Q4 2020 OrganiGram Holdings Inc Earnings Call
[music].
Name is Michelle and I will be your conference operator today at this time of would like to welcome everyone true.
Organic growth holdings Inc.'s fourth quarter full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be of question and answer session. We ask you to limit yourself to one question and one follow up question you may recall Q, if you will.
For the questions as a reminder of this conference call is being recorded and replay will be available on organic growth. The website. At this time I would like to introduce Amy Schwalm, Vice President Investor Relations. Please go ahead.
[music]. Thank you Michelle joining me today, our organic growth and Chief Executive Officer, Greg Angle, Chief Financial Officer, Derek watched and our Chief strategy officer of how we're going to be.
Before we begin the we'd like to remind you that today's call will include estimates and other forward looking information from which our actual results could differ.
These review of the cautionary language in todays press release regarding various factors assumptions in rest of the could cause our actual results to differ.
Furthermore, during this call, we warford of certain non <unk> measures, including adjusted EBITDA and adjusted gross margin.
These measures do not have any standardized meaning under IRS and are approaching calculating these measures may differ from that of other issuers and so may not be directly comparable.
Please see today's earnings report the more information about these measures.
I'll now hand, the call over to Greg.
Thanks Amy.
Good morning, and thank you for joining US today. This morning, we reported our fourth quarter and full year fiscal 2020 results for the period ended August 30 Onest.
For the full year gross revenue was 103.4 million and we grew net revenue, which excludes the excise taxes to approximately 87 million.
We're also very pleased to report positive adjusted EBITDA for the second year in a row.
Most of our discussion today will be centered on our Q4 results as the first three quarters of the European interest in past calls.
Since we last spoke with you in July or product portfolio. The change quite dramatically as we said it what we've launched 40, new skews, including some novel products across a number of categories in the segments and there's still more to come.
At the same time this is all being against the backdrop of meaningful growth for the Canadian Idol Rec market.
It's been exciting to do this as we continue to plant the seeds for long term growth and challenges presented by the global pandemic.
Our Q4 2020 net revenue grew 25 per cent from the prior year period, and 13% from Q3 2020.
We had higher flower sales in Q4 2020 as the large format value segment continued to grow and our expanded offerings in the segment resonated well with consumers.
And of course wrecked 2.0 sales contributed to our growth as the year ago, the products were not yet legal.
Lastly, we are extremely pleased to make our first shipment to Israel under our supply agreement with can't dark a leading Israeli medical cannabis producer.
To date. This is her again the grams largest in the international deal and where can docs exclusive supplier of indoor grown cannabis as.
As you May know the Israeli Ministry of Health recently amended its called the standards for imported can't of medical cannabis.
Very encouragingly, we recently identified a plan to comply with these update of standards I believe that we can continue the supply the product into the Israeli market once a day successfully implemented.
Q4, 2020 gross revenue increased 32% versus the net revenue increase of 25% from the same period last year.
Gross revenue better reflects the magnitude of sales volume shipments, especially since bride flow represents the largest category kind of its by far.
It's the average selling prices per gram of decreased in the industry. The percentage of excise tax of the gross sales price has increased significantly.
Therefore to achieve the same level of net revenue more dried flowers has to be sold as compared to last year.
As we guided with last quarter's results, we did not expect significant growth in or out of used truck sales in Q4 due to the time you never launches as part of a broad portfolio revitalization.
Introducing 40, new skews since July has been extremely busy.
Particularly as the industry began growing at an accelerated pace.
A couple of coupling this with the fact that we had a leaner work force, which not only reduce cultivation levels, but also processing of packaging capacity. These factors contributed to the certain launch delays and missed purchase order from filaments in late Q4 and to some degree in Q1 two.
In some ways the number of our products were a victim of our of their own success with better than expected initial sales such that we had stockouts shred was one example.
We're value internal processes and supply chain, including the benefit of gradually scaling up staffing to improve order fulfillment rates and realize more sales opportunities.
We are progressing well through the portfolio revitalization with up to 18, new skews expected in Q2 fiscal 2021.
We remain committed to offering innovative products.
We conduct proprietary consumer research to help us identify the attributes the kind of as consumers want most and we're very encouraged by the initial reaction were getting an early signs the exit of success of for many of our new products.
I will take a moment to recap some of the more notable ones.
The crush correct 1.0, and 2.0 price why remains the largest category in the Canadian Idol used truck market and we believe it will continue to dominate based on what we've seen in more of a true markets in the U.S.
There has been significant growth in the dried flower large format value segment and competition has intensified.
With the onset of the pandemic value products and large format. We're increasingly the focus of consumers as many of them either were forced to preferred to order online or take advantage of curbside pickup or delivery.
Our first of all you offering large format originally entitled trailer truck body, which is now simply known as buds launched in fiscal Q3, and we believe it doesn't just compete on price alone.
It offers product that is indoor grown well dried flowers and the strain specific.
Our values. The segment strategy. Also include includes dried flower offerings that were launched in larger format sizes of seven Gram and 50 Gram under the Trailblazer Brent.
In mid September we expanded our value portfolio with the launch of Shred. This product continues to perform well for us and we're seeing retail store sell out where it is carry it.
It really resonates with consumers it is high quality high potency dried flower debt is pre shred it for convenience at a grant of grams. Most affordable price currently offered on a per Gram basis, and it is made from whole flower.
Hi, potent CTC continues to be a key attribute for consumers as well as cult of our diversity.
In early August we launched three new THC streams under the Edison Cannabis company, Brad the general or under its street name Grapefruit GG four chemed dog.
And the limited time offering samurai's by where it's called the bar name the deferred.
Going forward, we will consider using street generic names from many dried flow products to the extent, we believe that will resonate even better with consumers.
We are making investments in new genetics and improve cultivation process to increase teach the potency and we'll introduce new strains in the highly important dried flower approvals category.
In addition to a record 1.0, we plan to expand our record 2.0 offerings, which we think will become a larger relative category more in line with mature you asking the markets.
At the end of July we launched Trailblazer snacks are kind of us infuse chocolate bar in meat and milk of flavors.
The 10 milligrams of THC in every bar each of the five sections of the bar filled separately, which allows for a higher accuracy as the fusion and micro dosing.
Trouble user snatches, our value segment chocolate offering and our second product type in the chocolate category after launching Edison bites in force skews earlier this year.
In time for the holidays, we also announced the launch of assist at as the bike chocolate.
In the seasonal gingerbread flavor for a limited time. These only came to market recently, but initial sales of being amongst the top sellers in the subcategories.
In addition to the gingerbread bites, we've also offered and other limited time, only seasonal product trailblazer, Cushe mystics and affordable 0.5 Gram pre roll.
Adjusted Green box that is a perfect African add on or stocking stuffer just in time for the holiday season.
Turning to our portfolio, we offer products for the value of mainstream and premium segments of the market already with the trailblazer towards cartridges Edison plus the other disposable pens and packs era cartridges.
Before the end of fiscal two to fiscal two Q2, we expect to launch trailblazer five tend towards the of cartridges in one Gram format. This will extend our line up to the suite of trial size of 0.5 Gram and full size one gram cartridges for the 510 day riser last.
Lastly, Randy note are right to point your portfolio is our reticent remix Dissolvable Cotter.
This product just landed and some from into retail stores. So we don't have an initial sales read yet, but recent data in Colorado for example show Canal Benoit infuse powder, so quickly risen in popularity comprising 55% of the state's beverage market in fact, 46% of kind of as consumers reported enjoying cabin only to infuse beverages multiple times a day.
According to the headset data.
Canada estimates suggest that the cannabis adult beverage market is of 467 million dollar opportunity.
As it is expected to increase by 15 fold its current market size over the next five years as per the break field.
We also conducted a survey recently, which indicated a large majority of consumers would prefer to add cannabis to their drink rather than consume a pre mixed cannabinoid infuse beverage.
The traditional edibles beverages and adjustable oil based extracts the body spent significant time breaking down fat soluble cannot annoyed particles before they can be absorbed before affects or felt.
Our R&D team developed the proprietary nano modification technology, the generates needle droplets, which are very small and uniform for Edison remix.
We believe remix provides enhanced bioavailability.
Both improved speed of absorption and improve total absorption compared to traditional edibles and beverages potentially.
Potentially allowing for a more reliable and controlled experience.
The nano motion technology is also anticipate the have increased stability to the temperature variations the.
Panicle disturbance salinity ph and sweeteners the car.
Other formulation also offers the discretion portability and shelf life expected of the dried powder formulation.
Before I pass the call over the dark I do want the highlight a couple of recent achievements that occurred subsequent to quarter end.
First as announced in October we invested an additional $2.5 million in high sent the Biologicals, Inc.
Now Benoit biosynthesis company you.
The additional investment was tied to a successful completion of the milestone linked to the first commercial sale of CBD a.
The CBD is the natural precursor to the naturally occurring form of CBD, which is converted to CBD in processing.
The product was manufactured through the end the amount of conversion of a protein produced from genetically modified east which is the process of biosynthesis.
The additional investment brings our total investment in the biotech company, the $7.5 million, representing the potential ownership interest of up to 46.5% on a fully diluted basis.
We believe the boss interest this process has some definite advantage over traditional cultivation of.
Peculiarly as it relates to the feasible production of minor and rare cabinets and as an alternative paths of producing pure major can avenue.
So we're very excited to watch this space evolve and high since progresses.
Also post quarter end, we raised approximately 69 million in gross proceeds from the underwritten public offering including the exercise of the over allotment option. We opportunistically took advantage of of financing with strong institutional support the became available we believe the de leveraging our balance sheet puts us in a more agile position of the.
Sector continue to see both growth as well as capital markets volatility. This.
This raise substantially strengthened our balance sheet, which Derek will describe further.
So I'll pass the call of duty him now and then come back to wrap.
Before we take your questions.
Thank you Greg.
I will start with our financial position as Greg Just mentioned, we recently closed an underwritten public offering of approximately 37.4 million units, including exercising the overallotment option at a price of $1.85 per unit.
We expect to use the net proceeds for working capital and the other general corporate purposes with the majority of the being used to pay down our term loan.
The latter was agreed as part of an amendment and restatement of our credit facility, which we just completed on Friday and is now available on SEDAR on the.
December Onest Tomorrow, we will use the proceeds from the offering to repay 55 million on our term loan to reduce the balance to 60 million from its current 115 million of.
After this term loan repayment is completed on December onest, and excluding the 8 million restricted investment on a pro forma basis, we would had $80 million in cash and short term investments and 60 million of long term debt.
Turning to our results for Q4 gross revenue increased 32% to $25.4 million from 19.2 million in the same prior year period net.
Net revenue grew 25% to 20.4 million from 16.3 million in the same prior year period.
As Greg mentioned higher flower sales international sales and the rest 2.0 revenue were among the largest contributors to this increase.
We also recorded a lower sales per vision for returns and price adjustments of 2.2 million as compared to 3.7 million in Q4 as compared to Q4 2000, Nineteens comparison period.
Q4, 2020 cost of sales was 29 million, which increased from $515.5 million in the same prior year quarter, primarily due to higher sales volumes and a non cash inventory provision of $11.1 million excess and unsalable inventory.
Of the 11.1 million $8.3 million related to excess trim and concentrate and 2.8 million consisted of adjustments to net realizable value.
As we indicated with last quarter's results, we expect a negative non cash adjustments to cost of sales for unabsorbed fixed overhead costs to persist as we plan to produce below full capacity for the foreseeable future.
In Q4, these negative non cash adjustments amounted to 3.5 million.
Q4, 2020 day adjusted gross margin increased to 16.2 million from $1.5 million in Q4, 2019 on higher sales and a lower sales per vision for returns and pricing adjustments.
The IRS gross margin for Q4, 2020 was negative 28.8 million compared to a negative gross.
Gross margin of $11.1 million in the prior year period.
The variance was largely related to higher non cash per vision and negative fair value changes to bio assets and the inventories during Q4 2020.
We continue to expect some production inefficiencies to possess persist, which will impact gross margins, while the launch new products and optimize production.
Our portfolio review that is ongoing and we expect to gain efficiencies when the product launch schedule normalizes.
Q4, 2020, SGN a of 10.8 million decreased 22% from Q4 2000, the genes amount of $13.9 million in the current quarter's SGN day as a percentage of net revenue was 53% compared to 85 per cent for Q4 2000.
19.
The Q4 2020 as DNA reflected our reduced spending during the ongoing COVID-19 pandemic and it was largely in line with the current year's Q3 SGN area of $10.3 million.
As a percent of net revenues the Q4 SGN a 53% was the decline from Q threes, 57% of net revenue.
As in the past management continues to closely monitor discretionary and below the gross margin expenditures.
Q4, 2020, the adjusted EBITDA was a negative 2.7 million this improved versus the negative adjusted EBITDA of seven to 7.2 million for Q4 2019. This.
This improvement was largely due to the current reporting periods improved adjusted gross margin.
We recorded a net loss of $38.6 million or 19.9 cents per share on the diluted basis during Q4 2020.
As compared to a net loss of $22.5 million or 14.4 cents per share in the same prior year period, primarily due to greater negative gross margin in Q4 2012.
Q4, 2012, net cash used in operating activities of 10.1 million with a decrease from the 15.7 million used during Q4 2019 the.
This reduced cash outflow was largely due to the prior year period increased working capital assets as we get scale of operations ahead of of roughly 2.0 legalization.
That concludes my formal remarks, I will now turn the call back over to Greg.
Thanks, Derek and I just wanted to clarify one comment Derek had made so the adjusted gross margin was $6.2 million. So just wanted to clarify that.
So looking ahead, we remain positive on the prospects for the industry inorganic growth the annualized run rate of the Canadian adult used truck market was estimated to be a record 3.1 billion based on the most recent data available.
From the start is Canada for the.
For September 2020, this isn't the increase of approximately 109% from September 2019.
There are number of factors, creating tailwinds to industry growth. The large factor is the much anticipated increase in the number of retail stores in Canada, essentially the store count in the provinces grew by 33% driven by Ontario's kind of us retail store stores growing 140%.
And Ontario is now on pace to add up to 40 stores per month and fits close to 250 stores right. Now. So you can see that there is material growth still expected.
The legalization of wreck 2.0 is another big tailwind product forms in these categories are still being rolled out with new skews, bringing enthusiasm to the legal market.
Consumers are very much still in the exploratory stage and willing to experiment as the broader selection and new product forms such as our remix powdered beverage are made available.
Outside of Canada, we continue to serve international markets, including his free on Australia, the export permits and look to expand sales channels internationally over time.
I don't think of it in my remarks without acknowledging the recent significant political changes in the U.S. and the ballot initiatives from both medical and I don't read kind of issues. They suggest the potential move to fed was legalised THC may have stronger momentum yet the outcome and timing the remain difficult to predict.
As we continued the modern develop potential U.S. THC strategy, we look to evaluate CBD entry opportunities in the U.S., which we've been doing for quite some time.
Our view is that it is better to measure twice and kind of ones and to continue to be selective on our opportunities. We actively consider we are focused on debt disciplined capital allocation.
Fiscal 2020 was nothing short of an eventful year for us and the industry, we entered the beeps and edibles market with a broad and innovative suite of products and continue to launch new products.
We signed our largest international deal to date with can dock in Israel.
We invested additional funds into our biotech partner Hisun as they made notable progress in canal Benoit biosynthesis work.
Significant expansion Capex related to our facility is behind us.
We strengthened our balance sheet recently for greater financial flexibility and the ability to act on potential opportunities always with the view to enhancing shareholder value.
Our strong culture of cost management, and prudent distress urinary spending helped us reported positive adjusted EBITDA for the second year in a row on the back of a strong of strong revenue growth and we of the backdrop of accelerated the industry growth as retail stores expand in Canada's largest frac market.
In closing we are excited about our products our partnerships in the year ahead.
We are working tirelessly at enhancing our agility and execution to capture more market share and topline growth.
And as always we are working to pursue profitable growth in an effort to generate attractive return on investment for shareholders.
That ends my prepared remarks, operator, if you could go ahead and open up the line for questions.
Okay. At this time from if anybody has the question. Please press star one on your telephone keypad.
When we ask that you have one question and one follow up and then you can get back in the queue. The first question comes from Aaron Jerry from the Alliance Global Your line is open.
Hi, good morning, Thanks for the question.
So first one for me.
So on the Veight segment.
It looks like quarter over quarter revenue did come down a little bit. So I just wanted to know if you kind of talk about the trends you're seeing there obviously, it's been a pretty competitive category just any further color in terms of the drivers and what may be impact you guys made some pricing pressure in the competition there and the margin kind of how you see that evolving free guys. Thanks, yes, the thanks, Aaron for the quarter.
And yeah. So we I mean, certainly we're one of the companies that offer the fulsome the portfolio. So having a premium means treatment of value offering we have seen more competition come into the marketplace and with that.
We have had to take some pricing adjustments as well you know I think.
Again, as we've seen with dried flower.
Consumers are looking at times to try new products. So that has put but I mean, certainly we're very excited about.
Certainly our of 510 countries continue to perform very very well and we're excited about the upcoming launch of our one gram in this next quarter, which we believe the hasn't ability to.
You know really have an impact on the market because of the success, we've seen of one grams in U.S. state markets.
Okay, great great. Thanks back on the interest second one from me before I pass it on.
We spoke about the increased brick more of that we've begun to see in Canada up 30%. Since July. So we'll just like to give some commentary in terms of how you think that comes into your plan to more fully utilize your cultivation space expensing of starts the 40 stores per month in Ontario, like you just mentioned.
And then just like any color, we might be able to get in terms of the first quarter. The now the were pretty well through it in terms of how that might have come through the top line in terms of seeing the the benefit of the increased brick and mortar there. Thank you.
Yeah, I think so were you know first of all of the on the kind of expansion of the direct space I mean, one of the things for us and I alluded to this in the call is that we are looking at.
The starting to increase our cultivation production and production.
The you know we've got space its not being fully utilized at this point and certainly as the at the market demand is growing and increasing.
We are right in the midst right now is looking at plans to start to scale back up so that would involve.
Potentially bringing in some additional staff back in for both.
Cultivation and downstream processing and it was one of the impacts certainly that impacted EPS in Q4 was.
We were we were juggling between one area and one other area in terms of packaging. So.
Yeah, the nail on the head in terms of we've got the capacity. So now is the time to start to.
To bring that on.
As far as Q1.
I guess the comments I would make is we are still in the midst of the portfolio revitalization and we've got new skews coming to market.
We have the had.
As I said in the call.
We've had still.
Some stock outs and certainly some lost sales opportunities in the near term but.
But again, we are excited to bring those new products into market not only for the ones. We've brought in Q1, but also into Q2, so beyond that I wouldn't give any kind of guidance on Q1 at this point.
Hi, great. Thanks, I'll jump back in the queue.
And your next question comes from David could tackle from ATP capital markets. Your line is open.
Hi, good morning, and thanks for taking my question and congrats on the quarter.
I just wanted to go into your international components of revenue for a second and tie that back to the flowers won't Canada. So.
In reading some of your financial statements were looking at revenues in Israel. We think just north of 3 million. So the remainder would be mostly 1.0 products in Canada. Most of flour, we think as you've indicated in your.
Your prepared remarks and press release, so I'm just wondering moving forward how important and significant internationally is Israel in particular going to be for you.
Yes, you have the.
Exclusive supply agreement with candour that said Israel's the relatively as you know Greg and other small market lots of competition et cetera. So just trying to understand how important should we be how should we be thinking about Israel.
The forward as the overall line item from a revenue perspective. Thanks.
Yes, Thanks, Dave of free question, Yeah. So I think couple of things I would say on Israel. So again, just to clarify where the exclusive supplier of indoor flower. So.
That's the the product line that we provide to them.
There has been from recent changes in Israel in terms of other medical cannabis systems. So we'll.
We're working to ensure that.
We're in the position to continue to supply and we've we've identified an appropriate path for the odd.
We've had great success of the product and you know that we have sold in there and certainly one of the strains is already sold out.
And so we see Israel as the market that we will continue to grow while there is a lot of competition.
We also struck the steel with Ken dockets of possible path for them to work.
Work to process product in the future.
Because of their certification and to be able to sell into other European markets. So the the agreement is two fold. It's you know to focus on the Israeli market, but it's also for potential access to the European market via can dock as a partner. So you got the I think there's two ways to look at it from that perspective.
And now the other point just to your first part of your question, Yes, I mean flower continues to be very important part of our market, which is why we've invested in new genetics and we've been spending a lot of time on bringing new genetics of new offerings to the market higher THC products, a broader variety as we've seen consistently where consumers more like.
The craft beer type market, where kind of as consumers are looking to try different and new products on an ongoing basis. So we you know we continue to invest in that area.
Thanks for that color very helpful and my second question I want to go back to highest in the off for a second and if I heard you correctly, Greg you had mentioned CBD Hey.
As one of the precursor can average there I'm just wondering does this mean youre going to start leveraging that cannabinoid first in some of your 2.0 products or is it the CBD and whichever can have in order to give us I guess my overall question for you on the issue of biologic Bursaries.
Biosynthesis is which 2.0 products you think are most of mineable right off the debt goat or bio synthetically derived in other words. Thanks.
Yes, it's a great question, David I mean, so really excited again, it's important to note that the highest since this was the first as far as we are aware of and they're aware of the first successful commercial sales production and sale of any of cannot only produce through biosynthesis and.
They they had the potential per person or buyer that was interested in CBD. So that was the product they ended up producing.
Right now the air focus and discussions with high centers. They have 23 canal guidance in their portfolio.
No those are minor could avenue is that the each uniquely positioned and I think I've mentioned this on previous calls.
Where we're really excited about in the future I think there's two paths for biosynthesis. One is producing the pure major cannabinoid for potential use in products and not only products.
That we would potentially produce but possible partners that high since the could partner with.
In other industries, but I think more importantly is the minor cannabinoids in certainly there was a number of them that we are looking at.
That when and I'll give an example of TCV for example, where TCV.
Has similar effects, the T.H.C., but does not necessarily.
Induce an appetite in the same manner or at least from anecdotal reports. So I think there's a lot of opportunities for some of these minor contaminants in the outback market.
Okay. Thanks for that and congrats on the quarter I'll hop back in the queue.
And your next question will come from Andrew Parsons from Stifel. JMP. Your line is open.
Thanks for taking my questions.
Maybe if we could.
The skus.
The news the new skews that you guys have rolled out the and the one.
Are expected to come.
Right any kind of metrics on.
How well those views have performed I know you mentioned some of the.
Some of the extremely well and has had stockouts, but wondering if you get to get a leading.
The more color.
And.
Yeah.
How how should we think about that should we.
Going forward we.
Kind of the expecting that this had maybe started off.
With relatively lower volumes and this will continue to wrap up.
Or was.
Was this more of a step change for you.
Yeah, and then thanks for the question Andrew I think the way to look at it in the same way in the past, where we've brought a few new skews the in right. So we we bring the offerings to market. So in this place we had three very specific dried flowers skews for example.
We look to see what market responses were planning for increased production around the skews, but certainly when we see a great response like in the past with our limelight we.
We doubled down or quadruple down on production of that strain right really good response, so and there is no question.
No debt that's been the case here in the <unk> one of the challenges when you're bringing new flower products in particular, and even new skews to market is.
There is the time lag to get listings in different provinces. As you know so you're you know what impact you're seeing from the market. So getting that feedback is variable, but certainly the that is our plan right to bring those new skews in the ones that are performed well will we will continue to increase production on them and the ones that didnt.
Perform as well, we'll reduce cultivation on them and pivot to other other items. So in addition to the of the three recent launches.
The new strains, we've kind of additional of trains coming up and in.
In Q2 and into Q3, so, but yeah I think it's important to continue you took the supply that theres that base of products like our limelight for example.
As our you know as our top selling.
Flower product and continues to be which has been great. So.
But again I think there's opportunities for some of these new strains as particularly the ones that are unique and or high THC to really position themselves.
Sales while in the marketplace.
Thanks for the additional color and maybe.
Maybe going on a similar.
Because it's just on your phase five expansion.
During the if you could give.
Any updates on that.
And kind of what needs to happen in order to get some of your hydrocarbon extraction.
Up and running and products on the shelves.
Yeah were the areas fully licensed and certainly our expanded C. O. Two extraction is we're up and running in that space. Now we are still working through the commissioning process on the hydrocarbon extraction. So.
I can't give a definitive target, but our team is working hard to.
To look to bring those products to market, but again it is dependent upon commissioning, which as you can imagine the have been some challenges with.
The last nine months with coated to getting true Commission, we've been successful in the past with commissioning new equipment for example, and remix and bringing in new offerings and chocolate. It just takes some times longer than originally anticipated because you're.
You are dealing with some of the challenges related to cope it and travel and the trying to do things remotely. So.
Thanks, So just some color I'll get back in the queue.
And your next question will come from Adam but come from Scotia Bank. Your line is open.
Good morning, Thanks for taking my questions.
So I just wanted to start with maybe talking of production output versus bad. So there was some commentary around miss opportunities when it came to the always in the Q and also the how you might be looking to increase stop the help resolve the issues.
We think about the bottleneck is it on the packaging side or what's the fiscal Q3's decrease in output a partial driver of best.
And then maybe more broadly when we think about the current output of roughly 44000 kgs per year is out of line to where you think near term demand is or do you think do you see the need to increase output further.
Yes, the great question, Adam So I would say you know it it certainly has been it's the combination of both in terms of.
Cultivation.
And the levels of cultivation and the one thing to keep in mind as well is that when you're planning cultivation that you're planning 20 to 18 weeks out from when the product actually is available so.
Some of those near term PEO misses were just the alignment on the first on the strains in which product was available as we can see a continually dynamically shifting market. So again, it's important for us to get consumer feedback and be able to quickly make sure that we're we're bringing the right product to market. So.
And so the bottleneck has been a combination of of cultivation, but also staffing certainly on a on a packaging and processing side.
One of the positives we have seen the if you can say there are any positives related to COVID-19 is that we have gotten more efficient we are able to do more with fewer people, we've improved processes quite dramatically because we've had to focus on.
How do we operate in the leaner environment and in a safe environment for our employees, which is really important.
So I think the ramping back up to some degree is important.
And at the same time, you're always going to have some overage.
Product in terms of production I mean, one advantage. We did have the do you have is that we have sufficient.
Working capital to.
To go through in the quarter, but at the same time, it's not always the in terms of inventory. It's not always the strain that are in high demand and I mean, thats always the challenge the balance so.
So I think when we talk about will ramping back up we're talking about slowly over time looking to kind of bring some of the facility back online.
Okay. That's good color and secondly, I just wanted to touch the comps.
Moving on as real.
Are you able to give any color on time, the expected timing of the remediation plans and where are you able to get some shipments and the fiscal Q1 or the or did that change the regulation pushes out of Mfas until fiscal Q2.
Yes, so I mean I can confirm we did not have the shipment in Q1 into Israel.
But we can't necessarily give of so give the give the timing target here I mean, certainly we're confident and then so is can dock and working with the Israeli.
Government that we we have of an appropriate path and the solution going forward.
So you know.
We expect and hope to be able to do that within Q2, but again its it is contingent upon.
The Israeli government as well as working with some inspectors as well to do things remotely so.
That's going to take some time, but.
Certainly hopefully we can work through that.
Okay, great. Thanks.
Your next question will come from Graham Chrysler from Avon Capital. Your line is open.
Hi, good morning, and thank you for taking my questions maybe.
Maybe as a follow up on it.
I was just being discussed there with respect to the international market and taking the previous comments.
With respect to some of the you know the staffing levels and other efficiencies that you're looking to increase throughout.
Throughout fiscal 2021 to me that sounds like it looks like Q2 might be the real inflection point that we should be looking at in terms of the new skews launching on whether it's the 40 that have been launched the other day junior looking the launch in Q1, and then the potential restart of international shipments starting in Q2 is my thinking correct there Adam.
Appreciate some further commentary with respect to the cadence of potential revenue growth. Thank you bye bye.
Great. Thanks for the question I mean at what I would comment on that so first of all just to clarify the the 40 SKU launches since July where Q4 end of Q1. So and then Q2 will have an additional 18. So yes. There is additional growth that we're expecting for example, the trailblazer.
One gram per day part that I mentioned, the coming Q2 so.
So I think again, we are we are optimistic about the.
The growth coming in the near term I guess, we historically don't give.
And in terms of revenue, but I think as we're seeing the impact of new.
Of the new SKU launches and continue to see new product launches even our remix for example, you know end market. We're only in a few provinces right now so we expect in the Q2 to get the.
The offering in the provinces.
Where they will accept it and of accepted it you know, it's not full distribution as of yet because as I said earlier there are lead times so.
Yes, I mean I guess the.
Can you comment I would make is we're on the right path and we continue to bring new products to market and it's just a matter of market acceptance and getting those products into market in the timely fashion, which we've done and I believe our team has done the great job in challenging times in doing so.
Okay understood. Appreciate the color. There then just as a follow up with respect to the gross margin was $11 million of inventory that was written off from paired this quarter impacting that gross margin I was just wondering if you could provide some more details on what sorts of products were included within that a lot.
Even though the dollar charge.
And at this point because of the company feel comfortable in terms of where its inventory position of sitting in terms of how things are cost of within there that it's through the bulk of these charges. Thank you yes.
Thats a great question Graham I'll, maybe I'll turn it over to Derek to answer that question.
Yes, Thank you Greg.
Yes for the.
Fourth quarter, other was 11.1 million and overall provisions around inventory, including adjustments from net realizable value of that 11.1 million 8.3 million is pretty much contained too.
Extract materials in terms of the concentrate and the trends so that was the the bulk of it and historically.
The company had built up a certain quantum in regards to these categories and but I can say is that.
This time.
We stopped harvesting the trim and and the price adjustments of the carrying value of the true and was a significant contributor as I look at the balance sheet, our inventory of bio assets now have declined 37% than as compared to a year ago and 28% compared.
Compared to our Q3 2020, and this has reduced our exposure to to the future valuation adjustments that would negatively impact average.
Future gross margins.
In the in the instruments you just very it's unreasonable to expect that there's not going to be some ongoing non cash adjustments for excess aged inventory and net realizable value adjustments due to the combination of price compression in the market combined with the ongoing changes to consumer preferences, having said that we do feel that over the last few quarters.
I had a heightened review of these matters and with the provisions now taken we are comfortable with the carrying values that but on balance sheet at this time.
Okay understood appreciate the color. Thank you very much.
Your next question will come from Rupesh Parikh from Oppenheimer. Your line is open.
Good morning, Thanks for taking my question I also wanted to follow up on the gross margins. The near term is it fair to think about the 30% level as maybe a base to build off of and then longer term just thinking about how you guys are thinking about the longer term scaling of of gross margin from here.
Yes, maybe rupesh. Thanks for the call of the question ill, maybe let their account so that one as well.
Yeah for fiscal year 20, our adjusted gross margin was 33%, but as you correctly note. The Q4 period that Weve just filed.
As I had the adjusted gross margin of 30%.
We just.
Has had the impact of significant price reductions in the market that has occurred over the current fiscal year.
And also includes the certain level of production inefficiencies.
But to some extent, we do believe the should somewhat persist as we continue to launch 2.0 products and continue on on the other learning curve to optimize production of but the of the Q4, 30% margin does reflect the.
Where it was with regards to the pricing in the market and our production levels in so at this time, it's that the fair indicator.
Okay, great and any commentary just longer term scaling of gross margins from here as you look forward.
Yes, we.
I would say the we stayed away from providing any guidance being long term target for gross margins just sort of the consequence of its two dynamic of an industry with increasing competition uncertainty, especially related to the duration and impact of the pandemic.
And again, we do believe we do have the potential to optimize our production inefficiencies as we work through the learning curve, particularly related to 2.0 products improving the packaging cost that Gregg was talking about earlier and as we move to larger format offerings on the tweak brand with a free pack the roles, but it's it's difficult of very.
Ever changing dynamic market and so that's the most we could provide for guidance at this point.
Okay, great. Thank you.
And your next question will come from John San Pedro from Shabby see your line is open.
Hey, Thanks, good morning.
You want to stick with that same topic of gross margin.
The next few quarters, and maybe we can simplify it a bit, but but particularly as it relates to the new skews and shred in particular.
Dosing of EPS quite popular I'm trying to get a sense of the impact of those and maybe the way. We can frame. This is yes. If there's no further pricing compression in the market is it fair to say that the cost optimization efforts you put in so far and the higher volume as you're expecting and the new skews your launching that that.
Similar environment in terms of pricing that you see margin growth.
Yes, maybe maybe Derek the answer that question here.
Well I guess as the question is range kind of share if theres no changes in the pricing in the market as we increase our volumes just inherently the increase your volumes, we do will absorb the the fixed overhead of mounds and have less of the unabsorbed fixed overheads from not operating at capacity along with improving.
Improving the efficiency.
Efficiency at the facility so on the under that parameter, yes margins would.
Under that scenario.
Okay. Thanks, and then my follow up is on a zone, Ontario, Greg you mentioned your optimism about this.
This province is because of the store growth, which I think it's fair you can you talk about your performance in Ontario relative to other provinces, whether it was in Q4 or in Q1, but even without giving specific numbers just trying to get a sense of if you think you're adequately participating in the industry growth in the products. Thanks.
Yeah. It's a great question, John I think you know, Ontario, we see is probably the most competitive market across the country and.
We certainly see more skews listed in Ontario than any other province and.
So when I think because of the size of the market. It is the one where we've seen the most significant stock outs, which on one hand, you can look at and say this is good news in terms of Theres product in demand.
But it has impacted us in terms of market share and revenue because of the size of the market growth I mean, we knew the market was going to grow but certainly the rate.
And as you if you think about the timelines and the kind of as space the rate of growth.
The kept moving up at a faster rate than anticipated and you know with kind of of 16 week 20 to 16 week planning cycle for certain product types being.
Being able to adjust on the on the other hand, it's good news of.
Again, the market growth I think is strong and will continue and even even.
Even even with couple of it and some of the restrictions put in place in the trombone Peel regions.
I think we'll continue to see good growth I know on the construction side in the licensing side. They expect that to you at the same pace. So.
But we were impacted I would say in Ontario, little more than other provinces with stock outs and B.
Because of success of said as he said Shred for example of which was alluded to earlier I mean.
It was one of the highest demand products through the Lcs website and through many stores of carried it in.
In the first few weeks of launch and so certainly for us to continue to supply that as we were bringing it into other provinces.
That was higher than expected demand for us. So again it you get strong growth and then you're in a position where you are not able to re supply the market quickly, but again, we're adjusting the accordingly and talk to the in a position of continuing to supply that on an ongoing basis and have it available, which I think is critical.
Yes.
Okay. That's helpful. Thank you very much.
And your next question comes from Matt Bottomley from Canaccord Genuity. Your line is open.
Thank you very much good morning, everyone just wanted to expand a bit further on non John prior question. There was sort of range around the area of when you look at the overall mark.
Market growth certainly of the retail level and you've mentioned this in your outlook.
The one month of the temper it looks like but the $3 billion market.
You have any color on dynamics of how much LP as the whole or sort of losing.
Their market share of the provincial buyers of pricing at the retail level are coming down at the same degree I imagine more of the economics might be going to the the.
Profit.
The the wholly owned retailers if there's the dynamic there to explore and then if you can give any color on the product skews and format that you're focused on maybe the animal side and the and the beverage side of the powder powdered beverage side.
I know, it's very nascent right now where you think you rank in the overall Canadian landscape as those office the have longer term growth profiles and what we're seeing in dry power.
Yes, I mean, the thanks for the question not I think when you look at when you look at the market I mean, certainly.
Now I'll look back over the last six months or 12 months even.
For example, when pricing reductions come into place and those predominantly are shared with the province. So your it's not just the company taking the pricing reduction.
You know its share so in many aspects some of the strategies are done jointly with provinces to move product or to react to competition. So I think there is some share in that happens even on that side of things.
I think we're seeing.
Well the evolving landscape I mean, we keep hearing discussions about how some of the systems may change in the foreseeable future. I mean, we know for example, new Brunswick is looking at going to a private.
Tender for their program.
There's some discussions about Alberta shifting some of their model. So I think it it's an evolving landscape and one that you've got to be flexible to work with.
No I think well for us one of the things that's been really positive as we've seen some consolidation on the retail side and.
So certainly the you know the partnerships and the companies where there has been consolidation or partners that we have strong ongoing relationships historically with so.
That's a positive and those are you know national presence is in both cases with the consolidation of the top and so that's a positive for us I think to get to the second part of your question. When you look at the expanded offerings I think you know in the near term.
Again getting out in the bay portfolio of getting out of one Gram is important we've seen a competitor just launched last week and you know we need to get that product out of market in this quarter.
We had plans to do so but again, sometimes those are impacted by cove, it and some of the equipment supplies and things like that but.
You know and remix we're focused on getting national distribution, we're looking at how do we increase the production levels on it and I think it's when you go to the future and if you look ahead the calendar year 2021.
It is going to be important to have the ability to produce at.
At some point.
Life resin whole plant extract the pens, we know they have a very strong position.
In the market like California, which is why we've invested in hydrocarbon ex extraction equipment ourselves you know again I can't give a timeline of when we plan to launch sales, but you always have to be looking ahead with these new forms as to kind of where the market's going in.
In some cases the use of state data can give you a good indication in the others you have to do your own market research, which we do quite a bit of as well so.
We are excited to even in the near term I mean, we've put out a couple of seasonal offerings. That's been in partnership with a couple of the provinces are Krishna sticks and gingerbread bites. So I think you know again those are just seasonal but.
So far good response from those as well.
Appreciate that and then just a quick follow up maybe overall the.
Yes.
Risk assessment or maybe higher level you on the market continues to expand so $3.1 billion number I think is very.
Very encouraging but when you look at the the LP land.
Overall, and not really dominated by by the profitability at this point.
Where do you see the.
Opportunity to really locking weathered margin or things that are more specific to organic growth.
Strategy and are confident the when we see a lot of my day and dried flower is the risk that the beep and category given the high competition could see of similar dynamic in the next year here and as the market gets closer and closer to what I think the the overall headline number in terms of market size might be close to 10 billion and we'll see where that Paul.
Where do you assess the risk of.
Subsequent product categories potentially being commoditized debt.
The overall macro that the industry continues to grow pretty healthily.
Yeah, I think look it's a great question I think to some degree we've already seen the.
Pricing changes happen in the Veight market rate. We early on the was limited competition that is more products came in the market we saw.
We saw pricing and again as I mentioned, we did share some of that pricing reductions that we took with.
With with the provincial partners into our private retailer, but the real I mean really what's the potential partners on the distribution side.
I think what's important though is for companies like or Ghana Graham as you know you are improving your efficiency right. So as as the pricing compression has happened.
Flour and you go to larger volume skews.
Certainly your packaging cost go down pretty dramatically.
And I think on 2.0 products. It's the same as you are producing more of the product you are producing of more frequently.
You're doing it more efficiently more effectively so while you're getting some price pressure.
But I think it's you know weve talked about this all along I mean, when we spoke about as the company part of our focus is to bring quality differentiated products.
And even the you know for example, our trailblazer snacks, chocolate bar, which which participates in the value of category.
Arguably is one of the best tasting and differentiated.
You know chocolates in the market I mean, it's you know it's a five piece bar and 42 grams each piece is filled.
Kind of independently. So it does allow consumers some flexibility in terms of dosing. It's not just one big bar, where you may not have the homogeneous kind of distribution of cash.
The average rents in it but again I think it's important to continue to focus on the new products and not just new for our offerings for that consumer that's always looking for something new and unique.
And also the differentiated products you can bring to market like remix and the quality of our chocolate.
Great appreciate all of that thanks.
And your next question will come from Rahul Sarah Gastar from Raymond James Your line is open.
Hey, Greg and Derek in any of the display for your debt for onto the whole today.
The couple of questions from me I know, we've talked a lot of of the production and how we can.
Enhance efficiencies going forward.
Wondering EPS and I'm looking at the yield per plant features year over year, and then you seem to have gone down from the sale of 150 grams per plan to around 100 at the end of this year.
Is this a problem that you can resolve the staffing and how how how important do you see the sort of the yield per plant issue as it flows into the rest of your business.
Yes, I mean, the maybe I'll start off and answer that Mike Michael and then if there was anything to add I mean, so certainly two things to keep in mind. So is on a per plant basis, we stopped.
Keeping trend by product a couple of quarters ago, right, we had sufficient extract inventory and sufficient extractable material. So thats of roughly 30% production drop in kind of yield per plant right. So if you look at from that factor and then we've been focused on increasing THC.
With some experimentation on different.
Of different techniques different styles also different strains of some of the strains.
As you know certainly you've done to our facility some strange.
You know how of higher yield per plant others have a lower yield per plan and it's finding that balance on a THC and yield basis rate, where you're still call the and I think.
I think as the again the.
The focus for US has to be you know I mean, when we when we speak about increasing staffing at all I mean, we're talking modest increase in staffing range is brain.
The limited number of people.
Back into the facility and increasing our staffing, but I think.
I wouldn't say that's going to have an impact on yield implant care per se, it's more about the genetics, who we choose to grow and I think thats. The most important ones. So hopefully that answers your question.
Yes, that's the yeah, Thats really helpful and just staying on the topic of staffing and it's in the New Brunswick recently the have you seen some enhanced of.
Good related restrictions and left the Atlantic bubble recently.
Are you seeing.
The sort of the reached the uptick in cases of New Brunswick, specifically affecting your operations or net so the two.
The restaff even modestly.
No. It's a great question I mean, so certainly we have worked closely with the government and actually we actually had a spot inspection of last week, where.
Public health work Safend Rcmp came in and they have been visiting sites across the province to ensure kind of safety protocols are in place in a safe workplace for employees and the.
They were satisfied with everything they saw on site. So.
So I think what you know, yes, we have seen an increase in the province, but I think for us.
We've been focused since the early days of co of it to make sure that we could and do you have the safe workplace for employees and I think our employees appreciate that.
And it's been a big part of what we do so to date. It has not had an impact on our facility and our operations I again, I think the greater impact the cobot, sometimes is more.
Equipment end or getting third party contractors into on to us to do work on equipment and things like that which has been a challenge so.
Gotcha, Thats terrific and if I could just one more in there if we could that we focus closely on biosynthesis and highest since the ethically and.
Your your recent investments and the recent.
Now in terms of free since BA is the big deal in the space.
How do you see.
Partnering with highest as a potential drugs into the United States given that bio manufacturing true contract research contract manufacturers can happen almost anywhere.
Yes, its interesting Michael I'm not sure if you you've spoken of Kevin or not but actually the this first production in sale was actually completed in the U.S. So they are working with the contract site. There they transferred over there you strains and enzymes to do it off from do an optimization process. So I think that the.
The the big difference with biosynthesis versus kind of as planned production as.
It doesn't have to be country specific and certainly theres lots of opportunities for.
For Hisun to operate either in the in any jurisdiction, where its legal and or two.
Well to operate in jurisdictions and do product transfers rate of of pure can Avenue I'd send certainly ones that don't have the same control met.
Mechanisms on them as others at this point or in the future ones that there's been changes. So I think I think that is a big part of their strategy right now so.
Thats really helpful. Thank you very much.
And your next question comes from Douglas men from RBC capital markets. Your line is open.
Yes. Good morning, just a couple of quick questions number one Greg.
You are one of the close to the industry and I'm just wondering what the thoughts are on the M&A right now and what you see unfolding in Canada, but also.
North and south of the border of with respect to the Canadian market.
Yes, I mean, we are you know what we have seen some consolidation now in the retail space and I think the we expect that to consider potentially Doug but.
But I think when we look at the space.
I've said this publicly before I mean, we are we are continuously approach by banks sender accompanies directly where companies are looking to be acquired or how the strategic investment into them and I think one of the challenges as always when you evaluate those companies is looking at.
What's there what's the differentiator whats the renovation, what's there kind of brand I mean, if you have all three of those and or a couple of those that can be quite unique then certainly something to evaluate it. So I think that's the challenge to be Frank in the spaces. There are.
There are many companies that don't really have that differentiation. So.
I think it's one of the things we focus on when we assess people is what is the differentiation how do you supplement I mean, certainly there's public public.
Public companies synergies that can happen in any M&A activity, but I think the more important things along with that or.
How did the two companies combined and what are the synergies you know in terms of the market opportunity. So.
North and south of the border I think that still.
Very much dependent upon.
You know what happens.
In the U.S. and I think you know if the Republicans control of the Senate.
With these two upcoming runoff of elections and in.
In Georgia that sets one tone, if its the Democrats were able to garner both those seats kind of might send the other direction. So.
We'll see what happens.
Okay, and then just I didnt want to continue on with the US market and you said you are doing some work about how the could unfold in how you are going to move as the result of that.
Can you elaborate on.
From what the company might be thinking we've seen other companies moving into the market in the I'm just wondering given your relationship with the company in Colorado.
You're thinking about it.
Yes, I mean look we continue to monitor the U.S. and certainly.
One of our key staff is on the on the board out of the us in the industry and I think.
We have certainly been a big part of our focus even on the GR side is to kind of keep keep our finger on the pulse of what's happening there.
I think when you look at the market as a Canadian company that still listed.
In the near term our focus as you know is our their CBD opportunities and I think that would potentially be a way to enter the.
End of the marketplace in the legal fashion, but.
But we do follow THC as well I think you know part of our focus as well has been very much about creating innovative products. So for example, our remix we've had a number of inbound licensing.
The contacts from companies on on both the CBD in the T.H.C. side.
For that technology and innovation and it certainly at this point. We haven't concluded are gone final with anyone we if we were to do so we would only do it with the CBD company at this point due to the legal the legal implications related dis THC revenue, but I think as the company. We're you know we we are continuing following flow.
Because of them, we have looked at CBD opportunities. We're just not at the point that we found something that made sense to us.
Perfect. Thanks very much.
Thank you everyone. This will bring us to the end of high Q when a session today.
I'd like to thank everyone for joining our conference call. Today. This will conclude our conference call you may now disconnect.
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