Earnings Call: Q2 2020

Aug 12, 2020

Earnings release

Good day, ladies and gentlemen, and welcome to the Trulieve Cannabis Corporation Second Quarter 2020 Financial Results Conference Call. My name is Marcella, and I'll 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, Ms. Lynn Ritchie, Director of Investor Relations for Trulieve. You may begin. Thanks, Marcella. Good morning, ladies and gentlemen, and thank you for joining us today. On the call with me today are Kim Rivers, Chief Executive Officer and Alex D'Amico, Chief Financial Officer. Following our prepared remarks, we will open the call to questions. Before we get started, I would like to note that today's call is being recorded for the benefit of investors, individual shareholders, the media and other interested parties. Please remember that our discussions today may include forward looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those forward looking statements. Statements made on this call speak only as of today, and we assume no obligation to update any of these forward looking information. Our financial results are provided in IFRS. Also, our prepared remarks this morning reference non IFRS financial measures in order to provide greater transparency regarding Trulieve. Where applicable, we may also provide a comparison to GAAP and non GAAP financial measures to assist investors. Any non IFRS financial measure presented should not be considered an alternative to financial measures required by IFRS and are unlikely to be comparable to non IFRS financial measures provided by other companies. Any non IFRS financial measures referenced on this call are reconciled to the most directly comparable IFRS measures in the company's MD and A for the quarter ended June 30, 2020, as well as in the table at the end of our earnings press release. We believe that our profitability and performance are further demonstrated using these non IFRS metrics. Please note that all dollar references are to U. S. Dollars. This morning, we reported results for the Q2 of 2020. A copy of our news release, financial statements and MD and A may be found on the Investor Relations section of our website trulieve.com and were also filed on SEDAR. In addition, a webcast of today's conference call will be available on our website later today. Now I will turn the call over to our CEO, Kim Rivers. Thanks, Lynn, and good morning, everyone, and welcome to today's call. I hope everyone is staying healthy and well. As we just celebrated our 4th anniversary, as I sit here today ready to start this call, I just have to say, wow. We went from 1 store to 56, 10 employees to 3,400, one patient 344,000 broke a single quarter $100,000,000 mark. And this quarter, our increase in free cash flow exceeds our revenue for 2016 2017 combined. We are proud Trulieve is headquartered here in Florida and we look forward to maintaining our lead in our home state. Thank you, Trulievers. Now I'd like to briefly cover our Q2 results and review our accomplishments during the Q2. Alex D'Amico will give a financial overview, discuss his 1st 2 months as our new CFO and share our guidance update. Then I'll offer some closing thoughts on our outlook before opening the call to questions. At a high level, Q2 2020 was an incredibly strong quarter. Truly have exceeded consensus for revenues and profitability, achieving approximately $121,000,000 in revenue, representing a sequential quarter over quarter increase of 26%. Our adjusted EBITDA was $60,500,000 or 50%. This is our 10th quarter of consecutive growth and profitability. Last quarter, we were pleased to report positive free cash flow and we are happy to report adding nearly $40,000,000 in positive free cash flow this quarter, ending with cash and cash equivalents of approximately $150,000,000 Given the first half performance, it's evident that guidance for the second half of the year needs to be increased. We are providing increased revenue guidance of $465,000,000 to $485,000,000 and EBITDA of $205,000,000 to $225,000,000 for the year. There are still uncertainties in the market given COVID, but we believe this updated guidance provides our best estimates based on trend information and business accessibility. Our expectations are based on our ability to successfully leverage efficiencies, continue our industry leading profitability and maintain a strong balance sheet, all of which are key components of our financial strategy that will allow us to capitalize on both organic and M and A expansion. Having these operational and financial fundamentals provides us with the right platform to go deep and expand organically in our home state of Florida. Trulieve is the only cannabis company in the U. S. To have achieved the scale of our cultivation operations plus our vast and growing store footprint all primarily through organic growth. That earned experience and deep seated skill set provides a position of strength while exploring potential strategic M and A opportunities to continue our expansion. We were disciplined and patient in 2019 as the capital markets changed and during the first half of twenty twenty as COVID further altered the market, but we have now built out a pipeline of expansion opportunities that will continue to unlock our value. Trulieve had solid results this quarter despite the heightened COVID environment. I'd like to share with you some of the patient trends we saw through June 30 along with recent trends this quarter as this is still a very fluid situation. When we spoke in May, we were experiencing 2 significant and distinct patterns with respect to patients, patient growth and patient behavior. The number of new patients entering the system was on the decline in the spring. This was primarily due to the requirement for new patients to be seen by a doctor for their initial medical marijuana card and doctors not open or available due to COVID. When doctors' offices reopened, we saw numbers increase sharply from a low of 180 patients in 1 week to a recent weekly high of almost 7,000 new patients. And what's important to note is that these incredible numbers have extended past the 7 weeks of COVID driven slowdown with the recent average 6 week growth rate of 5,200 patients per week, signaling sustained increased patient adoption rates. 2nd, in May, patient behavior started to swing back towards previous norms as Florida positioned itself for reopening. Patient walk ins were starting to return and had climbed from lows of 20% to approximately 35%, deliveries were settling back from highs of 20% to just under 10% and pickups have remained had remained near COVID level highs of 60% and were in the 55% range. At the end of Q2, patient behavior continued trending towards previous norms. Walk ins increased to 45%, deliveries decreased to 7% and pickups decreased to 48%. As COVID continues or if the state issues a stay at home order again, there may be a return swing towards deliveries and pickups. Customer behavior is, of course, a major contributor to financial performance, so I'd like to now cover our retail metrics. We opened 5 stores in Florida during Q2 compared to 3 stores in Q1 ending the quarter at 52 stores in the U. S. Today, we are at 54 stores in Florida and 56 nationwide with an additional store opening this week in Tampa. With an aggressive plan for store openings over the next few months, we are comfortable we will meet our goal of 68 stores by year end. Trulieve also continues to maintain our market leadership in Florida. With approximately 20% of the overall store count in Florida, we outperform our competitors by maintaining greater than 50% market share in both flower and oil. We believe our brand strength is primarily driven by superior product variety and quality, coupled with our customer centric execution and accessibility. This is illustrated by our TrueLeaver's engagement with us with over 85,000 Facebook followers, 10,000 Instagram followers and more than 75% of our patients included in our TrueLeaver loyalty program. Our strong performance during Q2, while pivoting our business for COVID, is a credit to our talented team and our ability to leverage our capacity. Let me quickly now run through the metrics we share each quarter. The first is customer retention rate, a common retail metric used to reveal customer loyalty. Our Q2 customer retention rate was approximately 76% compared to 74% in the 1st quarter. A second loyalty metric we track is average basket size and number of visits. For the quarter, patients visited an average of 2.7 times per month with an average basket size of $125 As we ended the quarter, baskets were beginning to settle at approximately $121 The 3rd metric we share is same store sales. This metric tracks growth at a store level. For the 26 stores opened in Q2 that were also opened for the full quarter in Q2 2019, we had same store sales increase of 30%. Our patients are remaining loyal as demonstrated by our metrics and our ability to pivot during a crisis to provide not only access to medicine, but also deliver the authentic relationships and customer experience that our true levers have come to rely on. Our industry leading cultivation and processing facilities are key to our ability to meet our true levers' needs. The growth in our cultivation and production footprint over these last few years and the scale of where we are now and where we are going to keep up with the demand has provided a number of lessons learned that have led to increased efficiencies. I'd like to highlight some of our plans for product and cultivation growth. Today, we are at 1,800,000 square feet of cultivation, about the size of 31 football fields and only one field shy of the 32 NFL stadiums. And we continue to grow. With the current level of demand and our expectations for patient growth that I mentioned earlier, we have a construction schedule for a number of new 24,000 square foot buildings to be completed monthly between now the end of the year at our Jefferson County location, and we expect larger buildings in that location to come online in 2021. This will not only meet current demand, but positions us for adult use and other catalysts with the ability to capture a tourism market in Florida of over 130,000,000 people per year, thus solidifying our leadership in our home state. Having just shy of 2,000,000 square feet in one state may seem staggering until you consider it in terms of business impact and opportunity. The Florida market has grown at an incredible rate. To illustrate this growth and according to reports from the Florida Office of Medical Marijuana Use for the week of January 10, 2020, the market dispensed 79,500,000 milligrams of oil and 19,000 ounces of flour. Comparatively, for the week of July 31, the market dispensed 138,800,000 milligrams of oil and 40,400 ounces of flour. That represents a market growth of 74% for oil and 113% for flour. Trulieve dispensed 38,300,000 milligrams of oil and 9,100 ounces of flour during the week of January 10 versus 72,300,000 milligrams of oil and 20,400 ounces of flour during the week of July 31, an increase of 89% for oil and 124 percent for flour. Almost doubling oil dispensations and more than doubling flower dispensations within 7 months is extraordinary growth, particularly during the COVID environment. This is why we are growing the way we are. But what does it mean to the business? We are accelerating cultivation growth to continue to meet increased demand. You will hear more from Alex about how this growth impacts inventory levels. The more flower that is grown, the more trim we are adding to our oil inventory. So there's a real interdependency that needs to be understood as inventory levels are not a straight line. Lastly, accelerated demand is a driver for the increased guidance we provided today. And of course, we continue to prepare for edibles with our own branded products as well as our partner brands. I say it on every call, but we do expect edibles to happen this year. All this work by our cultivation and production teams is vitally important to keep pace with demand and continue innovating and pushing ourselves forward to deliver the best quality products to our true levers. I'll now turn the call over to Alex D'Amico, our new CFO, for commentary on his 1st 2 months, our financial results and an update to guidance before I return with a closing statement. Alex? Thank you, Kim, and good morning, everyone. I'm happy to be here today as the company's new Chief Financial Officer. Before I review the company's Q2 financial results, I thought it would be important to share some initial thoughts on my role and outline for you my top initiatives for the remainder of 2020 and the first half of twenty twenty one. These first few months have been incredibly busy and exciting. Personally, I feel like I'm joining at a pivotal point in the company's history and I look forward to being part of a team that will drive changes needed to bring Trulieve to the next level. The initial area of focus for me was to augment and expand our accounting and finance departments by addressing people, processes and systems. 1st and foremost was staffing. I quickly built out a team of finance professionals with SEC and public company experience. We have more work to do in this area, but we have the foundation in place for the infrastructure required to support the challenges and opportunities ahead of us. Next was laying out a plan to build out the accounting and finance processes that will position us to become a U. S. Reporting company and will allow for deeper operational analytics and the strategic assessment of M and A opportunities. Finally, we laid the groundwork for our future with improved systems, starting with an upgrade to our SAP platform and the identification of a number of tools that will streamline and layer on additional controls in areas such as reconciliations, reporting, leasing and equity. 1 of our transformational projects since I've been on board has been triggered by our foreign private issuer status or FPI. As announced in July, our 2020 FPI testing showed that we have over 50 percent ownership of our equity shares held by U. S. Investors. This means we have transitioned to a domestic issuer and will be subject to SEC reporting requirements as of January 1, 2021. We are targeting and registering with the SEC in the Q4 and we will move to a GAAP basis of accounting starting with the issuance of our 2020 10 ks. Currently, we are in the process of converting our historical financials from IFRS to GAAP and prior to SEC registration, we will have an audit of those historical financials on a GAAP basis. Moving to GAAP is something that many of our shareholders will appreciate, but there is a lot of work that happens in the background and it will cause a subtle shift in how some of our financials are presented. More on that in a moment. More important than the registration process is the preparation to become an SEC reporting company. Among a number of things, this means preparing to become Sarbanes Oxley compliant. We have engaged the firm to assist us with SOX readiness, which will include the preparation of process flows and narratives as well as the identification of key controls. The readiness efforts will also require training throughout the organization in preparation for eventual SOX controls testing. You will note, we brought on 2 new members of our Board of Directors recently, Susan Thronson and Tommy Millner, who each have substantial experience with the enhanced governance processes and procedures that will be required to support our SOX efforts. Lastly, I view finance as a strategic driving force within the organization. As a department and as a team, we lead M and A efforts and we are heavily engaged with each and every department across the entire organization. My hope is that this involvement will continue the tremendous cross functional collaboration that exists within Trulieve. So now let's dive into the numbers for the Q2. As Kim covered at the top of the call, we had a very strong quarter. Trulieve had a record quarterly revenue of $120,800,000 breaking that $100,000,000 mark and representing a sequential quarter over quarter increase of 26% and a 109% increase over the same quarter last year. In regard to production expenses and cost of goods from 3rd party suppliers, I would like to remind all of you about something that was communicated on our prior call. This line is not cost of goods sold as you would find under GAAP. It is the cost of goods plus other production costs. An accounting election under IFRS allows for production costs or pre harvest costs to be expensed as incurred. Therefore, the additional costs added here and what differs from the cost of goods sold line under GAAP for those of you who are attempting to reconcile are those production costs related to the unsold inventory or said in another way what we call grow costs for unsold inventory. On a consolidated basis, production expenses in Florida and cost of goods from third party suppliers in Connecticut and California totaled $29,700,000 for the 2nd quarter. Revenue less these production expenses and costs was $91,100,000 for the quarter or 75 percent of revenue. This compares to 67,100,000 dollars or 70% in the Q1. As you can see here, we are beginning to realize the benefits of our efficient production processes in conjunction with the fact that we did not do a spring greenhouse planting. If we were to capitalize growth costs as is required under GAAP, the GAAP adjusted margin would have been 75% for Q2 as compared to 77% in Q1. At the end of the second quarter, we had cultivation of approximately 1,800,000 square feet and had capacity to produce just over 74,000 kilograms annually. As Kim alluded to, we have a plan to bring on just under 100,000 square feet of additional indoor grow by year end. Since we are discussing cultivation, I'd like to update you on inventory as this has been an important focus for our team. Under IFRS in Q1, we had a total of $227,900,000 of inventory, which includes a significant amount of fair value. In Q2, we had a total of $219,000,000 of inventory. We also had $41,300,000 of biological assets in Q1 $33,300,000 of biological assets at the end of Q2, which are also measured at fair value. In Q2, the GAAP equivalent would have been approximately $70,000,000 to $80,000,000 of inventory. On a quantity basis, at the end of Q2, we had approximately 7 months of total inventory. I want to take a moment on this because I believe it is important to understand the fluctuations that happen within inventory. Last quarter, we said we would start to draw down on our greenhouse oil inventory this quarter, and we did, reducing our overall inventory by $8,900,000 However, as we work toward reducing our greenhouse inventory reserves, we are also responding to the market growth in flower. At the point of harvest, we have tremendous flexibility in terms of where we direct our inventory in regard to product lines. Part of that decision will take into account market trends. We have been ramping our indoor grow to keep pace with the higher demand for flower. Additional indoor capacity means more flower coming through for cultivation. This also means that the trim associated with that flower increases, which in turn is primarily extracted for oil. This dynamic of reducing our greenhouse oil reserves while simultaneously adding TRIM oil from our indoor grow is expected to continue in respect of our increased revenue guidance for the back half of twenty twenty. We expect the step down in our overall inventory to happen at a slower rate due to this interdependency. Our oil inventory levels were advantageous for us during the first half of twenty twenty given the heightened demand we experienced as a result of COVID. Our ability to pivot and dial up or down harvests makes our greenhouse cultivation footprint a differentiator for us. The greenhouse harvest has been completed and we do not have plans for a fall harvest. However, with the uncertainties of COVID and potential catalysts such as edibles and wholesale, we are prepared. We are continuously maximizing efficiencies and evaluating inventory levels to be well positioned when an opportunity arises. I'll now turn to expenses. 2nd quarter SG and A expenses, excluding depreciation and amortization, were $33,100,000 or 27 percent of revenue compared to $28,300,000 or 29% of revenue in the Q1 of 2020. The operating expense line consists predominantly of dispensary and other corporate overhead related costs and in the 2nd quarter was slightly down as a percentage of revenue compared to the Q1. Overall, keeping a high degree of financial discipline around expenses is one of our keys to profitability. Operating income for the company was $37,500,000 this quarter compared to $31,100,000 last quarter. Net income was $6,600,000 for the 2nd quarter compared to $14,000,000 in Q1 resulting in earnings per share of $0.06 per share. For net income and EPS, it's important to note that if the fair value impact of biological assets were excluded, net income would increase to 23,400,000 diluted EPS of $0.20 per share. Net income is an area that will have visible changes with the conversion to GAAP starting with our annual filing for 2020. Focusing now on EBITDA. We believe adjusted EBITDA, a non IFRS measure, provides valuable insight into our profitability and performance. Adjusted EBITDA excludes from net income as reported, interest, tax, depreciation, non cash expenses, RTO expenses, share based compensation, other income, growing costs related to biological assets and unsold inventory and the non cash effects of accounting for biological assets. We reported adjusted EBITDA to help investors assess the operating performance of our business. Adjusted EBITDA for the Q2 of 2020 was $60,500,000 or 50 percent of revenue compared to $49,400,000 or 51 percent of revenue in Q1 2020. The $11,100,000 improvement in adjusted EBITDA this quarter is primarily due to the increase in revenue, partially offset by increases in operating expenses and the change in growth costs for unsold inventory. Turning to taxes. As a percentage of gross profit, including the net change in fair value of biological assets, our effective tax rate was 26% for this quarter. Now for an area that we are very proud of this quarter, our balance sheet. As of the end of Q2 2020, based on our continued profitability, our cash balance was $150,300,000 In Q1 2020, we were free cash flow positive at $11,200,000 We added to that number this quarter with a free cash flow increase of $39,600,000 and year to date, our free cash flow positive at $50,800,000 I want to note that the tax payment for Q1 and estimated taxes for Q2 were deferred pursuant to the COVID tax extension, resulting in a $45,000,000 payment made in July. In addition, we expect our free cash flow for the second half of the year to be impacted due to scheduled CapEx payments discussed previously. I'd like to share with you our updated guidance for the remainder of the year. As Kim mentioned, keeping in mind the uncertainties around COVID, we were hesitant to raise guidance until we have more clarity. There is still uncertainty. However, our current guidance is no longer practical. For the full year of 2020, we previously provided revenue guidance of $380,000,000 to $400,000,000 We now expect revenues in the range of $465,000,000 to $485,000,000 representing an approximate increase of 22%. Based on this revenue range, we anticipate adjusted EBITDA of approximately $205,000,000 to $225,000,000 up approximately 43% from our previous range of 140 dollars to $160,000,000 Full year 2020 revenue growth guidance is based on our current store footprint in Florida, California and Connecticut and includes an expected increase in number of dispensaries as well as increased patient growth in Florida. This guidance does not contemplate our Massachusetts operations generating revenues in 2020. As previously discussed, we anticipated CapEx investments of approximately $60,000,000 this year to expand our store footprint and cultivation. Based on CapEx spend in the first half of the year and our accelerated build plans in the second half of the year, we estimate approximately $7,000,000 per month of CapEx spend in Florida for the remainder of 2020. I will end by saying I am excited to be fully on board and I'm looking forward to the opportunities that lie ahead. I'll now hand this call back over to Kim for closing remarks. Kim? Thanks, Alex. COVID was not what any of us could have predicted or wanted, but we are happy to have the scale and strength in our supply chain to execute well in our business to meet the demands that came with it, all while providing stability for our employees during an uncertain time. We spent time over the last few months talking about the business continuity team we originally established for hurricane preparedness. We also created a dedicated retail response team that allowed us to quickly react and implement programs. More recently, we built upon our early safety and cleaning procedures, implementing additional measures to maintain safe medical marijuana access for patients, while also providing a healthy work environment for our employees. In addition to sanitizing every facility weekly, installing plexiglass panels at registers, promoting social distancing and implementing tech solutions, our teams continue to roll out industry leading health and safety procedures for the protection of our patients and staff. We've added medical grade HEPA air scrubbers in every store and facility, contact tracing protocols and are offering free rapid testing to our employees. We have developed training for staff on health and safety policies, increased communications at team level and have invested in a medical insurance upgrade to include a 0 premium choice for our employees so we can offer insurance that will drive a higher participation across the workforce. I am proud of what we have accomplished. It remains to be seen what the continued impact will be to the country and our overall health care systems, but I'm confident we are prepared to meet these increased demands and heartened to know we have taken a leadership position in regard to safety and support for our employees and our true leaders. We will continue our high degree of focus on execution and expansion during the second half of twenty twenty. Now let's shift to developments in our other markets. 1st, our plans for Massachusetts are approaching the finish line. We are nearing completion of the cultivation and production Phase 1 and our first dispensary build out is complete. We have begun our initial inspections and once the inspection process is final and we are approved, will enter into the Massachusetts Medical and Adult East markets. If we are not slowed by regulatory approvals, we expect to begin sales in Q1 of next year. And although there is not anything new to report on our California dispensary other than construction continues, we believe Connecticut could eventually see the benefit of change underway with proposed adult use in the state. We are also targeting expansion through state application processes. Our applications team has engaged in a number of opportunities that will strategically make sense for Trulieve. We've targeted our applications primarily in states that will support our vertical model, while also supporting the hub model that we've spoken about, which is how we as a company envision the future cannabis landscape. As we enter the second half of the year, we will continue to actively explore M and A opportunities that will positively contribute to our business and adhere to our strict growth criteria. Our goal is to position ourselves as the top cannabis MSO. Trulieve has come to the forefront for profitability, execution and the ability to successfully grow organically. As we expand into new states, we believe our value will be fully recognized. With a healthy balance sheet, a good business model and strong execution by our team, we expect to be the leading customer focused cannabis brand in the United States with depth in our target markets. I believe that there is a lot of positive movement within this industry on the social equity and legislative fronts. We fully plan to take part in this movement. Growing our industry with inclusive social equity goals is important, not just to us as a business, but for the people and communities we impact every day. Our mission is to improve people's lives. That's why Trulieve stands with those supporting our communities in a positive manner. As a sponsor for minorities for medical marijuana and a member of the National Cannabis Roundtable, we have pledged to continue advocating for social justice measures and equity and business opportunities. Taking part in social equity programs, organizations and initiatives is core to our company. We believed it was important when we founded the company in Quincy, Florida, a rural majority minority community and still believe in the importance after celebrating 4 years of operations and interacting with these communities daily. We truly understand just how powerful this impact can be. On the legislative front, we continue to monitor potential regulatory changes in the market and how different scenarios will impact our industry and operations. As we have been determined in essential business, we believe now more than ever, cannabis is being recognized not only as providing needed products, but also as an economic engine nationally. The Safe Banking Act is an important and necessary step forward to protect our industry. We look forward to congressional action on this key legislation. Lastly, before we end the call today, I do want to take a moment to thank our employees. Their dedication and unwavering commitment to our true levers is greatly appreciated. We do not underestimate the importance their essential roles play in delivering the medicine our true levers rely on and in our continued success. Thank you for joining the call today. And as I always say, onward. Hi, Marcelo. We can now open it up for questions. Your first question comes from the line of Derek Dley from Canaccord. Your line is open. Yes. Hi, thanks and congrats on a great quarter and outlook. And I certainly would echo those comments you just made on the Safe Banking Act. I wanted to ask just about the competitive environment that you're seeing in Florida. We have seen some of the other smaller players within the state announced some increases to their cultivation footprint as well. So I'm just wondering if you've seen any sort of changes in the dynamic in the pricing environment or even in the product availability? Yes. Thanks, Derek. So as we stated on the call, the market growth in the state of Florida has just really been incredible. When you look at not only the patient growth, but also of course the overall number of dispensations that are occurring on a weekly basis. And so we really haven't seen any additional pressure. I mean, of course, we appreciate and thrive in a competitive environment and have always said that we welcome competition. And it's interesting when we look at our stores and our performance on a store basis, the stores that are actually in areas with more competitors are some of our highest performing stores. So think that having the availability to comparison shop is one thing that again we pride ourselves in being able to perform well. Again with that increased market, what I would say is that, I think that it's great that other folks are bringing up cultivation. We of course will continue to perform within our solid plans and are going to continue to bring on cultivation as well, to continue to increase that incredible increased demand. And in terms of product, the types of products that were selling well last quarter, you kind of mentioned it was almost a bit of a barbell approach where you had value and you had premium doing really well. Did you see any changes in that this quarter? Or are you seeing those trends continue? Yes. Thanks for the question. No, we are seeing those trends continue. It's interesting when we look at it and we really segment out each and every one of our product lines. So certainly we have seen product growth with respect to our value segment which I think is to be expected particularly when you look at the macro environment and what's going on kind of at the national level. And when we think about when we think about unemployment numbers and so forth. It will be interesting to see with stimulus coming back in play, how that affects kind of the shift. But again to your point we are still seeing growth in that premium product line as well. So I would say certainly a little bit more of a heightened growth on value, but still some strong numbers on a premium as well. So we're kind of looking for those trends to continue and we'll certainly keep those updated as we look at those shifts. And maybe just one more just on that if I may. In terms of your gross margin, really strong this quarter up 500 basis points sequentially, but just interesting your comment there on value. So clearly, you guys are doing something right on the gross margin side. Do you view that level as sustainable over the medium to long term, albeit there's likely going to be some quarterly fluctuations within that number? Yes. I'm going to let Alex take that one. Yes. Thank you for the question. Yes, exactly as you said, there will be quarterly fluctuations. We don't expect material differences in that area, but there will be fluctuations depending on the inventory flow through and what we sell. And you'll see that as we convert to GAAP as well. But we should be holding approximately at these levels. Great. Congratulations. Thanks, Derek. Thank you. Your next question comes from the line of Russell Stanley from Beacon Securities. Your line is open. Good morning and congrats on a stellar quarter. Just around the accelerated CapEx plan, I know you've raised your guidance for 2020, haven't introduced guidance for 2021. But just trying to get an idea with that accelerated CapEx plan, what kind of dispensary growth we could see in 2021? How much how many new dispensaries could you support? Yes. Thanks for the question, Russ. So as you noted, we haven't come out with guidance yet for 2021. But we'll reiterate the fact that we are very, very comfortable with our ability to meet our previously stated goal of 68 stores in 2020. We may be just a little bit ahead of that in 2020. And so really again when we look at those so our guidance and our numbers certainly the CapEx to support it is driven by a number of factors, right? I mean we do we've done a complete recalculation and reforecast for the remainder part of the year. And with that, again, looking at the strong influx of patients that we've had and additionally looking at of course our repeat visits and basket sizes and so forth, we did feel like we needed to go ahead and bring on that additional capacity to support that growth. And of course, as we move into 2021, nothing specific yet for you on 2021, but I'm sure that we'll continue to get that question, so stay tuned. Great. Thanks. And just one more for me at this point. With respect to M and A, we've seen public company valuations improve significantly over the last few months in particular. I'm just wondering if you're seeing any of that filter down in terms of private company valuation demands. Are valuations still attractive? Or have those started to creep up as well? Yes. No, thanks, Russ. I think that it continues to be a mixed bag, right, with respect to private company valuations. I think you have some companies that have certainly come up against the capital crunch that certainly some public companies have experienced as well in the back half of twenty nineteen. And then depending of and this is market dependent as well as company dependent, different responses and ability to weather, I would say, the COVID challenges and changes, whether that means that a state maybe shut folks down for a longer period of time or that folks have seen an increase or a spike, but then now are scrambling to meet or to have to meet their capital demand requirements for growth. So I do think that that's a very specific question that will differ depending on company. But I think look I mean we're happy that we're in the position that we're in. We feel like we've got a lot of optionality with respect to expansion both again on M and A and on the applications front. And folks are certainly looking at our performance over the years and appreciative strong operators appreciative of that position and where we are and looking forward are excited to have conversations to potentially be part of the team. That's great. Excellent. Thanks for the color and congrats again. Thanks Russ. Your next question comes from the line of Matt McGinley from Needham and Co. Your line is open. Great. Thank you. My first question is a follow-up on the promotion mix. How much of an impact did that mix shift to flower or I guess value price point flower have on revenue in the quarter? And did COVID in any way change the level of promotion that you planned for in the second quarter? And would the I guess the realized price points decline on the unit basis in the back half? Or does that kind of stay steady from here? Yes. No, thanks Matt for the question. As I stated, we certainly started to see an increase in demand around that value segment, particularly it's interesting because it's not the same from category to category. So and some of it has to do of course with product introduction and what's being introduced in that category because as you know and I know you're familiar with, we're continuing to innovate, We're continuing to introduce new products all the time. And certainly one thing I will say about the Florida market really is that folks definitely have a strong, strong preference for new and a strong preference for innovative products. And so you'll continue to see us focus on that R and D activity as part of our DNA. And so we'll continue to of course have releases throughout the back half of the year. We certainly like as I mentioned on the flower category, we did see some increased demand in the value segment. Again, I think we were also doing some really kind of new and exciting things in that segment by bringing to market some kind of every week sort of a new blend, if you will, or new strain offerings, which I think added excitement to that product category. But then when you kind of transition into the vape category, we saw strong increases in our premium vape category. So it's not a one for 1 across all product segments. But so when you look at it kind of as a blended rate, it stayed fairly constant. In terms of predicting where we'll be in the back half of the year, again, I think some of that's going to depend on macro elements, right? And whether or not we continue to see pressure from a macro perspective when and if that additional $400 a week from an unemployment standpoint comes into play and how quickly. And again, just the COVID environment, I would say, in general. But I would say that our team is very focused on it. It's something that we look at on a very regular basis and are sure that we're responding and that we've got good solid product offerings in those categories as the market does shift based on those macroeconomic factors. Great. Thank you. And then second question is on inventory and gross margin. And I appreciate the nuance on how additional flower capacity means that you will have additional trim that will be turned into oil and so your inventory levels may not come down as much as you expected. But just want to confirm that the expectation is you still have a decline in inventory dollars over the course of the year? And then is there any if you're doing less of a greenhouse grow, is there any gross margin implication that we should think about into the back half or even into 20 21? Yes. As you stated, we are going to continue to work towards drawing down on our greenhouse oil reserves. And as you rightly pointed out, we have that dynamic of producing trim oil, which kind of backfills our inventory level. As we sell down our inventory, there could be a potential drawdown on margins, but it's not expected to be material. Okay. Thank you very much. No problem. Thanks, Matt. Your next question comes from the line of Pablo Zunich from Cantor. Your line is open. Hello, Kim. Look, I'm going to ask 2 more macro questions. Obviously, great quarter and congratulations on increasing guidance. So in terms of the Biden plan, when he's talking about federal legalization of medical cannabis, how do you think that plays out? Does it happen? Does it take a long time? How beneficial is it for you? Is it a problem given that you're mostly a single state operator? If you can just give some thoughts on that. And I know it's not quarterly related, but it would help in this forum. Thanks. Sure. Thanks, Pablo. Obviously, I think there's a lot that is in flux and there are a lot of details that would need to be ironed out with respect to the Biden plan or quite frankly any plan around legalization. I've said this before and this is just Kim's crystal ball. So for whatever that's worth, I would say that the expectation I think would be that we would see a stepped approach, right? I mean when you look historically back at say for example the removal of prohibition and with respect to alcohol, you certainly have strong state infrastructures at this point and regulations around cannabis. And I can't see the federal government coming in and completely disrupting the state preferences. So I do think that we'll continue with this, but perhaps a more I would say acceptable at the federal level state by state approach for some time. And then I would say that over time what we would expect is that of course interstate commerce regulations to change to allow us to ship products across state lines and so forth. But again, I think that particularly as it relates to distribution and sales that you're still going to see some fairly strong differences across different states for the near term. And along the same lines, if Florida were to allow wholesale, would that be better or worse for you? I'm trying to think, does it help the guys that have more stores, the guys that have more capacity? Just some thoughts on that if that were to happen and what do you think is the likelihood that that would happen? Yes. No, thanks for that. No, we certainly think that wholesale would be an additional revenue driver for Trulieve and we certainly think that we're the best positioned in the state to take advantage of that additional revenue stream really across each segment of our supply chain. So when we think about again cultivation and having that ability to dial up or down that greenhouse footprint along with the additional cultivation that we have coming online, being a preferred supplier and being able to contract and maybe even on an exclusive basis to supply new independent retailers that may be coming online. Then when we look at on the production side, having the ability to on the flip side being able to import or bring in specialty products that don't make a lot of sense for us to produce in house but require specialty expertise or IP equipment and so forth to be able to have again exclusive relationships with those types of suppliers and bring those in house. And then finally on the retail side, having the ability to get our products into more hands and again being able to have those relationships with those independent producers. I think that with respect to how wholesale may come to pass in Florida, what we would expect is that the current operators would be in a position to maintain our ability to operate in a vertical channel, but that new folks coming online would be required to pick the channel in which they would choose to operate in. So again, we see it as a potential positive catalyst for us and are certainly prepared to be able to participate in that additional revenue stream. Thank you. And one last one, if I may. Obviously, your stock has performed very well, but you still trade at a discount, right? If I can use the word, there's an overhang, right? I mean, you have the other big MSOs trading close to 20 times or high teens and truly 8 to 10 times. And that overhang is really the fact that you're mostly seen as a single state operator and then the future competition. I want to concentrate the question in terms of growth outside of Florida. From outside, without having all the details, I would say, why bother with Massachusetts, right? It's getting crowded, supply and demand could be equal a year out something. It's already a wreck, right? So you don't have optionality from going from med to reg. Why not focus more on a private MSO that gives you access to several states that have good potential from going from med to reg and have a maybe better growth potential? Just some brief thoughts on that, if you can dig deeper in terms of how you think about capital allocation. I just find that putting more money into Massachusetts, and maybe I'm wrong, in the scheme of things. So in terms of what you could do for your valuation, it may be better just to look at it privately and so. Thanks. Yes. No, thanks Pablo for the question. As we said in our remarks during our prepared remarks, we are continuing to focus on M and A. I've also said I think previously and this goes back to your question I think around how we see the landscape evolving over time. Massachusetts is an important Northeast market for us to start developing that hub in the Northeast. And so we continue to be excited about Massachusetts. We continue to be excited to launch a wholesale program in Massachusetts. Again, there are of course other states that are exciting as well and particularly states in that Northeast corridor. As we started to assemble a team in that Northeast hub, it also gives us greater flexibility in terms of adding additional markets and additional scale and creating synergy from an operational perspective around that hub. So we do think that there can be there's again a place for Massachusetts and certainly appreciate the opportunity that that market can offer along with additional growth opportunities specifically in the Northeast. So more to come. Yes. Your next question comes from the line of Andrew Parrissenu from Stifel. Your line is open. Thanks for taking my questions and congrats on the great quarter. Maybe if I could follow on with the comment on M and A. You're also obviously having an established platform as opposed to building 1 out from scratch and you guys are generating significant cash. How would you say that you're leading towards your growth in the future? Is it do you think a little bit more towards M and A? Or do you think applications is still an important part and piece of your future growth? Yes. No thanks for the question. So it's a combined strategy. And I think when you just look at the map of the United States, right, and you think about the states that have yet to develop a program, right? I mean, when you look at the Southeast, for example, and you see Florida, we're a little bit on a cannabis island down here. So we look at our surrounding states and certainly want to participate in the markets as they expand. Again, thinking about that hub model right from the Southeast. And then I'll just echo what I said before with respect to M and A. And I think that being disciplined with respect to M and A, making sure that we are doing and participating in M and A for the right reasons and not just as a because we're trying to go after a particular market placement with respect to the capital markets, but really that it's from an operational and fundamentals perspective the right thing to do for our company's growth and for our brand and for our customers. And I think it's really been and it's an important balance. I mean, I think we've seen over the last 2 years a lot of land grabbing and a lot of M and A that quite frankly it seemed on paper made a ton of sense and for the capital markets may have made a ton of sense. But when those pieces start to integrate or not, it can really have some significant negative effects and negative pressure on the business. So we do think that it's important to continue to grow, but we also think that that growth needs to be strategic and it needs to be thoughtful. And so we do plan to continue like I said in both avenues. Okay. And maybe to continue on that thought, you mentioned that there could be opportunities for companies that have been impacted by the shutdown in a negative way or in certain states or for those that have actually benefited and need a little bit of capital to keep up with the pace of rapid growth. Would you say that you're equally interested in both opportunities or perhaps one is more interesting than the other? Yes. No, again, I mean, I think it's very company by company and market by market specific. So just to reiterate, we remain opportunistic. We have been developing a fairly robust intake pipeline of opportunities and we'll analyze each opportunity through and against our very specific and strict criteria. Okay. And if I can just add on one more. Given it seems like your pipeline has actually increased recently from your comments today. And over the past year, we've seen kind of depressed valuations as was mentioned before. But really what has changed? Could you maybe describe why you seem a little bit more excited now than you were previously? Yes. I mean, I think that right, a bit of it has to do with just the fact of where we are and where we sit. And then I think that also the fact that we feel like we are in strategically and infrastructure from an internal perspective poised and ready and have the bandwidth to really focus on and have great integration. Again, the day of closing is just day 1 of a new opportunity, right? It takes a lot to then maximize and really make sure that, that new opportunity is integrated and that we're all able to focus as one team, particularly when we're talking about a very customer facing product with a retail branding angle like what we have in with Trulieve. And so I think that there's a combination of factors there. But and again, I think that potential folks who are considering wanting to be part of a larger company, I think, are understanding what we bring to the table at this point and are equally excited about potential partnerships. So I think it comes from both sides. Thanks a lot for taking my questions and congrats again on the great quarter. Thanks so much. Your next question comes from the line of Erik Delores from Craig Hallum. Your line is open. All right, great. Thanks for taking my questions and I'll offer you my congrats as well on a very strong quarter. I'd like to first focus on expansion, Jefferson County. I think you said 24,000 square foot facilities each month this year, larger facilities coming online in 2021. Great to see. I'm really excited to see the earnings power coming out of those facilities. Can you help us understand how you guys think about balancing supply and demand, especially on a longer term basis? I think investors are generally wary of oversupply given the dynamics that unfolded in Canada. Certainly, drastically different fundamentals in Florida versus Canada, but can you help us understand how you think about cultivation expansion and balancing supply and demand? Yes, sure absolutely. So we model everything very, very specifically. And I mentioned that before releasing increased guidance there was a complete top to bottom reforecasting across the entire company. As part of that, we're looking at, of course, our patient growth as well as our anticipated store growth, number of registers throughput through those registers, of course, buying patterns and trends from our patients. And really the cultivation capacity comes into play after that first demand model is built. So we're really building our cultivation capacity in step demand. We've always done that, like I said, with the exception of that greenhouse component, which again we're able to dial up and down. And we think really the reason that we were so focused on that is because it gives us great optionality in terms of having that additional supply available so that we can pivot and have supply ready for trends that are quite frankly the timing of which may be unknown at this point in time. So it is a very modular model and it does it is primarily driven off of demand. Okay. That's helpful. And then if I could just touch on your wholesale strategy in Massachusetts, certainly looking forward to seeing you guys roll out your strategy next year. I guess it's more of a 2 part question. First, how do you think of prioritizing distribution of your branded products in your own retail stores versus in 3rd party locations? Obviously, within your own stores that maximizes near term profitability. We've seen that from you guys out of Florida. But then prioritizing 3rd party stores obviously maximizes distribution, kind of gets your brands out there. How do you think about that trade off? And then, how do you think of, sort of growing or sorry, selling only what you grow versus also buying wholesale flower sort of supplementing your capacity. Obviously, in Massachusetts, you're we're kind of limited in terms of cultivation capacity unlike in Florida. So, as you look to sort of increase market share in Massachusetts, would you guys be open to buying wholesale flower as well or just would love to hear your thoughts on that as well? Thanks. Yes. Thanks for the question. So as you mentioned, right, certainly having a vertical channel is going to give us the best margin and also gives us the best, I would say, brand control. And so at the end of the day, having branded products in a branded store and having that customer experience controlled right and we think is a very, very important component of brand building particularly in a new market. So that is something that we will be focused on. And to your point, there's been a lot of discussion internally with Chris Kelly, who's our Director of Wholesale with respect to how much product and what type of product offerings we're going to have in store and our own stores versus what we'll be offering via our wholesale channel. Likely that we will not offer 100% of our product offerings right through a wholesale channel to get those something special if you will to come and give them a reason to visit our Truly branded stores. That being said, we also have of course a number of brand partners that we're excited that will also be joining us in Massachusetts. And so there they will also have the ability to outsource supply to then make their branded products that we'll be assisting in distribution not only of course in our stores but also as part of our wholesale portfolio. So a couple of opportunities there to really leverage and to maximize again revenue in both channels. So appreciate the question and are excited to share more with you all as that opportunity comes to fruition. Yes, very exciting. All right. Thank you very much, Kim. And again, congrats to you and your whole team. All right. Thanks so much. Your next question comes from the line of Kendrick Wynne from ATV. Your line is open. Thank you and good morning. Kim, in the interest of time, I'll let myself to one quick question. We've seen in your headline numbers, obviously, the impact of sort of the 4th quarter impact of flower in terms of market dynamics and your competitive positioning. Through that lens, could you give us some perspective on how you think market dynamics could evolve and how that would impact you on the introduction of edibles? And perhaps just some additional color on how to think about what that will do to competitive intensity in the market? Thank you. Yes. No, thanks so much. We have been anticipating edibles really, I mean, for a while now, to put it mildly. And we have a state of the art 10,000 square foot kitchen ready to go, products formulated not only with our own in house brands, but also with brand partners that have been announced across a number of product categories within the edibles lineup. Additionally, right, because of that because of the greenhouse oil inventory that we have on hand and our ability to tap into that for our edibles product line, We believe that we are at a strategic advantage there with respect to being able to launch and have that not impact our availability of other product lines. With the question specifically on flower and whether or not we think that there will be impact or cannibalization across segments, What I can tell you is that as I mentioned on the call Florida particularly loves, loves, loves new and new market segments. Also I can tell you that the when we look at how quickly Flower was adopted in the State of Florida, Flower came online in March of last year and we were quickly within 3 months, I think it was within a quarter up to about a fifty-fifty product unit split between flower and oil. I don't see flower demand going anywhere. I do think that edibles at least initially will be an additive product. Question as to whether or not there any degradation, I would think it would be a degradation potentially on the other oil categories versus flower. I expect flower consumption to continue to be fairly high. Great. Thanks, Kim. Congrats and I'll leave it there. All right. Thanks so much. Your next question comes from the line of Andrew Sampler from Echelon. Your line is open. Hi there and congrats on the quarter. Thanks so much. Just wanted to ask on the updated guidance. If I look at what you guys have been able to accomplish in the 1st 6 months this year, it's been really impressive. And I compare that to what's implied by the guidance. So if I take the midpoint of sales, I'm seeing some sales growth there. So that's appropriate. But when I look at that on an EBITDA basis, the average quarterly EBITDA would be somewhat lower than what you achieved in Q2. I'm just wondering if you're seeing any headwinds to your margin profile or are you modeling any buffer in there for a potential COVID impact? If you could just speak to the dynamics there that would be appreciated. Yes. No problem. Thanks so much. So I think that the first thing that I would say is that we try to be very realistic with respect to our guidance and again, increasing it on a sequential basis when you look at it. I mean, it's I think approximate 43% increase in EBITDA from what we guided to previously. And but to your point, we certainly don't know at this point and that's why we were hesitant to increase guidance in Q1 exactly what all the potential impacts with respect to COVID could be. And you heard me mention as we think about the kind of macro environment and the shift in pressure on folks from a macro perspective, I think that that remains to be seen as well. And as we think about folks, for example, in that high level of growth in our value flower line as an example. So to be determined with respect to COVID. The second thing that I would mention is that Alex did go into a bit of detail around just our efforts to get ready for being SEC compliant and SOX compliant. And there certainly will be expenses associated with those efforts as we transition and make the transition from IFRS to GAAP. And then finally, I would just say that again, we are ramping up for Massachusetts. We've got applications efforts underway. And there are we're kind of positioning for wholesale and other catalysts. There are some expenses associated with those things that are happening now ahead of revenue. And so we do have that included as well. So I think all those things lead to where we landed to with respect to our guidance and we feel pretty confident about that. Okay. Thank you very much for the color there. I was also pleased to see your confidence in being able to deliver 68 stores by the end of this year. I just want to see if you had any additional commentary on perhaps some scenario analysis. If the COVID situation worsens, could we potentially see that slow down? But you're looking perhaps to even come in on top of that 68 figure in a base case. Can you just speak to kind of the scenarios you could see playing out in that market? Sure. It's been very heartening with respect to our ability and our team's ability to continue to move forward and get stores open during COVID even in the middle of the heightened stay at home order here in Florida. All of the construction we feel very confident with respect to again at least our Florida store build that we'll be able to meet that number. The team has been laser focused on ensuring our ability to meet that goal and I have a high degree of confidence in them to be able to deliver. Great. Thanks for the color. All right. Thanks so much, Andrea. There are no further questions at this time. I'll turn the call back over to the presenters. Thank you for joining us today. We look forward to updating you again next quarter. This concludes today's conference call. You may now disconnect.