Q3 2022 Trulieve Cannabis Corp Earnings Call
I'm talking well keep your downward.
In fact, we've just.
For example for the fiber of reps in the field.
Correct.
Those trends come back get back that's the part of success that you believe you'll be believing distress.
[music] side in that area.
Sure.
Okay.
Right.
Okay.
You know <unk> been with the double digit start off with.
I see.
Pick up debris to run two of them in your fleet.
Do you want to know how you feel.
Brilliant.
Good luck in the Brexit, but no.
But through co.
Low singles.
So a piece of work.
California Law this California got it.
Among on them might develop in the <unk> zone, and I'm, not saying too much more at home, they're much more go and go home with some the bulk of Lukas daul.
No.
Next up is sold.
Sure.
Oh.
Woman to be broken.
Sure.
We go back a few meals Paulo.
Woman to be you can do both.
We won't be ready for the next episode.
Okay.
You won't see every day.
Yes.
[music].
Yes.
Thank you Laura.
Right.
I'm going to Irma.
They go in place some plans.
Right.
Popping hanger lens.
Joining me on the call.
Yes.
No.
That is no.
Only flu.
Yeah.
Yeah.
Yes.
Alright.
Okay.
Okay.
Sure.
Yes.
Matt.
Dan.
Thanks.
Okay.
M&A.
Yes.
Okay.
Sure.
[music].
Hum.
You can say September .
Thanks Terry.
Please turn on some.
<unk> you can tell Molly Thank you Paul Mckenzie.
Its take or pay income really metering.
And we're feeling and we know it.
<unk>.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Good morning.
Matt.
Okay.
Why.
Okay.
Yes.
<unk>.
Yes.
Yeah, Matt.
<unk>.
Right.
Yes.
[music].
Okay.
Yes.
[music].
Yes.
Welcome.
No more.
Good morning.
Yes.
Okay.
Right.
Yes.
Dave.
Yes.
Yes.
And then Matt.
Hey.
Yes.
In math.
Yeah.
Hi.
No.
Yes.
No.
<unk>.
Yes.
Thank you.
Okay.
Okay.
Uh huh.
Okay.
Yes.
Yes.
Yeah.
How about you.
[music].
Yeah.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Got it.
Yes.
Yes.
Yeah.
Sure.
Okay.
Great.
Okay.
[music] okay.
Okay.
[music].
Yes.
[music].
Yes.
And these tools.
Excellent.
Yes.
Well.
So.
Hello.
Listen.
Clean it up.
Yeah.
Yes.
Have you.
[music].
Yes.
Hello.
And if you want to offer you.
Okay.
Okay.
Okay.
Okay.
Okay.
From TPG.
Okay.
Yes.
Jim.
Okay.
[music].
You need that.
Uh huh.
Okay.
Oh.
The product.
Please.
Tim.
Yeah.
That is no.
How much either.
Please go ahead.
He did not.
Okay.
Oh, okay.
Yeah.
Okay.
Okay.
Yes.
Okay Alright.
Wow.
Yes.
Okay.
Hey.
Yes.
Yes.
Yeah.
Yes.
Okay.
Yes.
Yes.
Yes.
Yeah.
Yes.
Oh yeah.
Okay.
Okay.
Thank you.
Thank you.
Yeah.
Yeah.
Okay.
Okay.
Yes.
<unk>.
Yes.
Okay.
Yes.
Yeah.
Yeah.
You need.
[music].
Okay.
Well what else got better.
[music] rolled a basketball Liza one either.
And <unk>.
Yeah.
I didn't come here and are you, losing some of those.
Around and run just rope.
Hum.
Now you won't see that in theory.
Yes.
When I get in Maui.
Flat.
[music] Oh my brands in general.
The body camera.
Romeo.
We're not.
[music] Romeo and <unk> why not.
And if anyone known like is it just less demand.
Yes.
I didn't come here, when I leave and so those data around and Brian .
<unk> been smoking.
Yes.
[music].
Ben Harris.
So saying in term of jokes.
Sure.
Yes Pete.
As explained.
Good good.
Good evening, everyone and welcome to the tree leave Cannabis Corporation third quarter 2022 financial results Conference call. My name is Jenny and I will be conference operator today. As a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Christine Hersey Director of Investor Relations for truly you may begin.
Thank you good evening and thank you for joining us during today's call Kim Rivers, Chief Executive Officer, and Alex D'amico, Chief Financial Officer will deliver prepared remarks on our financial performance and outlook for truly following their prepared remarks, we will open the call to questions. Steve White President will also be available to answer.
This afternoon, we reported results for the third quarter of 2022, a copy of our earnings press release, and Powerpoint presentation may be found on the Investor Relations section of our website www dot truly dotcom and.
An archived version of today's conference call will be available on our website later today.
As a reminder statements made during this call that are not historical facts constitute forward looking statements and these statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with the securities and <unk>.
Change commission, including item one a risk factors of the company's annual report on Form 10-K for the year ended December 31 2021.
Although the company may voluntarily do so from time to time it undertakes no commitment to update or revise these forward looking statements whether as a result of new information future events or otherwise except as required by law during.
During the call management will also discuss certain financial measures that are not calculated in accordance with United States generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for true lease financial results prepared in accordance.
With GAAP a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that is an exhibit to our current report on form 8-K that we furnished to the SEC today and can be found in the Investor Relations section of our website.
Lastly at times during our prepared remarks or responses to your questions. We may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future I'll now turn the call over to our CEO Kim rivers.
Please go ahead, thanks, Christine and good evening, everyone and thank you for joining US today, we're pleased to report third quarter results and provide an update on our business before I discuss our results I would like to briefly address hurricane in and tropical storm, Nicole first and foremost I would like to say a special. Thank you to all of our employees who worked tirelessly during hurricane in.
To serve patients and restore our business operations, especially those who contributed to recovery efforts despite being personally impacted by the storm our team's experience and disaster preparedness plans, coupled with our sophisticated logistical and technological capabilities contributed to the effective management of operations before during and after the hurricane.
Our functional teams assembled to monitor storm development and the stock's response efforts, we deployed <unk> and operational units to provide self service deliver power generators and fuel and make necessary repairs to get stores back online to serve patients with minimal disruption through the hard work and commitment of our teams within 60 days, we were able to reopened 59 of the <unk>.
64 stores that were closed resulting in a $3 $3 million impact to revenue in the third quarter and.
And supportive recovery efforts, we rolled out several initiatives, including our Roundup campaign and a volunteer program to aid communities across Florida, and an assistance fund and supply related programs to support employees Trillium has committed to matching contributions from both programs. We are fortunate to be in a position to provide resources to our employees and the communities. We operate in during this time.
Of need as we sit here today tropical storm Nicole is making landfall on the east coast of Florida. We closed 16 locations earlier today in advance of the storm and will be working diligently to restore normal business operations, while prioritizing employee safety updates on store closures and re openings can be found on our blog available at <unk> dot.
Com.
Moving on to last night's midterm elections, we would like to extend congratulations to the citizens of Maryland for successful passage of recreational cannabis. We are looking forward to serving recreational customers in the state through our vertical operations, which included three retail stores showcasing our full suite of internal brands.
Turning now to our third quarter results truly are achieved third quarter revenue of $301 million up 34% year over year revenue decreased by 6% sequentially impacted by macroeconomic conditions foregone revenue due to the strategic shuttering of noncore assets regulatory changes in Florida, and the impact of Hurricane Ian.
Third quarter adjusted gross margin remained relatively flat quarter over quarter at 57, 1% compared to 57, 6%.
Adjusted gross margin remains strong despite lower revenue due to increased utilization at our new Florida indoor cultivation facility and flat promotional activity companywide, adjusted EBITDA was $99 million or <unk>, 33% margin, representing our 19th consecutive profitable quarter.
Operating cash flow was negative $22 million in the third quarter, an improvement of $23 million compared to the second quarter. We anticipate operating cash flow will be positive in the fourth quarter, and we will generate free cash flow in 2023, we exited the quarter with $114 million in cash.
Truly a strong financial profile remains a key differentiator within the cannabis industry and the current environment access to capital at attractive rate as a strategic advantage truly with in an enviable position among peers with term debt at a weighted average interest rate of eight 3% and no significant current debt maturities, we recently secured a commitment.
For $70 million in real estate backed financing at a favorable rate compared to our existing debt. We expect this financing will close before year end, even with greater access to capital versus peers. We will continue to exercise restraint with prudent allocation of capital in accordance with our long term strategy, we have clearly demonstrated our ability to safeguard capital by.
Avoiding costly investments in markets like New York that offer little line of sight to delivering returns at the same time, we are willing to divest duplicative in cash dilutive assets, where appropriate to maximize long term cash flow. We will continue to focus on executing while tuning out the noise.
Looking ahead, we are prepare to uplift to a U S. Based exchange once allowed we're nearing our two year anniversary as an SEC registered company with financials prepared in accordance with U S. GAAP, having completed an S. One registration in early 2021, and then advancing to an S. Three registration earlier. This year. In addition, we believe our diverse board of directors with.
Expertise across a variety of sectors, including beverage consumer and hospitality as well equipped to provide sage advice as we navigate the transition to a U S exchange, we expect a U S listing would afford.
Later access to capital increase liquidity and broader reach among investors.
Going to our retail operations during the third quarter, our industry, leading retail platform grew to 176 locations with market, leading positions in Arizona, Florida, Pennsylvania, and West Virginia, We opened 11, new stores in Arizona, Florida, and West, Virginia and relocated one quarter Dispensary, we closed two underperforming locations in California.
Permanent Lee and closed one dispensary for relocation in 2023 in Pennsylvania. We are on track to meet our guidance of 25 to 30, new store openings and up to six store relocations and 2022.
Retail sales declined by 5% sequentially to 284 million accounting for 94% of third quarter revenue generally trends observed exiting the second quarter continued with tightening economic conditions influence influencing retail results in different ways across our markets.
Retail performance in Florida based outsized pressure this quarter due to a number of factors first lower net patient growth followed by the implementation of rolling dosing limits and finally hurricane in net patient additions additions declined to approximately 500 per week in the third quarter bottoming at the end of July and rebounding somewhat at the end of the quarter.
Decelerating patient growth reflects the reversal of Covid related trends were program enrollments spike due to greater access through telemedicine, coupled with an increase in consumption hours and whole household income bolstered by stimulus dollars. We estimate the total cost to obtain a medical card through renewal. Our initial entrance is approximately $200, which may be high given the.
Current inflationary pressure on household spending since quarter end net patient growth has since rebounded to approximately 2100 patients added per week.
Second at the end of August Daily dosage, and 70 day supply limits took effect, while only a low single digit percentage range of patients were estimated to be effective in practice by these limits patients adopted a scarcity mindset pulling back on purchases to reserve supply capacity for the future.
Following the implementation of the new limits truly rolled out an online tool to provide patients with real time data showing available milligrams that are each category as items are added online shopping cards. We also worked with physicians to ensure that they understood the new limit and how does that exceptions to limits for patients where appropriate.
Your patient growth enrolling dosage limits added pressure on volumes dispensed in early September on top of an already stressed economic economic backdrop in response to the market slowdown several competitors began aggressively discounting to drive traffic offering mass discounts of 50% and higher storewide. Initially truly have also increased promotional activity.
But as a result of our ability to mine data and glean insights from customer behavior. We quickly adapted our approach data revealed areas for improvement to our strategy and we were able to quickly incorporate this data feedback doubling down on brand and product segmentation to reinforce our value proposition in lieu of indiscriminate storewide discounts.
We reset our focus on delivering clear and consistent messaging for each product here, while maintaining a disciplined approach to discounting for premium customers, who are interested in new and innovative products, we push information on the timing and availability of new and exclusive product drops within our mid tier segment, we pulse promotional activity offering periodic discounts on specific products to highly.
Brands are inventory for value customers, we offer high quality products at everyday low prices operating customers consistency without having to hunt for deals or wait to time purchases. As an example in September we reintroduced <unk> indoor flower with an everyday low price of $20 per eight utilizing this multilayered strategy, we are able to meet.
Value customers, where they are while preserving brand integrity for mid and premium tier products at the same time, we improve the overall customer experience with greater transparency on quality and pricing.
Following these changes in mid September our retail performance began to stabilize and improve just as these changes were beginning to yield positive results, Florida was hit by Hurricane Ian as I noted at the top of the call our advanced capabilities and depth of experience allowed us to quickly reopen stores closed due to the store stores closed due to the storm while our team is working to restore op.
<unk>, we provided timely updates on store openings modified business hours and alternative store locations, specifically to customers in affected areas utilizing targeted messaging.
Subsequent to quarter end, our retail performance has been steady in Florida aided in part by improved patient growth patient and physician acclamation to new supply limit and our refined promotional strategy. We are currently positioning for the holiday season, which historically has seen larger volumes and higher permission or higher promotional activity within the current macroeconomic.
Visibility is limited into year end.
Truly has garnered an outsized market share in Florida, with an average of 50% market share in flower over the past three years, while our size and exposure in our home state of Florida negatively impacted third quarter results, we expect our market leading presence to be a major driver of outperformance in the years ahead, Florida remains the largest growing medical market in the U S with.
<unk> future potential, including adult use consumption, Florida is poised to be the largest legal U S. Cannabis market with 22 million residents and 130 million tourists visits per year truly remains an active supporter of the smart and say, Florida campaign to add an adult use initiative to the November 2024 ballot. The campaign has already gathered over a.
<unk> of the total signatures required which once validated by the Florida Division of elections will trigger a review by the Florida Supreme Court. Prior developed placement signature gathering efforts are ongoing and thus far have tracked ahead of anticipated timelines assuming success, we estimate the Florida market could reach up to $6 billion. Following expansion to include adult use.
Sales, given our unreal unrivaled scale and production and retail footprint, we are poised to retain our leadership position in this massive market.
Turning now to Pennsylvania, as we highlighted during our second quarter call our customers continue to shift towards value products in the third quarter sales of premium products were flat, while mid and value tier units increased throughout this year, we've been increasing our production of branded products, including several value products with the <unk> brand with these efforts branded products.
<unk> almost doubled in the third quarter compared to the first quarter of this year, we will continue to expand our distribution of branded products are branded retail in Pennsylvania and expect to realize improved performance as these brands gained traction in the market and finally in Arizona third quarter retail results declined sequentially due to both the seasonal slowdown and pricing pressure across the market.
Over the hot summer months and into the fourth quarter truly of increased promotional activity to sell through legacy inventory within this challenging backdrop, we successfully depleted the bulk of legacy inventory and promotional activity has been reduced in time for a seasonal uptick in traffic ahead of the holiday season concurrently we began a broad initiative to increase the sale of internally produced.
Products through our retail platform since August we have opened three new truly branded dispensaries early performance at these new locations has been encouraging recently, we rebranded a dispensary in Glendale, and will continue to rebrand, Arizona retail locations and launch branded products over the next year.
And wholesale revenue declined 24% sequentially to $16 $5 million continuing declining trend from the second quarter. During the third quarter. We made the strategic decision to exit wholesale operations in Nevada, where the footprint was not efficient than the previous harvest operation with cash dilutive wholesale markets generally remained under pressure as weaker trends.
Persisted throughout the quarter. Consequently, consequently, wholesale customers are carefully managing working capital and inventory levels due to softer market conditions, we will continue to manage production mix and product allocation to the wholesale channel across key markets, such as Arizona, Massachusetts, Maryland, and Pennsylvania.
Focusing now on supply chain distribution across our retail and wholesale network supported by over 4 million square feet of cultivation and processing capacity and Florida, none of our cultivation and manufacturing or processing operations were affected by hurricane in during the third quarter. We continued to ramp production at our state of the art <unk> 750000 square foot cultivation.
<unk>, we expect the facility will be fully plans set at the start of the year with initial harvest and optimization efforts continuing into the spring as we ramp this new lower cost production facility, we have begun to pull older and less efficient capacity offline. This base capacity will remain available to ramp again as needed to meet future demand during the third quarter.
We produced 9 million finished good units compared to $10 million during the second quarter. During the fourth quarter. There are further lowering production and capacity utilization across markets to match current demand more closely and reduce inventory given the lead time required for changes in production to take effect. We expect the majority of these efforts will be realized downstream in Q1 and Q2 of 2023.
Right.
In Maryland, we are well positioned to serve recreational customers without significant capital expenditures, we continue to make progress expanding our branded product portfolio in Maryland with the launch of <unk> concentrates and modern flower base in the third quarter and September truly was awarded one of only two tier one production licenses in Georgia production commenced following.
Receipt of the award and we expect to complete our first harvest within the next few weeks, we look forward to opening dispensaries in serving patients in early 2023, and just last week, we were awarded a cannabis cultivation licenses in Connecticut, which allows for two adult use dispensaries, we plan to expand our operations in Connecticut in 2023, including the relocation of our Bristol does.
Sensory ahead of recreational sales.
Looking ahead as the industry matures, we believe the strongest companies will continue to separate from the pack. We believe the next industry phase, which we call cannabis two <unk> will be triggered by regulatory reform and defined by a more open and diverse competitive landscape spurring the need to build meaningful and lasting customer relationships. We expect these changes will provide an opportunity.
Unity for truly differentiate itself within a more robust and as the industry ecosystem.
Operators with scale distribution and technology will be better positioned to meet the needs of an increasingly sophisticated marketplace truly has been preparing for this next phase of industry development for several years, our regional hub structure anchored by leadership teams within cornerstone markets provides a solid foundation, our experienced building scale and depth has yield.
Best practices to achieve lower production costs and greater efficiencies throughout our supply chain and retail operations as evidenced by our 750 K facility, which we began designing in 2019.
Truly is expansive distribution network anchored by our industry, leading platform provides an opportunity to directly connect with the customer create brands clean valuable insights into customer segmentation and test methods to define and perfect the customer journey.
Our technology platforms and scale solutions are essential to strategic growth initiatives, including developing omnichannel capabilities and enhancing digital platforms. One concrete example includes our successful implementation of SAP in 2020, a world class ERP system that we are continuing to optimize while adding modules for.
Warehouse management integrated business planning and human resources, we will continue to expand these capabilities with the advent of cannabis two <unk> in mind.
The third quarter presented various challenges our team was able to adapt as necessary to course, correct and stabilize the business headed into year end. Despite short term headwinds in the economy in core markets. We believe the long term prospects for cannabis have never been brighter with increasing mainstream support and meaningful regulatory reform on the horizon.
This growth opportunities lie ahead for legal cannabis in the U S. As our industry continues to evolve I believe our long term strategic focus and commitment to investing in cannabis two <unk> will further differentiate truly among peers with that I'll turn the call over to Alex for more details on our third quarter results. Thank you Kim and good evening, everyone. We recently <unk>.
<unk> the one year anniversary of the closing of the harvest acquisition the largest U S. Cannabis deal completed to date since the deal closed we have been working to optimally position the business during the third quarter. We made additional progress on these efforts exiting duplicative and noncore assets in California, Florida, and Nevada ramping lower cost production.
Capacity and further refining our approach and our wholesale markets as we move through year end, we are continuing to execute on our strategy streamlining operations working down inventory and adjusting our production output as needed to better position the company for 2023.
Turning now to third quarter results, our team effectively manage the challenging economic environment, while remaining focused on our core operating plan third quarter revenue of $301 million increased 34% year over year compared to $224 million during the third quarter of 2021 third.
Third quarter revenue decreased 6% sequentially compared to $319 million macroeconomic pressure on household income foregone revenue and hurricane impacted third quarter top line results.
Third quarter GAAP gross profit was $168 million or gross margin of 56% compared to 58% during the second quarter of 2022, GAAP gross margin declined sequentially due to packaging costs related to the integration and resulting discontinuation of select brands product mix and the favorable impact in Q2.
<unk> of the beef recall reversal, partly offset by increased utilization at the new 750, K indoor facility and greater sales of internally produced products, we expect to further lower production costs as the new facility fully ramps into 2023 <unk>.
Excluding nonrecurring charges third quarter adjusted gross profit was $172 million were adjusted gross margin of 57%. We expect gross margin will continue to fluctuate quarter to quarter, depending on product and market mix and inventory flow through.
SG&A expenses in the third quarter were $114 million or 30% of revenue compared to $109 million or 34%. During the second quarter third quarter expenses include approximately $22 million of transaction integration and nonrecurring charges inclusive of $10 million contributed to the smart can see Florida.
The campaign <unk>.
Excluding these charges third quarter, SG&A was $92 million or 31% of revenue flat on an absolute basis compared to $92 million or 29% in the second quarter.
Third quarter expenses also included higher new store opening costs with 11, new stores coming online compared to six in the second quarter as we continue to invest for future growth. We expect quarterly fluctuations in SG&A expenses as investments are made ahead of increases in revenue.
Truly continues to pay taxes owed in a timely manner with $57 million in cash taxes paid in the third quarter and $162 million in cash taxes paid year to date.
Net loss was $115 million for the third quarter compared to net loss of $22 million for the second quarter third quarter net loss included $26 million of transaction and acquisition integration and other nonrecurring charges and $93 million and asset impairments disposals in discontinued operations, primarily associated with the strategic.
<unk> repositioning away from margin dilutive and cash flow negative assets, excluding nonrecurring charges and asset impairments net income would have been $4 million.
Third quarter loss per share from continuing operations was <unk> 41.
Compared to loss per share of <unk> 11 in the second quarter, excluding nonrecurring charges third quarter net income per share would have been <unk>.
We anticipate nonrecurring charges will continue to impact reported EPS through year end.
For the third quarter, adjusted EBITDA was $99 million or 33% compared to $111 million or <unk>, 35%. During the second quarter margin performance reflects higher expenses associated with store openings and fixed retail operating costs against lower revenue in the third quarter, partly offset by streamlined operations and greater efficiencies.
Moving onto our balance sheet and cash flow, we ended the third quarter with $114 million in cash and $553 million in debt.
Kim highlighted we expect to close an additional $70 million financing at a rate below our current cost of debt at eight 3% third quarter operating cash flow was negative $22 million an improvement compared to the second quarter, we expect to realize positive operating cash flow during the fourth quarter, we anticipate free cash flow generation next year will be.
Driven by improved operating cash flow and reduced capital expenditures.
Third quarter capital expenditures totaled $38 million. The majority of expenditures year to date were comprised of investments in supply chain and retail assets. We currently expect fourth quarter investments to be lower sequentially. We are at the tail end of a multi year investment cycle, having completed significant investments in supply chain capacity and infrastructure across several.
Markets, including Arizona, Florida, Maryland, Massachusetts, Pennsylvania, and West Virginia as.
As Kim mentioned earlier as our new 750, K indoor grow in Florida continues to ramp we have the ability to pull legacy capacity offline temporarily as demand increases in the future. We have tremendous flexibility to quickly ramp think supply chain capacity in 2023, we expect capital expenditures will be at least 40% lower.
Compared to this year.
And finally, our outlook and guidance for 2022, we expect fourth quarter results will be influenced by factors, including holiday retail performance with limited visibility into year end, we have a stretch target of 2022 revenue of $1 $2 5 billion and adjusted EBITDA of $415 million in summary, we delivered another.
Solid quarter, while managing through challenging conditions in the broader economy, we are committed to meeting customer needs improving performance in core markets and managing cash wisely, while streamlining operations across the organization, we have ample runway to prepare for future growth I am so proud of our team and I look forward to expanding upon the progress we've made thus far.
And with that I'll turn the call back over to Kim.
Thanks, Alex So U S cannabis industry continues to garner attention at the mainstream acceptance increases. The recent directed by President Finance issue pardons and reexamine the schedule one status in marijuana send a strong signal reinforcing our view that meaningful reform is on the horizon as the layers of prohibition or repealed truly it is incredibly well situated.
With its regional hub strategy proven ability to build depth and scale distribution capabilities and technology infrastructure recent midterm election results demonstrate the increasing popularity of cannabis across all demographics with successful protein or a solid initiatives in Maryland in Missouri and victory appropriate cannabis governors in Maryland and <unk>.
Dania with the elections elections concluded we believe the short term focus can now turn to the passage of say thinking we're hopeful that strong bipartisan support and demonstrated means of state legal cannabis operators will propel <unk> thinking across the finish line before year end irrespective irrespective of any federal reform, we are committed to <unk>.
Strategy and disciplined approach to profitable growth and long term shareholder value the legal U S. Cannabis market size is expected to triple by 2030, reaching an estimated $75 billion in annual sales. This impressive growth forecast does not fully include new market expansion.
Only 21 states have legalized cannabis for both medical and adult use and most of these states are located in the northeast and the West a majority of states have yet to legalize cannabis, leaving significant white space in catalysts ahead, we remain especially bullish on operations in southeast markets, such as Alabama, The Carolinas, Tennessee, and Texas given our.
Strength and track record in the southeast truly is well positioned to expand in many of these markets as new programs develop.
Our focus on serving customers remains our guiding light while we are building a sustainable and scalable company designed to thrive in an integrated commerce environment truly that's 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 can you go and Steve will be available to answer any questions. Operator, Please open up the call for questions.
Yes.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad and if you are using speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
For just a moment to allow everyone an opportunity to signal for questions.
And we will go first to directly of Canaccord Genuity.
Yeah, Hi, thanks, Thanks, everybody I just wanted to touch on that on that Capex comment. So on our math Capex next year will be in and around the sort of $120 million level can you just comment on where the bulk of that.
Is going to go towards it sounds like Youre fully competent fully built out in Florida, Maryland. It sounds like you do not need much more there so I'd imagine, Arizona, West, Virginia, potentially Connecticut would be areas of growth.
Hi, Derik. So yes, we are we will definitely be investing of course in our new market of Georgia, which will be coming online of course through 2023.
In addition.
We will of course continue to complete our build out as we mentioned that award in Connecticut, and that positioning ahead of and with the.
Incorporation of recreational sales in Connecticut, So we've got both.
Both our supply chain expansion, there as well as retail.
And then there will be I think some investment remaining in retail across our markets and we're going to obviously continue to be very strategic in terms of the number and placement of those of that retail footprint, but certainly we think that there is still some some room on the on the retail growth front into next year.
Okay, Great and then.
And it is asking.
One on pricing and Im sure Youre going to get a lot of this but.
What are you seeing in terms of the premium end of the market I know you use it sounds like you're starting to discount. It then you can look at your data unrealized perhaps a better strategy was to kind of hold your prices and it seems like that's what you're doing going forward. So is that is that sort of the plan is to really push that to the quality that truly offers on its premium and mid tier brands and then.
<unk>.
The outlook there was a comment about increased promotional spending around the holidays is that.
In particular focus on true lever that just what you expect from your competitors for bulk.
Sure so well.
We'll take them in order so and in terms of what we saw and what we're seeing from a trend perspective.
As we break it down between segments segments of a category between premium and value products product lines. There are some differences in customer behavior and market to market.
Certainly as it relates to our pricing strategy and we as I mentioned on the call as it relates to our premium products. We believe the results show that those can stand on their own it's important for us of course to message very directly and specifically to those customers who in this customer profiles too.
Our premium shoppers and so we're able to do that through our data platforms by and specifically again letting them know when exclusive drops in certain products were coming into markets and into dispensaries that their closest.
Situated too.
And as it relates to mid tier or mid tier category is the category, where we are able to.
<unk> and pulse promotions, so we use that category, two and to really and again attract those folks who are our mid tier shoppers, but who may be looking for.
Promotional activity or deals if you will and we have those on a regular cadence again, though able to target in and lean and lean into to folks that have certain profiles or certain customer.
Certain customer profile in our in our system and then finally, our value category, which we've seen and certainly growth across most markets recently.
Recently, and being able to speak to quality of products, but of course at more of an everyday low price, which we have found has resonated with folks really across across all markets and so on.
Our pricing and our again our touring our tiered strategy has and has gained traction and certainly is resonating it appears with customers moving to holiday holiday, which weakness has been consistent for us year over year increases in general in the market and then it also historically has been our most promotional quarter.
And of course, with Green Wednesday, and Black Friday coming in November and then the.
A holiday period at the end of December so.
We would expect that to continue and as it relates to.
Competitor activity.
We certainly continue to see high levels of promotion.
Across markets in Florida in particular, and I think over Halloween I think there was somebody who had 60% off the entire store. So we're still seeing in that end market. Although again are our portfolio and our our pricing strategy has held up.
Okay, Great I appreciate all the color all the best.
Yes.
And we'll hear next from Matt Mcginley with Needham.
Thank you.
First question is on inventory you noted that you produced 1 million fewer units than you planned.
Count was down by 27% in Florida, but you still have that $30 million building inventory quarter over quarter.
What do you what do you think an ideal inventory days or inventory dollars would be when your inventory better aligned in the first or second quarter of next year.
Heavy with inventory in any given state and should we assume that inventory drops into year end, even as as.
You noted.
We get this problem fixed until until 'twenty three.
Yeah. Thanks, Matt So definitely should see improvement into Q4 ideal inventory.
And again, it's obviously going to have nuances and vary by product category and market specifics, but just high level is approximately two and a half months again two to two five months I should say, depending on depending on more specifics, but as you pointed out and we.
We were successful in terms of.
Bringing down that that plant in count and there is a bit of a.
Card a little bit right now in this moment of transitioning right, particularly in Florida, where we have the 750 K ramping up where we wanted to make sure that that was in.
Continue we can continue to want to make sure that that stabilized by phase and as prior to decommissioning or bringing down.
They are less efficient.
Capacity and so that is that has happened again and it will continue to happen in phases and so the first impact of that.
Should pull through in Q4 with a ramp into into Q1.
And we think that based on our internal estimates, where we sit today and that the inventory kind of normalization if you will.
Happen exiting Q1 early Q2.
Got it.
On the gross margin your adjusted gross margin held in pretty well this quarter relative to the sales decline.
What you just noted with promotion and try and get these inventories down should we assume that the gross profit rate will be down in the fourth quarter or is there enough benefit from that facility ramping in Jefferson County, those pressures will largely be offset.
Hey, Matt Thanks, Yes, I think I think the <unk>.
Margin holding in the quarter was a real win for us and I'm happy about that we had.
I think more important than the one offs in the quarter or what we were doing structurally and strategically we progressed on our strategic plan we have.
The ramp into 750 K facility, we pushed higher volumes of internal products were internal retail and I think when you look.
Going forward Thats, what we read into rates. So even if there is increased pricing pressure from holiday et cetera, We will look for a margin of hold.
In the next quarter, given those improvements we made structurally and strategically.
Okay. Thank you.
We will go next to problems that I got from Cantor Fitzgerald.
Yes.
Two questions one maybe help us think in terms of memorial in Connecticut.
Mark you'd like Arizona with EMC that much significant growth from medical direct compared to say New Jersey, just help us think through that.
And then the timing of the three stores and when Youre going to be ramping up innovation, that's going to be good and then the second question.
I'm sure you've been following joined your team who have been following the kind of if you could also proposal kind of USA.
The discussions with NASDAQ in Europe Union, if NASDAQ were to approve it cannot be USA structure.
With him in the to leave would have the right to at least ignostic. Thanks.
Thanks, Pablo take those questions in order since there they are somewhat different.
And topic as.
As it relates to Connecticut, and as you know we are in Connecticut today, and with our Bristol Dispensary and we are in process of relocation of that disciplined period and expect that to be finished.
In time for certain certainly our goal is to have that finished in time for <unk>.
Recreational and the announcement of recreational sales and to be in.
Early participant in and through that store in the recreational market, there and as it relates to obviously or just.
Our partnership as it relates to the cultivation facility and the two stores. Just we just were awarded last week and we certainly have been in.
Investing ahead of award in anticipation of award.
And we will be working quickly to get that facility stood up.
We do believe that it will be very important in Connecticut to have supply as it is as is not atypical in some of these markets when recreational.
Comes to fruition that really supply chain is a key driver of success in those markets and say we will be working.
Get that facility stood up as quickly as possible and for through our lens.
Probably one of the more important.
Points of focus for success in Connecticut through next year.
And then would have the two stores the additional two stores come online.
Hopefully in alignment with that supply without supply coming online.
As it relates to volume and market and.
Obviously.
Little a little a little early to say and we think that it will be a contributor of market for us.
I wouldn't expect that it would be the most significant market that we have in our portfolio.
And on the second question.
Oh on the second question.
What I can tell you is that based on our conversations.
Internally and externally.
We do know it to be true that.
Any structure that is formally approved by NASDAQ would be available for other companies.
Think that where we sit and we certainly believe that we are and have a strong preference for a direct.
NASDAQ listing I think that.
Again, we would and are advocating.
Very very specifically for inclusion in the face bank plus of our Safe Harbor Safe Harbor language that would also include our protection for exchanges.
That we believe would give them comfort to allow for direct up listing as I mentioned in the prepared remarks, we are absolutely prepared.
To take advantage of.
Of that immediately and if that were to occur and given our status as the <unk> III filer.
And then we think would be viewed positively.
With respect to a conversion.
Current status.
Two it to a NASDAQ listed company.
Can I ask a quick follow up based on the results of the election last night did your views on the below.
Improve or decline.
I think.
Personally.
Somewhat.
What was what I was expecting.
Certain extent I think that the tension created between a close.
From a partisan perspective are close.
Close.
On the Senate and a Republican controlled house.
Along with a Democratic President I think that tension actually sets up nicely as it relates to Canada.
<unk>.
<unk>.
The folks in the house are certainly going to be passionate about getting.
Getting legislation passed.
During during the during the end of end of the year and I think that on the on the Senate side again, I think that that tension actually potentially please plays in our favor and I will tell you that all indications are that is absolutely under serious consideration.
In negotiations currently.
That's great. Thank you.
Yeah.
And we'll go next to Spencer Hanus of Wolfe Research.
Good afternoon. Thank you for taking the question. So if I could go back to Capex for a minute can you remind us how much right.
Spencer.
Spencer Biocrime of finding one woman, it's okay lets just move on to arrest and he can dial back end.
And we'll go we'll go to Russell family with Beacon Securities.
Hello. Good afternoon. Thanks for taking my question first maybe around Georgia.
And he has indicated plans for <unk> in 2023, and Kim you had mentioned on prior calls so we see parallels between Georgia, now where Florida was.
So years ago, just wondering.
Guess, what efforts might be underway to encourage.
Turning of that medical market.
Laxation, the THC caps or other changes we would.
To help accelerate and accelerate growth there and just understanding how fast you expect.
This market could develop relative to look forward is trajectory.
Sure.
And.
As a reminder, right and those awards again, just happened and we have not yet been through a legislative session where.
The program has been launched and so that will be a first for us coming up this spring.
We're very excited to participate and in a more direct way with the legislature during that time.
And we certainly are encouraged by continued increased patient growth and in Georgia, even in advance of us actually having stores opened the patient numbers continue to climb and just as a reminder, the way. The program is structured that number of stores, it's tied back to the patient growth numbers. So we believe that we are already.
Have quad.
Qualified enough qualified patients for an increase in the number of stores that we'll be able to we'll be able to build them. So again continued positive momentum in Georgia.
In advance of us actually getting open.
We'll be able to give you more color as we continue to operate there and we get open and we see where and where the potential.
Push and pulls are that are specific to that to that market every market is a bit it can be a bit nuanced as it relates to.
We're friction is created but we are and remain very excited about and about opening in Georgia and again, we will.
Looking forward to getting our products to patients there as quickly as possible they've been waiting a long time.
Great and maybe if I could one question round.
Virginia, It's a small state that you've opened up.
Up to nine stores, there now with <unk> on the way and Thats, a fairly rapid build out there given given the market size. So just wondering how those operations are performing and whether the market itself is developing at a pace thats more or less in line with your expectations.
Sure So, yes, west Virginia, just to be clear.
The market the market is performing in line with expectations as what I would what I would tell you and we think that there are some additional opportunities in west Virginia.
And to make some some.
It has conversations with legislators and continued conversation with regulators around some potential.
Structural.
Structural changes that would we think also be helpful.
In addition, certain lawmakers there has signaled the willingness or openness to begin having conversations about our potential.
A potential adult use introduction, which in a state like West Virginia, We do believe would be a meaningful contributor to our tax revenue base and could be.
Legislative.
Our legislative conversation so.
We like our position in West Virginia.
And we have and again.
Looking to open a store there going into the early part of 2023.
That's great. Thanks for the color I'll get back in the queue.
And we'll go back to Spencer Hanus with Wolfe research.
Okay, sorry about that hopefully you can hopefully you can hear me now, but just on your Capex and in terms of where you guys are in the investment cycle. There how much revenue do you think you could support with the existing cultivation that you have in place today and then how are you prioritizing building out new stores in Florida to sort of quantify your position in the state as other operators.
Come looking for your for your market share there.
On the Capex and revenue support I'll say there. So a good portion of our Capex for 2022 went towards 2023 initiatives and growth plans. So.
We feel adequate about where we are vis vis what we're looking at in 2023 in terms of Capex, where obviously won't comment on a number now, but you'll hear more about that from us a year end.
Yeah, and as it relates to our retail positioning strategy and Spencer as you know and we're very specific in terms of the.
The information that we review and as it relates to store placement and.
And we do a deep dive and look at customer trends.
We look at and certainly physician trends as well and then of course.
Information that we were able to glean not only through our registers, but also again through our through our data our data analytics and data platform. So we think we have a pretty.
Thank you.
Three dimensional four dimensional view.
In order to do our analysis as it relates to store placement I think it is important to note that also built into our retail platform in Florida is optionality. So there are a number of locations that we have that are that have expansion capabilities already built in where we can add additional points of sale.
As demand, we can ramp up or ramp down basically as indicated are dictated by demand and I would tell you. In addition, there are certain stores that are strategically placed already.
Advanced of an adult use initiatives coming to fruition example is of course, our store on Duval Street in key west.
That's fine as a medical store, but we think will be an incredible store once recreational hits. Similarly store outside of Daytona International Speedway is another is another easy example to point to so increased optionality built into current store footprint, but again continuing to analyze.
The data all the time to make sure that we're optimally positioned.
Got it that's helpful. And then you mentioned you contributed $10 million in a smart and say, Florida campaign do you expect to make additional contributions there to get the ticket that initiative over the line and are you expecting sort of help from some of the other msos in the state and then I guess, where are you tracking versus your expectations from a signature standpoint for that.
That campaign.
Yeah. So I mean look I mean, when youre talking about the advent of a $6 billion market, where we have close to 50% market share certainly there is in our view.
A strong investment case.
For for support of the of that campaign.
Would love for everyone on this call to call our peer set and makes the case as to why they too should be contributing.
In a market with this much growth potential I think it's the single most.
It has the single most growth potential against any other single single market as it relates to a medical direct slip.
I am hopeful that others will especially those that are looking to invest in Florida more in a more robust fashion going into a recreational and initiative will contribute alongside of US and we are tracking as I said ahead of expectations as it relates to signatures and we have got they have actually risk.
<unk> over a quarter of the signatures required in total which once validated the supervisors of elections have been a little busy recent.
Recently, but we expect that the validation rate to increase pretty dramatically here over the next months and once those are validated there will be an automatic trigger of Supreme Court review at that point signature gathering will not stop in the interim and again, it's pacing. It's pacing ahead of ahead of what we.
What we anticipated at this point.
Great. Thank you.
Okay.
And we'll go to Eric Pissarro of Craig Hallum Capital Group.
Great. Thanks for taking my questions.
Focusing on the 750 K square foot facility and banking the smaller production facilities. So obviously this is an efficiency play versus a growth play.
But are you still looking to match production growth.
Patient growth in Florida or are you anticipating any change to production.
Production per patient.
As you see.
So we're going to complete this process and then just on the same lines can you talk about the expenses associated with.
Sort of substituting these are banking the smaller production facilities with this larger one and does that impact as discontinued operation expenses.
Yeah. So.
Our strategy as it relates to matching and <unk>.
Pilot demand remains unchanged on a go forward basis, right and so right now again, we're in a bit of a transition as those those less efficient facilities come offline in the more efficient facility comes online.
Again, we believe and an incredible strategic position in that.
We can quickly.
<unk> ramp backup those other facilities in the event that demand.
Greece's I E in advance of a Florida rock turn on so.
We think that we think that certainly there is.
<unk>.
Our strategy our strategy play as it relates to and that on both sides right on the on the first on the front side us getting an increased.
Increased efficiencies through a large fairly automated and those are meaningful efficiency gains and through that 750, K. But then also coupled with the ability to have capex as we've already invested in that we could turn on quickly.
In advance of increases in <unk>.
And demand.
And at this time I would now like to turn the call back to Christine Hersey for final comments.
Great. Thank you everyone. We appreciate your time today, we look forward to sharing additional updates on our progress during our next earnings call. Thanks, again and have a great night.
And so this concludes today's call. Thank you for your participation you may now disconnect.