On March 8, Trulieve Cannabis (OTCQX:TCNNF) released its Q4 and full year 2022 financial results. As one of the leading cannabis companies, Trulieve is a bellwether and many investors look forward to the earnings reports for signs about the health of their investment and the state of the industry in general. This report will review the latest results and management commentary and discuss what they mean for the future of the company.
Trulieve Cannabis Fourth Quarter Performance
Financial highlights from the Q4 press release are in the table below. Figures in millions USD and percent change.
Q4 2022 Q4 2021 change Q3 2022 change FY 2022 FY 2021 change Revenue 302 305 -1% 301 0% 1240 938 32% Gross Profit 150 134 12% 168 -11% 682 568 20% Gross Margin % 50% 44% 56% 55% 61% Adjusted Gross Profit 162 181 -10% 172 -6% 703 621 13% Adjusted Gross Margin % 54% 59% 57% 57% 66% Net Income (Loss)** -77 -72 --- -115 --- -246 18 --- Net Income (Loss) Continuing Ops -76 -70 --- -77 --- -205 19 --- Adjusted Net Income (Loss) -35 2 --- 4 --- -30 123 --- EPS Continuing Ops -0.4 -0.48 --- -0.41 --- -1.06 0.14 --- Adjusted EPS -0.18 0.01 --- 0.02 --- -0.16 0.84 --- Adjusted EBITDA 85 101 -16% 99 -14% 400 385 4% Adjusted EBITDA Margin % 28% 33% 33% 32% 41%
Sequentially, revenue was flat compared to Q3 in spite of the addition of numerous stores. Gross margin dropped from 57% to 54%, net loss from continuing operations declined from -$77 million to -$76 million, the continuing ops EPS loss declined from -$0.41 to -$0.40. EBITDA was $35.2 million compared to -$22.3 million. Non-GAAP adjusted EBITDA, which removes many non-cash and non-recurring charges, declined to $84.7 million from $98.8 million in 2021.
Trulieve exited the quarter with $219 million in cash, largely due to $165 million in new notes and loans and an increase in the share count to 189 million from 145 million a year ago. The notes and loans, at rates of 7.5-8.0 percent, show Trulieve is one of the better risks in the sector.
Regarding the all-important cash flow, Q4 operating cash flow was $55 million and free cash flow was $21 million.
Plainly speaking, it was not a good quarter financially. Trends from previous quarters continued: adverse industry conditions, underperformance in revenue and income, and high growth-related costs for acquisitions, integration, and discontinued or redundant operations. Industry observers will note that this report is similar to other companies' Q4 earnings reports.
Objectives for 2023
With the winding up of a two-year major expansion program, a change in strategy is called for. In the earnings call, CEO Kim Rivers presented a new major objective for 2023, which directly addresses the financial weaknesses of 2022: Maximize cash generation and preservation. The components of this objective are outlined in the investor presentation accompanying the Q4 earnings call:
A second major objective for 2023 is: Make strategic investments to support future growth.
Although expansion will slow down, with capital investment reduced by around 50% and annual growth cost savings of $100 million, they will still open 15-20 new stores (compared to 25 in 2022). They also anticipate opportunities from an imminent industry shakeout, or as CEO Rivers put it:
... we believe constructive capital markets in the face of significant near-term debt obligations will spur industry consolidation and yield opportunities to acquire standalone and distressed assets.
Challenges to Trulieve
There are a number of widely acknowledged challenges, or threats, to Trulieve. Four of the most concerning are described below, followed by an assessment of their importance.
Competition: One of the biggest perceived threats to Trulieve is competition in Florida. For years Trulieve has been the dominant company in the state, leading to 19 consecutive quarters of profitability going back to 2017. Competition has been rapidly increasing as other companies are entering and expanding, and why not? Florida may be the best legal cannabis environment in the country because of population, acceptance, regulatory regime, and other factors. This growth and competition are evident in the chart below. Data is from the Florida Office Of Medical Marijuana Use.
Jan 2020 Jan 2021 Jan 2022 Jan 2023 Trulieve dispensaries 45 77 112 124 Total dispensaries 233 321 407 531 Trulieve % 19% 24% 27% 23% Total FL operators 13 14 16 19
The fear is that Trulieve will suffer from now intense competition and no longer benefit from the dominance it previously enjoyed. There is some truth to this idea. As shown in the chart below, Trulieve's share of the market is going down even as the total product they dispense continues to go up. Numbers are weekly averages for February 2022 and 2023.
2022 State Total 2022 Trulieve Total 2022 Trulieve % 2023 State Total 2023 Trulieve Total 2023 Trulieve % Dispensaries 404 112 28% 534 124 23% Mgs. THC 224,829,011 87,147,663 39% 287,014,276 100,432,212 35% Mgs. CBD 3,780,518 1,535,245 41% 2,883,020 1,072,082 37% Oz. Smokable form 78,771 38,803 49% 78,771 38,803 49%
Macroeconomics: Weak economic conditions hurt Trulieve. Inflation, labor shortages, supply chain problems, and a sluggish economy have been cited in the last several quarterly reports as hindering their performance. The increasingly likely prospect of a recession will make the business even more difficult.
Industry conditions: We are in what Green Thumb CEO Ben Kovler has described as "the middle innings" of the cannabis industry. This is when the huge growth capital of the early innings becomes overcapacity, leading to low or negative sales and profit margins. Returns on capital are lower than planned, and happily accepted debt becomes a burden. Trulieve, and numerous peers, will have to successfully navigate this first real crisis period the industry has experienced.
Ron DeSantis: Ron DeSantis is governor of Florida, the state with two-thirds of Trulieve's stores and probably even more of their revenue. DeSantis has not definitively come out against expanding legalization, but has made a number of statements suggesting he is reluctant at least. One thing we know about DeSantis is that when he wants something done, it gets done (see: Disney, Don't Say Gay, migrant relocation). If he feels strongly enough about limiting legalization to expend his political capital on it, cannabis could be in for a rough time. This is important because besides making small changes around the edges, such as dosage limits, it could affect the success of a planned adult use referendum in Florida in 2024.
Assessment of the Challenges
Competition: The process of competition ends with the strongest companies surviving, thriving and growing, while the weakest are taken over or disappear. Trulieve is unquestionably one of the strongest companies in Florida and the nation, with one of the most capable leadership teams. They started in Florida with nothing, the same as all other early entrants. Today, they have the same leadership that grew the company into the dominant enterprise in the state.
Trulieve has a massive scale advantage, which is extra-important in a vertical integration state where every company must support a complete operation from seed to sale. Small competitors likely can't compete against a 750,000 square feet greenhouse, massive marketing budget and human resources, branding, financial power, visibility, etc.
Macroeconomics: The conditions that made cannabis a difficult business in 2022 will continue to affect Trulieve even as some of them, like supply chain and labor issues, abate. The prospect of a recession adds more pessimism to 2023. Trulieve is already addressing economic trends, by refining offerings to customer needs and using their sophisticated data analysis capabilities to adjust inventories, marketing, and product shifts. Their size, management resources and financial strength puts them in a good position compared to smaller companies.
Industry conditions: As suggested above, current conditions of oversupply, overstoring, and overexpansion are part of the normal evolution of any emerging growth industry, and are self-correcting. It would be a mistake to act as though current conditions will go on indefinitely. The important question is what Trulieve's position might be in a more mature and quite different industry.
DeSantis: There's no telling what DeSantis will do as Florida moves closer to an adult-use referendum in 2024. He could let it go forward untouched, or he could bring his considerable political skills to bear and kill it. Yes, as he has said, a referendum is up to the voters, not the governor, but he has shown an ability to get his way on issues of importance to him. Let's hope a presidential campaign or some other factor makes him put adult-use in the category of "not important enough."
Summary and Recommendation
I continue to give Trulieve a buy recommendation. This rating is not based on what will happen this quarter, or even this year. While investors have learned that sentiment can change rapidly and dramatically in cannabis, conditions in the industry change slowly, and accomplishing the company's major new objectives will take time. Trulieve has identified two major objectives for 2023: 1) Cash generation/preservation, and 2) strategic investments to support future growth. These are completely in tune with the position of the company and the industry today. Trulieve has been one of the most successful cannabis companies, and if the past is a guide, they have the financial and managerial strength to accomplish these objectives. The result will be a stronger, more profitable competitor in a cannabis environment that will look quite different from today.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Ted Waller
Ted Waller is a private investor who bought his first stock at age 13 (GTE) and has over 55 years of investing experience. His focus is on value and favorable risk/reward ratio, and special situations. Acquiring wealth is an incremental process that requires setting goals, adherence to principles, and patience.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TCNNF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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