Q3 2020 Earnings Call
[music].
Good afternoon, everyone and welcome to your work Canada's third quarter fiscal 2020 conference call for the three months ending March 31st 2020.
Listeners are reminded that certain matters discussed in todays conference call or answers that maybe give us a questions asked could constitute forward looking statements that are subject to the risks or uncertainties relating to or his financial future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed in a wars annual information form and other periodic filings a registration statements.
These documents may be accessed via SEDAR and Edgar databases.
Oh that Trump I never want that this call is being recorded today Thursday may 14th 2020, I'd also like to note. So we're conducting our call today from our respective remote locations as such there may be brief delays cross talk or other minor technical issues. During this call. We thank you advance for your patience and understanding I.
I would now like to introduce Mr., Michael singer interim Chief Executive Officer, and Executive Chairman of our Canada's. Please go ahead mr. singer.
Thank you and good afternoon, everybody for joining me on today's call.
With me today is Glenn <unk>, our Chief Financial Officer.
I would like to start by extending my deepest gratitude to all of our employees, who have worked incredibly hard to keep the lora fully operational throughout the cobot 19 endemic more than ever I am proud to work alongside the people who make this organization great.
As we've stated our number one priority has always been the keep our employees safe and this continues to be the foundation of all of the decisions. We make the highest measures of safety armed forces. We continue to operate and work to serve the many people who rely on our products in these challenging an unprecedented times.
I would like the first take a moment to address our response to cold at 90, our facilities in Canada and internationally continued to be fully operational and we're working closely with local national and international authorities to ensure we are following or exceeding the standard guidelines within each region.
We have taken extensive measures to maximize the safety of our employees, who have been designated essential workers in Canada and two we are incredibly grateful.
These measures include reorganizing physical layout adjusting schedules to improve physical dispensing implement the extra health screening measures for employees and applying rigorous standards for personal protective equipment.
We have also introduced a special bonus pay program for active facility based staff and we continue to maintain regular communication with government representatives suppliers customers and business partners to identify and monitor any potential risks to our ongoing operations.
Turning to the quarter, well covert 19 will likely have a greater effect on Q4, it did not materially disrupt our business in Q3, the production and sale of candidates have been recognized as the essential services across Canada, and Europe and consumer Canada sales are primarily with government bodies, which continue to offer.
End customers online ordering and home delivery.
And consumer market retail stores are generally permitted to remain open subject to adhering to the required social dispensing measures.
With that said we are pleased to report that our Canada's net revenue excluding provisions increased 15% over the prior quarter to $72.6 million.
We maintained a leading kind of this market share in key consumer categories continue to lead the Canadian medical market and we have significant share in Germany.
Our focus is to continue to gain market share and we remain well positioned to capture more share of the revenue growth in key categories overtime.
We continue to leverage our coast to coast supply agreements to offer a broad range of premium consumer and medical products across Canada.
The third quarter. The number of total active registered patients exceeding 86000 was a slight decrease compared to the second quarter, which in the face of market challenges demonstrates the value of or low risk products and patient loyalty to the Aurora family of brands.
We are pleased with the progress we made on our business transformation plan that we announced in February.
As a reminder, that plan detailed our intention to better align the business financially what the realities of the current Canada's market in Canada success here will allow us to conserve resources and still position Aurora to build a sustainable growth platform longer term.
As part of this reset we committed to an SGN a run rate of 40 million to $45 million per quarter by the end of the fiscal fourth quarter 2020, and also stated our intention to reduce capital expenditures for the second half of fiscal 2020 to below $100 million.
Let me take SGN a first.
For Q3, we had roughly $80 million of SG any expenses slightly over $5 million of R&D expense. After adjusting for severance costs. This represented a material reduction of 24% or roughly $26 million from Q2.
Results would have been even better for the period, but many cost reduction initiatives were only initiated midway through the third quarter based on our transformation plan as announced on February six therefore, a number that's more important and the one that you should all pay attention to is $60 million, which is our current SGN a anne.
R&D run rate today in Q4.
This is about a 45% reduction from Q2 to achieve these savings we targeted noncore initiatives, which Glenn can speak to.
With redemptions also realize from certain divestitures that carry heavy SGN a burden.
This progress is very encouraging and we feel very confident reiterating our intent to manage the business to an SGN a run rate of between 40 and 45 million as we exit the fourth quarter.
Now turning to Capex, which was another main pillar of our business transformation plan, we committed to to reduce spending to below $100 million for the second half of fiscal 2020. We are pleased to report that we are on track to achieved that goal. This significant reduction in cash outlay really highlight the focus of our team.
In terms of achieving our goals and underscores the fact that we are viewing all capital spending through the filter of generating near term revenues and preserving financial flexibility.
Another important takeaway here is this we have approved capital spending plans of less than 25 million for the fourth quarter, which includes LP license Amalgamations. The completion of the joint venture arrangements to co locate treatment within our Polaris facility and the completion of the first six rooms at a risk.
To produce high demand cultivars all of these projects are expected to be largely complete in the fourth quarter, allowing first quarter 2021, capex to be well below fourth quarter 2020 levels. Another key takeaway.
In summary, since announcing the business transformation plan at the beginning of February the team at Aurora has taken a number of concrete steps to put the company firmly on track to meet or exceed our previously announced targets. These steps are designed to strengthen roars balance sheet and reduce go forward costs to fuel.
And positive cash flow.
And while revenues in this current operating environment can be difficult to predict we believe there are cost labors at our disposal to put us on a path to be EBITDA positive in Q1.
We remain optimistic about our future growth potential in Canada and international.
With that overview I'd like to now turn the call over to Glenn who will discuss our Q3 financial highlights in more detail.
I will then provide a brief update on our long term growth initiatives, then we'll open up the lying to questions Glenn.
Thanks, Michael Good evening, everyone.
Firstly, I would like to Echo Michael's comments banking or employees, who have done a tremendous job navigating our company through the complications of this pandemic.
Is this level of commitment that demonstrates why we are all time to be on your heart team.
With that said well now spend a few minutes reviewing our financial results for Q3 2020.
Of course, the figures I'll be going over today can be found in our financial statements Menghini either all in Canadian dollars unless otherwise stated.
So our third quarter with 30 from January 1st the March 31st 2020, you saw our net revenue excluding provisions of two point I know I.
I mean at $78.4 million or total cannabis net revenue split provisions came in at $72.6 million for the quarter.
Again into a bit more detail during the third quarter, a Canadian medical cannabis net revenue was $27 million up and $25.6 million last quarter.
Our patient base exceeded 86000, which although down slightly quarter over quarter is indicative of our strong medical position as that market basins continued headwinds from cannibalization and consumer market.
Also challenges with prescription renewals.
As many patient Aggregators move to an online model during the pandemic.
We continue to work at maintaining and growing our market, leading position and maximizing lifetime value of acute patients.
Good news is that to date in Q4 Canadian medical revenues remained steady.
Our international medical sales increased from $1.8 million in second quarter to $4 million in Q3.
Due to the resumption of sales operations in Europe in February volume administrative permutation in Germany, similar to the Canadian market.
We expect our European business, particularly in Germany, the growth sequentially within a short term with modest expectations.
Ooh GMP certification or company received in February Kevin or River facility, which are the capacity of approximately 30000 killed on Danny.
You are able to allocate significantly more product or export market has developed.
Consumer cannabis net revenue, excluding provisions was $41.5 million up 24% from prior quarter.
In Q3, we did recorded provision of $2.9 million against revenue, which captures the impact that actual and expected returns in place adjustments for sales in prior quarters. The significant majority of provision was related products sold in calendar 2019.
During the previous quarter Q2, we did see a drop off in our market share and flower as the market shifted significantly towards value brands, which we define as retailing close to $9.
In February we launched our competitive brand in this category daily special.
Placed point average potency and pack sizes that we think are very compelling proposition for the consumer in fact, we believe it competes well with the gray market will help grow the overall size the legal segment.
Clearly be monitoring outperform tier closely.
Data from Ontario indicate the daily specialty top selling flower brand in March and April and that or other brands had the leading market share in power and overall.
Well, Ontario retail sales have been impacted by the government mandated moved curbside pickup. We are pleased with today's announcement that Ontario retail stores with outside influences will be allowed to reopen fully as soon as next week.
Our average Q3 net selling price for consumer cannabis $4.30 per gram, representing a decrease from the $4.76 reported per quarter again, primarily attributable the impact to the lower average pricing of daily specialist in the value segment.
Our medical candidates average SP increased a couple of percent as our German sales came back online.
In the quarter, we produced over 36000 kilograms of cannabis. This is as compared to approximately 31000 kilogram per quarter.
With our facility fully scaled up we have focused the last several quarters and optimizing the performance of each facilities.
For instance, or top quality flow, which has strong market demand and segments like San routes and daily Special now represents approximately three quarters of Scott production.
From just over 50% several quarters ago.
Our forecast for inventory drawdown show that our top quality for her production versus sales will reach a steady cadence over the next several quarters.
And our mid quality flower Antrim will take slightly longer than that for steady state and grown down.
Growth in product categories like the value segment special leads or a high volume play from quarter to scale and hope to top quality flawless. Other facilities are now delivered.
Taking with production from.
We also continue to innovate operationally, both inefficiency and in cultivation.
For example, planned R&D with potential new high THC cultivars is progressing nicely with several cold of our candidate showing both high yield and delivering consistently above 20% THC.
Our cash costs to produce per gram of dry Canada's improved to 85 cents per gram down three cents from the previous quarter. We're pleased that we continued to deliver a very important key metric for our operations sub one dollar cash bonus to produce this is the leverage that allows us to launch such a powerful new entry into the value market.
Staining strong healthy and sustainable margins.
In Q3, we had $80.1 million of asking expense and $5.6 million of R&D expense.
As Michael noted a teenager included $5 million of onetime termination costs related to our resort.
After adjusting for the severance costs.
As DNA and R&D combined declined about 26 million.
Dollars or 24% from second quarter.
Again, reflecting the partial quarter impacted decision taking in February but more importantly, our current run rate for us to me is about $55 million and for R&D and approximately $5 million.
Our reset was meant to current focus to the organization in the parts of our business that will deliver meaningful short and long term value as such we reduced expenses across the board, including canceling the delaying numerous information technology projects. The elimination of project the required significant external professional fees renegotiation.
Several key marketing a research contracts reduction in certain marketing programs and the elimination of headcount across all of the FTC functions.
<unk> expenses were also reduced as the result of the divestiture of several noncore subsidiaries have had low gross margins and carried at a heavy as Jimmy Burton.
This progress demonstrates our commitment to manager or positive EBITDA for Q1, 2021, including a run rate $40 million to $45 million estimate, which ounces R&D as we accept the fourth quarter of 2020.
As noted earlier this reset is particularly important in the context of the current Covance 19 environment, while the near term growth into consumer market is difficult to predict we can control our production SDMA costs.
Looking forward as an example, further reductions will come from completion of several projects by the end of June 2020.
Including the amalgamation of our four separate licensed producer legal entities held by our members Encana Matt.
We anticipate that this will provide for significant sales fulfillment and SGN efficiencies.
Another example of cost reduction accommodates the completion of our year, one Sarbanes Oxley implementation, which is consumed significant effort in external expense in the current fiscal year.
Finally, we do anticipate further Aston and reductions as we complete the profit profitability review several parts for our business.
Capex so as Michael described we committed to reducing capital investment to below $100 million in the second half of fiscal 2020 and remain on track to that goal.
Q4 capital expenditures are approved at less than $25 million.
As we stated on our February call all capital spending is reviewed parameters of generating near term returns a focus on our core businesses in the preservation of financial resources.
Turning to our balance sheet as of March 30, Onest, our consolidated cash position was $230 million compared to 156 million as of March 31st 2090.
We reduced cash use in Q3 by over $118 million from the prior quarter to just under $155 million in Q3.
We used about $55 million, our cash to fund operations 84 million for capital spending.
We had a lot of invoices from seek to aid in early Q3.
And made debt in interest payments were about $60 million.
You are relatively neutral.
On working capital with 35 million dollar increasing inventory and biological assets offset by accounts receivable accounts payable changes.
So given the continued healthy adjusted gross margins.
The reductions and asking expense and capital expenditures as described above we expect cash use in Q4 operations and Capex to decrease significantly in Q3.
In Q3, we raised approximately $206 million under our aftermarket financing program and subsequent to quarter end, we filed a new prospectus supplement to enable us to raised an additional $250 million us under this program.
In this environment, we believe that access to capital is of Paramount importance for the company and our shareholders.
We have demonstrated with our progress on the operational reset we continue to prudently manage our liquidity as we remain on track for EBITDA profitability in the first quarter fiscal 2021.
The material run rate reduction in our top apps and estimate costs should provide comfort to our investors that we are laser focused on the health of our income statement balance sheet.
It steps that are current cash position she'd be sufficient to fund operations remain in capital expenditures the points were positive EBITDA and free cash flow to achieve sustainable.
The ATM capacity protect the company and our shareholders as a backstop in a very uncertain environment.
I would now like to take moments summarize our short term outlook.
Variables associated with Cobot, 19, pandemic and the still developing Canadian consumer markets, including consumer buying behavior at each store rollout.
Led ARR to focus in the near term on market share rather than revenue targets to manage the business.
Well, we remain optimistic about the total accessible market size Canadian consumer cannabis overtime, and we were pleased with our current market share and performance in key Canadian consumer markets.
Variables described above make the short term growth of the market and our revenue expectations difficult to predict with an adequate to create precision.
As a result, and not providing fourth quarter revenue guidance at this time.
We are however, reaffirming our commitment to manage the business positive EBITDA at Q1, 2021 cents easing whatever additional cost leaders, we need to we have shown that we're well on track to that goal.
Finally earlier this week, we completed our previously announced plan to consolidate Oliver outstanding common shares in the basis of one common share for every 12 common shares than on standpoint.
Ill now turn the call back to Michael.
Thank you Glenn.
Driving the rohrich to be a profitable and robust global cannabis company is extremely important to our team. Our goal is to manage the business with a high degree of fiscal discipline, especially in the midst of a global academic.
And as our results suggest we have made significant progress since February with more progress to come.
But we also recognize that cost reduction can't be the only avenue to realizing our potential in fact as we execute our plan we're still moving forward toward some larger goals. These include the development and implementation of programs that foster organizational success.
A plan designed to increase revenues outside of Canada by prioritizing the most profitable international markets and a strategy to leverage the U.S. market targeted towards opportunities that would importantly aligned with our key objectives of the stated reset.
Finally before taking your questions. Let me update you on our search for a permanent CEO.
As announced back in February the board engaged a global search firm and launched a comprehensive search process I can confirm today that this process has advanced nicely and we remain on track with both the selection and announcement of a new permanent CEO in the next few months.
Thank you for your time I'd now like to ask the operator to open up the call for questions.
Thank you will not be conducting your question and answer session.
In the interest of time, we as you. Please ask one question and one follow up the return to the Q. If you like you. Please turn to question Q. Please press Star Award under telephone Keypad, a confirmation told would indicate your line is in the question Q you May press star to if you'd like true of your question from the Q for participants using speaker equipment, it may be necessary to pick.
Comprehensive before pressing star one and once again, we ask you as one question and one follow up.
First question is coming from Vivien Azer from Cowen and company. Your line is alive.
Hi, This is Steve schneiderman pinch hitting for Vivien today, Thanks for taking my question.
We appreciate the long term strategic rationale for focusing on market share given the uncertainty due to collaborate.
Certainly that will help ensure that your brands remain dominate relevance to support further access in the world returns to normal or horrible that's Ed how do you maintain a high degree of confidence on your profitability targets without having any more clear view of revenue development to solve for operating leverage as a complement.
To your costs coming up.
Right, Thanks, Steve and just background for everybody, Michael I or 3000 miles apart our dairy body language sanmina build the questions I'll kick them over to Michael mix of smart procreate than takes them.
Steve Yeah. So thanks for the question listen well the tiny do would be realistic in this environment and we saw Ontario few weeks Backhauls and moved to the Curbside collection announced today announcing maybe.
And even next week allow.
Access to retail stores again, so it's a very dynamic environment on the consumer side, we're confident in our medical business, we're confident in our international medical business, but we're trying to be real.
Yes, Conservative if you will on the consumer market in Canada. So as we plan forward and we control and we can compete on market share we can't.
We can't compete we can't affect the growth of the market in terms of Stuart.
On the store counts and things like that so well over the planning to plan on our business such that we have a track through to EBITDA profitability and they're pretty much any reasonable scenario might envision so to be crystal clear we have.
Operating target SGN any targets.
No we if we need to.
We can pull additional costs believers within the business.
We have committed to being deposit in Q1.
Okay, great. Thank you very much and on daily special keep talking about how much of your volumes revenues.
And from the product and have you found this did the surely incremental or has there been some level of cannibalization between that and the core award brand.
Yes. Thanks, so so listen we were eight as we've described on previous calls we were already seeing significant shift towards the the value segment and then the premium segments there seems to remain intact.
And if you've talked a downturn in charge of our marketing in saying that the new core segment is the value segment Theres, a theres a middle of the market. There seems to have narrow quite significantly so and we think about cannibalization I'm not sure that we actually think cannibalization I think for just seems shipped to value.
With premium still playing well so in our brands the T sand rockdale still strong.
We see the launch of daily special as being.
Mainly incremental but also necessary to compete and lets now becoming significant part of the market Im just a little further in daily special It was launched as I said with a strong price point.
Consistently high.
We see and larger pack sizes. So I think we're also starting to see Steve is some shift from above market. These are at prices as far as we can tell a very competitive I look black market and certainly in pack sizes, which tends to.
So we're seeing larger demand for the 15 in 28 Gram pack sizes.
Thank you. Our next question today is coming from Michael Lavery from Piper Jaffray. Your line is that right.
Hi, Thank you.
Just was curious if you can dissect the quarter, a little bit more and you had mentioned last quarter you thought you.
Sales might be a little more in line, excluding allowances and certainly saw pickup from that I could you just give us.
Some sense of what the key drivers were relative to your expectations and maybe how much of Oh I'm part of the equation was the derivative 2.0 products.
Yeah sure.
So listen.
Our medical markets, both Canadian internationally performed well, but but in line with our expectations. The consumer marketing, Canada. Obviously is hard to predict we did see what we think with some pantry loading in March.
With the analysts depend MX and people started into.
Stay at home and load up a little bit but that was also that in March was also when we saw the impact of their daily special and.
In in terms of.
Data that we can digital and March our daily special in Ontario, and 9% of the flower Mart loans coming from zero percent two quarters ago. So we saw a couple things kind of hitting have probably.
More successful than we'd expected with daily special and certainly hope for anthem pantry loading in March and April we've seen a little bit of a reversion to the pre pandemic sort of ordering levels, but I think that was relative to our expectations on March and particularly the latter part of March items outperformed our expectations.
Yes.
That's helpful and just a follow up on daily Special can you give a sense it sounds like it's both performing.
Better than you had thought obviously, some pantry loading as as part of that probably but you also mentioned that thats till after the prepared remarks about just how focus you are on market share. How do you think about this brand going forward is at one you might even consider pushing harder on price or is it positions kind of the way you want them and if and when you say you're pushing.
Thank you are willing or thinking about pushing harder on share. It's it's more the same just just riding it out.
Oh.
Oh, I'm really pleased and I'm quite honestly I mentioned, 9% in April looks like as close to 13% of the power market, Ontario. So it's a bit we're pleased with the performance we need to protect that were there are pricing seems to be.
Pretty strong right now there are entrance, but route.
In March and April we've seen increasing share so so.
No immediate.
Issues with pricing and as we said earlier, we think it's now a product.
Number different characters to very competitive with the black market.
So.
Marketshare, let's let's be clear, we do have internal revenue targets. There. They are for our sales team to strive to hit.
But which we plan the business over the next couple of quarters Weve recognized that that's inherently difficult to predict.
So we just need to be cautious. So you don't the short term you need to protect our market share and then make sure that weve right sized the business to to get to EBITDA profitability.
Thanks.
Thank you next question three is coming from David could decoupled from Altacorp capital. Your line is now live.
Hi, Thanks for taking my question and congratulations on the quarter I just want to go back for a second two year derivative products I know Glenn you mentioned in your prepared remarks at a one of your your top selling products general fail.
From a flower side, how should we think of derivative products just doesn't overall revenue mix given just wasn't worth thinking about margins and how a derivative products represent.
Overall margin shares compared to flower products.
Yeah. So a couple of things there and that could start with and then Michael appeased, if anything to add.
2.0 products as you know we launched across a broad.
As of categories in December and our first of the gate to hit most of the major categories and with exception of beverage.
In December and we've learned since then.
Continued to pivot the organization to focus on those areas, where we havent yet see.
We're not running into the limits of demand so certainly hands on base becomes a gummies as well so.
Yeah that that's going to be a quarter kill that 2.0, there are a lot of players that when I look at market share San Ontario, It's distributed we're doing well, but it is distributed across a number.
Products.
In terms of our portfolio right now at flowers still by far the dominant percentage of what we sell and what we've seen in the space more mature markets, that's going to continue to be.
The situation.
We do expect 2.0 products to grow over time and certainly there are several if we tested we're scaling up a couple of them the.
Internal manufacturing capabilities on those products, where we think there's considerable.
Untapped consumer demand still.
Test the we tried to test the limits of better demand. So thats something that we'll continue to to be nimble long I think Dave over the next.
Over quarters, as we learn more like a concern.
Yes, I think that speaks well as well I mean in your prepared remarks, you were mentioning how premium type products like San route are doing well. Okay. That's helpful. My next question and last question really shifting from Canada now to international with co bids going on now.
No I get that you GMP certification in German distribution, but over and above Germany, and maybe Germany is included.
In this next question how do you think overall medical cannabis with regulators across the World now is going I mean is it slowed down is it binion increase like what does the appetite for candidates legalization, whether its medical likely medical or even recreational but slightly medical just across the world now with cold it.
Yes, that's an interesting question and difficult to due course.
To know back our regulators are reacting to assess as we haven't really seen any kind of slowdown in the business in Europe. In fact, there $4 million that we reported in quarter two.
Remember roughly a partial quarter for Germany for these are sustainable step forward for them. When they came back from the business and the only real impact I've seen or that I'm aware of it just the quarters from your dealers governments and regulators and people are working from home if processes get slowed down so.
Whether it's so tenders in various countries will provide us kind of slowed down but I don't think any of US belief has a long term momentum is it still there. It's just stuck in a short term is taking longer to get us.
Paperwork three regulators.
That's probably true, but tencent impacted our revenues.
Currently.
Thank you.
Thank you next question is coming from Johns Amparo from CBC. Your line is that a lot.
Okay, great. Thank you very much good evening.
I wanted to ask with the goal of getting to EBITDA positive by Q1.
Specifically about on your on the Ontario store.
Fronts any new growth is slowed significantly in existing stores or are restricted granted you mentioned in the open next week, but does that create incremental risk on achieving your goal and and I. Appreciate all the Colorado, Ontario performance, but can you talk to your performance outside of Ontario late both both in the quarter in subsequent.
Yeah, I'll start with that needs would be my hope to that but I listen we talked about on carrier to this one of the places are going to one of the larger provinces, where we actually get a complete dataset that includes their competitors, we don't normally get that from some other provinces, so that we and and our peers tend to focus.
On data coming out of Ontario, we're doing well in the other provinces are quite satisfied with our performance in all the major provinces. So in my comments around Daily Special Awards for our Gummies and things like that I think you can apply that across Canada or replace pickup meeting sharing in most.
The most categories in most parts in most major provinces.
All right and if you repeat tell us but your question.
Sure, the Ontario store closures and restrictions Oh, I think it adds at rest of the EBITDA goal or is there enough leaders on us unit.
Yes, so listen as we kind of looked at.
Yes, Q1, we've got a plan to get the EBITDA positive and Theres no growth than there is a further plan. We've said, we'll pull more leaders book homeowners anchors, we need to get there it's.
It's turnover of is called speed to achieve we've got we had a pretty healthy quarter was certainly a step forward and biddable turnaround from the last couple of quarters positioned properly.
We're just being cautious on the revenue on the said, but we do have a good solid base medical business and when I think we've got elements top and consumer performance as well so we will.
Monitor revenue and if it looks like the need to do.
Do more than will keep more.
But we certainly have a plan to clear plan from from here to Q1.
Okay. Thanks, and then on the inventory side I'm, just trying to square production versus sales and I think this is probably true the entire industry, but but you produced about 36000, even with fairly material revenue growth you sold about 13000, I know you give some details on sales velocity, but can you maybe elaborate on those.
More broadly how should we think about your production versus sales over the next few quarters.
Yes, so a couple of things going on there one thing I mentioned briefly but it's very important is that we have really been fine tuning our our facilities and so its guy are producing the top quality flower.
So that was potency and consistent sort of experience where the consumer.
Sort of thing you're going to putting divided into jar and deliver to consumer.
That that coming out of spine has gone from the mid Fiftys percentages up in delayed up into the seventies percentages now in huge shift in terms of turning out there.
The type of product that is in high demand. It goes into daily special key the daily special is delivering.
On a great experience and a high potency, but add to it at a very compelling price. So so it's been very important to have that shift and so the more of that we haven't read we don't think we've seen that the anywhere near the talk about demand. So there's been important to get more so as we look forward and project with those.
With those new efficiencies in place in terms of the type of product, where we're taking into the organization. We see that there will we will get into that steady cadence of the volume sold versus the volume being produced on that top quality power over the next couple of quarters and continue to drive down on that.
For the inventory.
For the this stuff that goes back into other products and sometimes it's just may be.
So really a smoke product that the pre roll or things that are still quality. Both in early may be smaller buys or a trim that'll take a couple more quarters code to grind down the inventory.
Cadence a lot of that will.
Is it related with the growth the 2.0 products as well so we're satisfied with where we are where we're out on that and pay close attention to it but again, but no change to producing the talk coffee flowers has been very important giving us confidence as if the product that will move out into the market in reasonable period of time, it's import.
And for a play like daily special with a high volume low price great experience play.
We need to operate at volumes to get those scale efficiencies you know, it's kind of a stepwise function on costs and so keeping us scale up keeps across the produce so it was critical to generate product over the Saudis this call.
Thank you next question today is coming from problems learning from Cantor Fitzgerald. Your line is that a lot.
Thank you a bundle.
Just one question.
The way to interpret the market when you announced you an ATM we meet April.
I Wonder if you're doing and orders just just talk to get shipped no down 50% over the last month and assumption that you would use for all of it and do how about 30 or more a person dilution.
No indication today into your prepared remarks, you the quantitative back stope. So can you just to clarify maybe can you repeat what you said if you are able to delivering you of course Guardian targets and lower Capex as you have on even if sales remain at a steady state where do you already know you wouldn't leave you with no need to dumped.
Turning to rainy day facility those are the ones have been go there, but you know your should've been reflected pretty much 50% dilution from the ATM facility. So just just if you want to like maybe we'd be able to clarify that context. Thank you.
Let me address to kind of a couple of specific points that Michael can talk kind of big picture with the way, we think about the business, but yes listen I think we've got a because we've actually demonstrated to you into the market that we have been able to reduce the cost structure. This organization significantly in the capex significantly and that will continue to do so.
We've got more confidence.
Our ability to to get up.
EBITDA profitability, but more importantly, a cash flow positive.
Over the near term so as we sit here today, we believe to cash in hand should give us there, but in this environment. We've seen it with all the major public companies and you got to have access to capital. So whether we saw major companies pulling down on an off all their lines of credit and put in bank whatever we believe that this is.
Similar so I hear you, but I think we've got more confidence with the state of our business as we stand here and proving number.
And having its still pretty I think solid revenue performance. So.
We do look at it is critical Backstopping are very uncertain time, but Michael maybe I think it's we're just some big picture comments in the state of our business.
Well certainly so look I think the consistent with what we had previously announced initiatives in advance. So obviously, our recently just refreshing. The current ATM. We had said is part of our resets that we were going to.
Leverage the initial ATM to raise approximately $200 million in order to fund the gap I'm getting us to EBITDA profitability and so we still believe that could be the case today and you saw the from our cash position that we just announced today 230 million. We believe as as noted by Glenn that that is sufficient cash.
Capital to get us to the right outcome.
We put in place the new ATM in April a really as a prudent measure in this environment. It's uncertain. We don't know the length some of which could will continue to survive, but I'm not even though we don't expect that we will need to tap into that ATM, we havent there as a measure just to protect the.
Business and our investors in the event that you know this uncertain environment continues for an extended period of time. So we feel confident that we I think are positioned well today, but I think you know as as good operators, we want to sort of pretax the company for the long term and I think putting that.
Additionally, our refreshed ATM in place just gives us the added level of protection that gives us comfort that we couldn't really aggressively as you know.
I'm, sorry business based on that we set plant.
Understood. That's very helpful. Just a quick follow up obviously youre going to Canadian market in Greg you gave us the numbers on the international side, just going back there can you frame you know the opportunity a year out.
We've been hearing about only six yourself in patients in Germany seems that demand market overseas right now is germany onto the use of focusing there right.
I suspect compressed just some quoted in context, and even how to model that I think in the jewelry goal. This year that could be about 25% doing business. So just just some deals you talked all very high market share but.
Other people seem to make a seamless claims with even more sales on would you have reporting but just some more color. Please thanks.
Well, yeah, let's be clear in around 25% of somebody's business, that's a small Canadian businesses not the same and thoughts right. So so weird with $4 million of revenue in Europe for a partial quarter. I think is one of the in one of the Lady performances for cannabis mill talking about any other types of revenue ducts in Canada. So.
So our medical Canada business International strong it we all know, saying this is different than a couple of years of either slower developing markets.
But there are European market that we're you know and im not going to.
Predict revenues, but we are exporting into compete like Poland and those sorts of things that are new market again, we're just going be prudent to expect slow so growth.
Latin America, you just see Brazil opening up.
Yeah.
Nearly a CBD medical market, but again, you know as Michael said.
They are prudent with our capital.
Any market or we can enter the market is a significant market opportunity and delivers near term revenues and bottom line. So no losses. Please.
Capital.
That those markets, we're looking in answering but but when you model these and they're definitely I mean.
Conservative with it May international stuff within that just expect some upsides along the way.
Thank you.
Thank goodness question today is coming from Adam Buckman from Scotiabank. Your line is our lives.
Hi, good evening, Thanks for taking my question.
So I just wanted to dig a little deeper into a 2.0 market dynamics. So looks like you guys generated about 5.6 million in cannabis 2.0 revenues in the quarter.
It's been pretty highly televised that Lps have had issues keeping products on the shelves. So first could you touch on your manufacturing capacity in the 2.0 market and maybe how it's a change since you first launch and then maybe how much of a drag that might have been in Q1 versus where it will be inc.'s keep Clark.
Calendar Q1 versus calendar Q2.
Now, let's start that so listen.
Much like in the launch of 1.0 scaling up manufacturing processes is not without its challenges and we certainly had those and continue to overcome them.
What we've done though as we kind of did launch I say prudently and a number and then then looked for consumer reaction to.
Types of products were offering pricing things like that so no. The currently doing now scaling up.
Several of them yeah categories, if you're well aware, we think there is significant consumer potential.
Michael to give any comment on that kind of a 2.0 market kind of where we're going from operations well. It's certainly so I guess, what I can add as well.
As time goes on we gain a greater level of knowledge in terms of demand and where we see the market going and I think as Glenn noted, we continue to optimize a very innovative product pipeline.
We're really going to focus on profitable skews and skews certainly that are going to help what we believed to bridge the difference between getting the supply to meet demand.
So it you know I think we came out.
Came out of the gate with a significant number of skews just not knowing where we were going to see.
The consumer sort of.
If you want the man.
We've learnt a lot and so we're really are taking those learnings and really going to refine that the areas, where we truly see I'm an opportunity for for profitable at scale is going forward.
Okay. Thanks.
And then secondly, just on working cap.
So.
Moving forward I think you've got kind of indicated that you should see level similar to this quarter can you maybe talk about the puts and takes from a working cap standpoint for the next couple of quarters, and how you're going to keep that in sort of neutral sort of place had it was this quarter.
Yes, so listen I think.
The big Walkley for us over the last couple of quarters, if you will or the driving working capital has been the build of inventory. So as a them described a little bit earlier, we do see.
Certainly.
Our brands like they were essential consumes a lot more volume and say a sand rap brand does the game out in a much lower price point.
So that's a volume play and its consuming more so thanks.
As we see our are the consumption or the sales volume starting to normalize with our production I will start to see that inventory the investment in working capital are investing inventory.
Starting to come down so that kind of what we expect over the next couple of quarters.
The rest of it.
You know ATM they are kind of stabilized now.
Collect from government.
Synergies to steady cadence on that.
He's pretty steady as well.
Okay, great. Thanks.
Yeah.
Yes.
Take our next question today is coming from John to from diesel Gen capital markets provided a lot.
Hi, good again.
So I just wanted to kind of keep pressing on the leaders that you have they reached the positive EBITDA so as to sales.
Become weak because of Colgate and riposte.
Well the situation.
Could you, maybe you're going to pull on those SGN easy or is it but are you can be cutting to the bare bones to the point, where at some point that SGN. They ask you name I was going to have team.
Bounce back in order to add.
Drawl growth going forward.
Yes, so it's a challenging question right. So.
I think ticket personal opinion.
We've seen.
Quite impact from coal with and have delivered some pretty good revenues and as I said earlier in my remarks medical sales go theme strongly understandably cautious on the consumer side. So.
I don't want to go too far on that we will do what it takes to get to positive EBITDA.
But I.
After Sallie I mean, I'm not expecting that we would have to cut to a point, where we've put our long term growth.
Risk.
And that's not my expectation.
Okay and.
Just wanted to touch a bit more on the 2.0.
So it sounds like you've got enough data then you are comfortable that you have enough data accumulated.
To know what skews your you need to ramp up on.
And you are doing that as we speak rain out.
Or do you still need to collect a little more data to have a better understand.
No thats right. So the major categories, we you know.
Where we are doing quite well and where we think there's still significant.
Demand we haven't.
M&A will find anywhere near that.
The topic that demand so that's.
Yes.
Is being wrapped up right now some of it has been ramped up or at least scaled up some of those operations and others.
There's a little bit more accounts, so some of the capital in Q4.
Was related to that there the modest amounts, but there are there still important in terms of turning out more of those product categories.
Thanks. Good. Our next question today is coming from Gram Cracker there from a capital your line is now right.
Yeah, Hi, Thanks for taking my question I'm, just one question here, Michael you mentioned towards the end of the prepared remarks.
About a other frontiers of growth in particular I mentioned, the U.S. market. So I was just wondering I mean, we've seen a backdrop of a lot of your competitors on scaling back investment in that market, particularly on the CBD side.
If not sort of talking down on expectations for for and transfer or how competitive they're looking to be in terms of that the near and medium term. So I'm wondering when you mentioned that market what sort of time horizon are you looking at as that for a potential avenue for growth.
And does it extend.
Keeping in mind, Pat it would be something that has to be federally Regal is it just a CBD Avenue there or is there potential other business streams or you could see growth there. Thank you.
Oh, it's a good question I think you know that's a market that is just and we've said this before just too big to ignore and so we've got our eye on that market and we're continuing to explore opportunities that you know that are going to be without a doubt have to sort of aligned with our reset plan and our stated objectives.
You know we you know we're limited in what we can do and under the current environment in the U.S.. So obviously it can't touch THC, but we see CBD CBD is as our tremendous growth opportunity and it's something that I think we are little more focused on and so looking for opportunities that we think would be complementary to our business.
Late needs to be accretive.
And you know given our focus on our own balance sheet, certainly has to be something where we are confident that we're not going to have to dig into our pocket I'm to leverage you know that opportunity. So you know I think we're excited about some of the opportunities. We're we're identifying and I think you know to your question about when we anticipate maybe.
Potentially looking at an opportunity in the last I would say certainly this year is certainly.
A window of opportunity for us and it's something that would I think we're more focused on them. We have been historically again with a lens on ensuring the task that fit for an aligned with our current reset.
I'll just add a little thanks for that in turn Yep question about our competitors.
Isnt, Unlike Canada, where most of the Lps grew up playing in the entire value chain from from company in a cultivation CJ through the distribution.
That's not true we don't need to do that in the U.S. and what I've seen some people pulling back and saying well why are we in hemp oil we don't help.
Things like that so just to just.
Kind of put this in context, if somebody pulling back from the market. It may just be part of the value chain that doesn't necessarily make sense, if they've learned about the market.
And we've certainly taking our time to understand our markets thoroughly understand where we think long term volume we created there and you don't need to plan all value chain.
Okay, Thanks, and just to follow up when you're discussing the timing of this year being a window of opportunity do you look at under the assumption that the regulatory environment stays as is which I would categorize it as that kind of grabbing that the current moment in time or does that assume that you're going to see some incremental progress.
Either on the regulatory environment or just in terms of at various points of distribution or certain states sort of jumping ahead of that and giving you smart clarity there. Thank you.
So I guess I'll take that Glenn So I guess, you know, we don't anticipate any material regulatory changes. So I think the opportunities, we're looking at or or with the idea that we don't expect those changes to occur certainly in 2020.
And I think the thinking there is you know we're exploring opportunities in advance of that regulatory change because you know, but the landscape is going to begin and probably competition very different.
You know on an announcement of some type of regulatory change in the U.S. So.
We want to get out in front of that and again I think looking at opportunities that we think is going to fit our our desired path which is.
And with an eye on profitability.
And continuing to strengthen our balance sheet and so we feel.
You know excited about.
Opportunity south of the border and well certainly pay attention to some of those opportunities in the coming months.
Thank you go next question today is coming from Doug NIM from RBC capital markets. Your line is not alive.
Thank you Hi, Doug.
First question just has to do with the some of the ordering patterns that you may be seeing coming provinces are short term multiple parties, even you shops that started off slow smaller orders.
Have you seen order size is increasing in terms of size, but perhaps frequency has dropped off.
And with the Kobin situation and could you comment on that.
Okay. So so listen I'm, just actually asked that question them or sales team yesterday, and you're not seeing the fee the ordering sizes pick up with the exception of you know those places where the provinces are getting more confident so they're really as you might expect with some people that pretty sophisticated at.
Caramel and now applying that to cannabis, where theyre seeing that they actually have great sell through they are their course ordered more of that product, but they're managing two specific inventory level that they want a hole. So I think the order patterns are reflecting nine in some of the amount that they're going to order is going to reflecting.
I'll quickly in Colombo, they don't want to get common same situation that.
In may.
29 team.
Too much on hand them.
LP to one that either so.
So thats why we had the minute, yes, right, but has there been any change in the last lets say month or two.
No not that I've been told 'em.
Certainly as they say you know they're ordering we've talked about the start it started to ship last year, and if anything or 2.0, they're just they're very.
That's very sophisticated now so we haven't really noticed anything with the code but.
It.
He has been a significant shift from what they were the trends were already seeing.
Thank you very short of our question answer session I turn the floor back over to management for any further or closing comments.
Well I just wanted to thank everybody for obviously, taking the time to ER to join our conference call. Once again, a this company is laser focused on.
On controlling the things that you know that we can and that is our reset plan was aimed at removing complexity out of our business and.
Reducing cost to a level that was consistent where we believe the business to be today within obviously, a lens on an ability to scale that up if and when we see the market changes, but we're very confident in you know when the changes and the measures that we've taken to get us to where we are today the jobs not done.
We have the balance of this quarter, just sort of get everything in line to ensure that we're going to deliver on our key objectives going into Q on Q1, 2021, and so the team has been incredibly focused.
Incredibly motivated to ensure that we meet this target and I, obviously want to thank the team and all of our employees for being incredibly supportive of.
You know this this in this important focus of the organization.
No were more disciplined as an organization than ever before and you know all the decisions. We make are certainly with the lens of.
Your term value in bringing true value to our investors and so you're going to see that as we go forward.
I'm excited about further updates that we're going to provide the market and of course, our investors as we go forward. So thank you very much for joining.
Thank you that Crusade teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.