applications team has engaged in a number of opportunities that will strategically makes sense for truly we've targeted or applications, primarily in states that will support our vertical model will also support in the hub model that we've spoken about which is how we as a company envision the future cannabis landscape.
As we entered the second half the year, we will continue to actively explore M&A opportunities that will positively contribute to our business and adhere to our strict growth criteria our goal to position ourselves as the top cannabis MSL truly has come to the port prep for profitability execution and the ability to successfully grow organically as we expand into new states.
We believe our value will be fully recognized with a healthy balance sheet, a good business model and strong execution by our team we expect to be the leading customer focused cannabis brand in the United States with depth and our target markets I.
I believe that there is a lot of positive movement within this industry on the social equity and Legislative front, we fully plan to take part of this movement.
And our industry with inclusive social equity goals as important not just to us as a business, but for the people in communities. We impact every day. Our mission is to improve People's lives. That's my truly stands with those supporting our communities and a positive manner as a sponsor for minority for medical marijuana and a member of the national cannabis round table, we apply.
To continue advocating for official justice measures and equity in business opportunities, taking part in central equity programs organization and initiatives is core to our company. We believed it was important when we founded the company and Quincy, Florida, a rural majority minority community and still believe in the importance after celebrating four year operation and interacting with these.
Communities Daily we truly understand just how powerful this impact can be.
On the Legislative front, we continue to monitor potential regulatory changes in the market and how different scenarios will impact our industry and operations as we have been determined and essential business. We believe now more than ever cannabis is being recognized not only us providing needed products, but also as an economic engine nationally the banking act as an important and necessary.
Step forward to protect our industry, we look forward to congressional action on this key legislation.
Lastly, before we end the call today I do want to take a moment to thank our employees their dedication and unwavering commitment to our truly verse is greatly appreciated we do not underestimate the importance their essential role play and delivering the medicine are truly versus rely on and in our continued success.
Thank you for joining the call today and as I always say onward.
Hi, Marcella, we can now open it up for questions.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from line of Derek Daily from Canaccord. Your line is open.
Yes, hi, thanks, and congrats on a great quarter and outlook and nice certainly I would echo those comments you just made on the safe Banking Act.
Wanted to ask just about the competitive environment.
That you're seeing in Florida, we have seen some of the other smaller players.
Within the state announced some increases to their cultivation footprint as well. So I'm just wondering if you've seen any sort of changes in the dynamic in the pricing environment or even in the product availability.
Yes, Thanks, Derek and so as we stated on the call the market growth in the state of Florida has just really been incredible when you look at not only the patients gripped the patient growth, but also of course, the overall number of dispensation star occurring on a on a weekly basis and so we really haven't seen any and any additional pressure.
I mean of course, we appreciate and thrive in a competitive environment and has always said that we welcome.
Competition and it's interesting when you look at our stores in our performance on a store basis. The stores that are actually in areas with with more competitors are some of our higher highest performing stores. So we think that having the availability to comparison shop is one thing that again and we at we pride ourselves and being being able to perform performed well.
Again with that increased market, what I would say is that am I think that it's great that other folks are bringing up cultivation. We of course will continue to perform within our solid plans and are going to continue to bring on cultivation as well on to continue to increase that incredible incredible increased demand.
And in terms of.
Product.
The types of products that we're selling well last quarter, you kind of mentioned it was almost a bit of a barbell approach, where you add value and you had premium doing doing really well. It did you see any changes in that this quarter are you seeing those trends continue.
Yes. Thanks for the question now we are seeing those those trends continue its interesting and when we look at it and we really segment out each in each and every one of our product lines and certainly we have seen and we've seen product growth with respect to you our value segment, which I think is is to be expected, particularly when you look.
At the macro environment, and what's going on kind of at the national level and when we think about unemployment numbers and so forth and it'll be interesting to see with stimulus coming back in play and how that affects kind of the shift but again to your point, we are still seeing growth in that premium product line as well so.
I would say certainly a little bit more of a heightened growth on value, but still some strong numbers on a premium as well so and we're kind of looking for AG for those trends to continue and we'll certainly keep this update updated as we as we look at this shift.
And maybe just one more just on that if I may in terms of your gross margin really strong this quarter at 500 basis points sequentially, but it's interesting your comment there on value. So.
Clearly you guys are doing something right on the gross margin side do you view that level as sustainable over that over the medium to long term, albeit there is likely going to be some quarterly fluctuations within that number.
Yes, I'm going to let Alex pick that one yes. Thank you for the question, yes, exactly as you said there there will be quarterly fluctuations, we don't expect material differences in that area, but there will be fluctuations depending on the inventory flow through and what we sell and youll see that as we convert to gap as well, but we should be holding approximately.
At these levels.
Great Congratulations.
Thanks, Eric.
Your next question comes from line of Russell stemming from Beacon Securities. Your line is open.
Good morning, and congrats on a stellar quarter.
Just around the accelerated Capex plan.
I know you raise your guidance for 2020 out of introduced guidance for 2021, but just trying to get an idea with that accelerated capex plan, what kind of dispensary.
Well as we could see in 2021, how much how many new dispensers could you support.
Yeah, I know thanks for that things for the question. So as you noted we havent come out with that guidance, yet for 2021, and but we'll reiterate the fact that we are very very comfortable with and our ability to meet our our previously stated goal of 68 stores and in 2020, we may be just a little bit ahead of that.
In in 2020, and so really again when we look at those so our guidance in our numbers and certainly the capex to support it is driven by a number of factors right. I mean, we deal we've done a complete and recalculation and report cast on for the remainder part of the error and with that again looking at the strong influx of patients that we've had.
In addition, additionally, looking at of course are repeat visits and basket sizes and so forth.
We did feel like we needed to go ahead and bring on additional capacity to support that growth and of course as we move into 2021 I'm nothing specific at 40 on 2021, but I'm sure that we'll continue to get that question so stay tune.
Great. Thanks.
Just one more from me at this point it so with respect to M&A.
Seeing public company valuations improved significantly over the last few months in particular Im just wondering if you're seeing any of that filter down in terms of.
Probably the company valuation demands our valuation so so attractive or have those started to creep up as well.
Yes, I know think dress.
I think that it continues to be a mixed bag right with respect to private company valuations I think you have some companies that has certainly come up against.
The capital Crunch that certainly some public companies have experienced as well.
And then the back half of 2019, and then depending of in this market dependent as well as company depend net and different responses and ability to whether I would say the coded challenges and changes whether that means that you know estate, maybe shut down for a longer period of time or that folks have seen an increase or space, but then now.
Our scrambling to meet on copper or to have to meet their capital demand requirements for growth. So I do think that that's a very specific question that that will that will differ depending on depending on company and but I think look I mean, we're happy that were in the position that ran we feel like we've got a lot of optionality and with respect to I assume.
Mentioned, both again on M&A and on the applications fraud, and folks are certainly and looking at our performance over the years and appreciative strong operators appreciative of that position in where we are and looking forward are excited to have conversations to potentially be part of the team.
That's great excellent thanks for the color and congrats again.
I think threats.
Your next question comes from the line Matt Mcginley.
Needham and company your line is open.
Great. Thank you.
My first question follow up on the promotion mix, which have been impacted that mix shift flower I guess value price point flower have on revenue in the quarter ended Tobin in any way change the level of promotion you planned for in the second quarter and what the I guess, a realized price points decline the unit basis in the back half or does that kind of safe steady from here.
Yeah, no thinks not for the question you know as as I stated, we certainly started to see an increase in demand around that value segment, particularly.
Interesting because it's not the same from category to category. So in some of that has to do of course with product introduction and what's being introduced in that in that category because as you now and I know you're familiar with we're continuing to innovate and we're continuing to introduce.
New products, all the time and certainly one thing I will say about the Florida market figure early is that the definitely have a strong strong preference for new and in a strong preference for innovative products and so on you'll continue to see us focused on that R&D activity, that's part of our DNA and so we'll continue to.
Of course am have releases throughout the back half of the year and we certainly like I as I mentioned on the flower category. We did see some some increased demand in the value and the value segment and and I think we were also doing some really kind of new and exciting things in that segment.
By bringing to market you know some kind of every week sort of a new blend if you will or new new strain offerings, and which I think added excitement to that product category, but then when you kind of transition into the beep Beep category. We saw strong increases in our premium vape category and so it's not a one for one and across all.
All product product segments, but until when you look at it kind of in the blended rate. It stayed fairly constant and in terms of predicting where we'll be in the back half of the year again, I think some of that's going to depend on macro elements freight and whether or not we continue to see and pressure from a macro perspective.
When and if that additional $400 a week from an unemployment standpoint comes comes into play.
And how quickly and again, just just the cobot environment I would say in general but again.
I would say that our team is very focused on and it's something that we look at on a very regular basis and our sure that we're we're responding and that we've got good solid product offerings and those in those categories as the market does does shift based on those macroeconomic factors.
Thank you so questions on inventory in gross margin I appreciate the the nuance on how additional flower capacity means that you will have additional trend that will be turned in the oil and so your inventory levels may not come down as much as you expected, but just wanted confirmed that the expectation that you still have a decline in inventory dollars over the course of the year.
And is there any.
If you're doing the last set of greenhouse grow is there any gross margin implications, we should think about into the back half, leaving it into 2021.
Yes, as you stated we are going to continue tours.
Drawing down our greenhouse oil reserves and as you rightly pointed out we have that dynamic of producing.
Trim oil, which kind of backfills, our inventory level as we sell down our inventory.
There could be a potential drawn down on margin.
Thanks, not expected to be material.
Okay. Thank you very much.
No problem. Thanks, Matt.
Your next question comes on the line Pablo Zuanic from Canaccord. Your line is open.
Hello, Jim will going out to more modular questions, obviously, great quarter relations increasing guidance.
So essentially biden plan, which is talking about.
Luckily essential.
How do you think that lease how did that doesn't happen does it take a long time.
Hoping officially 40, you issued abroad and given that you're mostly single state. If you can just give some thoughts on that.
To support the related but it would still be this form thanks.
Sure and things Pablo and you know, obviously I think theres a lot, but that isn't isn't flocks and there are a lot of details that we need to be would need to be ironed out.
With respect to the bind plan or quite frankly, any any plan around legalization and I've said this before and this is just kim's crystal ball so for whatever for whatever that's worth and I would say that the expectation I think would be that we would see on a stepped approach right. I mean, when you look historically back and say for example.
The removal of prohibition and with respect to alcohol and you certainly have strong state infrastructure to this point and regulations around around cannabis and I can't see the federal government coming in and completely disrupting and the state preferences as I do think that we'll continue with this and that per.
Perhaps the more I would say on acceptable and at the federal level state by state approach for some time and and then I would say that overtime and what we would expect is that of course Interstate commerce.
Regulations to change to allow us to two ships products, you know across state lines, and so forth, but again I think that particularly as it as it relates to distribution and sales that you're still going to see on some fairly from some fairly strong differences across different states for at for the near term.
Along to streamline Florida, where to allow wholesale.
Would that be better or worse for you I'm trying to think does it feel the guys and have more stores there. Thanks.
Just a fulsome Doug.
Robin and what do things like that.
Yeah no. Thank for that we certainly think that wholesale would would be an additional revenue driver for true leave and we certainly think that where the best positioned in the state can take advantage of that additional revenue stream and really across each SEC. Each segment of our supply chain. So we think about again cultivation and having that ability to dial up or down.
I'm not greenhouse footprint, along with the additional cultivation that where we have coming online and being a being a preferred supplier in being able to contract and predict maybe even on exclusive basis and supply new independent retailers that may be coming online and then when we look at an add on the production.
Side, having the ability to on the flip side being able to import or bring in specialty products that don't make a lot of sense for us to to produce in house and that requires specialty expertise or IP equipment. So forth to be able to have you know again exclusive relationships with those types of suppliers and bring those in house.
And then finally on the retail side and having the ability to.
Get our products into more into more customers hands, and again and being able to have those relationships with independent independent producers you know I think that and with respect to how wholesale may come on the path in Florida, What we would expect is that at the current the current operators would would be in a in a position to maintain our.
Our ability to operate in a vertical channel, but that new folks coming online and would would be required to to pick the channel, which that they would they would choose to operate end so and again, we see it as the as essential positive catalyst for us and our certainly on our certainly prepared to be able to participate in that and that additional revenue stream.
Joining us when you say, Mike obviously, youre still has performed very well but.
Yes, just at a discount go the upper end user where are you going over to John right. I mean, do you have the big data to be missiles trading.
Many times genes and to leave you.
On that overhang is really.
Because you're mostly in there for single state operator, and then the future competition I Wonder it wasn't really wish earnings.
Growth.
Yes.
You know from outside without having all the details I would say why bother with much issues that's right.
Getting crowded.
Randy monk would be equal a year out some things.
Right.
And obviously from going from a direct why not focused more on the primary the miss or that gives you access distributable stays good potential from going from it.
Maybe a better.
Some brief thoughts on that.
Deeper into it or you think about.
Just trying to putting more money into one issues, maybe I'm wrong.
Scheme of things.
For your valuation you may be better just.
Thanks.
Yes, I think public for the question.
We said and and as we said in our and our remarks and the during our prepared remarks. We are out we are continuing to add to focus on M&A.
Also said I think previously and this goes back to year to your question I think around how we how we see the landscape evolving over time, and Massachusetts is an important northeast market for us and to start developing that hub in the northeast and so.
We continue to be excited about Massachusetts, we continue to be excited to launch a wholesale program in Massachusetts and again there are of course other states that are exciting as well and particularly states and not northeast corridor and as we started to assemble a team in that in that northeast hub. It also gives us greater flexibility in terms of.
Adding additional and additional markets, an additional scale and creating synergy from an operational perspective around around not hub. So and we do you think that there can be and there's again.
Place for after Massachusetts, and certainly appreciate the opportunity that that market can offer along with additional growth opportunities and specifically in the northeast though.
More to come.
Yes.
Your next question comes from a line of Andrew person you Stifle your line is open.
Thanks for taking my questions on congrats on the great quarter.
Maybe if I could.
A follow on with the comment on M&A.
No.
We're also obviously focusing on applications, but.
Given M&A could.
Catapult your growth trajectory by having an established a platform as opposed to Golden went up from scratch and you guys are generating significant cash.
You know how would you say that youre, leaving towards.
Your growth in the future is it do you think a little bit more towards M&A or do you think applications is still a unimportant parts and pieces of your future growth.
Yes, I think for the question. So it's a it's a combined strategy and I think it when you just look at the map of the United States right and you think about the states that have yet to develop a program right. I mean, when you look at the Southeast for example, and you see Florida, we're a little bit on a on a cannabis island down here So I am.
We look at our surrounding states and certainly want to participate in the markets as they expand.
Again thinking about about that hub model right from the southeast and.
Then I'll just echo what I said before with respect to M&A and you know and I think that.
Being disciplined with respect to M&A, making sure that we are where we are doing and participating in M&A for the right reasons and not just as the because we were trying to go after and particular.
Market placement on with respect to the capital markets, but really that it's from an operational and fundamentals perspective, the right thing to do for our company's growth and for our for our brand and for our customers and I think has really been is in its an important balance I mean, I think we've seen over the last two years a lot of a lot of land grabbing analog.
One of M&A that quite frankly, it seemed on paper and made a ton of sense and for the capital markets may have made its kind of sense, but when those pieces start.
Start to integrate or not and it can really had some significant negative negative effects and negative pressure on the business. So we do think that it's important to continue to grow and but we also think that that growth needs to be strategic and needs to be thoughtful and and so we do plan to continue like I said and both in both Avenue.
Okay and.
Maybe to continue on that thought.
You mentioned that there could be opportunities for companies that have been.
Then impacted by the shutdown.
In a negative way or.
In certain states or for those that have actually benefited and needs a little bit of capital too.
Keep up with the pace of rapid growth.
Would you say that Youre your equally interested in both opportunities or.
Perhaps one is more interesting than the other.
Yes, again, I mean, I think it's very it's very.
Company by company and market by market specific so on distributor eight we remain opportunistic and we have been developing a fairly robust intake intake pipeline of opportunities and will.
And that analyze each opportunity through through and against our very specific.
Strict criteria.
Okay, and if I can just add on one more.
Given you know it seems like your pipeline has actually increased recently.
From your comments today.
And you know over the past year, we've seen kind of depressed valuations as was mentioned before but really what what has changed could you could you maybe described.
Why you seem a little bit more excited now than than you were previously.
Yeah, I mean, I think that right.
A bit of that has to deal with just the fact of where where we are and where reset and then I think that also the fact that and we feel like we are in strategically and infrastructure from an from an internal perspective.
Poised and ready and have the bandwidth I'm really focused on and you do have had great integration.
Again, the day of clothing is just a one.
Venue of a new opportunity right. It takes it takes a lot to then.
Maximize and really make sure that that new opportunity and integrate and on that were all able to focus as one team on particularly when we're talking about a very customer facing products and with a retail retail branding angle like what we have in with true leave and so.
I think that I think that Theres, a combination of factors, there, but and again I think that and potential potential folks who are who are considering and wanting to be part of a larger company I think.
Our understanding what we bring to the table at this point and are equally excited about potential potential partnerships. So I think it comes from both sides.
Thanks for taking my questions and congrats again on the great quarter.
Thanks, so much.
Your next question comes from a line of Eric Dolores from.
Craig Hallum. Your line is open.
All right great. Thanks for taking my questions in the offer you my congrats as well on a very strong quarter.
I'd like to first focus on.
Expansion Jefferson County.
As you said 24000 square foot facilities each month this year larger facilities coming online in 21.
Great to see that excited to see the earnings power coming out of those facilities.
Can you help us understand how you guys think about balancing supply and demand, especially on a longer term basis.
I think investors are generally where you have oversupply given the dynamics that unfolded in Canada.
Certainly drastically different fundamentals in Florida versus Canada, but can you help us understand how you think about cultivation expansion and balancing supply and Matt.
Yeah sure absolutely. So we we model everything very very specifically and and I mentioned that.
Before releasing increased guidance there was a complete top to bottom reforecasting across the entire company.
As part of that we're looking at and of course, our patient growth as well as our anticipated store growth and number of register throughput through those registers and of course buying patterns and trends for from our from our patients and really the cultivation capacity comes into play after that first.
Demand demand model built so we're really building our cultivation capacity in step with demand and we've always we've always done that and like I said with the exception of that Green House and.
Component, which again, we're able to dial up and down and we think really the reason that we were so focused on NYSE because it gives us great optionality in terms of having that additional supply available. So that we can pivot and have supply ready for on for trends that are quite frankly, the timing of which may be unknown at this point in time.
And so and it is it is a very modular model and it does it is primarily driven off of on demand.
Okay. That's helpful. And then if I could just touch on your wholesale strategy of Massachusetts.
Looking forward to should you guys roll out your strategy next year.
This is more of a two part question first how do you think of prioritizing distribution of your branded products in your own retail stores versus in third party locations.
Obviously within your own stores that maximizes near term profitability, we've seen that you guys out of Florida.
But then.
Prioritizing third party stores, obviously maximizes distribution kind of get your brands out there.
How do you think about that tradeoff and then.
How do you think of.
Sort of.
Growing or sorry, selling only what you grow versus also buying wholesale flowers sort of supplementing your capacity.
Obviously in Massachusetts, Your we're kind of limited in terms of cultivation capacity. Unlike in Florida. So as you look to sort of increase market share in Massachusetts would you guys be open to.
Buying wholesale flower as well or just.
Your your thoughts on that as well thanks.
I don't think thanks for the question. So as you mentioned right and certainly having a vertical channel it's going to its going to give us the best margin and also gives us the best I would say brand control and so at the end of the day, having branded products in a branded store and having that customer experience controlled right and we think is a very very and.
Coordinate component of brand building and particularly in any market. So that is something that we will be focused on and and to your point and there's been a lot of discussion internally and with Chris Kelly, who is our director of wholesale with respect to how much product and what type of product offerings, we're going to have in store in our own stores versus what will be.
Offering and via our wholesale channel likely that we will not offer 100% of our product offerings right through wholesale channel to get the something special if you will to calm and give them a reason to visit our truly branded stores and.
That being said we also have of course on a number of brand partners that were excited and that will also be joining us in Massachusetts, and so there. They will also have the ability and to outsource.
Supply to then make their branded products that will be assisting industry in distribution not only of course in our stores, but also as part of our on as part of our wholesale portfolio. So I'm a couple of opportunities there to really really leverage and to maximize on again revenue in both channel. So appreciate the question and are excited.
To share more with you all as that.
I thought opportunity comes to fruition.
Yes, very exciting alright, thank you very much chairman.
Perhaps you can hold him.
Right. Thanks, so much.
Your next question comes from the line of Kendrick win from Eightv. Your line is open.
Thank you and good morning acumen interested Tom Olimus also one quick question I, we've seen annual headline numbers, obviously, the impact of all sort of a full quarter impact of smaller in terms of market dynamics and competitive positioning.
Through that lens could you give us some perspective on how you think market dynamics could evolve and how that would impact Q on the introduction of edibles and Thats just some additional color on how to think about what that we'll see the competitive intensity in the markets. Thank you.
Yes. Thanks, so much on we have we have been anticipating edibles really I mean for awhile now to put a mildly.
And that we have our we have a state of the our 10000 square foot kitchen ready to go on product formulate and not only with our own in house brands, but also with brand partners that have been than had been announced across a number of product categories within the edibles lineup and additionally, right because of that and because of the green house and oil and.
Centuri that we have on hand, and our ability to tap into that for our edibles product line and we believe that we are at a strategic advantage there with respect to being able to launch and have that not impact on our availability of other products and other in other product lines and with the question specifically.
Flower and whether or not we think that there will be impact or cannibalization and across segments and what I can tell you is that as I mentioned on the call, Florida, particularly loves loves gloves, new and new any market segment.
Also I can tell you that the and when we look at how quickly flower was adopted in the state of Florida Flower came online in March.
Last year, and we were quickly within three months I think it was within a quarter up to about a 50 50 and product unit split between between foreign oil I don't see flower demand going anywhere I do think that edibles at least initially will be an additive product and question as to whether or not theres any degree.
Nation, I would I would think it would be a degradation potentially on the on the other oil oil categories versus versus flower I expect flower.
Power consumption to continue to be fairly high.
Great. Thanks, Jim Congrats and I'll leave it that.
Thanks, so much.
Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from the line of Andrew simpler.
Your line is open.
Hi, there and congrats on the quarter.
Thanks, so much.
Just wanted to ask on the updated guidance.
Look at what you guys had been able to recall Bush first six months this year, which has been really impressive.
And I compare that to whats implied by the guidance.
So if I take the midpoint of sales I'm seeing some sales growth there.
So thats appropriate, but when I look at that on an EBITDA basis.
The average quarterly EBITDA would be somewhat lower than what you achieved and in Q2. So just wondering.
You are seen any headwinds to your your margin profile or.
Are you modeling any buffer in there for a potential cobot about if you could just speak to the dynamics there that would be appreciated.
Yeah no problem. Thank so much and so I think that.
First thing that I would say as that we try to be very realistic with respect to our guidance and again, increasing at and on a on a sequential basis. When you look at I mean, it's I.
I think apartment, 43% increase in EBITDA from what we guided to previously and and but to your point and we certainly don't know at this at this point and that's why we were hesitant to increase guidance you know in Q1.
Exactly what all the potential impacts with respect to co that could be and you've heard me mentioned as we think about and the kind of macro environment and a shift in pressure on on on folks from a from a macro perspective, and I think that that remains to be seen as well and as we think about.
For example, not high high level of growth in our value flower line as an example, so TV determined with respect to Kobin.
Second thing that I would mention is that Alex did go into a bit of detail around just our and our efforts to get ready for on being FCC compliant and Sox compliant and there certainly will be expenses.
Associated associated with those efforts as we as we transition and make the transition from I addressed to add to GAAP and then and then finally I would just say that and again, we are ramping up for math and she said we've got applications efforts underway and there are we're kind of positioning for wholesale another catalyst there are summit.
Fences associated with those things that are happening now ahead of revenue.
And so we do have we do have that and included as well. So I think all those things lead to where we landed with respect to with respect to our guidance and we feel we feel pretty confident about.
Okay. Thank you very much color there.
I was also pleased to see your confidence in being able to deliver 68 stores by the end of this year.
Just wanted to.
Steve just any additional commentary on.
Perhaps some scenario analysis.
No the covert situation worsens could we potentially see that slowed down.
But what you're looking perhaps even come coming on top that 68 figure in the base case just speak to them.
One of the scenarios you could see Plano markets.
Sure.
It's been very heartening with respect to our ability and our team's ability to continue to move forward and get stores open during code that even in the middle of the heightened stay at home order here in Florida, and all of the construction and related service industries here in Florida had been deemed essential and we are well underway and concern.
Production in the majority of those locations and so we feel very.
Very confident with respect to again at least our Florida store build.
That will be able to we'll be able to meet that number on the teams then been laser focused on a on ensuring our ability to meet that goal and and I have I have a high degree of confidence in them to be able to deliver.
Great. Thanks for the color.
Alright, thanks, so much Andrew.
There are no further questions at this time I'll turn the call back over to the presenters.
Thank you for joining us today, we look forward to updating you again next quarter.
This concludes today's conference call you may now disconnect.
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