Trulieve – First in Florida

Trulieve is a cultivation, processing, retail, and distribution medical cannabis company, based in Florida. The company boasts the highest patient count, dispensary count, cannabis sales and revenue of any cannabis company currently operating in the Florida market. The company can also boast the highest levels of patient retention and repeat customers in the state – and Florida is considered to be one of the most valuable states in the US.

 

 

Trulieve operates a vertically-integrated "seed-to-sale" business, and thus controls the margin across the entire value chain. They have benefitted greatly from their first-mover advantage in the market. Trulieve operates 27 dispensary stores out of a total of 114 licensed dispensaries across the State. However, although they only account for fewer than one-quarter of the dispensaries, they account for nearly two-thirds of all sales. Phenomenal.

Trulieve is slightly unique in that it only sells its cannabis in its stores and does not sell to/get supply from any other cannabis producer. This allows the company to truly control their margins and maximise seed-to-sale revenue.

The company operates over 638,000 square feet of cultivation space, across four growing sites. Their greenhouse cultivation facility is capable of producing over 29,000kg of cannabis per annum. The company sells over 155 SKU's covering 45 different strains, and they manufacture around 80,000 products per week. They currently operate 27 dispensaries for a total of 55,000 square feet of brick-and-mortar retail. They also sell online through their own e-commerce site and deliver door-to-door across the state.

 

Objection…overruled!

In February, the company won a landmark lawsuit against the State of Florida. Florida imposed a dispensary cap of 35 retail stores per company. However, at the time of the cap being announced, Trulieve already had 14 stores in operation (remember that first mover advantage we spoke of?), and thus argued that these should not apply. They won the case and had the first 14 stores grandfathered, and hence did not count towards the cap. This means that Tulieve can open an additional 14 stores, bringing their total to 47 stores by April 2020 (the date until which the cap is applied).

This is HUGE for trulieve as this gives them a massive leg-up on the competition. Not only more stores, but the stores themselves earn more per square meter as time goes on and more patients are signed up to the location. When Trulieve hits the current 35 store cap, their total contribution from the 35 stores will be far, far greater than the rest of the competition when they hot that number.

 

 

And there will be significant competition because as we noted above, Florida is seen to be a very lucrative and valuable market. The Florida market has been one of the fastest growing markets, with the number of active patients have nearly quadrupled, from 56,000 in December 2017, to just over 200,000 as at the end of March 2019. And Trulieve has over 146,000 of those.

According to BDS Analytics, the Florida medicinal marijuana market will approach $1.1 billion by 2020.  Florida could eventually have 800,000 to 1 million patients. With the aging population and the vast array of qualifying conditions, this is a state that is set for significant growth in the coming 2-3 years.

Almost all of the MSO's now have a presence in Florida and the State-local, Game of Thrones style battle, has begun. It will become very saturated and will eventually start to put pressure on pricing, but Trulieve is currently way out front, in a still very immature market. There is time.

Trulieve not only sells its own product range but also exclusively licenses other brands' products in the State of Florida. In Q1 of 2019, they acquired the distribution rights for Sunshine Cannabis's exclusive genetics and signed an agreement with Love's Oven to bring their range of edibles to Florida. Just recently, they announced exclusive distribution rights to SLANG Worldwide's catelogue of products for Florida. The biggest distribution and retail chain in Florida just got the distribution rights to some of the best selling cannabis brands on the planet. Watch this space.

 

Not a One trick pony

In December last year, Trulieve acquired Life Essence, a vertically-integrated company with license applications pending for the Massachusetts market. The licenses are for 3 dispensaries, 3 retail stores catering to the recreational market, and a 126,000 square foot cultivation facility, which is estimated to be ready for harvest in late 2019. Massachusetts is going to be a very big market both for medicinal and recreational cannabis. It is estimated that Massachusetts's could account for 6-7% of the total US cannabis market by 2021. That's a pretty big number.

 

 

At the same time, they acquired 100% of Leef Industries, a company licensed to operate a medicinal and recreational store in Palm Springs, California. It currently carries 200 SKU's and should add about $2m in revenue in 2019. This is not even going to make the dial flicker, but it's a profitable learning experience. CEO Kim Rivers has explained in the past that Trulieve's growth plans are to start small, learn how to do it best, and then expand…rapidly. Who can argue when you look at how they have dominated the Florida market.

 

And so to the numbers.

In delivering their 2nd Quarter results, Trulieve simply smashed the ball out of the park. No other way to put it. 

"In 2018, we focused on building a foundation to scale the business over the long-term and made significant progress on Trulieve's core mission to create the preferred customer-centric brand in cannabis," said Kim Rivers, CEO of Trulieve.

"In the fourth quarter, we demonstrated our growth through brand expansion and scale by increasing our dispensary footprint in Florida by five stores, adding cultivation and state of the art processing facilities, onboarding strategic brand relationships and making significant progress on our plans for growth beyond Florida with acquisitions in Massachusetts and California."

Revenues for the quarter were $36 million, beating the analyst estimates of $33 million, and making them the #1 revenue generating company in the US, and number 3 on the overall list (only behind Canopy Growth and Aurora Cannabis…not too shabby).

The increase in revenue was attributable to increasing patient counts and the opening of more dispensaries. They opened 10 new dispensaries in the financial year, which contributed to a 12-month revenue total of $102 million, a cool 420% increase on the previous 12-months.

 

 

The gross margin fell from last quarter's 71% to 58% but this is attributable to an accounting adjustment. Even with this decline, Trulieve continued their trend of being exceptionally profitable. Trulieve earned EDITDA margins of 42% and 44% for the quarter and FY2018 year respectively. On top of this, they gave revenue and EBITDA guidance for FY2019 suggesting that the $44.5 million in EBITDA earned in 2018, could be raised to $92 million in 2019, with margins of 43%. Again, phenomenal.

One of the issues we do see is cash. They currently have $24 million in cash and cash equivalents on the balance sheet, but this is offset against $21 million in debt. They financed cash flow with $10 million in burn during the quarter and hence are going to have to raise at some point. Yes, they are making a profit and hence could cover this, but the opportunity cost of "slower" growth needs to be taken into account.

Many of the MSO's have raised bucketloads in order to aggressively expand across the US. Some of them are burning cash at a most horrendous rate. But, they are rolling the dice and going all out to grab market share. Trulieve is quite the opposite. A small, very profitable model, that grows slowly state by state. It will not be clear for some time as to which strategy (or combination of them) will win out, but it is something for investors to consider.

 

 

The Bottom Line

Trulieve delivered yet another phenomenal quarter, and then went on to give significant guidance for their Full Year 2019.

  • Revenue is expected to grow 108% to approximately $214M. As previously disclosed, the full year 2019 revenue growth guidance includes an expected increase in the number of dispensaries in Florida and execution on multi-state expansion.
  • Anticipated gross profit of approximately $145M for 2019, or 68% of revenue before net changes in the fair value of biological assets.
  • An adjusted EBITDA of approximately $92M, or 43% of revenue, reflecting the continued leverage of scale and financial discipline.

 

"2019 will be a year of execution for us as we leverage our strong revenue growth and positive adjusted EBITDA."

 – Kim Rivers, Trulieve CEO

 

"We will focus on innovating and delivering new products for our customers, such as smokable flower, edibles, and nano-emulsions. We will cultivate new strategic partnerships, as we have recently demonstrated with Slang and Blue River. Finally, we will execute on our plans for multi-state operational expansion."

In the past 12 months, Trulieve has opened 10 stores and continues to expand at a rapid pace. They have demonstrated extreme competence in profitable execution, and are the #1 market leader in Florida by a long shot. They demonstrate superb cost management and return on capital, as was evidenced in their move into two new States. Both deals completed for a combined $7.7 million in cash, with no associated share dilution.

We cannot see why Trulieve should not hit these numbers given their increased dispensary cap, the fact that Florida has moved to allow smokable cannabis. This in addition to an increased inventory of market-leading brands, makes Trulieve a lower risk investment with significant upside. We're very bullish and long.

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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