Trulieve Cannabis Corp. (OTCQX:TCNNF) Q2 2022 Earnings Conference Call August 10, 2022 8:30 AM ET
Company Participants
Christine Hersey – Director, Investor Relations
Kim Rivers – Chief Executive Officer
Alex D’Amico – Chief Financial Officer
Steve White – President
Conference Call Participants
Derek Dley – Canaccord
Matt McGinley – Needham
Spencer Hanus – Wolfe Research
Andrew Partheniou – Stifel
Aaron Grey – Alliance Global Partners
Pablo Zuanic – Cantor Fitzgerald
Russell Stanley – Beacon Securities
Scott Fortune – ROTH Capital Partners
Vivian Azer – Cowen and Company
Eric Des Lauriers – Craig-Hallum Capital Group
Ty Collin – Eight Capital
Operator
Good morning, everyone and welcome to the Trulieve Cannabis Corporation Second Quarter 2022 Financial Results Conference Call. My name is Vaishnavi and I will be your conference operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Christine Hersey, Director of Investor Relations for Trulieve. You may begin.
Christine Hersey
Thank you. Good morning and thank you for joining us. During today’s call, Kim Rivers, Chief Executive Officer; and Alex D’Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for Trulieve. Following their prepared remarks, we will open the call to questions. Steve White, President, will also be available to answer questions.
This morning, we reported results for the second quarter of 2022. A copy of our earnings press release and an accompanying PowerPoint presentation may be found on the Investor Relations section of our website www.trulieve.com. An archived version of today’s conference call will be available on our website later today.
As a reminder, statements made during this call that are not historical facts constitute forward-looking statements and these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company’s filings with the Securities and Exchange Commission, including Item 1A, Risk Factors of the company’s Annual Report on Form 10-K for the year ended December 31, 2021. Although the company may voluntarily do so from time-to-time, it undertakes no commitment to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
During the call, management will also discuss certain financial measures that are not calculated in accordance with the United States Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for Trulieve’s financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that is an exhibit to our current report on Form 8-K that we furnished to the SEC today and can be found in the Investor Relations section of our website.
Lastly, at times during our prepared remarks or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future.
I will now turn the call over to our CEO, Kim Rivers. Please go ahead.
Kim Rivers
Thanks, Christine. Good morning, everyone and thank you for joining us today. We are pleased to report second quarter results delivering top line growth and margin improvement. I am so proud of our team for managing through the rapidly evolving economic environment and staying focused on our core operating plan. Successful execution of our strategy requires constant evaluation and periodic adjustments to improve performance. We pay close attention to results across the organization, the broader economy and the competitive dynamics within the markets we serve.
Based on recent trends and the impact of proactive measures we are taking to improve profitability, this morning, we adjusted our revenue outlook by 5% from the prior guidance. Our updated guidance incorporates strategic changes across our business, while accounting for the impact of inflation on consumer spending, softness in wholesale markets and the lack of visibility in the economy. We are rationalizing activities that are weighing on margins and resources and channeling efforts towards our core business drivers. We have identified selected non-core assets for potential divestiture or closure that would allow our teams to concentrate on more impactful elements of our operating plan while reducing expenses in these non-core markets.
In July, we decided to discontinue wholesale operations in Nevada. Our limited presence in Nevada was too shallow to justify given the bandwidth and resources required. Without sufficient depth and scale, the performance did not meet our criteria. Similarly, we have made the decision to close select California retail locations. Jettisoning non-core assets and activities allows our teams to concentrate on more impactful areas of our business. Across our retail platform, we are focusing on performance within our high conviction markets, adding dispensaries in our core states, increasing the sale of branded products through branded retail and utilizing data to meet evolving customer preferences. In wholesale, we are taking specific action to address recent weakness. Where appropriate, we are reallocating products from the wholesale channel to our retail footprint and further refining our production mix.
We will continue to evaluate and revise our plans as necessary to manage through evolving industry and economic conditions. In classic Trulieve fashion, we will communicate any changes to our outlook as they arise. Just as we revised our guidance upward when consumption accelerated during the pandemic, we are modifying our outlook now as those trends unwind. Trulieve has always had a strong balance sheet with a focus on cash flow and profitability. Our fortress balance sheet has been a source of differentiation since inception. We will continue to optimize processes, teams and infrastructure and fully expect tighter market conditions will yield chances to acquire distressed and underlying undervalued assets.
As we sought through the opportunity set, we will be patient and adhere to our strict criteria for M&A. As we move through the remainder of the year, our team is committed to meeting customer needs, delivering improved performance in core markets, managing cash wisely and streamlining operations across the organization. Trulieve has the capital, discipline and experience to navigate this environment and emerge as a stronger company. We are focused on preparing for many impactful catalysts that still lie ahead. As an example, just this week, a campaign was launched to legalize adult-use marijuana in Florida. The best is yet to come.
Turning now to our second quarter results. Trulieve achieved second quarter revenue of $320 million, up 49% year-over-year and ahead of guidance for flat top line results. Revenue increased by 1% sequentially, following an increase of 4% during the first quarter. Growth was primarily driven by higher organic retail sales in our core markets. Second quarter GAAP gross margin was 57%, up from 56% last quarter. Adjusted EBITDA increased by 5% to $111 million, or 35% margin, representing our 18th consecutive profitable quarter. As expected, second quarter operating cash flow was negative due to the timing of tax payments. However, we expect strong operating cash flow for the remainder of the year. We exited the quarter with $181 million in cash.
Turning now to our retail operations. Retail sales grew by 3% sequentially to $299 million, accounting for 93% of second quarter revenue. I am so proud of our team for delivering this organic growth in a challenging macro environment. Our retail platform grew to 168 locations, with market leading positions in Arizona, Florida and Pennsylvania. During the second quarter, we opened 6 new stores in Florida, Massachusetts, Pennsylvania and West Virginia and relocated 1 Florida dispensary. Last week, we opened our first Trulieve branded dispensary in the Roosevelt Row neighborhood of downtown Phoenix. The grand opening celebration last Friday had a phenomenal turnout capped off by the declaration of August 5 as Trulieve Day by the Mayor of Phoenix. This new dispensary marks a major milestone in our plan to expand and rebrand in Arizona. We look forward to continuing our rebranding efforts across Arizona over the next year.
We are on track to meet our guidance of 25 to 30 new store openings and up to 6 store relocations in 2022. As of today, our industry leading U.S. retail network has grown to 175 dispensaries. Across our markets, we see different trends emerging as customers respond to this macroeconomic environment. Within this backdrop, we are monitoring customer needs and behavior to inform product allocation, production mix and new product development. In the second quarter, overall traffic increased 6%, while basket size decreased 3% with those trends accelerating in June. Units per basket were flat to slightly up across all markets. Overall, promotional activity was flat. Customer visits per month increased to 2.6 visits overall and 2.7 visits for medical-only markets. Customer retention was in line with first quarter metrics.
Diving deeper into data from our cornerstone markets, traffic was up in Florida and Pennsylvania each month in the quarter, while traffic declined in Arizona. Discounting was flat in Florida, up 1% in Pennsylvania and up mid single-digits in Arizona. Performance in Arizona exhibited typical seasonal patterns with declining traffic and sales alongside the rise in hot summer temperatures. Within our top three markets, distribution patterns varied across premium, mid and value tiers partly due to our actions to match product mix to demand. In Florida, unit sales of premium products increased as we produced more differentiated and premium products. In Pennsylvania, sales of value products increase driven in part by new value to your product launches. In Arizona, the percentages of units sold in premium and mid-tiers increased. However, value to your product still drove the highest unit sales. These trends continued into July as basket value increased in Arizona and Florida and decreased in Pennsylvania. We are tailoring our product offerings in response to shifting customer needs and our core markets further influencing these directional trends.
Since inception, Trulieve has been committed to meeting our customer needs. We often say that we are a customer obsessed organization. In order to deliver exceptional customer experiences, we must have the right products at the right price in the right place. We mined transaction data and feedbacks to meet evolving customer preferences and inform our product development, production mix and product allocation. Data trends are telling us that in certain markets, a segment of our customers are increasingly price sensitive and searching for value products. We have responded to this need by expanding production and availability of value their branded products such as Roll One. For example, in Pennsylvania, Roll One branded grown flower and many products launched in February and quickly rose among the top performing brands within our portfolio.
While we are seeing higher demand for value products, we continue to see strong demand for premium products, particularly among flower and concentrates. In Florida, Muse branded premium concentrates are among our top performing branded products. We recently launched Muse products in Arizona, Pennsylvania, and West Virginia. We can further enhance customer satisfaction by using hyper-personalized marketing techniques. Our data capabilities are expanding allowing for targeted outreach based on past purchase history, personalized product recommendations and multi-channel messaging delivered at optimal times. We are able to run targeted campaigns and compare outcomes relative to general marketing efforts.
Several of our campaigns this year clearly demonstrate the efficacy of personalized outreach. For example, we use geo-targeting to identify patients who live near new store openings. These campaigns resulted in 50% to 75% higher revenue. Another campaign targeting customers over a certain spend threshold resulted in nearly 3x higher revenue per click versus generic campaigns. We expect to rollout targeted marketing efforts in additional markets over the next year.
Turning now to our supply chain, distribution across our retail and wholesale network is supported by over 4 million square feet of cultivation and processing capacity. Second quarter production increased 79% year-over-year to 10 million units. This output supports new store openings, new branded product launches and new markets such as West Virginia. Our depth and scale within markets afford us the ability to increase efficiencies and reduce costs while adapting to changing market dynamics.
Given the modular nature of expansion and because we have significant capacity already, we can pullback or ramp up utilization as demand fluctuates. For example, in Florida, during our analyst event in June, we showcased our new 750,000 square foot state-of-the-art automated indoor cultivation facility. While we are still in the process of ramping and optimizing this new facility, once fully utilized, the 750,000 grow will have significantly lower production costs in our standard indoor 24,000 and 46,000 buildings. As this facility ramp, we have the ability to temporarily reduce utilization of legacy production capacity until it is needed.
Similarly in Pennsylvania, we have the flexibility to focus on supplying our affiliated retail operations until wholesale demand picks up. In Arizona, the acquisition of cultivation capacity in February provided an opportunity to quickly ramp production of branded premium indoor flower. The addition of this capacity eliminated the need for new construction at an alternate site, reducing capital expenditures this year and condensing the time to bring the supply online.
Turning now to our wholesale operations. Revenue declined 22% sequentially to $22 million. Wholesale markets in Arizona, Massachusetts and Pennsylvania softened as both supply and inflationary pressure on consumers increase. Weaker wholesale trends accelerated in June further validating our approach to prioritize retail sales with branded products through branded retail and to use wholesale channels primarily to expand distribution of branded products. In Pennsylvania, we are reducing production and allocation to the wholesale channel. Our concentration in retail provides an outlet for supply chain production, access to customer data and higher margins.
Looking ahead, we are laser focused on execution to meet our goals. We are working diligently to situate our team’s assets and operations appropriately. Ahead of significant future catalysts including adult-use sales in markets such as Connecticut, Florida, Maryland and Pennsylvania and the opening of new markets such as Georgia. Progress towards expanding these cornerstone markets is happening as we speak. On Monday, the Smart and Safe Florida campaign launched a political action committee with the ultimate goal of legalizing adult-use marijuana in Florida through a ballot initiative.
The campaign is targeting a voter initiative for the November 2024 election. Trulieve supports this initiative to expand access to cannabis for all adults in Florida. We have made an initial financial contribution to the campaign and we plan to provide future support. As an industry leader, we embrace our responsibility to advocate for adult rights for personal consumption. We are optimistic that other industry leaders in our home state will join us and support this effort. With numerous catalysts and significant growth potential ahead, the long-term opportunity for U.S. cannabis remains attractive. We are doubling down on our core financial discipline and sharpening our focus on the fundamental drivers of our business. We will continue to adhere to our strategy and our disciplined approach to profitable growth with an eye towards long-term shareholder value.
With that, I will turn the call over to Alex for more detail on our second quarter results.
Alex D’Amico
Thank you, Kim and good morning everyone. Second quarter revenue of $320.3 million increased 49% year-over-year compared to $250.1 million during the second quarter of 2021. Second quarter revenue increased 1% sequentially compared to $318.3 million. Trulieve ended the second quarter with 168 dispensary locations. As of August 10, Trulieve owns or operates 175 dispensaries, supported by over 4 million square feet of cultivation and processing capacity.
In the second quarter, reported gross profit was $182.2 million or gross margin of 57% compared to $178.2 million or 56% during the first quarter of 2022. GAAP gross margin improved sequentially driven by greater sales of internally produced products, the strategic shutdown of duplicative cultivation facilities, and the benefit of the Pennsylvania vape recall reversal, partially offset by the cost associated with ramping newer indoor cultivation facilities in Arizona and Florida, including our new 750,000 facility.
Excluding the impact of transaction-related and non-recurring charges, second quarter adjusted gross profit was $183.4 million or adjusted gross margin of 57%. The delta between GAAP and adjusted gross margin has narrowed to 40 basis points as the impact of acquisition and integration charges have continued to roll off. We expect gross margin will continue to fluctuate quarter-to-quarter depending on product and market mix and inventory flow through.
Turning now to SG&A expenses. SG&A expenses in the second quarter were $108.9 million or 34% of revenue compared to $106.4 million or 33% during the first quarter. Second quarter expenses included approximately $17 million of transaction and integration-related charges, inclusive of a $5.2 million earn-out payment associated with the indoor cultivation capacity in Arizona acquired in February. Excluding these charges, second quarter SG&A was $91.9 million or 29% of revenue compared to 30% in the first quarter. As we continue to invest for future growth, we expect quarterly fluctuations in SG&A expenses as investments are made ahead of increases in revenue. As Kim mentioned, we are strategically exiting underperforming markets and assets which may impact SG&A moving forward.
Net loss was $22.5 million for the second quarter compared to net loss of $32 million for the first quarter of 2022, an improvement of 30%. Second quarter net loss included $11.8 million in transaction and integration-related charges of $5.2 million earn-out, I just referenced, $4.3 million in asset impairments associated with the closing of redundant cultivation assets in Florida and a loss of $700,000 due to the repurposing of a development stage production site in Arizona. Excluding non-recurring charges, net loss would have been $1.1 million. Second quarter loss per share was $0.12 compared to loss per share of $0.17 in the first quarter. Excluding non-recurring charges, second quarter loss per share would have been $0.01. We anticipate transaction and integration-related charges will continue to impact reported EPS throughout 2022.
Turning now to adjusted EBITDA, for the second quarter adjusted EBITDA was $111 million or 35% compared to $105.5 million or 33% during the first quarter. As expected, we realized improved margin performance as part of our ongoing efforts to increase efficiencies and streamline operations.
Moving on to our balance sheet and cash flow. We ended the second quarter with $181 million in cash and $552 million in debt. Second quarter operating cash flow was negative due to the timing of two tax payments. We are actively managing the cash conversion cycle and expect to realize positive operating cash flow during the second half of the year. We expect to generate positive free cash flow in 2023.
Capital expenditures in the second quarter totaled $45 million. The majority of expenditures were comprised of investments in supply chain and retail assets. After lowering our CapEx plan by over $50 million, we currently expect third and fourth quarter investments to be comparable to the second quarter. We have tremendous flexibility in our cornerstone markets to quickly ramp capacity to meet future demand.
Turning now to our outlook and guidance for 2022. In recent months, we have made the strategic decision to jettison lower quality revenue and markets to focus on core business drivers. At the same time, accelerating inflation has weighed heavily on consumer sentiment and disposable income, leading to a lack of visibility in the second half of the year. Based upon these combined factors, we are adjusting the low end of our 2022 outlook by 5%. As such, we are targeting 2022 revenue of $1.25 billion to $1.3 billion and adjusted EBITDA of $415 million to $450 million. We are reiterating our longer term target of 60% adjusted gross margin and 40% adjusted EBITDA.
In summary, we delivered another strong quarter, while managing through changing conditions in the broader economy. I am so proud of our team. And I look forward to further building upon the progress we have made thus far. We have significant optionality to navigate the current environment while preparing for future growth.
And with that, I will turn the call back over to Kim.
Kim Rivers
Thanks, Alex. 6 years ago, we made our very first sale in Tallahassee to a customer that had to be medically transported from 2 hours away, because there were no ordering physicians in the area. Fast forward to today and there are over 740,000 patients and 2,400 physicians within the Florida medical marijuana program. It’s important for us to keep a sight of how far we have come, so we can stay focused on where we need to go. As cannabis becomes increasingly mainstream, we have greater opportunities to address critical issues for our industries.
2 weeks ago, a Senate subcommittee held a hearing to explore federal decriminalization of cannabis. Safe thinking recently passed the house for the seventh time and signals from Washington indicate some compromise legislation may advance before year end. At the state level, efforts continue to expand medical and adult-use programs. In Florida, a campaign has launched for an adult-use ballot initiative and 2024. In Maryland, voters will consider a ballot initiative for adult-use sales this November. In Connecticut, we expected that e-sales will commence early next year. We are committed to advocating for change at all levels.
Factoring in adult-use sales within our markets, we estimate the Northeast, including Connecticut, Maryland and Pennsylvania can double to approximately $4 billion in market size. In Florida, we estimate the market could reach up to $6 billion following expansion to include adult-use sales. Trulieve is incredibly well positioned to capture a significant portion of these growth opportunities. I have never been more optimistic about the future. We lead with strategy, follow with execution, and go deep in markets like our profitability depends on it. We will continue to do what we say we are going to do tuning out the noise and staying true to form. Our focus on serving the customer remains our guiding light while we are building a sustainable and scalable company. Trulieve is poised and ready to define the future of cannabis.
Thank you for joining us today. And as I always say onward.
Christine Hersey
At this time, Kim Rivers, Alex D’Amico and Steve White will be available to answer any questions. Operator, please open up the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Derek Dley with Canaccord. Please go ahead.
Derek Dley
Yes. Hi, thanks and good morning, everybody. Kim, I just wondered if you could talk a little bit about what you are seeing in terms of the differences between branded retail performance and wholesale. I know you gave some numbers there just in terms of what you are seeing on the wholesale side. But on the retail side where clearly appears much more of your focus is going to be on that higher margin branded retail. Can you just talk about what you are seeing and what some of the trends are within that important segment?
Kim Rivers
Sure. Thanks, Derek. As we mentioned on the call, there certainly was weakness in the wholesale market across the portfolio with noted weakness in the Pennsylvania market. In terms of branded products or branded retail, we are very encouraged that our organic growth was strong this quarter, and of course, coming off of a very strong Q1. We are seeing interestingly which is why we tried to get some more specific color on the call, a bit of mixed patterns across the portfolio. Overall though, and I think, it’s echoing I think other’s sentiment is that we are seeing baskets on a per visit come down slightly, again, in some cases higher than others. However, we are seeing number of transactions increasing. And so, which indicates, right – potentially it could indicate more of a call it paycheck to paycheck or more of a sort of regulated or rationalized spend on a per consumer basis. I think again what we are seeing is we are seeing traffic up, again, on a quarter-over-quarter sequential business or basis. So, that’s encouraging as well. But I think that again, what’s interesting too is that we have got in the premium category and contributing very strongly. In Florida also, we saw a rise there in Arizona as well. But then, again, kind of in a mixed view in Pennsylvania, we saw premium down, but again, value significantly up. So it is a bit of a mixed bag, but trends we believe are stable in terms of traffic, which is encouraging as we move to the back half of the year.
Derek Dley
Okay, great. That’s really helpful. And then when we think about the guidance that you have updated, I mean, I don’t think there is any real surprise there just given the dynamic, let’s call it, retailer and consumer spending environment that we are seeing. I just wanted to focus on that CapEx a little bit. So if my math is right, you are sort of reducing your CapEx by about $50 million in the back half of the year. When we think about CapEx, like are there – do you feel like you have adequate capacity given some of the major investments that you have made you alluded to Jefferson Park, which we all saw a few months ago? And then second question on that is just when we think about CapEx for next year, just given some of the more streamlined focus that you mentioned should we expect a different run-rate than what we saw in the front half of this year for next year?
Kim Rivers
Yes. So, CapEx strategically for us has been an area of focus as we really evaluated trends coming into the back half of the year. And as you noted, we have made investment in the 750,000 facility in Florida, which should be significantly more efficient than our legacy sites. And that will do a couple of things. We should note that, that site is not fully optimized. It is not fully online. So, a decent portion of the back half spend is going to be to continue to get that site online as well as to finish projects that were started earlier in the year as well as of course our continued investment into our retail, our retail platform across our markets. So, with the onboarding of that fully optimized 750,000 facility, what we will be able to do is we will be able to take down legacy, less efficient sites in Florida, but have those basically as a stable of CapEx investment, if you will, that we can bring back into market as demand warrant. So, that will certainly help the spend with CapEx going into 2023. So, again, we are being very strategic in terms of how we are investing yet at the same time and I think this is an important point, continuing to make sure that we are pacing and staying slightly ahead and in line with markets so that when trends reverse, which as we have seen in the past can happen also very quickly that we are not left behind and we are able to capture growth that we do believe will come back into the market once we work through this period of time.
Derek Dley
Okay, great. Thank you very much.
Operator
The next question comes from Matt McGinley with Needham. Please go ahead.
Matt McGinley
My question – my first question is on the G&A, you continue to manage those core G&A dollars well with the net dollars dropping from the first quarter to the second quarter. I guess how much – the question is two parts there, I guess, how much opportunity do you have in terms of optimizing that with the Harvest integration? Is there still more to be done there? Are you basically at the end of that? And then relative to the revised growth outlook, how should we expect those core dollars to grow into the back half?
Alex D’Amico
Hey, Matt. Yes. I mean, we have – we will have continued opportunities to rationalize SG&A going forward. We have done a good chunk of that already. As you see, we have come down and we came down in Q1, we came down again in Q2 on an adjusted basis. Just keep in mind in terms of whole dollars we are constantly building out in new markets ahead of revenue. So we will kind of always have that flux. So, there will be a flux quarter-to-quarter with that as we – we have invested ahead of revenue dollars. But in terms of Harvest, in particular, that’s still ongoing, there is still some more opportunity there, but again, it could be mitigated as we invest in other markets ahead of revenue.
Kim Rivers
Yes. The only other just call out there and I know you focused on core dollars, which I appreciate. But clearly as we do continue to rationalize the portfolio and lean into defining what our core business markets and strategies are, which then means jettisoning lower performing markets or assets and that obviously would have potential impact on SG&A as well and then just we do have that Watkins earn-out that is flowing through SG&A for the remainder of the year. So that will, of course, burn off, which is in our core market of Arizona.
Matt McGinley
Alright. Okay. And then the second question is on the inventory, I know there is probably some seasonality in that build and work in process was clearly a component of that growth. But relative to the revenue outlook for the back half, do you think that inventory as you see it right now is aligned with the sales expectations or I guess, how should we think about that building inventory relative to what you assume will come through into the back half in terms of sales?
Kim Rivers
Yes. Of course, inventory is something that we actively manage. I think that we should note that it is, of course, required to build ahead of store openings and noted that we have already added 7 new locations in Q3 compared – which is increase in terms of pace compared to the previous two quarters. So, we are in – do need to have appropriate inventory on hand for the store openings. We also have inventory in Florida, which we cycle through at appropriate pace and of course building product launches in new markets requires a little bit of inventory build as well. So there is going to be natural fluctuations, as we have communicated in the past on inventory from a quarter to quarter basis. But we do feel that it’s – we are at an appropriate level, we expect to continue to sell through that and again have the right mix of products available to sell and into full strategic levers again.
Matt McGinley
Okay, thank you.
Operator
Our next question comes from Spencer Hanus with Wolfe Research. Please go ahead.
Spencer Hanus
Great. Thanks for the question. Just wanted to dive into the wholesale market for a minute, could you talk about what’s driving the acceleration and weakness in June? And then do you expect more of that business to be rationalized over time and with the actions that you have taken so far in Nevada and some other places, what should be the margin benefit from exiting some of these non-core business lines?
Kim Rivers
Yes. Thanks, Spencer. And so we are obviously we will give additional color in terms of decisions made in Q3 – on the Q3 call. But what I will say is that as an in markets, such as Pennsylvania, where it appears that there has been a bit of a higher inflationary pressure on the consumer, we certainly saw companies just pullback in terms of what they were comfortable holding in vaults moving into the quarter. I think also right, in a market like Pennsylvania, we did have additional supply come online, across the market, ourselves included. Again, I think it’s important to note that in Pennsylvania, we are and do have the leading retail presence. So feel like we are prime positioned to be able to minimize the impacts there by increasing distribution of branded products through branded affiliated retail channels in Pennsylvania to your point, which of course, leads to higher quality of rev in that market. Question in terms of will we be able to absorb 100% right of that offset? I think that’s a bit unclear, again, will depend somewhat on continuation of that inflationary pressure on consumer spend. So hopefully that provides some color for you.
Spencer Hanus
Yes, that’s really helpful. And then just to move to Florida, you mentioned that discounting was flat there. Did you expect that to continue into the second half, one of your biggest competitors down there is targeting 60 stores by the end of the year? And then there is a couple of new smaller operators that are starting to scale finally down there? So just curious how you are thinking about the discounting environment in Florida?
Kim Rivers
Yes. No, I mean, I think that – look, I mean, in Florida, this line of questioning isn’t something that’s new to us. I think we have been answering similar questions since 2018. We are very comfortable in a competitive environment in Florida. We are not sitting still. We have got again increased efficiencies and increased capabilities with again the new facilities that we have coming online, we are continuing to bring into market interesting and innovative products that have received exceptionally well responses from the consumer base. And so I think we have increased optionality in Florida again that – I mean, when you think about it, right, I mean, that 750,000 building is I believe the largest indoor facility in the United States of America that we are standing up. And so we will have again incredible optionality as that facility ramps and contributes to productivity in the state of Florida. So, we continue to feel very confident about our home state. And of course, we are very excited about the future of Florida with – hopefully with adult-use sales coming into market and feel that we are best prepared to capture increased demand as that comes through as well.
Spencer Hanus
Great. Thank you.
Operator
The next question comes from Andrew Partheniou with Stifel. Please go ahead.
Andrew Partheniou
Good morning. Thanks for taking my questions. Maybe digging a little bit deeper on the guidance here, if you could provide some more information on your assumptions? Are you thinking about perhaps less benefits from increasing vertical integration than initially expected or perhaps this is a timing issue with production benefits flowing more into Q1 of 2023 as well? What kind of price compression assumptions are you factoring in the second half from current levels?
Kim Rivers
Yes. I think that – so as we attempted to communicate on the call, I think there is a few things happening simultaneously. So one, there was absolutely a proactive strategic decision – several strategic decisions that have been made as a result of looking and taking a hard look and this was look – this was a strategic goal of ours that we set at the beginning of the year is to evaluate the assets within our portfolio and make determinations as to which we were going to be core contributive business drivers and vis-à-vis those that were we needed to either close or sell or jettison. So that work has begun. And it’s interesting because of course with the macro environment on top, it provides perhaps greater visibility and it becomes more clearer in terms of which makes sense for us to go ahead and make those decisions on. So, that’s absolutely happening and we believe should happen in order for us to have a more streamlined and higher – again, higher quality portfolio on a go forward basis. At the same time, right, we have this unprecedented macro environment in terms of pace in which it came on board. And it’s when you rewind to when we issued guidance to today right there have been significant changes in consumer behavior that happened very quickly. And so, we are also taking those – that behavior into account. And really, we see that as pressure on the wholesale as we mentioned in the wholesale side of the business and therefore pivoting supply and leaning into and again, feel very good about the fact that we have the leading – industry leading retail platform with 175 locations across the U.S. at which we can pivot into. So, I would not say that it’s any type of reduction as it relates to the vertical strategy that we have. And we believe that branded products through branded retail absolutely does deliver the highest potential margins. I think that’s why you see that theme now being repeated across the peer set. And we also believe and continue to believe which we always have that, that’s also a way to ensure that we have strength of customer relationships and durability of customer relationships, which again show up in our loyalty metrics and across the platform. So, this is an – it is a combination of things happening at the same time. We feel it’s important to be transparent in terms of what we see as of today. Certainly, there could be shifts going through the back part of the year. I think that the holiday season will be very instructive in terms of where we see those trends and how we see those trends potentially continuing.
Andrew Partheniou
Thanks for that. And maybe continuing a little bit here, could you give some high level comments or perhaps quantify your level of vertical integration is now versus your target?
Kim Rivers
No, not we have in a metric that we are prepared to share. As I said, we are absolutely focused on the core strategy of branded products through branded retail. We will be continuing to evaluate assets and markets across the portfolio and weighing the contributive relevancy of those markets and assets throughout the upcoming months. And so even if I were to give you something today, that doesn’t necessarily mean that, that would be where we are at year end.
Andrew Partheniou
Okay, appreciate that. I will get back into queue.
Kim Rivers
Thanks.
Operator
Our next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Aaron Grey
Hi, good morning and thank you for the questions. So, first question for me and apologies if I am missing the prepared remarks, but can you give an update on store openings that you have embedded in the new guidance. I know previously, I believe it was 30 – or 25 to 30 roughly half baked in expected from Florida. So, can you give us an update on that number with the new guidance aAnd then just how you are feeling about to store outlook within Florida more long-term, particularly with the current environment? Thank you.
Kim Rivers
Sure. Yes, as we said in our prepared remarks, we are still on track. So that piece has remained unchanged, Aaron. And we feel that actually it’s more important maybe now than ever in terms of increasing our portfolio as it relates to being able to execute on our strategy of branded products through branded retail.
Aaron Grey
Okay, great. Thank you. And then diving into the gross margin, so definitely understand how there can be some volatility quarter-over-quarter, but just want some incremental color as you guys still see 60% longer term, just kind of the timing of when you think you might be able to shift into that, especially as you get more vertical in PA as you look to defend yourself within Florida and you are seeing some of the pressure on consumer wallet and shifting to some value brands. How do we think about the timing of when you started to see that margin improvement back to that 60% plus over the next couple of quarters? Thank you.
Kim Rivers
Yes. So, I mean, our 60-40 is definitely caches long-term, right, a long-term target, which we said is 2 to 3 years and we are certainly happy with our incremental improvement in margin as we ramp to those numbers. I would say that the larger maybe piece on margin that we are seeing right now is, again, you have got a 750,000 square foot facility that is ramping. And again, I do believe that’s the largest indoor facility in the U.S. and so that will take time to ramp. And so we have the initial rooms on board now. Keep in mind that the entire support structure for the fully built-out facility is also included in Phase 1. So that’s not fully utilized and won’t be fully utilized until the entire facility is online. So that’s coming through. And in addition, we have got our cultivation facility in – what – in the in the Watkins deal in Arizona that we are also ramping. So that 750,000 square foot facility will continue incrementally through the end of the year and we will continue to provide color for you guys as that does ramp, exciting initial results out of that facility in terms of improved yields and improved efficiencies over our legacy models. So it’s exciting to have that come online, but it will take a little bit of time to get a facility that large, fully optimized and contributive.
Aaron Grey
Thanks for the color. I look forward to seeing the facility come online more, and I’ll jump back into queue.
Kim Rivers
Thanks.
Operator
The next question comes from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.
Pablo Zuanic
Good morning. Kim, can you expand on this new ballot initiative and maybe provide some context in terms of what’s new, right, this was attempting for 2022 it didn’t work. They wouldn’t even attempt to make it unconstitutional. So why is this different? And on the same subject, if you had to handicap the odds of Florida or Pennsylvania going direct, first, which of the two would you say goes first? And then a separate question maybe for Alex? Alex, where we have done – I mean, we are waiting, plus we have 3%, retail growth, we assume Florida has to be around there, if not slightly higher, that probably means that you kept or gain dollar share. We have seen prices come down at least menus. So, it’s just a lot about your franchise, but if you can just give more color, Alex, in terms of on the question on pricing, if you guys, in terms of discounting what’s flat, what do you think happened with the market in the quarter, that would help at least to understand the strength of the franchise. Thanks.
Kim Rivers
Great. So, I mean I could talk about the Florida ballot initiative for a long time. So, I will try and keep this concise. But the Florida is interesting. It’s an interesting process. And we have very specific requirements in Florida, that are state specific in terms of what it will and will not be accepted as it relates to language. And that can be approved by the Supreme Court. So, in Florida, there are two signature thresholds. The first to get to the Supreme Court and the second to get actually on the ballot and they can run their signature gathering efforts typically run simultaneously. So, the previous initiative that you mentioned, and there were a couple, one was struck down due to a lack of compliance with the single subject rule. In Florida, it is requirements that a ballot initiative does need to be narrowly tailored to a single subject to avoid compound issues, and in potentially approving an initiative that has more than one issue embedded in it. The second initiative that you mentioned failed for the second reason that a ballot initiative can fail in Florida, which is that it was deemed to be misleading to voters, because it did not clearly articulate the fact that a change in State law does not absolve someone from potential violation of Federal law. And the court deem that to be an important distinction, that someone may not realize that if they purchased in Florida, and then, for example, maybe traveled across state lines, or got on an airplane right, that they would potentially be in violation of Federal law. And so those were the two specific reasons that the Court struck down previous initiatives. This initiative has been extremely narrowly tailored, and does leave implementation of policy to the legislature, which is another I will call it political challenge that previous initiatives have had. And in addition, it clearly states that there is no automatic absolve of Federal potential liability for an individual if they purchase under adult use program here in Florida. So, I do believe that this initiative does adequately address the issues that the court has raised in the past. I think that it incorporates the court’s comments, and I do believe has a significantly better chance than previous initiatives of actually passing and which is why, of course you saw an initial investment from us and our partners are very much involved as well. And we would expect and hope that other folks, particularly those who would like to also be leaders in this industry in the Florida market would step up and participate as well. And we will be providing updates on that as that group continues to come together. And as a result to PA versus Florida, that’s a tough one. And I mean I think in Florida, we have got to do certain with a potential ballot initiative coming in November of 2024. The question is right, if the legislature in Pennsylvania who has signaled, I would say more of an appetite or more of an opportunity to potentially get something done on the legislative side as opposed just about the initiative side, decided to lean in and take up the issue, now that we see surrounding markets in the Northeast launch. So, I am hopeful and would love to say that I would love a one, two punch with Pennsylvania, coming perhaps slightly in front of Florida, but obviously, that’s very political and remains to be same.
Alex D’Amico
And Pablo, I will just add additional color on your Florida question. So, we mentioned in our prepared remarks how our revenue increase was driven by retail pickup. We see pickup in Florida. Obviously, we don’t segment our business and get the exact amounts per se. But we do have a pickup in the Florida market in the quarter.
Pablo Zuanic
Thank you.
Operator
The next question comes from Russell Stanley with Beacon Securities. Please go ahead.
Russell Stanley
Good morning. Thanks for taking my questions. First one just around plans to sell more branded products to your own retail. Just wondering how much room you think you might have to do that when you consider the need to balance, having a variety of products from third-parties in those stores in order to drive traffic. How much – how do you think about that? And how much more room do you have you think to expand branded sales in that context?
Kim Rivers
Yes. I mean I think that clearly in Florida, right, it’s 100% required for the market. And so and we don’t have any room. We don’t have any room in Florida. In our other markets, we do have room and we are seeing incremental increases in branded products through branded retail, there was actually some pretty good pickup. And recently in Pennsylvania, again, as we strategically shift away from wholesale and are focusing on putting, again, some of those really strong performing recently launched brands in through our affiliated retail channel there. In Arizona, there absolutely is opportunity as that capacity comes online and as we launch brands effectively from the combined portfolio through Arizona. So, even though our combined portfolio does include, of course, legacy harvest brands, and there wasn’t as much of a focus on I would call it’s SKU refreshing, and really ensuring that those brands had the products placement and the education and availability to customers in those Arizona retail locations, as we think is appropriate in that market. And so I would say that there absolutely is incremental improvement in both of those markets, as well as in Maryland, where we are focusing as well ahead of adult use, launching in Maryland to again connect with customers over and over through our branded product portfolio.
Russell Stanley
Great. And just my second question, I think I ask this on every call, but can you give us an update on Georgia and how you think the licensing situation can play out and what the timelines might be, I know it’s crystal ball, but got to ask. Thanks.
Kim Rivers
Yes. No, absolutely. And we remain very enthusiastic about Georgia and we are happy that the protest period has officially concluded. And so now we are at that part of the process if you will, should be behind us as we wait for direction from regulators. And we are moving forward in Georgia to be prepared both on the cultivation and production side of things as well as site location and dispensary positioning, so very much looking forward to launching in that market as soon as we are able to.
Russell Stanley
Great. Thanks for the color. I will hop back in the queue.
Kim Rivers
You bet. Thanks Russell.
Operator
Our next question comes from Scott Fortune with ROTH Capital Partners. Please go ahead.
Scott Fortune
Yes. Good morning and thanks for the questions. A little bit follow-up on Arizona addressing that market can provide a little more color, now that you have full production, although adding capacity there. But it’s a very seasonal market, too influenced by the California black market over there pricing side. But you mentioned you have a number of ways to go as far as bringing your own brands into that and as for now which is the shift over Canada to the brand selling there. Can you provide a little more color on the margin profile for Arizona in light of your long-term margins targeted for that state and with the pricing going on in Arizona. How do you see kind of you ratcheting up the margins within that type of harvest and the Trulieve brand there, that would be helpful?
Steve White
And I am sure this is Steve. What I would say is, the opportunity exist to shift the percentage of internally produced products that are sold through our retail platform. And the reason why that opportunity exists, and why that’s an opportunity that we want to capitalize upon, is because when you – I mean, it’s obvious, but if you are selling your own internally produced products, the margins tend to be higher. The methods that we would use to increase that percentage really include how we are launching those products and how we are speaking to consumers as we bring those online. Part of all of that is the investment that we have made previously in additional capacity and we continue to make an additional capacity and so all of that flows through in conjunction with our marketing efforts in order to ultimately raise margins in that market.
Scott Fortune
Okay. Thank you, Steve for the color. And then maybe provide a little color on what you are seeing on the – with the tougher macro environment and then tight capital in the cannabis industry here. What type of valuations or opportunities are you seeing on the M&A front. And there are other companies divesting assets, just kind of a quick update on kind of the M&A opportunities from an overall market standpoint?
Steve White
So, we are obviously monitoring activity or opportunities on a number of different markets. For us with theory about what meets something that makes sense for truly, we haven’t shifted that criteria and/or where we shift that criteria we are seeing, we are starting to see better opportunities, and we are starting to see some distressed assets. And that’s aided by continued pressure in the capital markets and the inability. For folks like us who have the ability to make acquisitions, we will continue to do those or later, we will see some opportunities that make sense, and we will close them.
Scott Fortune
Thank you for the color. I just jump back in the queue.
Operator
Our next question comes from Vivian Azer with Cowen and Company. Please go ahead.
Vivian Azer
Hi. Thank you. Good morning. I wanted to turn back to the guidance revision please. Looking at the back half of the year, your comps are obviously very different between the third quarter and the fourth quarter. So, Alex, can you please dimensionalize how you are expecting the shape of the back half? Thanks.
Alex D’Amico
Yes. I mean as we said, lack of visibility into what the back half will bring. And Kim mentioned that the holiday season will be a leading indicator. But given at this point in time and where we are year-to-date, we thought that the revision was appropriate. We will continue to monitor that, hoping for some pickup nationally. But it’s really that the base is really monitoring consumer trends and the lack of what the second half will bring particularly around the holiday season.
Vivian Azer
Okay. Let me follow-up. Go ahead. Sorry, Kim?
Kim Rivers
No, go on.
Vivian Azer
Well, I just wanted to follow-up on what Alex just said, hoping for a pickup, nationally. So, maybe you guys can talk a little bit about, how much more degradation you expect to see either from a price deflation standpoint, from negative mix standpoint, because I mean there is a real possibility that you don’t grow your top line in the fourth quarter.
Kim Rivers
Hey Vivian. So, a couple of things. Number one, as I have mentioned, I think a couple of times now, there are a couple of things happening. So, we have also got on top of the fact that we are strategically making pivots within the portfolio that we believe are the best for our business, not just now, but for the long-term from a positioning perspective. So, you have that happening, which of course will have revenue impact, right. We are taking less than optimal, if you will, from a flow through perspective, assets and markets and jettisoning them. Which, of course, we won’t have them the top line even though in some cases, they were negative contributors through the rest of the flow. And so we have that happening, right, on top of the fact that we have what we would call I think, along with most retailers in America would call an uncertain macroeconomic overlay. And what we are seeing and what we are encouraged by, as we have said is that we are still seeing strength in Florida, which of course is an outsize contributor to our portfolio. We are also continuing to see opportunity for higher quality of earnings in our other core markets. And so, I would say that sure, there is, could bes, I guess on both sides of the equation. And I think we are managing strategically through those. And it was all traded in the fact that look, I mean we had strong organic growth in both Q1 and in Q2. And of course, our state mix is different than others. And but again, I think that timing is interesting, and we are setting up for catalysts that we think will be outsized opportunities for us as we look ahead in other markets that are going to be coming online and either coming online or transitioning to adult use in the call it near to mid-term. So, again, feel good about where we are, in terms of our team’s performance, feel good about our connectivity to our customers, feel good about being able to shift mix in response to customer demand and customer and the realities of what our customers are facing. And one note that I will say is that I don’t think maybe this is a bit different from other segments that I think sometimes there is this idea that a value branded product, significantly lower margin than a premium branded product, that’s not always the case. So, I think that again, we feel that proactively managing next and again, making sure that we are also being respectful of where our customers are. And we have the best optionality to be able to respond to those trends across our platform.
Vivian Azer
Okay. Fair enough.
Operator
Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.
Eric Des Lauriers
Great. Thank you for taking my questions. So, on the wholesale front, obviously, reallocating the retail in a big way certainly makes sense. For the business that you are keeping in the wholesale channel, how should we think about the mix of bulk versus branded and our branded sales? Can you help us understand your thinking of which brands you sell in wholesale versus reserved for your retail stores? Thank you.
Kim Rivers
Yes. Thanks Eric. It that – the answer to that question does depend on market a bit. As you can imagine, demand for certain products is stronger, depending on what folks are seeing across that particular market. And where customers are, what brands and what segments customers are responding to. And certainly, I would say and significant focus on finished good products, these are the bulk. And on a wholesale channel going forward, we do have strategic allocation with respect to – it’s not necessarily a complete branded products, but we will allocate, for example, certain strains, we will reserve certain releases, etcetera, for our retail locations. And to give again a more elevated experience and a reason for folks to come through – to our retail to get first dibs, if you will of desirable SKUs and desirable products. In Pennsylvania specifically, I can tell you that we absolutely are considering and we will be executing on a strategy there to have certain high performing SKUs exclusively available at our retail locations in that market, strategically through the back half of the year.
Eric Des Lauriers
Okay. That makes sense. Helpful. Last one from me. So, just along these lines of increasing the mix of vertical certainly makes sense. And from what I am hearing that this is basically the expectation for the foreseeable future. But as we kind of look at longer term at the wholesale opportunity, especially in states where the number of retail stores is capped, how do you think about the trade-off between the sort of EBITDA margins and then growth in absolute dollars? And maybe just ask directly, what would it take for truly to materially increase volumes through the wholesale channel down the road? Thanks.
Kim Rivers
Yes. I think that we are just looking at, I mean we are going to be looking at trends and tracking behavior, right. And certainly, right now, we believe that given the fact that we are the market leader in these markets vis-à-vis, our retail platform, it makes sense given current macroeconomic environment to shift more branded products through branded retail. That being said, we always have, and it’s important for us strategically to have optionality within our platform. So, when you talk about having the ability to dial up production capacity, when we talk about our continued investment in R&D and innovation, I think it’s important to note that we have over 1,000 SKUs that we are manufacturing and that we have the ability to bring into market. So, again, our ability to pivot into segments that are showing strong growth patterns exist, we absolutely we will be able to do that. And we are and have always been very focused on having a modular growth trajectory, meaning – and what that means is that we have additional capacity, kind of waiting in the wings, if you will, that we can ramp up very quickly, so that we can be in a more proactive position or posture when trends begin to reverse. So, again, we are I think a company that looks strategically at what the markets are presenting to us. And certainly when you overlay the fact that we with all cannabis companies have additional pressures to it, etcetera, it’s important for us to have that optionality and that ability to pivot and be responsive to market trends, while not getting too far over our SKUs, just given the dynamics that are specific to the cannabis industry.
Eric Des Lauriers
Very helpful. Thank you.
Operator
The next question comes from Ty Collin with Eight Capital. Please go ahead.
Ty Collin
Hi. Thanks for taking my question. I will keep it to one in view of the time. It looks like patient growth in Florida has slowed down quite a bit in Q2, and particularly in recent weeks in Q3. I know there are some ebbs and flows and maybe some seasonal influences there. But do you think the market is getting closer to saturation here? And is that a leading indicator for sales growth into 2H and ‘23? And I am curious what your sort of embedded expectations are in terms of patient growth for the second half and the updated guidance?
Kim Rivers
Yes. No, thank you for the question. It’s something obviously that we monitor very closely. And hypothesis is that that may be an area that we are actually seeing inflation show up in terms of pressure on wallet in Florida. And it does, it is approximately $200 to get a medical card in the State of Florida. That being said, as you mentioned, it’s been very recent in terms of two weeks, three weeks in terms of a trend. So, a little early to see how much we should extrapolate into back half, but certainly something that we are continuing to keep an eye on. And the other thing that I would say is that the team continues to do a fantastic job of gaining more than our fair share of new patients and initial patient into our stores in Florida. But obviously, that patient growth mark – that patient growth number is an important number for us to continue to monitor into back half.
Ty Collin
Great. Thanks Kim.
Kim Rivers
Yes.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Christine Hersey for any closing remarks.
Christine Hersey
Thank you all for your time today. We look forward to sharing additional updates on our progress during our next earnings call in November. Thank you again and have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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