Q2 2020 Sundial Growers Inc Earnings Call
[music].
Good morning, and welcome to send diagram worst second quarter Twentytwenty financial results Conference call.
As a reminder, all participants I listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
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Yesterday afternoon sundial issued a press release announcing their financial results for the second quarter ended June Thirtyth Twentytwenty.
This press release is available on the company's website at <unk> S and the other girls Dot com and filed on Edgar and SEDAR as well.
Presenting on this morning's call, we have talked Georgia, Chief Executive Officer, Jim Keel, Chief Financial Officer, and Andrea start dollar.
Then and Chief operating officer.
Before we start I would like to remind investors that certain matters discussed today's conference call or answers that may be given to questions could constitute forward looking statement.
Actual results could differ materially from those anticipated.
Risk factors that could affect results are detailed in the Companys financial reports and other public filings that are made available on SEDAR and Edgar.
Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated.
I'd also like to know that we're conducting the call today from our respective remote locations.
As such there may be brief delays cross talk or mine are technically shifts during this call.
Well, thank you and that's bad for your patience and understanding.
We will now make prepared remarks that and then well move on to a question answer session.
I would now like to turn the conference over to tax charge.
Good morning, and thank you everyone for joining us on our second quarter Twentytwenty earnings call.
As the Coburn 19 pandemic continue to affect global market and people around the world. We hope that everyone is staying safe and healthy during this time before we discuss our operations in our second quarter results I.
I want to take a moment and address the impacts appropriate 19, how some dollars adopting during this time.
First and foremost our top priority continues to be the health and safety of our employees sundial quickly activity at our emergency Operation Center back in March or response team, which is comprised of key leaders from across the company has been monitoring the situation daily and it's implemented a business continuity plan to support its employees.
While continuing to develop introduce reliable high quality products that meet the needs of our consumers I'm proud of Howard decisive team has executed on this plan.
In accordance with the guidance the provincial and federal health officials to limit the risk in transmission of Koby 19, we've implemented mandatory self quarantine travel and sanitation policies as well as social distancing measures.
We continue to be committed to our stringent procedures to ensure the protection of our employees and consumers along with achieving minimal disruption to our operations.
Sunbelt did not experience any material disruption to production processing activities in the second quarter related to coded.
Ratio, one diversity disparities continue to be Brooklyn, workplaces across the country and the swell of nationwide in international protests in demand for change has not gone unnoticed by sundial, we're proud to support and have signed the black North initiative led by West Hall.
North is an initiative that is challenging Canadian leaders to commit to specific actions and target design and anti black systemic racism among other things the initiatives that several specific goals such as having at least 3.5% of executive and board rose in the company held by Black leaders by 2025.
Social Justice starts at home, we need to and will address our hiring practices and corporate culture, as well as any potential conscious or unconscious biases and our leadership.
There are many ways to get diversity wrong, and we want to choose the hard right instead of the easy wrong decisions.
Diversity for us isn't about checking boxes are hitting hiring goals, we need to take concrete action, we're committed to continuing to learn listen and lead on action to address diversity discrimination and racism.
To ensure we reach our black North initiative goals, we're committed to review and improve our diversity policies and put real actions in place that support long term.
That makes solutions.
August 1st marks and I was one year anniversary as a public company. While the team has accomplished many important milestones to state that sundial shareholder return profile since the IPO had been disappointing would be an understatement.
Over the last six months, our newly constituted management team has worked hard to effectively reset the business. We've made solid progress on advancing our core objectives, including improving our financial flexibility narrowing our operating focus and lowering our cost structure, but there's still significant work to be done to deliver on innovation in.
<unk> capacity utilization and reduce our costs of goods sold.
In the second quarter the team achieved the extremely difficult task of growing revenues by 44%, while reducing SM DNA cost by 35%. In addition, our cash burn rate was reduced by 38% on a sequential basis.
To achieve this result, instead of a single quarter is a phenomenal accomplishment. Our team continues to deliver on the mission of transitioning from a business model that was entirely reliant on wholesale revenue to one focused on branded products not only did branded products reached an all time high of almost 70% of total revenues this quarter, but.
Our average gross selling price per gram of branded product actually increased by 11% to $5 than 67 cents per gram versus Q1.
[noise] largely driven by our success in the big category.
As we relentlessly strive for continued improvement we've made some very difficult decisions this past quarter, including additional headcount reduction the sale of high quality assets and the curtailment of our cultivation activities.
We're intently focused on reducing our cost of goods in the coming month. Our leadership team has formed a task force to identify ways and areas for additional strategic cost cutting in our cultivation and production processes. It is essential that we become more competitive versus our peers and the elicit market.
As consumer demand shifts and new products are introduced.
These initiatives along with continued strong consumer demand and increased sales levels to date in 2020 should position us well for the balance of the year.
So no success will continue to be driven by delighting, our customers with branded product offerings in capturing additional market share with a focus on inhalable products. We're pleased to see our quality brand resonating with consumers. We have strong foundational market share in Canada and are excited by the growth we're seeing in the broader market.
To develop trusted candidates brands that resonate with consumers. It is critical that we deliver consistent high quality products.
Andrew store will provide more details around this in his update.
As the industry in Canada continues to grow we believe that sundial is well positioned to meet evolving consumer preferences by being a consumer centric organization with data driven consumer insights and analytics.
Well sundial remains focused on its core strategy. The board of directors has determined that it is prudent to conduct a review of potential strategic alternatives to ensure that all opportunities to maximize value or explored sundar has engaged ATP capital markets as financial advisor to assist with this review.
There is no assurance that this review will result in the transaction of any kind and the company does not intend to provide any update or additional comment on these matters until the board approved the specific transaction or otherwise concludes the review.
While we are pleased to be one of a small handful of Canadian Lps able to post quarterly revenues greater than $20 million.
We remain focused on the intense competitive landscape and the need to gain greater scale to reach sustainable profitability, we view the Canadian market as a compelling long term opportunity, but the industry is still in its infancy and growing pains are part of the current reality for all Lps.
We are only just starting to see evidence of true brand loyalty among consumers, we're carefully monitoring commoditization in the flower market.
And have witnessed an epic 80% increase in part excuse in the marketplace since the beginning of this year.
It is unlikely that we will see this quarter's 40% growth in sequential revenue continue at the same pace in subsequent quarters. Unfortunately sundown success does not require it.
We continue to believe that the Canadian candidate industry will begin to take the shape of an oligopoly over the next 24 month.
This past, we'll likely see both consolidation.
Which will help leverage corporate cost structures and business failures as investors back away from smaller entity that will never achieved the scale required to become sustainably profitable.
Inventory liquidation and non economic pricing decisions will only accelerate this process.
Ultimately, bringing greater industry stability to the enjoyed by surviving Lps and their stakeholders.
So now expects 2020 to be a transition year at the company has reset its strategic focus streamlined organizational structure and implemented a comprehensive operational and supply chain productivity optimization program.
Our restructuring plans already helped strengthen sunbelt position.
We expect to continue to invest in our strategic initiative, we remain focused on reaching sustainable profitability.
I would now like to turn it over to Jim Koch Fund, our CFO to give you a financial update.
Thank you Jack and good morning, everyone I would like to remind everyone that all amounts are in Canadian dollars, unless otherwise stated and as we were still in the early stages of startup one year ago comparative period that I referred to will be Q1, 2020, unless I indicate otherwise also note that I will refer only to continuing operations, which will exclude results from a.
UK ornamental flower business as it was sold during the quarter.
In Q2, 2020, we made significant strides in optimizing our asset base, reducing our overall cost structure and recapitalizing, our balance sheet for sustainable profitable growth. We're pleased with our financial results for the quarter, particularly are counted mis revenue growth.
We completed the sale of our UK based bridge farm assets on June steps as previously disclosed we sold bridge farm to the former management sellers in exchange for the following.
The assumption of 45 million in debt under our term debt facility, which then totaled 150 million.
Assumption of contingent consideration liabilities from the original bridge farm acquisition agreement.
And the cancellation of approximately 2.7 million Sundell common shares held by the former management sellers.
He shares were issued in relation to the original bridge farm acquisition.
Along with the sale of bridge farm on June 5th we amended and restated our credit agreement extinguished our term debt facility as well is raising additional funds by way of issuance of convertible notes and the amount of 18 million us dollars in aggregate principal.
Under the amended and restated credit agreement with our senior lenders, we eliminated all financial covenants with the exception of a minimum cash balance of two and a half million until December 31st of this year or one quarter later under certain circumstances.
As well as a covenant requiring us to raise 10 million U.S. dollars of equity by December 1st 2020.
Furthermore, quarterly principal payments of $2.1 million had been deferred with the first payment now due on September Thirtyth 2020.
With respect to the term debt facility that was outstanding the remaining $73.2 million a principal and accrued interest there was not assigned to the former bridge far management sellers was extinguished and replaced with 73.2 million in senior second lien convertible notes.
These and elsewhere convertible into common shares at initial pricing one U.S. dollar per share.
As part of this transaction common share purchase warrants were issued to acquire up to 17 and a half million common shares at an initial exercise price of one dollar U.S. and an additional 17.5 million shares at an initial exercise price of $1.20 U.S. per share.
We've also improved our liquidity position with the issuance of 18 million us dollars an unsecured convertible notes.
Let's do not bear interest, except upon triggering certain defined events.
They mature on June 2022.
Overall, the amendments we've made to our debt facilities in the follow on convertible notes issuance has improved our liquidity and relieved lender restrictions to allow us to execute our go forward business strategy.
Turning to our Q2 2020 financial results, we reported net revenues of 20.2 million, reflecting a 44% increase over the previous quarter net revenues of 14 million.
We recorded an adjusted EBITDA loss of 3.9 million for the second quarter, which was a 7.7 million improvement over Q1.
Our net loss from continuing operations amounted to 31.6 million, primarily reflecting noncash charges related to fair value adjustments and an inventory impairment provision of 13.1 million on dried cannabis and cannabis extraction related to adjustments made to our product portfolio in order to meet rapidly evolving consumer demands.
As Jack mentioned, we've taken some difficult, but decisive actions to improve our cost structure sandals genie costs related to cannabis operations were reduced by 20% from 10.6 million to 7.7 million in Q2, when compared to Q1.
Production in our workforce required to adjust to market conditions and a focus review of all expenditures created this improvement.
Sales and marketing costs decreased from 1.8 million to half million in Q2, when compared to Q1 as certain cost were deferred.
We're budgeting for increased investment in sales and marketing expenditures in coming quarters.
During the quarter, we harvested approximately 6400 kilograms of cannabis and sold just over 6000 kilograms. This compares to last quarter, where we harvested approximately 10300 kilograms and sold 4400 kilograms.
During Q2, we curtailed cultivation and harvesting capacity utilization in response to market conditions, including an oversupply of product in the industry and adjustments by provincial boards and their inventory management strategies.
We are aggressively accessing opportunities to maximize the value of our invest of our existing inventory.
Our modular grow room configuration positions us to access additional production capacity as the need progress is so thats focused on opportunities for increased capacity utilization and throughput in future quarters to decrease the manufacturing overhead burden on production and reduce our cost of goods sold.
On average our gross selling price per Gram equivalent of branded products was $5.67 program in the second quarter 2020, including provisions compared to $5, an 11 cents per gram in the prior quarter.
Change in average gross selling price was primarily due to successful increase in vape sales.
Average gross selling prices for unrounded flower in the second quarter were to 82 program up from 274 program in the previous quarter. Despite competitive pressures in the wholesale market as result of industry wide increased inventory levels.
Adjusted gross margin for inventory impairment in fair value adjustments for Q2, 2020 was $2.9 million compared to an adjusted gross margin of half million dollars. In Q1 2020. This represents an adjusted gross margin of 14% of net sales for the current quarter.
For the quarter, we reported adjusted EBITDA loss of 3.9 million in comparison to an adjusted EBITDA loss of 11.6 million in the prior quarter.
Included in our adjusted EBITDA loss this quarter.
Was restructuring costs of two point fourmillion incurred as we continue to reduce our overall cost structure and optimize our operations.
With respect to our balance sheet as at June Thirtyth, we had cash and cash equivalents of $21.6 million total debt, including convertible debentures, where the principal value of 177 million.
We continue to take measures to address liquidity, including disposition of non core assets monetization of inventory minimization of all obligations across our cost structure.
Operational efficiency improvements and maximization of cash flow from operations.
Subsequent to the quarter end Sundahl has filed a registration statement for a mixed shelf prospectus, allowing it to issue common shares in an amount of up to 100 million us dollars at its discretion and intends to establish an aftermarket equity program covering issuances of up to 50 million us dollars.
As we mentioned previously we've fully completed construction of our cultivation facilities in old and are now limiting capital expenditures to essential expenditures.
As such we are reviewing alternatives to our plan extraction and processing facility at old. We're the largest part of our 2020 Capex budget was allocated.
From a maintenance Capex standpoint, we anticipate spending about $500000 per quarter to maintain current capacity.
Overall, we're very pleased with the progress we made to strengthen our balance sheet and liquidity position.
I'll now if I understood or president and COO sundial to provide some remarks about operations. Thank you Jim and good morning, everyone. The Canadian candidates. The industry continues to be extremely dynamic as the variety of offerings and the accessibility of quality legal product becomes more readily available.
We believe that our brand portfolio and our agile production footprint.
Sundial, a competitive advantage to better meet the demands of our consumers and customers as preferences evolve.
So let me update you on some of the progress some delta is making.
We have been consistent on our sales mix strategy over the past three quarters as you focus on driving better market penetration with our branded product offering versus the wholesale channel.
Our quarter to branded net sales increased to 69% versus 54% in quarter one 2020.
Puts us on track to delivered 80% branded and 20% wholesale business mix by year end.
Our recreational market share continued to show momentum in quarter, two with growth in each of the four regions nationally.
West, Ontario.
You back.
In Atlanta, Canada.
At the end of June we have reached 4.5% market share nationally compared to a 3% market share in quarter one.
Ontario will be a key market for our commercial business as we ramp our provincial investment in conjunction with the province in store expansion efforts.
As at the end of July Sunbelt has moved into the top 10 license producers within the Ontario market as measured by market share.
And our expectation is that we will continue to make positive traction in Canada's largest province year to go with continued investment in our people and our brands.
Quarter. Two was also our first full quarter in the province of Qubec and we're extremely pleased with how our brands have quickly resonated with consumers.
22% of our revenue in quarter, two came from the province in Qubec with their top week brand meeting our sales mix.
We remain optimistic about the opportunity in the province in how our brands are positioned to meet the needs of Qubec consumers.
Our VP product portfolio continues to resonate with consumers and gain traction representing 26% of our total revenue in the quarter.
And as a reminder, the CDC does not allow based sales currently in the province of Keybanc.
What is becoming more imperative to consumer preference innovate segments.
This product set only contain cannabis or cannabis extract and have no added ingredients.
Our portfolio delivers ignytas brand promise consistently and we remain encouraged that our focus on the high growth Inhalable segment.
I will allow us to further differentiate and drive meaningful share growth in this segment in quarter. Two we continue to expand our product offering through several strong launches.
The introduction of Palmetto flower with the new can three and a half Graham hold flower SK, you and the release of the Rascal OGC size tend to be cartridge.
We have only introduced the Palmetto brand can select provinces year to date.
But we expect to expand distribution nationally later this year.
We also released under our sundial brand Blue Nova flower.
CBD 20 to one simply you will loyal.
And the lemon riot disposable be cartridge.
And finally, we were very pleased to release another top Lee brand offering with Bubba flower, which launched the THC potency over 25% and quickly became one of the company's top selling flower SK use.
Talk leaves Forestar Gen. Five can be cartridge was also launched in the quarter.
And was well received by consumers.
As Jim mentioned, we expect our sales and marketing investments as a percentage of net revenue to grow meaningful during the second half 2020.
As we develop a holistic holiday campaign to drive in store and online brand awareness.
Sunbelt innovation pipeline continues to strengthen.
As we will be launching concentrate line extensions in quarter four.
I will talk leaf and grasslands.
In the form a bubble hash rosin in lab RASM.
Select entry into the edible segment is also be considered as we look at several third party manufacturing opportunities with the right economics.
Sandals approach to the value segment remains simple under our grasslands portfolio.
We must remain competitive given the size of the segments.
But we're not looking to lead price down further.
We think this action is counterproductive to a healthy industry for all stakeholders.
Instead, we intend to shift the narrative with our customers around how to grow the category by focusing on optimal assortment, along with pricing and promotional strategy that deliver profit per gram.
Versus a volume at all cost approach.
On that note we are excited to be launching a 28 gram top leaf offering.
Providing the candidates currency were a large pack option to meet their specific needs.
Timing of this launch is expected to be in quarter, four where the early part of 2021.
And we anticipate this to be well received given top lease positive traction with the consumers and customers nationally.
Our supply chain team has done a tremendous job overcoming significant processing challenges during the first quarter of 2020.
As our on time in full or Otis metrics continued to surpass 90% in quarter two.
Certainly an encouraging trend.
We want to keep that tip metric above 85% up below 100% on a year ago basis.
Constant tension between supply capability and increasing demand is optimal is creating a more agile and consistent supply chain muscle.
Well somebody has made meaningful progress on the commercial and operations fronts.
We also certainly understand that building a sustainably profitable business centered around the consumer.
We have acquired time to develop our brand portfolio and thoughtful choices in where and how we invest for future growth.
The learning curve, certainly remain Steve for sundial and the industry as a whole.
But we remain encouraged in the progress made in quarter, two and how we're positioning our business momentum for the remainder of the year.
With that.
I'd like to turn the call back to Zach for closing remarks.
Thanks, Andrew in conclusion send out continues to make progress in an uncertain environment.
We have completed five quarters as a public company and are working hard to transition from a startup business that is required significant cash consumption to a more mature stabilized business does the generator of free cash flow I.
I'm proud of our team's focus and dedication while navigating through this unprecedented time.
Thank you everyone for joining the call take care and stay safe.
I will now turn the call back to the operator for questions.
Thank you, we'll now begin to question and answer session to join the question Q You May Press Star then one on your telephone keypad.
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Our first question is from Vivian as there with Cowen. Please go ahead.
Hi, Thank you good morning.
Good morning, good and.
Good morning.
So my first question is on your revenues on so the mix improvement towards branded product. This is clearly healthy and you can see that showing up on in the ASP for sure in terms of sequential improvement but.
Little bit surprised that your ERP is like just holistically as low as they are given that branded mix a close to 70%. So offer a little color on like the offset by I presume. It's it's very aggressive wholesale pricing, but any other color would be helpful. Thank you.
Okay.
Yes, maybe in it it's Andrew I can take that just just I'm kind of question just in regards to.
The SP in general for Q2, and lower based on what we saw on the on the provincial mix versus the whole summit.
Yeah, exactly yes, I would think that like given that close to 70% and your revenues are now coming from branded product that fundamentally your ASP higher so just trying to understand the offset or the drag. Thanks.
Yeah, Yeah, I think I mean look at the when you look at our mix, we're pretty happy with the mix that we had as far as the branded side goes.
And obviously there is still a little bit in there as you mentioned in regard to the wholesale side, but but our mix is kind of moving in the direction that we expected to so I'll just give you a little color on that and and we anticipate.
Still good solid pricing on our branded portfolio certainly is top of continues to build traction, but about 16% of our.
Our mix year to date sitting in grasslands about 46% in top leaf and the balance is really in Sunday. So we have solid mix in there as far as the brand portfolio goes in the branded sites. We anticipate that makes the continuing to be the same but yes, I think you're right. We're seem a little bit at wholesale number being there and the 80 20 as far as Howard target.
For the balance of year as well on track as far as split goes.
Perfect. That's really helpful. Thank you for that.
Listen is on your commentary around sales and marketing.
So with reasonable enough that you would want to deals something around holiday, that's kind of traditional CPG certainly alcohol does it.
But you use the word holistic so given the restrictions in the marketplace and just I know its competitively has definitely just high level understanding of what that isn't like order of magnitude.
What we should be thinking out but has that line item has moved around a fair that.
Just in the queue restate according to the thanks.
Yes.
Good question Thanksgiving, Yeah, So I think you're right as we look up as we look about just kind of the occasions as far as how consumers shop, obviously is going into Q4 Theres a big one we came out with a couple of campaign Slater versions as we got an summertime, but we've kind of geared up aggressively just given the offerings, we're going to have in the market certainly anchored around top leaf.
On when I say holistic I'm talking about kind of above and below the line and certainly the big area of focus for us is going to be.
In store and we kind of call that start back marketing so looking at all of our retail partnerships across the country. We've got a great opportunity to drive traffic retailers are excited about the program. We started talking about this.
And you'll see a lot of the activity that we're going to implement specific to retailers specific to the region's focused on top leaf, but but very much about in store experience driving kind of awareness inside the four walls to store.
Terrific and last one from me is on.
No.
Hi, good publish them.
Earlier this week at the provincial level looking at category mix looks like it's David I think you guys at 26%.
Ill be your punching above your way, which is great.
Absolutely. So just trying to think about like how you are like benchmarking. Your success like what are the CPI. What do you think like the Brighton market share as relative to add to the category.
In the specifically.
Okay.
Yes were.
We continued to be really optimistic obviously, we've been pretty consistent on the beep side, So I think where.
We're where we expected to be inveighed, but of course, maybe into your point, we actually think theres tremendous upside still in the category. There's certainly a lot to offerings that are coming out.
We've actually had pretty good traction is based on the full cannabis broad spectrum offerings that we havent market.
So you know as far as that split of business. If you kind of look at it from a holistic standpoint as far as the industry goes it's kind of following what we thought it was going to follow with regards to the size of that segment.
But as we continue to grow and that we're going to we're going to continue to bring offerings. We're looking at a one gram offering as well in the back half. So the innovation is going to continue in beta.
Certainly on grasslands, and the one gram and we're going to bring out some new called the bars and strains on top leaf.
But I think as you look about you know, we're not going to give real guidance around what the portfolio mix is going to be but.
If we're sitting at about.
11% total right now I think we can double that as we get into what should be a pretty solid mix of segments for all of Canada, and we certainly want to take advantage of that so we're certainly not done on Dave We've had good traction to date, but the growth is still there and we're pretty optimistic about that I had another thing were doing on based as well just as as that segment.
Continues to kind of move is there's a lot opportunities there in regards to continuing to build the more profitable kind of be offering.
So we got a lotta initiatives insider sundial right now on how we best do that.
So you'll see more offerings coming to market. We're bullish on it I think of products delivered consumers seem to like it and if you look across the spectrum across all the regions, it's performing pretty consistently in all aspects I think we've now been.
Eight or nine weeks in a row now in Atlantic Canada. The number one provider updates, we intend to hold that but obviously, it's going to be harder than it was just given all the entrants coming in.
Our next animal thanks, very much the color appreciate it.
Our next question is from Jones on par with see Ibcs. Please go ahead.
Thanks, Good morning, I'm wondering what your expectations on gross margins over the next few quarters. The press release referenced trying to get Cogs down a bit further but it does seem like pricing is holding in maybe better than somebody expect given market dynamics of just would like to get a sense of puts and takes over the back half of the year. Thanks.
Yes, John Zack I could take that and good morning.
So we are expecting volatility in margins in the back half, we believe that stabilize margins of approximately.
40% are achievable, but with what we're seeing in terms of.
Area, the price compression and competition in the marketplace.
We expect volatility over the next six to 12 month.
Okay. Thanks for that and I missed it on the call, but the meet your 2.0 portfolio as it stands now and where you want to go is that accretive to margins or in line with it or is it a bit below as their startup costs, how should we think about that.
Yeah, we are looking at a number of initiative and we'll only start to invest meaningful timing capital to the extent that they are accretive to current margin.
Okay got it thanks.
One of the potential outcomes of the strategic alternatives with an investment and others I'm curious what you would look for in a potential investment I think you mentioned retail as a possibility is there a goal to vertically integrate.
You get preference for your own brands at store level or just what might you be looking for.
Actual investment.
Yeah. So as you know John we have a strong focus in the premium category, which we believe is still very much in its infancy.
Okay marketplace.
So don't want to get you to focus on retail I would say.
We do see a number of opportunities where there are brand or collections of brands that we believe are getting traction with consumers.
And to amalgamate those into a do an attractive portfolio, where there would be operating efficiencies, but also.
Having said under a much more efficient nimble corporate structure would be a great opportunity to drive profitability.
So you may see.
You make the interest in the tier two.
LP selectively at the corporate or brand level that we'd be looking at.
Okay. That's helpful. Thanks, and then one last one maybe we could talk a bit about innovation.
Maybe if you could elaborate on what you have in terms of the pipelines for future products and particularly I'm curious about concentrates. It does seem like pricing is a bit on attractive in the market right now versus the illicit side, maybe there's an opportunity there, but just would like to get your thoughts on that please.
Yes, good morning, John It's Andrew here.
A couple of pieces on that I think we mentioned in the call that.
We've been halal segment for us kind of consist of concentrate that's always been kind of in the pipeline for us.
We're getting ready to launch that in Q4 into your points just like in any other segment. There are certain price partitions, where we're going to need to compete in.
And if you look at the limited offerings that are on the market today, the kind of all over the map.
So we're going to be launching the top leaf brand as well as the grasslands map, our brand and guilty of seed kind of those.
Different formats play in those different price partitions. Accordingly, so that's going to be a big focus on it as I stated that will be bubble hasz rather than in libraries, and those are going to be kind of three areas or three formats or when you focus on from solve unless standpoint.
And then we're also.
Excited to kind of launch in the flower said at 28 Gram Top line. That's that's also in the pipeline as well for US we as we build out and we're still looking at animals as an opportunity, but certainly not a key focus area for US is we're obviously get mad inhalable side, and and very focused on that side.
Okay. That's great. That's all for me. Thank you very much.
Our next question is from David Cubicle with eight TB financial Please go ahead.
Hi, This is Glenn David Associates, Thank for taking my call Firstly, congrats on that brought both.
Well I had a question on the market save the data collected in the presentation.
The automotive showed improvement in the Wilson.
Strong, especially you hired six one in local markets waiting till that with those reps.
Just wanted to understand that even slow to market shape in Ontario.
So we will go a little both of them infrastructure loosely anything that a little bit to dividends in consumer predators saw good deal dynamics across the buttons.
Good morning. Thank you for thank you for the questions Andrew here, Yes, I'll take that one.
Maybe I'll start with Ontario.
Yeah, I think our whole strategy from the onset was to really anchor pretty strong in western Canada, and we see our strongest share position Western Canada.
What we're certainly seeing good share growth continue in Q2, as we as we ramp up those branded sales.
Ontario as as as we mentioned is going to be a big focus for us commercially. So so we're investing.
Aggressively there with both people and brand activation and that's kind of working in conjunction obviously with the store rollout.
And yes, we do see some some slight variances certainly as far as how the consumer is looking and how the consumer shopping in different regions, but for the most part as we look at it from a macro segment standpoint on the inhalable side, the split of that business in flower.
They've been concentrates is pretty consistent the makeup of how that's working and what's resonating with consumers might be slightly different.
But as far as our portfolio goes we're seeing pretty consistent.
Top leaf.
Assumption consumers are really rallying against that brand Sunday was pretty consistent as well and grassland is a bit higher in the market in Ontario. So it's certainly something we're watching as we make some decisions there with the portfolio, but relatively speaking.
The macro view on those segment mix is pretty consistent and we're playing in those pretty aggressively.
Yes, Thanks got safely and lastly, I wanted to understand the little gross margin dynamics.
In addition to revenue mix walk, but let US do you think reclaim Douglas managing all along.
Sorry can you just repeat the question just so I heard that I want to make sure I got that.
Well I think when your rigs.
And to having a substantial portion coming from wholesale segment. So I think conduct maybe loved what are you ones where mobile to gross margin.
So.
In addition to that or when you make.
The you'll see any been coming from the cost savings being called the gross margin all along.
Yeah, Yeah. Good question, so I think the.
Strategy for US has been consistent we were going to see.
80% to 20 mix on that.
Branded side versus our wholesale channel. We're on track for that so were going up we're going to continue to do that I think in regards to margin and making sure that we're taking it up I think absolutely we've got some pretty aggressive initiatives inside.
The facility to make sure that were or managing that.
Cultivation and production costs down Accordingly, I would mention look I mean at the end of the day, where we're never going to be the lowest cost producer in cannabis and Canada just given our.
Cultivation facility in the indoor that said.
We can make traction on ensuring that that price goes down and obviously helps to their margins and the team is certainly focused on that so absolutely to answer. Your question that is a big focus for the back half. This year has been and we'll continue to be.
And that that's going to be ongoing and we certainly see tremendous opportunities to take some further costs out on that cultivation production side, which is obviously any impact margins on the positive side.
Yes. Thanks.
With that Andrew comment.
You know, stating the obvious here by the the margins you're seeing today reflective of.
Cultivation and processing costs that have moved dramatically. If we've already made massive improvements and continue to gain more ground. There. So we're excited to present, the result of though that they flow through margins in future periods.
Thank you.
Our next question is from Doug Mohammed with RBC capital markets. Please go ahead.
Hi.
Good morning.
Two questions first one really has to do is pricing in big categories and I know you have your partitions, but can you give us an idea of what you're saying is going to happen with respect to pricing in your view.
On the paper side over the next six months to year.
Yeah, I think it's going to come down Doug right I mean.
Now I'd love to say that pricing is going to remain as it is today with with premium kind of leading the charge, which is what we're seeing by the way on bait segment.
But I also think we're going to see more offerings come into the market.
Youre going to see.
Providers to try to move through their inventory on oil. So I think the natural view is from our end of the industry standpoint is you're going to see the value side of base.
Kind of move up as far as a volume goes.
But I think the profitability in the profit pool still sits on that higher end that I think your bait consumer is going to be willing to pay a little bit more certainly as we see a little bit more noise on these.
Ingredients additives and whatnot and I think they're a little bit more conscious around bait than we've seen in the past so but I think high level, Doug you know you're going to see more to the left on vape no doubt about it.
That's why we're looking at grasslands, but we're also looking the larger playing grasslands at the one gram offerings.
But I don't think it's going to be as aggressive of a move that we saw.
Going to the left that we did with flower.
Okay, sorry, and why is that we've heard from people that are going to be pricing on the 60% discount Sir.
Okay.
Oh I can't comment on what other people said, but 50% discount on bake.
Yes.
Yes.
And that's something a Sunday was going to be doing but.
You know, we think that given our offering and given where the based category has been where we see it certainly in more.
Established markets out of the U.S. that the elasticity is very different Mb than it is a flower so can't comment around somebody making a 50% drop on me but.
I guess, we'll see where that happens.
Okay perfect.
Next question.
Relates to whether or not to company received any coated related grants or benefits nothing was noted.
And if there was nothing received I'm curious as to why you didnt pursue those.
Doug This is Jim I'll jump in on that one and we have carefully looked at all the programs that are available we've not been able to access them. We've not qualified for the programs available to date.
There is there continues to be new programs ruled out as you know and I believe that that that we potentially could.
Did we will qualify for the weight subsidy the new weight subsidy program. So that we that we have not finalized out and we're continuing to work on that but to date.
Are those programs or have certain requirements and and specifications to qualify that we have not been able to qualify we've carefully evaluated all of those programs that are available.
Okay. Thanks, very much for that men final question just has to do the deal that was finalized this morning.
Can you tell us about why that was completed right, let's say so the $50 million ATM, that's going to be out there shortly.
Yeah sure Doug Zack I could take that so as you know we recently constructed recently completed a pretty material restructuring of the business.
In early June.
And we're continuing to continuing to work to shore up our liquidity capital resources and improve the balance sheet. So we're looking at a number of levers that we can pull can do that.
As we mentioned earlier in the call. It's critical that we continue to invest in our brand.
And we're going to ramp spending in both sales and marketing who wanted to make sure that we had certainty around that pass on the operation side.
We won't be utilizing the ATM in the near term.
But do you expect to raise capital in the future.
That's where you're headed the question.
So maybe decision to bring greater certainty to our liquidity position and if you recall it wasn't 90 days ago. When we were issuing press releases around.
A brief covenant living off we were living on waivers at the time prior to getting our new credit.
Facility in place.
So I'm continuing to move to this restructuring and we've been we've been equitizing the balance sheet and the public markets, which can be a mackie process.
But we're gonna take further Scott to continue to clean up and de risk our balance sheet.
Mr Sure. Thanks.
This concludes the question and answer session I would like to turn the conference back over to exact charging for any closing remarks.
Thank you operator, and thank you all for joining we're grateful for your support an intention today look forward to updating you on our future progress. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Thanks.
And.
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