Great. Good morning, everyone. Thanks very much for joining us today. I'm Gerald Pascarelli, one of Needham's consumer analysts. We're very pleased to be joined today by Christine Hersey the Vice President of Investor Relations at Trulieve. Trulieve is one of the largest multi-state operators in U.S. cannabis, and they are the market share leader in the important state of Florida. Christine will be providing an overview of the company today, but before she gets started, just a few housekeeping items from me. In the event the audience has any questions, you should be able to enter them directly onto the portal, or if preferred, please feel free to email me directly at gpascarelli@needhamco.com, and I'll be happy to ask them discreetly on your behalf. So with that, Christine, why don't you take it away?
Great. Thanks for the introduction. You should be able to see this presentation here on the screen. This is our January Investor Relations PowerPoint presentation, which is available on our IR website. If you would like to download a copy, here we have our standard forward-looking statements. Trulieve is a leading cannabis company in the U.S. We are a multi-state operator with nine states that we operate in, and eight of those states with retail operations. We are vertically integrated, which means that we produce, we cultivate, manufacture, distribute, and retail our own products. The company was formed in 2015, and the very first sale was done here in the state of Florida in July of 2016. The company continued to grow, and we completed a reverse takeover and became listed on the Canadian Securities Exchange in September of 2018.
We are organized so that we have three main regional areas where we focus our operational management. We are in the southeast, the northeast, and in the southwest. We currently have over 4 million sq ft of production capacity, and actually, today we are celebrating the grand opening of our 227th store in Zanesville, Ohio. We have the leading retail presence in a number of states, including Arizona, Florida, Georgia, Pennsylvania, and West Virginia. Since the beginning, we've taken a targeted approach to balancing growth and profitability, and we have very strict parameters for capital allocation and how we're managing ourselves. This is just a quick snapshot of our production and our retail presence. Our objectives for 2025 are similar to our objectives last year. We have a heavy focus on the customer and delivering exceptional customer experiences across our entire platform.
We focus on quick and expedient, convenient transactions, and we offer a no-questions-asked return policy in all of our locations. We continue to collect customer feedback and data, really listening to the customer and monitoring trends and evolving preferences to see which types of products they want, and we use that information to inform our production mix and also manage our in-store experience. You'll hear members of our leadership team talk about branded products for branded retail. It's been a mantra of ours for several years now. In the third quarter, we sold over 11.5 million units
One of the things that also differentiates us from maybe some other companies is our continued investment in ongoing capital allocation towards building out infrastructure to support future growth. This is everything from investing in marketing technology, investing in IT infrastructure, to just evaluating our in-store experiences, retail flow, going back and constantly looking for incremental improvement to continue to improve our operations and get ready for the future. You heard me mention the customer experience. Trulieve has always had a customer-first mentality. We put a lot of time and effort into evaluating our processes and how we're interacting with the customer through all steps of the customer journey. Last year, we rolled out a revamped rewards program, which has done very well. We said in our Q3 call, we had over 450,000 loyalty members at that point.
We offer a fully stackable points program that's portable across markets within regulatory frameworks. We're also always looking at products and new products that our customers might want to try. And we do look at customer retention metrics very closely. We've had mid-60s company-wide retention for many quarters now, and in medical-only markets, we're at 74% retention in the third quarter. We utilize a house of brands approach to getting the right product assortment into our stores. We have value, mid, and premium tier segmentation for our brands so that we can meet customers at all price points and still provide high-quality products.
We also have cultivated a number of brand partnerships over the years, and we carry all the brands that you see here on the right in select markets, which really gives us another way to give customers what they want and get to try a cool and different brands from other companies and also gives us an opportunity to partner with some of these companies and learn and share experiences with them. As I mentioned, we have a leading retail footprint in U.S. cannabis. Today, we have 227 stores, and actually, with that new store in Ohio, we have 30% of our stores located outside of Florida. We do a lot of work when we're evaluating our retail network, deciding where to place new locations based on a number of metrics.
And we also periodically go back and revisit our existing network and determine if we need to relocate any of the stores. If anything has changed, we're able to get into better spaces with better parking or better layouts for what we need. So we do periodically do relocations. Our three cornerstone markets, which are the largest drivers of our revenue in our Adjusted EBITDA, are Florida, Pennsylvania, and Arizona. Florida and Pennsylvania are both medical-only markets. Arizona is medical and adult use. We have the leading retail presence in all three of these markets, and they are all limited-license markets. So these are markets where we're able to invest capital and build a significant amount of scale and depth in our operation, which contributes to our margins. And it gives us the ability to take that capital and then redeploy it and invest back into the business.
We have 160 stores in Florida, and we have several campuses for production, one of which includes our large flagship 750,000 sq ft indoor cultivation facility. This is a state-of-the-art facility which uses a unique workflow really designed to provide our workers with greater care and attention to each plant. So instead of having workers carry plants around the facility, we use a system of automated trays that move the plants from room to room and really gives folks greater time to spend inspecting and working with each plant. We've been working on really building up brand awareness with some of our more popular brands, including Modern Flower, Roll One, and Sweet Talk, and those are all widely available in Florida. In Pennsylvania, we have 21 retail locations, and we have three different grower processor facilities there.
So we have a small site, a medium site, and a larger site there. We've been working on pushing our brands through not only our retail network, but also through wholesale channels in Pennsylvania, again with Roll One and Modern Flower being two of the more popular brands that we offer there. And then in Arizona, Arizona is an adult use and medical market. We have 22 stores there. We just opened our 22nd store in Maricopa last week. And we, again, offer a number of our own brands throughout that market, including Modern Flower, Roll One, Sweet Talk, and Colors. And last year, we completed the rebranding of all of the acquired stores in Arizona. So we have one unified Trulieve brand across the entire network throughout the state.
So when we talk about our retail network and all the investments that we're making, we're really talking about positioning our company to compete not only today, but also for the long term. So you hear us talk about Cannabis 2.0. And really, no one in cannabis knows exactly how or when the rest of the story is going to unfold. But as these layers of prohibition peel off over time, we need to continue to adapt and be ready when new avenues open up for us or when we're able to compete in new ways. And so one of the things that we do is always try and build in a lot of optionality and a lot of flexibility into our business, into our business model, so that we're ready when some of these barriers come down in the future.
For us, that means having an amazing and very loyal army of Trulievers, our loyal customers that we're working to serve all the time, in keeping and reinforcing our regional hub strategy for our manufacturing operations, where we have folks who are on the ground and know the local markets, who are then supported by a national team. And then also just continuing to build out scale and really harness new efficiencies. That has helped us, again, improve our profitability, but we're also able to take learnings from these markets and bring them into other markets. So we have a lot of ideas that would come up in different markets, and then we're able to really utilize those solutions across our entire network. Having this distribution network with strong retail, strong wholesale definitely enables us to sell our branded products, build brand awareness, and build long-term equity.
All of that is supported by the investments that we're continually making in our technology platforms, and we'll continue to make those investments this year and into the future. Here are a couple of snapshots of some of the events in recent years. This is our leadership team. Our founder and CEO, Kim Rivers, is our fierce leader. She's a strong advocate for cannabis access and for really providing a normalized retail experience so that any and all are welcome into our stores, whether it's a soccer mom or anyone from any neighborhood, all walks of life. This team really has a lot of experience not only in cannabis, but in a number of sectors, including retail, including hospitality, and restaurants, and insurance, and finance. We have a well-rounded team and a very well-rounded board of directors.
So, these are former CEOs, executives, again, across multiple sectors and industries who've really been through a lot of different economic cycles, a lot of changes in consumer and different patterns. And so we're fortunate to have this leadership at the helm of the company. I want to just flip quickly to this highlight screen. This shows just our financial performance over the last couple of years, and you can see some of the trends up and down. Q3 is typically our seasonally weakest quarter, and you can see that the last three years in a row, we have a dip from Q2 into Q3. Because of our geographic exposure in Arizona and Florida, we typically see traffic slow down in Q3 and some pressure on basket. And then we normally see a rebound into Q4. So we've guided for exactly that scenario for the fourth quarter.
So we expect our fourth quarter top-line revenue will be up low single digit compared to the third quarter. And we think our gross margin in Q4 is going to come in line with what we've been able to produce year to date. Our 2024 operating cash flow guidance is at least $250 million with full year CapEx of $130 million. We have a very solid balance sheet and a lot of flexibility, which will allow us to meet our financial obligations and continue to invest in the business. We had $319 million in cash at the end of the third quarter and $481 million in debt. So I think that's a pretty quick, but hopefully effective overview of Trulieve. I'd like to give an opportunity for any Q&A with Gerald, if that's okay. Great. Thanks for that, Christine.
We actually have a few questions that came into my email while you were presenting. So the first one is just on pricing. If you could talk about how pricing has trended in Florida since the election, since the ballot initiative. Yeah, we've seen a number of different trends, I think, since the election in November. One is that patient counts have been increasing. So typically, folks may not renew their cards if they think adult use is going to come into play. So they hold off on renewing their cards, or they don't come into the program if they think they'll be able to come in as 21 and over without getting a medical card. So we did see a decline in the patient population in Q3, and then we've seen that rebound since the vote and continuing over into January.
So, we've had new patients coming back or returning patients, both coming back into the program overall. We haven't seen anything too different in terms of the holiday season or pricing. There are always, and this has been the same for the last three plus years, there are always some competitors who price certain items or certain categories aggressively or who run blanket store-wide promotions from time to time. That's sort of normal course of business in Florida. But we haven't seen any outsized changes really in the competitive landscape to this point.
Got it. Another one I had. Can you discuss your growth drivers for the business now without adult use in Florida for the foreseeable future?
Yeah, I would say we are not changing what our core business priorities and strategies are and have been for some time, right?
We are always looking to continue to expand in our retail footprint where we have the means, right? And so since the election, we opened a store in Georgia in December. We opened a store in Arizona last week. We're continuing to open in Ohio. We'll continue to look at our retail footprint and figure out, do we need to relocate some of these select locations in different markets to a better place that makes more sense? And we're also always looking at just meeting the cost, taking market share where we can in our markets, not just opening new doors and bringing in new customers that way too. So we'll give more color when we report our Q4 results at the end of February, and we'll have an outlook for 2025 that will provide more information.
But I would say for us, we're focused on continuing to run our core business the way that we have been the last few years, really focusing on making sure that the experience for the customer is great, that we're retaining our loyal customers, we're attracting new customers into the fold, and then expanding our network, whether it's retail or continuing to build out our wholesale channels in markets where we can. And that's on the top-line side. And we're continuing, of course, to keep driving efficiencies and reduce our costs where we can as well. We've made a lot of investments in technology and systems, and we've upgraded a lot of our production sites where we can, some of them incremental upgrades, but it continues to contribute to lower costs to operate moving forward, so.
Got it. Thank you. Another one.
Do you have any updates on your tax strategy?
No, we do not. In case anyone is watching and doesn't know exactly what we're talking about, in our Q3 earnings presentation, we have several slides talking about our tax strategy, but Trulieve filed amended tax returns in October of 2023, challenging the applicability of 280E to our business. Subsequent to that, we did receive cash refunds in Q4, in Q1, in Q2. And then we also received $5.2 million worth of rejection letters as well. Keep in mind that we don't file a single tax return. These are tax returns across multiple entities and multiple states. We're talking about dozens of returns here. We don't have an update on that. We've always said this would likely be a long process.
And in the meantime, we're continuing to run the business, and we'll see how that process unfolds.
Got it. Margin question. Your last quarter, 61% margin, notable expansion year over year and sequentially. Can you just speak to some of the drivers behind the expansion, whether or not the pricing outlook is more favorable or the benefits that you're getting from JeffCo?
Yeah, I would say there are a couple of things that are contributing to that. One, we're definitely getting benefits from JeffCo, which is that large indoor building that we talked about. We have very competitive production costs there. But we've also taken a lot of our learnings from multiple sites and really been working to increase our yields and lower our production costs at all of our cultivation sites.
So we've seen steady improvements in other markets like Arizona, Maryland, and so in Pennsylvania, and we'll continue to do that. And we've also been increasing the potency in some of those other markets too, which just gives us a more competitive product, which allows us to price those grams in a more competitive way. On the discounting side, I'd say one thing that we've been good at is staying very disciplined and not just discount, discount, discount in order to try and attract traffic. I think we went through an extensive inventory wind-down process in 2023.
And through that process, we had a lot of learnings that really told us a lot about customer behavior and where the boundaries are for price elasticity because it's a very fine line when you're able to attract traffic and sell more units versus when you're just giving margin back to the customers who are already coming to buy those products anyway. So we've been very protective of our margins, and it's worked out well for us.
Got it. Thanks. Another one just came in. This is on hemp. Peers are entering the hemp market as these products are free to trade without the heavy cannabis regulations. So number one, do you have a hemp line, or are you planning for it in the near term? I guess just your overall thoughts. And I assume that this is hemp-derived THC beverages. Yeah, I would assume that. Yeah.
I mean, we've been watching the landscape unfold, of course, and so we haven't come out with a position either way on hemp. Like all opportunities, we'll evaluate and do our homework and figure out what makes sense for us if we want to be in a certain segment and when it makes sense, so it's an interesting time. We just had two of the larger lobbying firms merge or groups, I should say, merge together. There was an announcement yesterday, so the National Cannabis Roundtable and the U.S. Cannabis Council are coming together and forming the U.S. Cannabis Roundtable, and those two lobbying groups together are going to be advocating for the plant, if you will, and so we'll see what comes out of that.
For Trulieve specifically, we like to do a lot of homework and really fully flesh out any strategy or anything that we want to go into before we dive in. So we've been watching all the developments. There are definitely some advantages to be able to sell a product without all of the restrictions that we face in strict THC business, but we'll make a decision when it's right for us.
Got it. Just as a follow-on to that question, I'm curious. A lot of people talk about this impacting beer and alcohol just because you get it in the same retail outlets. Has Trulieve seen any kind of cannibalization with traffic into the dispensaries given how readily available some of these products are? And specifically in certain states, I guess, where it's more pronounced?
Or is it not as cannibalistic as you would think, just given that the delivery mechanisms are different from what you get in a dispensary and beverages are just a very small part of likely what makes up your revenue at this point?
Yeah, I would say there are probably, I'm generalizing. So I just want to start out by saying I'm generalizing terribly. So it feels like we have not, in our dispensaries, had an impact on traffic. And I only say that because the trend for the last two years has been traffic is up, units sold are up, but there's been pressure on pricing, right? And so that's been the general trend. So demand for our products remains strong and continues to grow. And you see that with our customer retention numbers that have been within 1% the last eight quarters or so.
I mean, we're really serving a customer base that is comfortable coming into a dispensary, whether it's in an adult use market or in a medical market, and is comfortable coming into that ecosystem. To your point, I think some of the hemp beverages or hemp products that are outside of that dispensary system, especially if they're placed in an alcohol store or in a convenience store or something, are meeting customers where they're at. And so it's likely a different set of folks than who we are catering to, specifically in markets where they go and get a medical card and come into a dispensary. Those folks tend to come in with some frequency, right? And they're not just sort of casual customers who happen to be at a Total Wine, for instance, and then see something when they're checking out and try a new product.
So, I think there are different customer bases that are being reached in different ways with these categories.
Got it. I had one on Florida. There's some news out this week that the state's making another push to try to get cannabis on the ballot, I guess the midterm ballot in 2026. Can you just talk about, I guess, some of the, I guess what the process or the procedure is for getting that on the ballot? Does it differ from a general election? And then I don't know if this is easy to answer or not, but 56% approval is, I think, looking back among one of the highest on states that just had a simple majority that have legalized. So is there any way around a 60% supermajority? And do you know what that process would be? Yeah.
I mean, so I think there are. Right now, as it stands, there are two ways that adult use can be legalized in Florida. One would be the legislative body comes together with legislation, hammers out a deal, and then the governor signs it, and it becomes a law, right? So that's one pathway for legalization. The other pathway is still the citizens' initiative process. And that process, the way it works is the campaign, the Smart & Safe campaign just filed language, right, for a ballot initiative for 2026. The way that process would work is the same as the last one that was attempted for 2024.
There’s a signature gathering process, and there’s a number of signatures that you have to collect, at which point it triggers a Supreme Court review of not only the language, but also the summary language that describes the full text of the initiative. Then assuming that you collect enough signatures to get on the ballot and you pass the Supreme Court review, it would go for a vote in the midterm election in 2026. That would still require a 60%. That is a generic process that applies for all citizens’ initiatives in Florida because it is an amendment to the state constitution. That’s the process. We’ll see what happens. We’re sitting here in January of 2025. There’s a long road between here and there. As I mentioned, the state legislature could draft legislation and address it directly as well.
So we'll see what happens. It's still early days.
Got it. Last one for me. I would ask this to any operator, and I will ask it to everyone I speak with. But the DEA canceling the administrative hearings, a negative read, just given that it's already been delayed. So if you have any thoughts or review, I know people don't like to make predictions when it comes to any kind of regulatory reform, but if you have any view, I think that would be helpful for the audience.
Yeah. And so just for a little context, the rescheduling process is underway, and the administrative law judge was set to hold evidentiary hearings starting next Tuesday to collect evidence both in favor of rescheduling and opposing rescheduling.
One of the proponents of rescheduling had filed a motion to have the DEA removed as the main proponent based on some ex parte communication and viewpoints that they're not really in favor of rescheduling. So the judge who's overseeing the process stepped in and said, "I don't have the authority to actually remove the DEA, but I'm giving the proponent leave to appeal my decision, and so instead of carrying on with the hearings and then waiting until the end for challenges, they're letting this part unfold upfront so that we'll have clarity on that decision and can move forward." What that does in practical terms, though, is it also puts a pause on the hearings until the new administration fully staffs, or it feels like in the interim, the new administration will be able to appoint and get confirmed a new DEA administrator.
They also appoint a deputy DEA administrator. So we'll have more clarity on who the leadership is at the top. So we'll see how this process unfolds. It introduces some uncertainty into the timing, of course, which no one likes. But at the end of the day, it may actually improve the odds of rescheduling to Schedule III actually happening. So we'll see. We don't know yet who the DEA administrator is or what their posture is towards cannabis. But hopefully, we'll be able to find that out in relatively short order, and we can go from there.
Perfect. I just want to check the portal really quickly. I'm not seeing any further questions. So I think that's all we have. Thank you, Christine, very much for joining us, and thank you to the audience for dialing in. Have a great day. Thanks, everyone.