All right, thanks for joining us, everybody. We now have Trulieve Cannabis , which is a U.S. multi-state operator in the cannabis space here. With us from the company is Christine Hersey, the Vice President of Investor Relations. It's a really interesting time to be talking about the U.S. cannabis space because it feels like there's a lot more talk about a really big regulatory catalyst that feels like investors have been waiting for for quite some time. It's great to have somebody with us who can give us a lot more insight into what's going on. Christine, if I think back to the Q2 call, I think you and Kim had laid it out pretty well just as far as the four pillars that Trulieve sort of has right now, one being reform, the other being product and distribution, and then the customer.
I think that's probably a good framework for our discussion today. Where I'd like to spend the most time is on reform because we had a very big piece of news come out on Friday that the Trump administration is considering rescheduling. I don't think there's anything incrementally new necessarily in that. We sort of knew that for some time. Yet it seems like investors now are getting a lot more excited about the prospects of that. With that, it would be helpful, I think, to get an overview for someone who may not be familiar with the cannabis space or what rescheduling means in general, if we could go through that and also just get an idea of where are we exactly in the process as of today.
Sure. Thanks for hosting us again this year. Right now, marijuana or cannabis is classified as a Schedule I drug in the Controlled Substances Act, which basically is the highest level of control. By definition, that means there is no currently accepted medical use and there's a high risk of abuse. That is a category that also includes heroin and LSD. I think intuitively most people recognize that marijuana is not on par with heroin, right? The way I always frame it is if the principal of your child's school calls you and says, "Found heroin in Johnny's locker," or "We found marijuana in Johnny's locker," you're probably going to have two very different reactions to those calls, right? I think most people agree just from a common sense and practicality standpoint that marijuana should not be classified as a Schedule I drug.
At the same time, there are 40 states in the U.S. that currently have medical and/or adult use marijuana programs. There is a disconnect and a divide between the current federal law and regulation and what is happening in the majority of our states in this country. In 2022, the Biden administration kicked off a review of the classification of marijuana within the Controlled Substances Act, and that started a process whereby the FDA conducted a review of all the scientific and medical data, and HHS prepared a report with a recommendation which came out in August of 2023 recommending that marijuana be reclassified to Schedule III.
That would basically say, yes, we are acknowledging that there is a currently accepted medical use for marijuana in the United States, and going through a rigorous analysis and comparing it to other controlled substances as well as tobacco and alcohol, they felt that data showed that it should be in a Schedule III, which would be less than cocaine and fentanyl, but greater than benzodiazepines, right? Again, keeping in mind tobacco and alcohol are not controlled substances at all. They are just regulated and age-gated. That process unfolded, and then it went over to the DEA, who kicked off a public comment period and published a notice of proposed rulemaking. There were 43,000 comments that were submitted in the summer of 2024. The majority of those comments were in favor of rescheduling and/or de-scheduling cannabis and removing it from the Controlled Substances Act list.
That process continued into the fall. There were requests for a public hearing. There was an administrative law judge assigned to the hearing process. Then that hearing was essentially stalled. There was an appeal for some of the motions that had been considered. We came into a new administration. There was just recently a new DEA administrator who was confirmed into the spot. Coincidentally, the administrative law judge retired on August 1st. All of that to say is that this rescheduling is firmly within the hands of the executive branch. President Trump came out yesterday and in response to a question during a news conference, confirmed that they are looking at marijuana and potentially rescheduling marijuana, and that there would be some update on that in a few weeks. That's exciting news for the industry and for investors.
There have been a lot of starts and stops on this issue over many, many years, again, despite this growing popularity and continued adoption by states. We're excited to see where this goes. This was something that the president had campaigned on last year, and it sounds like the administration is ready to move forward. Just for perspective, this would not legalize marijuana or cannabis. It would simply acknowledge the medical value. By placing cannabis and marijuana into a Schedule III versus a Schedule I, it would remove some of the barriers for conducting research in further exploring medicinal properties of the plant. It would also remove the punitive tax burden, which is applied to Schedule I and Schedule II drugs, which is really designed to go after drug traffickers.
I think most people can also agree that companies that are operating within programs that were designed by states and that have state oversight, these companies and facilities are subject to regular inspections. The products are tested by third-party laboratories. They're labeled, they're tested. There are strict rules against advertising and how you are communicating about these products, etc. That is not the same thing as an illicit market drug trafficker who is essentially operating with no rules at all. There is starting to be some recognition that, you know, there are some disconnects between how these state operators are operating their business versus how an illicit market operator, you know, behaves in society. Those two should not be treated in the same exact way. All of this is very encouraging for the industry.
It's probably fair to say this is the single biggest regulatory catalyst that folks have been looking for, one of them certainly anyways for the last few years.
Definitely. You know, this industry has what I call degrees of difficulty in operating, right? There is a smaller pool of capital that we have access to. There is a higher cost of capital. We're not allowed to list on U.S. exchanges, even though we employ hundreds of thousands of Americans, for employees working in the sector. It can be harder to get mortgages or loans for a car, or even just keep basic banking services. There are a number of things, but at this point, you know, we are all starved for change. We're ready for reform. Some people have been working at this for decades. It would be a welcome step to have anything come through and be in place permanently and have it be final.
Rescheduling is something that is definitely within sight because, again, it's controlled by the executive branch and would not require a full vote or 60 votes in the Senate to pass through Congress in order to have that permanent change. This is something that is definitely achievable.
That's a great point. That also partially answers my follow-up question. It feels like most of the questions I get from investors are on what has to happen from here in order to get rescheduling. Do we need the hearings to resume, or can there be some other method in order to have cannabis be rescheduled from Schedule I to Schedule III? Because everyone seems to be a little bit unclear, I guess, on what needs to take place.
Yes. I'm not an attorney. I'm not going to provide any legal advice, but from what we can tell, there are multiple pathways that could complete rescheduling from here. The way that the Controlled Substances Act is set up, the Department of Justice or the Attorney General has primary oversight, if you will. The DEA is also granted some authority in this process. We think there's a pathway for some swift action that may or may not require resuming the exact pieces of the process that were already in flight. We'll see how that turns out.
Yeah. On the topic of reform as well, it'll be, I think, taking increasing attention from investors over the next, we'll call it a few months, with the prospect still of there being an adult use market in Florida potentially. I think this time around, it's fair to say that you are taking a little bit of a different approach in order to potentially getting that on the ballot. Can you just frame up for us what are some of the differences that you're taking?
Sure.
Smart & Safe Florida, I should say, is taking this time around.
Yes. Just for those who may not be aware, Trulieve was a large financial contributor and put a lot of effort and energy into the adult use campaign for the 2024 election in Florida. Some of the rules were changed this year for that process. Smart & Safe Florida earlier in the year launched a new campaign with revised ballot language designed to address some of the concerns that were raised during the prior election cycle. There were four main points that were revised. One was language for protecting children and making sure that there weren't products or advertising aimed at attracting children. The second one was an explicit ban on smoking or vaping in public. That was something that was raised during the prior election cycle. The third was allocation of additional operator licenses if recreational use is actually enacted.
There would be licenses for new players to come into the market without having the full vertical integration requirement. The fourth one was explicitly leaving open the possibility for the legislative body to enact home grow. The rules in Florida are pretty complex. Anything that is done through a citizen's initiative is basically pushing a constitutional amendment forward. You have to have very clear language of what's in the ballot. It needs to be addressing a single subject. If you're trying to address too many topics at once, the court will reject that language. The summary, which is on the ballot, which is basically what a voter would see if they came into the voting booth and did not know anything about the topic, that summary has to appropriately encapsulate what is in the full ballot language.
There are a number of items that need to be met in order to get onto the ballot. That's in addition to signature gathering. I'm reading your mind. Yes. Signature gathering. It's a multi-step process in order to get a citizen's initiative onto the ballot for any election cycle. The first part is to have a petition filed with your ballot language and summary. Then there's a signature gathering process. The full requirement is over 880,000 validated signatures. Smart & Safe Florida has over 660,000 signatures. 75% of the signature requirement is already met. The deadline is February of 2026. We feel there's ample time in order to complete that signature gathering throughout the rest of this year. The court review was triggered when the 25% threshold was met. That is already in process.
There would be a review of the language and the summary by the Florida Supreme Court to see if it's appropriate to be on the ballot for the 2026 cycle. The other thing to keep in mind is that this would be a midterm election cycle, but it's also a race for a new governor in Florida. That will determine some of the politics and the turnout there. In the 2024 election cycle, the adult use campaign had 56% of the vote, but the threshold is 60%. Revisiting the language in the ballot initiative and repositioning that to address some of those concerns up front, taking a look at how the voter turnout may or may not be different in a midterm cycle with a governor's race versus a presidential cycle, and looking at, of course, how public opinion evolves over time are all going to be determining factors.
Typically, the court has until April 1st of the election year to issue a ruling on whether or not the initiative would be on the ballot or if it meets the requirements to be on the ballot. At the latest, we would likely have a decision by April 1st of next year. Then you would have six months or so before the actual race in November of 2026.
Got it. Maybe we'll switch gears here and talk a little bit about product. Trulieve is somewhat unique in that it's very much customer-centric, customer-focused, always this focus on making sure the customer has the best overall experience, driving very high NPS scores, which some folks might tell you that's arguably the most important metric to look out for because that's what brings more people into your stores going forward. One of the things that yourself and Kim have touched on in the past is how there has been this shift from the consumer going perhaps away from the, we'll call it the mid and the high end of the spectrum, the mid to high price point products, more into the value tier. One of the things that you touched on on your recent call was your ability to be able to pivot there.
I mean, what in your view is it that underlies this ability to pivot so, so well and what's kept really Trulieve at the forefront for all the states that you operate in, most notably Florida, of course, but you also have a very healthy presence in Pennsylvania and Arizona as well. You touched on modern flower gaining a lot of traction, particularly in Pennsylvania. What's the secret sauce, so to speak, that's sort of underlying that ability to stay in front of the consumer?
Sure. We've spent a lot of money and a lot of time and energy building out our data and technology platform. We're able to see, by store, by customer, by SKU, how these trends are evolving over time. We did observe a similar shift in customer preferences back in 2022 and into 2023, where at that time there was some inflationary pressure on the economy and there was a trend more towards value in mid-tier products. We started to see some of those similar trends emerge at the beginning of this year. When we see that happening, you're also seeing a lot of news coming out about the consumer and consumer sentiment, along the same timelines. When that happens, we're able to just make sure that we're leaning into those value tier offerings and those mid-tier offerings, making sure we have greater assortment and depth of inventory within those categories.
The other thing that we have been successful at is adjusting our promotional strategy and making sure that we not only have a great deal of products at approachable price points, but we're also providing customers with the ability to have savings on individual product buys. Meaning I can offer you bundle pricing or buy more, save more, but if you don't have the cash in your wallet, you're not going to be able to take advantage of that. What you really need is 20% off an individual unit or something that's at a more approachable price point. We've been successful in these last two cycles of identifying those trends and then making sure that we're adapting our procedures in store so that customers can come in and get what they need. Typically what you would see is an increase in traffic and frequency of visit.
It's more of a paycheck-to-paycheck type of purchasing behavior, where people will come into the store more often, but they'll buy lower priced units. They're not consuming less, they're just trading down in some cases or being very, very selective about when they're choosing to spend more for a premium product. You have to make sure that the value proposition is clear. They're very savvy, right? Everyone has full price discovery on their phone. They can search through and figure out what the deals are at any dispensary near them. They know what a good deal looks like and they know what kind of run-of-the-mill looks like. They definitely are highly educated and aware of what's out there and what their options are.
Absolutely. You talked about the success in identifying trends. I would make the point that one of the trends that you've successfully captured on, it seems like it's growing very quickly, is your THC, your hemp-derived THC beverage platform where it's Onward, but then also Upward you recently introduced as well. It seems like it's gaining a lot of traction. Can you help frame up for the folks in the room the hemp-derived THC space and also the work that potentially led up to you going into the market in the first place and maybe what you've noticed from the set of consumers that those products have attracted thus far?
Sure. This is a different category from what we produce and sell in our dispensaries. The majority of our dispensaries are still medical only. There are still some barriers to come into the program. You need to visit a physician. You need to get a medical card. In some states like Florida, you need to re-up your allotment every so often. There are some barriers to entry, whereas hemp-derived THC beverages are farm bill compliant. You can find these products at your local alcohol or liquor store. For example, in Florida, we sell our Onward and Upward beverages at a number of different places, including ABC Fine Wine & Spirits and Total Wine stores, as well as some specialty liquor stores. This is somewhere where the consumer is already shopping, albeit for a different product category.
We're able to reach someone who may be curious about this category, who's not going to go to a physician, get a medical card in order to buy these products. This has been an interesting thing to observe and just watching, some of it is people looking for a social alternative without a hangover the next day, right? The Onward line is a cocktail alternative line. We introduced that as a pilot at the end of February, with 3 mg, 5 mg, and 10 mg flavors, which are cocktail replacements for martinis, mojitos, bellinis. It's something that's familiar enough to the consumer, but we've been preaching start low and go slow because if people haven't consumed cannabis before, or maybe it's been 20 years or so since the last time they've tried something, you want to make sure that anyone who's trying something new doesn't have a negative experience, right?
They would be unlikely to come back to this category. It's been interesting. It's still a very new and nascent category, right, compared to our traditional business or our core business. It's very new and it's starting out. We just announced we're adding more Onward flavors, which will be on shelves in September. We launched the energy drink with Upward. It has some caffeine, but it's not a lot of, it's not like mixing a Monster energy drink with something. It's got less, it's more like coffee and THC than it is pure energy drink. It's just an interesting and fun way to reach a new class of consumers, again, with tested, labeled products that are age-gated and sold through a regulated channel, but a different channel than what you would see strictly through dispensaries. It's early days. We'll see how this space continues to develop.
There are a lot of brands out there right now. There isn't any one brand with true critical mass. Scaling up, really locking down distribution, and getting a customer base with an intention to repurchase your product and then being able to find your product when they come back to the store and having it be available is really the name of the game for the near term. We'll see how it shakes out, but it's definitely a fun category and something new and exciting to talk about.
Absolutely. I see we're coming up on time, so maybe we'll leave it with this last question, but higher level, how are you thinking about capital allocation for the near term?
Yeah, everything in cannabis is situational, right? How we're allocating our capital and making decisions really is just based on the best information that we have at the time. We've talked the last few earnings calls about addressing some of our debt. We have $368 million in private placement notes, which are due in October of 2026. We've talked about retiring those notes and doing a refinancing for up to about half of that amount by the end of this year. There is a prepayment penalty on those notes until October 6th, so about two months away until that prepayment penalty lifts. We are also spending money trying to push catalysts. We are providing financial support to the Smart & Safe Florida campaign, for example. Our CEO and our team have been heavily involved in lobbying efforts to try and push for federal reform.
This year is a lighter CapEx year for us. We're only spending up to $40 million, really adding 10 stores and doing some store remodels and refreshes. There are going to be opportunities in the next few years, potentially for organic growth and new license applications in states or maybe even some pickup of distressed assets. Historically, our acquisition strategy has really been more peer-to-peer developed. Even the Harvest deal was done with the two principals of the companies coming together first and then pushing forward with that. We have not typically come in and been the highest bidder for assets. We'll definitely keep an eye on how all of that evolves. Obviously, with rescheduling, that has a meaningful impact on our future cash flows and the trajectory of our balance sheet moving forward. How that turns out will also be an important driver for how we're allocating capital.
On share buybacks, this is something that comes up quite frequently. It's something that our board talks about regularly. It's something that we all look at. Historically, when we've looked at that opportunity, we felt like we would be better served investing our capital into the business and building out our platform. Our board or management team has made personal buys in the open market from time to time. That has been our approach.
That's great. That brings us right to time. Christine, thanks so much.
Sure. Absolutely.