Q2 2022 Aphria Inc Earnings Call
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Ladies and gentlemen, thank you for standing by our conference will begin shortly once again. Thank you for standing by our conference will begin shortly.
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Good morning, everyone. Thank you for joining us to discuss children, Inc. 's financial results for the 2022 physical second quarter ended November 32021, joining me on today's call are Irwin Simon <unk>, Chairman and Chief Executive Officer, Carl Merton, Chief Financial Officer Blair Mckee.
Now president of till they Canada, Denise false check chiefs.
Chief strategy officer, and how that international and burned Maratha Chief Corporate Affairs Officer.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session for analysts and investment firms conducted via audio and participating retail show shareholders conducted through the Sei technologies platform.
Question submission and uploading.
Through the Sei technologies platform has already been conducted concluded and the company will read aloud and answered the top questions. Ms. Marotta you may now begin the conference.
Thank you and good morning by now everyone should have access to the earnings release, which is available on the investors section of kill raise website until right Dot Com and has been filed with the SEC and SEDAR on today's call, we will be referring to various non-GAAP financial measures.
Can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Today's earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP.
Also please note that we will be making numerous forward looking statements. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect Act.
Actual results could differ materially from those described in these forward looking statements. The text in our earnings press release issued today includes many of the risks and uncertainties associated with such forward looking statements and now I'd like to turn the call over to tell raised chairman and CEO Irwin Simon. Thank you.
Barry and Hello, everyone. We thank you for joining us for our call. This morning, and as the operator, just noted I want to recognize the new additions to our call today, including Blair Mcneill President of our Canadian business, who will speak on the evolution of our Canadian business and the Canadian market and Denise falter.
Check president of our international business, and Chief strategy Officer, who will speak on our global operations and its strength at the heel of international growth and legalization across Europe.
For all of the reasons, we will discuss this morning, we're excited to be announcing a new parent name for a company till right brands Inc.
Our new name reflects our evolution from a Canadian L. P to a global consumer package, good company and branded powerhouse with a market leading portfolio of cannabis and lifestyle CPG brands that are empowering the worldwide community to live their very best life.
Through the completion of our business combination last year, we positioned till right as a disruptive cannabis industry leader with a portfolio of highly sought after brands that bring people together in a memorable and positive way contribute significant operation scale.
Benefits from our broad global distribution footprint and last but not least that are flourishing from hands on CPG expertise and operational excellence across the board.
The economic engine driving shareholder value is there a model that seeks to generate current cash flow positive EBITDA, while adding the infrastructure production facilities and distribution networks to capitalize on the long term growth opportunities that come with increasing except.
Our medical and recreational use of cannabis globally and ongoing cannabis legalization.
This is the heart of til raise value proposition.
And its unique among our peer set most importantly, this model constitute the roadmap to $4 billion in revenue by the end of fiscal 'twenty 'twenty four.
As our results today underscore, we're making tangible and notable progress towards executing against this opportunity despite challenging conditions in certain key markets and geographies.
Despite the continuing challenging backdrop, driven by Covid and other competitive considerations, we delivered growth in the second quarter compared to a year ago. We also deeply gratified with second quarter results included in our 11th consecutive quarter of positive adjusted <unk>.
EBITDA, a strong affirmation of our ability to achieve topline growth and a pair it with smart disciplined operations acumen.
While there are multiple factors that contribute to this relatively strong outcome. None is more notable than the grit hard work and resilience of til raise global team.
They are performing admirably under some trying conditions and I'm immensely proud of their ability to execute.
Second we have been proficient and flexible in terms of simplifying our supply chain, particularly in light of today's headwinds facing our businesses.
This combined with our production and cultivation efficiencies. We have gained through the integration have allowed us to partially offset the negative impacts of COVID-19 and current cost pressures impacting every segment of the global economy.
Importantly, we believe there are temporary headwinds, which when they abate and conditions normalize put us in even stronger position for growth as we capitalize on our leading brands our distribution network, our proven execution skills and our strong.
Wrong financial profile and scale in Canada, Europe U S and the opportunities around the rest of the world with that I will now turn the call over to Blair Mcniel for discussions on our Canadian business Blair.
Thank you Irwin and I'm very pleased to be here speaking with all of you today and providing an update on our Canadian business.
I'm excited to have joined the til rate team from Bacardi.
Successfully ran their Canadian business for the last five years.
I see tremendous growth for til array in the Canadian market, bringing new consumers into the market and taking consumers away from the illicit market.
At the highest level. This market remains defined by an over saturation of licensed producers and retail stores, leading to unsustainable price compression and lack of profitability.
I want to be clear we.
We do not believe this is a sustainable environment.
The strong will survive.
So we view this as a temporary pinpoint and an opportunity.
Namely we are being more aggressive to win share capitalizing on our iconic leading brands, our innovation pipeline industry, leading cultivation capabilities.
It's on the ground provided to us through our expanded distribution partnership with great North distributors.
And the strength of our balance sheet.
Importantly, even in the intensive price competitive market, we have maintained our number one leading market share position in Canada.
And leading positions across our portfolio of brands with top rankings across adult use product categories.
Such as concentrates edibles flower oil free world topical vapes and beverages.
Based on recent high fire sales data in Canada for the months of September through November.
Still in the second full quarter since completion of the business combination our retail market share declined to 12, 8% from 16% in the sequential period because of the heightened price deflation.
As I alluded to our pricing strategy to defend share to a point.
But we will not severely compromised margins.
And to protect our gross margin we are implementing several initiatives to ensure we have the right cost index to compete profitably.
It can be clear.
Our Canadian market share strategy is to execute relentlessly and with the precision across two main fronts that complement and reinforce each other.
The strategic price reductions will drive near and long term growth in our fastest growing categories, they seem pretty well.
And position us for strong upside when the market consolidates further.
Second we are ramping up initiatives to educate and bring in new consumers through many different fronts, including partnering with retail and Bud tenders and.
And delivering a more aggressive marketing strategy and product innovation pipeline through business intelligence and insights.
On the medical front, we are also rolling out new until Ray medical website.
And patient platform that gives patients access to all four medical brand and enhances their experience.
This concludes till Ray medical are free of medical broken coast medical and some deals.
In short we have the scale and resources in Canada to allow us to double down on brand and strategically win.
With that I'll now turn the call over to Denise felt to check Denise.
Thank you Blair and thank you all for joining us today internationally. Our presence continues to grow we now offer a branded medical cannabis in 20 countries around the world, reflecting the trust that governments health care professionals and patients place in US every day.
Accordingly over the past five years, while everyone else is focused on other markets. We were focused on Europe, we strategically invested acquired and built a strong infrastructure team in business across the EU.
Which has twice the population of the U S and 20 times the size of Canada.
Just within the last couple of months policy discussions on the legalization of cannabis for adult use has intensified throughout Europe, with Germany, and Portugal being the most prominent candidate.
The dominoes are beginning to fall until ray if uniquely and optimally positioned when they do.
Our two state of the art cultivation facilities in Portugal, and Germany provide EU GMP certified pharmaceutical grade medical cannabis and we have sales and distribution arrangements to supply cannabinoid based medicine, two major pharmaceutical distribution channels. This includes among others our wholly owned subsidiary.
A dairy cc pharma in Germany, which has preferred access to approximately 13000 pharmacies and grill pharma in the U K.
Notably televise the only company currently supplying the German government with medical cannabis cultivated in country and we are the market leader across Germany in medical cannabis extracts and dried flower combined which helps to ensure that patient needs in Germany on that with products of the highest quality and safety while at the same time.
Ensuring consistent supply.
Juicing dependence on importation.
Germany, our revenue related to medical cannabis extract products grew.
16% versus last quarter, and we now have a market share of 64% in the extract market.
Our revenue related to dried flower products grew 10% versus last quarter, and we now have a market share of approximately 16% in the dried flower market.
As of November two rate is now the market leader in Germany, with an overall market share of approximately 20%.
Our strong reputation and product quality and safety and science based cannabis research also puts us in an excellent position to capture the enormous opportunity for both medical and adult use legalization in the U S.
And that time may be near on the horizon, because Germany's incoming government coalition has reached an agreement to legalize adult use cannabis nationwide within the framework of a regulated market.
In terms of population, Germany would then become the largest country in the world to permit the sale of adult use cannabis on a federal basis and when that milestone does occur. We believe we have a head start on the competition based on our E. GMP certified cultivation facilities currently operating in normal stage.
How many which has additional capacity to immediately support the recreational market.
And we have a track record backed by science technology and quality control standards to offer high quality adult use cannabis brands and products on a consistent basis that we are confident would be well received in the market.
We are also a market leader within other countries in Europe, where we have achieved the following.
In Portugal, we are the only approved medical cannabis products in the market with our T 18, dried flower, which is distributed through our distribution partners to medical stakeholders throughout Portugal.
In Luxembourg, we were selected by the Luxembourg Ministry of Health.
Exclusive supplier for the country's medical cannabis program for dried flower and oils.
In Switzerland, we distribute our cannabinoid based medical extract products to switch patients through our local partner in France. We were selected as one of four suppliers and a two year pilot experiment to supply approximately 3000 patients with medical cannabis. This experiment was to inform a regulatory framework for men.
Cannabis going forward and we expect a French medical market to be in the order what are the magnitude of Germany.
In Italy, we are one of five distributors license to important medical cannabis into the Italian medical market.
In the U K in the quarter, we completed our first shipment of broad range dried flower products with high medium and balanced potency seems to the U K market.
In addition, we are one of only three suppliers within the Irish market, whose cannabinoid based medical products are eligible for reimbursement.
As we look ahead with respect to legalization more fully we expect all of Europe to legalize medical use cannabis within the next 12 to 24 months and certain countries legalizing adult use thereafter right now there are compelling signs of Portugal, and Israel are also carrying out for adult use market.
Outside of the EU, our businesses in Australia, and New Zealand are performing very well with till they branded extracts and flowers, leading the market to give some highlights to where he was the first company to have both purified CBD and balanced THC extracts registered in New Zealand by meeting their high quality standards.
This took effect October 1st and the rollout of our products is going very well patients now have accessibility to all four jewelry products offered in the market and we are well positioned to drive ongoing growth.
In Australia, the reputation and trust in our brands continues to grow to give an example through our contract with the Department of Health Victoria 90 children are now participating in a government funded seizure program using our products, which will continue until the end of 2024.
Consistent with this growing trust in our brands more national pharmacies in Australia have requested Tilbury product by name driving a 29% increase in revenue quarter over quarter. In fact, our performance would've been stronger had our sales team not been prevented by Covid lockdowns from promoting our products face to face.
Turning to the rest of the world, we see additional opportunities in Argentina, where we benefit from our distributor relationship with ADP in Brazil, and even China and India. So in short our international opportunities are tremendous and I look forward to keeping you updated on our progress I'll now turn the call over to Erwin for a discussion of our U S operations before.
Carl closes the prepared portion of our remarks with a detailed financial overview Irwin.
Thank you, Denise and Blair and in the U S. I wanted to start with our CPG businesses Sweetwater Brewing, Manitoba harvest and our New addition, breckenridge this theory.
Which together generated approximately $150 million in annualized revenue and profitable EBITDA and have exciting potential for future growth.
To offer some insight utilizing our current footprint in the U S. Today, we're able to invest in these strong brands meaningfully expand their presence and leverage their distribution systems to parlay into CBD beverages.
CBD personal cares and related Adjacencies the free option that play is that these attributes will later be translated into THC businesses. In addition to our beverage alcohol businesses.
Upon federal legalization in the U S. Much like our med men investment will continue to explore THC options in the U S market. Once additional clarity is available suite waters known ports for 'twenty beers, among others, but since our acquisition of the business a year ago, we've expanded.
At the product line to include spirits ready to drink Bosco soldiers in a can and collaboration with our Canadian cannabis brand risk as well as hard teas, eliminate and new craft beers, including our new Imperial IPA and a b C lager in collaboration with our award.
Canadian craft cannabis brand broken coast.
It is our intention to make U S beer consumers more aware of our Canadian cannabis brands prior to federal legalization, because we have data that shows that beer drinking consumers are often cannabis users too.
We have even more opportunities with Sweetwater down the road, such as developing CBD products or infusing non alcoholic spirits with THC.
In addition to the new Sweetwater Taproom located at Denver International Airport and please visit it on your trips. We also recently acquired a second Sweetwater brewery and tap room in Fort Collins, Colorado, both which enables sweetwater to pursue their expansion through the rest of the U S and in the web.
Astern states.
Just a few weeks ago, we announced the acquisition of Breckenridge distillery widely known for its award winning Bourbon Whiskey collection, and innovative craft spirits portfolio, including Bourbon whiskey gin and vodka bracket.
Breckenridge is an exceptional leading brand that is current distribution across 50 states.
Working with its founder Brian and his team all of them, who will remain in place we plan to bring our CPG brand building expertise to bear and make targeted investments in marketing.
<unk> awareness and increase distribution.
Even now Breckenridge will benefit from synergies on the distribution side when paired with Sweetwater. We are confident that these steps will drive growth both now and in the future.
I should note that both Sweetwater in Breckenridge distilleries, our business that are cash flow positive EBITDA positive earnings accretive and can be leveraged for cannabis when federally permissible.
Sweetwater as distribution currently reaches over 47000 on and off premise points of sale and we are continuing to build the business.
Right before year end, Sweetwater announced the acquisition of Alpine beer and Green plush iconic west coast craft beer brands to be brewed in our new Fort Collins facility for West Coast distribution, all which complement sweetwater as existing product offerings and give us a strong foothold in.
California, and the west part of the United States, the largest state economy in the U S and the largest legal cannabis market in the world.
I spent my career building CPG brands with teams that I work with today and then we brought this expertise to til rate with an ability to identify and significantly expand leading CPG lifestyle brands that resonate powerfully with consumers even without legalization.
We can therefore grow these brands while building all the sets and pieces for the immensely positive impact that legalization will bring one day with this in mind I am excited about the very fast growth of the spirits category in the U S and we're exploring additional opportunities to build out our beverage.
<unk> alcohol business through more categories and of course brands.
The CPG deals in turn ensure access to EBIT more potential and deal flow and accretive EBITDA for us.
Turning now that Manitoba harvest, we have stabilized the business since assuming ownership by rebuilding its core hemp food portfolio in the latest 12 weeks are U S consumption in measured channels is up 2%.
On Manitoba harvest, a significant turnaround from the double digit decline in the brand was experience at the time of our of our business combination.
We intend to accelerate the business through 2022, as we're introducing a great deal of product innovation that will enable us to capitalize on consumers' interest in hemp products aligned with plant based low carb or keto diets.
As a certified B Corp, Manitoba harvest is committed to educating consumers are both the nutritional benefits and the sustainability of him as we grow consumer trial and awareness of hemp foods.
Additionally, we are leveraging our ingredients division to collaborate with CPG partners, who are incorporating the hemp seed head protein enhanced oil into their branch or til Ray wellness business is also developing multiple CBD beverage products for launch in 2022 will take full.
Each of our beverage manufacturing capabilities to deliver these innovative products to market.
Manitoba harvest products are currently available in 17000 stores in the U S.
As with Sweetwater, there is room to run.
Beyond that as we grow each of these brands, we will be able to use these distribution systems to parlay into CBD beverages personal care products and related Adjacencies.
These may later be translated into THC based products upon federal legalization in both cases, we do not need to expend significant capital build production facilities or distribution networks, they already exist and can be leverage.
We are setting the standard Manitoba harvest has the opportunity to become a multiple hundred million dollar company.
This is a clear refraction of the fact that even now before federal legalization, we're building out our U S infrastructure through cannabis adjacent products, putting the pieces in place to drive revenue growth today and to allow us to hit the ground wanting once legalization occurs and these assets can be.
More fully leveraged.
That being said, we view our ability to go on day one.
As important in that process, which is why we invested and convertible notes of Mednet, we have multiple benefit options regarding mad men more broadly we continue to build our strategic position through multiple turnovers. So that can we fully benefit from legalization when the time comes.
<unk>.
Of course, we could take additional options on multiple msos now, but this approach only provides options since we cannot recognize revenue or EBITDA from the underlying businesses and are dependent upon regulation to realize the full benefits of these options.
Yeah.
Moving on I will touch on our progress in delivering the $80 million in cost synergies, we've identified as part of the TRA of free a business combination in short. We are ahead of our original pace, having reached $70 million on a run rate basis to date.
With actual cash savings close to 36 million Carl will speak in more detail on our progress against our synergy goals in a minute.
In conclusion to sum up before I turn the call over to Carl till Res business model, which is based on current value. We are generating from our business in Canada International and U S plus the upside that comes with legalization is the backbone of our strategic plan and we remain on.
Track despite headwinds.
Our strategy our team are in place and executing and we are leading and differentiating our market position and we are looking at all ongoing opportunities to drive synergies reduce production costs and a strong pipeline of transaction and growth opportunities worldwide.
Why.
At the same time, we are cognizant of the near term challenges facing our business and the current pressure on our shares and that of our industry and the global economy in general.
<unk> com is likely to exasperate these challenges while unfortunate neither deter us from executing on our mission to further build our position in the global cannabis industry. In fact, they enable us to make investments and adjustments now that will pay even bigger dividends.
When a market and the global economy normalizes.
We have the brands we have the team we have the plan in place all to drive consumer demand and we will reward our shareholders and allow us to win and with that Karl will now discuss our financials in greater detail Karl.
Thank you Erin, let's now discuss our relative strength during Q2. The synergies we are successfully building into our business model as well as our cash and liquidity position at.
At the highest level the quarter was unquestionably impacted by a variety of factors, including as Blair mentioned marketplace saturation in Canada, and the impact of Covid on our operations.
Importantly, we are confident that the medium to long term implications of these challenges play into our favor.
Particularly in terms of our ability to implement strategies that will ensure we win market share.
Therefore, I'm more confident than ever concerning our organizational objective to emerge from the short term market challenges stronger more diversified.
And more profitable through our execution of our key competitive differentiators.
As with prior quarters I want to remind everyone that as a result of the arrangement between a free until rate our results in the prior fiscal quarter are based on our free of financial statements, but have since been adjusted to follow U S. GAAP and are presented in U S dollars.
Additionally, recall that in July 2021, we published an appendix to our investor deck located on our website that contains an unaudited analyst primer, which breaks down our free of U S. GAAP financial statements for fiscal 2020, and 2021 by quarter.
Please also note that throughout our call today, we will reference both our financial results in accordance with GAAP as well as our non-GAAP adjusted financial results.
Our earnings press release contains a reconciliation of our reported financial results under GAAP to the non-GAAP financial measures identified during our remarks.
Starting with the top line, despite a challenging environment. Our Q2 net revenue grew 20% compared to Q2 last year.
Although the comparison itself is not apples to apples because the year ago quarter does not include any contributions from legacy del Rey.
Okay.
We achieved our 11th straight quarter of positive adjusted EBITDA.
Particularly in a market where revenue was a challenge.
Speaks volumes to our relentless focus on operational and cost efficiencies, our overall planning capabilities and the success in integration and executing on the synergies we identified in the total rate of free a combination.
Over the past year, we have continually challenged market expectations on profitability.
And delivered superior results each time.
Yeah.
From a medical standpoint, there was similar downward pressure caused by COVID-19 from patients unable or unwilling to see a doctor as well as increased competition from adult rec and related price compression.
Ultimately, we believe that consumer demand for higher quality brands will rise once the pandemic wanes and Bud tenders are able to more positively influence purchasing decisions and then we will be best positioned to capitalize on that opportunity to entity similar to how consumers behave with regards to other products such as <unk>.
Carl.
Turning to our beverage business Sweetwater on premise demand remains impacted by Covid.
Premise channels look to be stronger in the future with our new innovation pipeline and increased distribution points.
New leadership product innovation and operating improvements have stabilized Manitoba harvest with its revenue contribution relatively flat from the sequential quarter and margins basically unchanged.
After managing through the changes associated with moving from branded product at a big box retailer to a white label product. We are pleased with its revenue contribution in Q2.
Finally, while cc pharma experienced the decline in net revenue a major part of the decline was tied to the strengthening of the U S dollar and the inherent weakening of the euro versus the prior year period.
More specifically if the Euro U S. Dollar exchange rate had been the same in the current quarter or is it was a year ago Cc pharma would have reported an additional $5 $3 million of revenue.
Before we turn to profitability. It is important to note. We performed a detailed review of our inventory as part of the quarter.
As part of our review, we identified an adjustment of $8 million and the value. We originally described to inventory.
$6 million and the value. We originally have scribed to prepaid and other current assets as part of our reverse purchase hotel right.
During the current quarter and prior to having finalized the purchase price accounting for the transaction, we reduced the inventory in prepaid and other current assets on the transaction date by $14 million.
And correspondingly adjusted deferred taxes and goodwill.
These adjustments did not flow through the income statement.
At the same time and as part of the inventory review, we identified inventory acquired in the transaction, whose cost due to price compression in the market was now higher than our expected selling price for the inventory.
Accordingly, we recorded an inventory impairment of $12 million in the quarter with the vast majority of the write down reflecting this higher priced inherited inventory from the transaction.
Yes.
In a challenging revenue environment operating excellence can play an outsized role and that's certainly true as we turned to bottom line performance.
Despite the headwinds we've all discussed here today, our team worked hard to optimize performance and as a result, we increased net income by almost $96 million to.
The $6 billion.
From the prior year quarter as well as improved our adjusted gross margin to 29%.
From 27% in the quarter on a year over year basis.
Further we reported our 11th consecutive quarter of positive adjusted EBITDA.
Which increased to $13 8 million from.
From $10 $1 million a year ago.
Importantly, we are confident our profitability will increase as more of our operating synergies become embedded within the platform.
Particularly by converting our legacy core brands, two or three is cost structure.
On a pro forma basis for example, if a free as cost structure had been in prior apply to the legacy <unk> brands in Canada. During Q2, we believe that our adjusted gross profit would have been $3 $8 million higher.
Recall that a frito has been a low cost producer with strong cultivation processing and manufacturing facilities and we are now pulling additional costs out of that structure to gain further efficiencies, while improving product potency and quality to meet market demand.
Adjusted free cash flow improved to negative $16 million from negative $53 million last quarter.
As we said last quarter, we believe that our first few quarters as a combined entity with likely see negative cash flows. However.
As we achieved our synergies we would be working towards sustaining free cash flow generation, which we believe will generate sustainable shareholder value.
Turning now to the business integration, we are making meaningful progress optimizing operations and as we focus on reaching at least $80 million of synergies within the first 18 months post transaction.
To date synergies achieved have reached $70 million on a run rate basis.
And $36 million of actual cash savings.
Further we are pleased to announce that we now anticipate reaching our $80 million synergy target within a little over 12 months of closing the transaction.
Or.
By our current year end on May 31.
Additionally, we are pleased to announce that we anticipate generating an additional $20 million in synergies from the transaction that will be achieved during our fiscal 2023 year.
Now, let's discuss Q2 in greater detail.
Within cannabis or medical business grew primarily due to contributions from legacy tool right.
And innovative new products, including the June launch of our of our new brand <unk>, which addresses unmet medical needs and provides patients with more choices and managing their health conditions with medical products.
Still we experienced a lower number of existing patient renewals and lower numbers of new patients in both independent and clinic patients because they were unable or unwilling to see a doctor.
Our adult use business on a net basis declined year over year. Despite contributions from the business combination because of the move the price base brands more competition and more aggressive price discounting during COVID-19.
And while we took the proactive measures to adjust our pricing and rationalize some skus during Q2 as discussed earlier, our cannabis gross margin fell as a result of the price protection provided to our customers as part of our pricing adjustments.
As a result of our pricing changes, we anticipate a minor fall in our cannabis gross margins going forward.
But we believe we will remain industry leading.
Or adult use business experienced a revenue decline the strong performer of the quarter was our international cannabis business.
We reported a 227% increase in revenues from the prior year.
Net cannabis revenue rose, 7% to $58 7 million for the quarter net.
And that distribution revenue fell 7% to $68 9 million for the quarter.
Net revenues at Sweetwater were $13 7 million slightly down from the prior quarter.
Net revenues from our wellness business, Manitoba harvest were $13 8 million, which was relatively flat sequentially and for which there is no comparable to the previous year.
We view this business has largely stabilized at this point under the leadership of Gerry Simon.
All of this led to net revenue, increasing 20% to $155 2 million in Q2 over the prior year period with the increase primarily driven by the contributions from legacy til rate for which there was no comparable in the prior year and.
And Sweetwater for which the comparable was only five days in the same period.
Adjusted cannabis gross profit remained flat at $25 5 million in Q2, while adjusted cannabis gross margin remained strong but fell to 43% from 46%.
This reflects in part our proactive and decisive steps to adjust our cost structure and reduce production costs through the integration process, leading to some temporary inefficiencies during this transitional phase, but ultimately this hard work now.
Greater efficiencies going forward.
Distribution gross profit decreased to seven 6 million in Q2, while distribution gross margin declined to 11% as a result of the impacts of Covid on Cc pharma sales mix.
Beverage alcohol gross profit was $7 8 million in Q2, and there was no meaningful comparable in the prior year as the acquisition was completed last November.
Beverage alcohol gross margin was 57%, which was on par with the sequential quarter. Despite the drop in revenue, but below the 60% we achieved in the prior year.
Wellness gross profit was $3 8 million and gross margin was 28%, which was in line with our expectations and for which there were no comparable last year.
In aggregate adjusted gross margin increased slightly to 29% compared to the prior year.
Adjusted gross profit rose, 27% to $44 8 million.
As we continue to achieve our synergy plan over the coming quarters and as our non distribution revenues increase their share of our total revenues, we expect to see continued improvement in this metric.
For the quarter, we reported net income of approximately $6 million.
Compared to a net loss of $89 million in Q2 last year.
Turning to cash flow and liquidity.
Adjusted free cash flow was negative $16 million during Q2 and reflected $17 million of net cash used for operations.
$7 million and investments in capital and intangible assets.
<unk> set by $8 1 million of cash expended related to our acquisitions.
Again, as I said earlier, we view achieving free cash flow on a consistent basis as a priority for this business.
While we certainly fell short in Q2, the negative negative adjusted free cash flow was within expectations given the integration of the Tory assets and represents a substantial improvement of over $37 million from the prior quarter.
We also still maintain a strong cash position of $332 million as of November 30.
To both support our existing working capital requirements and our business plan.
As we look forward and get beyond the near term challenges due to Covid and the omicron variant we see good reason for optimism.
First there will likely be a right sizing of the Canadian market that candidly will be accelerated as the dramatic impact of omicron very variance impacts consumer behavior across the board.
Further continued pricing levels below cost levels for the vast majority of our competitors are not sustainable.
Through the benefit of time, we believe those pressures will be removed.
Second the movement towards legalization is continuing with the anticipated legalization of recreational cannabis in Germany. We believe other EU countries will follow suit.
Moreover, we are continuing to invest in our U S assets, including Sweetwater in Manitoba harvest, which are already cash flow and EBITDA positive earnings accretive and will be leveraged for candidates along with other recent acquisitions, such as Breckenridge Alpine beer and <unk>.
Green Flash brewing that will be accretive to our portfolio.
Across all markets and geographies, we are expanding our energies and resources on executing on our highest return priorities.
Actualizing, our business integration to better manage costs, and capturing and delivering value for our shareholders.
This concludes our prepared remarks.
Thank you for your interest until Ray.
We will now begin the question segment of our call starting with questions from our covering analysts, which will be followed by a few questions from our retail shareholders from the same platform.
Operator.
The first question.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that you each keep to one question and one follow up.
Our first question comes from the line of.
Vivien <unk> with Cowen. Please proceed with your question.
Hi, good morning, and happy new year.
Happy new year and Vivian.
So you guys have been active.
Any standpoint in the alcoholic beverage market makes some good sense Irwin as you articulated in terms of the long term leverage ability.
Those asset but no.
Near term it is a bit of a different network. So I'd be curious just to hear your thoughts on any kind of synergy opportunities you see across those assets.
Incremental NII.
Furthermore.
Thanks.
Hey, Vivien, we are a little faster, so I'm going to have to Cogs.
We're going to have to talk over a fire alarm went off in my opinion.
Anyway.
Just.
Sure.
Just in regard to that listen I think what we saw with Sweetwater brewery number one.
Very quickly.
We rolled out our risk brand, we rolled out our <unk>.
Our broken coast brand and.
I think beverages is a major major part of the whole cannabis industry.
The second thing is this here I think one day when.
This does happen.
The opportunity to replace alcohol with THC.
And I've said this before.
The brands that are out there today, whether it's sweetwater, whether it's breckenridge are brands that consumers know and we will have the opportunity.
To get into the market with THC products.
I come back and I look at the whole Bourbon category is such a fast growing category and one day to be able to come out with a bourbon that's infused with THC under the Breckenridge name, which we would have an alcohol business, we'd have a THC business.
Third part is listen as you come back today to look to build brands out there and you saw we changed the name of the company the Tailgate brand company.
And you look at valuations multiples.
The spirit industry is similar to the cannabis industry in many ways and there's many crossovers are studies shows that consumers who consumed alcohol are also cannabis users so a lot of synergies and listen our.
Partner in Canada, Southern Glazer in regards to our distribution piece of the business.
That's the opportunity here in the U S. So I see a tremendous amount of synergies and these deals are accretive and there is good growth in these industries for us and one of the big things Vivien.
Can't do which is wait for the U S to legalize and I think what the important thing is is us being an adjacency categories that got growth Ive got accretion and that give us opportunities in the marketplace.
Understood. Thank you very much.
Q.
Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.
Hey, Thanks, Good morning, I guess I wanted to step back and think through the Canadian don't use business I think first off kind of pressure on your market share.
Actually post integration of kill rate could your diagnosis is it all a function of price the pricing and now that you're putting some price investments in place.
Thank you will be able to grow revenue at a level to where your actual Canadian profitability will growth. Thanks.
Good morning, Andrew So I'm going to start it and then I'm going to turn it over to Blair Mcneil, who is newly appointed President of Canada, but yeah, I think I come back for a second is this here.
One the Canadian market is continuously going through its challenges there's more stores opening up there is more Lps out there.
And also theres pricing.
And I come back and I look at here, we have 12 brands, we're going through SKU rationalization, we're going through brand rationalization and also if you come back to the liquor control boards. They are also going through SKU and brand rationalization and I think what's important is what til Ray has we're going to have brands, we're going to have.
Innovation.
To have products that consumers want because we're going to build our brands and that's why we changed the name to the tail right.
Branded company. The other thing is Andrew I think what's important is our products are grown in our Leamington facility. Our broken coast facility, that's going to be consistent with quality is going to be consistent with regulatory and going to be able to deliver potency. So with that yes. We have lost some share in the marketplace. Some of it was <unk>.
Self inflicted on ourselves, but the easiest thing is just drop price and grit sure, but we're here to build something for a long term Blair you want to add something to that.
Yeah, well thanks Irwin.
I would say first of all on the diagnosis side, it's very clear the inventory levels and a lot of Lps are unsustainable.
And.
To get rid of those inventories they're doing two things one is they are compressing prices and if you look in the last year, we've come down in price one 7%, while the market has come down 22, 6%.
So we are definitely protecting our margins on the way down and I think as an MLP, we have more room than a lot of our competitors to be able to take some smart pricing. So that's number one.
The other form of this new of this over supply of inventory has meant new brands.
Third 57, new brands were launched in the last year. So the market is getting very diluted and we are going to ramp up our innovation in a big way to fight that so we will take some strategic price, but we'll also do it with that industry, leading innovation portfolio behind our big brands, which Irwin just talked about.
And I think the most important thing and final part of your question is can we do it profitably and yes. We think we can we have big scale, we have some cost opportunities that we realized through the synergies, but we have further cost.
That we can take out of this business to make sure. We can do this and grow our gross margins, it's going to be a little bit of a bumpy ride over the next couple of quarters, but certainly we're in a I would say the best position to be able to weather. It. Thanks Andrew.
Hey, Andrew I think the big thing Andrew.
Andrew I think the big thing is listen one of the things that we're dealing with is a world.
<unk>.
We're also dealing.
With supply chain issues and products and stuff like that and at the end as we brought these two companies together and took out $70 million of cost and look at it.
More opportunities I think that's what the important part here is and Theres, a big opportunity in the Canadian market.
Right now only 50% of the market is going through the legal market, where there is additional illicit market you heard Karl talked about the opportunities for us in the medical market. So.
The industry is three years old in Canada, I think there's lots of opportunities and yes, there could be additional M&A opportunities for us in the Canadian market.
Thanks, Paul.
Thank you. Our next question comes from the line of Pablo <unk> with Cantor Fitzgerald. Please proceed with your question.
Good morning. Thank you can I ask you about the.
The JV with Anheuser Busch, just if you can give some background about the determination of that JV and if I try to put a positive twist on it does that give you more flexibility in pursuing partnerships with other CPG companies or there was no matter nishu.
I may add one for Denise and thank you for all that color. The news that was very helpful.
So a big jump sequentially about 40% sequential growth in exports is that a normalized run rate that we should think about for the next few quarters. If you can give more color there with Hilton. Thank you.
Thank you Pablo and good morning, and happy New year, I think listen the opportunity with Abi and I think very early on even before the.
Transaction closed we have discussions with Abi and it made sense to terminate this deal.
It was not a great deal for til rate number one.
Number two is the Canadian market Abi just did not want to do THC products and number three it was a major money Lucy.
Relationship, there and with that with our own infrastructure and our own distributor base with distributors in the beer business us knowing that business.
And with no growth, but big losses. It just made sense and it was mutually for both of us to terminate we still have a relationship with them in regards to our co pack relationship and doing a CBD product for them.
But that's ultimately it was not any type of play hostile issue. It just made sense economically it made sense for us and it made sense for them and listen it can create theres a lot of other beverage companies out there we have a lot of other relationships in the beer distribution business and one of the big <unk>.
Things, we acquired was a facility and we're the ones that have the facility in regards to <unk>.
Producing a manufactured drinks today, whether it's CBD or THC. So that's the whole thing with Abi and part of our synergies came from closing down this.
Joint venture.
Denise.
Thanks, Marilyn Hi, Pablo Nice to hear from you just in terms of your question in terms of run rate for Europe. So we are looking at a 37% run rate for the rest of the year now just just as a note of by sort of <unk>.
Caution in our numbers are often times shipments into other countries and as you know with the regulatory framework, sometimes that's the timing of that doesn't always work out the way, we want to with import and export permits, but there were no weather shipment into Lux and borrowers that was our first shipment into the UK.
So just cautioning just that with a 37% there could be some some changes in and out of quarters.
And I think Pablo the thing is is this year, we're excited about the European market.
Today, and I've said, it how do we get to $1 billion in Europe, It's got to depend upon legalization.
Certain countries, but you've heard Germany talk about it and we are working with the German government right now in ways that this is going to happen, it's probably going to get announced soon it will probably take maybe 12 to 18 months before it can happen.
You will see potentially Portugal.
Other countries go ahead because of the tax you EBIT see Mark home talking about it in France in regards to his election in May that is something that he will have on his election platform.
And with our facility in Portugal, with our facility in Germany, and with our Cc pharma, we're well positioned for that marketplace and as Denise said I mean right now there is 20 plus countries in Europe today that do sell medical Merit medical cannabis and we look to enhance those.
Sales.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Rich <unk> with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my questions also happy new year. So.
So I guess I just wanted to just touch on the Covid backdrop in Canada. If you guys can just help us understand what you're seeing right now in Canada, and then as we look at the business in the current quarter would you expect the canvas part of it to take a step back versus what you just did in Q2.
So.
Canada in Ontario, and a lot of the different provinces are shut down.
Blair I'll, let you go ahead and take that since you are in trial right now and you are the one dealing with the offices closed and restaurants closed but.
Cannabis stores are still open which is the good news. The only thing you have to show your vaccine card before you can enter and Thats. The same with the control boards. The other good news is people are staying home. So hopefully they are consuming more alcohol and consuming more candidates blur.
Yes, Thank you Irwin.
Yeah in terms of the Covid effects I think.
Over the last.
Almost two years, we have seen the similar issues so.
The ability to get capacity limits in store, which making sure our distribution team can get out there and talked about tenders and be in stores. So that is a little slower than what we'd like.
The supply chain things that Irwin mentioned earlier similar.
And so but we are seeing on the opportunity for consumption. We are seeing increases on that side. So I would say the COVID-19 is nothing unexpected to what we've seen so far in response to your question about the Q3 numbers. We are forecasting an increase in our Q3 business. So we definitely.
I think that our pipeline of innovation some of the strategic pricing moves. We've made will result in increased revenue versus Q2 bounce up here.
Great. Thank you.
And I think the big thing is this year.
Covid is something that's been around for two years.
The bad news is still around for two years. The good news, we're getting used to dealing with it and how to deal with it.
With that we have made tremendous amount of improvements to our business keeping our employees safe keeping our offices open.
One things online and making sure we sell into the Bud tenders and Thats, what our partnership with southern laser that has the boots on the street to get into the stores.
Market to these Bud tenders. The other thing is working with the liquor control boards to make sure we have inventories in regards to being able to ship to them.
Last quarter.
Because of labor not Havent labor, we lost multiple sales on pre rolls.
Some of the control boards took down their inventories because concerns of Covid, that's already come through our numbers. So there's lots of things that have happened and theres lots of things that reflect in our numbers because of COVID-19, but I think as Blair said, we're in a good place and having Blair on board today, who came through the <unk>.
The spirits industry with five years with bacardi, knowing how to work with the control boards, knowing how to work with an alcohol product in <unk>.
Today is totally responsible for the P&L of Canada and runs all sales marketing and operations in Canada. So it's great to have someone of <unk> caliber running Canada for us today.
Thank you.
Thank you. Our next question comes from the line of John <unk> with CIBC. Please proceed with your question.
Thanks, Good morning.
In the past the hour. So just just one question I'm wondering if your thoughts on cannabis M&A you had mentioned the 30% domestic share in the past. It does look like that will require acquisitions. So what are some attractive characteristics of a target that you might look for in Canada, and what have you learned from either the til ray of free a merger or deals outside the candidate space in informing your pizza.
Your M&A plans.
It's like every every one of them or something different.
And there is a lot and I've always said this in my prior days at Hain every deal I've done I've learned something different for from and.
What would we have done differently I think the big thing, which again, we learned from til rate.
EMEA free of coming together do we need 12 brands you can't support all 12 brands and one of the things and as you look at some of our revenue were down because we have 12 brands out there not being able to support 12 brands. The second is bringing the cultures together and bringing the people together and Thats something why Blair's here today is really too.
Bring the cultures together and bring the businesses together is how we what brands are we going to spend on the.
The innovation part of the business.
And then we closed two facilities in a skillet and the ninth because of cost notes facilities to produce and that's sort of as <unk> talked about before.
Is us being that low cost producer and that's us being the quality producer. Another big thing is how do you bring more and more consumers over from the illicit market you've got to offer innovation, you've got to offer new products, you've got to offer potency out there. So there's a lot we will learn in regards to future acquisitions.
Yeah.
I come back and say there is some great Lps in Canada that would add additional uniqueness and brands that would add additional.
Capacity and bring them into our.
Our free until rate facility.
<unk>.
There has to be consolidation there is close to 700 plus.
Lps in Canada today.
Youre seeing in regards to just in Ontario has gone from 600 to 200 stores. So the cannibalization happened in that marketplace. So.
Yes, we're looking at acquisitions in Canada, and as you can see today listen if you look at the top four five companies.
We all lose share but is it profitable share is a sustainable share and ultimately what happens to it and you just can't look at it quarter to quarter.
Understood I appreciate the color. Thank you very much.
Thank you. Our next question comes from the line of Gaurav Jain with Barclays. Please proceed with your question.
Hi, good morning, Thanks, a lot for taking my question.
On the comments that have been made around the Canadian market.
Next quarter revenue will be more than this quarter than clearly most producers are losing money right now and then we'll look capacity so.
What is your best estimate when the industry.
Is it later this year Q3, Q4, but is it more of a 2023 phenomena when we actually see an upfront in the industry and if you could think of both about what could be a potential margins at that time, I think that would help us really understand the opportunity here.
Okay.
I think.
Number one we're not ready to give guidance here, but I think the thing is is this here.
Blair is that and I'll, let <unk> speak for himself I'll, let Carl what's important is.
As we brought these two businesses together.
May June of last year.
And taking the cost out of these businesses and setting the floor for the brands the products, what sort of SKU rationalization and.
I hear from people youre down quarter over quarter, while there is seasonality there is holidays or there are certain stores that were closed during COVID-19. There's a lot of factors out there, but I come back and say this year. The Canadian market is a $9 billion market today at retail and Thats only for 50%.
That's only for 50% of the market the other market as the illicit market, there's ultimately sales and theirs consumers to bring over from that.
Regards to bringing new users into the marketplace I think thats going to continue to bring in more and more users into the marketplace. The other and I've talked about it before is the category in regards to the medical cannabis industry, which is tremendous size and opportunity for us.
You saw our margins improved somewhat in the group.
In the quarter, but I think the big thing Blair mentioned is this here while the industry was down on price, 22% were only down one 7% and yes, we lost two.
Two or three share points.
But I think as we build out the <unk>.
Core brands within <unk> as we build out the innovation with until Ray we build out the potency with until Ray.
And we have the boots on the street, which we had to get in there to educate the bus tenders, which are key.
Ultimately and I think it's also important is to have that consistent low cost producer out there coming out of the facilities blur or do you want to add anything.
No. We're we're not exactly where I was going to go which is there's so much runway on the illicit market. We're still only at 50% of that so certainly we see the opportunity for growth in the next two quarters.
Notwithstanding some of the issues there but.
We're building up capacity on three wells were building up capacity on flower, we're building out our innovation pipeline over the next 12 months to 24 months to have more robust launches into the marketplace. So there's a lot of runway for growth in Canada and as we said in our statement I think the bottom line is we see some of this compression.
Short term our short term, we don't know but.
As Irwin mentioned there are a lot of Lps, who are either buying products third party, which makes their margin compression much much worse than ours.
And Theres a lot of Lps, who are burning through cash trying to compete right now and some of that consolidation will ease inventory and we see the opportunity to optimize revenue from that point forward the timing isn't exactly clear, but we think it's it's not going to be long lived.
Thank you, Rob you might see margins.
Go down, but because of price compression and we out there are dropping some price, whether it's <unk> or some other things, but on the other side, where we have the opportunity and you heard me say today, we are increasing our.
Our cost savings and the costs that we're taking out of the combination of til Ray.
Korea.
Go into a $100 million and Thats ultimately, how we're going to support that and that.
What's important is here, we can afford to be able to go out there and do it and we're not going to do it recklessly by no means at the same time.
The products are going to be grown in our facilities, which are going to bring our overall costs down.
As we bring in.
Scaling and we bring in the Nanaimo production into our facilities in Leamington.
Okay.
Thanks, a lot.
Thank you.
Thank you. Our next question comes from the line of Jimmy Chen with BMO Capital markets. Please proceed with your question.
Hi, Good morning, just a quick question on the U S strategy. So when you talk to quite a bit about the CBD beverages personal care related Adjacencies that then can be translatable ph pool upon federal legalization, but I'm curious on this aspect, which is that what we see right now in the U S cannabis market.
Is that like Canada flower and pre rolls really dominate so I was wondering if you could talk about how you intend to build that aspect of your U S strategy. Because my sense is that I think mad men is primarily a retailer not as much a flour producer Christian thank you.
So in the U S Tammy.
We're seeing.
<unk> out there for other products and ancillary products, whether it's in drinks, whether its an edibles whether it's in.
Moisturizer is whether it's in.
Type of personal care products, but.
With that we have formed <unk> wellness.
Run by Jerrod and his team that is doing running Manitoba harvest today, so with that youre going to see us coming out with CBD drink soon youre going to see us coming out with.
Other CBD products Youre also going to see us focusing on hemp and taking a big position in the hold hemp market.
And what are the standards there I think we've done a great job in regards to improving.
The quality and the taste.
What we've done with Sweetwater has taken the risk brand in the broken coast brand in coming out with seltzer products and coming out with ipas in that market to introduce our brand names. So.
The U S market is the focus is to grow brands.
And spirits beer and CBD in wellness.
Until legalization does happen year at least that gives us good adjacency products and as I was telling somebody the other day.
In regards to regulatory ultimately regulatory will change the regulations will change in the U S and I think at that time, we will have a good sized business that we will be able to participate in the THC market, whether it will be flower, whether it will be pre rolls and without having the knowledge.
The business that we are in the Canadian market will be able to translate a lot of that expertise into the U S market.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Hi, good morning, Thanks for the question.
So I just want to touch on Manitoba harvest. So you spoke to some stabilization that you had seen parts of the merger.
Wanted to touch more on the margin side. So continue to see in the mid to high <unk> past few quarters now below the 40% levels. We had seen in the past. So just wondering if you could provide some color in terms of the gross margin profile, whether or not we should expect it to see now in this range with more of a shift to the branded white label, the white label versus branded prior.
See some margin opportunity there. Thank you.
Erin good morning.
Good question and I'm really excited about Manitoba harvest and I know.
Quarter over quarter, it was down a bit but if you look at Manitoba harvest the brand itself. It was flat quarter over quarter and this is a brand that until we acquired it I think they have lots and lots of plans for I'm not sure. It got the plans in attention and the other thing is everybody thought hemp hemp.
And what do we do with this.
The team that is working on this.
With me at Hain as introduced numerous new products I've seen the new product plan.
Seeing what theyre doing in regards to distribution.
Also I have seen what they've done in regards to.
Taking costs out of this business. We did have a lot of private label business that was not profitable and we have now discontinue that or given it up and some of that was.
Costco business that was Manitoba harvest, where they have converted it to their Kirkland brand.
And coming back and sort of saying the Manitoba harvest brand ultimately sell better. So number one is I come back and say, we're going to focus on the Manitoba harvest brand, we are going to come out there and legitimized hemp foods in regards to the quality of the product that tastes of the Prada.
Some of the products just did not tasteful, so we pull them off the marketplace in regards to the benefit of hemp and educating consumers why HAMP is good why it's good.
In regards to smoothies why it's good in yogurt.
Keto diet food and I think there is a big opportunity to really grow this business to $100 million business or do add on acquisitions, we have not in the snack business. We plan to enter the snack business we plan.
To enter other product lines and ingredients in this business.
Ultimately will the margins grow yes, because we're going to take costs out of the facilities that are going to be much more efficient and a lot of products that were co packing and third parties, we're going to move back into our facilities.
Manitoba harvest has sold in over 17000 stores, so looking to expand that and the key thing is there is a team in place that has done that before on the snack product on other grocery products and know how to do that.
Alright, great. Thanks for the answer to that and I'll jump back into the queue.
Thank you.
Thank you. Our next question comes from the line of Doug <unk> with RBC capital markets. Please proceed with your question.
Yes. Good morning. This question is for Denise I, just wanted to review what specifically the German timeline.
Would look like in terms of receiving.
Approval.
On a broader basis, what the risks might be and then.
Maybe you could just talk to us a little bit about your facility in Germany, and how would you be able to supply that.
If we did see the approval in 12 to 18 months and I'll leave it there. Thanks.
Yes, Thanks, Doug for.
For the question so in terms of the legalization timeline as you know the coalition.
<unk> already talked about the approval of medical sorry, adult use candidates into the German marketplace.
We are working on a framework a regulatory framework in order to execute on that and then as Irwin mentioned.
We are offering up our support and help to the extent necessary to help frame and provide some information in order to.
Allow for the development of that framework rather quickly.
I'll leave it will be a 12 to 24 months frameworks for the basically the adoption of new regulations as well as the execution and implementation of those regulations.
So in essence because of the fact that that whole framework has to be developed it has to go through various government channels and then it has to be ultimately approved and rolled out. So we believe that that timeline is probably around 12 to 24 months for full.
Execution implementation and commercialization of adult use candidates you asked about the Germany facility in New Orleans. So we believe that this uniquely positions that can provide us with great advantage in the German market one of the things that the German government has talked about is trying to eliminate the.
Overall requirement that they have to rely on X basically candidates that's imported into Germany.
And as we all know that there's not enough candidates is actually being produced in Germany to actually support that however, we are the only facility to date.
Plying the German government with medical Canada, There is room for expansion within the facility and we believe that we can very quickly.
Expand and also provides for the adult use.
Markets, we believe it's a great advantage for ourselves.
And just to add onto that.
We're really excited about Europe.
And I wouldn't want to be starting from scratch in Europe today, and I think thats. The big thing we've made the financial commitment.
<unk> dealt with the financial Burns.
We dealt with.
<unk> limited to medical cannabis.
And I think it's important today of where we are and what ultimately that could be worth one day I mean, the German market alone and again.
It's got a legalized in locked out will be done as a $2 billion to $3 billion market within itself.
Canada is 33 million people, Germany is $80 million and there is so much and thats whats why the Canadian market is so important for US number one both adult use and medical is legal but there is so much perfection that we have learned from the Canadian market.
And knowledge that we're taking to Europe today and at the same time, we will take that to the U S. Once the legalization happens here.
Thank you both.
[laughter].
Thank you. Our next question comes from the line of Gordon Johnson.
<unk> G Research. Please proceed with your question.
Hey, guys. Thanks for taking my question.
Just a quick question when I look at your sales on a like for like basis is it is it fair to say if I look at the sales for Carol weigh Africa combined in the fiscal second quarter. They were down 13, 9% year over year.
So sales quarter over quarter on a combined were down.
Year over year.
No no year over year. So one of the presentations you guys gave gave pro forma results for Apria fill rate sales in the fiscal second quarter of last year and that number was around $180 million. So using that number in the cells. You reported today of $1 55 on a year over year basis looking at pro forma.
Numbers on an apples to apples basis is it correct that the cells actually fell 13, 9% year over year.
So.
Gordon.
If you go to the analysts primer, which is I think the document you're referring to in Europe, and you look at the pro forma number on a on a pure dollar for dollar basis Youre correct, but I think you also have to go back and look at what was in those numbers for legacy <unk>.
In the prior year so in the prior year they had their one big shipment for.
For the entire year that was that was.
To the.
Israel in the international market of free ahead, it's one big shipment in the year in that in that period and you also had had.
Till right working towards it.
Its achievement of EBITDA positive by the end of that.
That calendar year, and so theres a few things that are in there that are that drove.
That number up that may not be comparable in future periods, and I think or and the other thing is to look at.
This quarter.
Close to $7 million of inventories.
Net of Ocs and as we've gone through SKU rationalization.
And we gone through product rationalization, but youre number quarter over year over year as a combined is absolutely correct, but theres factors that added to that also you heard Karl talked about currency.
In regards to this quarter $5 million in currency were down.
<unk>.
Absolutely right, but there is other conditions as we look at.
Quarter over quarter and year on year when companies come together, it's also.
Yes.
Sorry go ahead.
Yeah, No that's really helpful.
Yes, no that was really helpful. I appreciate that I was a little confused last quarter as well because it was a similar dynamic where the like for like numbers were flat, but the number at the top of the press release was much higher so separately.
<unk> that you guys are entering new geographies.
New markets et cetera can you tell us what you expect to be your biggest opportunity.
Over the next three to six months from a geography geography perspective and at.
It seems like Theres some opportunities clearly in the U S. Can you give us your outlook on excuse me. If you guys already said this but can you give us your outlook on national legalization. Thanks for the questions guys and good luck.
So number one.
Come back in.
Blair in charge in Canada today, and he has got a real good strategic plan you heard him come back and say about growth in the third quarter and all the things that we've been working on so.
So I feel good about the opportunities in the Canadian market.
You heard with Denise.
<unk> regards to Europe, and with that it's not going to happen in the next three to six months, but.
There's going to be plans in place in regards to us really growing in the European market Theres 20 markets today that has candidates.
Medical in Europe, the Big thing for Us in the U S. Right now as I come back and I say this here is growing Manitoba harvest.
Breckenridge has tremendous tremendous growth opportunities in 50 states. The majority of the product today is sold in Colorado, but we look to roll that out we look to rollout breckenridge in cans.
Spending.
Sweetwater into additional states going into the West coast with the Fort Collins facility with R. R.
Our green Flash, our alpine products. So there's lots of opportunities for us both in the U S, Canada and Europe.
Gordon and.
Last but not least there is additional cost to come out of this business and I think thats whats important for us in the next two quarters that we're free cash flow positive here and we really manage those costs.
And that we are able to get share back from a profitable standpoint, just not get share back for the sake of getting share back.
Yes.
Okay. Thanks again guys.
Thank you, ladies and gentlemen that concludes our questions via the telephone.
I'll turn the floor back to Mr. Marotta.
Thank you operator, and now I will turn to questions from let's say technologies platform from our retail shareholders script. Our first question is regarding the stock price what are you doing to increase the share price.
Perhaps reassurance stockholders.
So great question and listen it's something that I get asked all the time and my first and foremost is our focus remains on executing on our global growth strategy and I Hope we discussed a lot of that with you today.
We'll not be distracted by short term market volatility will not go out there and do short term.
Pricing and strategies, we will to the same competition, absolutely, but we're here to build a strong consumer package goods company. That's why we changed the name to til Ray brands.
Cannabis is still a nascent industry and shareholder value is our foremost priority when I went back to our shareholders and looked for additional shares I said, we would not go out there and use these shares for dilutive deals and so far we have not and that is a big part of our plants I think what's important too.
<unk> is our focus is executing and driving top and bottom line performance, but profitable one and delivering sustainable value just like Gordon asked me the question before.
It's very easy to growth there and do private label business is very easy to keep sales in place that are not profitable for topline growth, but that's not something we're going to do as we bring these two companies together how do we build the base.
For the future growth and listen there's lots that changes out there, yes, I've come out and said $4 billion. It's contingent upon legalization in the U S. It's contingent upon legalization.
In Europe.
I've come out and said I'd like to get to a $1 billion in Canada, there's lots of wood to chop to get there and I think a year from today there'll be lots of changes in the marketplace. This is a three year old industry and if you look at most companies today in most categories. There are a lot older than three years.
So we're out there redefining the category and trying to get it right do we get everything right no do we make mistakes along the way, yes, but we realize it and try to correct. It.
Thank you and then second and last question is what are the plans to enter the U S market in 2022 of the hottest performance look over the balance of 2022.
So the.
Our plan to enter the U S market as I've been clear about it is this here with our Breckenridge brand our Sweetwater brand.
Our green flash or alpine our Manitoba harvest, we really have.
Good stable of consumer products, we will look at other acquisitions in that marketplace, but one of the things we're not going to do is do deals where there is no sales no revenue no EBITDA and it's going to be dilutive to our shareholders and just to be clear of the shares that are shareholders approved us to use.
They are not dilutive today is if we don't use it.
I do not see legalized happening legalization happening in the U S for at least the next two years you got an election coming up in November of this year I don't think its going to happen after that depending upon how the house and the Senate goes.
I'm not sure if it's going to happen when the first year of that.
Biden administration can't get their bill through an infrastructure right now so I don't think cannabis is going to be one of the top things. So how does the performance look over the balance of 2022.
Listen I hope everybody on this call today heard what the team the same bringing.
Bringing blair's expertise to the Canadian market bring in diseases expertise to the European market and.
In regards to the finance group in regards to our overall vision, what we're doing out there at the same time dealing with Covid.
Dealing with trying to keep our facilities open.
Dealing with the market that's controlled by regulation.
I am proud of what the team has done and I got to thank the team tremendously.
I want to thank our shareholders for those that have stuck with us I know, it's been a bumpy ride and I feel it with you and appeal to pain and on the other hand, what we're trying to do here is to build a consumer products company that ultimately.
Has the results and ultimately reward shareholders and rewards most important thing I have always been told build a strong company and the stock will take care of itself and it's important to do those but at the end of the day, you've got to build a company you've got to build brands around what consumers want and that's what this team is.
Trying to do and I really come back and looked at the expertise in this team and I know we can do it.
Yes.
With that.
That is the conclusion of our earnings call for Q2.
I really want to thank everybody for listening today I know there was a lot of you on the call I know.
There's a lot of frustration in the industry, there's a lot of frustration out there.
When you look at different aspects and I read the text and I read the emails when you send them to me and where I can answer I'll try theirs.
Lot of times I just.
Cant, but we listened and we want to improve and I think that's what's important with til right. So ray is about our brands. It's about the strong management and one of the things I've tried to do was to bring in a strong management team and I think.
Got it a class manage I know I have an H class management team. That's working with me I have a top board of directors that is working with me. Our strategy is right enlisted in the strategy changes and Thats whats going on in this world today whoever thought.
Last year. This time, we would still be sitting here with Covid and the shutdowns. We are yes, I've come out and said I want 30% market share, but some of the challenges in that yeah, and when you have to change excepted and make the change just don't stick to it because you said it and that's one thing we're going to be flexible nimble and entrepreneurial and <unk>.
Come out there and say things that we have to change we'll change it and adjust to it.
In regards to our brands, we're going to build brands, even though the limitations on what we can say and what we can advertise we are going to be and we are a diversified company into adult use into medical into spirits into beer into food.
We will and we are concern reward our shareholders, we're not out there to do.
<unk> deals are deals that just don't make sense.
And with that hopefully.
In the end it all equals.
Everybody wants to see again I, thank everybody for their support and thank everybody for their input and I look always forward to input I look forward to those shareholders that have been with us a long time.
And the most important thing is stay safe out there.
Live in a world today, where.
Wished half of my friends happy New year, I got back from them I got Covid I've got Covid, Covid and I told him drink a bourbon beer and using cannabis will secure to at all so with that.
Happy holidays and.
Two a good.
2022 and I look forward to speaking to you again soon.
Yes.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.