Q4 2019 Earnings Call
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Welcome to the Valens company fourth quarter and fiscal year 2019 financial results Conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero or your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host every night executive Vice President of corporate development and capital markets of the Valley Company. Please go ahead.
Thank you operator.
Good morning, and welcome to the balance company fourth quarter in fiscal year 29, <unk> financial results Conference call.
A replay of this call will be archived on the Investor Relations section of the balance web site <unk>.
The Valens company Dot Com slash investors.
Before we begin please let me remind you that during the course of this conference call Valens management May make forward looking statements. These forward looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ from materially from expectations.
For more information on the company's risks and uncertainties related to these forward looking statements. Please consult the company's m. DNA and other regulatory filings available at W.W. dot feed our dot com.
Any forward looking statements should be considered in light of these factors. Please also note at the safe Harbor any outlook, we present as of today and management does not undertake any obligation to revise any forward looking statements in the future.
Joining me on the call today are Mr., Tyler Robson, Chief Executive Officer, Mr., Chris Biden, Chief Financial Officer, and Mr., Jeff House President.
With that I would now like the handover the call to Tyler Tyler. Please go ahead.
Thank you everyone and welcome to everyone, who has joined US for a fourth quarter and year end November Thirtyth 2019 conference call.
When I compare where we are now to where we were at the start of fiscal 2019 the differences.
At the beginning of the year were primarily an R&D company building out a diversified extraction platform and a number of testing methodologies with no meaningful revenue 12 months later in the fourth quarter of 2019.
We have become the most profitable publicly traded company.
Kind of his company in North America, excluding fair value adjustments and onetime items.
We were able to achieve this phenomenal growth by securing and executing on multiyear extraction contracts with leading players and the kind of a sector, which positioned us at the partner of choice to the industry.
In the second half of 2019 in preparation for kind of is 2.0, we broaden our platform beyond the extraction to include White label product development and manufacturing.
We now produce a broad portfolio safe consistent innovative products to both license producers and unlicensed companies such as brand focused entities in consumer package goods companies to help differentiate themselves and build their brands in the counted as market.
Hi, purity distillate and cannabis 2.0, Destin oil based products contributed to the record revenue in the fourth quarter of 2019, we leveraged cross selling opportunities with key extraction customers to launch new products and broaden their product portfolio. We are also rapidly securing an increasing number of white label contracts with new customers, which Jeff.
We'll elaborate on later in today's call.
We are currently the most diversified.
Largest extraction and product development and manufacturing company in Canada.
And with the capacity to manufacture more than 25000 kilos of distillate and a broad portfolio next generation oil based products to ensure we have the capacity and flexibility to handle continue acceleration in demand for our products as well as handle a seasonal variations in demand, we're expanding our 425000 Kelly.
I'm extraction input to over 1 million kilograms, and adding significant scale to a number our manufacturing capabilities and the second half of 2021, sorry expansion in Kalona comes online we believe our multiyear contracts manufacturing platform proprietary technologies and advance product capability is uniquely positioned down in the cabin.
Mark and then provide sustainable competitive advantage through which will we will continue to service our customers and generate shareholder value.
In the fourth quarter, we generated record record revenue of 30.6 million. This represents an 86% increase or the third quarter and a 240% increase or the second quarter of 2019. This increase was due to scaling our extraction activities as well meaningful candidates 2.0, Dustin product sales.
Gross profit for the quarter increase to 22.6 million.
Or 73.8% of revenue compared to 12.8 million or 77.8% of revenue for the third quarter of 2019.
Adjusted EBITDA was 17.7 million or 57.7% of revenue compared to adjusted EBITDA of 9.84, 59.4% of revenue at third quarter. While we continue to expect strong margin throughout 2020, we do expect some margins to moderate.
Over the coming quarters as White label product initiative make up an increasing percentage our revenue as discussed in our Q3 conference call well these products generate marking conservative margins. They represent a key strategic shift in our business, allowing us to be one stop shop or customers and further integrate ourselves into their value chain.
Finally, net income the quarter was.
Net income in the quarter was 4.5 million a 14.6 net income margin, making us the most profitable publicly traded kind of his company in North America with the highest net income margin, excluding fair value adjustments in onetime items I'll now turn the call over to Jeff Fellows President of balance to dive deeper into our operational achievements in Q4, albeit.
Level to answer questions at the end of this call.
Thanks, Tyler Oh first look at our recent achievements from a quarter, including some of the work we've been doing with our industry partners. We expect several significant developments in 2020 as kind of is 2.0 rolls out and the global markets open up.
So I'll also discuss these plans and our long term vision in more detail later in my comments.
We processed 61394 kilograms of drug candidates and biomass in fiscal 2019 of which 24426 kilograms of dried canvas and biomass was process in the fourth quarter as expected and discuss some of the Q3 conference call our processing volumes flattened in the fourth quarter as a production mix shifted to a number of smaller law.
Runs.
In order to help our customers launch a broad assortment of products into the kind of a strip rental market well. This decision resulted in reduced volumes. It allowed us it allowed us to expand our agreements with a number of customers to process White label products and increase our revenue per gram of input to $1.25 program in the fourth quarter of 2019 compared to 61 cents per gram in the third quarter.
Revenue program is expected to increase further and 2020 as product development contracts continue to grow a number and contribute to a higher proportion of total revenue.
The number of White label product development contracts, we have signed continues to ramp significantly and now what number extraction only contracts to support this overwhelming demand for white label product development and manufacturing services in December we entered into a multiyear manufacturing agreement with a health Canada license party that provides us with additional license capacity.
Initial 5000 square feet has been allocated the violence operations with a total of up to 50000 square <unk> square feet being made available subject to the counterparty receiving required health, Canada license Amendment.
On her last quarterly call, we discuss some of our agreements we signed in Q4, including major contracts with the Kotick brewing and shoppers drug Mart. Since then we have continued to secure new customers, including our largest publicly announced multiyear white label agreements a date for branded finished product with burnt limited purchase a leading premium cannabis and silly read company, which are shown in.
<unk> sales growth they approached us to launch a line of unique high quality canvas be pens in Canada with a minimum of 2.2 million be tends to be produced over initial to your term. We believe this represents gross revenue potential to volumes of over 50 million in the first two years subject to final acceptance from the potential distributors, including acceptance of the proposed price per unit.
We expect to complete our first shipment for burden. The first off of 2020, <unk> and are delighted to be collaborating with them to bring to market a line of differentiated they products for Canadian consumers.
Subsequent to the year end, we secured a number of new contracts, including a multiyear distillate and sorts of motion supply agreement with an IPO, which has a large scale edibles producer the team at the now we'll have been active in the Canadian kind of a sector for many years advocating for safe high quality edibles for the adult use market. They are rapidly scaling their operations, where the purpose built purpose built.
They did the art large scale facility coming online in 2020, which will give the value of the capacity to produce more than 400 million units and the first year of operations. We are delighted to be partnering with them at this exciting pointing their gross.
In December we also announced a multiyear extraction of white label agreement with <unk> Therapeutics.
We've already started permitting mixing in sealing products for animal health in preparation for vaporizers soft gels and tinctures.
As our customers continue to roll out products in Canada for kind of 2.0 and the size of the market expands we expect to secure more sales opportunities that are even larger in size and encompass a broader array of products.
We're excited about the opportunities not just in Canada, where we expect demand for our services to continue to accelerate but also globally as international markets open up we're confident we can leverage our expertise to be a pioneering the goal of kind of as market as it moves into legalization.
In February 2020, we achieved a milestone when we announced our first international purchase order for the shipping a white label products to customers in Australia, we expect to ship three skews of tinctures totaling 3000 unit units starting in Q2, 2020 pending receipt of necessary import and export permits.
We believe <unk>, Australia strong underlying demand for catalyst products together with the continued adoption of medical cannabis laws and potential relaxation of CBD laws will drive sustained growth in the Australian market, we continue to extend our footprint in Australia as well as other key international markets.
As they open up.
To further prepare for this we expanded our exclusive license for source cannabis emotion technology to include Europe, Australia in Mexico. In addition to Canada, representing a nearly 20 times increase in the addressable population.
This access to international markets in the near term is a unique differentiator for volume and bolsters, our white label product offering.
The consideration for the exclusivity in the expanded geography was $10 million U.S., consisting of $6 million in cash and $4 million in common shares. The agreement carries an initial five year exclusive term would I treat a renewal of the exclusivity subject to certain performance milestones related to operational and financial achievements as part of the agreement bounds will transfer.
The source royalty payments, which are subject to an annual minimum of $2 million over the term.
While we are committed to global expansion capital expenditures will be mainly focused in Canada with a future exporting products to medical markets that have limited distribution.
We aim to responsibly manage our growth to build a sustainable business over the long term. So we can truly maximize the upper opportunity inherent in the global kind of as market as these international markets mature we're on the local for acquisition and other opportunities that provide us with an accelerated platform gained market share I look forward to providing further updates on an international strategy, that's 2020 progressing.
With that I'll now turn the call back to ever at night, the talk about some of our corporate and capital markets development.
Robert Please go ahead.
Thank you Jeff.
As Jeff in Tyler mentioned, we've come a long way in a relatively short space of time as we enter the next phase of our growth driven by our extensive white label product development and manufacturing capabilities together with the rising demand for 2.0 products. We're cognizant of the need to keep our shareholders at the heart of all of our decision making.
This approach will ensure we always have the strongest foundation to navigate our growth with the emerging cannabis markets in December that TSX adventure exchange approved that normal course issuer bid otherwise known as MC I'd be to acquire up to 6 million 275.
It doesn't and 200 and for balance shares over the next 12 months, which if utilized will be funded with cash on hand.
Given our strong financial and operational performance prevailing market conditions and the value of our shares we're pleased to have the NC IB in place at this time.
We're also pleased that our operational accomplishments continued to be recognized by the investment community and we have been included in the recently introduced S&P TSX cannabis Index X can which is comprised of a select group of candidates issuers trading on the TSX GSX venture it changes.
Our shares are also now DTC eligible in the U.S., which should provide increased visibility and accessibility for our shareholders moving into fiscal 2020 and allow us to reach new investors in larger markets.
We expect to continue to analyze different exchange opportunities in the near term to access more liquidity for our shareholders.
We're still seeing a significant supply a flower on the market and the launch of candidates to point out products in Canada has been met with strong initial customer demand.
This these fundamental market dynamics are expected to drive demand for our services throughout 2020 and beyond.
We believe the product offering.
With consistent high quality in Protectable user experience will capture them most market share and empower brand development in a strict regulatory environment.
We're proud to have been interested by several leading brands to produce white label products and we're currently formulating a manufacturing 19 skews over three different 2.0 product lines to meet demand for our customers in 2020, we'll continue to invest in developing the intellectual property that will define tomorrow.
Cannabis markets across a range of products, including Veight pens, edibles concentrates cannabis and U.S beverages.
Topicals tinctures and capsules.
Our focus on innovation and ability to provide a broad range of services throughout the supply chain, including customize formulations emotion and turpin enhancements uniquely positions us to have to service a wide range of customers. We believe this innovation and focus on consistency, let us to have what we consider to be the.
Highest quality APC eyes of distillate ice lit and other custom formulations on the market.
This diversification strategy in our White label business is also enabling us to build a broad IP portfolio for product development that spans all products from tinctures and beverages edibles Topicals and concentrates.
During the fourth quarter two at celebrate our commercial scale entry into the high growth beverages, and edibles market, we acquired Pommies cider coal for 7.6 million.
Amit is a leading Ontario based beverage company and mature cannabis micro processing license applicant initially we intend to leverage the beverage manufacturing infrastructure of the Army's facility and they know how of its founders to capitalize on cannabis used beverage white labeling opportunity, including our existing agree.
We met with the candidates division of iconic brewing and other potential partners.
We are already producing beverages in western Canada that should be on the shelves in the next few months, but look to increase current capacity once the pommies facility is online.
To ensure we retain our leadership position in this market as it matures, we're budgeting for approximately 10 million of capital expenditures over the next well at the facility over the next 12 months, following which valens expects to have a significant capacity for beverages edibles and source in malls and formulation in greater.
Bronto area.
The planned capital expenditures to bring the facility into full operation are fully funded with cash on hand.
With that I will now turn the call over to Chris Biden CFO to talk about our financial results.
Thank you have right.
Based on the operational deferments highlighted earlier in this call consolidated revenue increased to 58.1 million for the fiscal year ended November Thirtyth 2019.
This annual revenue growth was driven by strong fourth quarter revenue of 30.6 million and 86% increase over the third quarter and a 240% increase over the second quarter of 2019.
Revenue for fiscal 2019 is comprised mainly of revenue from proprietary and industry, leading extraction and white label manufacturing services.
Sale of cannabis and have biomass and oil and oil based products destined for kind of as 2.0 products.
During the year, we experienced an increase in order volume and frequency of shipments, which which we anticipate continuing through 2020 as additional equipment is coming online, including expanding our hydrocarbon extraction to meet this demand.
Revenue from the cannabis operating segment increased to 30.5 million in the fourth quarter of 2019.
86.6% from 16.4 million in the third quarter of 2019.
Additionally, in the fourth quarter of 2019 company generated 0.3 6 million in revenue from analytical testing through the Companys ISO 17 owed to five accredited labs, including 0.2 7 million intercompany testing revenue.
With a rapid topline revenue growth in the fourth quarter customer trade receivables increased to 34.4 million.
Since year end, we're pleased to have already collected or have trade payables with the same partners on 81% of these receivables, which bolsters our already strong cash position and speaks to the strength of our customer relationships contracts and the underlying kind of us market.
Consolidated gross profit increased to 41.4 million or 71.2% of revenue for fiscal 2019.
For the fourth quarter of 2019 consolidated gross profit increased to 22.6 million or 73.8% of revenue compared to 12.8 million or 77.8% of revenue for the third quarter of 2019.
As mentioned on our Q3 earnings call the strengthening and gross profit percentage for the second half of fiscal 2019 was aided in part by onetime contract opportunity. In addition to our ability to realize increased efficiencies through the higher production volumes achieved through the year.
Gross profit from the kind of US operating segment in the fourth quarter was 22.6 million or 74% compared to 12.7 million or 77.3% in the third quarter of 2019.
Analytical testing operations saw a slight decrease in gross profit in the fourth quarter fiscal 2019 to 137000 or 38.5% of revenue compared to 146000 or 67.3% of revenue in the third quarter driven by higher intercompany service utilization.
Operating expenses for the year, where approximately 33.1 million compared to 13.8 million in the same period in 2018.
The increase from the same period in 2018 is primarily attributable to higher.
Fusion and amortization costs salaries, and wages and advertising and promotion expenses as a company scaled its operations to meet demand for services in 2019.
Adjusted EBITDA was 27.4 million for fiscal 2019 for the fourth quarter of 2019, adjusted EBITDA was 17.7 million or 57.7% of revenue compared to adjusted EBITDA of 9.8 million or 59.4% of revenue in the third quarter.
The company recorded a tax provision in the fourth quarter of 2019 of 6.3 million.
With the ramp up of profitability through fiscal 2019, one of the company's entities became taxable in the fourth quarter after using up all available non capital loss carry forwards. The company has strategies in place to effectively manage the overall tax structure of the company and review this type structure on an ongoing basis.
The company posted a net loss in the year of 6.5 million compared with a net loss of 15.9 million in the same period in 2018.
For the fourth quarter the company reported net income of 4.5 million.
The company had five sorry, 58.7 million in cash and short term investments as of November Thirtyth 2019, compared with 25.2 million as of November Thirtyth 2018.
The increase is due to the closing of April 2019 bought deal financing for net proceeds of 40.3 million exercise of warrants for gross proceeds of 22.6 million.
Funds will primarily be used by the company to continue to execute on its domestic and international growth strategy as well as general corporate and working capital purposes.
With that ill now turn the call over to the operator open the lines for the acuity.
Thank you at this time will be conducting a question answer session. If you like to ask a question. Please press star one on your telephone keypad, a confirmation told in the case.
And is in the question Q you May press Star too if you would like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your hands. It before freshness Sarkies one moment, please well we pull for questions.
And our first question is from David.
From Altacorp capital.
Please proceed with your question.
Hi, good morning, Congrats on a quarter guys and thanks for taking my question here.
Two questions I wanted to get through first is the you mentioned the Babe sizing the shelves with Bernstein I'm I believe in each 120 20.
Can you maybe comment a little bit on some of your other.
Derivative or legalization 2.0 products in beverages in particular, when do you expect those to hit the shelves in Canada.
Yeah sure David Thanks, Yeah. So obviously a number of it skews available tincture skews and beverages, we've just received.
Recently PEO from province.
Ontario or for beverages, So we expect to see those.
I got it never just on the shelves within the next couple of weeks.
Okay and the source beverages.
Yes.
Beverages are sourced based beverages.
Got it okay. Thank you.
Moving onto to Vaibs than Weve, I think everybody in this industry is well familiar and caught up with some of the controversy is around babes over the last several months I'm just wondering now in Canada in particular, especially with Albert opening up in getting rid of that Dan how does valens how is.
Your business has been impacted.
With the controversy with the Babes and now it's a lot of it seemingly going away.
This is Jeff again, and this in the short term, we didnt really experience any major challenges with the negative news in the base, it's always been our position from a Canadian context that the the labeling and the content requirements would allow us to provide seeds.
Listen products to the Canadian consumer so as a short term, we didnt noticed any material changes when it may have done was well some of the longer term growth, but in the back of Alberta, changing course said and they're being a number of skews in the market better could you sell well.
We view now that longer term opportunities as it was quite strong.
And David just on that noted.
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Like I think for we continue to see growth in that marketplace and the additional demand has been good from customers as well as their consumers overall and from.
From from our standpoint, with our Terveen formulations, we really differentiate ourselves from that as we get more formulations and custom formulation for our customers.
Our unique capabilities there I think we have a very unique opportunity.
Okay. Thanks, guys. My last question here, and then I'll hop back into the Q.
Looking at Capex here and what.
Within your prospectus for 2019, which was a little lights.
What was the actual versus a guided can you maybe just give us some guidance for capex for 2020.
Yeah, David It's every year. So you can see it in there.
Got it made sure that we put in there.
The Capex is really are key to facility in Cologne actually we have our current can CDK one bought in kind of the first half.
2020 here, it's going to be fully built and then ramping up into the back half in 2020, So we still have spending their call. It.
Looking at $20 million and then we're also.
Pending $10 million.
To build that out to get ready for animals and beverages.
Now, we'll also be in each 120 20.
No.
We'll be ended 2020, beginning in 2021 I'd just depending on.
We both license animals and beverage that once we could do we're still deciding whether we get wind up sooner or doing both at once so thats still evaluating that opportunity, we'll keep the market up to date progress.
But the Capex will be spent over the course of the year to.
Okay. Thanks, guys, I mean, I'll jump back into the queue again, congrats on the quarter.
Thank you.
And our next question is from Janney Wang with eight capital.
Please proceed with your question.
Good morning, congratulations on the quarter guys.
Thanks for taking my questions.
Thank you.
The first one is just could you talk about your receivables balance and kind of are you finding companies payback receivables on time and how do you go about selecting the partners that you work with and ensuring that they have to capacity to pay.
Okay.
Chris do you want to essentially.
For sure yes, so we definitely.
Our kind of actively managing our relationships with all of our partners.
To date, we Havent had any issues with with Collectability I think as we noted in our in our Mdna. We had as of the ended the year about 7 million over 60 days.
At this point in time, there's about 300000 of that that's still remains outstanding or hasn't been offset against payables with that with the same vendor.
And we're confident that those amounts all remain collectible.
I guess from a process standpoint to answer the other half of your question, we definitely as we're kind of engaging in in the different relationships, we have with our with our partners. We do a lot of due diligence on on the front end, making sure that we're comfortable with.
Who were were advancing credit to through those relationships.
Okay, and Jenny just a further that comment.
Like as far as our customers today, Weve, a very diverse customer group and going into 2020, we forecast every customer being under 20% of our revenue and if you look at that most and will be under 10% and I think you see that estimate continue to expand.
Decreasing the impact one customer in Brazil.
Anyone customer.
Got it thank you and just in terms of.
If you could just elaborate a little more on kind of the white label contract. That's currently in your pipeline at what point do you think we can begin to see sales from these contracts outpaced your tolling revenues.
I think you're going to start to see those white label contractor branded player contracts.
Thanks, Michelle very soon in the coming weeks here and as we move into the back half of the year into Q4, we expected nodes.
Revenues in the.
Coming from those contracts, we expect out pacing number the.
Extraction only contracts.
And just in terms of kind of the gross profit this quarter.
74%, that's that's very healthy if I compare to the second quarter considering that in Q3 that was kind of a one time opportunity that boosted margins.
Is it right to kind of think about gross margins.
Pretty healthy growth margins this quarter as a result of your white label manufacturing and.
Therefore, if we're unable were to continue then should we be expecting similarly healthy growth margin levels going into 2020.
No I think as we look at the gross margin profile as we're moving into more and more white label I'd say, it's probably the opposite as we said some of the commentary that the margin profile that we're going to experience. We believe will moderate over the next couple of quarters here.
The overall EBITDA profile.
Why do people contracts.
We get more aggregate value per.
But the margin profile is smaller so I think you're going to see that are our margins.
Moderate over the coming quarters.
And just on that yet we're not talking about a lot of moderation from our and it's just slight moderation as it becomes more of a mix as you said ramping up into Q4.
Hi, Thank you okay on the back thank you.
And our next question is from John shoe from discharge and capital markets. Please proceed with your question.
Hi, good morning, everyone.
Question on the revenue per Gram, you're saying, you're expecting that to increase from the current level.
That means that you're going to see less hem and in their term because obviously the revenue per gram would probably be a lot less maybe talk about how that mix.
From a head perspective.
More what you should look at John in that regard is it more finished products being sold forever for every finished product we saw the revenue per gram and a lot higher.
What your comment is correct on base extraction that on a on a per gram of input bases are.
Instruction numbers are lower but if that same extracted oil goes into a finished product that revenue per gram increases.
Okay, and then secondly, then.
Just on the when I look at your your deposits you have raw material inventory of $7 million. So can I assume that that maybe you stockpiling some pretty cheap biomass from the quarter, but you haven't received yet and.
Presumably that could actually help provide a bit of a boost for the upcoming quarter.
Yeah. So so I don't think I'd use the word stockpile and crystallized. Please jump in as you on your more I would say is that we get opportunities from time to time to get some strong repriced, our or well priced products. We don't speculate we don't think position, but we have white label contracts that we.
Bill later on the year, we won't be opportunistic and access those buys when they're available.
Okay, perfect and maybe just talk about just.
Prices in general what you're seeing out there we've been seeing power prices coming off we've heard about extraction rates coming down and there has been a dispute obviously in the industry. So where are you seeing things are some of the white label price is starting to come down from versus where you were negotiating maybe what you got six months ago and just.
To give us sense.
Directionally, where some of these things are going.
Hey, John Deford your no we've actually seen the opposite of White label pricing, increasing you got to remember that the beginning innings and the currently that you're negotiating with the distributors, but once that crisis that weve good visibility on that front. The good news from a margin standpoint is that right candidates prices continued to go down we can increase our.
Overall margin because we have the visibility on end market and that you just go straight to the bottom line.
You are seeing a double whammy that youre seeing the white label prices increases and then you can also see a benefit from benefit from the dry cannabis flower decreasing is that right.
Yes, I think as the market matures you start you're going to start to see a different quality products can many different levels of pricing.
So we're starting to see some of that.
Maturity coming into the market in terms of all our quality I'm getting higher pricing.
But absolutely.
Once the pricing is that in the original distribution area, if the input pricing goes down and that increases margin.
Okay. Thank you I'll get back into queue.
And our next question is from Kimberly headwind from Canaccord Genuity.
This was he was your question.
Thanks, guys great quarter, Yeah. So just with the Q4 results can you provide any color on the volume mix a in the quarter along with the pricing whether you thought you know certain areas strengthen or or come down person. So what you guided to last quarter.
So from volume standpoint.
Some more cannabis going into kind of that 2.0 products. Obviously, everyone is getting ready to date animals in the marketplace, which means they have to repair and get obviously oil based products in oil in general to the market. So so our mix was really driven towards that white label and as we mentioned previously in the call came I think you'd see that continue to expand.
Rapidly, especially with some of these new products coming year on the shelf shortly.
You're not willing to maybe give specific volumes on that.
We're not disclosing specific volumes right now, but as we get more transparency on the mix of our white label.
We'll be giving more and more information did to shareholders. Obviously, it's just we don't have that nets and we have so many skews going and its expanding every day, we just want to have visibility before we get that got it okay, well, maybe more just a general question I'm on the 2.0 roll out and what you're seeing on your end any differences across the provinces.
Certain products Yeah, just your thoughts on on how the rollout is going in general.
Yes, so great additional demand on the rollout I think that you've seen in news and from all investors.
We've seen sold out products and I think it's continued to develop.
Everyone got remember that 50% or almost 50% in the market in the U.S. and oil based products and we haven't had those in Canada, yet so it's really like half of the market coming online and you're seeing that from the national to than others.
No not really wouldn't have any different problems the province.
Okay, it's pretty steady across the board obvious.
And in terms of supply.
From a drive Canada standpoint.
No on the 2.0.
Yes, I think what you're seeing is there's only really.
Just over 10 sophisticated license producers with products and the shelf and obviously what people are having trouble with is keeping up to the demand today. It depends on what SKU, but I think you see that continue to be a trend going forward.
Okay, great. Thanks for taking my questions guys.
Thank you.
And once again, if you have a question you May press star one on your telephone keypad.
And our next question is from Greg Mcleish from MRC. Please proceed with your question.
Hi, guys. Just a couple of questions I was just wondering how white label revenue is going to sort of trend in the first half and into second half of the year started the revenues, but for what you think it could be.
Yes, So I think you can see a as the as the quarters evolve here that the white label percentage of revenue.
Increases to the point, where we get into the back half of the year that we believe the white label revenue will overtake sort of base extraction revenues.
So in terms of mix overall mix for the year.
You know are hard to say at this point exactly how quickly that white label accelerates other than my general trend.
But likely.
But the majority of the 50% of of our revenue for the year low like you still come from basic traction.
Great and then looking into 2021, I know, it's a little bit off but do you think it could be 50 50.
I think going into 2021, it could be actually more skewed towards white label.
Right.
And just say what we've seen in the industry is there a lot of companies are a lot of LP there do have.
Capital sort of their constrained on a capital side and a lot of them sort of indicated that they have wanted to move into extraction or do some self extraction are you finding that.
You know now what we're seeing is companies not necessarily wanting to invest in basic extraction, so that that means potentially more business for you.
Hey, good yeah, I'm not exactly what we're seeing so as the as everyone knows cash is king with a lot of these LP is a little bit strapped for cash or getting a little tighter.
We are definitely see the demand growing and we'll see some new contracts coming forward in the foreseeable future.
But yeah, we have absolutely no issues filling our pipeline in demand is getting is getting significant one of the biggest needs to is our hydrocarbon. We're one of the only wants to offer any third party hydrocarbon products. So that's going to be very highly sought after which we'll see in the foreseeable future as well.
Hey, how big a lead do you think you have on hydrocarbon over the next nearest guy like if I wanted to try to get license for hydrocarbon how long is going to take.
So it took us two years to get up and running Greg It Yeah, obviously use debt.
Reinforced concrete you need fire suppression system HVAC systems.
Just in Palo Verde approvals and walk through Bell, Canada regulations. It takes a long time took his two years to get there I think we've laid the groundwork for anyone else getting it somebody that that long for another person no I don't think so I think it's faster, but a lot of our customers. The feedback we're getting from them and saying Hey, we're in a residential neighborhood, we can't even getting zone for this.
And we actually don't want to put a bomb whose room in our 100 million dollar facility. So I think we have a longer road there than people think.
Great and just one final question what is sort of your pipeline for bringing on additional white label customers is it sort of leads into the first question I had at this if people are capital constrained they don't want to build their own facilities you guys have capital you're building a capacity. So what you know what what's the ability for you guys you continue to add.
Add large scale white label guys.
I think the opportunity then and Greg what you'll see the proceeds of future is actually diversifying our customer base and moving away from Sunday some of our license producer partners and more going after the CPG relationship where people are still dabbling their toes in the water essentially with what they're thinking so it's a unique value add that they can come.
I'm not and basically test the waters get the data launch abuse skews under under a different brands and then really make the correct decisions and how they proceed so you'll see more CPG relationships coming out of bounds shortly.
And Greg just further to that point in previous point, obviously with white label products were seeing a slight margin compression because it's coming online.
With these new contracts coming on rent were seeing revenue EBITDA growth and net income growth over the next few quarters in years, and we have a strong pipeline and I think that customer base is going to really drive that home and you're going to see it expand here.
Great I'll get back in the queue. Thanks, guys.
Thanks, Greg.
Your next question is from John Shoe from discharges capital markets. Please.
Please proceed with your question.
Hi, just a couple of questions here so.
Trying to understand the balance of the white label is coming online, which technically the lower margin business for you, but you early on the operating at around 25% capacity utilization.
What 25000 kilograms process, but you've got an annualized run rate of 425. So how does that how do you reaching the high utilization rate going forward I start help streamline the business Tony me to scale and whatnot.
Try the margins versus some of the the offset from the White label, just how do we.
Look at that going forward.
Well, the two of them or not necessarily a.
Apart John So it's a it's all about down right. So if we're doing a lot of small a lot runs our our actual capacity. If we were operate that for long periods of time wouldn't be 425000 kilograms right. That's it that's an average number based on average our processing side and downtimes. So the smaller the lots of more the downtime.
The less capacity, we actually have so as you are continuing to to get large volume runs from base extraction efficiency goes up but also as we get larger product runs for our white label products. So instead of getting runs of.
Hundred thousand basins, we get runs of a million basins are 2 million they tend to et cetera.
Really changes the efficiencies under which we can operate so it's not necessarily just extraction versus white label.
And is it fair to say that for at least the next several quarters as all these customers are trying to ramp up and introduce various products kind of like testing products, though to see if that's one work to that one work, we're probably going to see a lot more smaller run still until they get a better handle on what work for them upon which then they'll start coming out the bigger on so we're still going to.
That.
A bit of ahead when these smaller lot Ron.
Well I think there's going to be nice mix because a lot of the smaller lot runs that we did have sold very well in the markets and they're really starting to the scale of the orders that were getting our increasing on those items. So you're going to have not happening what we're introducing a bunch of a new brands and new companies products under the markets, where they will be smaller lot runs.
And then you, but you're still going to have the base extraction, a large run beds as large.
Growth from from Lps in terms of the flower production start continues to come off out of the production facilities.
Okay and you are even seen that are honored snapping to like even just yesterday, we in our job there for over 50 people you're seeing that demand, we're increasing miss you have to now.
Hi, we're preparing for that right now.
Okay and then just last question just just adding onto the question on the White label pipeline.
Can you give us a sense of.
Our the CPG players that you're talking to and this pipeline starting to represent more than the traditional LP either how is that pipeline mix looking from a.
Traditional versus the new customer perspective.
Well, it's still hard it's still hard to say John because in terms of actual volumes from some of these TPG players obviously the hold their card because there just in a lot of cases and work to junior work through the discussions with them. So pretty hard for US is at this point what I, what I can say is that the volumes from back group.
We will be expected to continue to accelerate as will the number of parties in that group.
Right I think I think in some of your previous that you had you talking to 50 different potential white label customers of the 50 for example, how many of those are more mainstream CPG versus just LP, they're looking to have a white label product.
Oh I see so so you calling MLP, so I wouldn't call them LP. The theres a lot of non licensed parties in that 50, John Rasor GE companies.
So CPG companies to me I I'm thinking of the large multinational international companies when you say CPG, but theres a lot of branded companies that have limited product portfolios, but are well positioned in their markets. We have a lot of those conversations.
Okay alright, thank you.
And our next question is from David could nickel from Altacorp capital. Please proceed with your question.
Thanks, guys. So I just want to go back to talk about international bids I mean, you guys put on a really nice announcement, I guess last week or a couple of weeks ago regarding the Australian.
Deal you have in place there for medical cannabis just wanted to touch on.
How you see your strategy overall from international RV still looking it.
Having an you GMP type model from your Kalona facility and exporting that.
What does that Europe, Australia, etcetera or is there are there still ongoing opportunities that you're assessing I'm on an international basis with having some sort of physical presence.
Those regions.
Both.
So I think that the opportunity in the international market is very strong in the short term obviously as we continue to bring on are key to facility.
Do you GMP standards will be looking to get you GMP certification there in servicing as much of the international market as began to drive volumes and efficiency through that facility that just makes sense, but at the same time you have a number of ongoing conversations and in international markets, where we have the right partners and the rate distribution opportunity in the rate assets. You know there's transactions that we would look to.
Do there as well so we're really looking at from a global infrastructure and efficiency perspective, as opposed to just market by market review.
So if we can service out of Cologne and drive volumes over there and get efficiencies. We will if there's other opportunities in markets, we're not afraid to try to transact there, but whenever we do you to be clear there is no big swings in our future, we're not going to take a tick a big swing at a a large deal acquisition or something the market opportunities ours are.
Good theirs, but they're small and they're growing slower rightsize facility with the right amount of capital allocation is the way to plant.
Okay. Thanks, very much so for me.
And this we have reached end of our question and answer session and I will now turn the call back over to Tyler Robinson CEO for closing remarks.
Thank you operator.
Fiscal 2019 with pivotal for Brown, we establish ourselves as the go to partnering industry and provided our ability to execute on extraction contracts and produce high quality white label products to support our customers brand previously bound with best known as a leader and extraction, both product development and manufacturing contracts now up numbering extraction only gone.
It is clear we are much more than that our rebranding as development company reflects the company's evolution and expertise from extraction to innovation and next generation products.
Now with the major expansion of the Canadian market as well as increasing global opportunity, we are well positioned to further grow the business and build the value of the company for the shareholders before we end today's call I'd like to think all the shareholders for their ongoing support at this exciting time in our evolution with that I'll ask the operator closed one.
With that this concludes today's conference and you may disconnect. Your line at this time. Thank you for your participation.
Thanks, everyone.