Q2 2020 Earnings Call
Good morning, My name is his dad and I will be your conference operator today at this time I would like to walk everyone to the a free up Q2 quarterly investor.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session for analysts and weren't <unk> best affirmed only if he would like ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound Keith Thank you.
Katie Turner you May begin your conference.
Thank you Dan Good morning, everyone. We appreciate you joining us today.
Turning to find a hurdle.
I think were ended November 32019 on today's call Irwin Simon and Carl.
By now everyone should have access to the earnings release financial statements.
Okay, and bathroom presentation, which are available on the investor section of website at www dot to create Inc. dotcom that financial statements have been filed with Peter and Uh Huh.
Before we begin please remember that during the course of this call management may make forward looking statement.
These statements are based on managements current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect and actual results could differ materially from those describing these forward looking statements.
Thank you Katie good morning, everyone. We appreciate you joining us today to discuss our second quarter financial results. Our team has accomplished a lot.
Oh boy.
Boy, what a difference a year makes.
From enhancing our global team for brand building activities, new facilities wrote production capabilities to investing in new systems technology as well as involving our corporate government.
I enjoyed working closely with her team and it's great to remove the interim title together. We all appreciate the appreciate their hard work dedication that has propelled us forward and we'll continue our future success is on horizon.
So let's focus on Q2, a few key quarterly highlights include adult use cannabis net revenue increased 46% and we nearly doubled our consolidated adjusted EBITDA as compared to the first quarter net cannabis revenue increased 9% and we nearly.
Triple cannabis operations adjusted EBITDA from the prior quarter.
We ended the quarter with one of the strongest casegoods cash positions in the industry, a strong balance sheet $498 million, a cash cash equivalent to fuel our future growth in Canada, Germany, and South America as I like to say cash is king.
We're proving that.
We believe that as a catalyst industry continues to evolve globally, our balance sheet and financial flexibility will continue to further differentiate us.
We remain focused on the highest return priorities for growth.
Our second quarter results demonstrate our emphasis on sustainable and profitable growth.
At a free up our entire team of more than 1200 employees is intensely focused on growing our branch profitability, our strong cash position for growth and focusing on our core assets that we believe will create the most value as we invest in them to grow.
This also includes the potential monetization of noncore assets, which will help to further streamline our business and reduce capex overtime.
Our mission is clear to be a premier global cannabis company with our medical and adult use cannabis brands. We are building brands that we believe resonate with consumers today and well into the future, which I'll focus on in more detail in a minute.
We created rope Boston is robust initiatives, a clear goals for execution across function and emphasizing our core capabilities and further developing areas of our business to position us for sustainable growth.
The level of accountability that we've been acted upon that delivers results, even as transitionary market dynamics impact the cannabis industry from time to time.
We believe as dynamics improve for everyone in the industry that a free up.
We'll continue to stand out as that leading candidate this company.
Korea has a strong foundation compelling business fundamentals and capabilities, which streamline operations process upgrades in investments in technology. The played a key role in our development would recent rollout of our new ERP systems and greater automation in our facilities.
And Leamington, we're consistently working on generating higher yields at a lower cost and low cost producer at a free or what our team as planted more than 600000 plants during Q2.
For your time, it our premier greenhouse featuring 1.3 million square feet up production received this license from health, Canada. Since then I'm proud to tell you a free at Diamond is now 100% plant.
And we expect the first full crop rotation in early February with the first shipments of wholesale drive but soon to follow.
We look forward to sales from a free diamond commencing in Q4.
We are excited about the tremendous growth opportunities. We now have as a result of expanding our total annual domestic production capacity in Canada as well as our strong medical and adult use brand sales.
And our GMP export and white label opportunities. We're pleased to have received confirmation of compliance with the requirements of the E. U G. M. P from multiple medicines authority the company subsidiary.
I've got the Rx analytics.
This license will allow free it to ship bulk and finished dry flower as well as bulk finish Canada soil for medicinal used in permit is permitted jurisdictions throughout the E U.
At a free up we strive to be better and all that we do as an industry leader. We recently finalized long term multi disciplinary research partnership with University assist catch one and it can avoid research initiatives as Scott you want to investigate novels and proprietary cannabinoid drug formulation.
And we're pleased to see positive early results well cost from the hospital gallons Argentinian trial with our free of medical oil.
Showing significant outcomes for the treatment refractory epilepsy.
We have compelling brands for patients and consumers are cross broad demographics today, a free I had five quality brands, including delay rip good supply broken coast as I, just mentioned a free or medical brand, we are increasingly connecting with consumers for a metal.
Well in adult used brand positioning and innovation to drive growth.
This is demonstrated by the following key brand highlights for the quarter.
Our for adult use brands combined help and number one position in the oil and capsule categories with sold eight representing the number one brand in the oil encapso categories in Ontario, Nova Scotia in principle that Prince Edward Island, the only provinces sharing sufficient data to determine.
For the month of November a free as adult use brands combined held the number one sales position for pre roll oil and capsules and number three sales position for flower as compared to other license producer.
A free of brands represent 13.8% market share in Ontario for November that's excluding capsules. This is that two thirds greater than the next largest LP.
As a cannabis industry continuously vaults globally. We're also evolving at a rapid pace to ensure a freest days ahead by leveraging our core capabilities.
A free is successful continued to be driven by or differentiation portfolio brands and products aimed at delighting distinct consumer segments. We believe the quality of our brands remain on batch in this industry.
Our entry into new product markets will be done is strategically and thoughtful manners, where the best opportunities exist differentiating us as we address patients and consumer needs at the forefront.
This includes vapor as I previously mentioned, we will have 34, new vapor skews, many which are already in stores today, including so leg gather on plugs balance Rip Super Lemon Hayes gene God and GDP sour Cushe goods.
Supply fruit Blue Dream Pineapple Express.
And we look forward to launching our edibles peas beverage and Topicals and the very near future.
Internationally, we're very pleased with our progress at Freear remains the only license producer in Germany were permission to grow at all three strains of medical cannabis approved by the German authority.
We remain confident that not only the first harvest in Germany happened before the end of this fiscal year, but that our CFO to extraction capability killed capabilities will be ready in January 2021. We're also pleased to report our import and wholesale.
A license for Germany has been received.
In Colombia, a free up partner with Federation medical Colombia, the host a first academic medical Congress in Bogota, Colombia.
The event welcome more than 200 doctors from the country, who participate in a full day of educational lectures by expert in the fields speaker share insights on the current state of cannabis in Colombia, the government's efforts in regulating the space and patient case studies from Mark from Canada.
In the U.S., we are focused on building strategic partnership and alliances for growth with an emphasis on industries that aren't necessary attached to but rather complement cannabis until medical candidates is fully legalized.
We believe a free it can generate strong growth in the us overtime.
Overtime, we continue to believe a free it will be a consumer package goods company.
With that comes plenty of options for us in the U.S. and around the world.
A free is increasingly well position with the right team in the right global markets with the right strategic initiatives production cave capabilities and capital.
To support our growth in fiscal 2020, and well into the future. We have a strong foundation in Canada, where we expect momentum to accelerate in terms of both sales and profitability in the second half of fiscal 2020.
This strong foundation helps us leverage key learnings implement on market Pacific bases in Germany, and Latin America, as I said, including Colombia, Argentina, Paraguay, and Jamaica as well as other international markets together.
The team at a free it has a not to entrepreneurial nimble culture that is grounded in capability and accountabilities.
We believe the opportunities for long term shareholder value creation are very strong I'd like to thank my leadership team My board and our associates around the world. We're all their help getting us to where we are today and their continued dedication to moving a free or forward with that I'd like to turn the call.
I'll now over to Carl to take you through our Q2 financials. Thank you.
Thank you earn and good morning.
Please note all financial references are in Canadian dollars, unless I mention otherwise.
Given recent industry events I want to highlight four key items from our results.
These quarterly results include no impairments on subsidiaries.
No inventory write downs.
No provisions for future sales returns and no sales returns on other adult views for medical Canada's.
As Irwin discussed in the second quarter, we continued to execute on our growth initiatives and prioritize profitability as we continue to position our business for long term growth and success.
We are pleased with our financial results, particularly our candidates revenue growth sequential positive adjusted EBITDA and our ability to maintain a strong balance sheet and cash position.
While recognizing the need to hasten the evolution of Cc farmers business model. Most importantly, as it relates to sales levels.
This demonstrates the strength of our team and the strategic initiatives, we are working on together to execute everyday and free up.
Our commitment to give back to both people in the plant. It continues for free launched its candidates education program, a free educates in the quarter.
Mandated to educate Canadian adults on responsible use of all cannabis products.
Legally available now and in the future.
Our free educates kicked off with a two city panel tour in Toronto and Vancouver.
Throughout the year, our free it will continue to provide both education and understanding where it makes sense to Canadians, helping them to better understand the ever evolving cannabis landscape.
Our sustainability benchmarking is underway and we're on track towards our commitment to report on our CSR and sustainability initiatives and practices. After the end of this fiscal year.
And finally plant positivity, our social impact platform, the champions plants and the incredible power. They have an overall wellbeing as well as looking to improve access to green spaces for communities.
We have a number of exciting programs launching soon and look forward to expanding plant positivity in more cities across Canada. This year.
Our financial results demonstrate our ability to continue to gain share both in provinces reporting share figures and provinces that have chosen not to share. These figures.
They demonstrate our continued focus on leveraging our cultivation experience into lower cost per gram.
And our focus on being and remaining adjusted EBITDA positive.
To both internally finance future growth initiatives and in the future being in a position to provide an annual return to our shareholders through dividends.
Net revenue increased 457% over the prior year period to 120.6 million.
[noise] compared to the prior quarter cannabis revenue increased 9% to 33.7 million from 30.8 million.
Adult use net revenue increased 46% to 29 million.
Distribution revenue, which was below our expectations for the quarter decreased from 95.3 million to 86.4 million.
The lower distribution revenue is associated with the change in the German governments medical reimbursement model as I discussed last quarter and normal business seasonality and Cc pharma.
Going forward, we expect to see more normalized rates of growth in distribution revenue.
Distribution revenue remains a key metric for our international team for the remainder of the year.
Our team in Germany are preparing the business for importation of you GMP certified cannabis from Canada.
Facility additions are well underway and they already have pharmacies reach for preorders in.
In addition.
The team continues to complete weekly practitioner initiated trading of pharmacists and doctors on all topics cannabis related.
We remain on track to harvest Germany's first domestically growing medical cannabis by the end of calendar 2020 from our new cultivation facility in new Minister.
The entire a free team in Germany is focused on positioning to free up with the most comprehensive license in the country as it dominating force in the German candidates market.
[noise] in Colombia, we are excited about the early results from hospital Gotta hands epileptic seizure control study.
Early results suggest a reduction in Caesars for 80% of the participants.
With 10% of the participants realizing a 100% decrease in seizures.
On the heels of this positive result, we're seeing pre registrations in Argentina for access to the new can't compassionate use laws.
Here in Canada, we'd like to extend our congratulations to our partner Tetra Biopharma, we're receiving a favorable letter of advice from the FDA for quickly.
Botanical drug for chronic pain, whose active ingredient is supplied by a freia.
This allows tetra to explore pain indications beyond cancers, such as arthritic neuropathic chronic back pain migraine and Freibel Malaysia.
With the potential to compete against first line pain medications, such as acetaminophen, and Thats ads and possibly even second and third line medications like lyric, our cymbalta and opioids.
The company sold 7062 kilogram equivalence of cannabis.
Up 18% compared to 5969 kilogram equivalents in the last quarter.
Adult use cannabis accounted for 5567 kilogram equivalents.
And medical cannabis accounted for 1237 kilogram equip them.
Further dried flower represented 3950 kilogram equivalents of this total with the remainder coming from cannabis derivatives.
The average selling price of adult use cannabis before the excise tax.
Decreased to 522 per Gram compared to six so two program last quarter.
In early as result of a shift in sales mix.
The average selling price of medical cannabis exclusive of wholesale and before the excise tax.
Increased $8 in 16 cents per gram compared to 756 last quarter.
Primarily related to a higher percentage of total medical sales coming from broken coax this quarter.
During the quarter, our cash cost per gram decreased from $1.43 to $1.11.
Our all in cost per Gram decreased from 250 to a gram to $1.98 Gram.
We continue to work to lower these amounts and await the impact of a free of diamonds expected lower cost program on our consolidated results.
Adjusted candidates gross profit increased to 19.1 million from 15.3 million as a combined result of increased sales.
Reduced wholesale sales and a reduction in costs.
Adjusted Canada's gross margin was 56.6% compared to 49.8%.
The increase was primarily due to know wholesale sales to other license producers during the quarter.
As well as reduced cultivation costs in the quarter.
Adjusted distribution gross profit decreased slightly to 11 million from 12.2 million.
Adjusted distribution gross margin decreased slightly to 12.7% compared to 12.8%.
SG SGN, a cost increased approximately 7.8 million compared to the prior quarter.
The increase in SGN, a was primarily related to a 2.6 million dollar increase in share based compensation.
And a 4.4 million dollar increase in selling marketing and promotion costs.
Primarily associated with variable costs.
Tied to sales.
We reported a net loss of 7.9 million or a loss of three cents per share compared to net income of 16.4 million or seven cents per share in the prior quarter.
And net income of 54.8 million or 22 cents per share in Q2 last year.
In an industry full of cash burns and heavy adjusted EBITDA losses.
Our focus remains on generating positive EBITDA.
For the quarter, we're pleased to continue our trend and report.
Third consecutive quarter of positive adjusted EBITDA.
The consolidated adjusted EBITDA in the second quarter, almost doubled to 1.9 million.
Based on adjusted EBITDA from cannabis operations of $3.4 million and adjusted EBITDA from distribution operations of 2.1 million.
But were partially offset by an adjusted EBITDA loss from businesses under development of 3.5 million.
Most notably adjusted EBITDA from cannabis operations almost tripled.
And the adjusted EBITDA loss from business under development.
Decreased by almost 20% in the quarter.
The increase in adjusted EBITDA is primarily attributable to increased sales in the company's canvas business.
Moving to liquidity, we continue to possess an industry enviable balance sheet.
Including a strong cash position.
An appropriate capital structure for our industry and a cap table with minimal potential dilution.
As of November Thirtyth 2019, the company had cash of 497.7 million to fund planned Canadian and international growth.
This amount is more than sufficient to fund previously announced capex working capital and strategic investments.
Out of the almost 5 million in 500 million in cash, we anticipate utilizing 45 million to complete German capex initiatives.
50 million to complete Colombian capex initiatives.
$10 million to complete the installation of butane and other extraction capabilities in Canada.
And between 50 and $60 million to fund the working capital increases associated with a free of diamonds ramp up.
Leaving between 300, and 350 million plus the cash generated from fuel future operations.
All of which is available for future strategic initiatives.
More than sufficient to take advantage of any attractive, but distressed asset sales in Canada.
US expansion or other income statement accretive opportunities.
In the second quarter, the company increases cash position by approximately $30 million.
Cash outflows in the quarter included approximately 36 million for investments in working capital.
27 million in Capex.
And a 4 million Opex burn.
Last quarter, we commented that our anticipated capex would be 20 to 25 million, which is consistent with what we reported for Q2.
And we expected investments in working capital to be $15 million to $20 million.
The incremental investment in working capital in the quarter related to higher inventory as we transition to cannabis 2.0.
Offsetting these items was our 880 million debt financing.
16 million related to the divestiture of noncore investments.
$4 million related to warrant and option exercises.
And 2.5 million in borrowings on Germany's line of credit.
Turning to our outlook for fiscal 2020 with a little over four months left in our fiscal year.
While we firmly believe than our original guidance certain market dynamics have evolved relative to our initial expectations, particularly in the last 30 days.
While there were a number of positive industry events in the quarter that speak to growth opportunities.
Those opportunities will only present themselves after the end of our fiscal year.
Including the change in the province of Ontario's retail rollout.
And the expected normalizing of store counts against Ontario's population.
Resolution of Albert is temporary ban on beeps.
And recent recent initiatives within the FDA to advanced cannabis to first second and third line therapies.
Despite these positives three key items more directly impact of freia in the second half of its fiscal year.
Including the continued delay in opening the 40 expected retail locations awarded by Ontario, and their lottery late last summer.
The temporary banning of Veight products in the province of Alberta, What studies the impact of the products with resolution on the temporary band not expected until very late in April .
The additional costs associated with using third party purchase cannabis to meet current market demands for our brands.
As opposed to the internal cultivation costs, if receipt of a free at times license had not been delayed.
And a delay in the growth of Cc Pharmas distribution business from recent changes to the German governments medical reimbursement model.
As such we now expect fiscal year 2020, net revenue of approximately 575 million to 625 million.
With distribution revenue, representing slightly more than half of the total net revenue.
A decrease of approximately 75 million.
And adjusted EBITDA of approximately $35 million to $42 million a figure expected to lead the Canadian candidates industry.
We look forward to generating an acceleration in our revenue and profit growth in the second half of the fiscal year and continue to believe the Canadian international cannabis industry outlook remains robust.
In summary at a free all we have differentiated brands.
Product innovation.
Greenhouse space.
Cultivation expertise.
Extraction capacity and automation technology to position us for success.
As we gain scale, we will gain efficiencies through our team's focus on further building our international distribution for our medical and they don't use cannabis.
We're pleased with our financial results this quarter and we continue to execute on our strategic priorities to be a stronger more profitable company.
Freia has a long runway of growth ahead, and we're confident in our ability to create long term shareholder value.
That concludes our formal remarks Irwin and I are now available for your questions Suzanne back to you.
And thank you just a reminder, today's question session is the star one on your telephone keypad, we'd like to ask a question.
Paul promote welcome pilot Q and a roster.
Our first question comes from one Owen Bennett of Jefferies. Please go ahead. Your line is open.
Morning, guys hopeful well.
Good morning.
Well it have you had just a couple of questions. Please.
Just a full so you gave a number of this meeting to the sales downside and could you maybe just some actual numbers on needs.
Season, this respite patients not see which have equal most impactful and then secondly could you just give a bit more comment.
Around the shift in sales mix impact in the average price in rock in the quarter. Thanks very much.
Thanks, Thanks, Owen so just in terms of.
In terms of the guidance.
We laid out at we laid out in order in the in the discussion and so I think the biggest item was the impact of the change in the store counts or the lack of change in store counts in Ontario, those 40 additional stores that were supposed to be.
Opening sometime in the late fall and now don't look like they're going to get open until March maybe late April .
That's certainly had the biggest impact.
The province of Alberta is temporary ban was next in order of priority.
And then the last piece related more to the purchase candidates in the quarter due to the delayed in.
Free of Diamonds license previously.
With respect to sales mix.
In the quarter.
We saw a greater increase.
In the.
In the in the brand mix itself.
And so we see higher prices per gram, and insulation and rep and slightly lower prices in good supply and there was a little bit more volume on good supply in the quarter.
Okay cool thanks very much.
Thank you.
Your next question slot of Aaron Gray of Alliance Partners. Your line is open. Please go ahead.
Hi, Thanks for the question and Irwin Congrats on the official title.
Thank you so just wanted to.
Dive a little bit more into the average price per gram. So can appreciate in terms of how what kind of decline sequentially given the increased volume for good supply.
How do we expect that kind of going forward as you're going to have more mix from feet coming online and then with beverages and edibles and the very near future. And then also you made a comment on athlete Diamond where I believe you referenced the wholesale market.
From sales come from down the fourth quarter. So should we expect kind of a lower price per gram there to kind of have an impact. So just high level, how to think about that line item kind of going forward over the next couple of quarters. Thank you.
So I'll just I'll take the question on the a free at Diamond in the wholesale piece first because I think there might have been just a misunderstanding in terms of that comment a free of diamonds sole customer is a free.
And so all of the product coming from a free at Diamond moves on off on a wholesale basis to a free and then a free it takes that product as all of the packaging Brent branding.
Product form a conversion and then cells and into the market. So.
So no we're not expecting a change in sales mix price mix average selling price.
Just as a result of free at Diamond coming online.
Any changes the happened within that would really be driven by a decision to two lower prices, which is not position. We have taken we continue to remain and see very strong sell through of our brands.
And it's really more just about that the mix of which brand is selling more in the quarter, which brand has more has more orders when do do shipments go out any and in the current quarter. We just we ended up shipping more good supply than we did the other two brands.
Actually the other three brand sorry, I'm forgetting broken goes right.
Okay, all right. Thanks, and just one more quickly than just in terms of what drove the increase sequentially in sales and marketing I believe settles the increase associated with variable cost tied to sales. So it should we expect that to be the new clip kind of going forward is that come back down sindicom that'd be helpful. Thanks.
Yes.
Yep.
It should be the new norm as we rollout new products, we continuously invest in our brands and continuously get new distribution out there.
And as more and more retail stores opened in Ontario, and more and more new products, whether serve apes animals and that will continue to spend dollars to grow those brands and products and it's working which is key because that's why our share increased in Ontario, and if you combine all our brands together you see what our shares.
Increasing the other thing is we continue to invest with their partners, great north or southern Glazers as boots on the ground, we get our distribution and to get our displays within the stores. So we'll continue to invest at those levels.
Hi, great. Thanks that makes sense, what the market share momentum I'll jump back in the Q.
Thank you.
And our next question comes the line of rank Cranleigh of capital. Your line is open.
Hi, good morning, and thanks for taking my questions here.
My first question was with respect to see pharma and the distribution revenue.
Quarters ago.
The question came up about seasonality in that revenue.
And it was discussed that there isn't seasonality in that revenue now I see that is one of the factors in there. In addition to the change in the reimbursement structure in Germany. So I was just wondering what's changed from the previous discussion there and how big are those impacts and seasonality what point to the year might we see some of those impacts.
As it goes on thanks.
Thanks, So we see we see some elements of UBS of seasonality really in this quarter tied around.
The pre orders, leading up to a leading up to the December period.
The in past years.
Seasonality wasn't as pronounced as it has it was this year, but the but by far the bigger of the two items at Cc pharma is the continued evolution of that business.
As it.
Scales properly for the change in the reimbursement model, we we believe that the the impact on revenues has has.
Hit its trough, but as it so to speak at this point and that future quarters, we will see growth in that in that number as the business.
Finishes that evolution.
Okay, and I think Thats very helpful. Sorry go ahead, I think it's important understand too I mean.
Theres a lot connected with Cc pharma in regards to the government there and.
Some of the regulation so thats, it's not so much seasonality, it's just how the government.
Mandates some of this distribution so it's not so much seasonality.
Got it Okay and then just.
As a follow up with respect to the comments made.
In the prepared remarks on the call thing that Diamond will have its first shipment out in February as that relates to revenue growth and the cadence of that revenue growth and tying into the to the guidance here as it is it fair to assume that the fiscal Q4 will have a quite a step up.
From the fiscal Q3, just trying to assess the met the magnitude of how large that for shipment could actually be.
Yes, that's fair.
Okay I'll get back into queue. Thank you.
Thanks Brent.
And your next question comes the line of Brent Lee of Seaport Capital. Your line is open.
Hey, good morning, guys. Thank you Carl something caught my ear on.
Potential monetization of non core assets I think it within our wins commentary but.
Can we just revisit that maybe have you put some type of quantitative factors around that comment or at the very leave.
Is that comment related to new management potentially looking to reverse some M&A decisions made by prior management can you can you just color that a little bit for us.
So I think first off like noncore investments you need to concentrate on long term investments convertible notes receivable promissory notes sections of our financial statements.
So promissory notes was kind of know 14 long term investments is no 13.
And the convertible notes receivable is note 11, I wouldn't say it is a change as it relates to M&A. That's that's behind US two things are very very different okay.
Alright, thanks for clarifying that and then or when if I can just sq something.
On on your Us focus.
And your.
Potential evolution, there or market entrants there so.
Sooner CBD in the U.S.
Just seem increasingly uncertain with recent commentary from both the FDIC and the USA.
There was even a recent article in the journal.
You know kind of painting, a picture that mainstream CPG companies are.
Actually stepping back from their CBD development, whether that's true or not.
You guys evaluate your place in the U.S market.
You talked about some some complementary complimentary areas that you're looking at and I can appreciate that but given the backdrop here is your position something that may have to increasingly weight in the U.S. or are your opportunities still run center and available. Thank you.
Thank you. So good question and I think this in a free from the beginning always had a position we're not going to jump into the us with a lot on known out there in last year when the acreage can it be deal happened.
I can back incentives like buying a lottery ticket so.
We're not going to go up there in jump into an on known situation.
But having a 25 your experience in the consumer package goods business.
Something in the consumer area that would complement of free and complement CBD or t_a_c. When it did become legalized is something that we are looking at that would have.
Strong sales strong growth and a strong EBITDA contribution that would fit within well with the Ria and there's nothing wrong with diversifying.
You know from cannabis, but to diversify into consumer packaged goods product what I said in my remarks, I want a free to be a global consumer package goods business.
That has.
Connection with the cannabis industry.
Thank you.
And our next question comes the line of Johnson power all of the RBC. Your line is open.
Hey, good morning, I wanted to ask what the Alberta, Vaping ban or temporary Dan you mentioned you expected last through April .
What conversations have you had with the province, and what's the problem is looking for in order to move forward.
At this point I think they're just they're there continue to collect information they've been a little bit tight lipped on on the full details of it but.
They just want they want to take the right steps for for their consumers and we just based on those conversations we feel that that's that's an April decision not not something that's going to happen when the next two three weeks.
Okay. That's helpful on the 2.0 product and pricing I don't expect you can share specific numbers, but just directionally do you expect these to be beneficial to price for Gram or Graham equivalent in gross margin given your your numbers are already had some competitors on those metrics and what we noticed that more in Q3 or is it.
More likely be felt in Q4.
I think you'll start to see it in Q3.
Okay, and Directionally versus your existing products that can you make an oh, sorry tied directly versus our existing product, yes. It will represent haptics.
Okay. That's useful thanks, and if I could sneak in one more about inventory I guess, a two part question you've got a meaningful amount it inventory I think it was about 10000 kilos.
Dr. flower on hand, so just walk us through why did you feel the need to buy from third parties and then in the second part of that given the stag a number of stores in Ontario does that make you rethink the production strategy at Diamond once once it is online and then do you feel you have too much inventory on hand or is there a risk you'll have too much inventory on hand for the medium term.
So.
If you look at our inventory I think that you're one of the things you'll see as there is a a bit of a conference call. Our concentration on oils and we are actively working on on managing all of the inventory balances, but that one in particular.
Some of our balances on salable flower were lower in that was that was where the customer demand was in the quarter.
It's a little bit specific to strings.
And potent Ses and things like that and so we supplemented.
Our production capabilities, where there was demand that we just didnt have the right specific.
Inventory.
Okay. That's all for me thank you.
Thanks, John .
Our next question comes from Matt Bottomley Canaccord. Your line is open.
Yes. Good morning, Thanks for taking the questions just two questions one on the domestic Canada sales and then just some more clarification on the international distribution just first I'm wondering if you can provide any commentary.
What your expectations are in the next six months or so given the significant increase in dry cannabis flower inventory balances at wholesalers. So I think you had a pretty solid pricing relative to some of your peers that have a 520 in changed this quarter, what magnitude could we potentially expect a price erosion, particularly on the dried flower.
I understand that the candidates 2.0 will likely more than offset this but I'm just trying to get my arms around how significant commoditization might be in the next couple of quarters your industry wide.
So I think I think that any level of price compression is really going to be tied to.
Brands themselves and people, who haven't invested properly in their brands and who haven't develop their brands and don't have sell through are going to experience far more.
Price compression than the people, who have have thoroughly invested and thirdly researched and develop good strong brands.
We continue to see very strong sell through of all of our brands.
Very positive reviews online related to the brands.
I don't foresee the same concerns with price compression that I think a number of our competitors do.
Okay, Great and then just staying on the other started to pick them up.
That's right after your question.
Yes, just staying on the just the cannabis. So are the domestic sales can you give any sort of gold posting or how you feel the initial launch has gone up to 2.0 products I understand we're very very nascent stages budget.
I know that retail is muted and you gave some of the factors in Europe in your press release and prepared remarks as to why guidance has come down but just the general first started three or four weeks of candidates 2.0 from a logistical standpoint, how that's been going.
Well I think you've seen the big difference.
For cannabis 2.0 versus 1.0 is the different ordering patterns that the control boards have gone through in Canada is 1.0. It was more about I'll take whatever any when Scott in Canada is 2.0, it's been a more muted.
Initial purchases by the by the control boards, there, they're trying things out there trying brands. They are trying to manage inventory levels inventory levels inside of the control boards inventory levels at stores and so the idea is lower purchases higher frequency or even just changing the cadence of orders.
And there's been some I've read some articles where in some places are or accordingly.
Stock and are doing more frequent reorders. It's just it's just been handled differently. This quarter. This at this time.
Great. Thanks, and just last question for me on the International side I'm, just wanted to make sure I understand the sort of ramp in in that in that segment, considering your revised guidance. So.
Out of a 50% of your revised guidance that put your international revenues that about 290 million you've already done about 180 in the first six months. So that delta of about 100, how is that going to come into the into the results over the next two quarters is it going to be a gradual decline because I imagine we're going to see more substantial decreases in that segment given.
Your your new guidance.
No I would suggest that you're going to see.
Revenues that more or less mirror, what they did this quarter in our international distribution business for each each of the remaining does continue to be the saying yeah.
Okay Fair enough. Thank you ms. is slightly more than half that gotcha. Okay. Thank you.
And just very minor in order to ask a question simply press Star then the number one on your telephone keypad.
Question comes a lot of although the lack of kantar discount your line is open.
Thank you good morning, everyone and look I just want to a follow up on due on the guidance question I mean, obviously based on the ship prices morning.
He doesn't like the guidance that I hope to say personally I like it.
And what I won't fly Riki here based on that number you've given we are looking sonobuoy sales for the second half about 160 made into the Colombian 10.
65 in the first off I mean, just a rough numbers right. That's a meaningful step up in goes the 100 seats needs that we're going to be on 20% goes.
Yes, you got Columbia's on those numbers, but just maybe give what does that who lot easy like what do you think happens we the base business.
What happens with two point or just a we got have more confidence on that big ramp up in sales that you have given here any color. We felt whether you know maybe a lot. We know what percentage of that you know how diaman helps and then just the base underlying business and then the central labs relate to the going down so they're thinking.
No.
So Pablo Hi, Hawaiian nice to hear from you.
I'll go with my piece first.
And then I'll, let Karl chime in here, but why are we confident in what happened out there. There's a lot of things that we're not in our control as Carl took you through but I think would you know candidate was 2.0 and rollout of the.
Product line.
We will.
Hopefully rollouts in edibles.
The latter part of the fourth quarter.
And continuously additional stores opening up in Ontario, and the rest of the country, our GMP certification, which we have received.
Over the last couple of days, which would be able to shift to you.
And just the Big thing is you know having supply here and with the free at Diamond coming on and we'd be able to start.
Shipping products in mid February that we now have supply so.
There is a real good plan in place it's a real good integrated plan from a gross standpoint from a process standpoint from our marketing standpoint, as we build their brands and last but not least is a whole rollout with our sales team and with great North who helps us do this.
And you know as you saw in our last quarter.
Cereal with 25 stores in more stores opening up we grew our shared over 13%. So that's why we feel good.
And this this is this industry.
Is in its infancy stages, there's lots of the change, but I got to tell you. We've really got a good measured account of how we will achieve this guidance in the back half.
The only thing I would really add to that Pablo is that.
Our sales growth to date has been more limited by our internal supply then by demand from individual consumers within our brands are as I said earlier, our brands continue to demonstrate very very strong sell through and significant levels of demand and so we remain confident that with.
Additional demand our ability to pick up additional share with with the expected.
You know retail rollouts in Alberta, and and BC and some of the other provinces as it relates to this year and then going past this year, Ontario.
All puts us in a position where we're extremely confident in that guidance.
That's good. Thank you Anthony just ask a follow up somewhat fluid monkey puts that give.
If you can talk about underlying trend in the September <unk> dollars Dutson data show flat sales sequentially month on month up double digit growth from the prior month.
What's happening in November December do you have a sense of that this chart during the market, but this is mostly mills in the very very low end of the market and I wondered whether that's incremental just thinking people going to DC market. So that's not a problem or ways really cannibalizing debit book just give more color in terms of what you see company and then in the underlying market for me.
One point Openstack since.
But from the market standpoint.
From a timing standpoint.
As we say, we continuously see great demand.
And I think there's a lot of anticipation and build up in regards to Canada is 2.0 enrolling other beeps and.
We're one of the first ones to get that with them and.
I I come back and say is here not much has changed from share that we talked about November so.
It's robust listen I think what happens is there is price out there and price always does matter, but one of the biggest things that we're seeing paboase is here the consumer wants brands and quality.
And that is the big thing and ultimately Where's the consumer coming from its them coming from the illicit market and coming into buying products that they know they have gone through quality regulation in that and that's what we feel very very good about and there's lots of plans in place at our free up how we continuously move consumers over from the listen more.
Get into the regulated market.
Thank you. Thank you.
And there are no further questions in the queue at this time I turn the call but presenters.
Thank you very much everybody.
Again.
A lot is happening at a free as you can see.
We're in an industry that's changing daily.
And you know I was part of a natural getting food industry for 25 years and so lots of change. They are very similar I'm down that ice yard meeting lot of investors today.
And it's exciting to talk about a free yet and as I sit back and look at their free from a rep standpoint from a medical standpoint, as we sit back and look at or GMP certification that we can sell.
Into the you as we sit look at many multiple products in multiple things that we can do what I will tell you cannabis is something thats going to be around a long long time in many many many many multiple facets.
Free it today, having both the free a one and a free diving, having that supply having that quality and have done that regulation.
And yes, we're talking about wreck only being.
Legalized in Canada today, but theres a lot we're learning from that that will help us role of products around the world as I said, we have a very interesting and we're looking at multiple opportunities for the us.
Just thought around CBD around other products that will complement cannabis and.
Thats something that we'll be focused so we have our brands. We have our people we have us our strategy. We have a strong balance sheet del allow us to do this and last but not lease we look to go back and how do we returned back to shareholders. So with that everybody have a great day and thank you very much for your time.
And this concludes today's conference call you may now disconnect.