Q1 2022 Valens Company Inc Earnings Call
Hello, and welcome to the Valens Company's first quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Everett Knight Executive Vice President of corporate development and capital markets of the Valens Company effort. Please go ahead.
Thank you operator welcome to the Valens company's first quarter fiscal 2022 financial results Conference call for the period ended February 28, 2022, a replay of this call will be archived on the Investor Relations section of the Valens website at the balanced company Dot Com Slash investor.
Yeah.
Okay.
Before we begin please let me remind you that during the course of this conference call. The balanced management may make certain statements, including with respect to management's expectations or estimates of future performance all such statements other than statements of historical fact constitute forward looking information or forward looking statements within the meaning of the applicable securities laws.
And are based on assumptions expectations estimates and projections as the date hereof specific forward looking statements include without limitation, all disclosures regarding future results of operations economic conditions and anticipated courses of action.
For more information on the company's risks and uncertainties related to forward looking statements. Please refer to our latest annual information form or our latest managements discussion and analysis each filed with the securities regulators Ortiz at SEDAR dot com or on Edgar.
Www Dot FCC dot Gov or on the balanced company's web site at the balanced company Dot com and which are hereby incorporated by reference herein.
Although these forward looking statements reflect management's current beliefs and reasonable assumptions based on current available information available to management as the date hereof, we cannot be certain that the actual results will be consistent with the forward looking statements in future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place.
Undue reliance upon such forward looking results for.
For any reconciliation of non-GAAP measures measured and discussed please consult our latest MD&A as filed on SEDAR and Edgar now joining me on the call today are Mr. Tyler Robson, Chief Executive Officer, Mr. Sunil Gandhi, Chief Financial Officer, and Mr. Fallows, President Mr. Adam Shea Chief commercial.
<unk> will also be available for questions. You can now follow along with the presentation on our website at the balanced company Dot Com slash investors.
With that I would now like to hand, the call over to Tyler Tyler. Please go ahead.
Thank you Eric and welcome to everyone that has joined our earnings call to discuss our results from the first quarter of fiscal 2020 to really want to start off with kind of three main points before we jump into it.
One revenue growth we're back we.
<unk> grew over 26% from Q1 in Q1 from Q4, you said it was coming at US now here, but it could not be possible without the pieces, we put into place in 2021.
With that we are.
With what we're seeing thus far in Q2, we're expecting double digit double digit revenue growth to continue into Q2.
I wanted to touch on costs, they have been higher than what we want them to be some are out of our control as we went through on our Investor day and some of them are in our control as we had to invest in new brand launches to set them up for success as we integrate the acquisition however, with the financials, we do not show in this we do not show the progress we have made in our integration initiatives that.
We will really pay off in the back half of the year. The third one the long term positioning the company has not changed in the public markets. We are measured from day to day, but the true value of the company is measured in years. The cannabis space is no different in 2022 is going to be a difficult year for many reasons and the money. We've raised earlier this month month makes us positioned to drive innovation profitable.
Revenue growth and realize the benefits of our integration initiatives we have planned.
I will go to slide six to really dive into a few more things that were kind of going on behind the scenes and we're really going to grade ourselves on what we've done in the last quarter. So the first one grow adult rec.
Market share in Canada, I would say we're meeting expectations. This is clearly the bright spot in the quarter were one of the fastest growing companies in Canada cannabis rack growing 36% quarter over quarter and now we have over 3% market share as of February 2022, but the most impressive part as we achieved this despite the Canadian sales declining four 6% in.
Q1 relative to Q4 based on high by our estimates.
Yeah.
The second one our U S business in Green zones.
It's progressing progress is improving despite a decline in green roads revenue Dtc's channel trends, we were able to launch new products as part of our own the day campaign as new product formats appeal to the mass market in conjunction with our own our own the day brand campaign, which has seen great momentum the third one.
<unk> positive EBITDA by Q4 progress is improving we are making progress towards that goal by having actually 95% of the first $10 million and cost efficiencies. While this is not yet reflected in our financials. We do expect to see an impact over time, especially in the back half of the year.
Yeah.
Number four reducing cash burn through improvements in EBITDA, working capital management and monetization of noncore assets this needs improvement and to be Frank This is getting most of our attention with our integration.
Gration initiatives only beginning in February they were largely not reflected in the quarter, but as I mentioned, we are quickly making progress just over four months of the citizens acquisition. We are now fully integrated into their operations and Colonna and we're looking to monetize the facility. This was always the plan.
We know we have work to do here and it's happening financials are backward looking and we have made progress since the quarter end, let's chat in the coming quarters number five.
On developing our <unk> strategy is permissible progress is improving to be clear with the back half of the initiative. We continue to make progress on developing a plan of attack that will not add any cash burn we will discuss more in the upcoming quarters with that I'll turn it over to Jeff Fallows.
Thanks Tyler.
On to slide seven.
Quarterly highlights.
We've made significant progress in Q1 with net revenue, increasing 26, 1%, primarily driven by strong growth in provincial sales, which increased 36, 7% in the quarter importantly, our Canadian recreational market share also expanded growing from two 4% to three 1% from November to February .
The products listed in 2021 began to meaningfully contribute to both market share and revenue gains.
This is a particularly strong showing given that the market contracted four 6% over the same period. According to hi Fi our data.
Given the strong growth in recreational market share we have now become a top 10 licensed producer in Canada and expect to continue our momentum on the back of the launch of our versus and Contra brand brands, which have already met with strong provincial demand as well as our newly acquired citizen Stash brand, which is now benefiting from our stronger and more efficient fulfillment.
<unk> capabilities.
We have also seen an inflection point in our <unk> sales and we expect to see continued strength in this segment.
Our green roads U S. CBD business was the outlier this quarter in terms of revenue growth as December is a seasonally weak months and changes are new programs were not launched until later in the quarter.
The quarter also saw several operational achievements, including our listing on NASDAQ new commercial contracts and the initiation of commercial beverage production at the Pommies facility.
Lastly, we completed a $32 $3 million capital raised subsequent to quarter end, adding strength to our balance sheet.
Our tangible book value per share now sits at $1 57 against the market price of $1 65 as of last night's close.
Tyler I'll pass it back to you to go through provincial sales.
Thanks, Jeff <unk>.
Obviously provincial sales has been a highlight of this quarter with exposure to over 80% of the Canadian market, we're working to.
Deepen our relationships with that and really work closely with some retailers that you guys can see.
Again, we do expect double digit growth in the in Q2.
Basically halfway through so pretty excited to continue to push and I think there's a lot of opportunity in adult rec alone.
Getting back into it we're really now a top 10 player with three 1% market share and when you do look at the top 10. Some of those positions are up for grabs as we continue to dominate out racking grow faster than the majority of our other players while they're losing market share.
Just to hit on some of the successes, we've had BC got but as the number one best selling SKU across all product categories, and Alberta, Ontario, and British Columbia and Saskatchewan. During the first three months of 2022. This speaks to the momentum we're truly happening.
I'll go to slide nine and talk about provincial sales.
Good progress on provincial sales, but it's low hanging fruit still remains.
We got to penetrate more stores in the key to success is distribution we.
We are we have been successful with a select few skus like BC guideline in store penetration. We believe this success will continue to strengthen our penetration across a broader portfolio of brands in the upcoming quarters.
Innovation, we continue to have one of the highest acceptance rates of new products, which directly goes through to the provincial boards and then down to distribution platforms. This speaks to our innovation and a great pipeline of products Thats still to come.
Really wanted to touch on innovation and I think we've gone over it a few times in the past on what innovation means and I've made a few bold claims which are coming to fruition now I truly believe in the infused pre rolls and the adaptability of our platform to really take advantage of that so what youll see in the upcoming quarters, which you can see on the slide today.
We are winning adult rec, not only as provincial boards, but winning distributions. So as we continue to drive profitable growth with key innovation like in <unk> pre rolls.
We do believe that we are going to continue to move forward.
Also with our platform I still believe we have the most versatile and flexible platform in adult rats, and Youll see it with this list of not only infused gummies beverages and different vape pens coming to market.
Yeah.
<unk> right before we move on to Jeff.
Obviously grew.
I kind of said it Neil the analyst from Haywood straight up asking me what to expect and I said growth. We grew 53%. So as we still move through the fewer bigger better strategy, we are hitting our stride, but we do expect it to be I would say choppy as we're meeting the demand plans of other licensed producers, which we're working through in cannabis is a volatile.
Market not only in the stock market.
Also with provincial boards and player. So as we continue to move through we do believe it will stabilize.
While we are comfortable with where we're going.
With that I'll turn it back to Jeff.
Thanks, Tyler and moving back to slide 11.
As discussed previously green roads decreased quarter over quarter by approximately 10, 5%. The decrease was attributable to the December slowdown, which is expected to persist from year to year as black Friday deals pull demand forward into November and consumer spending shifts away from good for your health and wellness products in favor of more indulgent consumer products.
In addition, the launch of our brand campaign delayed the launch of other online programs and we faced additional competition for online advertising and other consumer acquisition strategies as our competitors have started to pursue unsustainable spending strategies to attract new customers. While this has created some short term challenges for us law.
Longer term, we believe us will provide a tailwind for us in the market as our competitors strained their capital reserves due to higher customer acquisition cost or choose to divert funds from innovation R&D and other necessary investments with longer term consequences.
On the Investor Day, we discussed our product rationalization efforts aimed at simplifying buying decisions and creating a proper channel alignment strategy to ensure we have the right products and the right formats in the right channels at the right price point.
To that end, we have and we'll be launching approximately 39, new products and an additional 20 reformatted products under our sixth solution categories, which include sleep pain relief relaxation performance stress relief and Pat. One example of a new product is our arthritis pain relief.
<unk>, which has become a top selling product for us after only being in market for a few weeks.
Moving to slide 12 Green.
Green roads operate three distinct business segments in the U S online direct to consumer brick and mortar retail and white label and international as discussed on our Investor Day, We continue to see a transition of the business to the online direct to consumer channel, which now accounts for 54% of revenues, we expect to see continued growth in online revenues.
As the brand campaign launched in January continues to take hold and as our sophisticated E. Commerce platform continues to support a rapid scale up.
The retail business has seen and will continue to see the most changes given the post COVID-19 environment and as we complete our team realignment and Buildout, which is focused on deepening our penetration in existing channels.
Spanning our relationships with existing customers and launching green roads products into new channels.
Finally progress is being made on a white label and international business as cross selling to existing balanced customers begins to bear fruit and drive volume through our green roads manufacturing facility in Florida.
Now I will turn the call over to Sunil Sunil.
Thanks, Jeff.
Let me first start by saying that our operating environment continues to have some challenges specifically with ongoing inflationary cost pressure are very volatile supply chain and retail price compression in the Canadian market given the highly fragmented state for the industry.
As a result, we are taking actions to rightsize, our cost structure and streamline our operational processes, which I will discuss in more detail later on the call that being said, we do expect that from an industry perspective, 2022 will be a challenging environment project capitalized company with further financial failures anticipated across the marketplace.
Despite this tough operating environment, we are beginning to see the benefits of trading on NASDAQ with overall liquidity in our stock improving by 65, 5% quarter over quarter.
Our management team continues to believe that the long term benefits of trading on NASDAQ will outweigh the short term volatility that we've experienced in our share price in the first three months of 2022.
Now moving to slide 14.
Jeff mentioned, our Q1 2022 results demonstrates that the underlying business has constant inflection point consolidated revenues increased by 26, 1% to $23 2 million in.
In Q1, 2022 benefiting from strong Canadian operations, which represented 74% of total sales in Q1.
Provisional sales increased by 36, 7% to $10 8 million and this was.
Primarily driven by a combination of the consolidation of the first full quarter stays in SaaS as well as the launch of our <unk> and contraband brands in Canada.
We are pleased to see that the <unk> segment returned to growth in the corner and the increase was driven by some onboarding of new customers as well as specific sales, which allowed us to move through higher priced inventory.
Moving onto our Green roads, USB, PD business, which saw revenues declined by 10, 5% quarter over quarter.
To $5 1 million. This was due to seasonal trends with December being the slowest months of the year as Jeff mentioned earlier.
Now moving on to Slide 15, adjusted gross profit was $3 8 million or 14, 6% of net revenue in Q1 2022.
The decline in adjusted gross profit was attributable to a change in sales mix, including lower sales from our higher margin greenhouse business had an increased sales contribution from our lower margin <unk> relationships.
In addition, adjusted gross profit was negatively impacted by the monetization of higher priced inventory through our <unk> channel to better align our inventory with future requirements as well as higher transportation and raw material costs stemming from the ongoing supply chain challenges.
Despite the steep sequential decline in adjusted gross profit we were encouraged to see gross margin improvement in provincial sales, which saw an increase of 229 basis points over Q4 2021 as provincial sales reap the initial benefits of cost efficiency gains in spite of the retail price compression in the key market.
Yeah.
Now moving on to slide 16.
Adjusted EBITDA was $17 $6 million in Q1 compared to <unk> negative excuse me $13 3 million in Q4 2021, the reduction in EBITDA was primarily related to the lower adjusted gross margin.
And an increase in A&P spend that was associated with the new brand launches, both in Canada and the us otherwise.
Our operating costs and SG&A profile remained flat from the previous quarter and this was in spite of Onboarding and consolidating distribution SaaS business for the first time, which is a demonstration of some of our cost control initiatives starting to take place.
Subsequent to quarter end, we announced the shutdown, we announced the decision to shutdown. The citizens that facility has shipped all production to our Kona cabinet. This is expected to positively impact EBITDA future quarter. After the realization of onetime cost.
Now moving on to slide 17.
This waterfall shows the main sources and uses of cash since the end of Q4 in December we raised $40 million in debt financing and subsequently repaid previously existing debt.
Working capital also represented a $3 6 million dollar drag on cash in Q1, as we addition to our operation to support the launches of <unk> and contraband in Canada, while ensuring our entire <unk> portfolio wouldn't experienced stock during our period of rapid growth of Prudential standard.
Working capital investments are expected to moderate and flipped to positive contributions in future quarter, especially in the last half of the latter part of the fiscal year.
As the quarter represented a heavy investment of cash we took on the additional equity raise for gross proceeds of $32 $3 million, which closed in early April .
The negative.
Adjusted EBITDA profile of our business represents our primary focus as we move through 2022.
Key elements on the pathway to achieving positive adjusted EBITDA include the following one integration initiatives that we've already launched where we had $9 $5 million or an annualized on an annualized basis have already been action with another $10 $10 5 million coming.
Further savings in procurement and biomass sourcing has contract growing arrangements to begin to provide product three revenue grow at Tyler and Jeff are both mentioned previously and fourth we expect reduced one time costs associated with things like Brian launches and acquisitions moving forward.
I'd like to touch on an illustrative example.
Our cash conversion cycle on page 18, and it will provide some perspective.
It takes about 90 to 95 days to complete and move through the drivers behind what actually causes an increased investment in working capital. So as we walk through this example, first on day, one we purchased flower from third party generally with standard payment terms of net 38.
By day, 30% to 35, we process and package. The flower into finished product has started to ship it to the provincial boards, where we recognized but not collect the revenue yet at this point payments for raw flower has already been due and made.
Another 30 days forward, which is by day 60 to 65, we are required to pay the excise tax to the CRA on this sale that has already occurred amongst premium it's important to note that the excise tax on flower products can amount to its highest 30% to 50% of the gross revenue of the product will be.
Forward by day 90 to 95, we then finally collect the gross revenue from the provincial board. The Ocs our largest customer offers net 60 day payment term after taking delivery of the product.
So all this is a simplistic illustration is not necessarily representative all product types. It is important to note that.
We have rapidly growing provincial sales come significant demand on working capital associated with sourcing inventory excise taxes and receivables management from the personal for them.
Has that February 28, 2022, the company had approximately $43 $5 million of inventory on hand, compared to $42 million has that November 32021.
This increase in inventory was mainly attributable to the dry candidates inventories was packaging and supplies in preparation of new product launches across across versus cost about 10 citizens batch.
In addition, the company has had to increase safety stock levels due to the disruptive supply chain environment. This was offset by a decline in finished goods inventory and extract the candidates as we move through higher price inventories for our <unk> channel.
The upfront investment in inventory has been a drag on our cash flow this quarter as well.
We began to rapidly scale provincial sales.
As we have launched new brand new product. It has cost and it is expected to continue to cause some near term volatility inventory balances. However, as previously indicated at our investment day, we expect this investment in inventory to stabilize by Q4 2022.
As consumer demand and purchase orders of our products achieve a more normalized level of sell through and leached tighter inventory management.
Now from an accounts receivable perspective.
February 28, 2022, the company had $35 $6 million of trade and other receivables compared to $28 7 million as at November 32021.
As at February 28, 2022, the company had $13 $8 million in trade receivables balances over 60 days compared to $6 8 million.
The previous quarter at some of the increase in receivables was also driven by the timing of shipments and since quarter end. The company had subsequently collected has offsetting trade payable balances or provided for 81% of the balance that was outstanding at quarter end.
Yeah.
Now I'd like to move to slide 19.
We've made significant progress on the first wave of our integration initiatives as we've now executed approximately 95% of our first $10 million and cost efficiency through operational and organizational changes.
The $9 five.
$5 million has been action approximately two thirds are for.
$4 million of the cost savings are coming through the SG&A side of which almost half are driven through M&A synergies, while the remaining half were related to organizational realignment at balance.
This is expected to positively impact the SG&A in future quarters after accounting for the onetime cost.
The remaining one third or 33% or $3 1 million was driven by operational efficiency, including automation process standardization and supplier optimization, which is expected to positively impact margins in the second half of the year. We remain on track to achieve an overall total of $20 million in annualized cost saves.
<unk> run rate by the end of fourth quarter 2022.
With that I will now turn the call over to the operator to open the line for the Q&A session.
Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question comes from the line of Aaron Grey with it.
All lines Global partners. Please proceed with your question.
Hi, Greg.
Yeah, Hi can you hear me Charles.
Quarter on the market share trends that you guys are having there.
First question for me.
Just in terms of some of the arrangements that you guys are having for the contracts going forward just want to get a better sense in terms of obviously one thing you guys focus on in terms of the strange you've done a good job in terms of gaining market share in the fr apparel categories. So want to get a better sense as you're looking at these contracts. How are you guys are still looking to be able to stay nimble enough to be able to take advantage.
Buying more longer term contracts, but also making sure you guys have the right alignment.
To meet consumer demand. Thank you.
Yes, it's a great question I'll answer that one so depending on what brand. We use we have different strategy. So obviously, we're spot buying for some stuff and then were contract billing others. So what we are basically planning our product roadmap for the next two years and we're going to be sent sunsetting, some strains in genetics and bringing in new ones. So.
There's always something new to try something always exciting.
And what we did it was very intentional when we looked at the citizens dash platform.
Always knew there was a tremendous amount of synergies not only in head count, but also contract growth. So as we maneuver through the brands and different products. We are strategically placed them with certain growers that sort of scale. So what youre going to see out of the balanced platform is the reduction of cost per Gram, new innovation and new genetics coming in that we're not tied to anything so again I want to be very clear on it.
<unk> announcing this balance does not grow candidates, we have contracts to purchase it but if it doesn't meet our specific valens standard we're not obligated to buy anything. So we have the most versatile platform in Canada and there is a ton of exciting genetics coming down the pipe not only for the new contraband launch, but also for the citizens Dash launch and then.
<unk>, we're going to continue to be the lowest cost biomass in Canada to the point, where we actually tried to push it lower than some of the provincial boards are worried about our competitors.
And trying to hold the floor. So we can get more aggressive and as we move towards profitable growth.
Youre going to see a lot of that come to fruition.
Okay. Great. Thanks, that's really helpful color second question for me and then I'll jump back into the queue, just a higher level. One so when you look at the Canadian market in terms of shifts in format.
Most of the gains have been with pre roll over the past year or so shifting from flower to pre roll lessor for the mono products such as Canada. Both so just given the historical focus of valence as an X factor and kind of having some expertise in that and that kind of in those categories.
What do you think is really going to be needed to kind of see a bigger market share gain from the tucano categories. Do you feel like as we move out of Covid and get more and more brick and mortar shopping that will offer opportunity to see an increase especially made some of the pricing pressure that youre seeing in the vape category. So.
Really just how youre looking at that you point out categories basically levels over the next 12 months and when I see the opportunity for market share gains there. Thank you.
Yes, that's a great question to all start with that one and Adam I'm going to kick it to you.
When you look at the platform in Canada, I would say one is competitive to start but two because we are the most versatile company in this space I think we can take advantage of that so not only we're not tied to an index, we're not tied to certain products and we can push innovation harder quicker than some of our larger industry peer. So when we really look at consumer trends.
I called it a year ago, where I do believe infuse pre rolls is going to outgrow the pre roll category by year end, we are starting to see some trends in the market coming that way and then overall product development and or distribution of two point out products I really think there is two challenges the marketing limitation in education, which is industry wide, but also price.
So with compression that we do expect it to come down, but we also expect to combat that with higher margin products and different brands are really pushing quality and consistency over than some of the lowest priced up.
Adam feel free to comment.
Yeah, Hi, Tyler.
Just two points to with Tyler said, specifically around the brand portfolio that we've now laid out gives us the flexibility to access and provide consumers two point old products at a range of price points, whether that's an opening price point or whether that's more premium price point, whether it's across edibles beverages.
Category et cetera.
Agility on being able to offer the quality and the price point across.
A whole range of consumer buying patterns really will allow us to accelerate innovation and take disproportionate amount of share of the two point out category. So lots to come from us on this front in the quarters ahead.
Thank you for the question.
Great no. Thank you very much for that detail and I will go and jump back into the queue.
Okay.
And our next question comes from the line of.
Rodrigo Gomez with ATB capital. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
Just on your sales this quarter.
You showed some good growth sequentially.
In the slides you mentioned an increase in gross margins in that segment.
Our overall gross margin declined this quarter due to sales mix. So I'm just curious can.
Can you give more color on your margin in Canadian rack and are you having to compete on price to gain share. Obviously, you had some good market share gains.
Recently, and you know what.
What gives you confidence that you can expand margins in that segment, just considering that the market is very fragmented and very competitive. Thank you.
Yes, that's great question, So I'll start and then Sunil I'll pass it to you. So when we look at our branded portfolio, we're expecting different margin in different brands and as we rollout versus it is a market share leader in every category that will play and then I think we'll continue to see that roll rollout and when I said double digit growth I'm not speaking 10 just.
To be very very clear because we are winning adult rack.
When we rollout our market and we're obviously moving through some of our inventory, but as we move through that inventory and monetize it we do expect to be very intentional on what brands, we push and what markets on different products again, because we have the versatile platform. We can do things other people cant Sunil.
Yeah, sure and just to build off what Tyler Tyler mentioned I mean first of all yes, I mean, I think it goes without saying that the Canadian Rec market is extremely price competitive you can't deny that I think what we've shown is between category management at our branch strategy combined with our operational efficiencies, we still gaining.
Margin like over the coming quarters, and we would expect that that pace the challenges.
Ladies and gentlemen.
Are there any seem as if we have rusty.
Your line.
The company I'll see if I can go ahead and get to them.
Yeah.
Goodbye.
Yeah.
Okay.
[music].
Okay around companies speakers you can make proceed.
Yes, sorry.
As Jeff maybe you can.
Just recap what you said, they're not sure where the car the call broke up yes, sure I apologize for the technical difficulties there, we got cut off and apparently so.
Speaking to gross margin build on white collar side between our category management in our brand strategy.
We are expecting to overcome with the operational efficiencies some of the retail price compression challenges in the Canadian market. So yes, it's a headwind.
Obviously, you have to be cautious of the price prices in the market, but we are outpacing the category and building margin profile.
From an overall standpoint, as a company, where we would expect to see some positives and negatives on the margin side is like Green Green Rosewill continue to contribute a meaningful share of our business as we presented on Investor day as that grows we would anticipate our overall margin profile the growth where things become a little bit less predictable from one quarter to.
Next is on the <unk> side, which tends to have more volatility in the margin segment. So I would just say the long term trajectory is the right trajectory. We're on between the combination of Green roads in the adult Rec segment with some near term volatility caused by the <unk> site.
Okay.
Thank you.
And then my next question is on your U S business.
We had a decline this quarter, but can you talk about any early signs of your initiatives to grow that business or are you seeing any pickup in sales after the quarter end compared to perhaps last year and you know what sort of growth in sales should we expect for the next quarter and the reminder of 2022. Thank you.
Yes, that's a great question I'll pass it off to Jeff number one quick comment we did expect a slowdown at the end of the year. When you look at Black Friday, and the sales push we had been going into the Christmas season.
Historically it happens every single year with the Green road's platform.
Everything happened exactly as expected and Jeff why don't you kind of comment on what we're expecting going forward.
Sure so.
I appreciate the question, obviously when you implement changes.
In a business and as you can see by some of the numbers 39, new products 20 product format changes et cetera, launching of a brand campaign.
Realigning and reinvigorating team structures et cetera, These things take time.
So yes, we're seeing some positive signs and as I said in my prescribed remarks, you know things like the launch of our one of our first new product in the arthritis products.
It has been very very successful in terms of capturing.
The demand in the revenue profile, we were targeting when we launched it so we're strong.
<unk> encouraged by.
Product launches like that.
Also the conversations that we're having in the new distribution partners were having conversations with on the orders that are starting to come in on the retail channel are also encouraging so how far do we go where we believe we are on the right track with our with our U S business. We believe that the solution selling that we've moved the business towards was the right move and we believe the products that we have in our development pipeline.
Are the ones that the market is looking for.
So we are encouraged by what we see.
Thank you I'll hop back in the queue.
Okay.
Our next question comes from the line of Nicholas.
And partners. Please proceed with your question.
Yeah.
Hey, guys. Thanks for the presentation.
I had a question about the beverage segment.
With the new regulatory changes that health, Canada has put forth.
Got a month or two ago.
What do you think is the incremental change pretty the beverage category in your guys' market share as a whole.
Yes, that's a great question and we are ecstatic that the change is finally coming into fruition, maybe I'll kick it over to Adam on what he expects the beverage segment to do for our adult Rec numbers.
Thanks Tyler.
Beverages unquestionably going to be.
Significant unlock in <unk>, it's going to be.
Terrific way for us to bring new consumers into the category that changes recently announced I think only allow us to amplify what we're already doing which is offering a range of beverages.
Range of both high THC and sessional beverages, the portfolio will play and again, an accessible price point.
Adding lots of value.
With high high quality product. So this this will unquestionably be a very significant growth driver for us.
As we move forward in this year and in years to come.
Right. Okay. That's all for me thanks, guys.
And our next question comes from the line of Bryan Garnier. Please proceed with your question.
Yes, thank you for that.
You did 22 and a half million.
Both deal a couple of weeks ago.
By doing so you destroy it about 100 million shareholder value.
So what's the urgency for you to do this.
Steel and Linkedin Lynn Lynn.
Shareholders expect some positive returns from that thank you.
Yes, that's a good question and so now I'll probably kick it over you would have read but I will comment with the bought deal we needed to solidify the future of the business and ended with a very turbulent market. What we couldnt do is be unpredictable. So we were extremely intentional and on any bought deal. It always trades down after so it was to be expected, but it will it will recover.
In time, and again, we are making tough decisions as a large shareholder myself.
We are acting in the best interest of all shareholders.
We believe it was very intentional and needed to make sure that we could achieve the profitable growth that we expect in the coming years and tomorrow isn't promise we have no idea what's going on in the World you look at supply chain you look at interest rates you look at what's going on in Ukraine.
We needed to basically solidify the platform that we did so <unk> feel free to comment.
Yes, I think I think <unk> covered it very well I'll just maybe just build on what he said I think while I can appreciate the short term implications obviously didn't didn't look that great. The reality is as a business. We had we felt that it was very important that we had the capital position of the company to <unk>.
Get through the storm of 2022 that we see in this sector and quite frankly combined with what's happening in the global markets on a macro level for the reasons that Tyler mentioned political unrest global uncertainty around interest rates et cetera.
You can't predict what will happen Tomorrow next week or next month and so we felt we saw the opportunity we saw strong interest from our investor base to make the move that we did to solidify our future.
Yes, I'd say I'd, just add just to add on that Nick.
Nick as well is that if you look at all the integration initiatives that happened at the end of Q1 and into Q2 right. The reality of those changes we will see vastly in Q3 and Q4, but we wanted the right financial footing to be flexible in this environment just to Sunil and <unk>.
And sorry, Nick maybe if I could add one different perspective to this whole thing.
Wearing a former banker side here first and foremost you never tried to time the market the windows come when they come and quite frankly, you don't want to be the last through it. So we had an opportunity. We believe we have strengthened our balance sheet and we believe we made the right choice in pursuing the financing when we did.
Yeah.
Okay.
So it was all just about the paying back debt and not to do anything.
New.
Not sure I understand the question Sunil maybe you did.
No I think we if you could just repeat it if you don't mind, we didn't quite catch it yeah yeah.
To be honest.
He understands it also snyder.
So it's all about paying back debt and not to do anything new expensive.
For the company.
Correct, yes.
Go ahead go ahead.
Well I would say Nick.
As we put in the press release that we have very clear pathway of what we're spending on this is not to repay debt right as we've been through very thoroughly on the presentation. It is to managing the working capital and cash outflows of the business as the integration initiatives are still in process as there's a lot of onetime costs associated with so we believe this.
As value added to the operations today and this is not to pay back debt. It is to keep the balance sheet flexible and make sure that we can thrive in the back half of the year.
So it's mainly for working capital then.
Meaning operational losses that you expect to a cure in the coming months.
Yes, and with the brand launches that we thoroughly went through in the presentation today.
To walk through it offline with you.
Yes.
Yes, I think the closing point on now and as we needed Optionality.
In this market you need to be able to be very strategic and aggressive when the time comes and we didn't want to be looking over our shoulders. So what we need to do is solidify the future of the organization and it was the best decision for the company.
Yeah.
Any of these intrinsic market share that you want to share with us.
Yes, so I don't know if were already exact numbers on market share going forward, but what we will see double digit growth in adult rack and we do continue to move the needle forward.
Thanks.
And our next question comes from the line.
Jane <unk> with Stifel. Please proceed with your question.
Yes.
Thank you this is aided and speaking on behalf of Andrew part then you.
First of all congrats on the quarter guys. Just curious on Quebec do you guys have any updates on your progress there kind of moving into the Quebec market that you could share with us. Thank you.
Yeah, So I, probably can't give away too much information on the Quebec market. Obviously, we do have one SKU available online.
That we are continuing to push on and we do expect more in the in the future, but I think the big focus for US right. Now is on the big three provinces Bcl Berta in Ontario, and really opening up distribution and depth of product in those markets as as we continue to push on Quebec is a bit of a fickle market.
But we are we are continuing to move forward Adam I don't know if you have anything to add.
No I think you hit it spot on Tyler we've got a very very methodical plan that we're trying to execute with the with the Quebec.
Provincial board.
And for Us any significant.
Progress that comes in the quarters ahead in Quebec will be incremental to the existing plan we have in place.
So we feel very good about the progress were making into tablets point, it's all about doubling down on Alberta, British Columbia, Ontario.
A whole series of new distribution strategy, so lots to come in the coming weeks.
Okay, great. Thank you I'll step back in the queue.
Our next question comes from the line of Saree <unk> with Raymond James. Please proceed with your question.
Good morning, Tyler, Jeff Alright, Thanks, so much for taking my questions.
So congratulations on the provincial sales ramp that certainly has been impressive given the broader the broader.
So I wanted to drill down a little bit on the <unk> sales.
<unk> had a 50% sequential growth there.
Some of it however has been of course, because it's selling through some of those higher priced inventory so.
Given that that was potentially a blip in this quarter, how should we be thinking about those <unk> sales going forward and also what that margin profile will look like as you get through this selling through coming through this the high priced inventory.
Absolutely that's a great question and so now I'll probably leave the margin question for you, but as we continue to execute our strategy of fewer bigger better that has worked and it was very intentional.
We do continue to stabilize and what we're seeing right now is the unpredictability from some of our partners.
They are doing some wishful thinking so as we stabilized quarter to quarter, it's not that we're not getting the revenue it just might be bloated in some quarters over others and as we continue to stabilize and then have a bright stock inventory, we can pack out when we get the Pos in hand, so we do expect it to stabilize and be a more consistent sustainable trajectory going forward that being said we.
Do expect our <unk> segment to continue to grow.
But why don't you touch on margin in <unk>.
Yeah, I think the margin is actually going to follow some of that.
Tyler mentioned on the sales side in terms of that choppiness, because depending on which actual.
Contracted relationships.
Materialize the revenue in that given quarter and we are relying on others that they are deep in the market, that's where it can lead to slightly different profile from one quarter to the next obviously the long term trajectory, we expect sales and margin to be consistently moving forward, but from one quarter. The next it's hard to give guidance of that type of area. Because we are relying on the needs of other <unk>.
Pete.
Okay, Great that's really helpful.
And then so my follow up is on Green roads, you identified that December was weaker months easily.
However.
<unk> seen a couple slightly weaker quarters from from Green roads compared to the at least the macro annual historical number provided during the acquisition recognizing of course that U S. CBD space is hyper competitive and pretty pretty messy at the moment what are some of the sort of the biggest strategic things that you and the green Dot team are doing just that.
Consolidated and trying to drive that revenue back up to historical and beyond.
Yes that is a great question, Jeff why don't you start and then I'll kind of add on to the yen.
Yeah.
Thanks, Ross I think it's actually a great question. So as we looked at the U S CBD space and as we took over at Green roads, there had been a big shift in the way the market was viewing CBD in the channels under which consumers were going to get access to CBD and so when we saw that that change occurring.
We looked at the product portfolio, we looked at the ways that we were selling and we looked at.
The team and structures that we have in place and Thats really all of the conversation we've been having around realigning the channel strategy, making sure we have the right products in the right channels and quite frankly, making sure that when we were in those channels. We we're not just saying hey, we have CBD for sale its actually about products that offer different solutions.
For consumers, so basically selling a differentiated product and not just selling quote unquote CBD. Obviously this process takes time.
We would've loved to be able to just to turn it on.
Quarter, a quarter ago, but what I can say is having the majority of that work complete and as April is a big month for launching for US a number of those new products. We're excited about the performance, we're going to be able to bring bring to the market in future quarters, but I think thats primarily it.
You, we needed an updated product portfolio, we needed new channels and new ways to sell those products in those channels. We believe we've got that and we're ready to roll.
Yes, Rahul just to kind of comment on that I think Jeff did a pretty good job of illustrating it it's really redefining the portfolio and putting it in the appropriate channel, whether it's smoking vape, whether it's C store, whether it's retail or convenience.
It's really about redefining the portfolio repricing, a few things and even different format sizes. So what we're seeing as consumer trends change depending on the location. So really just trying to listen to the consumer and take advantage of that.
Great. Thanks, again for taking our questions and good luck with the next quarter.
And we have reached the end of the question and answer session I will now turn the call back over to Tyler Robson for closing remarks.
Alright, I appreciate it I wanted to say thank you for everybody for the time today.
Obviously, there was a tremendous amount of growth in the quarter. There is still a lot of work to do and we're not getting caught flat footed. So I truly look forward to speaking to everyone mid July when our next quarter comes out because I do believe it will be positive. So thank you for everyone for taking the time. Thank you for their participation. Operator, you may disconnect your call at this time.
Thank you.
Thank you have a good day.
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