Is Trulieve’s Grip on the Florida Market Slipping?

After Trulieve’s (CSE: TRUL) dominant quarterly performance, we wanted to take a closer look at what drove the stellar performance.

In this piece, we are digging into the Florida market to help investors better understand what’s driving Trulieve’s growth and whether the company is on track to sustain these growth numbers. We wanted to understand whether Trulieve is just along for the ride, or is actually outperforming market growth, and if so, by what margin.

In short, we found Trulieve is growing revenues above the market, in the face of a shrinking market share, in what remains an attractive growth market.

Let’s begin with a short overview of the company.

The Trulieve Story

While they are headquartered in Florida (40 dispensaries), they’ve also started making in-roads in California (1 dispensary), Connecticut (1 dispensary) and Massachusetts (retail pending). From our estimates, the California and Connecticut dispensaries represent 3% of their total revenues at best.

Clearly, they are a Florida-focused company.

Looking at their recent performance, it’s safe to say the sky is the limit if they can replicate the success they’ve had in Florida.

If we can better understand their strong performance in the Florida market, as well as the remaining upside, we can better understand the company’s growth potential.

Market Overview – A Snapshot

As of last week, Trulieve’s market share in medical marijuana extracts and smokable marijuana (referred to herein as flower) sat at 48% and 47%. We’ve excluded CBD-extracts in this analysis as it’s a much smaller segment of the total Florida market and growing at a slower pace (77 million mg of THC verses 2 million mg of CBD for the Florida market last week).

Market Share of Florida Medical Marijuana Extract Sales

Source: Florida OMMU

Market Share of Florida Medical Marijuana Flower Sales

Source: Florida OMMU

Looking at their market share of dispensaries, investors can see Trulieve capturing an outsized portion of the market per operating dispensary compared to peers.

Market Share of Florida Dispensaries

Source: Florida OMMU

This supports the notion that their customers may be “Trulievers” as company likes to say, or at the very least, they’ve secured excellent dispensary locations. Either way, it’s a good sign for Trulieve’s operational efficiency.

As competition heats up, it will be important to track the efficiencies of their dispensaries.

Market Overview – Transient

Looking at market share, it would seem Trulieve is starting to face stiff competition with decreases in both extracts and flower segments. Their market share has fallen 16% and 18% over the respective time periods.

Market Share of Florida Medical Marijuana Extract Sales

Source: Florida OMMU

Market Share of Florida Medical Marijuana Flower Sales

Source: Florida OMMU

Their smaller market share in flower products compared to extracts is likely driven by the more equal start all Florida-focused MSOs had with the delayed legalization of smokable products compared to extracts. However, they’ve still clearly leveraged their Truliever consumer-base to build a strong lead.

With Florida law forcing marijuana companies to operate vertically integrated businesses (i.e. no wholesale), it will be important to watch the trend in market share as everyone’s flower production ramps to full capacity.

At first glance, Trulieve’s declining market share in the Florida market suggests they are headed toward slowing growth. For a company priced on a growth multiple, that could be concerning.

However, the more important question is a bit more complicated. It comes down to what happens when a company’s market share is falling in a growing market and how their revenue changes compare.

Trulieve’s Q3 Topline Performance

With a total quarterly revenue increase of 22%, Trulieve has managed to grow revenue at a rate almost 4X greater their consumer-base consumption is growing.

Ultimately, an investor needs to understand the balance between those two competing factors to determine what direction the company is headed.

Starting at the top, Florida’s total patient growth has been steadily increasing over 2019, growing 14% in Q3 alone. Over that time, Trulieve’s revenue growth has outpaced the quarter-over-quarter growth in total patients every quarter.

QoQ Revenue and Patient Base Percent Growth

Source: Florida OMMU, Capital 10X Estimates

While this is impressive, it doesn’t consider consumption trends for the patients themselves. So, we’ve broken the numbers down further.

Average weekly extract and flower sales each increased by approximately 14% and 61%. This suggests extracts are growing in line with new patient additions while new flower SKUs are a driving substantial sales growth above the increasing patient count.

For Trulieve, their market share in extracts fell 9% from 54% to 49% over that period, while market share in flower fell from approximately 60% to 42%, or a 30% drop.

Now let’s look at the net effect of these variables over the quarter. First, we want to start with a simple illustrative example:

A farmer owns 50% of a farm that manages 100 sheep, in other words the farmer owns 50 sheep.

If over a one-year period, the farm grows 10% to 110 sheep, the farmer now owns 55 sheep, which translates to a 10% increase in the farmers sheep count.

Now, instead imagine the farmer starts with 55% farm ownership that steadily drops down to 50% over the course of the year (pretend this individual lives in Toronto and has to sell his ownership to cover climbing rent costs). If the sheep count increased 10%, the farmer would start the year with 55 sheep and finish the year with 57.5 sheep after accounting for the population increase and the sale of his ownership. He would finish the year having realized a net 4.5% gain in sheep.

Turning back to the Florida market, Trulieve’s net expected increase from extract sales is 3.4%, while their expected net increase in flower sales is 12.7%. Based on our estimated revenue split for Trulieve of 70:30 extract to flower, that’s a baseline expected revenue increase of 6.2%.

With a total quarterly revenue increase of 22%, Trulieve has managed to grow revenue at a rate almost 4X greater than their consumer-base consumption is growing. In fact, their revenue growth almost kept pace with consumer growth as if they hadn’t lost any market share at all.

Given the stiff competition in the Florida market, this is very impressive. It speaks to Trulieve’s ability to satisfy their consumer-base and keep them coming back for additional value-added products. It also suggests highly favourable supply-demand dynamics for MSOs in the Florida space.

To put this into perspective, to drive revenue growth 16% more than consumption growth, Trulieve must increase the ticket size of their patient base by 2.6% per visit (based on the stated average of 2 visits per month).

Another important aspect is the state of Florida moving towards legalizing edibles. Adding new higher-margin SKUs would be a big catalyst for additional revenue growth.

These product lines are not included in revenue guidance and with Trulieve’s production lines at the ready, it won’t take long for them to capitalize on the additional revenue potential.

While it’s also worth noting state-wide adult-use legalization is in the cards, it’s unclear over what timeframe that will occur.

To wrap up the conversation on market share and revenue growth, so long as Trulieve continues to grow revenues at rates greater than the current market is growing, investors shouldn’t be overly concerned about overall market share.

As competition heats up, naturally market share will decrease. While investors should certainly track these performance metrics, until the Florida market shows signs of slowing or Trulieve shows signs they can no longer grow revenues from their existing consumers, investors have little to worry about.

Now obviously revenue growth doesn’t come for free — companies need to continuously invest in new employees, products, and marketing to drive revenue. So, we looked at Trulieve’s operational efficiency to make sure recent revenue growth is in fact sustainable.

Trulieve’s Q3 Operating Efficiency

In their latest quarter, Trulieve generated gross margins of 61%, down slightly from the previous quarter’s 65%. This is likely due to a ramp-up at their production facility. Either way, these are very healthy numbers that suggest they have no issues operating at scale.

Moving further down, the company generated operating margins of 32% excluding fair value adjustments on biological assets. Again, this is down slightly from 36% in the previous quarter, however, it was partially driven by a non-cash depreciation and amortization expense.

With G&A decreasing quarter over quarter, the biggest cash expense increase was S&M, which saw a 29% jump. At first glance, this seems high considering revenues only increased 22%, indicating they had to spend more to maintain their hold on the Florida market.

However, when you look at the dollar of revenue generated per dollar spent on S&M you see it’s still inline with the general positive upward trend since 2018.

Ratio of Revenue to S&M Expense

Source: Company Filings, SEDAR

Given the challenges of breaking into new markets as well as the competition that can be expected in Florida, this will be an important metric to track.

So long as this ratio trends upwards or stays flat, investors can rest easy knowing Trulieve’s impressive selling and marketing skills are still generating positive ROI.

Final Note

To conclude our assessment, we want to take a look at valuations.

Based on 2019 price to sales, Trulieve is above the group average, however the cheapest of some of the large-cap companies like Curaleaf, GTII, and Cresco Labs.

2019 Price to Sales

Source: Capital10X Estimates

While that might suggest that the stock offers a less favourable risk/reward than cheaper peers, we believe Trulieve will grow into their “growth multiple” (unlike some Canadian LPs).

The premium multiple can also be explained by Trulieve’s profitability. Investors are willing to pay a premium for a company they know will be here for the long term in what has turned out to be a very uncertain and risky industry.

As we’ve outlined above, the company’s growth is built on solid fundamentals, and in fact, these fundamentals have been sound from the beginning.

Instead of trying to maximize growth in a nascent but rapidly expanding industry, Trulieve positioned themselves for operational success. To mash analogies, they didn’t put the cart before the horse, and now the rising tide has lifted their boat more than peers.

YTD Stock Price of US Large-Cap MSO’s

Source: Yahoo Finance

They started with the second most populous state in the U.S. as their home base. As the patient base has grown, Trulieve’s revenues have outpaced it by over 35% throughout 2019. Despite challenging competition, they continue to outperform the market.

As they set their sights on new markets, they will face new challenges. They will no longer be the incumbents, and competition will only increase quarter by quarter.

However, we believe their knowledge of brand building (creating a cohort of Trulievers) and operational efficiency will allow them to grow into their higher valuation.

The market also clearly supports this notion with the closing of its recent debt offering. Trulieve’s deal is the only non-convertible debt offering we’re aware of among U.S. and Canadian cannabis companies.

Further, looking at recent flower sales since quarter-end, Trulieve appears to be capturing even more of the growth in the flower market.

With adult-use recreational marijuana likely on the Florida ballot in 2020 and edibles legalization being discussed, the upside in their home state is still substantial. Not to mention the upside from eventual federal legalization, which continues to build momentum.

Until this company shows signs of slowing down, we believe investors should give serious consideration to owning one of the best-run companies in cannabis.

This piece was edited 11:15 am on Monday, November 25th, 2019 to reflect updated Price to Sales ratios in the valuations graph.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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