Q4 2022 Trulieve Cannabis Corp Earnings Call

Speaker 1: ?

Speaker 1: I'm still in trouble as I walk alone A pair of my bows in the snow of sky

Speaker 2: Good morning everyone and welcome to the True Lease Cannabis Corporation 4th Quarter and full year 2022 Financial Results Conference Call.

Speaker 2: My name is Beth Tweet and I will be your conference operator today.

Speaker 2: As a reminder, this conference is being recorded.

Speaker 2: I would now like to introduce your host for today's conference, Christine Hersey, Vice President of Investor Relations for Trulies. You may begin.

Speaker 3: Thank you. Good morning and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer, and Alex D'Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for TrueLeaf.

Speaker 3: Steve White, President, will also be available to answer questions.

Speaker 3: This morning we reported fourth quarter and full year 2022 results. A copy of our earnings press release and PowerPoint presentation may be found on the investor relations section of our website, www.truelieve.com. An archived version of today's conference call will be available on our website later today.

Speaker 3: As a reminder, statements made during this call that are not historical facts constitute for 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.

Speaker 3: including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including item 1a, risk factors of the company's annual report on form 10k, for the year ended December 31, 2022.

Speaker 3: Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise before looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Speaker 3: 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 GAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation.

Speaker 3: or as a substitute for truly 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 8K that we furnished to the SEC today.

Speaker 3: and can be found in the investor relations section of our website.

Speaker 3: Lastly, at times during our prepared remarks or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our financial results. Please be advised that we may or may not continue to provide these additional details in the future.

Speaker 3: I'll now turn the call over to our CEO , Kim Rivers. Please go ahead. Thanks, Christine. Good morning, everyone, and thank you for joining us today. We are pleased to report fourth quarter and full year results and provide an overview of our 2023 outlook. Since inception, Trulieve has embraced a strategy-driven approach to building a sustainable and scalable company.

Speaker 3: This winning philosophy has been a key contributor to our long track record of profitable growth. In 2022, revenues surpassed $1.2 billion. A huge milestone considering our very first sale was just six and a half years ago. In order to achieve such remarkable growth, a lot of things had to go right and the team had to make a lot of intelligent decisions along the way.

Speaker 3: Our success is attributable to operational excellence, well-timed capital raises, and legal and regulatory victories, all by design and a byproduct of thoughtful intention.

Speaker 3: Initially, Truli was primarily focused on market development within Florida. Our commitment and investment in our home state was a driving force of our success from that very first sale in 2016. In 2021, we meaningfully expanded our reach, completing seven acquisitions, including the largest completed transaction in U.S. cannabis history.

Speaker 3: With this change, our company transformed into a diversified, multi-state operator with the leading retail cannabis footprint in the world.

Speaker 3: The timing of this major expansion at True Weave coincided with the reversal and favorable economic trends brought about by the unwinding of COVID-related tailwinds and a decade-long period of global excess liquidity.

Speaker 3: The goal of 2022 was to digest and integrate harvest while transforming the company into a scaled multi-state operator. Following a series of strategic planning sessions in mid-2022, our ongoing merger integration efforts evolved into a broader set of actions designed to bolster our business resilience while improving our competitive positioning for the long term.

Speaker 3: The two objectives that we have for 2023 are one, maximize cash generation and preservation, and two, make strategic investments to support future growth.

Speaker 3: Efforts to boost cash generation began in earnest in 2022 and will continue this year. The net result of these actions is meaningful improvement with anticipated operating cash flow of $100 million up from $23 million in 2022. We expect higher operating cash flow combined with at least 50% lower capital expenditure.

Speaker 3: adjustments in production mix and capacity utilization, and inventory and expense production.

Speaker 3: As a result of the elimination of redundancies and the harvest integration, we reduced wages by approximately 20%.

Speaker 3: Last year, we jettisoned select California retail assets, exiting the Nevada market, shuttered duplicative production assets in Florida, and adjusted canopy to align with current demand.

Speaker 3: As we fully ramp our new 750,000 square foot indoor facility in Florida, we plan to pull back additional canopy at legacy sites, continuing to bank capacity for future use. The new facility utilizes state of the art automation and a proprietary design, which we expect will yield efficiencies and cost savings as the facility ramps throughout the year.

Speaker 3: Lower production costs should lead to lower cost of goods sold as inventory from Legacy sites is reduced and more product from this facility is sold through our retail network.

Speaker 3: Production mix adjustments and targeted promotional activity were utilized in the fourth quarter to accelerate inventory reduction and generate cash. Inventory was reduced by $4 million, representing a meaningful shift compared to the inventory billed of $32 million in the third quarter. We are prioritizing inventory reduction throughout 2023.

Speaker 3: which will pressure growth margins but increase cash generation.

Speaker 3: In December , we closed $90 million in loans with an average fixed interest rate of 7.5%, which is lower than our overall interest rate of 8.2%. With our strong financial profile, including additional unencumbered real estate and anticipated free cash flow, Trulies has significant optionality and access to capital at attractive rates.

Speaker 3: Given our financial strengths and operational flexibility, our team is well equipped to navigate the current economic climate. While industry headwinds have persisted into 2023, we believe industry growth will resume as cyclical trends inevitably reverse and numerous catalysts come to fruition.

Speaker 3: Turning now to our results. Full year revenue of $1.24 billion increased 32% compared to 2021. Contributions from the Harvest acquisition, new market expansion, and new store openings in existing markets drove top line growth. Adjusted EBITDA of $400 million or 32% margin increased 4% over 2021.

Speaker 3: 85 million or 28% margin, representing our 20th consecutive profitable quarter. Fourth quarter adjusted EBITDA reflects margin pressure due to inventory flow-through and miscellaneous one-time year-end accounting true-ups and investments in new markets and jam and

Speaker 3: Fourth quarter operating cash flow was $55 million and free cash flow was $21 million. We exited the year with $219 million in cash. The only near-term debt maturity is $130 million due in June 2024. Beginning in July , this debt can be prepaid without penalty.

Speaker 3: With our cash balance, cash generation, and access to capital, we will now purely risk vault addition to retire this debt.

Speaker 3: Our strong capital tradition affords truly the luxury of continuing to make thoughtful investments during this cycle when many cannabis operators are fighting for survival with expensive debt materies looming within this tighter capital market environment.

Speaker 3: These growth opportunities include the Florida Edel

Speaker 3: The most impactful upcoming opportunity for TrueLeave is the potential launch of adult use sales in Florida. As such, TrueLeave intends to continue financial support of the Smart in State Florida campaign for an adult use ballot initiative. Campaign efforts are ongoing to collect the 890,000 validated signatures required for inclusion on the November 2024 ballot. As of mid-February, the campaign gathered over 1 million raw signatures and over 2 million

Speaker 3: and the state of Florida just reported that 420,000 of those have been validated. With 22 million residents and 138 million annual tourist visits, we believe Florida will be a top legal cannabis market reaching $6 billion in annual revenue.

Speaker 3: Given our leading and outsized market share in Florida, the Adult East opportunity will be a very meaningful contributor to financial performance in the near term. Today, we announced the opening of our 184th store in Palatka, Florida. Alongside retail expansion and poor markets, we will continue to invest in new market development.

Speaker 3: In Georgia, we began production at our ADEL facility last year, and we expect to launch sales at our first two medical dispensaries pending regulatory approvals. In Maryland, discussions are ongoing with the legislature to define and codify rules for the launch of adult use sales this year. In Connecticut, we launched adult use sales at our Bristol dispensary three weeks ago, and are pursuing opportunities to expand our presence.

Speaker 3: We are encouraged by recent developments in Pennsylvania, where just yesterday, Governor Shapiro included adult use cannabis in his budget proposal. Beyond our existing operational footprint, we plan to pursue organic growth opportunities across the Southeast.

Speaker 3: Within our existing network, we are allocating resources to further advance our competitive position. Our proprietary customer data platform, SAP Enterprise software, and technology platforms to analyze and actionize insights provide a meaningful competitive edge versus peers today. As one example, because of our data insights, last year we expanded the availability of premium and value.

Speaker 3: debt obligations will spur industry consolidation and yield opportunities to acquire standalone and distressed assets. While Trulian has significant flexibility and access to capital, we will remain patient and evaluate potential opportunities against our stringent criteria.

Speaker 3: As the cannabis industry evolves, we believe investments in technology and data will gain importance. The next major industry phase, which we call Cannabis 2.0, will likely be triggered by meaningful regulatory reform. While the precise timing and exact outcomes are unknown, we believe the next wave will be defined by a more open and diverse competitive landscape.

Speaker 3: including age-restricted access structures and or direct-to-consumer models. Ongoing investments in scale, distribution, and technology favorably position truly to excel within a more robust industry ecosystem and increasingly sophisticated marketplace while providing significant optionality.

Speaker 3: Our capacity and scale provide flexibility to quickly ramp up production as demand increases.

Speaker 3: We believe in a more open environment. The ability to produce and distribute branded products at scale will be an important competitive differentiator.

Speaker 3: Trilio's industry leading retail platform provides an opportunity to directly connect with the customer, build brand equity, glean valuable insights into customer segmentation, and test methods to define and perfect the customer journey. We're investing in retail and technology platforms in 2023 in order to provide a competitive edge today while building the foundation for Cannabis 2.0.

Speaker 3: The long-term prospects for cannabis have never been brighter. Trulium is uniquely poised to bolster business resilience through a relentless focus on cash alongside targeted investments for the future. I have never been more confident in our ability to emerge from this period as a leaner organization ready for the many opportunities ahead.

Speaker 4: At this time, I'll turn the call over to Alex to discuss her financial results. Thank you, Kim, and good morning, everyone. We delivered record full year revenue of $1.24 billion, an increase of 32% compared to $938 million in 2021. As Kim highlighted,rien Anderson liked the.......

Speaker 4: exceeding $1.2 billion in revenue last year is a significant milestone for true leave.

Speaker 4: Full year retail revenue increased 33% to over $1.1 billion, representing 94% of revenue.

Speaker 4: During 2022, we opened 25 new stores, exiting the year with an industry-leading retail footprint of 181 dispensaries.

Speaker 4: 32% of our retail footprint is located outside of Florida. Companywide in 2022, customers visited our stores on average two and a half times per month with an average basket size of $86. In medical-only markets, average basket size was $99.

Speaker 4: Fourth quarter revenue of $302 million was up slightly sequentially. Sales increased by 2% to $289 million.

Speaker 4: We open five new stores in Arizona, Florida, and West Virginia.

Speaker 4: Fourth quarter retail results exhibited typical seasonal patterns with higher traffic and promotional activity around holiday events.

Speaker 4: We continue to see strong demands for premium products and some shift from mid-tier to value products.

Speaker 4: Fourth quarter customer retention was 66% company-wide and 76% in medical-only markets. Full year gap gross profit was $682 million, or 55% margin, compared to $568 million, or 61% margin in 2021.

Speaker 4: Fourth quarter GAAP gross profit was $150 million, or 50% margin, compared to 56% during the third quarter. GAAP gross margin was impacted by inventory reduction measures, lower margin wholesale revenue, and year-end true-up of various accounting estimates.

Speaker 4: We expect planned inventory reduction will pressure Gross Margin, but generate cash throughout 2023. Gross Margin will continue to fluctuate quarter to quarter depending on products and market mix and inventory flow through.

Speaker 4: For the full year 2022, SG&A expenses were $455 million, or 37% of revenue, versus $316 million, or 34% of revenue during 2021. SG&A expenses in the fourth quarter were $126 million, or 42% of revenue.

Speaker 4: compared to $114 million or 38% during the third quarter. SG&A expenses included ramp of new markets and reclassification of expenses associated with idle capacity from cost of goods sold, partly offset by lower payroll expenses.

Speaker 4: Excluding non-recurring charges, fourth quarter SG&A was $95 million or 31% of revenue, flat on a percentage basis to $92 million or 31% in the third quarter. We have taken steps to reduce core business expenses while purposely investing in technology and growth initiatives this year. Net loss was $246 million for the full year 2020.

Speaker 4: Fourth quarter net loss was $77 million compared to net loss of $72 million for the fourth quarter 2021.

Speaker 4: Fourth quarter 2022 loss per share was 41 cents, an improvement compared to loss of 49 cents in the fourth quarter of 2021.

Speaker 4: Excluding non-recurring charges, fourth quarter loss per share would have been 18 cents.

Speaker 4: Full year 2022 adjusted EBITDA was $400 million or 32% compared to $385 million or 41% during 2021. For the fourth quarter, adjusted EBITDA was $85 million or 28% compared to $99 million or 33% during the third quarter.

Speaker 4: Fourth quarter adjusted EBITDA margin reflects one-time charges, idle capacity, and inventory reduction, primarily associated with optimization efforts designed to increase cash flow.

Speaker 4: We ended the year with $219 million in cash and $648 million in debt. Fourth quarter operating cash flow was $55 million. We expect to realize improved operating cash flow in 2023 through a combination of expense and inventory reduction.

Speaker 4: Capital expenditures totaled $165 million in 2022, including $34 million in the fourth quarter. Free cash flow was $21 million in the fourth quarter. Turning now to our outlook, we expect 2023 results will be influenced by factors including macroeconomic conditions, including pricing pressure within our core markets.

Speaker 4: Based on the current environment and limited visibility, we anticipate first quarter revenue will be down slightly.

Speaker 4: Based on the current environment and limited visibility, we anticipate first quarter revenue will be down slightly. Full year gross margin will be pressured by inventory reduction.

Speaker 4: Factoring in continuing optimization efforts to improve cash generation, we expect the impact of margin pressure will be partly offset as we realize lower production costs and lower core operating expenses.

Speaker 4: This year, we are targeting operating cash flow of $100 million, inclusive of five tax payments as the December federal tax payment was deferred due to Hurricane Ian. We expect 2023 capex will be at least 50% lower than 2022. We are investing in retail expansion, the Florida ballot initiative, and the Florida ballot initiative to help

Speaker 4: new markets such as Georgia, and technology to support next phase of industry growth.

Speaker 4: We plan to open 15 to 20 new dispensaries and relocate up to six stores this year. We anticipate improved operating cash flow and reduced capital expenditures will yield positive free cash flow in 2023.

Speaker 4: Throughout 2022, we made a series of strategic pivots to reposition assets, streamline operations, lower expenses, and improve cash generation.

Speaker 4: Throughout 2023, we will take additional measures to further gain efficiencies and boost cash generation. As we continue to optimize the business, we are prudently managing expenses while continuing to strategically invest in long-term growth opportunities.

Speaker 3: And with that, I'll turn the call back over to Kim. Thanks, Alex. Overall, cannabis continues to become increasingly mainstream, gaining popularity across all demographics. Greater acceptance among millennials and Gen Z consumers on top of expanding usage to displaced alcohol and pharmaceutical products bodes well for long-term adoption.

Speaker 3: US legal cannabis sales are expected to triple by 2030, reaching an estimated $75 billion as additional markets open and expand. These market forecasts assume that no federal reform occurs by 2030. While meaningful federal reform has not yet been enacted, increased levels of discourse, lobbying, and attention from the President and Congress are encouraging signs for the industry.

Speaker 3: In October , President Biden announced a directive to issue pardons and reexamine the Schedule I status of marijuana, reinforcing our view that meaningful reform is on the horizon and would likely occur before 2030.

Speaker 3: Although expectations for reform in 2023 are muted, we will continue to advocate for meaningful change at the federal level.

Speaker 3: As layers of prohibition are removed, we intend to be at the forefront of change. For example, last month, Twitter, with approximately 400 million users, became the first major social media platform to allow advertising by U.S. cannabis companies. Truli was proud to be the first cannabis company to advertise on that platform. When regulatory change eventually allows for potential uplifting to a major stock market,

Speaker 3: provides critical insights that inform our overall strategy.

Speaker 3: As a champion race car driver once said, you cannot overtake 15 cars in sunny weather, but you can when it's raining. Trulieve has the scale, strategy, and capital necessary to weather the storm, along with cash generation to invest strategically while others focus on survival. Thank you for joining us today, and as I always say, onward.

Speaker 5: At this time, Kim Rivers, Alex D'Amico, and Steve White will be available to answer any questions. Please open up the call for questions.

Speaker 2: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.

Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker 2: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Speaker 2: In the interest of time, please limit yourself to one question and one follow-up.

Speaker 2: At this time, we will pause them in parallel to assemble our roster. The first question today comes from Matt McGinley from Needham. Please go ahead.

Speaker 6: The Jefferson County facility would be critical to sustaining your gross margin, but you mentioned in the prepared remarks that inventory depletion will pressure the gross margin. When should we expect that older inventory to be depleted and for the newer, lower cost Jeffco inventory to flow through COGS? As we look at that gross margin rate, the 54% that you achieved in the fourth quarter addressed those errors among the

Speaker 3: So we call that the three-dimensional puzzle that we have in front of us. And so you have three main factors which you actually just touched on. You have, of course, consumer behavior, which really is more pressure on wallet and what products and what rates those consumers were coming into byproducts and in front of us specifically.

Speaker 3: Coupled with, of course, our legacy facilities and the inventory that's been built from those facilities, which is at a higher cost than the product that's coming through our Jefferson County facility. It's not, as I think you're indicating, a simple, you know, we sell through all of the legacy and then switch over.

Speaker 3: to Jessica as we're producing now out of Jefferson County. I can tell you that early indications are that the Jefferson County efficiencies are on point and are absolutely contributing to lower cost inventory. That is combining, of course, with the inventory on hand from our legacy facilities.

Speaker 3: towards that lower-cost inventory from the Jefferson County facility. And, of course, all the products that we've produced, each SKU, each subcategory has different velocity levels, et cetera, so a little hard to forecast precisely. And as I said, I wish that there was just a simple, okay, we're going to hand it off from point A to point B, because that's just not business reality.

Speaker 3: and the pressure there, you won't have the one time. So there will be, we would anticipate a pick up in Q1.

Speaker 6: On the cash flow guidance for the year, to get to that $100 million, you need about $75 million in improvement to hit that target. Where do you expect to be or where do you hope to be at year-end in terms of inventory turns or inventory dollar levels? You also made the comment on the five tax payments. Do you expect to fully pay off that?

Speaker 3: $50 million tax balance you had at year end into 23. Yep. So, as we mentioned, there was a tax deferral, and that will be paid in Q1. So, in the prepared remarks, we talked about five tax payments in this next year, which we're contemplating and still able to achieve even with those five...

Speaker 3: initiatives for 2023 primary will be to balance out that inventory and to pull up Jeffco, sell through and you know right size and capacity in Florida specifically. So we would expect to exit the year in a more in a more balanced and favorable inventory position.

Speaker 3: Again, with the key focus throughout this year on cash generation and cash preservation, importantly to offset, however, somewhat by strategic investments in foundational growth initiative.

Speaker 2: The next question comes from Russell Stanley with Beacon Security. Please go ahead.

Speaker 7: The next steps are you're well over the valid count required for the Supreme Court review. Can you remind us as to what happens next on that front?

Speaker 3: So the next step is signatures will continue to be gathered. We do have, I think the campaign has incredible momentum now, which is a testament, I think, to the overwhelming support by Floridians of the ballot initiative and their desire to see adult youth on the ballot in 2024.

Speaker 3: But there's not any requirement for them to hear it sooner rather than later So really anytime between now and April next year We would expect to be notified that the Supreme Court has scheduled a time to review the language for both single subjects and And lack of ambiguity and so that that would be that step and however. I don't believe that the campaign in

Speaker 7: you mentioned that during the prepared remarks. I guess, remind us as to when you expect sales to occur, given your weighting on some regulatory approvals and maybe map out to you if you can, how quickly you might build that on the retail front there. Yep, so Georgia continues to be a market that we're really excited about. We certainly feel that we're in a great position given proximity to our headquartered operations in Florida.

Speaker 3: All indications are that the state is continuing to push forward and wants to open those sites quickly as well since we have patients in Georgia that have been waiting, you know, six plus years and for for product to be available. And as a reminder Georgia.

Speaker 3: that are in various phases of build-out, permitting, et cetera, for additional retail locations throughout 2023. The next question comes from Kenrick Tige with ATB Capital Markets. Please go ahead.

Speaker 8: Thank you and good morning. Kim, your prepared remarks called out continued strong demand for premium, but I wonder if you could speak to the pricing dynamics in premium. What has been the extent of the reset or the market clearing price rather for premium flower in Florida specifically and how should we think about the evolution of...

Speaker 3: the pricing for premium products given the current environment? Sure. So, I mean, you know, as we, I think, call out in the prepared remarks, and then also I would point everyone, which I'm sure you're aware of, of the PowerPoint in the deck that's also filed along with our KNR press release, and there's some additional information there as usual.

Speaker 3: see significant discounting quarter over quarter and again company-wide and from Q3 to Q4 which is I think where your question may be centered. We certainly do see some trade down with the biggest shift from mid-tier to value.

Speaker 3: like this in cannabis. And so it provides, and we're choosing to look at it as an opportunity set to really understand, again, shifting consumer patterns. We certainly had a front row seat into what those shifting consumer patterns looked like in a robust growth environment when we had COVID and we had outsized demand.

Speaker 3: due to a number of factors and also increase available spend. Now it's our opportunity to learn and to meet customers where they are during the flip or the reversal of that in a more pressured or wallet tightening environment. So for us, our value products are continuing to...

Speaker 3: of our customer retention metrics, we believe that if we can retain that customer through this cycle, when there's a reversal, and they do have more available dollar suspend, as we've seen in the past, they'll flux back up into that mid-tier and even grow at a more robust rate, the premium category.

Speaker 8: Thanks, Kim. Great color. If I could just switch to Marilyn quickly. That's the pace in which it appears to be transitioning to adult use is certainly a potential silver lining on 2023. Truly, there's one of the best, if not the best position operated in that market..

Speaker 8: Can you speak to and just contextualize the 2023 opportunity in Maryland for Truli, particularly with a potential adult use start date now being pulled forward to as soon as July of this year? Thank you.

Speaker 3: Sure, and thanks for that. Marilyn has been a great market for us. We have been really dialing in and focusing on the quality of our indoor production there. The team has been hitting it out of the park recently. I think I actually just posted some pictures on...

Speaker 3: on Twitter, you know, as to just the beautiful flower that's being grown out of our Maryland facility and agree, I think, that our product mix, we've also been dialing in and ensuring that we've got great variety of skill and great variety of...

Speaker 3: of different tiered products and as well as our internal brands and increasing the availability of our internal brands there ahead of rec and so and we certainly look at Maryland as an opportunity and for this year and the team is very focused on making sure that we've got a Fantastic launch and when recreational sales become available.

Speaker 2: The next question comes from Erin Gray with Alliance Global Partners. Please go ahead. Of the

Speaker 6: Hi, good morning and thank you for the question. So would you just love to get any color in terms of expectations for average sales per store? You know, I know you guys don't give a lot of granular color on that, but maybe some broader dynamics, you know, just some implied numbers, you know, do say there'd be some pressure on that. So we can talk about how much of that might be from the overall pricing pressure and average ticket versus some traffic.

Speaker 6: And then just the anticipation, particularly for Florida, as operators continue to open up stores in the state, given the current medical market and in anticipation of the adult use market. I know you have some planned openings of your own. Just how you're thinking about the average sales per store, particularly for the state of Florida. In the next step, I'll talk to Dr. Robert Sbda, who is the CEO of mission search and head you through masters work inside the university. In the next panel I'll talk to Dr. Robert S Surviv who will come out to AnPER

Speaker 3: Yeah, I mean, you know, again, point you to the deck that was filed as well. We've got some good information in there for you also. But really, again, when we look at as a company-wide, right, we had visits of 2 1-1-2 times per month for the year. In Florida, specifically, really combined with other medical-only markets, they're-

Speaker 3: basket pressured by 3%, which of course leads you to your 2% growth number. So again, folks coming back more frequently, which I think makes sense, right? When you take a step back and you think about the macro environment, when you've got wallet pressure, it's that I have $20 in my pocket and I'm going to have $20 disposable income this pay period, and I'll have a $20 in my pocket.

Speaker 3: believe that there are still some markets like today we open a store in Palatka and feel really great about that store it's the right sized footprint for that particular market so this isn't a you know all stores are the same size no matter what the geography or you know

Speaker 3: market demand that we're projecting could be. So we think it's the right size store for the market. It's positioned well. It's in a white space for cannabis in general, and certainly for truly even our portfolio. And so we'll continue to identify and look for those particular opportunities for us. And that would be true and hold true.

Speaker 6: regardless of whether there's recreational or not in Florida. So we believe that that continued investment is warranted. Great, great. Thanks, Sarah. That was a really helpful color. And then just a second one for me quickly. In terms of the $750,000 facility and the ramp above that, it sounds like that's going well. Could you just talk about as you're now trying to kind of bring down inventory, you know, imagine a lot of that in Florida, you know, how do you think about...

Speaker 6: the timing of the ramp-up of the 750 and then maybe being flexible in terms of how much you're bringing on in terms of the other facilities that you have in the state. You know, having been down there, it seems like you do have a lot of ability to kind of turn some off and turn some on in a rather quick manner. So, talk about how you're looking to kind of transition through that as you ramp up the 750K and then also work down some of that inventory. Thank you. Sure. So, we look at that very regularly. We actually look at our productivity, which

Speaker 3: with higher levels of terpenes, your flexibility as far as being able to transition that into fresh frozen and a hydrocarbon premium product, vis-a-vis a crude oil product, etcetera, there's maximum flexibility, right, the higher quality flour that you are able to grow. And so, you know, early indications, as I mentioned, are incredibly strong.

Speaker 3: 2022, move forward with taking some of those sites offline, would anticipate that that will continue as we work to match what, you know, and better be in a position to better predict with more harvest behind us, the quality and the efficiencies that we're able to gain out of that 750k facility.

Speaker 2: The next question comes from Derek DeLee with Canaccord Genuity. Please go ahead.

Speaker 8: Hi, good morning. This is Polkidon for Derek. I'd stay a couple of questions on our end. I just wanted to learn a little bit more about Vets Virginia. I believe you guys are up to 90 spents. So could you provide some color on how sales and medical patients are progressing at the market?

Speaker 3: Sure, so we actually open our 10th store in West Virginia here recently. So we do have our full 10 retail stores built out along with our cultivation and production facilities to support those 10 locations. Sales in West Virginia have been strong and we also recently launched our brand partner in the building.

Speaker 3: to market there. There's also conversation happening in West Virginia about potentially an adult use initiative. So, look for that market to continue to be a solid contributor to our portfolio today and then potential growth catalyst ahead in the future.

Speaker 4: We make strategic investments as we always do. Keep in mind that a good portion of that will go to retail, retail new store builds, repositions, but also investments in new markets.

Speaker 3: and our continued investment in technology as well. Yeah, I think that what you're going to see is a shift, whereas I think prior, we talked about the fact that we're coming off of a multi-year investment cycle, primarily focused on building supply chain and distribution capacity. That's really coming to an end. And so aside from with the caveat and the asterisk of

Speaker 3: said to the retail side of the house along with repositioning and then of course investment ahead of catalyst and new markets. The next question comes from Pablo Zoonix with Cantor Fitzgerald. Please go ahead.

Speaker 9: Good morning, everyone. Can I just go back to the balloting initiative questions just specifically if you leave the area in the state Supreme Court?

Speaker 9: You said they can review the text now from here to April , but I guess three questions. One, do they have to wait first for the 190,000 signatures to be validated?

Speaker 9: Two, can you remind us what was the issue they had with the last text I was proposed for the ballot? And then three, we know for sure they have to opine before April . And you may that sound like if they don't make any comments by April , it means they have approved it, but is that necessarily so? Could they actually maybe say that look we haven't finished reviewing this?

Speaker 3: So it's expired and we're not going to do it. Can you give more photo on that please? Sure. So the first question, no. There's a lower signature threshold for Supreme Court reveal. So that number is just south of 300,000 signatures, Pablo, and that has been achieved. So as soon as that signature number has been achieved, that's what triggers Supreme

Speaker 3: homegrown and adult use which was deemed to be more than a single subject. In addition the Supreme Court gave guidance that because there was not explicit language signaling to voters that this still was federally illegal that that was problematic as it relates to the ambiguity and tier.

Speaker 9: April . So there's not a situation where they can say we haven't gotten around to it so you can't be on the ballot. That's not how it's written in Florida law. Hopefully that helps. Thank you, that's helpful. And just the follow-up there. So, so after that, assuming that they approve the wording of the ballot initiative, there are no other impediments from there to November 24 to be on the ballot or you know, could there be a...

Speaker 10: Thank you.

Speaker 3: Yep, sure. So, it's a... So, I think we're... So, a lot in there. Let's take it one at a time. There is no additional impediment as long as the total number of signatures has been achieved and it passed the Supreme Court review by...

Speaker 3: the process laid out in the in in Florida law, then that measure is certified for inclusion on the 2024 ballot. So there is no interim review step or authorized review step by the legislature or the governor. Again, this is a citizens ballot initiative process. So it's meant to allow for the citizens to have.

Speaker 3: more direct access to initiatives or policy and to be able to vote directly on that policy. And so I think that was the first question. The second question is it really is a 50% of the vote that is threshold in the state of Florida for all ballot initiatives as a reminder, the medical and election protection

Speaker 3: cannabis ballot initiative passed by the highest percentage of any ballot initiative ever in the history of the state of Florida with over 70% of the vote. Currently, adult use cannabis is pulling over 70% as well. So, have, you know, high level of confidence, so that really it's two, except in spite by the people of the language and of

Speaker 3: proportion to population. And so that's one of the reasons why you see the disparity between raw signature and we talk about raw signatures versus validated signatures. So that's part of that calculation. And when we always use a raw number that about 65-ish percent of raw signatures.

Speaker 3: typically will be converted into actually valid counted signatures. And so that's part of the whole calculation that leads to the signature threshold, not the approval threshold on the ballot.

Speaker 11: Hi, good morning. Thanks for taking my questions. Maybe first thinking about about...

Speaker 11: quarter over quarter, but retail revenues overall were up 2% talked about gross margin a little bit under pressure while you're reducing inventory.

Speaker 11: Just wondering if you can provide a little bit more color on the main drivers behind your retail performance in Florida and if you can quantify the impact of monetizing inventory levels. versus just watching blackAndNet recording British and y'all talk about the rest of

Speaker 3: how that impacted your sales or margin. Any additional color there could be helpful on how we think about this year. Sure, so as we stated, right, well a couple things just to level set, right? In Q3 you had a lot of noise in Florida and you had a lot of noise in the Florida numbers. And as a reminder for folks in Q3, we had hurricane, we...

Speaker 3: and certainly pick up in the value category. And other reminder, the data that you guys have, and I know it's the only data that's available, so we have to use it. But the data that's available through the OMMU is volumes only. And so when you have shift to value, right? And it's not a one for one. In other words, you can't necessarily draw a straight line from, oh, this is, you know, call it pre-inflationary environment, Q1.

Speaker 3: This is how that translated into revenue. That product mix and the way that those sales are being generated today because those consumers right, mid-tier consumers shifting to value, it's just a different, so consumer may be the same, but product mix, basket mix, different. So I think that's where some of the challenges are, for you guys as you try and correlate the following.

Speaker 3: dollar per milligram that's pulling through and how is it reflected in their product mix and the spending patterns of that particular consumer subset. I'm going to get that additional color.

Speaker 11: Just thinking about your operational expenses, it seems you pulled back a little bit on marketing in the quarter, but that was offset by higher G&A costs.

Speaker 11: If you compare it to Q3, could you talk a little bit more about the main drivers behind those movements and how we should think about normalized levels this year? Should we expect marketing to pick back up or GNA to level out here?

Speaker 4: Yeah, so we, I mean, as you noted, we had a reduction in sales and marketing quarter over quarter. We mentioned kind of a cutting from our core operating expenses, and you see that come through there. On the G&A side, there's a couple of things going on there. We see an increase, and that's primarily related, you know, we talk about this.

Speaker 4: cash generation and preservation strategy and inherent in that is the taking offline of capacity and idling some of our legacy production facilities and when you do that and you're not producing out of them those costs continue to cost or classified or reclass that have kind of cost of goods sold and into SG&A. So we have that in the quarter and we'll continue to have that in throughout 2023

Speaker 4: We're focused on reducing our core operating expenses as we know in our open remarks. And that will be partly offset as we kind of be close we can. And the position we've built for ourselves continues to strategically invest in growth opportunities and initiatives. So you'll have lots of puts and takes through the SG&A line throughout the year, a little bit of lumpiness, depending on the timing of investments. The next question comes from Eric.

Are you perhaps looking at some of those remaining as part of that stable run rate outlook going forward? Thank you.

Yep, so we absolutely expect that by the end of the year, again, we'll be at a anticipated stable study run rate, as it really, and that would include the balance, if you will, of facilities between...

the 750k facility as well as the legacy and format, I guess, is what I would call it facilities. That doesn't necessarily mean I just want to say, just so we're all talking in the same language here. When we're saying legacy, I don't want to imply that that necessarily means that they're

you know, older and age or what have you. We're talking about really the footprint and the design of the facility. So it's really the legacy design facility, not necessarily, you know, legacy, I guess, and of a traditional kind of, you know, aged, aged, you know, vernacular. So, but yes, I would tell you that at the end of the year, we expect that to be balanced in the state of Florida. Okay, and are you able to quantify how much of that new, newer facility?

of the legacy production facilities. And that's what I'm saying, that blend will shift, but it also depends on what the product mix is because certainly certain products that we make have different levels of velocity. I mean, we just talked about, right, the shift to value. You know, flour continues to have pretty high turns for us. So it becomes a complex question very quickly that.

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

Yeah, no Thai thanks. I mean, I think that really we've pride ourselves in transparency and being communicative to the market and as it relates to our strategic priorities. And as outlined this morning, our strategic focus for 2023 is cash generation, cash preservation.

right coupled with very targeted and strategic investment and specific growth initiatives. And so given that, we felt that the most meaningful metrics for us to focus on and for us to really be communicative on our cash driven. And so, in quite frankly, right, given the Martinez of the current environment, and there is uncertainty, right? I mean...

Read the Wall Street Journal yesterday. It's the recession that six months away always, right? And it's been that way for the last year. So, again, with uncertainty on the macro environment, we have chosen to focus on the things that we can control, which again is the notion of cash generation and cash preservation and wanted to make sure that we were transparent in giving color around those metrics. Okay, appreciate that. And just for my follow-up question on the years.

since the harvest acquisition. I mean, the primary opportunity in the state of Arizona is on retail for our organization. However, there is an opportunity to...

maximize the output from our market leading retail footprint. And that is by increasing the amount of internally produced product that we sell through that retail footprint. And then increasing the efficiency with which we make those products that we sell through that retail footprint. And then increasing the efficiency with which we sell through that retail footprint.

quarter decline in wholesale opportunities in other states. I'm wondering if you're seeing any of that low down in wholesale opportunities having caused inventory builds, beginning to spread to other markets. And if you are seeing those inventory builds kind of recurrent in other states, what are you doing to address that?

Yeah, I mean, as you I think correctly point out, right? And it's primarily in Florida. And again, I just want to make sure that we're just all the same page that was intentional in nature, right? And we were ramping, Jessica. We knew that we were going to have an inquiry bill. Wanted to make sure that Jessica.

you know, yes, there was inventory build, but yes, we also were expecting partially, right? If there wouldn't have been inventory build, that would have meant that Jefco actually was not doing what we thought that it was going to do, which would have, you know, I call it kind of, you know, champagne problems as it relates to, you know, where we are today. And now, right, again, according to plan, we're focused on getting Jefco fully ramped now that we're confident in the ability to achieve.

their absolutely is and will continue to believe, to be I believe, pressure on wholesale, you know, for truly events and organization, wholesale is not an overly significant part of our business portfolio. And so, you know, that impact has been relatively minimal.

To our overall businesses, we've continued to be able to focus on, again, our leading world-leading retail footprint and, again, pushing and having the ability to sell our branded products through branded retail throughout the U.S.

Great, thanks for that. And my technical question would be on EBITDA margins. You know, I know much of the discussion has been on the gross margin line so far, but I guess with the EBITDA margins, you've got the additional lever of being able to dial back, operating expenses as well.

Q4 was the first quarter where we've seen that dip below the 30% level. Could you maybe comment on whether you believe you could recapture that 30% or more, sometimes for the end of 2023 or in 2024, and how are you thinking of the EBITDA margins going forward relative to where we saw them in Q4?

Yep, so I mean in Q4, right, we as you indicated, I'm Ibadai is going to be impacted by your, you know, the inventory and the puts and takes that we just talked about, other relates to the inventory wind down throughout the year. In addition, Ibadai is also impacted by, you know, also previous comments about the reclassification.

expenses that were previously capitalized into COGS that now are pulled through into GNA and so and you know as those sites continue to be titled and that that certainly will will pull through as well. That being said, right, we do believe that the inventory wind down with the contribution of

So, you know, I would say obviously we're not in a position because all of this is predicated, as we know, on, again, consumer demand and where that lands this next year, but, you know, again, as an organization, feel good in terms of our ability to control and meter and manage our core business expenses as well as our continued management of inventory throughout this year.

and have a great day.

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