Q2 2023 Trulieve Cannabis Corp Earnings Call

August 9, 2023

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Good morning, everyone and welcome to the Trulia Cannabis Corporation second quarter 2023 financial results Conference call.

My name is Jason and I will be your conference operator today as a reminder, this conference call is being recorded and I would now like to introduce your host for today's conference Christine Hersey, Vice President of Investor Relations for Chili's, you may begin.

Thank you good morning, and thank you for joining us during today's call Kim Rivers, Chief Executive Officer, and Ryan Blust interim Chief Financial Officer will deliver prepared remarks on the financial performance and outlook Hercules.

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 second quarter 2023 results.

Copy of our earnings press release, and Powerpoint presentation may be found on the Investor Relations section of our website www dot to leave dotcom, an archived version of today's conference call will be available on our website later today.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 fact constitute forward looking statements and these statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's filings with us.

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 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 for <unk> financial results prepared in accordance with GAAP a reconciliation.

Filiation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that is an exhibit to our current report on form 8-K that we furnished to the SEC today and can be found in the Investor Relations section of our website lastly at times during our prepared remarks or responses to your questions. We may.

Upper 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.

Thank you Christine good morning, everyone and thank you for joining US first I'd like to welcome our interim Chief Financial Officer, Ryan, but for the call Brian joins really five years ago and has been an integral part of our team.

Turning now to our results demand for legal cannabis remains strong in the first half of the year truly realized record traffic and units sold proving the durability of our products and loyal customer base throughout the economic cycle, we have successfully pivoted and adapting our business to meet evolving customer preferences and strengthen our competitive position back in March.

Outlined our plan to streamline operations, while simultaneously, making targeted investments and long term growth initiatives measures taken to improve cash letter from the core business and focus resources towards unlocking potential in attractive markets are reflected in second quarter result.

Recent wins include fully planting our new 750000 square foot indoor cultivation facility in Florida opening the first medical dispensaries in Georgia opening our first dispensary in Ohio, launching recreational sales in Maryland, and advancing the Florida adult you felt initiative.

Our team has done a phenomenal job executing on our plan and we are carrying this momentum through the remainder of the year.

Second quarter revenue of 280 million is in line with our guidance, excluding deferred revenue retail revenue increased sequentially by $3 million driven by increased traffic and volume, partly offset by price compression and Florida volume increased by 21% and oil products and 9% in flower, but truly selling 130 <unk>.

Sent more oil at 150% more flower per store in the second quarter than the average competitor contributing to higher revenue.

Gross margin of 50% declined by 2%, primarily due to the reclassification of idle capacity costs from SG&A to Cogs, resulting in tax savings of $4 million annually.

Building upon the progress made in the first quarter, both GAAP and adjusted SG&A expenses were further reduced this quarter adjusted EBITDA was $79 million or 28% margin, representing a 1% increase in our twenty's second consecutive profitable quarter.

Across our pump platform actions to bolster our business resilience and solidify our industry, leading to the center gaining traction truly pays taxes owed on time, which is a differentiating factor among peers year to date tax adjusted cash flow from operations was $98 million.

During the second half of the year, we expect to realize additional cost savings as optimization efforts benefit financial result in June we exited additional California retail locations and began to wind down operations in Massachusetts to preserve cash and direct resources towards more attractive markets in Florida, we are mothballed legacy production capacity to offset greater.

Output from our new facility, leading to increased efficiencies and ultimately lower cost and Arizona additional steps to streamline production and distribution to our retail network are expected to yield greater efficiencies and support the relaunch of several branded products later this year.

Possibly utilization alignment across other markets to match current demand combined with higher sales of internal products are expected to further reduce core business expenses.

<unk> sells the highest volume of branded products are branded retail in the U S, reaching $11 6 million units of internal products sold during the second quarter.

The largest retail network of 186 dispensaries supported by over 4 million square feet of production capacity, we are able to realize the benefits of scaled vertical integration.

Large scale production and distribution of branded product remains a distinct competitive advantage for truly resulting in more direct to consumer contact greater efficiencies and lower operating costs the possibility to increase throughput to meet spikes in demand as an important different differentiator that allows us to capture the upside during peak traffic.

Power of our platform was on display during record traffic on for 'twenty, and seventh and holidays up 10% and 54% respectively compared to last year.

Inventory drawdown and $22 million in the second quarter contributed to improved cash generation.

In the back half of the year, we anticipate further inventory reduction as we approach normalized steady state inventory levels are at least 750000 square foot indoor cultivation facility in Jefferson County is an important strategic asset once production is dialed in we expect to achieve lower production costs in Florida, which we can use to buffer margins and provide additional savings for.

Our loyal customers cash generation can improve in the second half with lower expenses and conversion of inventory to cash as such we remain on track to achieve our target of $100 million in operating cash flow and generate positive free cash flow. This year cash at quarter end was 160 million really was one of the highest cash balances the legal cannabis.

And additional unencumbered real estate that can be mortgages at attractive rates in the current environment, our cash on hand cash generation and access to capital place to relieve among top tier operators and provides significant flexibility to address our near term debt obligations.

He remains the top cannabis retailer in the world anchored by industry, leading retail positions in Arizona, Florida, and Pennsylvania in the second quarter, we had a new retail locations in Arizona in Pennsylvania relocated one store in Florida and opened the first medical dispensaries in Georgia, while it is still early days, we expect our business to grow alongside the program.

As he patients enroll and eventually new qualifying conditions and form factors are permitted as one of only two operators in Georgia. We are eagerly awaiting new rules to allow registered pharmacies to distribute cannabis products across the state.

In July we opened our first medical dispensary in Ohio, which has 370000 registered medical patients and November 2023 but it was in Ohio will have the opportunity to decide whether to permit adult use sales with almost 12 million residents. We estimate the market could reach $2 billion in annual sales.

In Maryland recreational sales launched on July one truly.

Truly to commemorate the occasion with celebrations and specialty products, including homegrown clones product bundles and blue crab Kush flower as expected, we realized a meaningful increase in traffic and sales at our three dispensaries alongside an uptake in our wholesale business traffic increased 200% and sales pretty sensory increased 150%.

During the first months of recreational sales our team did a phenomenal job maintaining customer service standards with a sharp increase in traffic.

With the addition of Maryland, we now operate in five adult he states, providing an opportunity to learn more about customer preferences and consumption patterns.

Currently 161 dispensaries are 87% of our retail network serve only medical patients, we expect to significantly grow our business as more of our markets expand to include adult use sales with scaled operations in attractive markets with meaningful adult use catalysts, such as Florida, and Pennsylvania, we are uniquely situated to increase our lawyer.

Customer base and serve a broader audience in Florida. The campaign for adult use us or past the required threshold with over 1 million validated signatures. The Florida Supreme Court have received briefs regarding the citizens initiative as a reminder, the court can issue an opinion anytime between now and April 2024, with 2020 with 22 million residents and <unk>.

138 million annual tourists visits we believe Florida will be a tough legal cannabis market, reaching $6 billion in annual revenue, given our 40% market share scale and service and ability to quickly flex our production with minimum investment clearly there's ready to expand its leadership position with this opportunity in Pennsylvania, a bipartisan bill to establish a dose.

Sales was introduced last month, we remain optimistic that enactment of adult use programs in nearby states, such as Maryland, New Jersey, and New York will spur action in the Huston state with almost 13 million residents. We believe the Pennsylvania market could reach over 4 billion in annual sales with adult use consumption in the meantime, we continue to optimize production and retail operations.

In the second quarter, we further refined our production mix gain new product approvals and opened a new affiliated dispensary the percentage of our own branded products sold through our affiliated retail network reached 50% in the quarter aided by the popularity of modern flower in row. One we plan to further increase sales of branded products through branded retail in Pennsylvania.

Our retail led strategy enables close contact with the customer and the ability to define and control the customer experience from end to end by providing the right products in the right place at the right price consistently we're able to grow a large loyal customer base and build lasting brand equity customer attention data shows the efficacy of our approach was 64.

Set of customers companywide, and 74% and medical only markets returning in the second quarter, a refreshed web site is slated to launch before year end improving customer satisfaction as we approach the busy holiday period.

As our customer base in retail network ROE, we are enhancing our data analytics platforms and improving customer communications in the southeast we are utilizing predictive modeling tools and AI driven recommendations for product affinity and timing of outreach at the same time, we are further defining buyer personas to improve targeted messaging with our customer data platform paid.

Media, social media and search engine optimization tool investments in systems and infrastructure to support future growth of our ongoing demand for legal cannabis remains strong and we expect to realize meaningful increases in traffic and unit growth over the next few years as we enter new markets and catalysts come to fruition and preparation we are adding foundational elements were.

Prior to support additional scale and significant volume expansion.

<unk> increased demand, while maintaining customer service standards requires both cleaning and insight into evolving customer preferences.

We've expanded our ability to gather customer feedback and are utilizing the data to inform our processes and customer approach alongside data collection to inform product development and demand planning. These tools allow trillium to garner a competitive edge today, while preparing for a future defined by integrated commerce with meaningful catalysts on the horizon. Our team remains focused on cash burn.

<unk> in generation as we expand infrastructure required to manage accelerated growth with our proven ability to operate at scale adapt to evolving landscape and strong balance sheet I'm fully confident in our team and competitive positioning with that I'll turn the call over to Ryan.

Thank you, Tim and good morning, everyone.

Quarter revenue of $282 million declined 1% sequentially, excluding deferred revenue retail revenue increased sequentially by $3 million driven by increased traffic and volume partially offset by price compression.

Second quarter, GAAP gross profit was $142 million or 50% margin, representing a 2% decline quarter over quarter.

Gross margin reflects the reclassification of idle capacity charges from SG&A to Cogs, resulting in the tax payments of 2 million this quarter and 4 million annually.

Gross margin will continue to fluctuate quarter to quarter dependent on product and market mix inventory sell through promotional activity and idle capacity costs SG&A.

SG&A expenses in the quarter were $96 million or 34% of revenue compared to $100 million during the first quarter.

Adjusted SG&A was 81 million or 29% of revenue compared to $87 million or 30% in the first quarter.

Reduced SG&A expenses are the result of ongoing efforts to lower core business expenses, including consolidation of production capacity and elimination of redundancies.

Second quarter net loss was $404 million compared to net loss of $64 million in the first quarter.

Second quarter loss per share was $2.14 compared to a loss of 34 cents from the first quarter net.

Net loss includes noncash impairment charges of 64 million following the strategic decision to wind down operations in Massachusetts, and a $308 million goodwill impairment triggered by the recent stock performance no impairments were identified based on management's forecast.

Excluding nonrecurring charges second quarter loss per share would have been eight cents compared to a loss of nine cents in the first quarter.

Second quarter, adjusted EBITDA was $79 million or 28% compared to $78 million or 27% during the first quarter adjusted.

Adjusted EBITDA reflects optimization efforts to maximize cash preservation and generation.

We ended the quarter with $160 million in cash during the second quarter cash consumed in operations totaled $23 million inclusive of the two tax payments in semi annual interest payments.

Normalized for tax and interest payments cash generation improved by $25 million in the second quarter.

Inventory was reduced by 22 million in the second quarter as a result of targeted efforts to wind down specific volumes and product categories. During the remainder of 2023, and we expect to realize improved operating cash flow through a combination of expense and inventory reduction.

Capital expenditures totaled 11 million in the second quarter, we expect 2023 capital expenditures will be at least 50% lower than 2022.

We plan to open 15% to 22% to 20, new dispensaries are relocated up to six stores this year.

Vectren and results quarter to date, we anticipate third quarter revenue will be down mid single digits sequentially.

The adult use launch in Maryland, and strong traffic around the seventh and holiday positively contributed to July performance at the same time seasonal trends, including extreme heat in our cornerstone markets and wallet pressure on consumer behavior are influencing topline results.

Steps to streamline operations and reduce costs are expected to benefit margins, while inventory reduction initiatives will impact gross margin.

Overall, our initiatives are yielding positive results and we look forward to reporting further progress as we continue to execute on our plan. This year with that I'll turn the call back over to Ken. Thanks, Brian U S. Legal cannabis remains a compelling investment opportunity with significant long term upside potential every year cannabis becomes more mainstream as access to legal products expand through <unk>.

Programs as highlighted during the whole story with Anderson Cooper on CNN. This week. The 55 plus community is the fastest growing group of cannabis consumers in the U S. During the program Dr. Sanjay Gupta visited a Florida, it's really a store with a 94 year old patient who had found relief from cannabis as a replacement for pharmaceuticals demand for cannabis remains strong.

And industry analysts forecast revenue will nearly triple by 2030 to over $70 billion in annual sales truly with an industry leader poised and ready to define the future of cannabis as this market grows with a leading retail network of over 4 million square feet.

4 million square feet of capacity and access to capital. We are further solidifying our position as numerous federal and state level catalysts come to fruition, although the timing remains difficult to predict federal reform through legislative action or rescheduling of cannabis is on the horizon. We remain optimistic that change is inevitable in the meantime states continue to enact medical one.

Adult use cannabis program through citizens initiatives and legislation expanding the legal market and spurring greater adoption and acceptance two of our largest markets, Florida and Pennsylvania have the potential to launch adult use programs in the next couple of years truly has been a phenomenal success story with tremendous growth and I'm fully confident our best days are still to come.

Thank you for joining us today, and as I always say onward.

At this time, Kim rivers, Brian Blessed and Steve White will be available to answer any questions. Operator, Please open up the call for questions.

Thank you we will now begin the question and answer session to 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 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'll pause momentarily to assemble our roster.

Our first question comes from Derek delay from Canaccord. Please go ahead.

Yes, hi, congrats on the strong quarter.

My first question is just on the on the Jefferson Park facility can you just talk about how the ramp up there is progressing.

You know I think last quarter, you mentioned that it was performing well almost do well and that might be a bit of an inventory buildup, but this quarter we saw some.

Showing movement on that inventory wind down so just perhaps how is the balance of the ramp up of Jetblue progressing and how should we think about that in terms of inventory and margins over the next couple of quarters.

Sure So and Jeff co of course is a strategic asset for us at 750000 square feet. We're very excited that now and has officially been fully planted and is in full utilization and that means that the second phase is now in operation. The first phase continues to perform up performed well.

We again had and this quarter was spent ramping the second phase and getting that into production anytime you ramp a new a new phase of a facility of that size and we will continue to dial it in as we mentioned through the rest of the skier.

You know I wouldn't expect a straight line.

And on on performance there, but we do continue to have an expectation to that facility will meet if not exceed R.

Our you know our model as it relates to your performance there and then ultimately.

What that should do and what we should see to begin to come through and pull through the numbers and from the first phase in the back half of the year and again in that second phase as we enter 2024 is and lower lower production cost, which of course will impact margins, but of course with margins, we've got a multitude of factors and low.

Production costs for sure, but we have to also consider the inventory wind down and in what we're doing there strategically to generate cash and then of course ultimately right product mix matters and as we look at consumer demand. So all three of those will continue to interplay and as we're as we're continuing the rest of 2023.

Okay and then just following up just on that inventory wind down I think he mentioned.

24 million for the year of $22 million in Q2.

Should we expect that to sort of continue at that same rate over the over the balance of the year and do you anticipate by year end being in the inventory position that you are targeting.

Yeah, I mean, we're certainly continuing to normalize inventory levels and so certainly you can expect additional inventory wind down to occur throughout the rest of this year.

And we are working to get to a normalized inventory rate exiting this year will it be exactly on 12 31, I don't know that I can I can say that precisely.

Because it always has to come back to the consumer right and that product mix and what the what the consumer and types of products that the consumer where the consumer demand is and that being said I will say that the strategies that we've deployed are resonating and as evidenced by this quarter and really it's pretty exciting for us and the timing just worked out.

But with this inventory and effort, we really had an opportunity to you and.

To experiment with some different strategies and listen different product offerings, and again utilizing our data insights to and because the consumer patterns have shifted over the last 12 months and so to really be able to have the flexibility to have products and value propositions to meet that current consumer.

Profile, which will we think put us in a strategic advantage and as we exit this sort of inventory wind down period to better align our product mix in our portfolio offerings with and with this consumer preferences. So it's really been and of course, certainly a source of interim cash generation, but also.

So strategic.

Kind of asset is the way we're looking at it as we're able to better align our our go forward plan with that consumer preferences.

Okay, Great I appreciate the color. Thank you.

The next question comes from Matt Mcginley from Needham. Please go ahead.

Thank you.

The comments around the mid single digit revenue decline in the third quarter. It sounded like that was more Arizona with the heat related comment.

Assumption, a little bit more broad based.

And that you are seeing weakness in other other markets as well.

As far as that.

So far after the project with the <unk>.

Fourth quarter would look like and you may have more pricing compression, but if that is primarily Arizona related would you expect to see an acceleration in the trend in better revenue in the fourth quarter compared to what you expect to see in the third.

Yeah.

So Matt I don't know if you've looked at the weather in Florida, either but we're pretty we're pretty hot down here right now as well and so you know.

But that being said I mean, I think the comments around Florida, obviously demand was really strong and in a in Q2 in Florida, specifically and obviously you all have the O&M you data there.

Price pressure I think in Florida is more of the as more of the story, but Arizona certainly and in Q2, we begin to see that seasonality right. I mean, there just is seasonality in our business and maybe more so than than comps that are peers because of our positioning in our market and our market spread.

So Q3 is really the prime impact rate of that seasonality and as we have a full quarter of it in Q2, you have a it starts kind of back half of Q2, so and let's see I don't know if you have any other color on Arizona specific tip. It.

Typically it is true that Q2.

The second quarter, and third quarter in Arizona or weaker.

In particular, when you look at the third quarter. This year, we had record heat levels you saw temperatures in excess of 110 degrees I believe 30 out of 31 days or all 31 days.

So youre going to see you will see some weakness associated with that seasonality.

Because the temperatures were worst than usual and then you start to see a recovery as temperatures dropped and people start returning to school.

Got it.

Overall, it sounds like that's more transaction based than price decline.

Yes.

Got it.

You spend another 9 million this quarter on the smart and say, Florida campaign now that you have this thing that yours, because that's been stopped or are you now in a period, where you're transitioning to.

Anymore on legal expense to get this on the ballot.

Well hopefully the lawyers wont be not expensive Matt.

As a recovering lawyer.

I'm pretty keen on watching this fees and but yes. The large the largest part of that spend is around signature gathering and certainly would expect that to taper dramatically in the back half of the year.

Okay, great. Thank you.

Yep.

The next question comes from Andrew <unk> from Stifel. Please go ahead.

Hi, good morning, Thanks for taking my questions and congrats on the good quarter here.

Just wanted to maybe touch on a little bit more on on the Ocs guidance.

You reiterated the 100 million this year, so obviously, a big second half.

Inventory is already come come down meaning.

Meaningfully in Q2, and you expect more of that to come I would imagine that the two holidays in the quarter helped.

Just wondering you know.

How should we manage our expectations.

Over the next two quarters.

You talked about.

Excuse the analogy in Q3 and a potential recovery in Q4, so should we also be thinking.

The majority of the cash generation would be in Q4 as well it's also.

Period with lots of holidays, even though you have southern town in your August because I'm in Q3.

Yeah.

Wouldn't say that I, wouldnt necessarily equate and the commentary around it.

<unk> kind of seasonality on top line and to necessarily equate to.

<unk>.

Correlating.

Decliner pressure on cash on operating cash flow and keep in mind right. A few things. Let me just give me color and it's not only raise the inventory wind down effort that generated that will generate cash and are in our business. We have been since really mid year of last year, and optimizing and and really focusing.

<unk> on streamlining the business in meaningful ways and some of those initiatives take time to realize through the financials, but we are starting to see those come through at this point and we got kind of a partial quarter. If you will this this past quarter and theres going to be some additional acceleration of those again.

Pulling pulling through.

Things that we've started over the last 910 10 months coming through the financials in the back half of the year. So.

And it's not.

Singular in terms of you know a lever related to inventory wind down. It also really is true.

Through focus and disciplined focus of getting the business and in the right posture. So that we're set to exit this year as a leaner organization and and that's something that that's again I'm very proud of this team. We've been we've been very laser focused on so that'll that'll start to pull through and you'll you'll see those results come in and back.

<unk>.

Thanks Scott.

And then maybe thinking about the use of cash.

Capex hasn't really ramped up much.

Year to date since last quarter.

You do provide an upper limit to capex.

But is it possible that got it.

Capex could be a step change lower.

That upper limit.

Just wondering on that.

Because I think in the past as well you mentioned that your desire to retire the $130 million of debt due next year.

I just wanted to.

I understand the puts and takes on that because if you're.

Comfortable two to provide color on retiring that debt or an update on timing I mean, it seems like you have the resources for that.

Yeah, I mean again and you know one of the one of the.

Primary goals is to have optionality right in the business. So that we can take advantage and make strategic decisions and.

Choices right on the table and so and we're very happy again, with our cash position and particularly given that we do pay taxes on time, and particularly you know in this year. As a reminder, we have five tax payments and still are going to be in a position to be free cash flow positive.

And on target for our cash flow from operations goals, So and really for us, it's about and flexibility and optionality. So that we can make and make decisions that are best for the business as opportunities present themselves. So and you know the capex guidance, we've given them.

We're standing behind that and again and happy that we've got and the ability to to be in an enviable position, where we have where we have options that we can that we can choose between.

The next question comes from Russell Stanley from Beacon Securities. Please go ahead.

Good morning, and thanks for taking my question first on SG&A. Congrats on the reductions there to date and just following on your comments Jim around.

The lagged impact.

Some of that being in Q2 I guess.

Adjusted or normalized SG&A around 29% of sales in the quarter, I guess, where would it have been I guess.

Efforts to David had a full impact in the quarter and how much will or might you take that how how do you envision getting on that front.

Yeah, Ross I don't have a number to give you on that on that specific on that specific metric and.

Obviously, it would have been higher and slightly but I think that again. It's a question of you know what's coming in the quarter was one time versus what's an ongoing initiative.

And those of course as you can understand will vary for a man from quarter to quarter.

And.

For us it's really again the focus is on optimizing the operation.

And we want to make sure that we're running efficiently, but also effectively and we are of course very focused on making sure that our standards continue to be met and that we're continuing to and again, our mantra is scale and service so and we certainly want to make sure that we it's a <unk>.

<unk> right and in terms of getting to the appropriate level of optimization, eliminating redundancies theres been a lot of effort and focus on back of house and really making sure again that do then those parts of the organization are streamlined and again running efficiently and there's some additional work thats in flight on that.

And quite frankly, you may not see that come through until maybe first part of next year right I mean, it's an ongoing discipline.

And one that again, we really started to focus in on and in a meaningful way at midyear last year and are committed to and I think you'll you'll again youll continue to see benefits pull through and pull through on the financials.

Thanks for that and just for my follow up just switching to Georgia can you elaborate I guess on the pace of market growth here relative to your expectations and also elaborate I think on your reference to the potential for pharmacies to begin distributing products I guess pending rules on that okay. Yeah sure.

And so in Georgia is really I would say on on pace as it relates to expectations and it's going to be you know kind of a steady build as I've said before it reminds me a lot.

Lot of early days in Florida, where I don't think anyone on this call with may be paying attention to Florida and back in those days, because we were kind of a little CBD only and then right to try came in and then conditions started getting added and you know.

Up until the point where of course, there was the ballot initiative and everyone's heard of.

<unk> turned our way and Georgia is really similar and that in that respect and we're working and certainly have good relationship with the state are currently focused on really trying to get the time for karnes down right again, similar to Florida right now it takes.

Too long for someone to actually get a card in Georgia.

And that being said and you know there are some positives right, where we're excited about the upcoming rulemaking draft rules are out so that process is in flight.

And those rules will allow for pharmacies to and to order products into into active point of sale for and for our regulated cannabis products in that market and so we've been developing relationships with and its primarily going to be independent pharmacies at this point and that we've been developing it.

Relationships within the independent pharmacists and feel that there is.

Meaning it could be a meaningful uptick in distribution points at once that once that actually is enacted and we're able to we're able to start selling through those channels.

That's great. Thanks for the color I'll get back in the queue.

Yes.

The next question comes from Eric Dey, Laura <unk> from Craig Hallum Capital Group. Please go ahead.

Great. Thank you for taking my questions.

The first one is just on Jeff co Hi, this is <unk>.

General question here.

Wondering.

How long you expect that to take.

Hate to be dialed in.

Do you see this as sort of a quarter or two.

Just like a few a few.

Harvest to kind of get dialed in or do you think the sort of uniqueness of the automation in this facility.

Either pull that forward or push that back a bit just kind of.

I'm wondering how long you expect Jeff could it be dialed in and obviously understand that there is a sort of a lag from when it's dialed into when that inventory actually gets sold but just wondering.

How youre looking at the sort of timing of of Jeff coach given its uniqueness.

Yeah, I mean, so just as kind of a reminder, right and the first the first phase of Jeff co is fully planted that is on a regular cadence at this point and that is flowing through.

The inventory mix and currently so it's.

And we don't it's not like weak because of a facility of that large we don't plant everything at one time and so it's on a rolling harvest schedule otherwise we would have these huge ebbs and flows if you will in terms of our end in terms of not only our inventory inventory.

Inventory ended our labor and kind of everything else and so and it is it's going to be more and kind of a gradual folding in if you will then I would say a kind of a step function change. So I just don't want those to have an expectation that we wake up one day and it's you know.

And then all of a sudden rate there's a step function change in terms of our in terms of R.

Our cost basis. So it is it will come in over time and in terms of when we think in completion. It will be fully contributing like I said I think that's gonna be and dialed in and Kinks worked out and we can feel like this is okay. This is our new normal of steady state going forward.

It's gonna Thanksgiving for for Us to really see that right and the numbers. One again, we have to continue to work through legacy inventory and clear that out because we have higher you know higher cost inventory that is currently in and in the in the queue. If you will.

And then and then in addition, we have to and we have to actually get those kinks out and remain kind of operational and Jessica. So I would say really that for that to happen that's going to be a 2024.

And item, but that doesn't mean again that we won't begin to see benefits into 2023, I mean, we're already starting to see that come through the pipe.

And now with the first phase, but again right. We have this inventory wind down effort happening simultaneously and it also it also should be noted wishing you actually mentioned that product mix matters right. So depending on again, how fast our turns are what velocities look like on particular products.

And how we're allocating that legacy inventory versus and then the new Jafco inventory.

And of course full impact and how quickly you start to see impact you start you start to see in the and the flow through on the financials, so and so.

Short answer is all in 2024 with some benefit coming through in 2023.

That makes sense I appreciate that color and then my next question I apologize if you touched on this in the prepared remarks, I'm juggling another call but.

I was really impressed with the gross margin performance this quarter. Despite the inventory reductions obviously inventory reductions are.

Our primary focus here can.

Can you just kind of talk about how youre thinking about the tradeoff between margins trying to inventory reduction in the second half should we expect.

Margin pressure from this 50% range in the second half as you won't want inventory or.

Is there something about these results that sort of gives you confidence in being able to unwind inventory without too much of a further impacted margins. Thank you very much.

Hey.

Thanks for the question.

As we've noted previously there are a number of factors that impact margins.

One of the unique things.

That occurred this quarter was the re class.

For idle idle capacity between G&A back to Cogs.

<unk>.

For the remainder of the year.

We continue our inventory reduction, which does impact margins and we've touched quite a bit on <unk>, so far but again, we're still selling through all our legacy inventory.

There is.

Consumer demand obviously has a.

Yes.

With different velocities.

It's going to.

Yeah.

That kind of ebbs and flows every quarter, so it really isn't linear.

Yeah, and I would just to piggyback on what Ryan said I mean, I think that there. The reality is is that you know.

It's it's it's dynamic and it's it really does I'll go back and it's as I said before to the customer and that product mix piece and then flows through that right is what inventory bucket. We're pulling from what are the costs and are relying on inventory right and and then of course and.

Sort of it again is that as long as the inventory, it's going to have a negative impact on margin if its jet fuel inventory it'll be it'll be certainly a little bit better.

And that sort of dynamic will continue right through our inventory wind down and completion.

Which is will be definitely for the remainder of this year as you know.

Okay.

The next question comes from Scott Fortune from Roth and Kim. Please go ahead.

Yes, good morning, and thanks for the questions.

Real quick, Florida, you mentioned seasonality.

Seeing heavy discounting there.

Price pressure.

That got us through how kind of from a seasonality standpoint.

Counting them more than they are in general and just your initiatives from loyalty and other initiatives continue.

These numbers have continued to kind of offset that price pressure.

In Florida going forward.

More competitors coming on board here.

Yeah, I mean, so Florida of course is is a cornerstone state for us, It's our home states, where we got our start and and we feel very of course connected.

To our customers in the state of Florida, and we certainly have seen customer preferences shifts in Florida, and just you know as.

As we have in varying degrees across different different markets and we also of course strategically have and launched our inventory wind down initiative. This.

This year, so for us and we are absolutely leaning into.

Sell through a particular.

Product types, where we believed that there is strong consumer demand in order to work through that inventory and in an effective and an effective way and then it had have had good success, there and you know and of course as we mentioned had incredible results and this this quarter in terms of in terms of just volumes and.

Florida with.

Incredible and increases of as I mentioned, 21% up quarter over quarter in oil products, and 9% and flower and you know again, just because I love the statistic and it's 130% more oil at 150% more flower per store than our next closest competitor so.

And we certainly what we're seeing in Florida, specifically is while we are seeing some price compression we're seeing demand.

Increased on an absolute basis quarter over quarter number of transactions are up in and I think that really plays to our strength because of our scale and our position where we are I think uniquely positioned in Florida, specifically, where we can handle increased demand and so for us.

Increased volumes is something we're incredibly comfortable with and we're also comfortable with shifting again consumer preferences, our ability to pivot from our production from our production.

Property standpoint.

Our retail capacity standpoint, our cultivation capacity standpoint is unmatched and so we're really at this point you know happy to lean into that strength.

Particularly again now when we have excess inventory and we can really use this time to and to dial in to changing consumer behaviors and use it to really understand and.

And test rate and strategies to really meet this consumer where they're at.

Got it I appreciate the color there.

Then probably crib real quickly.

On the other states, Ohio, Pennsylvania potential.

<unk> you Sir.

I think the expansion in Maryland.

Can you provide a little bit more color or call out some of the states and kind of the capex.

23, you're not giving anything out in 'twenty, four but kind of the capex needs.

Kind of expanding on those can you just kind of update on that.

The other place was it would be great.

Sure so and our metrics that we've given as it relates to Capex is that we're looking to and expand to 15, new stores 15 to 20, new stores this year and a relocation of up to six and this year raised so far year to date, we've opened 11 and we've done three relocations.

So certainly more to come on that on the retail side of things and we and other states as mentioned in the prepared remarks, Pennsylvania has really been a great a great performer for us and we've really pivoted strategically there too.

Launch and really.

Consumer has.

Accepted and really by evidenced by the numbers of our own branded products through our branded retail in Pennsylvania that was a strategic initiative that was launched in the back half of last year and were up to 50% sell through of branded products are branded retail in that market.

And again really in terms of when we think about kind of durability brand building et cetera in a market that is really important for us as we consider the central upside of an adult use flip in Pennsylvania with legislation.

Recently introduced and we think that's a high likely reckless state in the next call. It 12 to 24 months. So I'm very excited about positioning in Pennsylvania, Maryland that team has just done an incredible job and really to take again and the volumes of our existing platform.

Up to 200% with Rx slip and it's just you know again really really incredible performance and also I think evidence when we think about our sell through again internally branded products and only through our retail channel in Maryland, but also wholesale and the cultivation team and production team really dialing in.

Our flower is outstanding there as well as our additional product portfolio. We just we just launched our our edibles line, there as well and so again, Maryland, and really great performance by that by that team with a recreational a recreational flip Arizona as we mentioned and normal for this time of year that we are.

Being seasonality and in that in that state and we are poised to launch additional brands in Arizona in back half of this year as we come out of that seasonal period and plan and to also begin to focus on which is already started branded products are branded retail sales.

Leave that there's certainly upside to be had and as it relates to again brand building and in Arizona, which is another another focus of ours through the back half of this year into <unk> into early next year.

Great I appreciate the color.

Yeah.

The next question comes from Aaron Grey from Alliance Global Partners. Please go ahead.

Hi, good morning, and thank you for the questions.

First question for me I wanted to come back to Florida.

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