Q3 2021 Trulieve Cannabis Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to the truly cannabis Corporation's third quarter 2021 financial results Conference call.
My name is Jamie and I will be your conference operator today.
As a reminder, this conference call is being recorded and at this time I would like to turn to introduce your host for today's conference Christine Hersey Madam. Please go ahead.
Thank you.
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 our prepared remarks on the financial performance and outlook for two relief. Following their prepared remarks, we will open the call to questions. Steve White President will also be available to answer questions.
As a reminder statements made during this call that are not historical facts constitute forward looking statements and these statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with the securities and exchange.
Commission, including item one a risk factors of the company's annual report on Form 10-K for the year ended December 31, 2020, although the company may voluntarily do so from time to time. It undertakes no commitment to update or revise these 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 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 truly is 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.
ARX or responses to your questions. We may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future.
This morning, we reported results for the third quarter of 2021, a copy of our earnings press release and an accompanying Powerpoint presentation may be found on the Investor Relations section of our website Www Dot <unk> Dot com an archived version of today's conference call will be available on our website later today I'll now.
I'll turn the call over to our CEO Kim Rivers. Please go ahead. Thanks, Christine Good morning, everyone and thank you for joining US today, we are thrilled to report our 15th consecutive profitable quarter driven by continued outperformance in record revenue as we approach the end of the most transformative year in our company's history, we remained firmly on.
Offense with an unrelenting focus on executing our strategy just over six weeks ago. We closed the harvest acquisition the largest U S. Cannabis transaction to date as we outlined during our call on October 1st this deal solidifies our position as the largest and most profitable public multistate cannabis operator in the U S on a pro forma basis the combined.
Company's third quarter results would have been approximately $316 million in revenue and $121 million and adjusted EBITDA. The strongest among any reporting MSR. This quarter on a standalone basis truly reported third quarter results of $224 million in revenue, representing an increase of 64% growth compared to last year. This.
Growth was achieved with an industry, leading gross margin of 69% and adjusted EBITDA of $98 million trillion operates in 11 states across three hubs, where we now have a total of 155 dispensaries, 40% greater than our nearest competitor importantly, we now operate 47 dispensaries outside of Florida compared to to just one.
Year ago, our industry, leading retail network is supported by over $3 5 million square feet of cultivation and processing capacity with market, leading operations in Arizona, Florida, and Pennsylvania, we are well positioned to build additional scale and depth in our cornerstone states, while redeploying profits to open and expand into new and emerging markets.
Our teams were working to close our harvest acquisition, we did not slow down during the third quarter truly alone opened seven new dispensaries closed the Keystone shops acquisition in Pennsylvania launched new products, including the first line of concentrates using hydrocarbon instruction in Florida introduced a new brand portfolio with cultivar collection momentum Muse and sweet.
Product lines announced depending license award in Georgia acquired an additional retail licensed and launched wholesale operations in Massachusetts and became the first operator to commence cultivation activities in West Virginia concurrently the harvest team opened six new dispensaries purchased an option to buy a license and Arizona secured sale leaseback financing for the Hancock Merrill Lynch.
<unk> and arranged the sale of the duplicative licensed in Florida for $55 million in cash since the end of the third quarter. We've kept the momentum going in October we opened a new affiliated retail location in Pittsburgh, Pennsylvania, and the past week, we were first to market in West Virginia opening the first two medical dispensaries in the state and Morgantown and weapon.
And Florida, 14 legacy harvest dispensaries reopened its truly branded locations throughout the month of October those dispensaries are carrying harvest branded products such as alchemy colored modern flower Emerald. One in addition to the extensive portfolio of truly products totaling over 750, skus across a wide variety of form factors.
For harvest stores that were opened more than one month.
As harvest and subsequently converted to truly post acquisition, we have already seen a 35% increase in their revenue run rate, thus far with a conversion of harvest stores in Florida completed we are focused on additional locations as of today truly operates 108 dispensaries in Florida, and we expect to open another five dispensaries by year end <unk>.
The third quarter truly maintained the top position in our home state of Florida truly remains the largest operator in Florida as measured by every conceivable metric, including volume of products sold for flower and oil number of SKU range of product categories sold number of patients served total employees open retail locations cultivation and manufacturing.
And capacity revenue and profit according to data published by the Department of Health between July and October one truly bill loans sold over 32000 pounds of flower and more than $1 1 billion milligrams of oil respectively, amounting to more than 200% and 275% greater than our nearest competitor while we are <unk>.
<unk> of our achievements and acknowledge these impressive statistics, we are committed to continually setting the standard for operational excellence, while remaining focused on delivering exceptional customer experiences. We are forging ahead with a series of initiatives centered around broadening access to cannabis products in Florida capacity expansion and technology investments designed to further advance our lead.
<unk> position.
First we are proud to lead the way further expanding access to cannabis products in the state of Florida with the first available concentrates manufactured using hydrocarbon extraction since the initial launch in September. These products have been very well received so much. So that we've recently quadrupled hydrocarbon extraction capabilities and are building out additional capacity that will come online through the <unk>.
Beginning of 2022. In addition, we continue our cultivation expansion efforts, while also adding manufacturing capacity across several other product lines. During the third quarter. We began operations at our new 55000 square foot Tampa production facility, which includes a larger edibles kitchen, we expect the new kitchen will be fully ramped by year end, bringing.
<unk> existing space for increased production as the market leader in Florida, with roughly 50% market share for over five years now we have collected and analyzed data for roughly half of the total transactions in the market to date. This data offered us valuable insights into customer preferences and behavior that informs our decision, making one point of differentiation for our organization.
Station is continued investment in technology, including our SAP enterprise software system and customer data and analytics platforms. These tools are more truly have the ability to capture and utilize data companywide eight and sox compliance and enable patient and customer appreciation and retention tool. We aim to maintain our position as a leading operator in purveyor.
Of high quality cannabis products with a customer centric approach, we will continue to invest in Florida and in cultivation manufacturing and retail capacity. So that we can deliver high quality products and best in class customer experience to patients across the state, Florida remains one of the most attractive medical markets in the U S demonstrated by continued growth in 2021 on top.
The accelerated growth experienced during 2020 patient growth in the third quarter remained strong. Despite the end of telemedicine consultations in June with an average of over 2600 patients added per week due to our existing scale and depth additional investments in Florida continue to deliver fast and favorable returns that we can redeploy and invest in future growth opportunities.
<unk> ahead of catalysts, including adult use sales turning now to Pennsylvania in July we closed on the acquisition of Keystone shops, adding three affiliated medical dispensaries in the Philadelphia area to our retail presence as we indicated during the October 1st call. We were not required to divest any affiliated cultivation or retail assets in Pennsylvania as part of the <unk>.
<unk> acquisition in October when additional affiliated medical Dispensary opened in Pittsburgh.
Pennsylvania presents a significant growth opportunity both within the existing medical market and with the potential future expansion to include adult use sales as of mid August Pennsylvania reported over 360000 active patients certifications and more than $2 billion in cumulative dispensary sales since the program's inception, we remain optimistic that mounting by part.
Listen support will ultimately lead to legislative measures to allow adult use consumption in Pennsylvania.
Rounding out the discussion of our key market, let's turn to Arizona, our cornerstone state in the southwest the Arizona market continues to develop and has outperformed our expectations since the launch of recreational sales in January since harvest reported second quarter results in August the team opened our 16th Dispensary in North Mesa purchased an option to acquire a 20th.
And made considerable progress on developing a new upcoming retail location, which will be the only dispensary in downtown Phoenix. This market provides both an anchor to our operations in the southwest and an opportunity to glean valuable insights in this growing recreational market, we're continuing to invest in Arizona and as the largest retail operator in the state we are well positioned.
Ahead of the coming winter months and return of tourists and snowbirds.
Following the recent debt offering and repayment of high cost in short term harvest that truly it has ample cash to fund our growth initiatives within this generational investment opportunity over the next few quarters, we will continue to invest in our cornerstone markets, adding depth in our retail reach and scale and our cultivation and production assets by fortifying our leadership position, we will incur.
<unk> branded products through branded retail stores, while continuing to build our wholesale channel broadening our reach ahead of future catalysts in the coming year more than 20 locations will be rebranded to relieve outside of the state of Florida, creating a consistent experience across markets. In addition, we will strategically invest in emerging markets that offer attractive returns while we.
We continue to invest in further developing assets across our existing hubs. We are open to completing additional tuck in inexpensive acquisitions. Our hub strategy allows us to add bolt on assets and our operational hubs supported by our existing teams and infrastructure in new regions or M&A activities centered around adding boutiques and assets as we did with the.
The acquisition in the southwest again, we will remain disciplined with our M&A strategy pursuing profitable growth, where we have an opportunity to acquire strategic assets in attractive markets at an appropriate price.
In addition, we will continue to pursue opportunities in new markets through organic license awards, we remain focused on markets with attractive regulatory structures that will allow us to achieve optimal scale with consistent supply quality and branding as part of our commitment to delivering exceptional customer experiences while pursuing profitable growth our third quarter results.
And recent actions demonstrate our commitment to our strategy into our goal of building a sustainable and scalable business engineered for success.
As a reminder, our fourth quarter results will include the full quarter contribution for harvest absent any contribution from harvest. We remain confident in our 2021 guidance of revenue in the range of $815 million to $850 million and adjusted EBITDA in the range of $355 million to $375 million, we will provide full year 2022 combined guidance.
We report fourth quarter results in March with that I'll turn the call over to Alex for more details on our third quarter results. Thank you Kim and good morning, everyone. This has been a tremendous year. So far highlighted by significant progress along several fronts, including operational execution organic growth and expansion initiatives and acquisition and integration efforts.
We will continue to build on this momentum through year end and into 2022 as we fully integrate the harvest acquisition will be leveraging expanded capabilities across our organization supported by a deeper bench to help successfully navigate the rapidly evolving landscape within our industry. We're proud of how far we've come and excited to keep it going into next year.
As Tim highlighted earlier, we reported third quarter revenue of $224 $1 million, an increase of 64% year over year compared to $136 3 million during the third quarter of 2023rd quarter revenue increased sequentially compared to $215 1 million during the search.
Quarter further adding to outsize growth in recent quarters truly ended the third quarter with 101 dispensary locations as of November 15th truly owns or operates 155 dispensary locations.
The company achieved gross profit of $154 million or gross margin of 69% in the third quarter compared to $144 5 million or 67% during the second quarter. During the third quarter, we employed a targeted pricing strategy to preserve margin and retain the value of our brands and product offer.
In addition, gross margin was positively influenced by increased flow through of material to finished goods. Despite macroeconomic labor constraints and the onboarding of additional capacity in all markets. This was partially offset by increased third party product sales and the inventory fair value step up brought on by the acquisition of Keystone shops.
Early in the quarter as stated in prior quarters, we expect gross margin will continue to fluctuate quarter to quarter, depending on inventory flow through product and market mix.
Turning now to operating expenses SG&A expenses in the third quarter, excluding depreciation and amortization was $79 9 million or 36% of revenue compared to $61 5 million or 29% of revenue during the second quarter of 2021 third quarter expenses included approximately $16 one.
$1 million associated with onetime share based compensation and transaction acquisition and integration costs. The increase in share based compensation expenses related to the onetime exchange of outstanding warrants to restricted stock units the transaction acquisition and integration costs were primarily related to the harvest acquisition.
Excluding these onetime costs SG&A was 29% of revenue.
As we continue to build scale and depth in cornerstone markets, while expanding in new mortgage we expect quarterly fluctuations in operating expenses as investments are made ahead of increases in revenue.
Operating income for the quarter was $66 3 million compared to $76 $3 million earned in the second quarter net income was $18 6 million for the quarter compared to $40 9 million for the second quarter. The sequential decline in operating and net income reflects the aforementioned onetime operating expenses and higher estimated tax.
Provision for the third quarter, we expect quarterly fluctuations and estimated taxes, particularly within our high growth industry. We generated earnings per share of <unk> 14 on a fully diluted basis absent onetime expenses earnings per share would have been 26.
We expect transaction and integration costs will continue to impact reported EPS for the next few quarters.
Turning now to adjusted EBITDA for the third quarter 2021, adjusted EBITDA was $98 million or <unk>, 44% compared to $94 9 million or 44%. During the second quarter. This is attributable to the flow through of our increased gross margin, partially offset by the increase in sales and marketing expense associated with our growing retail footprint.
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We ended the third quarter with a cash balance of $213 $6 million bolstered by $75 1 million in operating cash flow through the first nine months of the year subsequent to quarter end, we completed a $350 million private placement of five year senior secured notes at 8% representing industry, leading terms for us.
Touching cannabis companies.
We have retired $270 million of high cost in short term harvest debt, an $18 million of truly notes payable.
Our strong cash generation and financial profile provides flexibility to quickly capitalize on expansion opportunities invest in organic growth and go deeper in states, where we operate companywide capital expenditures year to date average just over $21 million per month in accordance with our plans expansionary Capex investments will continue through year end.
And throughout 2022, as we build scale and depth in line with market growth trends fourth quarter investments will include allocation of capital to newly acquired harvest assets.
In closing I'd like to express how proud I am of the team here at <unk> and how tremendous it has been to see firsthand the growth and continued evolution within the organization I look forward to carrying this positive momentum into next year.
With that I'll turn the call back over to Kim. Thanks, Alex. This is been an exceptional year to data to relieve underpinned by the transformational acquisition of harvest, we are exiting the year as a larger stronger organization, well capitalized and ready for the next phase of growth. While we have accomplished a great deal. It remains true that our story is just beginning.
We are still in the early innings for Chili's and the U S. Cannabis industry. The continued efforts to advance significant cannabis reform through legislation such as the Safe Act more act and the newly introduced state's Reform Act highlights the increasingly mainstream acceptance of the cannabis industry in this country by the broader population business and political leaders.
In our view it is only a matter of when and not if change will come even as federal reform continues to build momentum advanced into the state and local level are accelerating over time broadening the opportunity set and delivering greater access to cannabis two and eager public for reference the U S. Legal cannabis market is expected to grow to $48 billion in 2020.
<unk> up from $26 billion in 2021, the markets in which we operate today represent over 50% of forecasted sales and are expected to grow over 65% in the next five years within this context truly is uniquely positioned to meet the promise of this generational investment opportunity with an enviable combination of unmatched scale.
<unk> operational excellence strong financial profile and World class team truly this poised and ready to define the future of cannabis. 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.
We will now begin the question and answer session to ask a question you May Press Star and then one using your Touchtone telephone.
You are using a speaker phone, we do ask that you. Please pickup your handset before pressing the keys.
So withdraw your question you May press Star two.
Once again that is star and then one to ask a question.
Our first question today comes from Derek delay from Canaccord Genuity. Please go ahead with your question.
Yes, hi, good morning, and congrats on another set of strong results.
I wanted to focus in on Tuesday, and particular, so one let's start with Pennsylvania, we've been hearing from some others about price competition.
In Pennsylvania from what I get namely on the value and can you comment on what Youre seeing within that and then the second part of that question just in terms of incremental capacity coming online and as.
Is your capacity online now and I would assume that that would focus on the on the higher end cultivar side.
Sure I think that thanks, Derrick so as it relates to pricing in Pennsylvania, I think to your point there has been a lot of conversation around around pricing and what we believe and what I believe is that pricing in Pennsylvania started exceptionally high and so what we're experiencing is a normalization of pricing that happen.
<unk> over time and should happen over time in any market.
And certainly value products appear to be more affected which makes sense as of course quality separation occurs among pricing tiers.
In Pennsylvania historically.
Through our acquisition of <unk>, we have been focused on premium products and so we certainly have experienced I believe.
Less pricing pressure than maybe some of our some of the peer set.
Moving forward, we do plan to bring additional capacity online and as noted we werent required to divest any of our.
Any of the harvest retail or cultivation affiliated assets in that state and so really the focused in Pennsylvania will be to bring increased branded products through branded retail over time, and we believe that that will provide significant upside as it relates to margin.
And that state along with of course increased product availability and that the customers are looking for from our from our brands.
Okay, Great. That's helpful in Pennsylvania, and then secondly secondarily.
Arizona, and maybe maybe Tim or Steve can answer this one but as.
As the markets entered adult use here.
What are the typical consumption patterns of customers in that space. As you know the thing that theirs is there a material difference between new adult use customers and perhaps the previous medical customers.
Thanks Derek.
They are generally the customers the adult use customers look a lot like the medical customers. What you will see over time and this is generally true I think of all markets that add adult use sales.
The recreational sales the basket sizes tend to be a little bit smaller than the medical sales and over time, you see a transfer of customers from patients over to adult use customers in other words, the number of medical patients decreases as the recreational custom.
<unk> increased.
We are seeing those patterns in the state of Arizona.
Okay, Great. That's very helpful. Thank you very much.
And our next question comes from Andrew <unk>.
<unk> from Stifel GMP. Please go with your question.
Hi, good morning, Congrats on the great results and thank you for taking my questions.
Maybe thinking about Pennsylvania and Massachusetts.
Especially given you just entered Massachusetts wholesale market.
If we leverage had said we kind of see that the pricing in both markets at the retail level.
Similar.
But at the same time.
We are seeing some pricing normalization I think as you put it in Pennsylvania, Massachusetts seems to be.
A little bit more stable, even though it's an unlimited license market there.
I'm just wondering if you have any thoughts around that.
Why do we see a kind of difference.
And trends.
And both of those states and if you could.
Provide any of your thoughts and color on that would be helpful. Thank you.
Yes, I think the things Andrew.
First I would just caution.
<unk> against relying on any any any single data set.
As we certainly have has found some inconsistency is.
There, but understand that we deal with the best the best available that we have.
I think that it goes back to what my comments previously around the fact of where where things started.
In Pennsylvania, and we May in fact be seeing.
A bit of a pendulum swing there as again differences in tier there are established whereby a do you think in Massachusetts, there are already existing pretty definitive price price pricing as it relates to quality on a tiered basis across several across several categories in.
In Massachusetts, So I think that and it's a little bit of a case study in.
Pricing strategy and in consumer behavior across both markets and but that's that's at least what we're what we're seeing and I think just to add a little additional color. We certainly are seeing the continuation rate of barbell patterns.
Cross across both markets, but with Pennsylvania, I think part of that barbell is being established straight which is a bit different than what we see in Massachusetts.
I appreciate that color.
Maybe switching gears to new states and your outlook on that.
Ideas around New Jersey, New York, Illinois, other states in that area.
In New Jersey in particular I believe.
Correct me, if I'm wrong, but.
We're among the 2019 RFA medical applicants.
Wondering if you had any updated thoughts around around entering new jersey or any of those other states.
Does M&A makes sense with the increased visibility on on Rec legislation and how that market will look in new Jersey or New York.
Yes, I mean as you know we don't comment on.
Any sort of specifics around around M&A, and we remain very bullish on the northeast as a whole and we think and we like our position in the northeast currently.
We also of course as we as we noted in our prepared remarks have very specific metrics around deployment of capital, whether it's through organic growth or through or through M&A.
Just for this is in the northeast.
Depending on how you draw your state lines, but west Virginia that we just opened.
This past this past weekend I was at that Grand opening and I can tell you that and there were there was an exceptional reception to add to the first store opening in West Virginia. We served over 240 customers on day, one lines around the block.
Starting very early and going into the evening so.
We're excited about our footprint and we are certainly poised to take advantage of additional opportunities as they become available and remain bullish on the northeast as a as a hub.
Thank you for that and I'll get back in the queue.
Great.
And our next question comes from Russell Stanley from Beacon Securities. Please go ahead with your question.
Good morning, and thanks for taking my question I guess my first just around the integration progress.
<unk> on the on the rebranding of the harvest dispensaries in Florida.
Just wanted to get your thoughts on how far through well.
It must be an extensive process you are I know you are only six weeks in but I guess wanted to get your thoughts on when you when you expect to be substantially complete.
Sure I mean I.
I think from from our perspective, and I'm going to let Steve comment on this as well, but from our perspective integration is going extremely well.
I think I have noted previously that Steve and I. When we first started having discussions about the possibility of a transaction and.
We're in sort of the final wrap up stages of the LOI.
We set a priority of alignment across teams as really.
Sort of a defining priority in other words, if it through the transaction through diligence if things started to get offside, we were going to have another conversation about whether or not whether or not it made sense to continue because that's how important we believe that alignment really is throughout the process and I think that that was well served our teams have gotten shoulder to shoulder very quickly.
And are working together.
Think that the evidence there is in the fact that we haven't had any significant departures.
Identified as key team members in.
In addition, as you mentioned stores are being converted product lines are coming through on a combined portfolio basis, which is again a key a key thing for us.
As we get through integration, we will certainly have additional work to deal through 2022.
And bringing systems together over 11 markets and is no small feat and we are certainly heads down working on that and as we speak and then of course on my prepared remarks, we talked about the fact that we're going to begin store conversions across the combined platform and in addition, we will be working through inquiry.
Capacity to bring that branded product portfolio on a combined basis across across the combined platform as well Steve do you have any other comments there sure I think Ross it's important to remember that.
Just for context.
Actually months away from what could be expected close was in other words, we shouldn't even be having this conversation.
But we did find a number of areas in which the two teams where we could bring the two teams together more quickly and we could actually get to the close faster. It's been a point of emphasis for both organizations, obviously, because it's a very big deal. So I would say across all aspects every way that youre going to look at the integration process were.
We're very much ahead of schedule and have demonstrated that the teams together are executing maybe even better than they were independently.
Yes.
That's great and maybe just one more and I'll get back in the queue on Massachusetts I think.
You've recently entered the the wholesale market there just wanted to get a sense. If you could share perhaps penetration numbers, where youre at and perhaps any targets on penetration be it by year end or each one or whatever you can share on that front would be helpful.
Yes, I think for us.
As you as you noted we are we just launched our wholesale operations in Massachusetts.
We have been focused on making sure that we have the right the right product mix with both truly branded products as well as our national partner branded products.
Recently brought to market and both bank and our partner Blue River, which we think are two differentiators for us in Massachusetts, alongside our variable received cultivar collection flower brand and our high end concentrates brand.
So we are we feel like we have the product mix, where we want it at this point and now we're ramping production scale to meet demand.
As we as we get to understand what the what those demand profiles look like for each one of those for each one of those categories I can say I am not in a position to share particular numbers on this call, but I can say that we.
In terms of number of doors, we are hitting our targets and are continuing to ramp and as again, we bring that capacity online.
That's great. Thanks for the color I'll get back in the queue.
Okay.
And our next question comes from Matt Mcginley from Needham. Please go ahead with your question.
Based on the pro forma pro forma numbers you provided in the third quarter. It looks like harvest revenue declined by about 10% quarter over quarter and EBITDA dollars would have been down a little bit as well I assume that was probably mostly Pennsylvania and Arizona, but can you talk about what happened in those states and I guess, how what's transpired in the fourth quarter overall with the harvest business.
Hey, Matt Yes, keep in mind when you do a pro forma we're taking out the impact of intercompany. So when you and when you add that back quarter over quarter harvest was down just slightly over 1% actually.
Yes, Matt This is Steve specific to your questions about Pennsylvania, and Arizona, what we can say is that we actually saw quarter over quarter improvement.
In our retail sales in both of those markets.
That the that the marginal decline quarter over quarter was mainly attributable to or entirely attributable to Nevada sales.
Okay.
On the gross margin side, how much of a headwind was labor inflation and labor availability and the gross margin in the third quarter that that was something you noted that the bigger issue in the second quarter and it appear.
Appears to have largely dissipated in the third but I'm just kind of curious what that what that looked like overall and I guess more importantly look what does that look like into the latter part of this year.
Yeah. Thanks, Matt So as we noted correctly in Q2, certainly and that was a headwind for us in Q2. It was also it was also there in the beginning of Q3 and we compensated for it by.
Increasing our overtime and so the cost of labor for US did was with elevated somewhat in Q3, we do see a normalization.
It happened not started occurring in the back side of Q3, and we would expect we would expect that to be.
Back to a more normal normal rate and going into and certainly what we're experiencing now in Q4.
Okay, great. Thank you.
And our next question comes from Pablo <unk> from Cantor Fitzgerald. Please go ahead with your question.
Thank you good morning.
Steve One question for you.
The commentary at the beginning.
In Florida, the hardware stores with the new assortment and changes sales went up about 35% can you give more context or that they saw the stores were just rebrand. It he set of numbers for demand for the week I mean is that a number that we should just up on total year, how the stores in Arizona, Pennsylvania.
The benefits of the two.
Leave notion.
And then a second one forgive me if I may.
So forgive me if I look at this will equal numbers of which even at the time I know what our students. We think Keystone was about $10 million for the quarter. So that means that sales were about flat right and if I'm right.
And sales were flat and we'll see about 8% volume growth in Florida that would mean for your price mix was down about seven to eight points quarter on quarter for you could you give some context, there I mean any quarter would help thank you.
Yes.
Thanks, Pablo and I'll start with the Florida question.
So when the legacy harvest stores, where they're required to be shut down and then opened again is truly stores post close.
With the addition of additional products and some additional renovations in the stores themselves.
What we saw on an annualized basis is an increase of 35% between the the numbers at the harvest stores were we're showing prior to the close down and after in other words it's.
Just a bump.
A bump that you saw that was temporary.
Days that we calculate it out and annualize those days and so you saw a 35% increase there.
Mainly due to the increased product skus and some of the additional flow through work that was done by the Trulia.
Okay.
Uh huh.
Sorry, you can go ahead I'm sorry, no no no go ahead.
No. It was going to say that 35% number of course is very impressive but my question was more was that something you calculated based on the results really weak or demands I mean, I'm just trying to think how we extrapolate that going forward and is that 35% is something that we should assume we don't just get the benefit in your stores in Pennsylvania, and our rezoning that Stu. Thank you.
Yes.
Yes, I don't know whether or not you could apply that pattern across other states or not but what specifically what we're looking at is we're comparing our August.
Our legacy harvest numbers with the annualized numbers post flip over to truly stores.
Whether or not those I mean, I don't know that you could extrapolate much further in other states because obviously in the state of Florida.
Truly skus are quite expensive.
So we will see and we'll report what happens in the in the other states.
Yeah.
I'm going to I'm going to try Pablo to two there was a.
A few questions I think on the back side of that for me, but just to piggyback on what Steve said, certainly strategically and in the.
Other markets, what we're going to be focused on near term is while we will have additional capacity coming online we are going to be focused on getting the product mix.
Yes.
Situated for through our combined to our combined brand portfolio for each market and increasing and increasing production of branded retail in <unk> branded products into and through an expanded branded retail channel and that certainly will be the primary focus.
In both Pennsylvania, as well as Arizona.
In the coming months and so.
While in Florida, specifically.
We were able to come in and make a immediate impact by increasing not only product availability, but also again.
More robust combined product portfolio of both harvest legacy harvest and truly products into those channels and.
We will plan to do some of the same in other markets, but of course, we'll also have a different product mix, that's appropriate and acceptable rate to customers in each of those markets.
Moving forward.
Can you comment came on my question on Florida, I mean, if you want I can repeat it.
Do you want to be prudent.
Yes, I'm not sure yes, please repeat it.
Okay.
Australia, I think where she was based on my math Houston shops is about 10 million in sales for the quarter. So that was in the quarter on quarter in organic terms. The business was flat I mean, nothing wrong with that in the current context, but.
Data portfolio has grown about 8% volume growth.
I mean that the price mix in the quarter was down about 8% sequentially. It would be consistent with all the talk that we are hearing about price competition, there, but some color there would be helpful. Thank you.
Yeah, So and I'm, sorry, I'm trying to I'm trying to reconcile the comment as it relates to Pennsylvania to how it relates to Florida, what I can say around the Florida business is that certainly we're very proud of our performance in Florida This quarter.
We had increased inventory flow through into into finished good products, which we felt was very important in order to continue to keep up with what we're seeing on the ground right and so as we mentioned there was promotional activity. However, I think we did a significantly better job this quarter executing.
On strategic promotional opportunities, while maintaining margin, which you saw come through in the results.
And certainly making sure that we are offering more targeted promotions.
Certain product categories.
We when you have promotional activity. It's important that we continue to have the ability to have.
Have increased scale, because you have to have additional production rate increase because you're selling more units obviously.
Slightly at slightly lower prices and so I think that this quarter, we really saw again, a combination of our scale coming through our production team firing on all cylinders and our our sales and marketing team leaning into more specific strategic.
Promotions that led to our outperformance on our peer set as it relates to Florida, and quite frankly are maintaining rate over 50% market share most weeks.
As reported by the Illinois.
Alright, Thank you congratulations thanks.
Thanks.
Our next question comes from Aaron Grey from Alliance Global Partners. Please go with your question.
Hi, Good morning, Thanks for the question and congrats on the quarter.
So first question for me wanted to double back a little bit on the last one.
But kind of talk about between the lines of kind of retail versus wholesale.
I know you haven't historically kind of provided the breakout between retail versus wholesale for the company starting to ship now with some of the key acquisitions as well as harvest coming through so I just wanted to know maybe if during the quarter you can kind of provide some breakdown or maybe he didn't want do that maybe some metrics used to provide in terms of same store sales visits basket. Just if you could provide some color.
On how that trended during the quarter I think that could be helpful. Thank you very much.
Yeah. Thanks, Erin so obviously historically wholesale has been less of a relevant metric for to relieve given our significant presence in the state of Florida, where wholesaling is not it's not an option. However to your point and we are starting to experience additional wholesale capacity as we.
Outside of the state of Florida.
Important to note that we're not necessarily managing the business this way at.
Currently.
We are again continuing to focus on that wholesale channel on a go forward basis I think it is important to note that in 2021, if you were to exclude Florida.
Half of our business is was was.
Via wholesale and we do plan to double that business moving into 2000, 2022. However, I showed again reiterate that we do believe that the best return.
Is is through branded product in branded retail and that will remain a priority.
Okay, great. Thank you for that color.
And then just in terms of some of the competition within Florida and the promotional activity I mean, you talked about some targeted promotion yourself just based on some commentary from peers. If it does persist we had talked about on this call on the last quarter in terms of how long it will last.
Given the high margin profile within the state. So if it does persistence state you know what are you guys looking to do maybe in terms of expanding it beyond just more targeted promotion, obviously very healthy margins. Despite some of your current promotion during the quarter. So how are you now looking at the state and.
Evaluating the competitive environment in the case of more heightened competition and promotional activity for an ongoing basis. Thank you.
Yeah, I mean, I think that look we've been I think very very successful in maintaining and.
Static in terms of impact.
<unk> as it relates to as it relates to pricing.
And promotional activity and however, what you saw from US this quarter again was an.
An increase rate as as that flowed through to our margin based on our strategic focus.
Look if I can put up 69% margin.
Ill do that all day, and so I think that.
The proof is in the result, then we like to rely on our results as opposed to a go forward statements.
I should note that as it relates to investment in Florida to be clear, we have the ability over the next 12 months to bring online an additional 1 million square feet.
Cultivation.
And again, we will be making decisions as to whether or not to actually bring that capacity fully online or not depending on what we need to do and what we see in the competitive landscape and we're not taking our foot off the gas in the state of Florida is an incredible market with incredible continued returns as well as future upside.
It continues to grow on the medical front and of course as we continue to position ahead of adult use.
Sure.
Alright, Thanks, a lot for the color I'll jump back into the queue.
Great.
Our next question comes from Camilo Lyon from <unk>. Please go ahead with your question.
Thank you good morning, everyone.
Just going back to Alex maybe if you could just help us on the Q3 gross margin.
Unpacking the moving parts you talked about a few different puts and takes maybe if you could just quantify them to help us understand the magnitude of those buckets and maybe just from a larger perspective from a higher level perspective, how do we think about the buckets to consider into 'twenty two.
Yeah. So just keep in mind, when we are saying, we deploy strategic and targeted discounting strategy in the quarter helps us preserve margin and protect our brands. So you could call that.
Flat to Q over Q in that regard.
In addition, we continue to build our infrastructure in accordance with our Capex plan, we bring on additional we onboard additional capacity in all markets this quarter, particularly in Florida, and we were able to as Kim alluded to navigate some of those labor challenges in our processing centers and increase increase of flow through.
<unk> work in process to finished goods, we implemented some additional overtime to do that and we ended the quarter with a higher level of finished goods in the prior quarter. So.
Those in conjunction.
Was partially offset by the inventory fair value step up.
And we all know and love.
Casting from with our Keystone shops. So those are the kind of buckets for margin.
Was the was the better pricing action the bigger contributor was at the higher level of finished goods.
Hi.
As you bring on capacity right. So it's a combination so high level of finished goods.
The increase in net flow through from with and then you bring on additional capacity.
As we were saying that was kind of a little bit back loaded in the second half so we benefit from that.
Got it very helpful and then.
As we looked at 'twenty two maybe if you could just remind us what your capex projects look like as you have coming online to.
To support some of the.
The market in store growth that you were talking about.
Yeah. So we.
We'll certainly give additional color on 2022.
I think youre on the year end call I think globally, what we're prepared to say today is that we're going to continue to invest in our core cornerstone markets, which we're defining as Florida, Pennsylvania, and Arizona to bring on additional capacity again with the goal of having increased branded products through.
Increased and robust platform of branded retail stores and so those investments a lot many of them are in underway currently.
With additional expansions expected as you're out throughout 2000 22022.
Okay very helpful. Good luck and thanks, thanks for the color.
Our next question comes from Graeme Kreindler from eight capital. Please go ahead with your question.
Hi, Good morning, and thank you for taking my question, where a bunch of enter what is expected to be a seasonally strong period in Arizona. So I was hoping you could discuss if you're seeing any shift as we're in the early stages of.
Some seasonality here, what that's looking like as well as the inventory situation mistake given it was tightly managed earlier in the year at the onset of <unk>. Thank you very much.
Sure Graham.
So on Arizona typically what you see is a little bit of seasonal weakness over the summertime months, you see less people in the state of Arizona.
And typically what you see is that that trend reverses or starts to reverse around October.
In terms of.
Any supply constraints continuing in the state of Arizona as you would expect.
The supply and the or the wholesale market is less constrained than it was when we originally into.
Introduced adult use sales and so additional capacity has come online and so we're starting to see.
Less and less of our strengths there.
Thank you for that and then just as a follow up on the Arizona market. We've seen some increased consolidation activity as of late and I'm wondering if you could discuss what the opportunities in the landscape looks like potentially for further consolidation or where value valuations are trending, particularly after started off the year Hot.
And now we're seeing some more deals as of late I appreciate that thank you.
You bet.
So, Arizona, obviously, a cornerstone market and one where we'd be interesting interested in adding to the retail portfolio or if the price was appropriate.
The challenge has always been when the price is appropriate.
When you saw the initial passage of the recreational initiative you saw prices spike.
So you saw some deals that were deals that were aware of and frankly not not interested in paying those prices. So it becomes for us in a state like Arizona more challenging.
Get deals done, but we will continue to be evaluating what opportunities are there and if they hit the criteria are our criteria for acquisition and we will still execute on deals in the state of Arizona.
Okay understood. Thank you very much for that.
Okay.
And our next question comes from Ken Rick.
<unk> from <unk> capital markets. Please go ahead with your question.
Thank you and good morning.
I Wonder if you could speak to hydrocarbon extraction.
Its ramp us as a differentiator and the most as you look to 2022 and the competitive dynamics in Florida.
Do you have any insights you might have there with respect to.
Having said that ramp and that significance.
Sure Ken Rick So hydrocarbon extraction is an incredibly efficient.
Extraction technique.
At yields significantly higher quality concentrate products than.
Any of our previously existing extraction methodologies and we are currently in the process of bringing on a number of new skus that will be new to the state of Florida that customers have been asking for that not only will we be able to make available but will be able to make available in a very scaled way, which we believe.
It has always been part of our competitive strategy and the state of Florida and products that we brought to market. So far have among the highest velocity of products of any in our portfolio and signal to us that we needed to quickly not just double down quadruple down with respect to our outlook.
And so that's what we have done.
The capacity from that expansion is actually coming online as we speak so products have been made in our in our in the testing cycle now with the expectation that we'll have an expanded portfolio available going into the holidays as I mentioned on the call. We are also.
We're not stopping there because our forecasts indicate that we're going to need even in even more.
Capacity to be able to effectively bring online the variety of products that we were going to bring online coming through 2022. So we have additional investments in production equipment that will go into additional.
Manufacturing facilities across the state.
Through through 2022, so that all will continue to ramp first half of 'twenty two but we're very very excited about that particular market segment and the state of Florida.
Thank you, Kevin and just just not enough to mischaracterizing that.
Obviously very useful towards sector availability, but it would be a fair characterization that in the context of the current promotional activity or potential price was in Florida.
And we will also provide for a useful additional sort of arrow in euro equivalent so to speak.
Absolutely I think it's also important to note that the efficiencies and therefore, our margin pull through on those products are exceptionally high.
And again allows us significant flexibility as we think about positioning on a go forward basis.
Thank you a quick final one from me just on Pennsylvania, What's your mind, all the risks of any supply imbalance market sort of dislocation in the second half of 2022 with.
A number of players like yourselves potentially included adding a needing to add cultivation capacity ahead of adult use.
How do we think about the potential pricing dynamics or dislocation there if the market position.
The addition of a supply imbalance in anticipation of adult use.
Yeah, I mean, I think that again, it's important to note that not all supply is created the same and not all brands our products are created equally.
That coupled with <unk>, so I like our positioning in Pennsylvania as I've noted previously.
And certainly our and.
The way that products legacy products resonate with customers.
Has been and continues to be extremely well received on the wholesale front on the retail front.
As we get more and more capacity availability and product availability that we can provide internally through branded retail.
I think in a more insulated position through through 2022, so I feel strategically I feel that we're in about as good of a position as you can get.
If you look at again, the combined affiliate footprint vis vis our peers out there.
Great Thanks and congrats.
Okay.
Our next question comes from Scott Fortune from Roth Capital. Please go ahead with your question.
Yes, good morning, Ken maybe a pretty good update on the legislative upfront first on the federal side with the Republicans narrative now in play.
More later today, but the seemingly pressure to get Legislative reform ahead of mid terms of awful lot of focus around so you're thinking and then color around that and then also progress towards Florida, and Pennsylvania movement ahead of adult use what's kind of the keys.
Going forward with those two states that'd be great for an update there.
Yeah, absolutely I mean, I think that I, along with probably everyone. On this call is very much looking forward to congresswoman methods update today at two o'clock on her proposed legislation.
I for one and thrilled to see.
A female Republican.
Take a leadership position in this in this conversation I think that it is doing the job of refocusing the conversation.
Bipartisan way, which hopefully will lead to.
Something that is actually possible.
And both chambers as you said before before the midterms. So we're encouraged by the development and of course, we also have a.
Our eye on the defense Bill this week.
And the opportunity potentially at least for safe banking to be in the mix.
As that as that moves forward. So I think a lot of positive at least movement on.
On the federal side, I mean, but I think look I mean importantly, and our business remains successful and remains poised for significant growth as we have been growing over the last five years.
Regardless of what happens at the federal level. There are a number of state catalysts ahead.
And it does provide significant opportunity for our business and to your point, Florida and we are.
Currently there is a homegrown bill that is that's making its way which would.
The door, if you will for for legalization certainly conversations continue around the posturing for an adult use initiatives coming down the pike.
Of elections in 2024, and Pennsylvania, and we similarly are encouraged by recent bipartisan.
Bipartisan legislation and.
I think that the conversation in the northeast as the region continues to accelerate with with markets.
Finally, coming coming online.
In the adult use space, which again, we continue to believe will be somewhat of a domino effect across across the region.
Great No I appreciate the update and then last question for me kind of where we're at on the loyalty programs.
To help offset some of the discounting or pricing competition in Florida could you provide a little bit of update on the loyalty side of things.
And those initiatives.
Sure I mean, so we are we certainly and we certainly have a very widely accepted loyalty loyalty program in the state of Florida, when we look at our loyalty metrics, which we review quite often those remain exceptionally high.
We're still around 70, 879% of customer loyalty in the state of Florida.
Our customer base is continuing to return to tree leave time over time and to get to get products that they that they depend on and incorporate into their into their everyday lives.
We're looking forward on a go forward basis as we integrate our systems across the combined platform. The goal certainly is to have a unified loyalty program across the 11 markets that we that we're in today.
Offer again that consistent customer experience and from from branded retail at a branded retail location.
Perfect. Thanks for the color I'll jump back in the queue.
Thanks.
Our next question comes from Eric Deloria from Craig Hallum Capital Group. Please go ahead with your question.
Great. Thanks for taking my question and my congrats as well on the strong results.
So I appreciate your comments on the price normalization trends that youre seeing in Pennsylvania, and some other markets.
Florida does seem to be a bit different mostly.
Retailer discounts here.
Can you comment on some of the pricing trends that youre seeing in Florida across product categories or across the premium value spectrum and then are any of these price normalization trends that youre seeing.
Impacting your planned production or branding mix.
With comments on hydrocarbon in cultivar collection it sounds like there might be a increased mix towards premium, but just would love to get your color. There. Thank you.
Yeah, Eric Thanks for that thanks for the question.
We're continuing to see barbell patterns hold true.
Florida quarter over quarter over quarter with with certainly.
Increased growth on both the value and on the premium side of the business.
What we are seeing is we're seeing.
A little bit of an increase in that in that.
Mid tier as well simply because with certain promotional activity and certainly with the strategy that we deploy in this last quarter.
Margins actually are tend to be a bit better than that mid tier and so when you discount that mid tier category right that value customer is unable to purchase into mid tier so theres, a little bit of a blended blended pick up.
On that front, but overall I would say that really when we look at premium quarter over quarter, it's very very consistent and when we look at value again with just dot color that I gave as it relates to <unk>.
The slight uptick in the in the mid tier we are seeing value continue along existing trends as well.
In terms of how we're thinking about product mix moving forward.
Certainly we want to make sure that we have an adequate and robust supply on the premium side of things.
And that we are continuing to focus on efficiencies.
And product quality, which thankfully the hydrocarbon setup allows us to excel in both of those through that through those product offerings.
Okay, Great. That's helpful. Thank you.
Mhm.
And our next question comes from Andrew Semple from Echelon capital markets. Please go ahead with your question.
Good morning, and congrats on the results.
Hoping for some insights on Pennsylvania retail dynamics in recent months.
Inclusive of the harvest business there.
Pricing normalization, we've seen at the wholesale level increased transactional volumes at the stores and assuming that might be the case is that volume.
Perhaps been enough to offset pricing and then secondly.
Where you have seen wholesale price compression have you seen retail margins expand at all or.
As those price savings has been mostly passed onto the consumer.
Yes, im going to give some general color and then I'll let.
Steve take it as it relates to the legacy harvest portfolio in the quarter.
So what I would say is that I think in general we are seeing we're seeing.
A lot of that pricing flow through to the customer.
And again and in in Pennsylvania, I will just reiterate the fact that.
It's not it's not universal right and we certainly are seeing and different segments that have different and.
Different level, if you will of.
Bifurcation on pricing.
And I think that again, that's really the establishment of more clear cut tiers of product, which is again very normal and really every other every other market that we participate in so we think that it's healthy in terms of how the market is responding to them too.
To create again clear cut tiers of products across across different lines I don't if you want to speak to the harvest legacy.
Sure.
There was as I mentioned earlier.
Response to a question from Matt Mcginley, we did actually see an increase quarter over quarter in the legacy harvest stores at the retail storefront and in fact, it was one of our larger increases on a percentage basis across the portfolio.
So we aren't seeing or havent seen.
<unk> pressures.
The retail level.
Great. That's helpful and just a second question if I may on the guidance.
If I look at the upper end of that guidance range.
For the full year for the truly business.
It would seem to imply maybe.
The slight sequential decline even at the high end of that.
Just one.
See if you would comment on whether you expect to see any pressures to growth within Q4.
I know theres, a lot of moving pieces potentially even intercompany revenues.
But just wanted to see if theres any potential pressures so the pace of growth.
Into the fourth quarter.
Yeah, I think so we as we've said over time I truly does not we're not going to change guidance on a quarter by quarter basis.
Absent some significant or material change change in the business.
We thought that it was important to indicate that we are very confident and remain confident in our ability to hit previously stated guidance, especially given.
The the sort of this quarter as it relates to our peer set with many folks.
<unk>.
Or or in some cases and withdrawing guidance. So we felt that it was important to comment on it.
But.
Again, it's just to be consistent with our previous practices and that we're not going to necessarily update that.
In any given.
Given quarter.
And then again just a reminder, we will be given giving of course combined guidance.
On a go forward basis.
And the next quarter next quarter call.
Great. Thanks, again for the additional color and congrats on the results.
Our next question comes from Vivien <unk> from Cowen. Please go ahead with your question.
Hi, This is Ross on for Vivien. Thanks, so much for taking the question.
There's been a lot of discussion about pricing, but we'd love to get a better sense of how the pricing environment informs your philosophy around incremental cultivation capacity.
So it was a little.
Evidenced that these dynamics will reverse in the near term have you had to reevaluate your expansion plans in any legacy truly markets or any of the newly acquired harvest markets. Thanks very much.
Yeah no. Thank you.
Look our model and our decision, making metrics are and have a number of inputs.
And we've built the company to be very bottoms up in terms of how we how we model and how we look at the business and certainly as we think about our forward forward looking plans and we are evaluating not only of course.
Pricing and but again, we're looking at growth in the market, we're looking at and increases in our customer base is we're looking at our our flow through and our current customer and metrics at our store levels. So there are a number of inputs to our model.
I would say that again as we as we look at the future. We believe that in all of our markets additional capacity is warranted.
We are looking at a very robust we think forward looking growth cycle ahead through 2022 on now.
A much more significant platform. So we see a number of opportunities for growth that absolutely would indicate that we need to make additional investments in those markets.
And again, we think that and really one of the one of the big takeaways for 2022 will be that capacity coming through into branded product in branded retail.
That will provide and not only top line, but again additional additional margin pickup across across the platform as we continue to integrate and optimize this.
This incredible platform that we now have.
Great. Thank you very much I'll pass it on.
And our next question comes from Owen Bennett from Jefferies. Please go ahead with your question.
Hi, Good morning, this is actually Derek Marciano, calling in from Owen Congrats on the quarter again, most of my questions have been answered, Bob, Florida, and Pennsylvania, but just wanted to touch on the Georgia market.
You guys have received a 10th of.
The award for the class one production license there one or two licenses polluted licensing environment. I was just wondering if theres any update on timeline that that market's going to come online and kind of comments on the potential of that market and then I guess the second question would be plans within these more mature markets like Colorado, and California, where your footprint is not as robust as obviously.
For the Pennsylvania, Arizona.
What are the plans there with obviously, it's a much much more mature.
Competitive markets.
Color would be great. Thank you.
Sure we remain very very excited.
Georgia opportunity and very normal post license award for there to be.
A period of.
A pause period.
And as you know regulations are developed and it's also very very typical for there to be protest period et cetera, that's happened and I think every market that I'm aware of.
And so that's the period that we're in right now in Georgia, and we would hope that by.
Within the next 12 months that we would have greater clarity. We certainly have plans in place are ready to already to hit go.
As soon as soon as we're able to.
And as soon as we received the Green light from the state there and Georgia look a lot like the Florida market looked at its inception with a big differentiator and the fact that there are already over 18000 patients registered in the state of Florida awaiting for products to come on to come online and and so.
In addition, right as we think about.
The other markets to your point, and California, and Colorado, what Youll see from US in the next year as you will see in California, the rebranding of a number of stores into and to truly locations.
In Colorado, we are continuing to evaluate that market we have made.
Smallish investments in Colorado to to ensure that our product mix there on a on a wholesale basis is properly positioned as we think about again that branded product portfolio and getting that into as many customers, Kansas possible moving into next year.
Alright, thanks, so much I'll pass it on.
Yes.
And ladies and gentlemen, with that we'll be ending today's question and answer session I would like to turn the floor back over to the management team for any closing remarks.
Thank you for your time today, we look forward to providing additional updates on our progress during our next earnings call have a great day.
Yes.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.