Q2 2020 Tilray Inc Earnings Call
[music].
Greetings and welcome to the till race second quarter 2020 earnings call.
So I have all participants already listened to only about a brief question answer session will follow the formal presentation.
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Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Rafael Girls. Please go ahead.
Good afternoon, and thank you for joining us until rates second quarter 2020, <unk> earnings conference call and webcast on with me today, Our Brendan Kennedy, Chief Executive Officer, and Michael Crichton Chief Financial Officer before we begin please remember that during the course of our discussion management may make forward.
Looking statements within the meaning the private Securities Litigation Reform Act 19, 95000 amended [laughter]. These statements are based on managements current expectations and beliefs and involve risks and uncertainties that could differ materially from actual guidance and those described these forward looking statement.
Please refer to tell raise reports filed from time to time with the United States Securities and Exchange Commission and Canadian Securities regulators, along with the earnings press release issued today for a detailed discussion of the risks that could cause actual results could differ materially from those expressed or implied and any forward looking statements.
[noise] finally, please note on today's call magic refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustment, which are non-GAAP financial measure.
The company believes that these non-GAAP measures provide useful information for investors.
Takes time. This information is not intended to be considered in isolation or the substitute for their financial information presented in accordance with Cowen. Please refer to today's release for a reconciliation of each non-GAAP financial measure the most comparable measures prepared in accordance with gap.
Now I'd like to turn the call over to Brent.
Good afternoon, everyone and thank you for joining us.
I will begin with perspectives on key industry headwinds and opportunities followed by an update on our business performance Board outlook, then Michael will review, our second quarter financial results.
Despite kogut, we've seen continued demand in the industry.
Indications suggest consumers have transitioned reasonably well ordering under various provinces ecommerce platforms, which has helped maintain product demand.
We see the demand has been partially driven by the introduction of value added canvas product offerings, which are becoming more affordable and accessible as license producers larger problems, such as Ontario continue to increase their distribution points of sale.
Additionally.
He privately operated retailers like ramped up curbside pickup online ordering and delivery services to consumers.
One potential longer term outcome of Toby is that consumers may have a heightened concern for quality and safety, while being more interested in pending products from ice age retailers.
These producers rather than the it wasn't market.
This may lead to a faster migration from the listed market to the legal market, which would be a positive for the industry.
Additionally, can't campus has been recognized as an essential business in Canada, Germany, Portugal, Australia multiple U.S. state.
I recognizing this industry is essential stabilized and burdens the case for legalization around the world.
First for medical canvas.
By adult use.
As we believe trends is getting the steady increase in the number we go Kansas markets supports our thesis that there's a significant global growth opportunity.
This recognition validates our thinking that Canada, the mainstream product consumed like other consumer staples.
[laughter] turning to page what has changed so right now.
Beginning in January 2020, we successfully refocused our business.
Right size our cost structures.
Narrowed our focus to three strategic priorities.
Well.
International Medical segment in which we have a proven track record.
Potential to be one of the winners.
We expect meaningful growth to continue on a quarter over quarter basis.
In fact, we anticipate it will exceed our revenue in Canada over the course of the next several years.
Second and they didn't don't use well that's not fit.
Marketing was converted to the legal market.
Continues to present significant opportunity for our business.
Additional consumers convert to legal market.
We also believe increased numbers of licensed brick and mortar retail stores greater product Assortments based on the introduction to the auto products and lower pricing on dried flower well continue to encourage consumers to move to the legal market and present, great opportunities for our business.
Third, Manitoba harvest foods, which provides us with that product platform and the United States and they seem to other countries around the world.
We also evaluated our business and reduced our cost structure. Many of these measures have already had a positive impact on our piano and we expect to continue seeing benefits for the remainder 2020 and into future years.
It's important to clarify our cost reduction efforts began during the first quarter.
Before an unrelated to cope with 19.
We anticipate the need to modify or business structure, we made plans and took aggressive actions ahead of our peer set [noise].
Many of these necessary, but time consuming measures are behind us.
Our cost reduction efforts included the following Rightsizing, our resources and significantly reducing their as June expenses.
This included eliminating or reducing contractors and third party vendors evaluating marketing budgets across all brands to ensure we drive revenue in key areas of growth.
Most notably we completed the difficult process, reducing our headcount by more than 30%.
We closed our garden, which was a high cost spoke facility in Ontario.
We also undertook other efforts to increase operating efficiencies, which will result in future additional cost savings.
Additionally, we focused our investment on our high performance facilities in order to maximize yield and leverage our existing footprint and manufacturing capabilities.
The international medical market and don't use market in Canada, and then food markets globally.
We also took significant effort to clean up our inventory and write down or destroyed products such as a byproduct that are no longer feasible to the market or it seems values decline due to market dynamics.
Finally, we have reviewed our portfolio investment and taking appropriate charges based on expectations.
Our current potential future value.
By completing these actions, we have better aligned ourselves with market demand and a position co race to drive towards the adjusted EBITDA breakeven or profitability by year end and generate enhance shareholder returns going forward.
None of these actions were taken lightly and none of them were easy.
However, given the right actually did take in order to position our company has a nimble or in cost efficient business poised to realize the benefits of growing consumer inpatient demand for products.
Current and future markets.
Well implementing these changes we also had several significant accomplishment.
We brought international production on on that or you campus in Portugal, We're now able to take advantage is.
Take advantage of Portugal.
And the climate, which is amenable to year round cultivation, and a lower cost of labor.
Also on a Portugal facility, we received end to end good manufacturing practices certification in accordance with you standards.
Among other things this allows us to manufacture medical cams extracts inhouse export GMP produced finish medical candidates products, both dried flowers in oil from Portugal throughout the European Union and the other international markets would we go medical candidates regulations.
Our knowledge, we are among the first and the cannabis industry to successfully obtained a full you you GMP certification within that you.
We strengthened our balance sheet closing at the $60 million that facility and then maybe $5.3 million net equity offering. These two transactions provided sufficient capital to focus on our path to profitability.
We also released 30.5 million shares from the private your walk up to reduce overhang and enable us to manage the increased sort of public float in an orderly fashion.
Turning to page.
From what we had already accomplished to where we stand today.
We're harvesting some of our first crop at scale to Mark facility in Portugal that can be shipped to other countries around the world.
Canada, we've integrated the kindred salesforce.
Acting as our sales agent for all provinces in territories, excluding Quebec.
Leveraging the expertise and relationships, we expect <unk> distribution to grow and you don't use market with high parks diverse portfolio of brands, such as Canada, China, Joey and Marley natural.
We anticipate kindred to expand the distribution sales.
Both our existing products as well as our new to the auto product.
Well with who we have been able to ramp up production and maintain significant sufficient dock.
Notably, while we are lining our production import product portfolio to address continued demand for high potency products were also monitoring value consumer behavior closely and are contemplating further innovation was a batch to ensure our offering me consumer need.
While others have and will join US in this segment of the market. We believe that Canada like other CPG categories has room for several successful brands in each price segment.
And that you consumers a purely DRAM driven at this stage of industry evolution.
Our current retail footprint estimate in Canada, or 2020 is somewhere between 1000 101250.
Barring any unforeseen issues the co but.
This is toward the high end right original estimate between 812.
And would be a positive catalyst for towards growth.
The growth of the overall, it's market in Canada.
Given industry dynamics, and changing consumer behavior, we reevaluated, our supply requirements and taken steps to terminate a restructure supply contracts on favorable terms the tour.
And all instances resolve contracts, we've eliminated any future purchase commitment.
Due to increases in our O'neil in productivity, we believe artillerist. It's all these will be able to deliver most of our anticipated needs for the next 18 to 24 month.
And then any shortfall can be made up by purchases from third parties.
Attractive prices.
We're set up for significant international success and growth in the coming quarters.
Through the efforts of our dedicated multi disciplinary European team.
And our supply from art you campus in Portugal.
He will generate most of our near term international sales growth in Germany. We plan to continue Spike flowers oil products sold in Portugal, and enough volume to meet the market demand in a sustainable manner.
We already have long standing and strong relationships with pharmacies in Canada. This distributors in the market and continue to build significant brand awareness among our patient population in Germany.
We also expect to see continued growth in Australia, Latin America and other international locations. However, this growth will be up much smaller starting base and currently exists in Germany.
We see significant opportunity in the medical market in France, and continue to aggressively pursue potential market opening opportunities in other countries.
Separation, we've expanded our global medical Advisory Board and are happy to welcome Dr., Anna Caballo, whose located in Portugal.
We continue to rely on the expertise and experience or medical Advisory Board as we work to further legitimize the medical candidates industry based on research and data.
Now turning to second quarter.
I'm pleased to report strong financial results for a period ending June Thirtyth 2020, specifically compared to last year's second quarter, our cannabis revenues showed significant growth.
International medical up 349%.
Canada don't use up 17%.
Canada medical increasing by 65% and our health products increased 2%.
We also reported a meaningful improvement towards adjusted EBITDA, We recorded a loss of 12.3 million, which compares favorably to the adjusted EBITDA lots of 18.7 nice in the first quarter this year.
With happened a year now complete I'm pleased to say that we just experience our two best quarters until rates history.
Despite changing industry dynamics and challenges brought on by cope.
Now I'd like to discuss where we're heading.
We leveraged the steps, we've taken and director efforts onto our core businesses. We expect our next two quarters to be even better than the first you.
Our goals back half 2020 actually deliver additional revenue growth.
Better gross margins and breakeven positive adjusted EBITDA in the fourth quarter.
Absent any significant covert 19 setback.
We expect meaningful revenue growth in our international medical markets.
Or do you buy additional growth and the Canadian adult is business.
One of our objective is far revenue outside of Canada from International Medical and you U.S. and international food to exceed Canadian revenue.
I had seen significant growth in our international medical during the first half the year and expect that trend to accelerate in the back half of the air.
Our facility in Portugal will help support this growth internationally.
During the next 36 months, we hypothesize additional 40 countries, but legalized medical Canada.
And for additional countries will take serious steps towards Levi's, then they'll use Canada, which will only add to our international opportunity.
Certainly the need for additional sources of government tax revenue, maybe a factor in this process.
Many are speculating that social unrest in the United States has furthered the case or legalization and candidates reform nationwide.
While we believe this is certainly true we also believe that reform federal at the federal level is largely dependent upon the election outcome in November.
For state.
Voting on it legalize they don't use cannabis, Arizona, Montana, New Jersey, and South Dakota.
Restate, our voting on medical cannabis legalization.
Mississippi, Nebraska, and South Dakota <unk>.
The inclusion of the medical measure on the ballot in Idaho is uncertain.
In the meantime, we're focusing our U.S. strategy on building a portfolio of trusted CBD brands in states, where we are legally permitted to itself and we will address the federal CBD market.
Further clarity from the FDA.
To conclude.
In addition to fill rate to be more efficient and successful in our key businesses Global Medical Canada, Canada Canadian that don't use Canada in global product.
Given our footprint, we have a diversified source of revenues that has helped us maintain growth during challenging times and positions us to achieve our ambitious goal few one of the worldwide winners and our industry.
We've strengthened our balance sheet and are squarely focused on our path to profitability.
And we're pleased with what we've accomplished regarding our cost reductions.
We will remain focused on building brands and creating product that resonate with our consumers and patients around the world.
Enabling till ray to become the most trusted Canada and them company.
With that I'd like to turn things over to our CFO, Michael Cree Tech to review our financials.
Thank you Brendan and thanks to everyone joining us on our call and webcast. This afternoon.
Please note all the financial information, we're discussing today was prepared in accordance with U.S. GAAP and it's an U.S. dollars unless otherwise indicated.
Second quarter revenues grew 4.5 million or 10% to approximately 50.4 million or 69.4 million Canadian compared to the same quarter last year.
We experienced growth across all product channels, excluding bulk and realize significant ongoing improvement in our international medical channel.
Canada segment revenues increased 16% to 30.2 million or 41.5 million Canadians compared to 26 million were 34 million Canadian for the same period last year.
The increase was driven by 17% growth and I don't use to 17.6 million.
65% growth and kind of the medical to 3.8 million.
349% growth and international medical to 8.3 million.
Bulk contributed 402000 and sells compared to 6.7 million in a year ago quarter.
As previously indicated we expect continued growth in both the I don't use and medical sales channels for the remainder of 2020 and a decline in bulk sales as we focus on higher margin opportunities.
We will take advantage of bulk sales on an opportunistic basis and in cases, where it helps us rebalance inventory levels in certain products.
Yeah, I don't use growth was partially due to the launch of our kind of its 2.0 products in December 2019.
2.0 products now account for approximately 22% about it you cells and are expected to continue to contribute to the channel growth as we launch new form factors in the coming months.
I don't use represented 58% of kind of its revenue and the second quarter of the 2019 and 2020.
Kinda medical represented 13% of kind of this revenue in this years second quarter versus 9% in a year ago period.
International Medical represents a 28% to kind of this revenue in the second quarter 2020, compared to 7% in a year ago period.
As expected bulk fell to 1% to kind of its revenue from 26% last year as we focus on opportunities to sell totally products to end users.
Segment revenue increased 1.6% 20.3 million for 28 million Canadian compared to 19.9 billion for 26.1 million Canadian for the same period last year.
Until there's more clarity from the FDA on CBD in the U.S., We view the EMS segment, which is primarily our Manitoba harvest business as a business that is likely to deliver modest top line growth.
Segment revenue mix during the second quarter was 60% kind of us and 40% compared.
Compared to 57% cannabis and 43% him and the second quarter last year.
We expect to see a continued shift to higher percentages candidates in the coming quarters.
On a sequential basis revenue decreased 3.2% from the 52.1 million achieved in our first quarter.
This was driven by 15.8% decrease in I don't you sells a 5.3% decrease in kind of the medical sales and a 5.1% decrease in himself.
All of which were partially offset by a 43.2% increase international medical sales had a minimal contribution from bulk sales.
In general our quarter over quarter decline and I don't yourself and kind of the medical was largely attributable to pantry loading we experienced in the month of March.
This was one of the few measurable impacts to our business that we attribute to coated.
Well April continued to exceed sales levels of January February we saw a drop off in May and June and were unable to offset the entire impact of the accelerated sales experienced during the March period.
This was partially due to changes in purchasing behavior by the Canadian provinces.
Temporary store closures in Ontario.
Shipped to curbside pickup or delivery and the limited number of retail locations added during the quarter.
We estimate the March increase was responsible for approximately 14% incremental sales.
During the quarter. We also completed the transition to our outsource Celsion kindred, which resulted in a brief period of limited retail sales coverage.
Early indications when to increase cells in the I don't use channel as kindred expands our business with existing accounts and establishes new points of distribution for our portfolio products.
Although kilogram equivalent sold increased 105% to 11430 from 5588 in the prior year second quarter. This was largely driven by a one time bulk transactions related to the settlement of supply contract.
Our average net selling price per gram of cannabis and the second quarter was $2.64, a 43% decrease or 197 from the 461 during the same period in 2019, and a 50% sequential decrease from the 528 during the first quarter this year.
However, the two dollarssixty four during the second quarter of 2020 was impacted by a onetime bulk transaction associated with the termination of a supply contract.
Excluding the onetime transaction average net selling price increase to $5.03 from the same period in 2019.
The increase was primarily due to continued growth of our international medical business, a shift in sales to higher potency and higher priced products and the continued growth of about 2.0 products in Canada.
Going forward, we expect our average selling price program to remain stable or increase over time as sales of international medical cannabis continued to make up a larger percentage of our sales mix.
Our average cost per Gram sold cannabis and the second quarter was $2.06 per Gram, a roughly 47% decrease from $3.86. During the same period in 2019 $3.97 during the first quarter this year.
The decrease was impacted by the same onetime both transactions associated with the termination of a supply contract.
Excluding the onetime transaction net cost per gram decreased to $3.42.
The year over year decrease is primarily result of reduced cost structures at our facilities due to our cost cutting efforts better throughput and cost absorption at our Hyde Park holdings processing facility.
Partially due to the availability of low cost product available from third parties.
Nevertheless, with the closure of high Park Gardens high cost facility and increased grow volumes in Portugal, where we've had limited cost absorption, we expect to see cost per gram reduced overtime as the full benefit of our cost reductions is realized.
We may see fluctuations as or facility in Portugal continues to ramp production and the percentage of third party purchases berries in relation to our own product quantities.
Gross margin for the second quarter, including asset write downs and onetime charges was negative 10.7 per cent compared to 27% in the same period last year and 21% during the first quarter 2020.
During the second quarter. This year, we wrote down 18.6 million of inventory some of which was associated with the closure of high part gardens, and some of which was the result of an exhaustive review of all products and stock cannabis and him and a thorough evaluation of their potential use or demand in the market.
This number also includes approximately 5 million associated with the write off of a deposit for purchases from a supplier.
During the same period last year and the first quarter 2020, we wrote down inventory valued at $200000 and $4 million respectively.
Based on the actions taken during the first half of 2020, we do not expect to incur additional material inventory adjustments in the foreseeable future.
Gross margin for the second quarter, excluding inventory valuation adjustments was 26%, which represented a 100 basis point decrease from the year ago period, and a 300 basis point decrease from the first quarter of 2020.
The decrease was partially due to introductory shipments made at lower margins in our international medical business and as previously indicated a onetime bulk transactions associated with the settlement of a supply contract.
Excluding the onetime transaction gross margins, excluding inventory adjustments was 32% a 500 basis point increase last year, and a 300 basis point increase versus prior quarter.
Gross margin for cannabis, excluding inventory valuations and adjustments decreased to 10% from 14% in a year ago quarter.
20% in the first quarter Twentytwenty.
Excluding the onetime both transaction previously mentioned candidates margins were 20% 600 basis points higher than prior year and flat to Q1 Twentytwenty.
Gross margins for him excluding inventory evaluations and adjustments was 50% compared to 51% in a year ago quarter, an increased from 41% in the first quarter of Twentytwenty.
The increase from Q1 is largely due to the timing of discount programs offered to our largest customer.
Please recall starting in 2020, we made the decision to stop attributing any cost I used to byproduct at our high Park and Portugal facilities.
This decision should reduce our need to make future inventory adjustments. However, this decision has had the impact of increasing our cost per gram on flower and derivative products that do have value.
Moving to expenses.
Total operating expenses, including non cash impairment charges of 28.4 million were 70.4 million in Q2, a 25.2 million increase compared to the prior year quarter.
Excluding impairments and write downs second quarter operating expenses totaled 42 million and represented a 3.2 million decrease from the prior year second quarter and a reduction of more than 9 million from the first quarter. This year.
The savings is even more significant if we compare Q2 to the annualized run rate of Q4, 2019 and amounts to a 13 million dollar reduction.
This is demonstrative of the meaningful impact we've seen from the cost reductions Brendan mentioned earlier.
The details of the 28.4 million noncash impairment charges incurred during Q2 includes 25.1 million related to the closing of high part gardens.
This consisted of 13.6 million for land and buildings.
Point 2 million for its cultivation license and 1.3 million for foreign currency translation adjustments.
Included in the noncash charges was 3.3 million related to our separation from Smith and Sinclair.
There were no asset impairments in the second quarter of last year.
During the first quarter. This year, we had 29.8 billion related to impairments.
Similar to an inventory adjustments, we do not currently envision additional material impairments.
The expense reductions implemented have taken place across all aspects of our business and it could head count reductions of over 400 people as well as cost controls and all departments.
We're now focused on investing dollars in areas that will generate the highest expected return across the business.
We do not believe we cut costs or head count to the extent they will have an adverse impact on our ability to meaningfully grow our business across all categories and 2020 and 2021.
It's Brendan indicated.
Our efforts to reduce our cost structure, we're not prompted by the covert situation.
Plans to rightsize the business were and are independent of any covert impacts in the market.
While these changes were difficult we feel we have completed the majority of these measures and are in a good position to focus their outlook on future growth.
Net loss for the second quarter, including inventory adjustments unimpaired charges was 81.7 million or 65 cents per share compared to a net loss of 36.3 billion or 37 cents per share in the second quarter of 2019.
The increase net loss was primarily due to the impact of the change in fair value of warrant liability and the impairment of assets.
Excluding inventory adjustments and impairment charges.
Net loss was 34.7 million, a 1.4 million improvement compared to Q2 2019.
The 116 billion improvement versus Q1 Twentytwenty.
Adjusted EBITDA loss for the quarter was 12.3 million compared to a loss of 18.7 billion in the second quarter last year.
The improvement in the year over year adjusted EBITDA loss was due to higher revenues and lower operating expenses.
On a sequential basis and despite moderately lower revenues attributable to cope with 19, our adjusted EBITDA loss reflected at 34% improvement from 18.7 million boss and the first quarter of Twentytwenty as we implemented our cost reductions and operational efficiencies.
The significant momentum reflects our commitment to achieving positive or breakeven adjusted EBITDA by the end of Q4 by continuing to grow revenues improved margins and operate our business sufficiently.
Turning to the balance sheet, we ended the second quarter with cash and cash equivalence of approximately 137 million a reduction of 37 million from the 174 million at the end of the first quarter 2020.
Due to restrictions associated with the warrants we issued in March of this year, we had very limited access to our aftermarket or ATM offering program.
During Q1 in Q2.
Given our existing cash balances future access to the ATM program.
Increased efficiencies in our business, we believe we have sufficient capital access to future capital to manage our operations and execute our plans for the remainder of 2020 and into 2021.
We anticipate our cash flow needs for the remainder of the year to be approximately 45 million to 55 million, which primarily consist of operating cash needs, a 15 million to 20 million.
Plus interest and principal payments of approximately 15 million.
Capex of approximately 16 million.
These numbers assumed no meaningful additional impacts due to coated and the remaining capex assumes completion of phase two in Portugal during 2020.
We did experience some covered related construction delays in Portugal during April when they are still expected completion this year.
However, we experienced future construction delays later this year due to cope with 19, they may impact total capex spend for the year.
It's important to note that during the quarter and subsequent to the quarter, we aggressively reduced our future purchase commitments.
This reduction is the result of renegotiating endorsed terminating several legacy supply contracts with out of market terms.
Well some solutions required certain cash payments, given existing market dynamics and projections of future available supply and pricing.
Final outcomes were favorable to tell right.
As Brendan outlined at the beginning of the call we're focused on our path to profitability.
We made significant changes to our business during Q1 Q2 to strengthen our position as a leaner and more efficient leader and the candidates and help industries.
These actions, while difficult and time consuming are largely behind us, which will now allow us to focus on future growth.
We're not keenly focused on growing our revenue.
In particular, we expect to see meaningful growth in international medical where we already have a proven track record.
Additional growth and I don't use from our existing 2.0 products and new form factors and from leveraging our kindred salesforce.
And by expanding the presence of Pim products at existing and new brick and mortar an online retail outlets.
As we increase sales were now position to realize the benefits of our new cost structure.
Looking ahead, we remain focused on achieving significant revenue growth and a level of profitability that supports our growth initiatives.
We believe the cannabis industry is still in its early stages and meaningful revenue opportunities exist and we'll continue to surface as additional countries legalized medical indoor out use kind of us.
We also believe there will be revenue opportunities for CBD in the U.S. once the FDA provides more clarity on nationwide regulations.
We fully expect till right to have a substantial and profitable presence in our existing and future markets for kind of person him and we believe we have taken significant actions position till ray to achieve this goal and be recognized as the most trusted candidates and hemp company.
Brendan underlying all available to take your questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is the question Q.
My first start to if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys.
Our first question comes from Vivien Abrams with Cowen. Please go ahead.
Hi, good evening. Thank you.
And then Mike.
So my question is a high level one on your production strategy. So Britain you called out a couple of things, so you're shutting down hypercard and high cost that makes sense.
Noted that.
It seems like there might be.
External supplied high quality.
Same time, you're making the bulk sales again terminating supply agreements I'm just trying not to piece. All this together like you obviously want to avoid cultivating.
Internally to high Hot but what gives you confidence that there's actually adequate supply to supplement that particular, given what you're doing slightly better.
Yes, when we look at when you look at our facility in a in Portugal, and our facility in and it's gone, Ontario, what we've seen over the last what we've seen over the last.
Six months is that our yields and tremendous gone.
Have increased significantly.
Based on some improvements that we made to the facility.
Really starting about a year ago and those those improvements were completed.
In Q1 sort of saying, we're saying two things out at that facility significantly higher yields.
Well as significantly higher.
Potency.
From from that facility.
And so that that gives us confidence that our internal candidate supply from a three different facilities in the nine, though and it's gone and and Portugal.
Will enable us to meet.
The demand that we see.
Over the course of the the next year.
Okay.
Thank you for that.
Moving to.
Market in Canada, obviously, kobin very challenging operating backdrop.
You guys and the industry as a whole I am curious about.
How big an impact could really was because obviously, it's still early in reporting season, but your peers, who do you actually break out also.
We didnt see the same kind of softness in there and there is many cobot specific call out at least thus far.
For Canadian candidates earnings. So I guess the question is how do you feel about your positioning.
<unk>.
Segments do you feel like you.
One your fair share of that segment. Thanks.
I think it's yet to be determined I think it's a it's a good.
It's a segment that we saw emerging are really starting in August.
20, United team and we were we were one of the first two.
To enter that that segment.
I think that there's still a.
There's still lack of brand loyalty within certainly within that segment in Canada, but.
I think it's probably early or to determine what what our eventual market share.
We'll be.
In terms of covered I think the.
The the biggest impact and coated with the pantry loading we saw ROI across <unk> and Canadian medical at the end of.
Q1.
Where [noise].
You saw online ordering.
Yes, and we saw online ordering within our medical.
Patients increased significantly in March and and that led to some high inventories.
I placed bike, though you'll see us at the end of at the end of March and some of those provinces and I do it sort of work through a work through that inventory in Q2.
Perfect. That's helpful. Thank you I'm going to squeeze one last one in on clearly the bright spot on the quarter was international medical very impressive that in six months time, you guys have been able to double your revenue base and obviously led by Germany, I really appreciated your comment Brendan it out over the coming years, Germany actually surpassing 10.
Good.
From a population standpoint alone like how does that make the kind of said, it's but I'm curious what you're seeing kind of in the last three months, maybe a six month and one of the problem, but the German market with having the Undersupply was.
Starting with you a limiting factor in terms of doctors really embracing prescribing can't event. So is there have you started to see that evolve or are we still like getting the medical community comfortable with a more about supply chain in Germany.
Yeah, I think the there have been significant well I'll step back a in terms of how you friend. The question. He I think one of the things that that's important to note is that you know when the first two quarters and this year, our international medical exceeded our.
Our international medical revenue for all Bashir and Oh, we expect that trend that's significant growth on international medical to continue in Q3 and and into.
Into Q4, and so that's that's a trend that we think it's really positive and we're doing everything to ensure that.
We can to ensure that we continue to pick my grow that international.
Revenue there their habits and supply issues in a in Germany.
One of the legacy suppliers has been able to the quite product over over the course of part of Q1 and into Q2, and so that the big opportunity for US we are starting to see both the.
The number of well I shouldn't say, starting where we are continuing to see the number of patients.
Who have prescriptions.
Increase and we're continuing to see the number of.
Doctors, who are writing prescriptions increased although it it's still off a.
Relatively small base.
Yeah, that's it takes time.
It takes time to educate.
Patients it takes time to educate.
Positions in.
In any emerge emerging medical market. We tune same thing you can the four years ago.
We follow the same thing in Australia, you know over the last two to three years.
And so we know how to do it.
Educate physicians, we got educate pharmacists, we know how to educate patients and so that's what the process that were that we're marching through.
That's great. Thank you much.
There.
Our next question comes to Rupesh Parikh with Oppenheimer. Please go ahead.
Good afternoon, and thanks for taking my questions. So I wanted to ask a question just just on gross margin. So you broke out separately, the Canada best and have artists like we did for the first time. So I just wanted just to understand how you guys are thing John.
Our board.
Hey, thanks repair so on the gross margins for cannabis I think we do continue to see expansion of the gross margins as we see the international medical make up a higher percentage of our cannabis actual sales.
And when we talk about the him or you know I think the we'll probably see that fluctuate depending upon what kind of discounts and other things that we offer to to customers in that particular space, but we do see that between how about 40 and 50% consistent margin I'm moving forward for him.
That's exclusive of any kind of real CBD activity in that particular space.
But <unk> and on the so I think thats the the two pieces of it.
Okay and cannabis, what's the expectation for that going forward.
Oh, you know cannabis I don't necessarily have up an expectation that number for kind of seeing how fast we get growth out of the the international medical market. We're trying to monitor what's going on relative to pricing I I generally think we'll probably see a couple of hundred basis point expansion in that a couple hundred basis point expansion and that on a quarter over quarter basis.
Is what we're looking at for total margins and inclusive it up.
Okay, Great and then on the Canadian Rock side, you guys could we expect there for me in the back half of your how do you. How are you thinking about the perimeter by flower versus two point out do you expect kind of stupid I noted that how bigger impact or flower just any thoughts in terms of how do you guys are thinking about that road bike operator.
So generally and Brendan you know if you've got some attention on this but generally speaking I think that we're seeing good growth coming out of the other 2.0 products. We did see good quarter over quarter growth on a sequential basis, and our and our Vapours in particular, we saw roughly 12% growth on that.
And so I'd say that we continue to see solid growth not we do see good growth in the package flower. Although it's just a you know I think its moderating a relative to 2.0.
Hi, Rupesh I I'd, just add that yeah, we do have Oh.
A number of two don't know products and our pipeline that we anticipate.
Lunching here in Q3 and into Q4, and so we had we had built a two don't know product portfolio.
And starting gosh, two years ago, and so there are a number of product, where we thought we would see more competition.
At this point and and we don't and so.
We have a number of products that will launch and wrote in the coming.
Great. Thank you for all the color.
Next question comes from Pablo Sanuk with Cantor Fitzgerald. Please go ahead.
Thank you Hello, everyone just want to follow up on International front, you know the concern that the Germany's developing so slowly and then we she had a lot of companies talking about supply into the market. So is it a reset that margins will actually be oversupply in the next six months.
And on that and along those lines you didn't talk about your you want to shoe from Portugal, lower costs, and say shipping from Germany from from Denmark, what producing in Germany are shipping from Canada.
But you know how much of that advantage should be able to retain them. So a profit margins plenty of cost and so much lower why wouldn't you be able to have much higher share just trying to connect those dots there potentially oversupply.
How does it for you compared to other company. Thanks.
So when we look at the patient when they look at patient count in a in Germany.
We look at the growth of patients a in Germany.
Compared to a medical patient counts in a in Australia.
And in a in Canada that back in 2014 15.
Yes, the curve the adoption curve in a in Germany is is actually accelerated compared to Canada and in Australia, and so so we do you expect to see.
Continued.
Patient growth there, obviously much higher Q2 2.4 times the population.
So.
Eventually it will be a much much larger medical market.
You know, we we have seen a number of.
Competitors.
Yeah, either she's a European operations or significant meeting.
Cut back European operation, and so that that meet the optimistic about our.
Opportunity to to capture.
Marketshare within in Germany.
A follow up there just on the one that would be that ought to get being posted they were breakeven by the fourth quarter. What their sales increase would you need to see what are you breakeven or or do you still plan further cost cuts on on a separate topic, you mentioned that shifting to a two way, but all could already sort of part of the distributor to fill in kind of figure.
Give more color on the than where there would be any disruption.
I feel good business. Thanks.
Maybe I'll I'll I'll take the.
The second the second part of a that question first so we we integrated A. I suppose broker called Kindred and so we're using their sales force.
Who are acting as our exclusive agents for Oh provinces in territories.
For a Quebec.
So we made that transition in the middle.
Q2.
And so Weve you know obviously, it's been a lot of time, educating and ramping up that that salesforce and.
What that does is it gives us.
Much broader reach in Canada.
Prior to that transition.
We had about 18 people on that failed.
On our own internal so thin and kindred has a boost for you too.
Sales stuff and so that will.
Not only increase the frequency.
Which we.
Interact with the various.
Provincial distributors and individual retailers, but also increase.
The scope so the number.
Retailers that we can.
Interact with on a on a <unk>.
On a daily weekly monthly basis, so that transition did take place in the middle of.
In the middle of Q O Q2.
And we do expect that too.
Drive.
Revenue growth within the don't use market in second half here.
[noise] there'd be no question.
Yeah. So I'd say, you know to the point that brendans, making about the distribution the kind of I don't use market is that we do see a growth in that market I'd say that it's not exceptional growth, but it's certainly solid growth coming from a candidate rack, where we see the accelerated growth coming is from the international medical.
And I think we've been pretty consistent about saying that we expect that to be a pretty significant growth.
Opportunity for us as we move forward you know I hesitate to put numbers out there right now in terms of what kind of percentages were talking about you know we're working towards all the things that we need to to get to the EBITDA positive or breakeven and that's inclusive of the cost cuts. We've got we should see some benefit as we move into the.
Back half of this year for saying the full impact of the cost cuts that we have implemented and not necessarily just a partial amount of those says we did in Q1 in Q2.
So it's I think that we've got some some moving parts that if we you know if our revenue expectations are not necessarily met I think we've got some avenues that we would look to to go down and try to still make that happen or.
If we see the revenues start.
Shifting to what we think they should is that we've got an opportunity to maybe make some additional investments and the company elsewhere.
Got it thank you.
Next question comes from Eric Right with Alliance Global partners.
Hi, good evening enough. Thanks for the question.
So my first question comes along lines without Manitoba I know it seems like its Kim you know your third in terms rank order for top line opportunities, but last quarter, you talked about increased demand from Costco and Amazon. So just let's get some more color in terms of how that business has been evolving kind of how you see that growth opportunity over the next six to 12 month. Thanks.
Yes, so Manitoba harvest.
I think that we see that is a kind of a top line moderate growth story or it's.
Despite the distribution that we might get that's just a larger business right now that's fairly well establish the takes other significant distribution I didn't really change the growth profile. So I'd say that we just see that is kind of a stable gross type of a business going forward I kind of in the range, where it's been.
[noise] alright, great. Thank you and then just just one more from me then just in terms of ASP and I guess it goes as well to be gross margin profile. It's kinda when asked about earlier as we look for the additional sales from international I know you said I'm you know in this quarter was kind of impacted from some introductory shipments that lower costs.
So kind of you know how quickly can we see that kind of evolving kind of juxtaposed against kind of potentially lower value offerings at the Canadian adult use market side seems like with the Accenture, both you're expecting to continue more on the international side that should be a nice lift but you know how do we kind of think about as that continues to evolve in Japan.
Actually do use you know some third parties as well here on the Canadian side I'm, just kind of think about the puts and takes down the gross margin that'd be helpful. Thanks.
Sure so.
When we talk about the average selling price over in Europe in the international medical.
We're seeing average selling price inclusive of all the markets in which we sell in it is probably the.
$9 Manger, so nine to $10 range.
And I think that we see that there may be some pricing pressure on that as we kind of move into the year, Germany or just as there's more market entrants trying to gain share as well as we start to introducing new product offerings or other lower THC potency.
On the the Canada wreck you know I'd say that we have seen actually we've been we've been pretty consistent with our pricing we haven't really been.
Been driving pricing down like a lot of other people have we've been trying to manage the margin and pricing question, there as well as the product offerings.
And when I look at kind of the the sales by potency that we've seen a pretty significant I guess growth of cells of higher potency for us in the marketplace.
To the tune of I mean were roughly in terms of high and mid potency. We're in the 40% for high potency, 48% for mid I'm, saying, probably 12% below potency right now.
So we're trying to manage that margin equation.
In Canada, so that we can see that as a profitable business as opposed to just a market share on the revenue business.
Alright, great. Thank you that's helpful.
Next question cause or Michael Lavery with Piper Sandler please limit yourself to two questions.
Thank you very much.
Just wanted to follow up a little bit on the EBITDA up piece and the positive to break breakeven to positive I know you touched on some of the thinking around the revenue piece of that but can you give some color on what are the key things to watch how much are the costs pretty well set versus that fall just.
Driving the revenue.
Making sure you drive revenues the right way are there some other flex factors <unk> <unk> you know, what's what's most important for you when you're watching that and how confident are you in being able to hit that by the end of year.
Sure. Thanks, So that's good question so.
When we look at the cost reductions those are pretty well set at this point there may be some marginal additional things that we do just to optimize business in certain areas, but in general when I look at all the cost areas, we've taken roughly 32% or out of our cost structure.
And that's everywhere from employee cost to sales and marketing professional fees public relations then it's across the board and so when I look at that in terms of how it breaks down a we've actually.
If you compare it to a run rate of Q4 last year, we've achieved 15 million to that and we see the rest of that dropping to the bottom line.
And Q3 in Q4 time frame.
So you know that's roughly I mean, we brought me reduced our or SGN they spend.
Somewhere in the range of 50 million a quarter to EUR 30 to 30 a quarter.
And so I'd say that that's pretty well said and what we would be looking for is the topline growth to leverage those costs now.
Okay. That's really helpful and just a follow up on Europe, or I know you said it would outpace other segments and be a growth driver I guess, just maybe to help us not get carried away in our modeling [laughter] any other you know any other color you could give their introductory pricing, we should watch out for either to new.
Customers work toward channels or countries, Besides Germany, or you know anything just to help give a sense of how to frame a little more precisely what the backup looks like.
Yeah. So I don't think we have a more of the introductory pricing type of thing coming our way we're more focused on the the actual pricing into normal market channels. At this point then.
And we'll continue along those lines. So I'd say that you know I hesitate like I said I hesitate to just give out kind of a number.
Yeah, I think we've talked about previously or something in the 40 to 45 50 million range for that business and you know I still think that that's kind of where our eyes are headed.
And we'd like to see you know try to make that happen.
Okay. Thank you very much.
Next question comes to grab heck regular with eight capital please limit yourself to two questions.
Yeah, Hi, good afternoon, I had a question Brendan I'd be curious your thoughts on you mentioned in the prepared remarks about the U.S. either the market and specifically with the haven't business. How you know there the real meaningful growth will it really comes from getting some regulatory change, particularly from the FDA. So I was wondering as it relates to the.
Coming election, and there's a lot of eyes on what that might do on the T.H.C. side is there anything odd that that you potentially could see as meaningful I'm coming out of that with respect to have to unlocking incremental value from the CBD side. Thanks.
That's a that's a good question.
Oddly.
Probably at this point it seems like.
There's a good chance in the U.S. that we may have a some clarity on T.H.C. before CBD.
Or perhaps they have you perhaps they come concurrently.
But I have a [laughter] I've taken myself out of the business I'm trying to predict or anything having to do with timing and the FDA.
And so I I don't I don't really have a great answer for for your question.
Other than I remain.
Yeah.
I remember I remain extremely optimistic about.
T.H.C. and and clarity between the federal government and state government related the tape C.
You know in the in the coming 18 month.
Okay, I appreciate that and as a quick follow up just a with respect to add to that had business there and as you are navigating the environment right now with that but the walk down the reopening a is or is there any color you can pop provide with respect to how much of the sales mix Y E commerce versus.
How much was in store or how that's deviated from historical just be curious to getting any additional color in that respect nice.
You know I don't I would I don't really good bundle.
I was just going say that we've seen.
In terms of mental the harvest, we've seen really strong strong business with with both Amazon.
And the Costco.
And we saw that Ah, we saw that Q1, and we saw that continue.
Into.
Into Q2.
Yeah, I, just I don't I don't have the details on the split.
So my apologies for that I, just I don't have that data.
All right in front of the at least.
I can certainly get <unk> dr. excellent. Thank you.
Next question comes from Tami chatter with BMO capital markets again, please limit yourself to your question.
Thanks for the question I just wanted to go back to Canada rack up for a second.
Just wondering if you can just give more detail as to how you intend to you know him gross or in that segment. Because you know this quarter. It was a sequential decline anyways right now and not in that market or it appears the only way to grow share even if it's short lived before someone else complete sounds like it's too.
Good luck competitor in that hard value segment. So it seems that you're trying to manage to not go aggressively there. So I just want to understand how you're thinking about how to manage your like Youre actually got true and your proponents in that segment in the face of beside this apparent trend in the industry.
Yeah, Yeah, we've seen we expect to see increases in a distribution through a relationship with kindred, which gives us greater reach and.
Greater frequency interacting with the relative there the respective.
Provincial buyers and and retailers and we've seen a healthy growth in a two day <unk> product revenue growth and we expect a with.
The additional Oh, two dose skews that we're launching and its somewhere some moved in half a dozen it doesn't we expect to see a continued growth.
In it don't use we expect to see growth and then don't use in Q3 Q4.
Okay, and specifically on that your point now product launches I'm, sorry, if I missed this I didn't think I saw it in the press release or heard around the call, but I was wondering if you're able to give additional color on the timing for THC beverages, where you when that might be coming.
Mark It sounds like there's good benign in that category. Thanks.
Others, good demand you know.
The.
The team at a at fluent beverage would be better equipped to to answer that question. So.
No I would I would 0.2 to two you aren't answer it I know the working on it and yes, they're optimistic about their ability to produce those products.
Okay. Thank you.
Next question comes from Magic harder with Stifel. Please limit yourself to two questions.
Thanks, I'll keep my question, one I, just I guess I guess in here, you're reiterating positive EBITDA guidance in the quarter. It's all the even our prudent was driven by a lower s. Yoo ne.
Actually lower or actually works if you consider last year. So I'm just guessing with the gross margin seemingly it's it's it's it's it's not on track for improvements if I heard Michael correctly earlier in the call you're not even looking for that much of an improvement from 10% level I guess, what provides you the incremental competence of getting there to adjusted EBIT on can you give us kind of.
Revenue target for the year to get that gets you there. Thanks.
Yes so.
That I did indicate that there would it be improvement on the margins on 100 to a couple hundred basis points.
And then in terms of a revenue target.
Just I don't think that we're going to give that kind of specific guidance right now.
Just a lot of moving moving issues in the marketplace. We've got to plan in place that we think delivers what we need to to come at the EBITDA breakeven or positive.
And we're working towards that but I, just don't think that it's it's prudent right now to be giving specific revenue target guidance.
And just I guess clarification I did hear at 100 to 200 basis points, but does that off the 10% adjusted gross margin for the cannabis business or is that for the overall gross margin for the children business.
Well I mean, I think it's it's largely driven by cannabis, it's not necessarily going to be driven by.
By Manitoba Harvest I think we had indicated that the Manitoba harvest business margins would be in that 40% to 50%. So.
No it's going to fluctuate their based upon how we how we approach the marketplace for discounts there. So I think that when we're talking and that's where it's been historically in last couple of quarters. So I think when we look at the business and cannabis is that we see some improve margins there from the growth on the on the international.
Side of things, we see the growth in margins relative to kind of that'll rack based upon 2.0 products.
And the mix of products that we continue to sell.
And I think we just you know and I'd say that the the Q2 margin was quite low based upon some that onetime bulk transaction that we indicated.
And so that won't be replicated.
And so I think we've got some some improvement the mostly in the back half the year.
Okay. Thanks.
I would like to turn the floor over to Brendan for closing comments.
[noise], Great, let me, we and our discussions Tonight by expressing my appreciation to the entire toward team for all the due to improved the lives of our customers.
Through the power of hump in Kansas. Thank you all for your interest in our company or participation on tonight's call a in your thoughtful questions how do we didnt.
This concludes today's teleconference. You may now disconnect your lines.