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 remind you that certain matters discussed in todays conference call for answers that maybe give us a questions asked could constitute forward looking statements that are subject to the risks or uncertainties relating to wars financial.
Your 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 it registration statements.
These documents may be accessed via SEDAR and Edgar databases.
Well they 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 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, but 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 Aurora fully operational throughout the cobot 19 and that.
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 to 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 falling 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 layouts, adjusting schedules to improve physical distancing implementing extra health screening measures for employees and apply rigorous standards for personal protective equipment.
We have also introduced a special bonus paid 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 cobot 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 essential services across Canada, and Europe and consumer Canada sales are primarily with government bodies, which continue to offer.
And customers online ordering and home delivery.
And consumer market retail stores are generally permitted to remain open subject to adhering to the required social distancing measures.
With that said we are pleased to report that our cannabis net revenue excluding provisions increased 15% over the prior quarter to $72.6 million.
We maintained a leading kind of its 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 at premium consumer and medical products across Canada.
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 a 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 expense and 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 its $60 million, which is our current SGN a anne.
R&D run rate today in Q4.
This isn't about a 45% reduction from Q2 to achieve these savings we targeted non core initiatives, which Glenn can speak to.
With reductions 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 NSG in 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 reduce spending to below $100 million for the second half of fiscal 2020. We are pleased to report that we are on track to achieve that cool. This significant reduction in cash outlay really highlights the focus of our team and term.
As 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 recent.
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 profitability.
And positive cash flow.
And while revenues in this current operating environment can be difficult to predict we believe there are cost levers 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 line 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 panda.
Is this level of commitment demonstrates why we are all proud 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 last quarter with vary from January 1st March 31st 2020, we saw our net revenue excluding provisions of two point I know.
I mean at $78.4 million or total cannabis net revenues was provisions came in at $72.6 million quarter.
Again into a bit more detail during the third quarter or Canadian medical cannabis net revenue was $27 million up from $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 and 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 falling in administrative permutation in Germany similar to the Canadian market expect our European business, particularly in Germany, the growth sequentially letting the short term with modest expectations.
I think you GMP certification or company received in February Kevin or River facility, which has the capacity of approximately 30000 Tilda Danny.
You are able to allocate significantly more product to 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 or sales in prior quarters. The significant majority of this provision was related products sold in calendar 2019.
During the previous quarter Q2, we did see a drop off in our market share in flower as the market shifted significantly towards value brands, which we define as retailing less than $9.
In February we launched our competitive brand in this category daily special and price 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 site legal segment.
So clearly do 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 or dollars in some sense pogrom, 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.
The 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 facilities fully scaled up we're focused the last several quarters on 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 started 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 drawdown.
Growth in product categories like the value segment, the daily special leads or a high volume play from quarter to scale and output top quality flowers as our facilities are now delivered.
Kicking 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 cost of our candidate showing both high yield and delivering consistently above 20% THC.
Our cash cost of today's program of dry cannabis improved to 85 cents per gram down three cents from the previous quarter. We're pleased that we continued to deliver on 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.
Turning 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 reset.
After adjusting for these severance costs.
SDMA and R&D combined declined about 26 million.
Dollars or 24% from second quarter.
Again, reflecting the partial quarter impacted decisions taken in February but more importantly, our current run rate for asking me below $55 million and for R&D at approximately $5 million.
Our reset was meant to focus to the organization in the parts of our business that will deliver meaningful short and long term volumes as such we reduced expenses across the board, including canceling are doing numerous information technology projects. The elimination of budgets are required significant external professional fees renegotiation.
Several key marketing research contracts reduction in certain marketing programs and the elimination of headcount across all of the FTD functions.
<unk> expenses were also reduced as the result of the divestiture of several noncore subsidiaries that had low gross margins and carried at a heavy as Jamie burden.
This progress demonstrates our commitment to manager or positive EBITDA for Q1, 2021, including a run rate $40 million to $45 million estimate, which now includes R&D as we exit the fourth quarter of 2020.
As noted earlier this reset is particularly important in the context of the current coded 19 environment, while the near term growth to the consumer market is difficult to predict we can control or production units to remain 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 but Aurora methods Encana Matt.
We anticipate that this will provide for significant sales fulfillment in 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 sta reductions as we complete the profit profitability review several parts of 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 with parameters of generating near term returns a focus on our core businesses in the preservation of financial resources.
Okay.
Turning to our balance sheet as of March 30, Onest, our consolidated cash position was $230 million.
To the 156 million as of March 30, Onest 2019.
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 that cash to fund operations 84 million for capital spending.
We had a lot of invoices from cetane or two three.
And made debt in interest payments of about $16 million.
We were 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 from Q3.
In Q3, we raised approximately $206 million under our aftermarket financing program.
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 as we've 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 Capex and estimated costs should provide comfort to our investors that we are laser focused on the health of our income statement balance sheet.
It's steps that are current cash position she'd be sufficient to fund operations remain and capital expenditures the points were positive EBITDA and free cash flow achieved and 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.
As variables associated with cobot banking pandemic, and the still developing Canadian consumer markets, including consumer buying behavior at each store rollout.
I've 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 key Canadian consumer markets.
And 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 in Q1 2021, even whatever additional cost leaders, we need to have shown that we're well on track to that goal.
Finally earlier this week, we completed our previously announced plan to consolidate all of our outstanding common shares in the basis of one common share for every 12 common shares outstanding.
I'll now turn the call back to Michael.
Thank you Glenn.
Driver 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 mix of a global and dynamic.
And as our results suggest we have made significant progress since February with more progress to comp.
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 plant.
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 at 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.
And the interest of time, we as you. Please ask one question and one follow up the return to the Q. If you like you placed into 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 to remove your question from the Q for participants using speaker equipment that 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 gave 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 irrelevant 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 a more clear view revenue development to solve for operating leverage as a complement.
To your cost going up.
Right, Thanks, Steve and just background for everybody, Michael I or 3000 miles apart or to reap body language. So I'm going to build the question, though kick them over to Michael If it's Mark proclivity takes them.
Steve Yeah. So thanks for the question listen well the tiny do would be realistic in this environment. We saw Ontario few weeks backhaul thing to the Curbside collection announced today announcing maybe and also maybe even next week allow.
And 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.
Store counts and things like that so while we plan 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 and SGN any targets.
No. We if we need to weaken bowl additional cost numbers within the business, we have tremendous being deposit in Q1.
Okay, great. Thank you very much and on daily special keep talking about how much of your volumes revenues came from the product and have you found this to be surely incremental or has there been some level of cannibalization between that and the costs.
Sure Award brand.
Yes. Thanks, so so listen we've 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 darn who's in charge of our marketing and saying that the new core segment is the value segment Theres a in the middle of the market. There seems to have narrow quite significantly. So when we think about cannibalization I'm not sure that we actually think cannibalization I think for just seems shipped to value.
Premium still playing well so in our brands, we see San Rockdale still strong.
Then we see the launch of daily special as being.
Mainly incremental but also necessary to compete in what is now becoming significant part of the market Im just a little further and daily special It was launched as I said with a strong price point.
Consistently high potency and larger pack sizes. So I think we're also starting to see Steve is some shift from the BOP methods to either at prices as far as we can tell a very competitive I look black market, and certainly pack sizes, which tends to.
We were seeing larger demand for the 15 28.
Pack sizes.
Thank you. Our next question today is coming from Michael Lavery from Piper Jaffray. Your line is that right.
Thank you.
Just was curious if you could dissect the quarter, a little bit more and you had mentioned last quarter you thought.
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 a.
Part of the equation was the derivative 2.0 products.
Yeah sure.
So listen.
Our medical markets will Canadian and international performed well, but but in line with our expectations the consumer marketing, Canada office and it's hard to predict we did see what we think with some pantry loading in March.
With the analysts depend MX and people start into kind of stay at home.
Showed up a little bit but that was also that in March was also on the saw the impact of their daily special and you know in in terms of.
Data that we continue in March as daily special in Ontario, and 9% of the flowers market 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 expectations.
March and particularly the latter part of March outperformed our expectations.
That's helpful and just to 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 a part of that probably but.
You also mentioned that's 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 thinking are willing or thinking about pushing harder on share. It's it's more the thing.
And just just riding it out.
Hello, 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.
Our pricing seems to be.
Pretty strong right now there are entrance, but Rick.
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 in a number different characters to very competitive with the black markets. So.
Market share, let's let's be clear, we do have internal revenue targets there there for our sales team to strive to hit.
We plan to business over the next couple of quarters, we recognize 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 that go from Altacorp capital. Your line is that alive.
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. It one of your your top selling product seminar fail.
Can you comment a flower side, how should we think of derivative products just doesn't overall revenue mix given just when we're thinking about margins and how derivative products represent.
Overall margin shares compared to flower products.
Yes.
Yes, so a couple of things there on that could start with and then Michael a piece of anything to add.
2.0 products as you know we launched across a broad.
As of categories in December and our first out of the gate and hit most of the major categories and with the exception the beverage.
In December and we've learned since then.
Yeah 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 good to be a crowded scale that 2.0, there are a lot of players that when I look at market shares in Ontario, It's distributed we're doing well, but it is distributed across a number.
Products.
In terms of our portfolio right now or is still by far the dominant percentage of what we sell and what we've seen in the state more mature markets, that's going to continue to be.
The situation.
We do expect 2.0 products to grow over time and certainly this everywhere. 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.
The test we try to test the elements of the demand. So thats something that will continue to to be nimble long I think Dave over the next number 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 the new 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.
It's going I mean is it slowed down has it been increase like what is the appetite for candidates legalization, whether its medical likely medical or even recreational but slightly medical just across the world now with cobot.
Yeah, that's an interesting question and difficult to due course.
To know back our regulators are reacting to step as we haven't really seen any kind of slowdown in the business in Europe. In fact, there are $4 million that we reported in quarter.
Remember only 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 when you're dealing with governments and regulators and people are working from home that the processes get slowed down so whether it's so tenders in in various countries will come to that thats kind of slowed down, but I don't think any of us belief with a long term momentum is.
Still there, it's just kind of short term is taking longer to gifts.
Paperwork three regulators, but that's probably true with Tencent impacted our revenues.
Currently.
Thank you.
Thank you next question is coming from Johns Amparo from CBC. Your line is not alive.
Again, great. Thank you very much good evening.
I wanted to ask what the goal of getting to EBITDA positive by Q1.
And specifically about omni upon the Ontario store a front I mean, new growth is slowed significantly in existing stores or are restricted granted you mentioned they may open next week, but does that create incremental risk on achieving your goal and and I. Appreciate all the color on on Ontario performance, but can you talk to your performance outside.
The Ontario of late both within the quarter in subsequent.
Yeah, I'll start with that needs to be Michael for that but I listen we talked about on carrier because 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 from other provinces. So look we end and our peers tend to focus on data coming out.
Ontario, we're doing well in the other provinces are quite satisfied with our performance in all the major provinces. So my comments around Daily Special Awards for our Gummies and things like that I think you can apply that.
Across Canada, where we play pickup meeting.
In most most categories in most parts in most major provinces.
Right and if you repeat so Aspen your question.
Sure, the Ontario store closures and restrictions Oh I could ask at rest of the EBITDA goal or is there enough leaders on yesterday.
Yes, so listen as we kind of looked at.
Q1, we've got a plan to get the EBITDA positive and if there is no growth than there was a further plan. We said, we'll pull more leaders book homeowners anchors, we need to get there if.
It's turnover of those calls speed to achieve we've got we had a pretty healthy quarter was certainly a step forward and bit of a turnaround from the last couple of quarters and yet positioned properly.
Or just being cautious on the revenue lines that said, we do have a good solid base medical business and when I think with 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 cleared plan from some similar 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 the entire industry, but but you produced about 36000, even with fairly material revenue growth. We 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 the consumer.
That that coming out of spine has gone from the mid Fiftys percentages up and built up into the seven these percentages now huge shift in terms of turning efforts. The type of product that is in high demand. It goes into it daily special key the daily special is delivering.
On a great experience and a high potency, but at a but at a very compelling price. So so it's been very important to have that shift and so the more of that we have been we've we don't think we've seen that the anywhere near the top of that demand. So it'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 flower 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.
Really a smoke product that the pre roll or things that are still quality. Both in early may be smaller bonds or a trim.
It'll take a couple more quarters, so to grind down the inventory.
Cadence lot of that well.
Related with the growth of 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.
Changed pretty fun to talk coffee flowers, and very important for giving us confidence is the product that will move out into the market in reasonable period of time, it's important for a play like daily Special is a high volume low price great experienced quake, 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 a scale up keep their costs to produce so is critical to generate product over the saudis this call.
Thank you. My next question today is coming from problems learning from Cantor Fitzgerald. Your line is that a lot.
Thank you a bundle.
Hi, just one question.
You know the wage rate interpret the market when you announce your ATM meet April.
I Wonder if you're doing a lot of she is just talked we shipped no down 30% over the last month and assumption that you would use for all of it you would have about 30 or more a person dilution.
No end the call today into your prepared remarks, you the qualitative back stope. So can you just to clarify maybe can you repeat what you said.
If you are able to delivering your cost cutting targets on the World Cup exposure you have a new any sales remain at a steady state where do you out right. Now you will need you will need to double that facility I understand it's a rainy day facility those are the ones of them go there.
Your share price 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. Thanks.
But let me address to come in a couple of specific points and then Michael can talk kind of big picture with the way, we think about the business but.
Yes, listen I think you've got because we've actually demonstrated to you into the market that weve 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 of our ability to to get to that.
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 guys have access to capital. So whether we saw major companies pulling down on and off all their lines of credit and putting 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.
Having no still pretty I think solid revenue performance so.
We do look at it is critical backstop in a very uncertain time, but Michael maybe I think it's we're just 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 it's part of our reset 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 that 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 really as a prudent measure in this environment. You know it's uncertain. We don't know the length some of which a cold it 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.
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 can really aggressively.
Advance our business based on that we set plant.
Understood. That's very helpful. Just a quick follow up obviously, you and growing the Canadian market in Greg you gave us a numbers on the international side, just going back there can you frame the opportunity a year out.
We've been hearing about only six yourself in patients in Germany seems a domain Mark you know what she's right now is Germany onto after years of focusing there right.
I suspect compress 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 because you don't know very high market share but.
Other people seem to make a similar claims with even more sales and would you are reporting but to some more color. Please. Thanks.
Yeah, let's be clear in around 25% of somebody's business. That's a small Canadian business is not the same and thoughts right. So so weird.
$4 million of revenue in Europe for a partial quarter I think is one of one of the Lady performances for cannabis minutes talking about any other types of revenue in terms of Canada. So so our medical Canada's business internationally as strong as we all know, saying this is different than a couple of years of either slower developing markets.
But there are European market that we are you know and not gonna.
Predict revenues, but we are exporting into can compete like Poland and those sorts of things that are new market again, when there's going be prudent to expect slow slow growth.
Latin America, you just see Brazil opening up.
Yeah.
Nearly a CBD medical market, but again.
Michael said.
We're prudent with our capital.
I would make any market or we can enter the market is a significant market opportunity in delivers near term revenues and bottom line. So no losses. Please.
Capital.
That those markets, we're looking at entry, but but when you modeled essendant definitely I mean, our.
Conservatism as it May international stuff, 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 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 walk.
Calendar Q1 versus calendar Q2.
Yeah, I'll start that so listen.
Much like when 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 finish it 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 on.
Categories. If you will where we think there is significant consumer potential.
Michael It to give any comments on the kind of the 2.0 market kind of where we're going with from operations well.
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 I you know came out of the gate with a significant number of skews just not knowing where we were going to see a.
The consumer sort of if you're one demand 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 going forward.
Okay. Thanks, and then secondly, just on working cap.
So.
And moving forward I think you guys 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 I don't watch this quarter.
Yes, so listen I think.
The big Walkley for us over the last couple of quarters, if you will.
Drive and 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 San rock brand does it mean that are much lower price point.
It's a volume playing 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 you investing inventory.
Starting to come down so that kind of where we expect over the next couple of quarters.
The rest of it.
You know 18, a are kind of stabilized now.
Collect from governments and countries to steady cadence on that.
Pete pretty steady as well.
Okay, great. Thanks.
Yeah.
Yes.
Our next question today is coming from John to from diesel Gen Capital markets. Your line is not a lot.
Hi, good I got here.
So I just wanted to kind of keep pressing on that the leaders that you have reached the positive EBITDA. So it's the sales.
Become weak because of Colgate and the post.
For the situation.
Could you maybe you have pulling those eschew Navy resent, but are you gonna be cutting to the bare bones to the point, where at some point that SGN. They asked you name I was going to happen.
Bounced back to in order to add.
Drawl growth going forward.
Yes, so it's a challenging question right. So.
I think [laughter] 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 goal teams strongly understandably cautious on the consumer side, though.
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 put our long term growth.
At risk.
[music].
And that's not my expectation.
Okay and.
Just wanted to touch more on the 2.0 until it sounds like you've got enough data then you're comfortable that you have enough data accumulated.
To no excuse 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 lot more data to have a better understand.
No thats right. So the major categories, we we know.
Where we are doing quite well and where we think there's still significant.
Demand we havent.
And the naval find anywhere near double.
The topic that demand so that's.
It.
Is being wrapped up right now some of it has been ramped up where we scaled up some of those operations and there's.
There's a little bit more accounts, so some of the capital in Q4.
Well as relate to that they're they're 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 not a lot.
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.
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. A you know what sort of time horizon are you looking at as that for a potential Avenue for.
Growth.
And does it extend.
Keep in mind, Pat it would be something that has to be federally Regal is it just ask CBD Avenue, there or is there potential other business streams or you could see growth there. Thank you.
Well, 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.
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 a 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 certainly 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 gonna have to dig into our pocket on to leverage.
That opportunity so.
I think we're excited about somebody opportunities, where 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 U.S. I would say certainly this year as it's 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 this past that fit and aligned with our current reset.
Now I'd just add a little thanks for that in turn Yep question about our competitors.
Vincent Unlike Canada, where most of the Lps grew up playing in the entire value chain from from Cabana 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 in some people pulling back in saying why are we in him why are we going to help.
Things like that so just to just kind of put this in context.
Great pulling back from the market. It may just be part of the value chain that doesn't necessarily make sense of 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 do you don't need to plan all value chain.
Okay. Thanks, and just a 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 some more 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 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 you know our desired path, which is you know again 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 alive.
Thank you Hi, Doug.
First question just has to do with the some of the ordering patterns that you may be seeing from provinces are short term multiple parties, even yourselves that started off slow smaller orders.
Have you seen order sizes, increasing in terms of size, but perhaps frequency has dropped off.
And with the Kobin situation and could you comment Turner.
Okay. So so listen I'm, just actually asked that question them or sales team yesterday, and you're not seeing that the the ordering sizes pick up eight with the exception of 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.
Course ordering more of that product began managing two specific inventory level that they want a hole. So I think the ordering patterns are reflecting might even some of the amount that they're going to order is reflecting how quickly that input on low they don't want to get compensated situation that I could mean me.
29 team.
Good luck on hand them.
The LP to one that either so.
So that's when we had in there right.
Right, but has there been any change in the last lets say month or two.
No not but I've been told 'em.
Certainly when you say you know they're ordering we've talked about this time it started to ship last year and if anything were 2.0, they're just they're very.
That's very sophisticated now so we haven't really noticed anything with the co but.
It.
There's been a significant shift from what they were trends were already seeing.
Thank you. We every share of our question answer session I turn the floor back over to management for any further or closing comments.
Well I'm just wanted to thank everybody for obviously, taking the time to ER to join our conference call. Once again. This company is laser focused on a on controlling the things that you know that we cannot matters are reset plan what.
Aimed at removing complexity out of our business and Ah 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 change, but we're very confident in.
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 and 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 but the lens of.
Near term value wouldn't bringing true value to our investors and so you're going to exceed 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.