Q4 2023 Trulieve Cannabis Corp Earnings Call
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Christine Hersey, Vice President of Investor Relations for true leave you may begin.
Thank you.
Good morning, and thank you for joining us during today's call Kimberly Harris, Chief Executive Officer, and West Gutmann, Chief Financial Officer will deliver our prepared remarks on our financial performance and outlook are truly.
Following the prepared remarks, we will open the call for question.
This morning, we reported fourth quarter and full year 2023 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An archived version of today's conference call will be available on our website later today.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 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.
The company's filings with the Securities and Exchange Commission, including item one a risk factors of the Companys annual report on Form 10-K for the year ended December 31, 2023, as well as our periodic quarterly filings.
Though the company may voluntarily do so from time to time.
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 United States generally accepted accounting principles or GAAP.
We generally refer to these as non-GAAP financial measures.
These measures should not be considered in isolation or as a substitute for true lease financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is available in our earnings press release that is an exhibit to our current report on form 8-K that we furnished to the SEC.
Today and can be found in the Investor Relations section of our website.
Lastly at times during our prepared remarks or responses to your questions. We may offer metrics to provide greater insight into the dynamics of our business or our 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. This is an incredibly exciting time for tree leave we entered 2024 and a position of significant strength just as the outlook for meaningful catalysts frightened by the end of this year, we will have greater clarity on two of the biggest events for our industry rescheduling and Florida adult use the D.
EBITDA is expected to make a recommendation on the classification of cannabis anytime now.
Florida, The adult youth initiative is a leading a court opinion for inclusion on the ballot. This November either of these catalysts alone would be significant.
Our cash position, an outsized market share in Florida, we are best positioned to realize the tremendous potential upside. However, it should be noted that without any catalysts. Our base business remains strong and we are poised to build upon recent momentum having completed the lion's share of inventory reduction and optimization efforts, we are operating more efficiently.
Making higher quality products elevating performance in retail and generating more cash from our existing core business in 2023, we cut SG&A expenses by 14% to 34% of revenue.
Full year, adjusted EBITDA of $322 million or 29% margin underscores our operational strength alongside full year cash flow from operations in excess of $200 million driven by a significant boost in cash flow in the back half of the year.
The fourth quarter was exceptionally strong the best quarter of the entire year underpinned by sequential improvements in revenue gross margin and adjusted EBITDA revenue increased 4% to 287 million strong holiday sales in the last six weeks of the year contributed to outperformance gross margin of 54% improved two per.
<unk> due to lower production costs targeted promotional activity and reduced pressure from inventory reduction efforts.
Adjusted EBITDA margins improved to 31%, representing our 24th consecutive profitable quarter.
Fourth quarter operating cash flow was $131 million and free cash flow was $122 million. In addition, we recently added two seasoned executives to the leadership team CFO West Gutman and CFO Maria Zhang and we are already benefiting from their contributions we exited this year as a much stronger company and have carried that.
Momentum forward into 2024, where we will continue our relentless focus on incremental improvement.
Before we dive deeper into results I want to discuss <unk> catalysts, starting with Florida.
To date truly what's been the primary financial supporter of the Spartan say, Florida adult use campaign, we are proud to be at the forefront driving this opportunity to expand access to cannabis and our home States. Currently we are waiting a decision by the Florida Supreme Court to allow the initiative on the ballot. This November the court has until April one to make a determination or the initiative will automatically be <unk>.
<unk> once on the ballot initiative requires 60% voter approval in order to pass we anticipate a robust voter education and awareness campaign will be required to ensure success in November.
Legal cannabis in Florida, it could be a $6 billion market opportunity effectively tripling from today's medical only market with 22 million residents and $138 million annual tourist visits we believe Florida will be the best cannabis market in the world adult use in Florida would be the largest conversion and U S cannabis history and our team is working.
<unk> to prepare for this monumental event.
Really maintains outsized market share with 21% of stores in Florida, selling over 115% more flower than the state average eclipsing all competitors.
Given our ability to ramp idle capacity and fund additional investments, we expect to build upon our leading position at launch in May of 2025.
From a production standpoint, we are positively thrilled with the performance of our new 750000 square foot state of the art cultivation facility in Florida.
It is fully ramped and consistently producing high quality high potency products at scale with lower costs. We are realizing an average potency of 28% THC and 3% Europeans alongside a 30% reduction in cultivation costs. This strategic asset continues to outperform our internal expectations and we believe it is.
Benefits may be unlocked as we continued to island production.
In 2023, we idled legacy capacity as we ramp this new facility during the fourth quarter, we brought a portion of our idle capacity back online to support increased customer demand.
As demand increases alongside the Florida adult use opportunity idle capacity will be restarted turning to retail we are able to support higher traffic through a combination of increased staffing additional points of sale increased online orders and express lane during the fourth quarter, we added four new stores in Florida, including our first dedicated express pick up.
<unk> in Crawfordsville. This efficient store concept is designed to provide customers with quick and convenient access to pick up orders.
Early performance of this location has exceeded expectations.
The opening more express pickup locations. This year throughout 2024, we will be adding new locations in Florida, expanding our retail network to serve the growing medical market.
Moving now to other adult use opportunities a few weeks ago, the governor of Pennsylvania called for the state legislature to pop adult use legislation as part of his budget overview. The governor's aiming for an accident by July of 2024 with adult use sales launching on January one 2025 truly remains the leading operator in Pennsylvania with 20 affiliated.
Dispensaries supported by three production sites, we are actively monitoring the progress in Pennsylvania, and expect momentum will continue to build as nearby states adopt recreational programs.
In Ohio final regulations for the adult use program are expected later this year with sales launching as soon as this fall.
<unk> operates one medical dispensary and may gain additional assets pending the outcome of ongoing litigation. We have reached a preliminary settlement agreement and expect our store count to expand with both operational and potential dispensaries, we will be in a better position to share additional information pending a final settlement agreement and adult use program details in Ohio.
Shifting back now to our results in the current business climate.
In 2023, we added 17, new locations in Arizona, Florida, Georgia, Ohio, Pennsylvania, and West, Virginia, and launched recreational sales in Connecticut and Maryland.
Today truly has the largest retail network of 193 dispensaries, serving as a primary conduit for our strategy to distribute branded products through branded retail.
This year, we will complete the rebranding of all retail locations in Arizona to the truly brand in 2023, we sold approximately 45 million branded product units and gained traction with several of our brands most notably modern flower enrolled one.
From an operational standpoint today, we are running more efficiently with optimized assets streamlined processes improved inventory levels and lower production and operating costs, adding.
Adding to our strength from our improved competitive position consumers are showing greater resilience.
While it is too early to call a definite trend signs of improving cost consumer health are emerging.
Lending accelerated into year end with higher basket trending up into higher priced tiers, and greater trading up into higher priced tiers in greater willingness to participate and buy more save more style promotions.
This was evidenced by December traffic, which exceeded third quarter average traffic by 100000. In addition baskets were up in December and every market compared to every other month in the quarter and be Q3 averages in total by 5%.
Units sold during the fourth quarter increased by 4% sequentially.
Other customer base continues to grow we are adapting and how we approach customer service and how we continue to motivate employees to maintain high service levels. During the fourth quarter, we piloted a revamped bonus program in Florida for our store general managers to incentivize favorable customer experiences are rewarding specific outcomes for metrics, including net.
A motor score overall satisfaction, we time and fulfillment times compensation is appropriately aligned with our team's ability to deliver positive customer experiences based on the early success of this program. We are implementing that structure across our retail network. This year, our focus on the customer experience contributes to customer retention.
During the fourth quarter customer retention held steady with 56% of customers company, companywide, and 74% and medical only markets returning to source.
We aim to improve the customer experience and retention reinforcing laughing brand equity for the retail platform and branded products across the loyal customer base in January we launched a new website in several markets built upon more advanced technology, which we call web seat auto this new hub architecture provides greater functionality for users while supporting higher trough.
<unk> and enhanced data capabilities.
Building upon this upgrade a revamped loyalty program rolled out in Arizona in Maryland, and we'll be launching in other markets, including Florida, and Pennsylvania thing.
With a simplified reward structure hearing designed to reward repeat purchases and portability across markets. We expect this new program will attract into light loyal customers. We plan to have all markets migrated to the web sudano platform and refresh loyalty program. This year.
We remain committed to investing in infrastructure technology platforms and talent. These critical elements are necessary to solidify our competitive position today and ensure readiness for long term success in this rapidly evolving industry.
In summary last year, we successfully executed on our plan to repositioning is really ahead of the next growth cycle, just as we said we would do.
We created a leaner organization that is ready to meet the opportunities ahead with that I'd like to turn the call over to our new CFO West Gutman. Please go ahead.
Thank you Kim and good morning, everyone. We delivered full year 2022 revenue of $1. One 3 billion highlighted by a strong fourth quarter to close out the year 2023 was another pivotal year marketing substantial completion of our transformation strategy ahead of the next wave of catalysts as Kim noted fourth quarter revenue of $287 million improved four.
[noise] percentage sequentially, driven by stronger retail performance across all markets. During the last six weeks of the year for.
Fourth quarter results include contribution from Ohio operations.
Inclusion of our Ohio via E fourth quarter revenue exceeded guidance.
Full year GAAP gross profit was $589 million and 52% margins compared to $689 million up 57% margins in 2022.
Compression is inventory reduction efforts pressured gross margin, partly offset by lower costs.
A good year with stabilized pricing reduced pressure from inventory and lower operating costs, all of which 8% fourth quarter margins fourth quarter GAAP gross profit was $154 million with 54% margin, representing a 2% improvement sequentially.
Gross margin will continue to fluctuate quarter to quarter, depending on product and market mix inventory sell through promotional activity in idle capacity cost.
For the full year 2023, SG&A expenses were 386 million or 34% of revenue improving from $447 million or <unk>, 37% of revenue in 2022.
SG&A expenses in the fourth quarter were $96 million for 34% of revenue holding steady compared to the third quarter.
Net loss was $527 million for the full year 2023, compared to a loss of 246 million in 2022.
Net loss would have been $70 million in 2023, excluding the second quarter goodwill impairment and other nonrecurring charges, primarily associated with strategic repositioning of assets to improve our cash flow.
Fourth quarter net loss was 33 million compared to net loss of $25 million in the third quarter for.
Fourth quarter loss per share was <unk> 18, compared to a loss of 13 in the third quarter.
Excluding nonrecurring charges fourth quarter loss per share would have been 12%.
<unk> in the third quarter.
Full year 2023, adjusted EBITDA was $322 million on 29% margin compared to $398 million or 32% during 2022.
Fourth quarter, adjusted EBITDA was $88 million or 31%.
Fourth quarter adjusted EBITDA margin reflects the culmination of optimization efforts to maximize cash preservation and generation.
During the fourth quarter cash flow from operations totaled $131 million with free cash flow of $122 million.
Inventory was reduced by 17 million in the fourth quarter. As a result of continued efforts wind down specific volumes and product categories.
Capital expenditures totaled $9 million in the fourth quarter and $40 million for the year in.
In 2023, we opened 17, new dispensaries and relocated five in line with guidance.
Moving to our balance sheet and tax strategy.
For the year with $208 million in cash and 483 million a reduction of $166 million from last year's debt balance in the fourth quarter, we redeemed $130 million of senior notes with an interest rate of 975% and closed $25 million mortgage financing at a fixed rate of eight 3%. Our next debt maturity is not <unk>.
2026, providing ample runway to generate cash and support investments and long term growth initiatives as.
As we highlighted during our last call. We recently took a tax position challenging replicability to AEP. Our business last October we filed amended tax returns from multiple business entities for the year 2019, 2000 22021 based on our legal interpretation of 280.
To date, we've received approximately $113 million of cash refunds associated with a portion of these amended returns of which 62 million you can see prior to year end. We also received correspondence benign one amended return amounted to $1 2 million.
Julie unknown final outcome of this tax position at this time, we continue to accrue an uncertain tax position on our balance sheet. In summary. This accrual includes three parts. The amounts received for some of the amended returns plus the estimated incremental tax liability for 2022, and 2023 offset by estimated overpayments on our tax accounts.
And so this process reaches a final resolution we anticipate the uncertain tax position will increase over time, we will continue to make timely payments as an ordinary corporate taxpayer.
As mentioned earlier the DEA is currently evaluating the proposed rescheduling of Kansas to schedule III <unk> burden is lifted truly could realize hundreds of millions of savings over the next few years.
Turning now to our outlook based upon the visibility that we have today, we anticipate first quarter revenue will be similar to the fourth quarter, while we continue to see momentum across our retail platform Mark results will be influenced by the timing and size of tax refund checks and consumer spending in 2024, we are targeting cash flow from operations of at least $225 million and capital expenditures of seven.
We plan to open at least 25 stores this year.
We may refresh our forecast later this year, depending on the timing and progress for industry catalysts, including the adult use initiative in Florida progress on adult use legislation in Pennsylvania and program details to the Ohio adult use market, we're off to a fantastic start and the team remains focused on further improving the business while preparing for the next phase of accelerated growth with that I'll turn the call back over to Jim. Thanks.
Yes.
We're on the cusp of what could be a historic tipping point for U S. Cannabis rescheduling of candidates to schedule three would represent a watershed moment. After over 50 years of classification as a schedule one drug this major development could set off a series of reforms ultimately leading to greater acceptance and adoption of <unk> across the country. The clear validation of accepted medical use for.
Cannabis and the Unredacted HHS recommendation for schedule III confirms that everyone. In the industry has known for years that Canada has tremendous potential as a medicine.
Similarly, the analysis completed by HHS clearly demonstrates that cannabis is less dangerous than many scheduled drugs and alcohol. This data aligns with prevailing attitudes of consumers between 'twenty, one and 40 years old who do not attribute the same social segment of cannabis as those who grew up during the war on drugs recognition of the unfair characterization of cannabis.
With a meaningful starting point for future reform.
While candidates continues to gain mainstream acceptance many of the state markets. We operate in are increasingly likely to adopt adult use programs in the near term, Ohio is poised to launch until E. Sales. This fall we estimate this market could reach $2 billion in annual sales.
To advance adult use legislation in Pennsylvania are gaining momentum propelled by strong support from Governor Shapiro.
We estimate the Pennsylvania market could reach approximately $4 billion in sales pending.
Pending Court review and voter approval, Florida will launch adult use sales in 2025, our number one priority. This year is to secure and prepare for adult use in Florida.
Today, it's really just not only the largest operator in Florida with over 3 million square feet of production capacity and 132 stores, but also has a clear market leader given our scale competitive production cost and ability to quickly flex up production, we are preparing to expand our market leading position with this opportunity with strong cash generation in <unk>.
Clearly defined strategy, it's really the best position for the coming wave of meaningful growth catalysts reinforced by a solid core business I'm fully confident in our ability to execute on our plan and I wouldn't trade hands with anyone in the industry. Thank.
Thank you for joining us today, and as I always say onward.
At this time and rivers and less certain and will be available to answer any questions. Operator, Please open up the call for questions.
Thank you.
Ask a question. Please first one on your telephone coupons.
This question has already been addressed.
So from Q, please from stores too.
Once again, ladies and gentlemen, this tourism.
Sure.
And today's first question comes from Lou home with Canaccord Genuity. Please go ahead.
Thanks, and good morning, everyone. Congratulations on the strong results Jim I, just wanted to ask I realize I'm, putting the cart a little bit before the horse here because we haven't told you can first before you have a more definitive picture of whether or not.
The adult use market measure should be on the November ballot, but.
In the event that it is and we do get accepted.
Just by the people of Florida, and we have an adult use market that stood out in 2025, how should we be thinking about any incremental investments required from trulia.
It's about happening I imagine if you were to go into the stores in Florida, We know Theres a lot of.
POS terminals, so we need more people to staff those and handle the additional traffic. So any other investments we should be thinking about Jeff goes ramps and Theres also the legacy growth that you can bring back online what else should we be considering.
Thanks, Luke so and obviously, we are incredibly excited and very laser focused on the adult use opportunity in Florida, and it really can't be understated and the size of the opportunity and when we talk about a market you know converting into a $6 billion opportunity with again.
138 add annual tourist visits and $22 million residents not to mention of course neighboring neighboring state resident opportunities as well. It really is just an incredible incredible opportunity.
We of course have been doing a lot of work behind the theme, though as it relates to modeling and running through different scenarios. So that we can be in the best absolute position the tank to take advantage of the opportunity as it presents.
Like we said, we're going to update folks as things come into focus but to your point, we certainly have.
Room within our existing footprint, we have stores that have that are underutilized currently and that's strategic that's by design. We have stores that are currently medical but would be better positioned as recreational locations key west our store in Daytona.
We have several beaches stores that are come to mind as it relates to that to that footprint and then as you mentioned and really the timing as it relates to the performance of Jeff co cannot come at a better time and as that site is now fully contributive.
And but we have additional efficiencies that we think we can we can eke out and while we of course also have our legacy capacity that we can bring online as well so really excited about the future as it relates to the adult use opportunity and again, we'll say it again believe that it is the biggest conversion opportunity. It is the biggest conversion opportunity in U S.
But history.
That's great and then following on that loss.
You had mentioned that the.
Store economics of unit economics for the express pickup stores were better than your expectations and you'll be rolling out some more of those over the course of the year can you give us a sense of a little more detail, maybe how favorably those compare to the traditional stores that you've rolled out.
Give me a directionally speaking.
Where it is that you're able to find those better unit economics, I imagine, it's lower labor costs, but is there anything else to consider there.
Yeah.
Sure so.
Our express pickup location, we piloted it in Crawford Bell for those of you who arent familiar with geography, that's about 30 45 minutes from our headquarters here. So we were able to get.
Eyes on it we knew that there were there was some demand there and as we're able to track.
Both through deliveries in our heat mapping of our customer our customer database and we knew there was demand there, but it is a it's a a bit of a bedroom community. If you will and so it's a.
We didn't believe that it can support a full a full investment of a full service store locations. So the current store averages between two and three employees and again, we're able to turnaround pickup orders in a very efficient manner.
So the throughput capabilities of that store as well and it's a smaller footprint and because we don't have a full a full showroom and theres no walk up service available. So it really is in terms of the unit economics significantly more efficient than our traditional stores.
And of course in that location, we have the demand, but the supportive as well. So it really is a homerun on all metrics and we're looking for additional opportunities that have the same type of demographic metrics to really use in some cases as infill stores in other in other locations throughout the state in this upcoming year.
Great last question and then ill pass it along here.
It's great to see that Youre able to get the cash back from the community taxes paid previously and I realized there's really not a whole lot of detail you can share.
As it relates to your legal strategy here, but I wanted to ask when it when it comes to be.
Legal opinion or the base that you're relying upon is that that information. That's I guess applicable solely just to truly for us it's mostly relying upon industrywide information I guess, just trying to figure out if there's implications from the broader industry as a result of that.
The information that you've shared on the refunds earlier today.
Yeah, so given the uncertain.
<unk> of the claims as they sit today and we do view that as a trade secret.
In large part specific to our position in our in our organization.
And we are not going to be sharing that information publicly given the fact that it is and where it could be in a litigation posture.
And specifically that information would become available if and when we actually get to a court filing.
And so that's really all I'm able to say about it today, but.
There's going to be I would say a blend of REIT industry and truly the specific positioning and in our and our position.
Okay I appreciate it thank you very much.
Thanks Luke.
Our next question comes from.
Uh huh.
Craig Hallum Capital Group. Please go ahead.
Great. Thanks for taking my questions and congrats on another very strong quarter here.
So first of all just a bit of a follow up to that last question on the tax returns I'm wondering if you could elaborate.
On the uncertain nature of these tax returns here I mean is this something that.
Potentially we should sort of earmarked fees.
These returns as potentially needing.
Needing to be paid again down the road can you just elaborate a bit more on sort of how confident you feel that this cash will remain on the balance sheet.
Hey, Thanks for the question Eric This is Wes, yes, I mean from accounting standpoint.
The rules are the rules and these these remain what's called on certain vessels just because of how the statutes are currently risks. So that's why the refunds received will continues to be accrued on the balance sheet and we'll continue to add to the incremental nature of <unk> in future periods until potentially a rescheduling happens.
Operationally.
Is it just the legal counsel on our board of directors, we're fully aligned.
On this process and on this on the following position.
We don't comment on additional refunds, but that said we are not necessarily holding back.
<unk> received as it relates to future investments and growth initiatives.
Okay, great I appreciate that color.
And then you mentioned how.
You've seen a bit of a shift in Q4.
<unk> consumers.
Purchasing more premium products a bit of a mix shift towards the premium end of things can you just talk.
How you view your current inventory and production mix between value and premium obviously, you've highlighted a very impressive.
Quality metrics coming out of the new facility in Florida, so seemingly you'd be sort of.
Ready to meet that increased demand for premium products I'm. Just wondering if you could comment on sort of how you view that current inventory and production mix. Thank you.
Sure. So really what we saw in the fourth quarter was some mix shifts, but I will say that it was really more weighted towards the trade up from.
The value to mid tier.
So and we're seeing some more consumer flexibility.
In the market and so what I mean by that as you know earlier in 2023, there certainly was more of a what appeared to be a hard and fast ceiling on spend and wallet pressure was significant meaning that someone would come into the store and they literally only had call it $20 to spend whatever dollars. They had that was that there really was.
<unk> to flex up or flex into.
Either a higher higher category or with certain promotions, which is a buy more save more.
We're finding those that they were really not as effective and early 2023 that behavior has begun to shift and I will again emphasize the fact that we're just starting to see that now and we saw some in the holiday period, we're watching it very closely of course in Q1 and as we mentioned specifically March.
Will be an important month as we see how consumers respond with.
Some additional dollars in there and there will be a tax refunds, so and again moderate our has been in a very strong category for us across all of our markets and has been performing exceptionally well, which is our mid tier brand in both flower and we have a lot of oil products in that brand as well.
And so it's great to see some consumer.
Consumer resilience and but a little bit like I said, a little too early to call a definitive a definitive trend on that.
Alright, I appreciate the color. Thanks again.
Yep.
And our next question comes from Eric.
It was alliance Global partners. Please go ahead.
Yes.
Hi, Good morning, Thank you for the question and congrats on the quarter.
I wanted to touch base, a little bit more on the rewards program you mentioned that you'd want to know in two states and plan to go forward, including in Florida.