Trulieve Cleans House As Multi-Year Expansion Wraps Up (OTCMKTS:TCNNF)

The sentence no one likes to hear: “It was a kitchen sink quarter.” Trulieve’s (OTCQX:TCNNF) third quarter earnings report is out, and it appears that sturdy fixture has been sighted. The report contains a few surprises that dragged on performance. This article will look at the numbers in detail, followed by a discussion of Trulieve’s place in the US cannabis pantheon.

Trulieve’s financial numbers from 2022 third quarter

GAAP numbers are in the table below. (Figures in millions USD except EPS). All important metrics were up compared to Q3 2021 but down sequentially, except for operating expenses up 37%. Adjusted EPS was $0.02, but GAAP EPS -$0.61. Continuing operations GAAP EPS was -$0.41 suggesting a big drag from discontinued operations has been removed.

	Q ending Sept.30, 2022	Q ending Sept.30, 2021		Q ending June 30,2022
Revenue	301	224	34 %	319	-6 %
Gross Profit	168	154	9 %	184	-9 %
Gross Margin %	56 %	69 %		58 %
Operating Expenses	196	88	123 %	143	37 %
Operating Expenses %	65 %	39 %		45 %
Net Income (Loss)**	-115	19	—	-22	—
Net Income (Loss) Continuing Ops	-77	19	—	-22	—
Adjusted Net Income (Loss)	4	36	-90 %	-1	—
EPS Continuing Ops	-0.41	0.14	—	-0.11	—
Adjusted EPS	0.02	0.26	-92 %	0	—
Adjusted EBITDA	99	98	1 %	111	-11 %

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Why the big difference?

The loss of $115 million includes $26 million in non-recurring acquisition and integration costs It also includes $93 million in asset impairments, disposals, and discontinued operations. These are the kind of costs associated with growth through acquisitions. In the earnings call, CFO Alex d’Amico reported that their multi-year expansion campaign is now largely complete. The timing of charges like these, particularly the $93 million, is partly determined by management. It appears they chose to put as much as possible in this quarter, but no doubt there will be some charges in the future.

Ongoing operational performance

After adjustments, the latest results show EPS of $0.02, more or less in line with recent quarters. As cannabis investors know, the industry is in a difficult environment. All companies are reporting impacts from margin reduction, inflation, labor supply, logistics, and consumer unease. Anticipating more of the same, Trulieve will be lowering production and capacity utilization during the fourth quarter. The company also felt the impact of hurricane Ian, which did not do much damage to company assets but affected retail (no cultivation or manufacturing facilities were affected). Hurricane Ian closed 64 retail locations and had a negative impact of $3.3 million. Although revenue was up 34% year on year, it was down 6% sequentially. The lower revenue was attributed to Ian, macroeconomic conditions, and the closing of non-core margin dilutive or cash flow negative assets.

The question arises concerning how much weight to give to GAAP vs. non-GAAP adjusted results. The list of adjustments was very long. They even backed out $200,000 of COVID-related costs. Since the expansion campaign is mostly complete, the largest part of non-recurring costs is done, although there will be some in coming quarters. In this scenario financial performance returns to the previous status, near the top of the industry but suffering from continuing industry and macroeconomic headwinds.

Capital position

Capex was $278 million in 2021, and based on projections should be about $131 million in 2022. The company projects a 40% reduction in capex for 2023. They currently have $114 million in cash. This should be sufficient, but Trulieve has never had trouble raising money. Their blended interest rate is 8.3%, and recent borrowing has been below that. In addition, they expect to be cash flow positive in Q4 2022 and 2023.

There are positives

Looking at the larger picture, there are factors in Trulieve’s favor.

SAFE Banking: As I have written previously, the chances of favorable banking legislation passing before January are better than they have ever been, and the benefits to the industry would be significant. The results of the recent election have jacked up the motivation of Sen. Booker, Sen. Schumer, and their allies. There’s no more time to dither and pontificate – they have to buckle down and get something passed by January before the opportunity vanishes along with Democrat control of the House.

Adult use in Florida: There is an active campaign to put an adult use referendum on the Florida ballot in 2024. In a recent poll, 76% of Florida voters favored making cannabis legal, and support was bipartisan. That amount of support is remarkable in these fractious times. In the earnings call, CEO Kim Rivers noted that when adult use begins Florida will be the largest legal market in the US, with 22 million citizens and 130 million tourist visits a year. It’s estimated that adult use would at least double the size of the market in Florida, which would disproportionately benefit Trulieve as the largest operator in the state. State cannabis referenda have almost always been successful in the past, except in 2022, when only two states (Maryland, Missouri) approved it and three (Arkansas, North Dakota, South Dakota) did not. The consensus is that it will pass in Florida, but observers will be watching with interest. Trulieve has contributed $10 million to the campaign.

Trulieve’s industry position: Trulieve’s prominence in Florida is unrivalled by any company in any state. Much has been written about other operators flocking to Florida and reducing Trulieve’s early dominance. Good data on the subject is available from Florida’s Office of Medical Marijuana Use. The table below compares on Trulieve’s market share from now and early January 2022. Yes, Trulieve’s market share is decreasing as other companies increase their presence, but they still have almost 25% of all stores in the state and dispense about 40% of the product.

	01/07/22	11/04/22
Dispensaries	111	121
Dispensaries %	28.0%	24.7%
Medical %	40.6%	37.4%
CBD %	49.2%	38.2%
Smoking form	50.9%	44.0%

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Trulieve is easily the strongest and most prominent cannabis presence in Florida, and is likely to continue that position indefinitely. In my assessment this conveys a number of advantages:

• Location and name recognition: Trulieve has 121 Florida locations. The next largest, MuV, has 61, and 15 of 22 licensed operators have between zero and 20 locations. Clearly, if you’re looking for a dispensary the odds it will be Trulieve are greater than any other name. In addition, as the oldest and largest operator Trulieve has the best name recognition, and many consumers value familiarity.
• Economies of Scale: Scale brings efficiency in many areas, including cultivation, manufacturing, marketing, technology, and retail. As one example, Trulieve has implemented SAP’s ERP system, which few companies in the sector have the resources to do. Scale is even more beneficial in states where all operators must be seed-to-sale. Small operators have to allocate their limited resources across the entire process. whereas Trulieve is not resource constrained and can build efficiencies across the entire value chain.
• Financial Strength: Every industry has marginal operators that underperform or even go out of business because of financial or other deficiencies. Undercapitalization, for example, has been the downfall of countless small businesses. Even when they survive they can struggle to implement a business plan. Trulieve’s financial strength will enable it to survive and thrive, and will be particularly important if economic conditions continue to deteriorate.

Trulieve Investment Recommendation

I continue to assign Trulieve a BUY recommendation, based on a minimum 12 month timeline. The Q3 2022 report contained some distressing points, particularly lower GAAP EPS, lower revenue, and a very large number for non-recurring expenses. Results were also impacted by unfavorable industry and macro conditions. Fortunately, Trulieve’s multi-year expansion campaign is now mostly complete, which the company believes will improve performance. We’ll see. Experienced cannabis investors know that surprises are a fact of life in the industry.

There are several factors undergirding the BUY recommendation. SAFE banking and a successful adult-use referendum in 2024 would give a strong boost to the entire sector. Trulieve’s strong position in Florida (and across the country) gives it advantages not accessible to other operators. Also, in my assessment Trulieve has one of the best management teams in the industry. They made Trulieve a cannabis star in the early days, and in spite of doubters led a growth campaign that gives them the largest retail network in the US. There is no other team better qualified to realize the potential of that growth.