Q4 2022 Trulieve Cannabis Corp Earnings Call
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Good morning, everyone and welcome to the trim. These candidates corporation fourth quarter and full year 2022 financial results Conference call.
My name is Betsy and I will be your conference operator today.
As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference Christine Hersey, Vice President of Investor Relations for truly you may begin.
Thank you.
Good morning, and thank you for joining us.
During today's call Kim Rivers, Chief Executive Officer, and Alex <unk>, Chief Financial Officer will deliver prepared remarks on our financial performance and outlook virtually.
Following their prepared remarks, we will open the call to questions.
Steve White President will also be available to answer questions.
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and Powerpoint presentation may be found on the Investor Relations section of our website Www Dot Trulia Dot com an archived version of today's conference call will be available on our website later today.
As a reminder statements made during this call that are not historical facts constitute forward looking statements and these statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties.
Scribed in the Companys filings with the Securities and Exchange Commission, including item one a risk factors of the company's annual report on Form 10-K for the year ended December 31 2022.
Although the company may voluntarily do so from time to time it undertakes no commitment to update or revise these forward looking statements whether as a result of new information future events or otherwise except as required by law during.
During the call management will also discuss certain financial measures that are not calculated in accordance with the United States generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute.
Virtually 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 web site.
Lastly at times during our prepared remarks or responses to your questions. We may offer metrics to provide greater insight into the dynamics of our business or our financial results.
Please be advised that we may or may not continue to provide these additional details in the future I'll now turn the call over to our CEO . Kim Rivers. Please go ahead. Thanks, Christine Good morning, everyone and thank you for joining US today, we're pleased to report fourth quarter and full year results and provide an overview of our 2023.
<unk>.
Since inception truly it has embraced our strategy driven approach to building a sustainable and scalable company. This winning philosophy has been a key contributor to our long track record of profitable growth in 2022 revenue surpassed $1 $2 billion, a huge milestone considering our very first sale with a 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.
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 initially.
Initially truly was primarily focused on market development within Florida, our commitment and investment in our home state was the driving force of our success from that very first sale in 2016 and 2021, we meaningfully expanded our reach completing seven acquisitions, including the largest complete that transaction in U S. Cannabis history we.
This change our company transformed into a diversified multi state operator, with a leading retail cannabis footprint in the world.
The timing of this major expansion it to relieve coincided with a reversal and favorable economic trends brought about by the unwinding of Covid related tailwind and a decade long period of global excess liquidity.
The goal of 2022, which 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 are ongoing merger integration efforts evolved into a broader set of actions designed to bolster our business resilience, while improving our competitive positioning for the.
Our long term the two objectives that we have for 2023 or one maximize cash generation and preservation and to make strategic investments to support future growth.
Efforts to boost cash generation began in earnest in 2022, and we 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 expenditures will you.
<unk> positive free cash flow, we are targeting annualized gross cost savings of approximately $100 million, partially offset by investments in strategic growth initiatives.
Actions taken to date include shuttering of margin and cash dilutive assets adjustments of production mix and capacity utilization and inventory and expense reduction.
As a result of the elimination of redundancies and the harvest integration, we've reduced wages by approximately 20%.
Last year, we jettison select California retail assets exited the Nevada market shuttered duplicative production assets in Florida, and adjusted canopy to align with current demand.
As we fully ramp our new 750000 square foot indoor facility in Florida, We played a pullback additional canopy legacy sites continuing to bank capacity for future use the new facility utilizes state of the our automation and our proprietary design, which we expect will yield efficiencies and cost savings as the facility ramps throughout the year lower.
Production cost 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.
<unk> 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 build of $32 million in the third quarter. We are prioritizing inventory reduction throughout 2023, which will pressure gross.
<unk>, but increased cash generation in December we closed $90 million alone with an average fixed interest rate of seven 5%, which is lower than our overall interest rate of eight 2% with our strong financial profile, including additional unencumbered real estate and anticipated free cash flow truly have significant optionality and access.
Two of capital at attractive rates.
Given our financial strength and operational flexibility our team is well equipped to navigate the current economic climate.
History headwinds have persisted into 2023, we believe industry growth will resume as cyclical trends inevitably reverse and numerous catalysts come to fruition.
Turning now to our results full year revenue of one point to $4 billion increased 32% compared to 2021 contribution from the harvest acquisition, new market expansion and new store openings in existing markets drove topline growth adjusted EBITDA of $400 million or 32% margin increased 4% over 2020.
Full year adjusted EBITDA reflects integration and repositioning activities following the harvest acquisition and shifts in the economy and competitive dynamics across our markets fourth quarter revenue of $302 million was up slightly with 2% growth in retail revenue adjusted EBITDA was $85 million or 28% margin represent.
Our 20th consecutive profitable quarter fourth quarter, adjusted EBITDA reflects margin pressure due to inventory flow through and miscellaneous onetime year end accounting true ups and investments in new markets and accruals.
Fourth quarter operating cash flow was $55 million in 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 with our cash balance cash gen.
<unk> and access to capital purely this vault addition to retire this debt.
Our strong capital position affords truly the luxury of continuing to make thoughtful investments during the cycle. When many cannabis operators are fighting for survival with expensive debt maturities looming within this tighter capital market environment. These growth opportunities include the Florida adult use valid initiatives, new market and retail development M&A and technology.
To drive success, and an integrated commerce environment.
The most impactful upcoming opportunity for Trillium is the potential launch of adult use sales in Florida as such truly that tends to continued financial support of this Martin say, Florida campaign for an adult use valid initiative campaign efforts are ongoing to collect the 890000 validated signatures required for inclusion on the November 2024 ballot as.
Mid February the campaign gathered over $1 million raw signatures and the state of Florida, just reported that 420000.
And 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 given our leading an outsized market share in Florida. The adult used opportunity will be a very meaningful contributor to financial performance in the near term.
Today, we announced the opening of our 184th store until Lockup, Florida alongside retail expansion in core markets. We will continue to invest in new market development.
In Georgia, we began production at our ADL facility last year, and we expect to watch sales at our first two medical dispensaries pending regulatory approvals and Maryland discussions are ongoing with the legislature to define and quantify our 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.
We are encouraged by recent developments in Pennsylvania, We're 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 within our existing network. We are allocating resource resources to further advance our competitive position our.
Terry customer data platform, SAP enterprise software and technology platforms to analyze and <unk> 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 branded products such as cultivar collection Muse enroll one we employed.
These timely data driven adjustments to optimize assortment and depth of inventory ultimately meeting evolving customer preferences and fostering customer loyalty on the M&A front, we believe constricted capital markets in the face of significant near term debt obligations will spur industry consolidation and yield opportunities to acquire a standalone in distressed.
Assets, while its release has significant flexibility and access to capital, we will remain patient and evaluate potential opportunities against our stringent criteria.
As the cannabis industry evolves, we believe investments in technology and data will gain important the next major industry phase, which we call cannabis two <unk> 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, including age restricted.
Access structures <unk> direct to consumer models.
Ongoing investments at scale distribution and technology favorably position truly to excel within a more robust industry ecosystem and increasingly sophisticated marketplace, while providing significant optionality, our capacity and scale to provide flexibility to quickly ramp up production as demand increases.
We believe in a more open environment the ability to produce and distribute branded products at scale will be an important competitive differentiator truly 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 protects 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 to point out.
The long term prospects for cannabis have never been brighter truly is uniquely poised to bolster business resilience through a relentless focus on cash alongside targeted investments for the future I've never been more confident in our ability to emerge from this period as a leaner organization ready for the many opportunities ahead at this time I'll turn the call over to <unk>.
Alex to discuss our financial results.
Tim and good morning, everyone. We delivered record full year revenue of one to four 1 billion, an increase of 32% compared to $938 million in 2021.
As Tim highlighted exceeding $1 $2 billion in revenue last year is a significant milestone for chili's full.
Full year retail revenue increased 33% to over $1 1 billion.
Representing 94% of revenue.
During 2022, we opened 25, new stores exiting the year with an industry, leading retail footprint of 181 dispensaries.
32% of our retail footprint is located outside of Florida.
Companywide in 2022 customers visited our stores on average two five times per month with an average basket size of $86 a medical only markets average basket size was $99.
Fourth quarter revenue of $302 million was up slightly sequentially retail sales increased by 2% to $289 million, we opened five new stores in Arizona, Florida and West Virginia.
Fourth quarter retail results exhibited typical seasonal patterns with higher traffic and promotional activity around holiday events. We.
We continue to see strong demand for premium products and some shift from mid tier to value products fourth quarter customer retention was 66% companywide and 76% and medical only markets.
Full year GAAP gross profit was $682 million or 55% margin compared to $568 million or 61% margin in 2021.
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, 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 product and market mix and inventory flow through.
For the full year 2022, SG&A expenses were $455 million or <unk>, 37% of revenue versus $316 million or 34% of revenue during 2021.
SG&A expenses in the fourth quarter were $126 million or <unk>, 42% of revenue compared to $114 million or 38% during the third quarter SG&A.
<unk> expenses include a ramp of new markets and reclassification of expenses associated with idle capacity from cost of goods sold partly offset by lower payroll expenses.
Excluding nonrecurring 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 2022, compared to $18 million net income in 2021 net loss would have been $30 million in 2022, excluding nonrecurring charges asset impairments disposals and discontinued operations associated with the harvest acquisition and the strategic repositioning.
Assets to improve cash flow.
Fourth quarter net loss was $77 million compared to net loss of $72 million for the fourth quarter of 2021.
Fourth quarter 2022 loss per share was <unk> 41.
An improvement compared to a loss of <unk> 49 in the fourth quarter of 2021, excluding.
Nonrecurring charges fourth quarter loss per share would have been 18.
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Full year 2022, adjusted EBITDA was $400 million or 32% compared to $385 million or <unk>, 41%. During 2021 for the fourth quarter, adjusted EBITDA was $85 million or 28% compared to $99 million or 33% during the third quarter.
Fourth quarter adjusted EBITDA margin reflects one time charges vital capacity and inventory reduction primarily associated with the optimization efforts designed to increase cash flow.
We ended the year with $219 million in cash and $648 million in that 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 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.
Based on the current environment and limited visibility, we anticipate first quarter revenue will be down slightly full.
Full year gross margin will be pressured by inventory reduction.
During and continuing optimization efforts to improve cash generation, we expect the impact of margin pressure will be partly offset as we realized lower production costs and lower core operating expenses.
This year, we are targeting operating cash flow of $100 million.
Inclusive of five tax payments as of 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 to Florida ballot initiative, new markets, such as Georgia and technology to support next phase of industry growth. 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.
Throughout 2022, we made a series of strategic pivots to reposition assets streamline operations lower expenses and improved cash generation.
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 and with that I'll turn the call back over to Ken.
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 should place alcohol and pharmaceutical products bodes well for our long term adoption U S. Legal cannabis sales are expected to triple by 2030.
Reaching an estimated $75 billion as additional markets open and expand these market forecast assume that new 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 in October present.
Biden announced a directive issued pardons and reexamined the schedule one status in marijuana reinforcing our view that meaningful reform is on the horizon and would likely occur before 2030.
Although expectations for reform in 2023 are muted, we will continue to advocate for meaningful change at the federal level.
As layers of prohibition are removed, we intend to be at the forefront of change for example last month Twitter was approximately 400 million users became the first major social media platform to allow advertising by U S cannabis companies.
Really this proud to be the first cannabis company to advertise on that platform when regulatory change eventually allows for potential uplifting to a major stock exchange, we believe truly will be well positioned given its current S. Three registration and track record of financial reporting under U S. GAAP are diverse and experienced board of directors when additional depth and credibility.
To our organization their collective experience across agriculture alcohol hospitality and retail industries provides critical insights that inform our overall strategy.
Champion race car driver once said you cannot undertake 15 cars and sunny weather, but you can when it's raining truly 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.
Sure.
Okay.
Yes.
At this time, Kim rivers, Alex D'amico, and Steve White will be available to answer any questions. Operator, Please open up the call for questions.
Yes.
We will now begin the question and answer session.
You ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Matt Mcginley from Needham. Please go ahead.
Yes.
Jefferson County facility will be critical to sustaining our gross margin, but you mentioned in the prepared remarks that the inventory depletion will pressure the gross margin when should we expect that older inventory will be depleted into the newer lower cost Jeff co inventory to flow through Cogs and as we look at that gross margin rate of 54% that you see.
You achieved in the fourth quarter, we will price compression.
Push that below the 54% or could you still get above that as Jeff got becomes operational I guess, how should we think about the puts and takes on the reduction versus the lower cost Jeff go inventory that potentially could improve your gross margin rate.
Hey, Matt So we call that the three dimensional puzzle that we have that we have in front of us and so you have three main factors, which you actually just touched on Brian do you have of course consumer behavior, and which really is more pressure on wallet and what what products and at what rate does this.
Consumers are coming into byproduct in Florida, specifically.
Bold 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 and its not and as I think you are indicating a simple.
We sell through all of the legacy and then switchover.
To suggest co as we're producing now out of 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 and lower cost inventory and that is combining of course with the inventory on hand from our legacy facilities and really it's going to fluctuate and throughout this next year as and as that combination in that mixed shift and changes over time right as we're pulling.
There's legacy facilities offline and naturally there will be more of a shift towards a greater weight towards that lower cost inventory from the from the Jefferson County facility and of course, all of the products that we produce each each SKU each subcategory has different velocity levels et cetera.
So a little hard to forecast precisely.
As I said I wish that there was just a simple okay, we're going to hand, it off from eight to point B, but thats just not thats not business.
And but what I can tell you is that and there was outsized margin pressure this quarter and given the impact of some one time and one time things that we will not have going into going into Q1, and so while we will have to your point and the additional noise around the inventory sell through.
The pressure there.
We won't have the one time, so there will be.
We anticipate a pick up.
In Q1.
And on the cash flow guidance for the year to get to that 100 million you need about $75 million improvement to hit that target.
Where do you what do you expect to be where you hope to be at year end in terms of inventory turns our inventory dollar levels and you also made the comment on the five tax payments do you expect to fully pay off that $50 million tax payment cash balance you had at year end and into 'twenty three.
Yes, so as we mentioned there was a tax 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 tax payments.
Importantly, operating significantly improved operating cash flow of one.
100 million plus free cash flow into 2023 and as it relates to the time on hand, and we certainly again in terms of our initiatives for 2023.
Primary will be to balance out that inventory and to pull up jafco.
Sell through and rightsize capacity in Florida, specifically, so we would expect to exit the year in a more in a more balanced and favorable inventory position and again with the key focus throughout this year on cash generation and cash preservation and importantly to offset <unk>.
We're somewhat by strategic investments in foundational growth initiative.
The next question comes from Russell Stanley with Beacon Securities. Please go ahead.
Good morning, and thanks for taking my question, maybe just on Florida in the adult use work and the efforts there congrats on the.
And that growth signature count just wondering what the next steps are.
Youre well over the valid count acquired for the Supreme Court review can you remind us as to what happens next on that front.
Sure So and the next step is.
<unk> 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 and <unk>.
<unk> of this.
The ballot initiatives and their desire to see adult use on the ballot in 2024 and the Supreme Court has from now until April of next year to the fact to decide when they would take up the review of the language and which is a standard process in the state of Florida, and if they do not hear it by.
On April of next year, then that language is deemed approved but there is not any requirement for them to hear it sooner rather than later, so really anytime between now and April of next year, we would expect to be notified that the Supreme Court has scheduled.
To review the language for both single subject and lack of ambiguity and so that would be that step. However.
I don't believe that the campaign intends to slow down on signature gathering between now and then to ensure that the again momentum continues and that that threshold of signatures to get on the ballot is reached.
In time for the 2020 for election.
Great and for my follow up on the Georgia, you merchandise as mentioned during the prepared remarks.
I guess remind us when you expect sales to occur given given youre waiting on some regulatory approvals and maybe map out do you think you can how quickly you might build out on the retail front there.
Yes.
Georgia continues to be a market that we're really excited about and we certainly feel that we're in a great position given proximity and two are headquartered operations in Florida lots of economies of scale and efficiencies to be shared with with that with that state and with leadership teams and shared resources.
We expect and hope that within the next I'll call. It 60 days and we have a clear path to retail opening we certainly are ready to open our first two retail locations, there and and all indications are that the state is continuing to push forward and add one.
To open wants us to open those sites quickly as well since we have patients in Georgia that have been waiting.
Six plus years and for product to be available and as a reminder, Georgia. There is an active program today with over 25000 patients currently registered and we can and do you plan to open additional stores quickly.
Once we are able to and have the green light to begin dispensation, but we'll start with we'll start with those first two and then are in various phases of build out permitting et cetera for additional retail locations and throughout 2023.
Okay.
The next question comes from Kendrick Peggy with ATV capital markets. Please go ahead.
Thank you and good morning, Jim 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 draw the full premium flower in Florida, specifically and how should we think about the evolution of the <unk>.
Pricing for premium products, given the current environment.
Sure So I mean.
As we 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 the of the Powerpoint deck. That's also filed along with our along with our and our K in our press release and there are some additional information there as usual.
Premium demand for premium we actually saw.
An increase in units sold across across all of our cornerstone markets in the fourth quarter and and we actually did not see significant discounting quarter over quarter again companywide from Q3 to Q to Q4, which is I think where your question, maybe maybe centered and.
We certainly do see some.
Trade down with the biggest shift from mid tier to value not necessarily on that.
On the premium side, and but as a reminder of the way that the stock has historically.
<unk> been built and I think continues on is that you have you have certainly that premium category Theres a barbell right. It's.
Premium and high level of stickiness on premium and then value has been growing.
With the change in economic climate as more folks shift from that mid tier down to delta value. So you see that when we talk about our our basket being pressured but frequency being up I think one of the most important metrics for us and definitely a strategic focus of our organization as customer.
Our retention.
As we think about rate and this cycle and the opportunity to learn and gain customer insights I mean, we've never been through a cycle like this in cannabis and so it provides and we're choosing to look at it as a as an opportunity set to really and understand again shifting consumer patterns. We certainly had a front row seat into what those shifting.
Consumer patterns looks like in a robust growth environment, when we had COVID-19 and we had outsized demand and due to a number of factors and also increase available spend and now it's our opportunity to learn and to meet customers where they are.
During the kind of the flip for the reversal of that and more pressured our wallet tightening environment and so on.
For us our value our value products are continuing to have strong growth in our resonating.
<unk>.
But our premium products I would say and are continuing to hold with again. The most notable shift from mid tier trading down to value.
Cornerstone markets again, very proud of our customer retention metrics, we believe that if we can retain that customer through this cycle. When there is a reversal and then they do have more available dollars to spend as we've seen in the past and they'll flex backup into into that mid tier and even grow at a more robust rate than the premium.
Laurie.
Thanks, Congrats color if I could just switch to the Maryland quickly.
That's the pace with which it appears to be transitioning to adult use is certainly a potential silver lining on 2023.
Sure David is one of the one of the best if not the best position operator in that market can you speak to in just contextualize, the 2023 opportunity in Maryland <unk>.
Please particularly with our potential adult use stock now being pulled forward. So as soon as July of this year. Thank you.
Sure and thanks for that and Maryland has been a great market for us and we have been really dialing in.
And focusing on the quality of our indoor production there and the team has been hitting it out of the park recently I think I actually just posted some pictures on.
On Twitter.
Just the beautiful flower, that's being grown out of our Maryland facility and I agree I think that our product mix and we've also been dialing in and ensuring that we've got great and variety of and a skew in great great variety of and from different tiered products and as well as our internal brands and increasing the availability of.
Our internal brands Theyre ahead of rack and so.
And we certainly look at Maryland, as as an opportunity for this year and the team is very focused on and making sure that we've got a fantastic launch when recreational sales become available.
The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning, and thank you for the question.
So would just love to get any color in terms of expectations for average sales per store I know you guys don't give a lot of granular color on that but maybe some broader dynamics.
Just some implied numbers do say there'll be some pressure on that so we can talk about how much of that might be from the overall pricing pressure on average ticket versus traffic 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.
I'd be wrong, just how youre thinking about the average sales per store, particularly for the state of Florida. Thank you.
Yeah, I mean again pointing to the to the <unk> that was filed is while we've got some some good information and therefore you were you also but really again, when we look at and when.
When we look at as a companywide right.
Visits of two five times per month for the year.
Florida, specifically really combined with other medical medical only markets over 75%, 76% customer retention.
We had an increase of course in Q4 in our through our retail network increase of 2% quarter over quarter. So we did see some growth in our in our retail network and really that was traffic increasing so traffic is up as a whole, 5% basket pressured by 3% and so which of course I can lead you to <unk>.
Growth number so.
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 have got wallet pressure right is that.
$20 in my pocket and I am going to have $20.
Federal income this pay period I don't have another $20 available next pay periods. So we're seeing and smaller spend per visit but increased frequency across across the network.
And in Florida in particular, it was very similar similar story.
In Florida, and as far as positioning in Florida, We do believe that there are still some markets like today, we opened a store in <unk> and <unk>.
Feel really great about that store, it's the <unk>.
<unk> sized footprint for that particular market. So this isn't a.
All stores are the same size no matter, what the geography or.
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 Trillium in our portfolio and so we will continue to identify and look for those particular opportunities for us and that would be true in hold true regardless of whether theres recreational or not.
In Florida. So we believe that that continued investment is warranted.
Yeah.
Okay. Great. Thanks, that's really helpful color and then just a second one for me quickly in terms of the 750 K facility and the ramp of that.
It sounds like Thats going well can you just talk about as Youre now trying to kind of bring down inventory I imagine a lot of that in Florida, How do you think about.
The timing of the ramp up of the 750, and then may be being flexible in terms of how much you are bringing on in terms of the other facilities that you have in the state.
It seems like you do have a lot of ability to kind of turn them off in terms of Montana, rather quick manner. So talk about how youre looking to kind of transition through that as you ramp up the sudden 50 can then also work down some inventory. Thank you.
Sure. So we look at that very regularly we actually look at our our productivity which includes.
It's a combination of factors, including yields of course, but also and tissue levels tripping levels really a bunch of quality metrics as well, which matter depending on of course, the protein or the.
The product mix that you're shifting that and that inventory into you. So for example, if <unk> got higher quality flower with higher levels of <unk> and <unk>.
Your flexibility as far as being able to transition not in our fresh frozen and hydrocarbon and premium products.
And BCD accrued oil product et cetera, there is maximum flexibility right the higher quality flower that you are able to grow and so.
Early indications as I mentioned are incredibly strong out of about 750 K facility.
And so as we're monitoring those metrics were also doing calculations in terms of how that will impact our overall.
Wind down plans for our legacy sites and you saw us in 2022.
Move forward, we're taking some of those sites offline and what.
Do you anticipate that that will continue as we work to match and what.
Better be in a position to better predict with more harvests behind us.
The quality and the efficiencies that we're able to gain out of that 750 K facility. So.
It's not going to balanced completely overnight, but I do believe that those efforts have started and you will continue to see.
That work happen again with the goal of exiting 2023.
In a call it.
Run rate stable state.
The next question comes from Derek <unk> with Canaccord Genuity. Please go ahead.
Hi, Good morning. This is focused on for Derek.
Couple of questions on our end.
Wanted to learn a little bit more about best Virginia.
You guys are up to nine dispensaries.
Sure. So we actually opened our 10th store in West Virginia, I hear recently, so we do have our full 10 retail stores built out along with our cultivation and production facilities to support to support those 10 locations and sales in West Virginia has been strong and we.
We also recently launched our brand partner, the Bellamy brothers, and West, Virginia, which is the premium flower brand that we have and those sales are also.
They have been.
Exceptionally strong as well so west Virginia continues to evolve as we're able to bring in new form factors and new innovative products to market. There and there is also a conversation happening in west Virginia about potentially an adult use initiatives and so look for that market to continue to be a solid contribute.
Adder to our portfolio today, and then potential growth catalyst ahead in the future.
Okay. That's great. Thanks, a lot and then just on the Capex just wondering where would this be directed to our 2023 is that mostly new store builds and then if you could characterize any one particular state that would be great as well.
Yes, so I mean, we're not going to break out state by state.
We made strategic investments as we always do keep in mind that.
A good portion of that will go to retail retail new store builds Repositions also investments in new markets.
And our continued investment in technology as well, yeah, I think that what youre going to see is a shift whereas I think prior rate we talked about the fact that we're coming off of a multi year investment cycle, primarily focused on <unk>.
Building supply chain and distribution capacity and Thats really coming to an end and so.
Aside from with the caveat in the abstract of what's required in new markets right, but even in Georgia right. The supply chain footprint is in a good spot and obviously, depending on them wanting to meter that up with growth in that market as it occurs just like other markets, where modular there so thats that will pace along with market growth.
And so the bulk of the investment is shifting as Alex said too and the retail the retail side of side of the house along with repositioning and then of course investments ahead of catalysts in new markets.
The next question comes from Pablo <unk> with Cantor Fitzgerald. Please go ahead.
Hi, good morning, everyone.
Can I just go back to the Bartlett initiative questions, just specifically related to the state Supreme Court.
You said they can review the text.
No from tier two to April , but I guess three questions. One do they have to wait first for the 890000 signatures to be validated.
Two can you remind us what was the issue they had with the lost.
So that was proposed for the Bartlett.
And then three we know for sure they are comfortable buying before April I mean, you made it sound like you. They don't make any comments by April you mutually approved it but it doesn't necessarily so could you actually.
Maybe you can say that we haven't finished reviewing this so its expire and we know what to do can you give more color on that.
Sure. So the first question no and there is a lower signature threshold for Supreme Court review, So and that number is just south of 300000 signatures Pablo and that has been achieved so as soon as that signature number has been achieved that's what triggers Supreme Court review.
And the second question around previous initiatives at.
It was struck down on and lack of single subject. So there was an initiative that introduced a concept that included.
The distribution requirements, along with whom grow 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 theres still list federally illegal but that was problematic.
As it relates to the ambiguity and tier so both of which have been addressed in the current.
Current draft language and finally, it is true that because.
The Supreme Court is required to review language by April they cannot not review it and then.
In other words, it's not a.
No news equals it goes on the ballot. So if they decide not to they've been waived their ability to opine if they have not opined by day.
Date certain in April so and there is not a situation where they can today, we haven't gotten around to it. So you can't be on the ballot. That's not that's not how it's written and in Florida law hopefully that helps.
Thank you that's helpful and just a 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 'twenty forward to being on the <unk> or <unk>.
Could there be other issues with the legislature would gather node or are there other steps I'm, not saying things like Adobe predicted that could just happen.
I'm talking about other steps that need to be completed in other words yesterday say the wording is fine it goes straight to about one and a follow up on that if I may.
Once it's in the download I assure that you need to have 50% of Google County, known in total for the state if you can clarify that thanks.
Yes sure so.
So I think we're light.
A lot in there and let's take it one at a time and there is no additional impediment as long as the total number of signatures has been achieved and impacts of the Supreme Court review by.
In the process laid out in the.
In Florida Law, then that measure is certified for inclusion on the 2024 ballot. So there is no interim review step or authorized are used up by the legislature or the governor again. This is.
Citizens ballot initiative process. So it's meant to allow for the citizens to have.
More direct access to and.
<unk> initiatives or policy.
And to be able to vote directly on that on that policy and so I think that was the first question. The second question as it relates to 60% of the vote that is the threshold in the state of Florida for all ballot initiatives as a reminder, the medical cannabis.
Cannabis ballot initiatives passed by the highest percentage of any valid 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.
High level of confidence as it relates to and acceptance by by the people of other languages of adult use cannabis in general in the state.
By County is actually refers to the signatures not the vote. So for the signatures the signatures. The 890000 signatures have to be distributed statewide.
In proportion to population and so that's one of the reasons why you see the disparity between Ross and we talked about raw signatures versus validated signatures. So that's part of that calculation and then we always use a rough number that about 65 ish percent of raw signatures typically we.
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.
The next question comes from Andrew personnel with Stifel. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Maybe first thinking about.
Florida.
Inventory here.
It seems like Youre, Florida volumes were up low double digit quarter over quarter.
Retail revenues overall were up 2% talked about.
Gross margin a little bit under pressure, while you're while youre, reducing inventory just.
Wondering if you could 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.
How has that impacted your sales or margin.
Any additional color there could be helpful. On how we think about.
This year.
Sure so and.
As we as we've stated rate well a couple of 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 also had the dosing limitation guidelines come out from the LMU and there is and again.
Kind of a lot of confusion in the market, which.
I believe anyway depressed those numbers in Q3, so it looks like there was this.
A significant uptick if you will in Q4 and Q4, what we talked about right is the fact that there was.
Shift and certainly pick up in the value category and as a 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 <unk> as volumes only and so when you have shift to value right and it's not a one for one and in other words you can.
Not necessarily draw a straight line from Oh. This is call. It pre inflationary environment Q1. 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.
It's just a different so consumer may be the same but product mix basket mix different so I think thats where.
Some of the challenges are.
For you guys as you try and correlate the volume numbers into into dollar amounts and I think thats going to be across companies that operate in Florida in particular, as we see and some.
Some companies are coming out with large scale large format products.
At value pricing. So there are numbers on the <unk> may look.
It can be better but again, it's the question is really what is the dollar dollar per milligram.
Pulling through and how is that reflected in their product mix and the spending patterns of that particular consumer subset.
I appreciate that additional color.
And just thinking about your operational expenses assumes who pulled back a little bit on marketing in the quarter.
But that was offset by higher G&A costs.
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 G&A to level out here.
Yes, so I mean.
As you noted we had a reduction in sales and marketing quarter over quarter, we mentioned kind of cutting from our core.
Operating expenses and you'll 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.
Talk about this cash generation and preservation strategy and inherent in that is to taking offline of capacity and idling. Some of our legacy production facilities and when you do that and youre not producing out of them. Those costs continued costs are classified or re class out of kind of cost of goods sold into SG&A. So we have that in the quarter and we.
We'll continue to have that throughout.
Throughout 2023.
We're focused on reducing our core operating expenses as we noted in our opening remarks and that will be partly offset as we can.
Because we can and the position we built for ourselves continuing to strategically invest in growth opportunities and initiatives. So youll have a lots of <unk>.
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 des <unk> with Craig Hallum Capital Group. Please go ahead.
Great. Thank you for taking my questions.
Can you help us quantify how much of that 750000 square foot facility is ramped right now.
And then just clarifying.
By the end of the year do you expect to have all of these old higher cost facilities shuttered or.
Are you, perhaps looking at some of those remaining as part of that stable run rate outlook going forward. Thank you.
Yes, so and we absolutely expect that by the end of the year again, we will be at a and anticipated stable steady run rate as it really and that would include right and D and balance if you will of facilities between the 750 K facility.
<unk> as well as the legacy.
Format, I guess is what I would call it facility 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 older in age or what have you. We're talking about really the footprint and the design of the facilities. So it is really.
The legacy design facility not necessarily.
<unk> I guess in of a traditional kind of aged aged.
Vernacular so but.
But yes, I would tell you that I think by the end of the year, we expect that to be balanced.
And the state of the state of Florida.
Okay and are you able to quantify how much of that.
The newer facility has ramped right now.
Yes, I mean, it's partially ramped and it will continue.
I think that your question is not necessarily around how much of it is ramped but how much of it is actually flowing through to inventory and what the mix is right and what the rate of mixes between what's contributing with the lower cost contribution from that facility <unk> and.
The historical cost 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 and the shift to value.
Flower continues to have pretty high turns for us so.
It's it becomes a complex question very quickly.
Debt.
<unk> is not going to necessarily be smooth and really throughout throughout this this sort of ramping and off off ramping period, if you will.
The next question comes from Todd Cohen with eight capital. Please go ahead.
Hey, good morning, Thanks for the question with respect to the outlook you provided for 2023, obviously, you refrain from providing full year sales and EBIT 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.
Cash flow target operating cash flow target could you get there with flat sales for example.
Yeah, Hi, Thanks, I mean, I think that you know really and we 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 cash.
<unk> cash preservation right, coupled with very targeted and strategic investments in specific growth initiatives and so on.
Given that we felt was the most meaningful metrics for us to focus on and for us to really.
B communicative on our cash driven and so and 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 great and it's been that way for the last year or so.
Again with uncertainty on the macro environment.
We've chosen to focus on the things that we can control, which again is is that the notion of.
Cash generation and cash product cash preservation and wanted to make sure that we were transparent in giving color around around those metrics.
Okay I appreciate that and just for my follow up question on the Arizona market. Obviously, that's a that is one that's been under a lot of pressure from a price perspective sales of kind of stagnated or been declining on a year on year basis, but it is a market you continued to invest in during 2022 I'm. Just wondering is that something where you expect to deploy more cash.
Capital in 2023, and maybe how your view of that market has evolved since the harvest acquisition for example.
Yes, I'm not sure that the.
Our view on the market has changed since we 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.
Your next question comes from Andrew cynical with Epsilon cap market.
Please go ahead.
Hi, there and good morning, everyone.
In the past you've noted that the majority of excess inventory has been in Florida, and I presume that continues to be the case.
However, we've seen a kind of multi quarter decline in wholesale opportunities in other states.
Im wondering if youre seeing any of that.
Slowdown in wholesale opportunities haven't caused inventory builds beginning to spread to other markets.
And if you are seeing those inventory build kind of a.
Turning it up in other.
In other states what are you doing to address that.
Yeah, I mean, as you I think correctly point out right and.
Primarily in Florida, and again I just want to make sure that we're just all on the same page thats that was intentional in nature right and we were ramping jafco. We knew that we were going to have inventory build.
To make sure that Jeff co is stable and that we're on.
We're comfortable and confident in the output there so we had parallel.
Facilities running through 2022, primarily in Q2 and Q3 and then as Jeff Co has come online and felt confident enough to begin to pull off again, not legacy styled and footprint. So.
Yes, there was inventory build but yes. We also were expecting partially right. If there weren't wouldn't have been inventory build that would have meant that <unk> actually was not.
Doing what we thought that it was going to do which would have.
I call it kind of champagne problems as it relates to.
Where we are today and now rate again. According to plan, we're focused on and getting Jeff co fully ramped now that we're confident in the ability to achieve and that lower cost per gram.
And quite frankly, higher quality and out of that facility and focusing on selling through and generating cash from from that inventory build that happened in 2022 and as it relates to wholesale certainly and I don't I don't think were going to be alone. In these comments in this commentary it continues from last quarter and that in certain other markets.
There absolutely is and will continue to believe that <unk>.
I believe pressure on wholesale for truly as an organization and wholesale is not an over overly.
Significant part of our business portfolio, and so that impact has been relatively minimal.
Our overall business as 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 second question would be on EBITDA margins.
The discussion has been done on the gross margin line, so far but I guess with EBIT 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% of Apple's sometime before the end of 2023.
In 2024, and how are you thinking kind of EBIT margins going forward relative to where we saw them in Q4.
Yep.
In Q4 right.
<unk> indicated and EBITDA is going to be impacted by the.
Inventory in the puts and takes that we just talked about as it relates to <unk>.
<unk> inventory wind down and throughout the year and in addition, and EBITDA is also impacted by Alex with previous comments about the reclassification of expenses that were previously capitalized into Cogs that now our pull through into G&A, and so and as the sites continues to be idle.
That certainly will pull through as well that being said right. We do believe.
That the inventory wind down with the contribution of increased mix from.
From our 750000 square foot facility will have positive impact great and on that on that margin line and.
Pull through all the way down to.
Two our adjusted EBITDA line as well so.
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 where that lands and this next year, but.
And as an organization feel good in terms of our ability to control and meter and manage and our core business.
<unk> expenses as well as our continued management of inventory and throughout this year, but expect it to be somewhat non linear.
This concludes our question and answer session I would like to turn the conference back over to Christine Hersey for any closing remarks.
Thank you everyone for your time today, we look forward to sharing additional updates on our progress during our next earnings call. Thanks, again and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.