Trulieve Cannabis Corp. (OTCQX:TCNNF) Q3 2022 Earnings Conference Call November 9, 2022 5:30 PM ET
Company Participants
Christine Hersey – Director, Investor Relations
Kim Rivers – Chief Executive Officer
Alex D’Amico – Chief Financial Officer
Conference Call Participants
Derek Dley – Canaccord Genuity
Matt McGinley – Needham
Pablo Zuanic – Cantor Fitzgerald
Spencer Hanus – Wolfe Research
Russell Stanley – Beacon Securities
Spencer Hanus – Wolfe Research
Eric Des Lauriers – Craig-Hallum Capital Group
Operator
Good evening, everyone and welcome to the Trulieve Cannabis Corporation Third Quarter 2022 Financial Results Conference Call. My name is Jenny and I will be your conference operator today. 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 evening 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 afternoon, we reported results for the third quarter of 2022. A copy of our earnings press release and 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 An archived version of today’s conference call will be available on our website later today.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 31st, 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’ll 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 third quarter results and provide an update on our business. Before I discuss our results, I would like to briefly address Hurricane Ian and tropical storm Nicole. First and foremost, I would like to say a special thank you to all of our employees who worked tirelessly during Hurricane Ian to serve patients and restore business operations, especially those who contributed to recovery efforts despite being personally impacted by the storm.
Our team’s experience in disaster preparedness plans, coupled with our sophisticated logistical and technological capabilities contributed to the effective management of operations before, during, and after the hurricane.
Cross-functional teams assembled to monitor storm development and dispatch response efforts. We deployed mobile tech and operational units to provide self-service, deliver power generators, and fuel and make necessary repairs to get stores back online to serve patients with minimal disruption.
Through the hard work and commitment of our teams, within six days, we were able to reopen 59 of the 64 stores that were closed resulting in a $3.3 million impact to revenue in the third quarter.
In supportive recovery efforts, we rolled out several initiatives, including a roundup campaign and a volunteer program to aid communities across Florida and an assistance fund and supply relay programs to support employees. Trulieve has committed to matching contributions from both programs. We are fortunate to be in a position to provide resources to our employees and the communities we operate in during this time of need.
As we sit here today, Tropical Storm Nicole is making landfall on the East Coast of Florida. We closed 16 locations earlier today in advance of the storm and will be working diligently to restore normal business operations, while prioritizing employee safety. Updates on store closures and reopenings can be found on our blog available at trulieve.com.
Moving on to last night’s mid-term elections. We would like to extend congratulations to the citizens of Maryland for a successful passage of recreational cannabis. We are looking forward to serving recreational customers in the state through our vertical operations, which include three retail stores showcasing our full suite of internal brands.
Turning now to our third quarter results. Trulieve achieved third quarter revenue of $301 million, up 34% year-over-year. Revenue decreased by 6% sequentially, impacted by macroeconomic conditions, foregone revenue due to the strategic shuttering of non-core assets, regulatory changes in Florida and the impact of Hurricane Ian.
Third quarter adjusted gross margin remained relatively flat quarter-over-quarter at 57.1% compared to 57.6%. Adjusted gross margin remained strong despite lower revenue due to increased utilization at our new Florida indoor cultivation facility and flat promotional activity company-wide. Adjusted EBITDA was $99 million, or 33% margin representing our 19th consecutive profitable quarter.
Operating cash flow was negative $22 million in the third quarter, an improvement of $23 million compared to the second quarter. We anticipate operating cash flow will be positive in the fourth quarter, and we will generate free cash flow in 2023. We exited the quarter with $114 million in cash.
Trulieve’s strong financial profile remains a key differentiator within the cannabis industry. In the current environment, access to capital at attractive rates is a strategic advantage. Trulieve within an enviable position among peers with term debt at a weighted average interest rate of 8.3% and no significant current debt maturities. We recently secured a commitment for $70 million in real estate backed financing and a favorable rate compared to our existing debt. We expect this financing will close before year-end.
Even with greater access to capital versus peers, we will continue to exercise restraint with prudent allocation of capital in accordance with our long-term strategy. We have clearly demonstrated our ability to safeguard capital by avoiding costly investments in markets like New York that offer a little line of sight to delivering returns.
At the same time, we are willing to divest duplicative and cash dilutive assets where appropriate to maximize long-term cash flow. We will continue to focus on executing, while tuning out the noise.
Looking ahead, we are prepared to uplift to a US-based exchange once allowed. We are nearing our two-year anniversary as an SEC registered company with financials prepared in accordance with US GAAP. Having completed an S-1 registration in early 2021 and then advancing to an S-3 registration earlier this year. In addition, we believe our diverse Board of Directors with expertise across a variety of sectors, including beverage, consumer and hospitality is well equipped to provide sage advice as we navigate the transition to a US exchange. We expect the US listing would afford Trulieve significantly greater access to capital, increased liquidity and broader reach among investors.
Moving to our retail operations. During the third quarter, our industry-leading retail platform grew to 176 locations with market-leading positions in Arizona, Florida, Pennsylvania and West Virginia. We opened 11 new stores in Arizona, Florida and West Virginia and relocated one Florida dispensary. We closed two underperforming locations in California permanently and closed one dispensary for relocation in 2023 in Pennsylvania.
We are on track to meet our guidance of 25 to 30 new store openings and up to six store relocations in 2022. Retail sales declined by 5% sequentially to $284 million, accounting for 94% of third quarter revenue. Generally, trends observed exiting the second quarter continued with tightening economic conditions, influencing retail results in different ways across our markets. Retail performance in Florida faced outpriced pressure this quarter due to a number of factors.
First, lower net patient growth, followed by the implementation of rolling dosing limits and finally, Hurricane Ian. Net patient additions declined to approximately $1,500 per week in the third quarter, bottoming at the end of July and rebounding somewhat at the end of the quarter. Decelerating patient growth reflects the reversal of COVID-related trends, where program enrollment spiked due to greater access through telemedicine, coupled with an increase in consumption hours and household income bolstered by stimulus dollars.
We estimate the total cost to obtain a medical card through renewal or initial entrance is approximately $200, which may be high given the current inflationary pressure on household spending. Since quarter end, net patient growth has since rebounded to approximately 2,100 patients added per week.
Second, at the end of August, daily dosage and 70-day supply limits took effect. While only a low single-digit percentage range of patients were estimated to be affected and practiced by these limits, patients adopted a scarcity mindset, pulling back on purchases to reserve supply capacity for the future.
Following the implementation of the new limits, Trulieve rolled out an online tool to provide patients with real-time data showing available milligrams under each category as items are added to online shopping carts. We also worked with physicians to ensure that they understood the new limit and how to get exceptions to limits for patients where appropriate.
Slower patient growth in rolling dosage limits added pressure on volumes dispensed in early September on top of an already stressed economic backdrop. In response to the market slowdown, several competitors began aggressively discounting to drive traffic, offering mass discounts to 50% and higher storewide.
Initially, Trulieve also increased promotional activity but as a result of our ability to mine data and green insights from customer behavior, we quickly adapted our approach. Data revealed areas for improvement to our strategy, and we were able to quickly incorporate this data feedback, doubling down on brand and product segmentation to reinforce our value proposition in lieu of indiscriminate store-wide discounts.
We reset our focus on delivering clear and consistent messaging for each products here while maintaining a disciplined approach to discounting. For premium customers, who are interested in new and innovative products, we push information on the timing and availability of new and exclusive product drops.
Within our mid-tier segment, we pulled promotional activity, offering periodic discounts on specific products to highlight brands or move inventory. For value customers, we offer high-quality products at everyday low prices, affording customers consistency without having to hunt for deals or wait to time purchases.
As an example, in September, we reintroduced roll one indoor flower with an everyday low price of $20 period [ph]. Utilizing this multilayered strategy, we are able to meet value customers where they are, while preserving brand integrity for mid- and premium-tier products. At the same time, we improved the overall customer experience with greater transparency on quality and pricing.
Following these changes in mid-September, our retail performance began to stabilize and improve. Just as these changes were beginning to yield positive results, Florida was hit by Hurricane Ian. As I noted at the top of the call, our advanced capabilities and depth of experience allowed us to quickly reopen stores close due to the storm– stores closed due to the storm. While our team was working to restore operations, we provided timely updates on store openings, modified business hours and alternative store locations, specifically to customers in affected areas, utilizing targeted messaging.
Subsequent to quarter end, our retail performance has been steady in Florida, aided in part by improved patient growth, patient and physician acclimation to new supply limit and our refined promotional strategy. We are currently positioning for the holiday season, which historically has seen larger volumes and higher promotional activity within the current macroeconomic environment, visibility is limited into year-end.
Trulieve has garnered an outsized market share in Florida with an average of 50% market share in flower over the past three years. While our size and exposure in our home State of Florida negatively impacted third quarter results, we expect our market leading presence to be a major driver of outperformance in the years ahead. Florida remains the largest growing medical market in the US with tremendous future potential. Including adult-use consumption, Florida is poised to be the largest legal US cannabis market with 22 million residents and 130 million tourist visits per year.
Trulieve remains an active supporter of the Smart & Safe Florida campaign to add an adult-use initiative to the November 2024 ballot. The campaign has already gathered over one-quarter of the total signatures required, which once validated by the Florida Division of Elections, will trigger a review by the Florida Supreme Court prior to ballot placement.
Signature gathering efforts are ongoing and thus far have tracked ahead of anticipated time lines. Assuming success, we estimate the Florida market could reach up to $6 billion following expansion to include adult-use sales. Given our unrivaled scale in production and retail footprint, we are poised to retain our leadership position in this massive market.
Turning now to Pennsylvania. As we highlighted during our second quarter call, our customers continue to shift towards value products. In the third quarter, sales of premium products were flat, while mid and value tier units increased. Throughout this year, we have been increasing our production of branded products, including several value products with the RO brand [ph]. With these efforts, branded product revenue almost doubled in the third quarter compared to the first quarter of this year. We will continue to expand our distribution of branded products for branded retail in Pennsylvania and expect to realize improved performance as these brands gain traction in the market.
And finally, in Arizona, third quarter retail results declined sequentially due to both the seasonal slowdown and pricing pressure across the market. Over the hot summer months and into the fourth quarter, Trulieve’s increased promotional activity to sell-through legacy inventory within this challenging backdrop. We successfully depleted the bulk of legacy inventory and promotional activity has been reduced in time for a seasonal uptick in traffic ahead of the holiday season.
Concurrently, we begin a broad initiative to increase the sale of internally produced products through our retail platform. Since August, we have opened three new Trulieve branded dispensaries. Early performance of these new locations has been encouraging. Recently, we rebranded a dispensary in Glendale and we’ll continue to rebrand Arizona retail locations and launch branded products over the next year.
In wholesale, revenue declined 24% sequentially to $16.5 million, continuing declining trend from the second quarter. During the third quarter, we made the strategic decision to exit wholesale operations in Nevada where the footprint was not efficient and the previous harvest operation was cash dilutive. Wholesale markets generally remained under pressure as weaker trends persisted throughout the quarter.
Consequently, wholesale customers are carefully managing working capital and inventory levels due to softer market conditions. We will continue to manage production mix and product allocation to the wholesale channel across key markets such as Arizona, Massachusetts, Maryland and Pennsylvania.
Focusing now on supply chain. Distribution across our retail and wholesale network is supported by over four million square feet of cultivation and processing capacity. In Florida, none of our cultivation and manufacturing or processing operations were affected by Hurricane Ian. During the third quarter, we continued to ramp production at our state-of-the-art indoor 750,000 square foot cultivation facility. We expect the facility will be fully planted at the start of the year with initial harvest and optimization efforts continuing into the spring.
As we ramp this new lower-cost production facility, we have begun to pull older and less efficient capacity offline. This dense capacity will remain available to ramp again as needed to meet future demand.
During the third quarter, we produced 9 million finished goods units compared to $10 million during the second quarter. During the fourth quarter, we are further lowering production and capacity utilization across markets to match current demand more closely and reduce inventory. Given the lead time required for changes in production to take effect, we expect the majority of these efforts will be realized downstream in Q1 and Q2 of 2023.
In Maryland, we are well positioned to serve recreational customers without significant capital expenditures. We continue to make progress expanding our branded product portfolio in Maryland with the launch of Roll One™ Concentrates in modern flower vapes in the third quarter.
In September, Trulieve was awarded one of only two Tier 1 production licenses in Georgia. Production commenced following the receipt of the award, and we expect to complete our first harvest within the next few weeks. We look forward to opening dispensaries and serving patients in early 2023.
And just last week, we were awarded of cannabis cultivation license in Connecticut, which allows for two adult-use dispensaries. We plan to expand our operations in Connecticut in 2023, including the relocation of our Bristol dispensary ahead of recreational sales.
Looking ahead, as the industry matures, we believe the strongest companies will continue to separate from the pack. We believe the next industry phase, which we call Cannabis 2.0 will be triggered by regulatory reform and defined by a more open and diverse competitive landscape, spurring the need to build meaningful and lasting customer relationships.
We expect these changes will provide an opportunity for Trulieve to differentiate itself within a more robust industry ecosystem. Operators with scale, distribution and technology will be better positioned to meet the needs of an increasingly sophisticated marketplace.
Trulieve has been preparing for this next phase of industry development for several years. Our regional hub structure anchored by leadership teams within Cornerstone markets provides a solid foundation. Our experience building scale and depth has yielded best practices to achieve lower production costs and greater efficiencies throughout our supply chain and retail operations as evidenced by our 750K facility, which we began designing in 2019.
Trulieve’s expansive distribution network anchored by our industry-leading platform provides an opportunity to directly connect with the customer create brands, claim valuable insights into customer segmentation and test methods to define and protect the customer journey.
Our technology platforms and scale solutions are essential to strategic growth initiatives including developing omni-channel capabilities and enhancing digital platforms. One concrete example includes our successful implementation of SAP in 2020, a world-class ERP system that we are continuing to optimize, while adding modules for warehouse management, integrated business planning and human resources. We will continue to expand these capabilities with the advent Cannabis 2.0 in mind.
While the third quarter presented various challenges, our team was able to adapt as necessary to course correct and stabilize the business headed into year-end. Despite short-term headwinds in the economy and core markets, we believe the long-term prospects for cannabis have never been brighter. With increasing mainstream support and meaningful regulatory reform on the horizon, tremendous growth opportunities lie ahead for legal cannabis in the US.
As our industry continues to evolve, I believe our long-term strategic focus and commitment to investing in Cannabis 2.0 will further differentiate Trulieve among peers.
With that, I’ll turn the call over to Alex for more details on our third quarter results.
Alex D’Amico
Thank you, Kim, and good evening, everyone. We recently celebrated the one-year anniversary of the closing of the Harvest acquisition, the largest US cannabis deal completed to date. Since the deal closed, we have been working to optimally position the business. During the third quarter, we made additional progress on these efforts exiting duplicative and non-core assets in California, Florida and Nevada, ramping lower cost production capacity and further refining our approach in wholesale markets. As we move through year-end, we are continuing to execute on our strategy, streamlining operations, working down inventory, and adjusting our production output as needed to better position the company for 2023.
Turning now to third quarter results. Our team effectively managed the challenging economic environment, while remaining focused on our core operating plan. Third quarter revenue of $301 million increased 34% year-over-year compared to $224 million during the third quarter of 2021.
Third quarter revenue decreased 6% sequentially compared to $319 million. Macroeconomic pressure on household income, foregone revenue, and Hurricane Ian impacted third quarter topline results.
Third quarter GAAP gross profit was $168 million or a gross margin of 56% compared to 58% during the second quarter of 2022. GAAP gross margin declined sequentially due to packaging costs related to the integration and resulting discontinuation of select brands, product mix and the favorable impact in Q2 of the vape recall reversal, partly offset by increased utilization at the new $750,000 indoor facility and greater sales of internally produced products.
We expect to further lower production costs as the new facility fully ramps into 2023. Excluding non-recurring charges, third quarter adjusted gross profit was $172 million or adjusted gross margin of 57% and we expect gross margin will continue to fluctuate quarter-to-quarter depending on product and market mix and inventory flow-through.
SG&A expenses in the third quarter were $114 million or 38% of revenue compared to $109 million or 34% during the second quarter. Third quarter expenses included approximately $22 million of transaction, integration, and non-recurring charges inclusive of $10 million contributed to the Smart and Safe Florida campaign.
Excluding these charges, third quarter SG&A was $92 million or 31% of revenue, flat on an absolute basis compared to $92 million or 29% in the second quarter. Third quarter expenses also included higher new store opening costs with 11 new stores coming online compared to six in the second 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. Trulieve continues to pay taxes owed in a timely manner with $57 million in cash taxes paid in the third quarter and $162 million in cash taxes paid year-to-date.
Net loss was $115 million for the third quarter compared to a net loss of $22 million for the second quarter. Third quarter net loss included $26 million of transaction, acquisition, integration, and other non-recurring charges and $93 million in asset impairments, disposals and discontinued operations, primarily associated with the strategic repositioning away from margin dilutive and cash flow negative assets.
Excluding non-recurring charges and asset impairments, net income would have been $4 million.
Third quarter loss per share from continuing operations was $0.41 compared to loss per share of $0.11 in the second quarter. Excluding nonrecurring charges, third quarter net income per share would have been $0.02.
We anticipate non-recurring charges will continue to impact reported EPS through year-end. For the third quarter, adjusted EBITDA was $99 million or 33% compared to $111 million or 35% during the second quarter.
Margin performance reflects higher expenses associated with store openings and fixed retail operating costs against lower revenue in the third quarter, partly offset by streamlined operations and greater in areas offset by streamlined operations and greater efficiencies.
Moving on to our balance sheet and cash flow. We ended the third quarter with $114 million in cash and $553 million in debt. As Kim highlighted, we expect to close an additional $70 million financing at a rate below our current cost of debt at 8.3%. Third quarter operating cash flow was negative $22 million, an improvement compared to the second quarter. We expect to realize positive operating cash flow during the fourth quarter. We anticipate free cash flow generation next year will be driven by improved operating cash flow and reduced capital expenditures. In the third quarter, capital expenditures totaled $38 million, the majority of expenditures year-to-date were comprised of investments in supply chain and retail assets.
We currently expect fourth quarter investments to be lower sequentially. We are at the tail end of a multiyear investment cycle. Having completed significant investments in supply chain capacity and infrastructure across several markets, including Arizona, Florida, Maryland, Massachusetts, Pennsylvania and West Virginia. As Kim mentioned earlier, as our new 750k indoor grow in Florida continues to ramp, we have the ability to pull legacy capacity off-line temporarily.
As demand increases in the future, we have tremendous flexibility to quickly ramp bank supply chain capacity. In 2023, we expect capital expenditures will be at least 40% lower compared to this year. And finally, our outlook and guidance for 2022. We expect fourth quarter results will be influenced by factors, including holiday retail performance. With limited visibility into year-end, we have a stretch target of 2022 revenue of $1.25 billion and adjusted EBITDA of $415 million.
In summary, we delivered another solid quarter while managing through challenging conditions in the broader economy. We are committed to meeting customer needs, improving performance in core markets and managing cash wisely while streamlining operations across the organization. We have ample runway to prepare for future growth. I am so proud of our team, and I look forward to expanding upon the progress we’ve made thus far. And with that, I’ll turn the call back over to Kim.
Kim Rivers
Thanks, Alex. The US cannabis industry continues to garner attention as mainstream acceptance increases. The recent directive by President Biden issued pardons and reexamined the Schedule 1 status in marijuana sent a strong signal, reinforcing our view that meaningful reform is on the horizon.
As the layer of prohibition are repealed, Trulieve is incredibly well situated with its regional hub strategy, proven ability to build depth and scale, distribution capabilities and technology infrastructure. Recent midterm election results demonstrate the increasing popularity of cannabis across all demographics with successful pro-cannabis solid initiatives in Maryland and Missouri and victory of ProCut cannabis governors in Maryland and Pennsylvania.
With the elections concluded, we believe the short-term focus can now turn to the passage of safe thinking. We’re hopeful that strong bipartisan support and demonstrated means of state legal cannabis operators will propel safe thinking across the finish line before year-end. Irrespective of any federal reform, we are committed to our strategy and disciplined approach to profitable growth and long-term shareholder value.
The legal US cannabis market size is expected to triple by 2030, reaching an estimated $75 billion in annual sales. This impressive growth forecast does not fully include new market expansion. Only 21 states have legalized cannabis for both medical and adult use, and most of these states are located in the Northeast and the West. A majority of states have yet to legalize cannabis, leaving significant white space and catalysts ahead. We remain especially bullish on operations in Southeast markets such as Alabama, the Carolinas, Tennessee and Texas.
Given our strength and track record in the Southeast, Trulieve is well positioned to expand in many of these markets as new programs develop. Our focus on serving customers remains our guiding light, while we are building a sustainable and scalable company designed to thrive in an integrated commerce environment. 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] And we will go first to Derek Dley of Canaccord Genuity.
Derek Dley
Yes. Hi. Thanks, everybody. I just wanted to touch on that CapEx comment. So on our math, CapEx next year will be in and around the sort of $120 million level. Can you just comment on where the bulk of that is going to go towards?
It sounds like you’re fully confident, fully built out in Florida, Maryland, it sounds like you do not need much more there. So I’d imagine Arizona, West Virginia potentially Connecticut would be areas of growth?
Kim Rivers
Hi, Derek. So, yes, we are — we will definitely be investing, of course, in our new market of Georgia, which will be coming online, of course, through 2023. In addition, we will, of course, continue to complete our build out, as we mentioned, that award in Connecticut and that positioning ahead of and with the incorporation of recreational sales in Connecticut.
So we’ve got both supply chain expansion there as well as retail. And then, there will be, I think, some investment remaining in retail across our markets. And we’re going to obviously continue to be very strategic in terms of the number and placement of that retail footprint. But certainly, we think that there is still some room on the retail growth front into next year.
Derek Dley
Okay, great. And then, I’m going to just ask you one on pricing, and I’m sure you’re going to get a lot on this. But — what are you seeing in terms of the premium end of the market? I know you — it sounds like you started to discount and then with your data realized perhaps the better strategy was to kind of hold your prices and it seems like that’s what you’re doing going forward.
So is that sort of the plan is to really push that sort of quality that truly offers on its premium and mid-tier brands? And then, in the outlook, there’s a comment about increased promotional spending around the holidays. Is that, in particular, focused on Truly, or is that just what you expect from your competitors or both?
Kim Rivers
Sure. So we’ll take them in order. So, in terms of what we saw and what we’re seeing from a trend perspective, as we break it down between segments of category between premium, mid and value product lines. There are some differences in customer behavior market to market, certainly, as it relates to our pricing strategy.
And we — as I mentioned on the call, as it relates to our premium products, we believe and the results show that those can stand on their own. It’s important for us, of course, to message very directly and specifically to those customers who — and those customer profiles who are premium shoppers.
And so, we’re able to do that through our data platforms by specifically, again, letting them know when exclusive drops and certain products are coming into markets and into dispensaries that they’re closest situated to.
As it relates to mid-tier, our mid-tier category is the category where we are able to and speak and post promotions. So we use that category to really, again, attract those folks who our mid-tier shoppers, but who may be looking for specific promotional activity or deals, if you will. And we have those on a regular cadence, again, they’re able to target in and lean in to folks that have certain profiles or certain customer — certain customer profile in our system.
And then finally, our value category, which we’ve seen certainly growth across most markets, recently and being able to speak to quality of products, but of course, at more of an everyday low price, which we have found has resonated with folks really across all markets. And so –our pricing and our — again, our tiered strategy has gained traction and certainly is resonating, it appears with customers.
Moving to holiday, which this has been consistent for us year-over-year. It increases in general in the market. And then it also historically has been our most promotional quarter of course, with Green Wednesday and Black Friday coming in November and then the holiday period at the end of December.
So we would expect that to continue as it relates to competitor activity, and we certainly continue to see high levels of promotion in — across markets in Florida, in particular, and I think over Halloween, I think there was somebody who had 60% of the entire store. So we’re still seeing that in market, although, again, our portfolio and our pricing strategy has held up.
Derek Dley
Okay. Great. I appreciate all the color. All the best.
Kim Rivers
Yes.
Operator
And we’ll hear next from Matt McGinley with Needham.
Matt McGinley
Thank you. My first question is on inventory. You noted that you produced 1 million fewer units, and I think your plant count was down by 27% in Florida, but you still had that $30 million build in inventory quarter-over-quarter. So what do you think an ideal inventory days or inventory dollars would be when your inventory is better aligned in the first or second quarter of next year? Are you heavy with inventory in any given state? And should we assume that inventory drops in the year-end even as you noted, you don’t really get this problem fixed until 2023.
Kim Rivers
Yes. Thanks, Matt. So definitely should see improvement into Q4. Ideal inventory just — and again, it’s obviously going to have nuances and vary by product category and market specifics, but just high level is approximately 2.5 months. Again, that will — 2 to 2.5 months, I should say, depending on more specifics.
But as you pointed out, we were successful in terms of bringing down that plant count and there is a bit of a we’re caught a little bit right now in this moment of transitioning, right, particularly in Florida, where we have the 7,500 ramping up or we wanted to make sure that that was — continue — we continue to want to make sure that, that’s stabilized by phase, and as prior to decommissioning or bringing down other less efficient capacity.
And so that is that has happened, again, and it will continue to happen in phases. And so the first impact of that should pull through in Q4 with a ramp into Q1. And we think that based on our internal estimates, where we sit today, that the inventory kind of normalization, if you will, will happen exiting Q1, early Q2.
Matt McGinley
Got it. And on the gross margin, your adjusted gross margin held in pretty well this quarter relative to the sales decline, given what you just noted with promotion and trying to get these inventories down, should we assume that the gross profit rate will be down in the fourth quarter, or is there enough benefit from that facility ramping in Jefferson County that those pressures will largely be offset?
Alex D’Amico
Matt, thanks. Yeah, I think the margin holding in the quarter was a real win for us, and I’m happy about that. We had I think more important than the one-offs in the quarter are what we were doing structurally and strategically, we progressed on our strategic plan. We had the ramp in the 750,000 facility. We pushed higher volumes of internal products through internal retail. And I think when you look going forward, that’s what we lead into. So even if there is increased pricing pressure from holiday, et cetera, we look for a margin to hold in the next quarter, given those improvements we made structurally and strategically.
Matt McGinley
Okay. Thank you.
Operator
We will go next to Pablo Zuanic of Cantor Fitzgerald.
Pablo Zuanic
Yes. Two questions, Kim. One, maybe help us think in terms of model in Connecticut. I mean, is that going to be a market like Arizona that we didn’t see that much significant growth in direct compared to, say, New Jersey. Just help us think through that? And then the timing of the three stores and when you’re going to be ramping up cultivation. That’s for Connecticut.
And then the second question, I’m sure you’ve been following — you and your team have been following the Canopy Growth’s proposal, kind of, USA, and the discussions with NASDAQ. In your opinion, if NASDAQ were to approve the USA structure, would that mean that Trulieve would have the right to have list in NASDAQ? Thanks.
Kim Rivers
Thanks, Pablo. Let’s take those questions in orders since they’re somewhat different in topic. As it relates to Connecticut, as you know, we are in Connecticut today with our Bristol dispensary and we are in process of a relocation of that dispensary and expect that to be finished in time for — certainly, our goal is to have that finished in time for recreational — the announcement of recreational sales, and to be an early participant in — through that store in the recreational market there.
And as it relates to — obviously, just our partnership as it relates to the cultivation facility in the two stores we just were awarded last week. And we certainly have been investing ahead of award in anticipation of award, and we’ll be working quickly to get that facility stood up. And we do believe that it will be very important in Connecticut to have supply as is not atypical in some of these markets when recreational comes to fruition that really supply chain is a key driver of success in those markets.
And so we’ll be working to get that facility stood up as quickly as possible. And through our lens, that’s probably one of the more important points of focus for success in Connecticut through next year. And then would have the two stores – the additional two stores come online, hopefully, in alignment with that supply coming online.
As it relates to volume and market and obviously, it’s a little early to say. We think that it will be a contributive market for us. I wouldn’t expect that it would be the most significant market that we have in our portfolio.
Pablo Zuanic
Right. And on the second question?
Kim Rivers
On the second question, what I can tell you is that based on our conversations internally and externally, we do know it to be true that any structure that is formally approved by NASDAQ would be available for other companies. And I think that where we sit, and we certainly believe that we are and would have a strong preference for a direct NASDAQ listing. I think that again, we would and are advocating very, very specifically for inclusion in the Safe bank plus of a safe harbor language that would also include protection for exchanges that we believe would give them comfort to allow for direct uplisting. As I mentioned in the prepared remarks, we are absolutely prepared to take advantage of that immediately. If that were to occur. And given our status as an S3 filer, and we think would be viewed positively with respect to a conversion of current status to a stock-listed company.
Pablo Zuanic
Can I ask a quick follow-up? I mean, based on the results of the election last night, did your views on the probability of Safe plus improve or decline?
Kim Rivers
I think that personally, it was somewhat what I was expecting to a certain extent. I think that the tension created between a close from a person perspective, close on the Senate and a Republican controlled house along with a Democratic President, I think that tension actually sets up nicely as it relates to cannabis. I think that the folks in the house are certainly going to be passionate about getting legislation passed during the end of the year. And I think that on the Senate side, again, I think that that tension actually potentially plays in our favor. And I will tell you that all indications are that is absolutely under serious consideration and in negotiations currently.
Pablo Zuanic
That’s great. Thank you.
Operator
And we’ll go next to Spencer Hanus of Wolfe Research.
Spencer Hanus
Good afternoon. Thank you for taking the question. If I could go back to CapEx for a minute. Can you remind us how much…
Kim Rivers
Spencer?
Operator
We’ll get Spencer back one moment.
Kim Rivers
It’s okay. Let’s just move on to Russ and he can dial back in.
Operator
And we’ll go to Russell Stanley with Beacon Securities.
Russell Stanley
Hello. Good afternoon. Thanks for taking my question. First, maybe around Georgia. And you’ve indicated plans for retail line share in 2023 and Kim you mentioned on prior calls, how you see parallels between Georgia now and where Florida was, I guess, several or so years ago. Just wondering I guess, what efforts might be underway to encourage an opening of that medical market, be it relaxation, the THC caps or other changes that would help accelerate growth there and just understanding how fast you expect this market to develop relative to Florida’s trajectory?
Kim Rivers
Sure. So as a reminder, right, those awards again just happened, and we have not yet been through a legislative session, where the program has been launched. And so that will be a first for us coming up this spring. We’re very excited to participate in a more direct way with the legislature during that time. We certainly are encouraged by continued increased patient growth in Georgia, even in advance of us actually having stores opened. The patient numbers continue to climb. And just as a reminder, the way the program is structured that number of stores is tied back to the patient growth numbers. So we believe that we already have qualified — enough qualified patients for an increase in the number of stores that will be able to build — so again, continued positive momentum in Georgia, even in advance of us actually getting open.
And we’ll be able to give you more color us as we continue to operate there and we get open and we see where the potential push and pulls are that are specific to that market. Every market is a bit and can be a bit nuanced as it relates to where friction is created. But we are and remain very excited about opening in Georgia. And again, we’ll looking forward to getting products to patients there as quickly as possible. They’ve been waiting a long time.
Russell Stanley
Great. And maybe if I could have one question around Virginia. It’s a small state, but you’ve opened — I think you’re up to nine stores there now with 10th on the way, and that’s a fairly rapid build out there, given the market size. So just wondering how those operations are performing and whether the market itself is developing at a pace that’s more or less in line with your expectations?
Kim Rivers
Sure. So, yes, West Virginia to be clear. And the market is performing in line with expectations is what I would tell you. And we think that there are some additional opportunities in West Virginia again, to make some — have conversations with legislators and continued conversation with regulators around some potential structural changes that would, we think, also be helpful.
In addition, certain lawmakers there have signaled the willingness or openness to begin having conversations about a potential adult-use introduction, which in a state like West Virginia, we do believe would be a meaningful contributor to tax revenue base and could be a legislative – legislative conversation. So we like our position in West Virginia. And we have, again, we’re looking to open our 10th store there going into the early part of 2023.
Russell Stanley
That’s great. Thanks for the color. I’ll get back in the queue.
Operator
And we’ll go back to Spencer Hanus with Wolfe Research
Spencer Hanus
Guys. Sorry about that. Hopefully, you can hear me now. But just on your CapEx and in terms of where you guys are in the investment cycle there, how much revenue do you think you could support with existing cultivation that you have in place today? And then how are you prioritizing building out new stores in Florida to sort of fortify your position in the state as other operators come looking for your market share there?
Alex D’Amico
On the CapEx and revenue support, I’ll say there. So a good portion of our CapEx for 2022 went towards 2023 initiatives and growth plans. So we’ve – we feel adequate about where we are vis-à-vis what we’re looking at in 2023 in terms of CapEx. Obviously, we won’t comment on a number now, but you’ll hear more about that from us at year-end.
Kim Rivers
Yes. And as it relates to our retail positioning strategy, and Spencer, as you know, we are very specific in terms of the information that we review as it relates to store placement. And we do a deep dive and look at customer trends and we look at certainly physician trends as well. And then, of course, information that we’re able to glean not only through our registers but also, again, through our data analytics and data platforms.
So, we think we have a pretty 3-dimensional, 4-dimensional view in order to do our analysis as it relates to store placement. I think it’s important to note that also built into our retail platform in Florida is optionality. So, there are a number of locations that we have that are — that have expansion capabilities already built in, where we can add additional points of sale and as demand, we can ramp up or ramp down basically as indicated or dictated by demand.
And I would tell you, in addition, there are certain stores that are strategically placed already in advance of an adult use initiative coming to fruition. example is, of course, our store on the Duval Street in Key West and does fine as a medical store, but we think will be an incredible store once recreational hits similarly a store outside of Daytona International Speedway as another easy example to point to. So increase, we have optionality built into current store footprint, — but again, continuing to analyze data all the time to make sure that we’re optimally positioned.
Spencer Hanus
Got it. That’s helpful. And then you mentioned you contributed $10 million to the Smart and Safe Florida campaign. Do you expect to make additional contributions there to get that initiative over the line? And are you expecting sort of help from some of the other MSOs in the state? And then I guess, where are you tracking versus your expectations from a signature standpoint for that campaign?
Kim Rivers
Yes. So, I mean, look, I mean, when you’re talking about the advent of a $6 billion market, where we have close to 50% market share, certainly, there is, in our view, a strong investment case for support of that campaign. And I would love for everyone on this call to call our peer set and make the case as to why they too should be contributing in a market with this much growth potential.
I think it’s the single most — it has a single most growth potential against any other single market as it relates to a medical direct flip. And I’m hopeful that others will especially those that are looking to invest in Florida or in a more robust fashion going into recreational initiative will contribute alongside of us. And we are tracking, as I said, ahead of expectations as it relates to signatures.
And we have got — they have actually received over a quarter of the signatures required in total, which once validated, the supervisor of elections have been a little busy recently, but we expect that the validation rate to increase pretty dramatically here over the next months. And once those are validated, there will be an automatic trigger of Supreme Court review at that point Signature GATHERING will not stop in the interim. And again, it’s pacing ahead of what we anticipated at this point.
Spencer Hanus
Great. Thank you.
Operator
And we’ll go to Eric Des Lauriers – Craig-Hallum Capital Group
Eric Des Lauriers
Great. Thank you for taking my questions. Focusing on the 750,000 square foot facility and banking the smaller production facilities. So obviously, this is an efficiency play versus a growth play. But are you still looking to match production growth with patient growth in Florida, or are you anticipating any change to production per patient as you sort of go in and complete this process?
And then just on the same line, can you talk about the expenses associated with sort of substituting these or banking these smaller production facilities with this larger one? And does that impact these discontinued operation expenses? Thanks.
Kim Rivers
Yes. So, our strategy as it relates to matching supply with demand remains unchanged on a go-forward basis, right? And so right now, again, we’re in a bit of a transition as those less efficient facilities come offline and the more efficient facility comes online. We have, again, we believe, an incredible strategic position in that we can quickly ramp back up those other facilities in the event that demand increases, i.e., in advance of a Florida rack turn on.
So we think that certainly, there’s a strategy play as it relates to that on both sides, right. On the front side, us getting increased efficiencies through a large fairly automated another meaningful efficiency gains through that $750,000, but then also coupled with the ability to have CapEx as we’ve already invested in that we could turn on quickly in advance of increases in demand.
Operator
And at this time, I would now like to turn the call back to Christine Hersey for final comments.
Christine Hersey
Great. Thank you, everyone. We appreciate your time today. We look forward to sharing additional updates on our progress during our next earnings call. Thanks again, and have a great night.
Operator
And so, this concludes today’s call. Thank you for your participation. You may now disconnect.
Be the first to comment