Q1 2021 Aphria Inc Earnings Call
Good morning, My name is Mariama and I will be your conference operator today.
At this time I would like to welcome everyone to the <unk> Inc. Q1 quarterly Investor calls.
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Thank you Mariama good morning, everyone and thank you for joining us to discuss a freer inc.'s financial results for the first quarter ended August 31st Twentytwenty on today's call are Irwin Simon and Carl Murdock.
By now everyone should have access to the earnings release financial statements and M. DNA, which are available on the investors section of a free is website at Www <unk> Korea Inc. Dot com.
The financial statements have been filed with SEDAR and Edgar.
Before we begin please remember that during the course of this call management may make forward looking statements.
These statements are based on management's current expectations and beliefs and involve known and unknown risks and uncertainties.
Which may prove to be incorrect and actual results could differ materially from those described in these forward looking statements.
Please note the text of the free in the earnings press release, and the financial filings issued today for a discussion on the risks and uncertainties associated with such forward looking statements.
I'd also like to remind you that all references to financial figures are in Canadian dollars unless otherwise stated.
And now I'd like to turn the call over to Irwin. Thanks.
Thank you very much to Marin good morning, everyone. We appreciate you joining us today to discuss our robust start to fiscal year 2021 and our.
And our first quarter, our global team continued to execute against our strategic plan and continued to perform at a high level to further a free is industry leading market position.
All with consistent emphasis on driving long term sustainable growth by focusing on our highest return opportunities and most profitable priorities as we've told you. So.
As a purpose driven company, we take great pride in leading with our core values and are committed to changing people's lives for the better by investing in our products our people and of course, our planet we.
We began our transformational journey over a year ago with a laser focus we turned our attention to achieve a traditional business fundamentals and the terms of maximizing growth in net sales profitability cost containments, managing cash flow and cash management we.
We've made substantial changes across our entire organization to position to free up for sustainable long term growth with a strategic focus is on solidifying our strong strong Canadian foundation by driving category leadership with strong cash carefully curated brands and the introduction of many.
The new innovative products.
And increasing our market share in the Canadian market with a focus on operational excellence and B, which we are that low cost.
<unk> quality producer in Korea.
Increasing our profitability through continued cost managing and having that strong cash position for growth and expanding our geographic reach where it makes sense and that is something that we focus on these initiatives helped propel a free afford and be the number one can have as a company today. In addition, we.
Built a strong management team and continue to execute against these initiatives and they're focused on winning and I am a.
And I am incredibly proud of our entire team and the culture of accountability and entrepreneurship, we have created debt.
Dedication collaboration and ability to be both nimble agile in what remains a dynamic operating environment has helped us generate the strong financial results that you're seeing today.
I've spent nearly 30 years running the CPG company in the U.S. I know what it takes to build winning brands and brand equity is key and I understand the importance of brand equity and selling good quality products in the us the up and coming us elections could provide for a change in federal regular.
Patients, which are free up we'll be ready for it.
Our first fiscal quarter results reinforce a free is inevitable leadership position, particularly in Canada.
We believe we're executing at a level above our competitors.
Our results this quarter reflect record adult use cannabis revenue an increase of 248% compared to Q1 last year and an increase of over 23% from Q4 fiscal 20, while enabling us to also maintain a cash cost per gram.
The low one dollar this.
This represents the fourth consecutive quarter of lowering the free is cash costs to produce dri cannabis, while continually to utilize our cultivation expertise to increase our product quality.
Thanks to our team in Leamington, we continued to execute well across all our facilities, including a free a one a free diamond and broken codes were outperforming many of those in the marketplace with solid market share gains in Canada with new brands product innovation, which will continue to evolve as we anticipated.
That the changing consumer inpatient preferences and demands.
Additionally, the balance of supply and demand in our Canada's business remains a top priority.
Carl will explain in more detail, we proactively took stent. This it took steps shortly after year end to lower our cannabis supply further we continue to actively manage both sides of supply and demand and working to work to lower our investment in inventory balances.
For the first quarter adjusted EBITDA from our connect can cannabis business increased 11% to $10.4 million and.
And on a consolidated basis, we reported our sixth consecutive quarter of positive adjusted EBITDA.
As I've consistently say and I always say cash is king we ended the first quarter with $400 million of cash to fuel future plans and growth in Canada and internationally.
At a free up we've created one of the strongest balance sheet with ample financial flexibility to also pursue potential future M&A, if and when we believe there's an opportunity to further enhance our shareholder value.
I am consistency I am consistently challenging our team to evaluate opportunities, where we can win and continue doing so in the future while we maintain a safe environment for our team to work for the ongoing global health crisis.
Relative to our largest competitor a free and maintain its number one revenue position among Canadian Lps in term of adult use gross revenue a free and maintained our number one position in Canada with 23% growth.
Widening the gap from our next closest competitor and a free a continued to maintain its number one ranking when compared to its closest competitors on an adjusted EBITDA basis.
We believe that our differentiation portfolio brands, which are all designed to resonate with consumers in all categories is a key component of what sets us apart from our competitors.
This provides us with the ability to establish a leading position in the adult used market in Canada.
As this industry evolves, we continue to evaluate the cannabis market our adult use brand portfolio in order to ensure that it continues to meet multiple consumer segments.
We are also leveraging our vast selection of strange to offer each consumer segment, a differentiation experience, while focusing on the value proposition for each of these segments as it relates to price potency and product assortment.
Our team has done a tremendous job of entering new product categories that drive.
Dr. most consumer demand.
Last quarter I was excited to share with you the launch of a t. proof of value brand inspired by Q backlog culture. Most recently our team introduce bingo to the Canadian market and economy brands utilizing lower potency cannabis.
We've experienced strong strong initial sell in for both the Ti pool and bingo.
These two brands complement our existing high quality brand portfolio, including good supply Solei rift and broken coast and remember these brands are only a couple of years old broke.
Broken coast remains a top super premium brand nationally delivering exceptionally quality standards across.
Across our total business, we continue to gain national market share and grow brand sales in the primary markets of Ontario Upper to Qubec, British Columbia at quarter and that is quarter over quarter were talking about.
For the month of August 2020, a freer ranked as the number one LP for sales in the brick and mortar retail channel across all brands in Ontario, and Alberta, and Ontario for the quarter of a free maintain at least to 17% market share per always see monthly reporting of free expiries.
60% more sales than the next highest LP in Ontario and that.
And that is according to headset data, which covers a large portion of the Canadian retail market, although not encompassing all the retail sales for the month of August.
Headsets. Most recent publication also highlights of fruit a freeze the brand for the current quarter, including 48.4% growth in the quarter, 55% better than the industry average in Canada. The number one LP encana with market share up 14% more than 20%.
Higher than the next closest LP as you can see we're achieving a lot with our brands and our brands are growing nicely and.
And the month of August a free abates cartridges maintain the highest market share, scoring a 12.6 share 30% higher than the next closest LP. Our brands held the number one pre roll share and our brands held the number two dried flower oil share in Canada, So see what the number.
Others are saying consumers are buying our products again looking at the quarter in Alberta, we understand for the month of September a freer held at 23% market share across all categories.
And our bateson dried flowers obtain 32% share and 21% market share respectively again, great achievements importantly, Mark reports suggest spending in the legal market outpace the illicit market for the first time and boy. This is a big win.
As I've said before conversion of the illicit to legal market represents one of the largest opportunities for free and the industry as a whole.
We continue to believe this will be achieved through strong brands price quality innovative new formats and of course access to many retail stores that will continue to open across Canada.
As soon as they are now able to purchase quality cannabis in similar format at a similar price through the legal market. So why wouldn't they and when it comes to access consumers will have more options with retails acts stores expected to triple across the country.
We continue to believe free is well positioned to benefit from the future growth of retail.
To summarize from enhancing our global team our brand building activities, leveraging our cultivation expertise and production capabilities managing our cost to reinvesting in R&D, a free up is well positioned for future growth we.
We remain excited about the tremendous growth in Canada potentially to us and the rest of the world.
Focusing on our international opportunities, we currently maintain operations in Germany, Italy, Malta, Colombia, and Argentina, as well as strategic relationships in Israel, Denmark, and Poland and.
In establishing our international international footprint, we focus on areas, where weve identified the biggest opportunities for growth with low cost of capital that can drive near term profitability and.
In Germany, we recently completed our first certified.
New GMP shipment of dried flower from our free a one facility to our German subsidiary Cc Burma.
This is a significant milestone for free or one that strengthens our position as a leading cannabis company in Germany and in the European Union.
We are leveraging our strong medical platform, our multifaceted international operation, which combines domestic cultivation import permits large distribution infrastructure to increase access to high quality medical cannabis for the patients worldwide.
We remain excited about future milestones, including the completion of our cultivation facility in New Minister, Germany, which we expect will be completed this coming quarter.
We maintain our strong foundation in Canada and have great momentum, we believe going forward. We've built a strong foundation with our strong leadership team strong brands industry, leading cultivation expertise combined with our emphasis on cost containment and the highest return on our priorities.
As well as our key consumer data insights all will fuel our growth in Canada and internationally.
Our teams continue to lean in and take an aggressive and balanced approach to our future growth and profitability.
I would like to thank our entire team worldwide, our board of directors or operational for our operation and financial results are direct results of their ongoing commitment to a free up our brands our products.
We are very pleased with the start of this fiscal year and.
And look forward to a great year to come with that I will now turn the call over to Carl who will take you through our financial results for fiscal Q1 Carl.
Thank you Aaron good morning, everyone.
Our cannabis business started off the fiscal year strong ARPU.
Our brands continue to excel in market and late in the quarter, we introduced our large format sizes and our new brand single, a large format offering utilizing lower potency cannabis.
Our financial results continue to be the envy of the industry.
We reported another quarter of record gross revenue for adult use cannabis.
Cash cost per Gram remain below one dollar as we leverage our cultivation experience and we generated our sixth consecutive quarter of positive adjusted EBITDA.
These results helped us maintain our robust capital structure, we have.
We have a strong balance sheet, a strong cash position.
And a cap table with minimal potential dilution that continues to position a free app with a multitude of opportunities to pursue future growth in Canada and internationally.
Before I review, our fiscal first quarter financials in more detail I want to Echo Irwin sentiment and extend my sincere thanks to our global team are.
Everyone continues to operate at a high level internationally with an emphasis on initiatives that prioritize a free is profitability not only for today, but well.
Well into the future.
We prioritized, having a more diversified brand and product offering portfolio to maintain and take share across product categories with our leading adult use and medical brands.
We continue to find pockets of industry, undersupply and capitalize on them using our data insights and understanding of consumer preferences.
We believe our operational execution has helped further extend our leadership position in the cannabis industry.
As Irwin mentioned earlier balancing supply and demand remains one of our biggest priorities in Canada, particularly after the on precedented ramp up of our free at Diamond facility in less than one quarter.
In the Middle of June we temple temporarily reduced our cannabis output at a free a one.
Focusing the reduction on our operating facility with the higher of our two cost structures.
As a result of cannabis is 12 week growth cycle. This reduction in capacity did not impact harvests until the month of September.
And therefore had no impact on Q1.
Managing canvas supply is not just about less plants.
We are focused on processes and procedures designed to minimize the amount of sugar lease term on plants.
Increased the amount of salable flower off of each plant.
And minimize the amount of extraction grade flowers growing.
The adjustment to operating cannabis output already affected our current focus.
While always being capable of further adjustments on the supply side is on identifying additional sources of demand include.
Including introduction of new cannabis 2.0 products.
Meeting short term demand increases for free roles.
Continued development of our industry leading portfolio.
Introduction of bingo and economy brand utilizing lower potency cannabis.
And meeting the demand in international markets for either GA, CP or GMP certified product.
Including Israel, Germany, Italy, Australia and Columbia.
As Irwin mentioned, we press release that we have shipped you GMP certified product to Germany, and the last two weeks and we in.
And we anticipate sales by Cc pharma.
The triggering event for us to record the sales in our consolidated results.
To occur in the next two weeks.
Further pending receipt of permits from health, Canada, we anticipate a late quarter shipment to Israel.
Throughout the global Health crisis, we are staying nimble and agile to best manage our canvas operations and our supply chain as a marketplace evolves.
To the end of the quarter, our supply chain experienced little impact as a result of over 19.
While the impact on our supply chain has been minimal the portions of our business reliant on in person visits.
Whether they be to doctor offices hospitals pharmacies or cannabis clinics continued to be negatively impacted by.
The volume of these visits were noticeably down during the quarter.
Post quarter end, we are beginning to see improvement but give.
But given the continuing global health crisis. These activities will continue to impact both distribution revenue and medical cannabis revenue going forward.
Focusing on our financial results for this quarter in more detail.
Cannabis revenue increased 18% from the prior quarter to $62.5 million.
Gross adult use revenue increased 23% from the prior quarter.
To $69.6 million while may.
While medical medical cannabis revenue was lower in the quarter as new patient registration slowed.
Our industry, leading portfolio of eight products continue to drive demand.
Revenue from Veight products was 13% of gross Canadas revenue in the quarter and increased 19% from the prior quarter.
During the quarter the company sold 20882 kilogram equivalents of cannabis.
Including 16780 kilogram equivalents of adult use cannabis.
And 1072 kilogram equivalents of medical cannabis.
Net revenue in Q1 increased 16% over the prior year period and.
And decreased 4% from the prior quarter to $145.7 million.
Distribution revenue decreased 17% to $82.2 million in Q1.
The decline in distribution revenue is largely a function of the impacts of the COVID-19 health crisis.
Including reductions in the number of elective procedures and in person visits to physicians and pharmacies.
The average gross selling price of adult use cannabis decreased to $4.15 per gram in Q1 comps.
Compared to $5.23 per Gram in Q4 prime.
Primarily as a result of the initial pipeline fill of new large format offerings, including the introduction of bingo.
The average gross selling price of medical cannabis increased to $7.38 per Gram in Q1 comp.
Compared to $6.63 in Q4.
Adjusted cannabis gross profit increased to $31.5 million in Q1 compared to $28.1 million in Q4.
Adjusted can have its gross margin was 49.7% in Q1 compared to 52.9% in Q4.
The increase in adjusted Canada's gross profit dollars and decrease in gross margin was primarily due to the release of and pipeline fill of large format products and bingo utilizing lower potency cannabis, which.
Which provided an increase in sales, but at a lower margin than a free is other branded products.
Absent this pipeline fill.
Adjusted cannabis gross margin would have remained approximately 53%.
Our cash cost to produce per Gram remain below one dollar for the third consecutive quarter and.
And decreased 1% to 87 cents in Q1.
Despite temporarily reducing our operating capacity, we expect our cash cost to remain below one dollar.
Our all in cost per Gram decreased 17% to $1.41 in Q1.
Adjusted distribution gross profit decreased slightly to $11.8 million in Q1 from $11.9 million in Q4.
Adjusted distribution gross margin was 14.4% in Q1 compared to 12.1% in Q4 based on Cc pharma sales mix and cost containment in the quarter, highlighting cc farmers' ability to concentrate on higher margin opportunities even during a period of.
Lower volumes.
SGT costs decreased to $54.4 million in Q1 compared to $116.6 million in the prior quarter.
An increase from 41.4 million in the prior year quarter.
The increase from the prior year is primarily due to higher operating costs as we grow into our global operations and increased selling costs associated with our higher sales.
For the quarter, we reported a net loss of $5.1 million or a loss of two cents per share.
As we have consistently stated our focus remains on generating positive EBITDA to start.
To start fiscal 21, we are pleased to continue this trend and report our sixth consecutive quarter of positive adjusted EBITDA.
Consolidated adjusted EBITDA in the quarter increased 16.3% to $10 million from $8.6 million in the prior quarter.
This includes adjusted EBITDA from cannabis operations of 10.4 million and adjusted EBITDA from distribution operations of $2.4 million, but.
But partially offset by an adjusted EBITDA loss from businesses under development of $2.8 million.
Most notably adjusted EBITDA from cannabis operations increased 11% in the quarter.
This has been achieved by driving revenue increases and our constant focus on our cost structure.
From a liquidity perspective as of August 31, 2020, the company possess cash of $400 million to continue to fund planned Canadian and international growth.
As previously announced we established an at the market equity program under the prospectus we filed in August.
During the quarter and up through today's date, we have not drawn on the ATM facility.
The ATM will allow us to issue common shares an amount up to 100 million us dollars.
Which will provide additional optionality in the event of an acquisition, requiring a cash payment or more flexibility when scheduled debt repayments occur.
In the first quarter, the company's cash position decreased by $97 million.
The majority of this decrease related to one time items that are not anticipated to continue in the future most.
Most particularly $19 million related to decreases in the us Canadian foreign exchange rate.
$15 million related to the cash payment as part of a legal settlement with a former customer essentially returning the cash deposit made by the customer.
And the delayed receipt of HST refunds held by Sea Ray as a result of COVID-19 processing delays of.
Of which we subsequently received all $20 million claim.
The remaining cash utilized in business included 8 million.
$8 million and increases in accounts receivable in our cannabis business late in the quarter as a result of the large format and Bengals pipeline fill seven.
$17 million in Capex the money.
The majority of which related to completion of our German cultivation facility.
$5 million in inventory increases in our distribution business.
Revenues lagged against our plan in the quarter for which purchases have been adjusted in the current quarter.
And $15 million in cash costs going into inventory for the candidates business down from $30 million in the quarter, but.
But consistent with our comments in our Q4 earnings call.
We anticipate a much lower capex in the second quarter somewhere between eight and $13 million as we complete our German expansion.
Further we expect lower working capital requirements going forward.
We continue to believe we will be free cash flow positive in Q3.
We believe this free cash flow when combined with our existing cash position and strong balance sheet will support our growth initiatives in both Canada and internationally.
In summary, we believe our free it continues to be on matched on a variety of financial metrics, including our record of consecutive quarters of positive adjusted EBITDA Our FFO.
Our focus on profitability our.
Our operational efficiency.
And our overall cannabis revenue.
Our strong cash position helps support our ability to succeed through the times ahead, given the uncertainty of the current environment.
For fiscal 2021, we will continue to execute on our strategic priorities, including becoming a stronger more profitable company.
We will continuously worked closely with the local and global communities, where we operate and those we serve.
We believe that a free is diverse branded partner product offerings robust balance sheet and dedicated team of global employees are key competitive advantages that give us confidence in our ability to create long term sustainable shareholder value for many years to come.
This concludes our prepared remarks, Irwin and I are now available for analyst questions back to you Mariama.
Thank you.
Wonder if you ask a question you will need to press star one on your telephone.
John Your question press, the pound or hash key please stand by while we compile the culinary roster.
Your first question comes from Andrew harder.
Paul Your line is open.
Thank you good morning, I wanted to ask you mentioned the consumption has been strong you mentioned the headset data of course, and this has two consecutive quarters, where your shipments have meaningfully kind of trick trailed consumption. So I guess kind of an update on that but I guess more importantly, the kind of us that we've established and leading market share position you help lhi growth at the top.
The board level, which is really good thing that matters most anything.
Yes, I want to ask are you.
Helping you win you discussed with the provinces are are you getting that are they working with you more well has anything changed are you getting larger orders lot more frequent shipments all those things that were trying to piece. This together, whether the leadership position is kind of fully translate for you guys.
So I'll start and then I'll turn it over to Carl.
The leadership position starts with the consumers that want our brands, Okay and that's what's the most important here is buying our brands and the repeat purchase of of our brands and it's not just in one province, its in many provinces across Canada and you see the growth among our.
Brands and not only one brand it's six of our brands so.
There is something there call a trend there is something there called consumer behavior.
So thats number one number two is some of the data that we announce theres a lag on that data so its not exactly as we say.
Our growth in certain month or certain quarter, you don't see a totally in all our shipments you immediately.
And I think thats some of the problems that happened out there.
Carl do you want to I would just echo that there that there is a lag I think the the presence of headset data has been very helpful for for Lps for the control boards and for retailers.
To understand what products, moving and how quickly but there.
But there are steps in between in the process and and those pieces are still being worked on by the by the by the control Board. I. Also think you have a few control boards that are that are going through some transitions some of which are our ordering less but more frequently some of which are in the process of moving.
Ladies and changed order patterns as a result of moving those facilities and we would expect going forward, we're going to get to a point, where where that that data and the LP sales are a little bit more consistent but in these very early stages of headset you may not.
You may not you may not see that.
Sure. Okay. So second question just within that I wanted to ask because this is the first quarter you've launched the debt.
The discount brand bingo I guess at the consumer level call. The Q early to tell US. It's is it cannibalizing any of your other portfolio, but I'll take into perspective, the habit, but secondly, going back to that shipments perspective is it is that cannibalizing any of your other brands. Our problems is saying hey, we're going to wait for bingo, we don't want to take it take as much good.
Supply or sleep or anything like that thanks, So I think.
So I think you're right, it's too early but it's a different product line is kind of like having you know event of analyse screaming coming out would have another chocolate chip thats, what it's like here. So it's not.
Yes. This this stream this brand in this product and most of the consumers like when there and are buying it.
Don't understand and realize incident free of brand.
So I think if anything what were looking to take market share away from some of our competitor brands not from ourselves. So so far no and it's a different strain different product line in a different brand than anything we have today.
Thanks, I'll pass it on guys. Thank.
Thank you thanks Andr.
Your next question comes from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thanks for the questions.
First question for me would be on the gross margin line gross margins came down some but remained pretty healthy at 50% for canvas gross margins. Despite the launch of Banco as it looks like the all in costs did come down. So just wanted to get a better picture of how best think about the puts and takes of value mix going forward as well as your kind of overall.
Cost per grant to further offset that especially as you look to increase the mix of Vapam potentially international sales, which tend to have higher ASP. Thanks.
So a lot of things that one question Aaron.
Try and unpack it a little bit I think if you look at.
So as you look at the continued growth of faith. There are a number of things that make up each vape sales dollar and so.
That that results in involves having a slightly lower gross margin than our other products.
[music].
That product line is growing but but.
Dried flower continues to grow as well.
At the cost coming out of our greenhouse have been decreasing we will see a little bit of a minor headwind.
In the next couple of quarters as we adjust our output.
But we don't anticipate that taking our our cash costs above one dollar, though they are going to remain at or below one dollar amount. So I think when you net all of the different pieces together, you've got some pluses you've got some minuses, we anticipate margin.
Margins staying in that 50% to 54% range.
Going forward.
Which are healthy margins for canvas company as you said in your merch remarks.
Absolutely. Thanks Fine that's helpful color.
Second question for me and I'll pass it on its just on the distribution revenue. So those came down a decent amount sequentially and you offer some color on that but but gross margins there and our gross profit dollars were.
Relatively consistent Q over Q. So you did mentioned that being a part of sales mix as well as cost containment in terms of the gross margins offsetting the lower sales. So just how best to think about back going forward as are the lower sales going to continue but have the higher gross margin. So you continue to have pretty consistent gross profit dollars are just some help.
Sales of what you're seeing going forward on that business line I think will be helpful. Thanks.
So it's still early stages in our Q2, but as we said we're starting to see improvement in the number of in person visits that are happening, which is really the key driver for our for both medical cannabis revenue and for our distribution revenue.
Those things are moving forward Weve take cost containment measures.
And should result in there those margins increasing slowly.
Slowly over time or maybe the better way to say it is staying consistent with what they were this this quarter, but you will see margins continuously improve.
As through our distribution company, we sell more and more cannabis, which are higher margin products and I think Carl made it very clear in regards to wire sales were down this quarter.
NCC pharma because.
Europeans not traveling a lot less elective surgeries, which we expect to come back now, but the big thing is we now have a distribution system that goes to over 37000.
13000.
Drug stores.
Ultimately and now we have are you GMP license and we can start shipping to Germany. There is a big big opportunity there and Thats why we acquired Cc pharma for that distribution to be able to sell medical cannabis into the drug stores with high margin products and you'll see the margins continues.
Grow as more and more win as you heard US say, our first shipment went a couple of weeks ago, and hopefully that continues more and more.
Thanks for that color and I'll jump back in the queue.
Thank you thanks Aaron.
Your next question comes from Pablo Zuanic with Cantor Fitzgerald. Your line is open.
Good morning.
Good morning, Pablo So how do you look I just I want to touch on two things that I guess unrelated to the quarter, but regarding the us right tell us.
Why should we thing that you have.
Oh right to compete that are right to the well.
How advance how do you there if I.
If I compare that other companies have contingent deals to weigh in missiles or other platforms.
Other platforms in place just just remind us.
Whether the type yield what why should we think is well positioned to.
He is well positioned to in the us market.
So.
Pablo as you know I personally have a little bit of experience in the CPG and the industry in the us.
I must tell you every day, we get calls.
Msos and we get calls from cannabis companies looking to do something with a free in the us.
As legalize from a federal lever, we can't so with our expertise in regards to our grow building, our brands and being far as advance with our product line.
Our R&D I think on the legalization.
There will be plenty of opportunities for us to go into.
Different states.
To acquire strategically aligned with different companies.
And with our balance sheet to do it and what I can say Pablo Theres plenty of things, we're working on today and.
And could be ready to go.
No sooner than later.
Theres changes that you know the changes that happen that will allow for you to enter the us one thing.
Said this back.
Last April I am not going to focus on the us a muzzle buy a lottery ticket not knowing what's going to happen there.
And I'm not sure those cannabis companies that bought percentage.
Percentages of Misos and.
Held them and haven't been able to effectively do anything with them get earnings from them have not been the right thing for shareholders, but once we know what the state.
Of the landscape looks like from legalization.
There is so much that we'll bring to the US I think we'll have our opportunities to be able to decide which is the best one for us.
Thank you and then one more okay.
I think we would only be concerned about other price deflation, we're seeing kind of that so Germany right 18 million people do I just cannot own more become so big opportunity, but from what I see and I guess, how that people see the market has been very slow to develop.
Doctors, not least driving volumes due to very low so yes, it's nice on the supply side, everyone is gearing up but the demand is not there is no playing out just just to refresh for US you know why should we think that things in Germany will accelerate over the next one or two years on a mosquito, Germany, because yes, it should be good market potentially and kind of.
In Canada, we are seeing price inflation. Thanks.
So you're right on what you say about Germany, but I think a couple of things it's slow, but it's common it's not not coming so it's not like you know.
It's come to a halt.
So thats number one.
And I feel good about where Germany ultimately will go and unfortunately cobot has not helped at all but the demand is there now we got our licenses that will help and that's that's going to be a key. The other thing is this here I will say this year I think Germany will be.
The first country in the EU.
That will legalize recreational cannabis.
And there has been plenty of discussions there and if and when that happens again, we will be there.
So I mean, we have and we're ready with our facilities.
We're ready with product.
And.
The big thing that we have there is our distribution to those 13000 drug stores that we can distribute product too little slower.
Little slower, but that's why we won the tenders.
And but.
Its not like Theres no.
There is no game that to start there.
Got it thanks, and just one last one.
Sure I don't want to rehash the questions about.
Okay.
What's helping retail versus pipeline on gross margins, but.
If I look at your Mdna Carl.
It says there that the large pack sizes and bingo accounted for Knight close to $90 million in growth in great quarter on quarter on your total sales grew $13 million right. So help me reconcile that because obviously.
Large large delta on the value side, but definitely I mean, as we have been down unrelated to that.
I guess, we'll have to focus on thoughts on gross profit right because yes. Those margins may so yes, but you know they go from to 60 to 151 of them or something but im looking at the late this market data, we can just clarify or hits. It prices seems you at all this quarter would be down another 20% for your flower business. So so just help me get comfortable we don't.
Gross profit on.
Understand better what happened in the quarter because.
Like I said, the Mdna sales 19 million growth in value.
Versus the real for 15 million foot footprint. Thanks.
So.
Just follow I think first off.
As a as I answered one of my earlier questions. I think we have to be a little bit careful with some of the data that that is out there. It is in Nielsen level quality at this point the different sources that are out there have different.
Different groups of stores that are connected and so I think it.
I think it's always very good directionally.
But it can't be taken to to literally.
When you when you look at.
The total growth.
For the quarter.
The quarter in terms of Canadas revenue.
Im not sure I am understanding your point, because when I look at it and I look at our Mdna, we're basically saying that but the growth in the quarter was was largely driven.
Bye Bye bingo.
Right, it's you're going on a gross basis from 65 to 82 and $18 million on that is is bingo and I think that reconcile so I guess I'm just a little confused where you're drawn your number from now I will pass it on but can you confirm what I just said is right there.
There was a bit total delta the bingo Delta is larger than the total delta right, so sales, but no I'm, saying I'm.
Im saying they are the same but that's okay. Okay.
Okay, all right got it. Thank you I'll follow up later offline. Thank you.
Your next question comes from Timothy Chan with BMO capital markets. Your line is open.
Yes. Thanks, Good morning first question.
Just stick on Bengal for a second on the place the retail price of the product is on the lower end within that 28 grams format compared to many of the other peers. So I'm just curious when you approach the pricing architecture for this brand.
Why go quite low on the scale compared to peers given that you have been gaining share so far without a big value presence.
So Tammy I think we said multiple times during the.
[music].
During the call it and are discussed in our disclosures in the Mdna. We're looking at the Bingle brand it differently than we look at our other brands. We look at thing, though as a way to utilize lower potency cannabis.
That gets growing in our facility that wouldn't qualify to be moved in other categories and we're taking advantage of our of our low cost to move that product.
And it's.
The thing is Tammy the reason we came out with it we saw a need for it.
And we saw a need for which consumers are asking for and.
As Carl said, we had supply Ford and we Didnt really see.
The opportunity, we didn't really see a competitor really hitting that area and what we want to what we want to do is.
To make sure it's not going to cannibalize our existing brands.
Okay understood and my second question.
Going back to the commentary you both had about managing your supply.
With what you're able to sell and whatnot.
You mentioned that you have.
Really reduce production at a free a one I guess I just want to understand that a bit more because I think you stopped disclosing kilograms produced so are you able to give us a context of how much that sort of impacted your your output.
Temporary routine and just to confirm theres been no.
Supplier production output changes made at Diamond Crescent I'll leave it there. Thank you.
I'll, let Karl jump into first I think again.
As we get more history in this business and we look at our brands and is more stores opening and we focus on growth we focus on margin we focus on cash flow.
We're going to grow what we're selling and we want to make sure we sell what we grow.
We have three great facilities, and if we have to pull back and only grow in certain parts of the facilities to make sure that we sell to demand.
And ultimately.
As demand grows we will continue to.
Grow a lot more we have the capacity to do it. So that is the big thing from a financial standpoint from a quality and the thing is when you are dealing with as many strange when you're dealing with six brands and.
And when you're dealing with multiple whether it's pre rolls eight hours. The last thing we want to do is be out of stock as we build our brand that we want consumers to be able to always buy.
Our products. So its now as we start to really dig in its really managing our inventory our supply our purchasing power of packaging, we we buy a tremendous amount of packaging and want to make sure that again, we're we're buying from a cost standpoint.
And were buying from a supply standpoint, and don't have other stops and that's some of the thing is we have too much a one thing on enough of the others. So.
Theres a major plan in place here how to figure.
Figure out our our supply chain and our demand forecasting for what consumers want the other thing is what we've got to continue to look at Hanmi is today is 800 stores across Canada. If they go to 3000 stores whats going to happen. There we think for free that's another two $300 million of sales have.
In the demand to grow that out number two as you look at brands that we have built that have gone through three $400 million at retail how to build those out what happens in regards to veight versus pre rolls the pre roll market is on fire right now so how do we continuously that sales of April and making sure we have enough of that so.
Thats the Big thing here is now just bringing in.
You know a lot more process and.
Intelligence into our whole growing because the problem is once you start growing so you got to do with it.
Hope that answers your question.
Thats helpful. Thank you.
Your next question comes from John Dunn Peril lets the IVC. Your line is open.
Good morning, guys. Thanks, good morning.
You mentioned, becoming or expecting become free cash flow positive in Q3, I just like to get a sense of your capital allocation priorities when it comes.
When it comes to either debt reduction versus greenfield investments or M&A.
And with M&A I'm, referring anything outside of the U.S. candidates. This I'd like to get a sense, how you're thinking about that for calendar 21.
So I'll, let Carl talk about Capex for facilities and I think we're.
That that is winding down from a standpoint, there, but yes, I as I said.
Or is M&A stuff that we are looking at and there's very interesting M&A stuff.
If I gave you a number you might know what I'm looking at I'm trying to do but.
We have the right balance sheet to go there we have the ability from a leverage standpoint.
Free cash flow positive.
And basically from a cash flow standpoint today, I mean, if you take away.
You know some currency and other things I mean were free cash flow positive.
Now so.
We will continue sales as our sales continue to grow.
Listen we're down below a dollar on our cost and we will continuously come down and as I talked about.
Theres five points, we're going to do we're going to grow our share.
We're going to take costs out of our facility as we continuously look at.
Look at what we grow what we sell.
We continuously look as SKU rationalization in regards to all our brands we stay.
We still have some facilities that are not producing income and we'll look to get those too.
Income positive.
And with Germany really coming on we look to see Germany in a positive.
At a very very soon.
In regards to Capex other than that Carl Theres not a lot of Capex. So we finished all of our major capex projects in Canada.
Future Capex in Canada is really a function of opportunistically identifying.
Some type of project that improves profitability.
As it relates to Columbia everything remains on hold as it relates to Germany, we see about.
Under $10 million of Capex, that's still to be to be spend all of that will be spent this quarter.
And I think I said earlier $8 million to $13 million is our expected capex spend in the next.
Sure.
Okay, I hope that answers your question.
Yes Thats helpful. Thank you and then secondly, just wanted to dive a bit deeper on the average sales price.
Can you quantify what the deflation was if you back out the impact of bingo. It sounds like the increase in gross cannabis revenue was sourced from bingo and if you think about the rest of your portfolio is having a volume increase presumably.
But can you quantify what the price decrease would be on a like for like basis on your other brands. Thanks.
So if we if we pull out large format offerings on the average selling price would have increased 60 cents in the quarter.
Got it okay. Thank you very much thank you.
Your next question comes from Graham Kindler with capital Your line is open.
Yes, hi, good morning, and thank you for taking my question here just wanted to ask a follow up here with respect to managing the supply overall.
Yes on two fronts. One there was a wholesale sales of $4.7 million as well as looking the composition of inventory on.
On the cannabis side in particular, it looks like on the kilogram basis, that's about two thirds.
Cannabis too and one third tramps. So just wondering on the wholesale side of things.
What that market looks like.
It's expected to be volatile, but they're still possibilities to help rebalance your your own internal supply there and with respect to the cannabis, particularly out of that split I mentioned earlier, how much of that do you think is actually workable into the current brand architecture versus might be earmarked for extraction later down the road or actually for wholesale. Thank you.
So so graham.
I think there is there is some confusion on the on the wholesale market, sometimes with people I view it as really two separate markets.
So there is there is there is a wholesale market for extraction grade product, which can include.
Flower that just doesn't look nice.
Things like that and.
Trim and that market. Obviously is is is massively oversupplied right now.
We made some adjustments in our costing.
In the current quarter, we removed fair value increment from our trend to reflect that and our trims. All now care carried on our books at at 15 cents. If you look at what's coming in the the infamous crop tobar.
There is a lot of.
Extraction grade product that people have harvested and quite honestly I don't think people are going to find homes for at this point.
But that that part portion of the wholesale market is very different from selling excess capacity of dried flowers.
And I think there are tremendous opportunities.
In that in that portion of the market and to sample flower Theres a number of Lps that have taken production capacities down.
And now finding it may be a need for a little bit more product or finding that they're growing too much trim, they and they can't get that level of salable flower they want and so they are interested in buying and theres a number of Lps that have switched to closer to asset light models and and those Lps that have done that.
Our out there looking for saleable salable flour and so when you have it you have the ability to take advantage of of that need and move that product.
A very reasonable price as opposed to what the trim in the extraction, great things are going to move out over the next six 912 months.
So I just think they're very very different markets.
Okay. Appreciate the color. Thank you.
Okay. Thanks, guys.
That's all the time, we have for questions today, I will now turn the call back over to Irwin Simon Simon for closing remarks.
Thank you very much and thank you everybody for getting on our call today again I want to thank our team all our three fellow employees or.
That are working in a per silver these and keep it going through these tough times.
I got to tell you I am really proud of what we've been able to do our Canadian Canada sales were up 23%, our EBITDA $10 million I mean, all of last year, we earned $17 million. So what a great start to the first quarter.
Currency or other.
Next our cash flow as profitable if you take away a lot of those things from one time.
We have number one share and continue to grow tremendously in.
In multiple multiple provinces out there.
Shows consumers want our product.
Again continuously we've got our cost down per Gram below a dollar.
We are seeing great headway in Germany, yes, it's a little slower, but we will get there and then.
And in regards to the US don't count us out just because we don't have a big strategic partner.
We know the us well, we know the opportunities and with a free of performing the way. It is I will tell you. There's multiple companies. There is multiple partner opportunities for us. It's just we want to make sure when we do it we want to pick the right. One it's just not about money.
With that we're excited about the cannabis industry.
We're only into this for about two years actually its fears in October that cannabis ultimately legalized in Canada.
We perfected a lot we've taken this company along way and I am proud of where a free is today on a global basis.
There is lot of on known so there in regards to.
What's going on with Cobra and the growth and what's happening cobot. Many areas I would say stock up on Canada. This weekend, because you never know if retail stores are going to close et cetera, but there is a lot.
Theres a lot to come from or for you so would that be safe.
Happy Thanksgiving to the Canadians that just so.
Celebrate it and to the Americans that we'll celebrate in a few weeks and look forward to speaking to you in the.
In the new year with that I. Thank you for joining us today.
This concludes today's conference call. Thank you for participating you may now disconnect.