Q4 2020 Aphria Inc Earnings Call
Hi, My name is true smelter conference operator today.
At this time would like to welcome everyone to the after <unk> Q4 quarterly Investor is called.
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Great. Thank you Greg Good morning, everyone. We appreciate you joining us to Scott <unk> financial results for the fourth quarter in fiscal year ended may 31st 2020.
Today's call or Irwin Simon and Carlos.
Now everyone should have access to the earnings release, the financial statement, Mdna and Investor presentation, which are available on the investor section of a free as website at www Dot dot.
Dotcom the financial statements have also been filed with SEDAR and Edgar.
Well again, please remember that during the course of this call management may make forward looking statements. These statements are based on management's current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect actual results could differ materially from those describe any forward looking statements.
Please note that that's a test every earnings release and the filings issued yesterday included discussion other risks and uncertainties associated with dashboard bucking statement.
All financial references are in Canadian dollars MKH management mentioned, otherwise also some of the financial masterpiece discussed on the call our non <unk> RF measures and we'd like to refer our listeners should the company and you know where an explanation as to how the company calculate those metrics and now I'd like to turn the call over to Irwin.
Thank you Kt and good morning, everyone I hope everybody has the opportunity to review our press release. This morning. We appreciate you joining us today to discuss our strong fourth quarter financial results and a great endear fiscal 2020.
I'm proud of the execution of our global team and particularly in a very dynamic operating environment.
Today I'll focus on this pivotal time, we find ourselves in before dividing before diving into the strength of our revenue growth brand performance profit increases enhanced balance sheet and robust cash cash position.
During the quarter, we continue to ensure that health and wellbeing upper more than 1000 employees around the world as we work together to protect and prevent against Cobot 90 in the workplace and in our local communities and our homes.
On a daily basis, I'm reminded okay, I'll add to tell how as well and resilient. Our team is that a free up as reserves as we read as our valued patience and consumers providing them with our medical adult use cannabis products.
I'm in lead meeting this week and I have to say, how proud I am to see how well our facilities in greenhouses or operating.
Thank you do work raised the matter free up for all their hard work dedication.
At the same time I'm challenging our organization to evaluate opportunities, where we can be better more supportive and more United.
Not only can be as we combat this global epidemic, but also champion the advancement of inclusion and diversity both at a free anixter.
As a purpose driven company, we take great pride and leading with our core values, which are rooted in setting the standard for change and innovation in our industry and beyond.
This starts with our talented and dedicated global team from those in our production facilities International operations corporate offices and of course, our board of directors.
Everyone at a free a contribute to our success and achievements in fiscal year 2020, and we're consistently taking a diversified approach to our innovation corporate citizenship strategic partnerships and our and our global expansion.
Boy, what a difference a year makes it an industry. That's only a few years old and it has undergone significant change a free up has emerged as a clear leader, helping to both define and change the cannabis industry in Canada and abroad.
Carl will focus more on the details of the fourth quarter I am incredibly pleased with our strong in to the year and how well we are position for continued growth and success.
Relative to our largest competitors are free to maintain its number one net revenue position widening the gap from our next closest competitor in terms of I don't use gross revenue a free of moved from number two didn't number one in Canada with a 26.8% growth.
And a free of continues to maintain its number one ranking when compared to its closest competitor on an adjusted EBITDA basis.
A few key highlights include fiscal year 2020, consolidated net revenue increased 129% and adjusted EBITDA improved by nearly $45 million compared to fiscal 2019 with Q4, representing the fifth.
And I say it again, the fifth consecutive quarter positive adjusted EBITDA.
Importantly fiscal year 2020 adult use cannabis revenue increased.
Hundred 84% year over year, driven by the strength of our strength of our brands that we believe our unmatched in the industry, which I'll provide more detail shortly.
We also experienced strong growth on the medical side in Germany with Cc from.
Our distribution generated net revenue of 99 plus million dollars in the quarter.
We continue to leverage our market leadership as we develop our medical cannabis markets internationally.
We have been partnering with clinics by delivery educational materials to support them and caring for their patients as well as providing resources during cold at 90.
In Germany, we have established our salesforce is to develop our outreach strategy and online training platform to educate the positions.
And they Canada, we have restructured the medical team to ensure the right amount of dedication and focus on growing our medical business.
We remain well positioned to fund the future growth in Canada, and internationally with just under $500 million in cash and liquidity and as I always like to say cash is definitely king here.
We reduced our net debt position by approximately $73 million in the quarter.
And finally, we made key decisions during the year to favorably monetized strategic investments.
We've taken a $64 million noncash impairment charge this quarter, which Carl will provide more information on a little later.
Well, our commitment or business internationally remains the same we have pivoted our business models in international markets away from a large capex spend.
If not for this shift in the strategy collectively these businesses would have cost as upwards of $40 million in capex and the spend in a $2 million topics loss.
In the short term, we will supply or demand and let him with cannabis products sourced from Canada and are exploring our mid to long term options of whether a smaller production footprint would be appropriate or whether to outsourced production to a third party or simply ship product from Canada.
When you look at all we have achieved in fiscal 2020.
And where we started at just over a year ago, we're very pleased where our ability to generate consistent results.
A cornerstone of our long term strategy is to be focus on the highest return priorities for our growth that enables us to be the only profitable publicly traded license producer in the industry.
We believe we have the appropriate capital structure for our business and this provides us with strong financial flexibility in the future.
At a free yes, we're setting ourselves apart from the rest of the cannabis industry generating some of the strongest sales growth maintaining one of the strongest balance sheets and cash positions compelling consumer brands and well diversified global business.
Our teams continued to work closely with our global supply chain partners to manage minimize any potential business disruptions as we continue to operate through this but that make and best manage our operations to fulfill both customer and customer needs.
Our team and Leamington executed well across all our facilities, including a free of one and a free at die.
As I discussed last quarter, we took decisive actions to continuously developed strategies to effectively manage says the challenges created this cobot related operating environment with our number one priority on our employee safety and keeping our facility, which we have done fully.
Operational.
Throughout the fiscal year and more recently, we further strengthened our leadership team and Leamington across core functions for examples in the areas up production packaging HR quality and operation. The team is doing a great job of efficiently integrate history, a diamond to our processes.
We're consistent we're consistently working to generate greater yields at lower cost. We are pleased that in Q4 cash cost per gram remain below at dollar for the second straight quarter and decreased 5% for from Q3 288 cents.
We're pleased with a quick ramp up of quality product that is coming today from a free a dime.
We're excited about the tremendous growth opportunities in Canada, as well as our strong medical adult use brand sales extraction capabilities and our ability to export you GMP product and white label opportunities.
From enhancing our global team our brand building activities, new facilities and production capabilities to investing in R&D freia is well positioned for future growth.
Getting to our brands, we believe our brands differentiate us in the industry as we serve patients and consumers across broad demographics in geographies.
Our six high quality and brands, including so late Rip good supply broken coast, a free up our medical brand and most recently exclusively in the province secure back. The addition of Petite book Tour adult use brand portfolio.
The depot is a value brand inspired by Qubec culture and brand positioning is straightforward or its straightforward functional bowl charming and iconic with additional blue Red logo that has a modern twist.
We also look forward to introducing two new exciting brands in fiscal year 2021 beyond so definitely stay tune.
Broken coast remains a top super premium brand nationally delivering exceptional quality standards.
Across our total business, we continue to gain national market share and grow brand sales in the primary markets Terrile, Alberta, Qubec, British Columbia quarter over quarter as a result of free it continues to drive category leadership and success growth as our revenue from I don't use Canada.
This grew by 184% from the first quarter to the fourth quarter. They are just great numbers.
Total sales across primary markets grew significantly each quarter, most recently, increasing 27% from the prior quarter.
In Ontario, we added 300 basis points to our market share during Q4.
For the month of May 2020, a free ranked as the number one LP for sales in all products and categories in the brick and mortar retail channels across all brands in Ontario, what a great accomplishment.
This was achieved through strong sales from a free as flower positioning maintaining the number two position and pre roll oral sprays vapours, maintaining the number one position.
In pre roles Rip good supply are right in the top three pre roll brands.
Yes, and our good supply Royal Highness is a top selling three and that ramp flower Lcs. We're pleased that our oils of solar is a leading brand across the country, where there are so low so lay free CBD oil.
It is important to note that we have seen very very strong growth across our brands invades good supply Pine alive. Pineapple Express 510 is the best selling Bay, but we'll see us pretty impressive you should try one.
This market opportunity has been quickly ramping anchored tribute to our bill did grow adult use revenue in excess in excess of the category growth rates and in Alberta Korea has ranked the number one license producer across all product categories by dollar amount.
A free of success will continue to be driven by our differentiation portfolio of brands products aimed at delighting distinct consumer segments.
We are increasingly connected with patients and consumers through medical adult used brand positioning and product innovation to drive our growth.
Coming up we're excited about launching our liquid enhancers topicals concentrates in the near future followed by a free edibles and beverages.
We maintain a strong foundation in Canada, where we expect momentum to accelerate as I mentioned last quarter consumer behavior is changing but this change continues to accelerate throughout our data insights and understanding of our consumer preferences. We believe we are well positioned to capital.
Yes on these changes in the campus marketplace. This combined with our strong foundation also helps us to leverage key learnings implement them on a market specific basis in Germany, Latin America, and the us as well as other international markets.
Before I turn the call over to Carl.
I want to thank the NASDAQ as our new exchange partner, where freest started trading in the us on June eight.
This move is a reflection of our ongoing commitment to find cost efficiency ways of operating so we continue to deliver long term value to our shareholders.
We're also committed to corporate social responsibility and our expect and are excited to be working on these preparation of analysis for our stakeholders in an effort to evaluate opportunities for improvement in areas as we over index today.
In summary, we are building brands that we believe resonate with consumers today and well into the future. Our mission is clear to be the trusted partner for our patients and consumers providing them with a cultivated experience and health and wellbeing through a high quality and differentiation and app.
Fleet innovative products.
As we execute on our vision of changing People's lives should better one person a time by inspiring and empowering the worldwide humidity D to live their very best like propriety, providing them with products that meet the needs of their mind body in Seoul, and vote a sense of wellbeing.
I would like to thank our entire team worldwide for their agility focus tenacity, while navigating through.
Non dynamic operating environment.
Our operation and financial results are a direct result of their hard work dedication once again from the bottom my heart I. Thank you so much with that I now would like to turn the call over to Carl Carl.
Thank you Aaron and good morning.
Before I discuss our results I'd like to echo earn sentiment and thank our entire team for all their hard work in fiscal 2020, our operational and financial achievements are because of their efforts and as a result, we furthered our leadership position both in Canada and internationally setting us apart.
Vision and positioning us well for fiscal 2021 and beyond.
As Irwin discussed we continue to execute on our growth initiatives and prioritize profitability with long term growth and success in mind as we build brands that we believe resonate with consumers today and we'll continue to in the future.
We are pleased to present, our fiscal 2020 and fourth quarter financial results, which lead the industry in almost every important financial metrics, particularly our adult use cannabis revenue growth.
Sequential positive adjusted EBITDA, and our ability to maintain a strong balance sheet in cash position.
As we emerge from the initial tradition of managing the current health crisis to creating our new future the strength of the a free of team becomes even more evident.
We are doing everything we tend to continue serving our patients and customers.
In executing our strategic initiatives.
The difficulties caused by the pandemic that our patients customers and employees face each day require strong leadership and communities coming together to support one another at a fair.
Our team rose to the challenge and is executing every day.
We continue to actively manage operations and our supply chain in anticipation of the changing impacts of the pandemic.
To this point any impacts other than as discussed in our Mdna were minimal.
From a liquidity perspective, we believe we possess sufficient funds for what we believe will be the expected duration of the pandemic.
We have cash an undrawn line of credit facilities of just over 50 500 million.
And account receivable balances that are largely with crown corporations totaling approximately 55 million that is due within the next 60 days.
Our net debt maturity is not until July of next year, and we do not anticipate any issues with our debt covenants.
Additionally, we announced today that we established and at the market equity program under the prospectus, we filed in August of last year.
Allowing us to issue common shares in an amount up to 100 million us dollars, which will provide us additional optionality in the event of an acquisition, requiring a cash payment and or more flexibility when scheduled debt repayments occur.
Irwin provided an overview of the disciplined and while Pran planned actions, we took in across our business.
And I also want to highlight a few additional industry data points that are important to keep in mind for a free.
These include.
Recent stats, Canada reports highlight a growing market of adult use purchases at the retail level. Most recently, indicating approximately 2.2 billion of annualized sales with the market itself growing approximately 24% during the same period as our quarter end.
It is important to note that the stats, Canada report that Thats, Canada reports at the retail level.
And provincial cannabis wholesalers by at the wholesale level.
So you usually see a difference in growth between the two.
It is our belief that provincial cannabis wholesalers took advantage of the pandemic conditions in the quarter to better align their inventory levels with consumer demand.
For some brands this meant major reductions in orders while for other brands. This represented slower growth and experience at the consumer demand level.
Accordingly, we believe that provincial cannabis wholesaler demand during the quarter with substantially less than the consumer demand portrayed in the stats Canada report.
Making our approximately 27% growth and adult U.S revenue in the quarter more consistent with the market share growth we observed in our brands during the same quarter.
Turning to our financial results they demonstrate our ability to continue to gain market share.
They demonstrate our continued focus on leveraging our cultivation expertise into lower cost program.
And our focus on remaining adjusted EBITDA positive.
Net revenue in Q4 increased 18% over the prior year period.
And 5% from the prior quarter to $152.2 million.
This net revenue is comprised of 99.1 million of distribution revenue.
And 53.1 million of cannabis revenue.
Distribution revenue increased 12% to 19 $99.1 million in Q4.
And gross cannabis revenue was 65.5 million compared to 64.4 million last quarter.
Net cannabis revenue benefited from the growth in adult U.S revenue.
But this was more than offset as we expected in communicated on our Q3 call from the decrease in wholesale revenue.
Gross adult U.S revenue increased 27% from the prior quarter.
56.7 million.
And medical revenue was relatively flat consistent with patients reduced ability to get out to see doctors or refill their prescriptions.
During the quarter the company sold 12557.
Thousand kilogram equivalents of.
Cannabis, including 10831 kilogram equivalents of adults use cannabis and 1273 kilogram equivalents medical candidates.
The average gross selling price of adult use cannabis decreased to $5 in 23 cents per gram in Q4.
Appeared to $5.47 per Gram in Q3.
Primarily as a result of a shift in product mix.
Caused by the strength and demand of one of our two core brands good supply.
Brand, which plays within the value market category.
And price reductions in key markets to solidify market share.
The average growth selling price of medical cannabis exclusive of wholesale.
Increased to $6.63 per Gram in Q4 compared to $6.41 in Q3.
Our cash costs to produce per Gram remain below one dollar for the second consecutive quarter decreased 5% to 88 cents in Q4.
With the meshing of a free of diamonds cost structure into our income statement, we anticipate further reductions in this figure going forwards.
Our all in costs program in Q4 remained flat at $1.69 to Graham.
Adjusted cannabis gross profit increased to 28.1 million in Q4 compared to 23.7 million in Q3.
Adjusted cannabis gross margin was 52.9% in Q4 compared to 42.7 in Q3.
The increase was a combined result of the increase in higher margin adult U.S sales the wholesale transaction ratio.
And our higher usage of the lower cost cannabis product produced by a for U.
Versus the sale of cannabis that was purchased through wholesale channels from other Lps in the prior quarter.
I am pleased that since Q4, we sold all but approximately 4.4 million of purchase dried flower that we are contained in our inventory level at the end of Q3.
And we anticipate selling the remainder within the next month.
Adjusted distribution gross profit increased slightly to 11.9 million in Q4 from 11.4 million in Q3.
Adjusted distribution gross margin was 12.1% in Q4 compared to 12.9% in Q3 as a result of the impacts of Cobot 19.
Cc pharma sales mix.
As DNA costs increased to 116.6 million in Q4 compared to 50.9 million in the prior quarter.
The increase is mainly related to $64 million of noncash impairment charges that Irwin already referred to as a result of the changes that we made to fully impaired Jamaica and listen to and the pivot in our business model in Colombia away from a large capex spend.
If not for these changes these businesses would have cost $40 million in capex.
And $2 million in Opex annually.
As part of the noncash impairment charges, we recorded approximately 5 million of impairment endless too.
Approximately $19 million of impairment in Jamaica.
At approximately 40 million of impairment in Colombia in Argentina collectively.
The Jamaican cannabis market is first and foremost a tourist market.
The Pandemics long term impact on tourism in general and tourism to Jamaica in particular forced us to reevaluate our relationship and cash flow expectations from this market.
Resulting in us taking a noncash impairment of the assets in our Jamaican operations.
Similarly, we recorded a notch noncash impairment on all the assets and those so two operations since the country able to sell to close its borders and our partners and senior management team have not been able to access the facility.
Reside outside of lots so too.
The impairments income from being in Argentina, where based on revised cash flow expectations going from the impacts of cobot 19, but only resulted in partial write offs of intangible values.
For the quarter, we reported a net loss of 98.8 million or a loss of 39 cents per share as a result of the noncash impairment.
Compared to net income of 5.7 million or two cents per share in Q3.
And net income of 15.8 million or five cents per share in Q4 last year.
Moving to full fiscal 2020 results.
Adult use net revenue increased 300 and the 7%.
From 36.9 million in 2019 to 150.4 million in 2020.
We reported net cannabis revenue of 204.7 million in 2020, an increase of 129%.
From 89.4 million in 2019.
Net revenue in 2020 was 543.4 million an increase of 129% from 237.1 million in 2019.
In 2020, we reported positive adjusted EBITDA from cannabis operations of 20.1 million.
Compared to a loss of 17.5 million in 2019.
And improvement of almost $40 million.
2020 was a transformational progress.
Year for for you.
And we continue to execute on our plan to position ourselves for future growth in Canada and internationally.
In an industry full of cash Burns and heavy adjusted EBITDA losses, our focus remains on generating positive EBITDA.
For the quarter, we're pleased to continue our trend and report a fifth consecutive quarter of positive adjusted EBITDA.
Consolidated adjusted EBITDA in the quarter increased 49% to 8.6 million from $5.7 million.
This includes adjusted EBITDA from cannabis operations of 9.3 million.
And adjusted EBITDA from distribution operations of 1.9 million.
Partially offset by an adjusted EBITDA loss from businesses under development.
From 2.7 million.
Most notably adjusted EBITDA from cannabis operations increased 55% in the quarter.
Moving to liquidity as Irwin said, we continue to possess an industry enviable.
Balance sheet, including strong cash position robust capital structure and cap table with minimal pen potential dilution.
As of May Thirtyth 2020.
The company possessed cash of $497.1 million to fund plan Canadian and international growth that will also support any covert 19 pandemic related financial impacts.
While all material in process and new Capex.
Projects are currently on hold our German expansion has continued.
We expect the spend approximately $15 million to further finish our German expansion.
Our Colombian expansion is now on whole temporarily.
And we reevaluated the growth plan of the Colombian market in the new environment.
With regulatory shutdowns and pending product registrations and this slowed our expected development of the South American market.
During the quarter, we're able to proactively manage our working capital investments to a lower value than originally anticipated only invest in $12 million versus the previous guidance of $25 million to $50 million.
As a result of revised growth expectations versus anticipated pre cobot 19 growth, we do anticipate a minor build in inventory over the next quarter, which will be corrected the quarter thereafter.
All leaving approximately $450 million plus cash generated from operations available for future strategic initiatives.
We believe this is sufficient to take advantage of any attractive distressed asset sales in Canada us expansion or other income statement accretive opportunities.
And protect us from any adverse impacts of the pandemic.
Cash inflows in the quarter, primarily included $26 million from the liquidation of the promissory note from Jay opportunities.
2.3 million from Cc Pharmas additional term loan and 2.7 million provided by operating activities.
Loses of exclusive of changes in our working capital.
Cash outflows in the quarter, primarily included approximately 12.1 million for investments in working capital.
28 million in Capex, and 8.6 million associated with repayment of financial liabilities.
Earlier Irwin high highlighted the strength of our brands.
It is a common misperception across the industry that a deep discounted value product offering is necessary to be successful in the saleable flower category.
What I think speaks volumes about our brands is their success, including there number one positioning in several individual categories.
And that we enjoyed continued growth in our saleable flower business.
Without the benefit of an economy priced one ounce package size.
And our primary markets based on headset data for Ontario, the value category grew from 28% of 28% of sales in August 2019 to almost 50% in may of 2020.
In Alberta, the category grew from 20% in June 2019% to 42% in May 2020.
And in BC the category grew from under 20% to over 40% from August 2019 to May 2020.
I look forward to reporting our early success with both the 15 Graham and one ounce package sizes next quarter end now that some of them are out in the market with more to come by the end of our first quarter.
We believe we can continue to find pockets of industry under supply and capitalize on them by identification supply.
And brands and our products and product line extensions that support those pockets of under supply.
This quarter, we continue to gain national market share.
And grow brand sales in the primary markets we mentioned.
And we are excited to be introducing two new brands season, or mdna in fiscal 2021 and beyond.
Our free a continues to drive category leadership, and we believe that through our data insights and understanding of consumer preferences. We are well positioned to continue to take advantage of the opportunity to these under supplied markets provide in the quarters in years to come.
We continue to demonstrate incredible success in Canada, and we believe that the companies that are able to execute in Canada are the ones, who will experience the same success in the us.
As the legalization process unfolds there.
Our free it continues to be on matched on a variety of financial Mac metrics, including our record of consecutive quarters of adjusted profit positive EBITDA.
Focus on profitability operation efficiency and cannabis revenue.
Our cash position will support our strong performance and underlying our ability to succeed through the times ahead, even given the uncertainty of the current environment.
A free establish the standard financial stability and strength for the industry over a year ago.
Seen our team continue to accelerate this standard on a day to day basis. So.
Our leadership position in this space.
I'm, so proud to be a part of this great team.
As great as today is as part of this team I know tomorrow, they will make it even better.
Our financial results this quarter are the stepping stone for the future.
As we continue to execute on our strategic priorities heading into 2000 2000 22021.
Namely a stronger more profitable company supporting our employees and the communities we operate in during these difficult times.
We believe that a free is competitive advantages brand strength.
Balance sheet and the dedication of our employees.
Continue to position the company at the top of the market.
And we remain confident and our ability to create long term shareholder value.
That concludes our formal remarks, and Irwin and I are now available for your questions Chris back to you for the questions.
Thank you.
Okay.
Yes.
Going.
Jefferies.
Okay.
Good morning Gen Topol.
Good morning, good morning.
Hey, David and couple of questions Craig just first of all.
On a non res GM he approvals fee now and you mentioned the continued spend on the on the Gen cultivation could you just maybe talk about your expectations for the whole Jamie specifically.
The next 12 months when not chairman cultivation comes online and then secondly, you spoke about possibly boom in the market for attractive.
Stressed assets just wondering what would you classify as an attractive distressed asset quality and I'm not thank you very much.
Hey, Thanks, So and I'll handle the first part of the question and Iron will take the second.
The EU GMP certification that we received in the late in the last couple of quarters are a big opportunity for us.
We see the ability to to supplement the German market with.
Export sales.
In Q2, as we've now secured all of the external permits necessary. We're just waiting for the one from health, Canada to make our first shipment we expect the for sale to happen just at the end of Q1 early Q2.
We're also looking at using our Canadian operations as we talked about earlier.
Enter into.
The Colombian market with that product on an interim basis.
Based on all the changes that were happening in coated.
The the cost structure that we've been seeing coming out of our Canadian cultivation operations put them very close to the ability to.
Two.
Or the sorry, the cost structure inside of the Colombian market and so we see that as an.
A positive way to avoid.
What was supposed to be a short term capex spend.
No. It answered in regards to distressed assets I think we looked at a couple away.
We would look at some 2.0 assets.
That ultimately we could move all or 2.0 production.
Two manufacturing for our own brands.
We also look both Canada and the us.
Consumer brands.
That our consumer brands today.
But ultimately could be converted.
Cannabis brands in the future.
And.
We're also looking for assets that organic growth and assets in regards to that will generate positive cat. We're also the same thing as we look in Europe.
Where theres asset opportunities in the medical field that can complement our current.
International.
Platform.
Great. Thank you very much gentlemen, very helpful.
Thank you.
The next question is.
Yeah.
Hey, Thanks. Thanks. Good morning, guys first I wanted to ask you mentioned the consumption trends and what we've been seeing is that your shipments here or kind of well below actually what we've seen from of the brick and mortar provinces. So you mentioned the inventory you mentioned the wholesalers, taking taking advantage Union story.
Could you expect to see kind of a catch up in the next couple of quarters or has the provenance taken a term permanent step down here.
Got it I think a couple of things number one.
I think some of the provinces, we're looking at their financial position led inventories run down.
Thats number one.
And number two is as store openings were on hold.
And not as much inventory was needed and number three as stores were closed during that period of time and everything was online. There was no ordering so I think again there is been a big demand for product now and.
The different liquor control boards now are ordering to build their inventories backup.
Okay got it and then second question I know that you guys kind of refraining from giving guidance during the kind of uncertainty of cobot 19, but just kind of kind of some.
Somebody asked that are out there of the story here.
Do you expect free cash flow generation here in F. Like 21, and just go a step further you've given to prior margin targets for the business. What we see that next slide 21, or perhaps the thought in 21 spend more aggressively behind candidate further your position. Thanks.
So.
On the on the spend side.
Yes, I would say that the thought process is that there.
Is this the value category continues to increase in demand.
There is opportunities that we've enjoyed the success that we have with our brands as I said without the benefit of having that 15 gram or one ounce package size that we're just starting to get out to the market today and we see huge opportunities.
With with that with with that with that part and sorry, I forgot the first part of your question.
Yes.
Timeline for free cash flow generation, I know, you're not giving guidance, but kind of any anything we should think about on that side positive free cash so getting to positive free cash flow is really a function of.
The capex spend and now that we see that the huge changes we've made there.
Yields you'll see that Capex spend decrease over the first couple of quarters, and we should easily be into free cash flow by that.
For the year and also was building inventory as part of a free of Diamond and Capex. So we should absolutely.
Positive free cash flow.
Thanks, I'll pass it on guys.
Thank you.
The next questions from Paboase manage with Cantor Fitzgerald Your line is open.
Good morning, everyone. Good morning Pablo.
One question in terms of just if you can repeat the number.
In market share trends. So you grew in Greg, 27%, but what's your estimate of the B to b market during the quarter because like you said that 20% retail is not the number that we should be looking at.
Related to the maybe more importantly, just help us understand better the sustainability of your market share gains for even the market share position than you obtain number one right and if I can elaborate on that if you would first invade I know people are catching up then that's less sustainable right or in in flight hour.
People have been catching up with value brands, just expand a little bit more than that if it's a sales team or the brands, maybe that's more sustainable just some color on the other withheld. Thank you.
So that.
The growth in the eight at the wholesale level or the b to B market I'm not sure.
Like B to B is really wholesale is a wholesale to other Lps, if I separate that from sales to control boards.
And the provincial wholesalers.
Provincial markets.
Those.
Demand was really about half of what we saw in the stats, Canada report and we think that more closely aligns with the growth we sustained in in in our brands.
The 27% increase in share.
And.
And Pablo regards to our brands I mean, we'll continue to spend behind our brands will continue to innovate. Yes. We were number one in dates and you heard me talk about all the new Babes and coming out and Dave's under different brands. So first of all week.
With.
Great North we have a great sales team that is on.
On the street out there with visiting stores and working with the but masters.
And again, our whole thing is to build out our brands and build out the quality and regulatory goes behind our brands and as you saw our pricing you know in regards to our cost per Gram has come down tremendously, which should make our products affordable the other big thing too.
I don't mention here is not so much just taking share away from the other brands, it's taking the share away from the illicit market and that's the biggest opportunity out there you come back and look at the cannabis industry today Theres twice as mounted Canada's sold through the lucid market, that's going through stores that so thats. What we have to go after is taking concern.
Tumors away from the listened market and buy in branded products, where they can trust to quality trust to regulatory invited good price.
Hey, guys can follow up I mean, obviously the question that we I'm sure you get from investors. It's you know consists of all the oversupply right and so thats going to worsen we dealt with the growth that we may seem the index holding the full if you can just expand on that.
How about it I mean, obviously your price of reach sequentially. The end declined on much right, but just more color on that because it seems to be able answer I know there Steve for investors well I think oversupply is something that's out there but on the other hand.
You're hearing and reading about lot of these.
Bigger Lps and other Lps taking.
Charges and shutting down.
Following a lot of their grow houses, okay I think.
Free of Diamond and are free.
One we're a low cost producer and you'll see us down to 88 cents and there's other opportunities there so again.
We have automation, we have a great facility.
We are located in a great pool of candidates. This serves all of Canada.
So with that we have all the grow we need today, but it's again going back to what I said, it's building your brands and with that taking supply away from the listen market and a lot of these bigger Lps just way way way overbuilt and some of them, we'll close their facilities in.
Some of the other Lps will go away.
I think just just to add to that Pablo.
The harvest from the outdoor market.
Goes back to our comp arc, our comments about industry oversupply and under supply. It really is is further creating an oversupply situation in spite of the trim and the extraction grade market and if you can grow good salable flower people will buy it and I think that's that's clear people are.
Buying ours are are good saleable flower without the need to create one of these economy or deep discount value brands.
To date and and that market will that market will continue.
And I just a squeeze one last one if I may have them, Saudi I know when it would be very short, but obviously the news from Bloomberg right out of potential merger, we owed auto was very specific right and I guess I'd like to hear from you.
Yes.
It doesn't want to get share I mean issue.
And that will be on someone they just issues, but is that more.
What's the question out there do you need to scale to continue to gain share to compete overseas.
Just give some color there because one thing is buying distressed assets and other things merging with an equal pretty much. Thanks, well first of all I'm not sure Theres No real reason the comment on it because it's something that's not happening so.
Ill go back and say the only thing on a big picture.
In this and you know me from other industries consolidate and something important.
And I think.
The most efficient biggest player in the Canadian market is important for opportunities in the us so im not going to comment on our work as there's nothing there to comment on because there is nothing happening, but I come back and say if there is an opportunity for consolidation there is an opportunity to take cost from the SGN.
And there is opportunities to grow the two of them together with their brands internationally.
And scale does matter, which gives you an opportunity one day when the US Legalizes I think the biggest player in Canada has a big opportunity in the us.
Got it thank you.
Thank you.
The next question is room and gray with the lines Global partners. Your line is open.
Hi, good morning, Thanks for the questions.
First one for me is kind of continuing launched in terms of the supply dynamics you know if im looking at the kilograms harvested during the past two quarters, you'll definitely come up pretty considerably.
I mean coming online. So just how do we think about those marketplace dynamics for you guys. Typically I think you mentioned some near term.
Inventory levels being increased.
But how do we think about the need for brick and mortar no additional brick and mortar overcome support that growth with the additional harvest. Irwin also believed that you mentioned white label opportunities. There. So how do you think about the opportunities for that digital harvests and being able to sell that through thank you.
So again I'll go back to the same story I think people believe there's oversupply in the industry, but I think it is just way too simplistic to say that Theres flat oversupply. There are lots of pockets of under supply. We've we've we've built the strength of our brands and are not when physicians as an.
LP in all product categories by sales.
Because we have been able to grow flowered that that people will buy.
And and as as that can as that process continues as detailed rollout expands in Ontario.
I think the most recent information they releases that they're they're going to try and get at least five stores prove per week I'd like that to be a lot faster.
But that's that's a very healthy pace in comparison to where we sat before.
As those new stores come on as BC continues their license new stores.
As as demand continues to increase in Quebec.
There are more and more opportunities to self salable flower.
And the issue in the market as it has nothing to do with saleable flower. It has to do with an with an abundance of extraction grade material.
Right and the people that have too much of that on their balance sheet are going to are going to suffer and the people who are growing that much of it. This year are going to have a hard time moving those those products.
And just from a standpoint, there I come back and say there is tremendous opportunities for us to grow white label to do those sale, but you. So we're no longer building a greenhills now in Colombia, because we feel theres an opportunity that we can ship directly from Canada into the Columbia market, it's going to save us for.
The million dollars and with our all our GNP certifications and our licenses the opportunity for Europe is going to be tremendous and don't be surprised.
Germany becomes legalized over the next couple of years, so I come back and say, yes out their supply issues, but I'm going to tell you is also cannabis 2.0 big opportunities and again, it's coming back with a different strains in the different quality of product is ultimately going to set.
The different Lps, apart and will be part of that.
Great. Thanks, I appreciate that and then if I could just.
Ask one more I certainly can appreciate the need to kind of keeping close to the best in terms of your Brandon unveiling. Thank you have upcoming but just curious to some of the commentary you had in terms of high income case competition, we're seeing in valuing I mean clearly made it.
Certainly and turn to your opinion that it's not just in terms of having low price, but also having no good quality product, but just curious in terms of your quality data insights what you're seeing in terms of what those opportunities might be both within the legal market and then Irwin you can fix we mentioned also the need to be competing with the black market. So she is where you kind of see those pockets just.
Given also what you'd notice in terms of new product formats coming out it seems like it's going be more on the concentration topco side with the edibles coming on later, so wondering if that's more a function of what you're seeing in terms of opportunities or just something interesting on the supply chain fine. Thanks.
I think as I said earlier salable flower is.
As many categories unto itself right and we have great strength in the in the brand equity that exists for broken coast inside of the premium plus.
Portion of that market.
Yes.
Good supply one of our core brands along with.
With reps have have done very well again, they compete in very different markets ramp is a little.
More for.
The higher end use someone who is looking for something a little creatively, whereas good supply is more just about that value offering.
With with that with with the lower price.
We've we've teased inside of the new new brands coming one of which will be in that.
In that lower category, and we'll take advantage to use.
Some of the material that we have that doesn't meet our our current levels for those other higher level products.
And we think that offer opens up a greater opportunity.
Alright, great. Thanks.
Thanks, Eric Thanks.
The next question is room.
You May research your line.
Hi, good morning, gentlemen.
Good morning.
Regarding credit if you could grow I wonder if you could comment on the.
Outdoor grow.
Totally agree with you about oversupply of extraction grade but.
For a case that eventually will have.
Outdoor grow the sufficiently.
Good quality to create blended.
Pre roll that would be.
Competitive on cost and now that we're talking pennies in terms of.
Costs and gross margin and that's the cornerstone of a free of strategy.
What are you doing about outdoor you're going to stick with.
Obviously highest.
Automated green houses in the country.
So.
I think the key is a lot of people talk about there the low costs that theyre able to to grow this outdoor product at but then they haven't been able to move.
And the you look at what I'm seeing written online as infill infamous Lee crop tober, that's going to.
Going to happen this year, it's good to be very difficult to move it and so it's great to be able to stand up and say I can grow doors for 10 cents I can growth doors for 20 cents, but assumes yuri actually capable of selling it.
And if you can't move it because there's so much product of it and that's all going into one market extraction grade.
It is 25 cents really the right Youre right cost if you have to throw it over half of it three quarters of it out your cost start to creep. Your start your cost creep back up right. There just isn't so I don't view, there being enough demand in extraction grade material to support the thesis of an outdoor grow.
If you could have an outdoor grow that's your primary source of feeding your 2.0 products I think thats potentially a good business model for someone but as soon as you create start creating inventory levels in excess of demand you're going to have difficulties with that concept.
And I think consistency and again as you come back and look at what we're growing today and the quality of the products. We're growing in the pricing I'm not sure were outdoor ROE is going to be a better option than what you can buy from a free up that as the different strains in different qualities and defer and the pricing that we're able to.
Offered today.
Great.
Anyway, great quarter, guys keep it up thank you so much really appreciate that.
The next question.
And the low capital markets. Your line is open.
Hi, Thanks to the question first just wanted to touch again on the developments that are happening on the U.S. funds in terms of regulatory reform there.
There's been no development that the Democratic platform launch two or supports federal legalization of medical candidates, but differing back Legalisation, Dave and I guess.
Thank you for you, but does that sort of change or impact the way youre thinking about frias U.S. strategy I mean, something like that if it is enacted I mean could you share what sort of business model would you envision.
Im curious why do you mentioned that scale in Canada would help for the US I will give them there would still be I presume some sort of border restrictions and you would have to build supply chains relatively new greenfield.
So.
Good question number one.
I always look at.
The the biggest in Canada that has gone through all the history has gone through all the development R&D and has the facilities.
When us opens up for a rack or medical I think they're going to look at the companies that can bring.
A lot of the history and a lot of the data and financially.
You know be able to get going I think is you can back and look in the different states in the us.
They're going to want to deal with companies that really have.
A good history and had been able to build out companies have quality and have regulatory et cetera. So I think.
There is an opportunity for those.
Legalization.
Korea will be rate in the long to get additional licenses and if there is not is there going to be an opportunity for us to acquire licenses with our history. So that's number one and were going to be swimming around to see where there is there is opportunity. Secondly is we're looking at offer.
Communities in the us to acquire companies that either have distribution that have maybe a medical business or a consumer business. When it does become legalize where there's a conversion year or they have a distribution business and that helps us to get into the us market and with 27 years of history.
In the consumer we're open to us market.
Myself and some of my team members, we know us market quite well so I want to take every bit of expertise that we have in the Canadian market in the international markets, both on wreck and on medical and one day translate that into of.
The opportunity in the us market.
Got it thanks and.
My follow up question is specifically on the vapor category I noticed some of yours and some of your peers is products has had some modest markdowns already so I'm just wondering curious to get your thoughts could this be another category, where there might be pricing pressure down the road I'm just thinking.
This is you've mentioned.
The or maybe all of the industry oversupply in your view concentrated on more supply in the extraction grade sort of input. Thank you.
And so Tammy I did I think if you look at those a lot of those price decreases they happened very early on we all basically came out of the gate, a little bit blind as to what pricing.
Amounts were going to be and Weve very quickly recognized.
A lot of our base that we'd come out a little bit high the rolled out to two to affect those changes took a little bit longer than I think anyone was anticipating there's a lot of steps that have to go through through the controlled to control boards and then working its way down to retail.
But we've also identified some key categories, where we think we can we have offerings that consumers will enjoy greatly and we've tried to make them a little bit more affordable, particularly during.
During the cold timeframe and so I don't think I don't think though you should be interpreting that that's going into.
Necessarily.
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A race to the bottom and Tami again like I keep harping on this illicit market.
There is a lot of vape, so bear that are in needless in market Theres, an opportunity for us to take.
Those sales away from those markets, where we have gone through tremendous quality and regulatory and we were put no safe quality product.
Okay. Thank you that's helpful.
Thank you Tammy.
The next question is from the easier with Cowen Your line is open.
Hi.
Yes.
Hi.
A follow up on some of the commentary around them.
Between.
We certainly in my coverage of alcohol that.
And on that.
Well familiar with but I do have a question I'm trying to reconcile another comment you made our wins around.
The white space opportunities that you guys go thank goodness for use with innovation standpoint.
Some of your peers also feel the same way like what is the risk that theres another.
Like inventory management working capital management has.
There are clear operation, it's going on that cutting thats, probably the battle against the wall Mccaf management standpoint, So I'd love to hear how your reconciling thats it. Thanks.
So so again, it's like anything.
There is strong competition out there and that's that.
Key business opportunity for us and I've met with.
Multiple retailers.
How to work with them in regards to white label for them not White label has to go through.
Leaderboards and everybody has an opportunity to do it.
The other thing is what we don't want.
Had a meeting with somebody yesterday talking about white label, and we're not going to allow it to cannibalize your good supply and what are we going to do difference in different strains in different products. So I think.
So it's no different in my old World, where we had our brands that we did private label for someone and what private label stood for and what the brands stood for and today. If you walk into retailers Theres a lot of private label, there, but as you know being an analyst in the liquor business, we want to buy.
Those were not buying in private label block out there.
And that's where brands do matter and New Jersey.
Preaching about brand equity brand equity brand equity and Thats why so Lee is winning the shares that it is in good supply is willing to share that it is I think there's going to be an opportunity out there.
For a white label brand, but at the end of the day brands will win here and brands were when if you got the right pricing.
Right strains and Theres a lot of other products.
We're coming out with that or new products that are going to be able to build upon these brands now again.
This is a difficult industry because you can't go up there in traditionally advertise number one like you can and most consumer products and.
And yet it's not like and.
In the liquor business you can have multiple customers.
Here are you really got to sell through the liquor boards is not like they can't get the right deal Loblaws like Walmart you really got only Canada stores to sell through.
So that's that's what you really got to build upon your brands here and you really got to educate your consumers on the quality of your brands of pricing of your brands and uniqueness and Thats, who is going to win here and there will be an opportunity for white label and if we can be that low cost producer, we're going to win that white label business.
That's really helpful. If I could squeeze and a follow up.
Given your.
Any expertise in CPG different category, certainly have different dynamics that you think about where you'd like to see kind of EBIT margin profile for your canvas business over time.
Here's an appropriate.
For what percentage of total category revenues not necessary your business, but just total category.
Coming from from White label.
Listen if you come back and look you know in my old consumer days.
18% to 20% was.
On label or private label.
Listen if we got 80% is branded business today, and 20% as white label.
Be very happy with that.
Perfect. Thanks to the color.
Thank you.
That will conclude the question answer session will turn call back over to management.
So thank you very much.
For joining our call today I must tell you in a difficult difficult time, whoever thought we'd be sitting here in a year from today.
We'd be social discussing.
And walking were walking around wearing masks.
Whoever thought that most retail stores would have been close it's great to see that.
Trauma was moving to phase three.
What you saw during this period.
That consumers want it to buy cannabis products I must tell you. During this time our employees came to work we had an 80% of our employees that showed up every day.
And with that as we took care of our employees.
We really never had any really situation from coal that in our facilities and thats great to see and now we worked with their employees. It was great to see how we operate at around the world.
With teams with zoo, and we've been able to deliver.
As we look at next year and I know, we've talked about guidance.
I wish I could look into a crystal ball and say what we all the living in this world that we're living in today, having four kids in school not knowing who is going back to school is not going back to school and where you're going so theres a lot of uncertainty out there, but what I will tell you is this year that is certainly out there a free it today has.
Seven great brands, a free it today has a tremendous supply chain out there where we can grow.
Over 265000 kilos, a year and have the ability to do that for you today can put out their tremendous products.
Via today has a strong strong balance sheet, we don't have to go there and raise money a free today has a tremendous management team very very lucky that I get to work with the management team out there I think if you come back and what Carl's talk about as from the Soc standpoint.
We have no significant deficiencies no material weaknesses in what we've been able to do and we all know where we came from in a free up and where it is today. So I come back and say Hey, This industry is just in its infancy stages and its two years old from a legalization standpoint, there is.
So much opportunity out there from a medical standpoint.
And let's hope one day Theres abate built there that's a vaccine towards Cove and.
It solves a lot of problems so.
I am really really excited pumped up a on a free I'm really really excited pumped up.
In regards to cannabis industry I look at products like White claw that is clubs sold and block and how big a business that is there will be a weight class type of product. One day that is either THC or CBD that will be sold similar to that so the opportunity is tremendous and the opportunity.
His tremendous for Korea, and Thats why is we get better and better in Canada, we will be there one way or another in the us and the rest of the world. So thank you very much for getting on the call be safe out there really and.
During the rest of your summer. Thank you very much.
Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.
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