Q2 2022 Valens Company Inc Earnings Call

Speaker 1: For sho J.

Speaker 2: the formal presentation.

Speaker 2: 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.

Speaker 2: At this time, it is now my pleasure to introduce your host, Everett Knight, Executive Vice President of Corporate Development and Capital Markets of the Valence Company. Everett, please go ahead.

Speaker 3: Thank you, operator.

Speaker 3: Welcome to the Valens Company second quarter fiscal 2022 financial results conference call for the period ended May 31st, 2022. A replay of this call will be archived on the investor relations section of the Valens website at thevalenccompany.com slash investors.

Speaker 3: Before we begin, please let me remind you that during the course of this conference call, balance management may make certain statements including with respect to management expectations or estimates of future performance.

Speaker 3: 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 of the date thereof. Specific forward-looking statements include without limitation all disclosures regarding future results of operations, economic conditions, and anticipated courses of action.

Speaker 3: For more information on the company's risks and uncertainties related to forward-looking statements, please refer to our latest annual information form on our latest management discussion and analysis, each as filed with the Securities Regulatory Authorities at CEDAR.com and on EDGAR at SEC.gov or on the Valence Company's website at thevalencecompany.com and which are hereby incorporated by reference herein.

Speaker 3: Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on the current available information available to management at the date hereof, we cannot be certain that the actual results will be consistent with the forward-looking statements in the future. There can be no insurance that the actual outcomes will not differ materially from these statements. Accordingly, we caution you not to place undue reliance upon such forward-looking statements.

Speaker 3: For any reconciliation of non-GAAP measures measured and discussed, please consult our latest MD&A as filed on CEDAR and EDGAR.

Speaker 3: Now, joining me on the call today are Mr. Robson, Chief Executive Officer, Mr. Sunil Gandhi, Chief Financial Officer, Mr. Jeff Fallows, President, and Mr. Adam Shea, Chief Commercial Officer, will also be available for questions.

Speaker 3: With that, I would now like to hand the call over to Tyler. Tyler, please go ahead.

Speaker 3: Thank you, Everett. Obviously, thanks everybody for taking the time. We're going to jump right into it and hit a few things head on. And I'm probably going to start right on slide six. So the biggest things I want to do is try to remove the noise from what's going on in the industry and what's going on with the company and really focus on the fundamentals. And I want to be very clear that this quarter is not up to our expectations. Even though we did have double-digit growth in every segment other than adult rec.

Speaker 3: We did have net revenue increased 3.5%. SG&A did decline as we said it would, but it's not happening fast enough. And our cash burn is improving, but again, not fast enough. So all the right things are happening, but we do need to do a better job of accelerating some of those opportunities. And obviously the biggest one right now is the provincial sales. Obviously we missed on the double-jib growth, which I did make that comment. A few things happened out of our control, but I'm not using it as an excuse.

Speaker 3: When you look at the transition from verse to versus, our team did an outstanding job of being prepared to do it. I would say some of the provincial boards fell short. So when you look at the depletion strategy of what's gone on, we missed four weeks of those products because some of the retailers thought products weren't available because the provinces didn't have them ready for the depletion. So rather than being out of stock, it was under a different SKU number. So we have corrected it and I am happy to say that we got a record month of June .

Speaker 3: and everything is back on track and then we are essentially ahead of where we expected to be now and that's without any of the RTVs and without any of the late shipments that made it out of the Kelowna facility. So again I'm being very optimistic but cautious at the exact same time. The business fundamentals are improving and I know there's a lot of noise and I know there's a lot of things to improve but at the end of the day I'm pretty happy with the way things are going internally. So at that I'll turn it over to you Jeff.

Speaker 4: Great, thanks Tyler.

Speaker 5: So the core message on the first slide seven.

Speaker 4: Is that

Speaker 5: is progress with both improvements and challenges coming from all of our focus areas.

Speaker 5: We continue to gain market share in Q2 as new product launches at the provincial level began to gain momentum. However, challenges related to our brand changeover from verse to verses resulted in us taking a step back in aggregate revenue despite our market share gains.

Speaker 5: Again, we saw a rapid rebound in both demand and aggregate sales in June with our best retail sales month to date.

Speaker 5: We also saw a revenue rebound at green roads from a seasonally weak Q1 reaching aggregate revenue dollars roughly equal to that of Q4. However, inconsistency of supply from our third party manufacturing partners, including vapes and gummies, limited growth, and we were left with a material amount of demand on the table in the quarter.

Speaker 5: Efforts are already underway to address these challenges which are expected to dissipate as we get deeper into Q3 and Q4.

Speaker 5: Integration initiatives are delivering against plan and are expected to deliver strong cost savings both above and below the gross margin line over the next two quarters.

Speaker 5: While some of the targeted initiatives took longer than originally planned to launch, the net benefits of the additional planning and preparation have created an opportunity to deliver more than the $20 million in annual savings originally forecasted.

Speaker 5: Managing cash and reducing cash burn are key areas of focus for us and we are beginning to see the benefits of our efforts here.

Speaker 5: That said, we have yet to see the full impact translate to our cash flow statement but remain confident that we will be able to manage our cash balance effectively and see a material reduction in our use of cash over the next two quarters.

Speaker 5: in line with our anticipated EVA DAW performance.

Speaker 5: While our Canadian recreational business continues to get the majority of our focus in line with the opportunity we see there, we continue to keep our finger on the pulse of the USTHC market to ensure we remain well positioned to enter that market when appropriate.

Speaker 5: Moving to slide 8.

Speaker 5: We have made significant progress executing on our strategic initiatives this quarter showing both a modest growth in net revenue of 3.5% and a more meaningful decline in SG&A of 6.2%.

Speaker 5: Despite the temporary setback in the provincial sales quarter resulting from the vs vs transition, our Canadian recreational market share expanded growing from 2.8 to 3.2% in Q2, firmly solidifying us as a top 10 licensed producer.

Speaker 5: This is a particularly strong showing as we continue to see strong sell-through for our products at retail. Subsequent to quarter-end, we secured an exclusive cannabis partnership with Coldhouse and saw the launch of our Quebec exclusive brand, Bon Jack.

Speaker 5: which are both expected to further accelerate provincial sales in coming quarters.

Speaker 5: In Q2 we saw B2B LP sales increase 11.1% and we expect to see ongoing strength in this segment as we continue to realign to focus on larger customers and orders.

Speaker 5: Our GreenRoads US CBD business returned back to growth in Q2 with revenue increasing 11.8%, primarily driven by early momentum in new product launches and new international distribution channels for GreenRoads branded products.

Speaker 5: Five months into our integration initiatives we have actioned $15 million in annual cost savings and have identified over $5 million of additional annual cost savings to be actioned in the next few quarters.

Speaker 5: With the annual cost savings action identified to date, Vons is on track to exceed management's original $20 million.

Speaker 5: Target by fiscal year end 2022.

Speaker 5: Moving to slide 9, Valence has become a top 10 licensed producer with 3.2% market share in Q2.

Speaker 5: Most importantly, for the 3 and 12 months ended May 30th, Vownds is one of the fastest growing companies as measured by retail consumption as we continue to develop strength within our brand portfolio through products that resonate with consumers.

Speaker 5: Moving to slide 10 and 11.

Speaker 5: We continue to dive a little deeper into our market share performance on a product category basis based on Hi-Fi or data. In Q2, we expanded market share across all product categories in which we participate. This is an impressive showing despite the noted quarter-over-quarter decline in provincial sales.

Speaker 5: Starting with vapes, we remain a top 10 LP.

Speaker 5: improving to the number 7 position in Q2 with our market share increasing to 3.7% despite the category continuing to get more competitive quarter over quarter.

Speaker 5: In Q2, we launched four of the most affordable vape SKUs in Ontario under the Versys brand. Since launching in May, we are already seeing evidence that our vapes are taking the targeted market share away from competitors.

Speaker 5: With our Vape manufacturing platform, keep an eye on this category for us over future quarters.

Speaker 5: We continue to see our beverage market share expand for the fifth consecutive quarter with a 10.9% market share in Q2.

Speaker 5: Since a lot of, since the launch of versus cellars at our Palmley facility at the beginning of the year, we have heard and continue to hear tremendous feedback from consumers and bud tenders.

Speaker 5: Furthermore, in Q2 we added to our line up of beverages with the launch of mango and ruby grapefruit arriving just in time for the summer season.

Speaker 5: Moving to our flower based offerings, we continue to build on our leadership and drive flower and pre-rolls which are two product categories we have seen tremendous growth in over a short period of time despite not cultivating flower.

Speaker 5: We have seen incredible traction with our Verses BC God Buds since its launch in July of last year And it has now become one of the best-selling skews in Canada. With the launch of our Verses Super Lemon Haze and Quarter Mill, we look to replicate the success in the dried flower category.

Speaker 5: Furthermore, with the launch of our jar of J's under versus and our premium infused pre-roll Big Willy under contraband, we look to take further market share in the pre-roll category as we add new innovation and provide convenience to consumers in a variety of formats.

Speaker 5: In summary, we don't believe the revenue setback during the quarter is indicative of the opportunities we are realizing in adult rec. On the contrary, we continue to make great strides against our strategic objectives in the first six months of 2022.

Speaker 5: and continue to grow market share. With the recent product launches, ongoing innovation, and expanding our distribution for all categories with cold house, we expect to achieve our targeted objectives in each product category.

Speaker 5: Slide 12. We have made a significant shift in our provincial sales strategy by signing an exclusive cannabis partnership with Coldhouse to increase store penetration and expand market share in core markets.

Speaker 5: Working with Coldhouse will provide distribution coverage to 65% of the Canadian market, allowing us, in conjunction with Coldhouse's dedicated field team, to connect with and educate retail staff about our brand and product attributes and help drive consistent in-store category strategy across British Columbia, Alberta and Ontario, which have the most saturated retail markets.

Speaker 5: This partnership will allow us to increase the frequency, reach, and touch point of our brands.

Speaker 5: More importantly, we can utilize their sophisticated CRM system to have real-time data to better serve retail stores across Canada.

Speaker 5: Lastly, subsequent to quarter end, we have organically expanded our retail and online footprint in Quebec with the launch of Bon Jack, an exclusive brand in Quebec. With this launch, we have secured an additional six SKUs in Quebec, which we anticipate will hit markets in September 2022. With Quebec, Vons will have exposure to approximately 95% of the Canadian market.

Speaker 5: Lastly, subsequent to quarter end, we have organically expanded our retail and online footprint in Quebec with the launch of Bon Jack, an exclusive brand in Quebec. With this launch, we have secured an additional six SKUs in Quebec, which we anticipate will hit markets in September 2022. With Quebec, Vowns will have exposure to approximately 95% of the Canadian market. Cad venerant.

Speaker 5: As mentioned earlier, provincial sales took a step back in the quarter due to a complete rebranding and switch over to versus.

Speaker 5: More specifically, this transition was not properly delineated for brand continuity by provincial distributors in their ERP system, which caused retailers to think the product was out of stock when we had simply rebranded to Versys.

Speaker 5: This resulted in absent depletions in some of our highest velocity skews in one of the busiest months of the year.

Speaker 5: That being said, with the versus rebranding now behind us, the business is off to a strong start in Q3, with sell-in to provincial distributors strongly rebounding, and we saw provincial sales accelerate in June with record monthly revenue.

Speaker 5: Even more importantly, we are seeing strong visibility into our pipeline of purchase orders for July .

Speaker 5: On slide 14.

Speaker 5: As discussed, we did see a rebound in revenue at green roads in the quarter, but that growth was muted by delays and stockouts in key product categories.

Speaker 5: We have already actioned process changes to minimize these disruptions going forward and will continue to work with our suppliers to ensure we are realizing on the full demand opportunity for Green loads products.

Speaker 5: We have seen early success in the launch of new Gummy Invade SKUs and expect these to be key areas of growth for us in the back half of the year.

Speaker 5: In addition, efforts to distribute GreenRoads branded products to international markets have started to bear fruit with early success seen in this area in the quarter.

Speaker 6: Slide 15.

Speaker 5: That said, competition for CBD based products in the US remains strong and we are moving quickly to deliver our new solution based offerings into new and more appropriate channels. We expect to see greater success from these efforts in the coming quarters, particularly as we more fully leverage our online capabilities, launch our kiosk strategy in partnership with Signify in premium mall locations around the US and build greater volumes with new distributor relationships which have been a key focus of the Green Roads retail team.

Speaker 5: With that, I'll pass it back to Tyler to discuss our B2B performance. Tyler?

Speaker 3: Thanks Jeff. B2B sales increased 11.1% quarter over quarter with Q2 revenue increasing to 7 million. While we have seen higher demand for bulk sales we remain optimistic that the platform will continue to strengthen as our partners optimize their manufacturing processes at both industry and economic.

Speaker 3: B2B can be lumpy quarter to quarter as we realign biomass to optimize margin profile for each customer.

Speaker 3: Moreover, Pipeline remains robust with new B2B opportunities within and outside of the cannabis industry which provides upside.

Speaker 3: Thanks, Tyler. Slide 17, please. Let me start by saying that our operating environment continues to be challenging with ongoing inflationary cost pressures, a volatile supply chain, and retail price compression given the highly fragmented state of the industry in Canada. As a result, we have been taking aggressive actions to right-size our cost structure and streamline our business, which I will discuss in more detail later in the call. We do expect at this time that 2022 will be a challenging environment.

Speaker 3: with financial failures anticipated across the marketplace. Now on slide 17, Solidarity Net Revenue, you can see increased by 3.5% to $24 million in Q2 2022 with broad strength across Green Roads B2B and international markets more than offsetting the volatility in our provincial sales revenue.

Speaker 3: As previously discussed, provincial sales revenue decreased by 14.8% to $9.2 million in the quarter, largely due to absent depletion weeks in certain provincial markets from the rebranding of stricken SKUs from verse to verse.

Speaker 3: Additionally, about $0.5 million of shipments to provinces late in Q2 pushed revenue from May into June .

Speaker 3: But even excluding these factors, provincial sales revenue.

Speaker 3: revenues have rebounded in June .

Speaker 3: for the best month ever for the company. This combined with a strong pipeline of purchase orders already in hand for July give us confidence that the rebrand of expanded product portfolio is gaining traction with consumers and bartenders.

Speaker 3: Our B2B segment continued its double digit growth, reaching $7 million revenue Q2, up 11.1% from the previous quarter. The increase is primarily driven by higher demanded bulk sales and some onboarding of new customers.

Speaker 3: Our GreenRoad US CBD business also saw a double digit growth of 11.8% to reach $5.7 million in the quarter. Growth was primarily driven by direct consumer e-commerce sales and an increase in international sales from the Florida facility. International revenue from the Canadian facilities showed a strong performance in the quarter, growing to $1.1 million.

Speaker 3: up from $0.4 million in the previous quarter, driven by growth in shipments to Australia.

Speaker 3: round one to Joe was waiting to

Speaker 3: Moving over to this slide, adjusted gross profit was $3.4 million, or 14% net revenue in Q2.

Speaker 3: Margins in Q2 were negatively impacted by moving through higher-caution inventory and sales mix between B2B and B2C channels.

Speaker 3: Despite the flat adjusted gross profit in the corridor, we implemented numerous initiatives in Q2 with conditioned values for improvement in adjusted gross margins in coming corridors. These include optimizing our biomass and input sourcing, and increasing our output capacity.

Speaker 3: commissioning new automation such as flower packing, and optimization of our product and provincial mix.

Speaker 3: As a result of these variables, we are confident that our margin profile will demonstrate significant improvement in Q3 and Q4 of 2022.

Speaker 3: Adjusted EBITDA was negative $15.9 million in Q2.

Speaker 3: The improvement in adjusted EBITDA was attributable to lower SG&A costs with adjusted gross profit being flat quarter-to-quarter. On a reported basis, SG&A is a percent of net revenue improved by 908 basis points in Q2 relative to Q1 as we are starting to realize the initial benefit of our integration initiatives.

Speaker 3: Furthermore, this includes a $1.4 million non-cash impairment related to risk on B2B balls in the corner.

Speaker 3: Adjusting for this, EBITDA would have been negative $14.4 million in the quarter compared to negative $17.6 million in Q1.

Speaker 3: Now moving over to slide 19, this waterfall chart shows the sources and uses of cash since the end of Q1. Overall in Q2 we took a large step forward with cash flow from operations and cash flow from investing activities showing a combined improvement of $4.8 million quarter over quarter.

Speaker 3: And this is before the realization of the majority of our integration initiatives. We expect this trend to continue and improve significantly into Q3 and Q4.

Speaker 3: Cash flow from operations alone improved improvement of $3.2 million or 13.9%. These improvements stem from the improvement in adjusted EBITDA and as mentioned on last quarter's earnings calls, working capital investments moderated this quarter representing a much smaller drive on cash.

Speaker 3: The negative adjusted EBITDA profile of the business, although improving, represents our primary focus as we move into the latter half of 2022.

Speaker 3: Key elements on the pathway to achieving positive and just EBITDA include integration initiatives that are on track to deliver the targeted savings.

Speaker 3: Further saving in procurement and biomass sourcing as contract growing arrangements begin to provide products.

Speaker 7: in the month ahead.

Speaker 3: revenue growth that we've now seen come back to growth in provincial sales as Tyler previously mentioned and reduce one-time costs associated with brand launches that we experienced earlier in the fiscal year.

Speaker 3: We expect cash from operations to demonstrate significant improvement in Q3 to between negative nine and negative $12 million based on the following factors. One, the improved EBITDA performance through the combination of margin improvement and cost reductions that have been action and are expected to reduce this level of cash burn in Q3 and Q4.

Speaker 3: Secondly, we have initiatives underway to dispose of non-core assets such as the citizen and the facility emissions. This is expected to add to our cash position.

Speaker 3: Thirdly, we are expecting continued improvement in working capital management as we have now largely moved through several product launch phases.

Speaker 3: Now that being said, as a matter of prudence and to increase our margin of error, we are currently exploring non-dilutive options such as operating lines or working capital solutions to increase our financial flexibility in the event of further deterioration in market conditions.

Speaker 3: Moving to slide 20.

Speaker 3: Only five months into our integration initiatives, we have actioned $15 million in annual cost savings and have identified another $5 million in funding for the

Speaker 3: additional calls they need to be actioned in the next reporters.

Speaker 3: With the action identified today, we are on track to exceed our initial estimate of $20 million as a target by the fiscal year 2022.

Speaker 3: The important takeaway from these initiatives is that they only had a smaller impact on our financials in Q2 and the company expects to realize the majority of these benefits in Q3 and Q4.

Speaker 3: Of the $15 million action, approximately 79%, or $11.9 million, of the cost savings are coming through SG&A with the remaining 21%, or $3.1 million, coming through the COGS line.

Speaker 3: of the additional cost savings that have been identified in the Netflix of the $5 billion.

Speaker 3: Vazmin anticipates 40% of it to come through SG&A and 60% to come through CAHGS as we further streamlined the organization to deliver process related efficiencies.

Speaker 3: Imagine expensive cost savings to positively impact operating expenses and drive margin expansion in the coming quarters.

Speaker 3: In conclusion, before we get to the Q&A session.

Speaker 3: This quarter clearly shows the progress we have made in overall SG&A as we realize the fruits of our integration initiatives. However, we have largely not seen the impact, the positive impact I should say, of our contract growth, further automation and integration initiatives related to cost control that are coming online in Q3 and Q4.

Speaker 3: With biomass costs being one of the largest inputs for our cost of goods sold, we expect greater strides forward on gross margins over the coming quarters.

Speaker 3: We are moving quickly and we are a much different company today than we were in Q2 and for the better.

Speaker 3: With that, I will turn the call over to the operator and open the line for the question and answer session.

Speaker 2: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad and the confirmation tone will indicate your line in the question queue.

Speaker 2: You may press star 2 if you would 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.

Speaker 2: We ask that you limit yourselves to two questions initially so that we have time to speak with as many of you as possible. If you have additional questions, please rejoin the queue and we'll endeavor to come back to you later in the call. One moment please while we poll for questions.

Speaker 2: Thank you. Our first question is from the line of Aaron Gray with Alliance Global Partners. Please just use your questions.

Speaker 8: Hi, good morning and thank you for the questions.

Speaker 8: So first question for me, just going from the verse to versus, right? So you talked about record month in June for sales to provinces, strong visibility into July . I just want to get some commentary in terms of how you feel comfortably on the sell-through at retail for that, especially with the brand switch and potentially not having it on a shelf or online for that certain period of time. You talked about a couple weeks. And then if you could just quantify the revenue impact you think you had from the disconnect with the provinces and the different skew numbers. Thank you.

Speaker 3: Yeah, thanks Aaron, great question. I will kick it over to Adam Shea, our Chief Commercial Officer in one second, but I would say it definitely hurt us. And I would say the balance team did everything we could to basically make a smooth transition. But it was very lumpy at some of the provincial boards, even doing a brand transition at quarter end or their inventory month for the year end was challenging to say the least. But Adam, why don't you comment on both of those?

Speaker 3: Yeah, thanks, Tyler. Aaron, I appreciate the question. So the verse to verse transition, despite some choppiness throughout Q2, we're in a very good spot now. We're seeing strong, strong replenishment orders coming in. And I'm very, very bullish on where we'll be over the next several weeks. I think we have normalized our depletion rate to your specific question around the impact. So on average, the depletion rate from provincial boards

Speaker 8: All right, great. Thank you very much for that color. And then second question from me, just on the gross margin, you know, as it relates to your EBITDA profitability target, can we focus on the gross margin for a second here and just help us bridge to, you know, some of the line items there in terms of the improvements on the gross margin, whether or not you want to give more of a specific target in terms of what's embedded in the EBITDA profitability on the gross margin side. Any color there to help us, you know, bridge down the improvement would be very helpful. Thank you.

Speaker 3: Absolutely. Sunil, why don't you take that one? Sure. Look, obviously we don't really give margin guidance as an official statement from the company, but I think we know that based on our views around provincial mix, sales mix, the cost improvements that we absolutely expect to see, largely based on contract growth situations and automation, we would definitely expect our gross margin profile to double from where it is now. To be fair, one of the things that the company will certainly do is sit a few more volumes of equity on the outside. So not very limited to capital Investigation or your leverage on to penguins or to campaigns, which is really something you would stand by your mind, and you may try to handle that in your office so that in the morning

Speaker 3: back to where we would need it to be. We want the steady state of business long term to be a gross marginal profile of north of 30%.

Speaker 8: All right, great. Thanks so much for the call. I'll jump back in with you.

Speaker 2: Our next question is from the line of Neil Glimmer with Iowa Securities. Please assist me with your questions.

Speaker 9: Yeah, good morning. Thanks for the questions. Maybe I'll start on the cold house distribution or partnership. Obviously, it was just announced in June . When does that actually get sort of fully implemented? And what sort of things are you going to be monitoring as far as evaluating the success of that over the first few months of the program?

Speaker 10: Adam, why don't you start and then I'll add on to the back of yours.

Speaker 3: Yep, sounds good Neil, thanks for the question. Very excited about the Cold House partnership. Anyone who is familiar with Cold House, they're experts in direct to start distribution, logistics, et cetera. We've got an exclusive partnership with them now where they'll solely represent balanced brands specifically to start in the markets of BC, Alberta, and Ontario. In those three major markets, we'll have well over 90% coverage of the legal cannabis retail universe.

Speaker 10: with the ability for frequency weekly and biweekly to well over 75% of that universe. So we are very – this gets underway September 1st and we are very bullish of the ability for that team to have laser focused priorities related to dialing specific brands and ultimately be able to help both retailers and consumers better navigate our portfolio. So we are feeling very bullish about that knowing Coldhouse's record of success in other categories.

Speaker 10: there. We've interviewed all the big ones. I've never seen anything like Coldhouse before in my my career.

Speaker 9: Okay great, thanks both of you for that. Second question again is you know on the EBITDA profitability I guess if I'm trying to think through the cost-saving initiatives you guys have announced you know at least 20 million dollars, if I you know just sort of take the simple way to go about it so that's you know five million a quarter you know some of it's going through COGS and some through SG&A you know is there what sort of revenue, I don't know if you're going to answer this but like is there certain revenue level that you guys need to it you know achieve.

Speaker 5: its margin you can sort of come to an assumption around sort of targeted SG&A levels. I think what you're going to see is a combination of both. I think number one revenue growth as we're seeing in the pipeline both on our retail recreational footprint as well as green roads and other areas of business number one. Number two as we said we see 20 million plus in savings through the initiatives that we're running.

Speaker 5: We think that that's going to contribute towards that EBITDA positive. And thirdly, I think the product mix as all of these other retail sales or our recreational sales continue to increase, the product mix will skew towards higher margin products.

Speaker 5: contribute towards that EBITDA positive. And thirdly I think the product mix as all of these other retail sales or our recreational sales continue to increase, the product mix will skew towards higher margin products. Neil, I don't know if you want to add to that.

Speaker 3: I think Jeff had a nail on the head. It's obviously you're flexing all three levers. It's the revenue growth, it's the margin expansion and the SG&A going down all at the same time that will all contribute to us getting there.

Speaker 3: Not just the cost for that.

Speaker 9: Okay great thanks very much guys.

Speaker 9: Thanks very much, guys.

Speaker 2: Our next question is from the line of Andrew Parsin with CIFIL-GMP. Please just use your questions.

Speaker 5: Hi, good morning. Thanks for taking my questions.

Speaker 5: Maybe first talking about B2B and...

Speaker 5: in your US, hemp business, international as well, all very impressive growth rates here.

Speaker 5: Just looking forward trying to understand, you know, do you believe that these growth rates are are replicable? Are you expect to see stronger growth in rec that could...

Speaker 5: supplement or or

Speaker 5: you know, overtake maybe a little bit of softening in the B2B CBD channels.

Speaker 5: or international because the team of this quarter was really hitting on all cylinders there. And it could be a little bit of softening before a re-exceleration would.

Speaker 5: sometimes occur.

Speaker 5: Just wondering if that's the proper way to think about it, or next quarter we should see the continued momentum on all of these businesses.

Speaker 10: Yeah, a great question. So Jeff, I'll answer the first part and I'll kick it over to you to the US side. I do expect stability across the board in a lot of the verticals. Obviously with the biggest area of attention for us being adult record provincial sales, we do believe there's a huge opportunity there which should bring stability to our forecasting and moving forward because we're in control of our own destiny. As far as B2B, it's extremely lumpy so it's week by week, month by month.

Speaker 10: A lot of the challenges we're seeing with Adlerac, a lot of the other licensed producers are seeing as well. There's a lot of turbulence, but what our goal right now to do is just optimize the manufacturing capabilities we have and then backfill the strategic partnerships like the B2B relationship. So I do expect. In addition, several project alternatives have been developed for the Xamarin development

Speaker 10: more momentum to continue, especially through adult rec and some of the other opportunities and instability on the B2B side. Jeff, why don't you touch on the US?

Speaker 5: Sure and from the green road side while we did see growth 11% growth quarter over quarter you know I can say that we were it didn't meet our expectations in terms of performance in the quarter. There were some online challenges related to our strategies with Facebook and Instagram that that held us back a bit but also as we noted the third-party suppliers not providing the consistency or the availability of product to meet the demand.

Speaker 5: So we do expect there is more demand, there's more opportunity, and there's more sales growth coming out of green roads in the coming quarters. Working hard to realize that. On the international side, you're right, there was a nice little bump there this quarter, but I won't say that that's sort of a one-time. I'd say that that's been a long time in building and nurturing that and since you're all been patient with us in terms of realizing that, but we're starting to see the benefits of all those efforts materialize. And so the growth that we saw, you know, as we're looking at Q3 and Q4 right now, we're continuing to be excited.

Speaker 5: own sales force. Just wondering, you know, what really drove you to partner versus them versus developing this in-house?

Speaker 10: Yeah, no, I think that is a great question. And Adam, feel free to tag on at the end. We looked at all models going forward, interviewed the majority of the big distribution platforms and or sales agencies. And we've never seen anything with the level of sophistication that we saw with cold house, whether it's the CRM system, whether it's the routing, I've never seen anything like it. And even when you look at the predictability of the opportunity at hand, it's like we can be at this store at this time between 10, 25 AM on a Tuesday and 10, 30 AM. So the repeatability.

Speaker 10: of Coldhouse and then traceability too. They've been extremely successful and if you look at some of their other partners, I think you can understand why that we would choose them. Adam, I don't know if you want to add anything.

Speaker 10: Yeah, and because the only two or three things I'd add to Tyler's comments is, you know, the way to look at this really is about, it's a balanced sales force that is anchored in, in, in cold house. So you're going to see the, the retailer will see a balanced representative wearing ballum, the tire show up to their, to their store. So, you know, the person at store XYZ in Ontario that also has a store in BC, they're, they're just going to see a balanced representative who's there on a consistently frequent basis.

Speaker 10: who's being very methodical about their call, not there sort of randomly talking about 25 different things over the course of 40 minutes, rather a very specific 15-minute call that's anchored in key priorities. And then as Tyler referenced, the significance in their intelligence around routing really allows us to drive that reach and frequency that just isn't, we did not see that in any of the other partners we could have considered.

Speaker 10: Very excited for that to be underway on September 1st. Thanks for that. I'll get back in the queue.

Speaker 2: Thank you. Our next question is coming from the line of Frederico Gomez with AGB Capital. Please receive a few questions.

Hi, good morning. Thanks for taking my questions. My first question is on your sales guidance for 2023, $225 million. That would be more than double the revenue that you had this quarter annualized. So could you maybe just remind us how much of that growth you expect to come from B2C in Canada? How much of that would be B2B and how much would come from the US?

You're just trying to understand which segments you expect will grow faster or not sheer, and how much you have within your control to drive that growth. Thanks.

Yeah, no, good question. I'll probably kick it over to Jeff or Sunil. I don't think we're going to get formal guidance on the breakdown of how we expect the revenue to unfold. Obviously, with the turbulent time in cannabis, I think it's going to come from multiple levers or verticals, but Jeff Sunil, feel free to add on.

Sure, I think maybe I'll start and, Sunil, you can clean up. So if we're looking at the various segments, obviously, and we said very specifically that we think there's a significant opportunity for us in the Canadian recreational space, that's getting our priority and that's getting a lot of our focus. So a significant amount of the growth we anticipate coming from that, number one. Number two, we think from the green roads in the US CBD business.

We think we've only just started to scratch the surface on what that business is capable of doing. And so from our perspective, that's going to also add a significant contribution to that growth profile. I think you're also going to see international start to take a little piece of the pie, start to add on a more meaningful basis as we move forward here in the coming quarters. B2B, as Tyler said, will be lumpy, but some of the relationships and some of the opportunities that we're seeing are the more nurturing.

That could also be a very big contributor to our revenue profile going forward.

Yeah, I think Jeff nailed it straight on. I think the way to look at it is our two key pillars of growth that we expect to get us to where we want to be is Canadian Alaric and GreenMotes with the other segments playing meaningful but supporting roles.

So the revenue in the margin growth being led by a Canadian auto rec and green loans

Okay, thanks for the caller. And then my second question is, you have some market share targets and you are behind them for certain product categories in particular pre-rolls. So could you comment on what initiatives you have in place right now to drive growth in pre-rolls for the remainder of the year? Thank you.

Yeah, absolutely. So Adam, I'll go first and then feel free to tag on. I do believe we are behind in a couple categories and I think there's very real reasons. One, some of our listings got delayed in Alberta, for example, eight weeks. And then some of the, I would say, infused pre-rolls haven't really made it to market share numbers yet. So in the later half of the year with a lot of the listings going live, that's when you really expect to push the needle. That coinciding with a cold house start, we believe will be the back half of the year that will really start to gain momentum. Adam?

The only, uh, spot on Tyler, the only additional thing that I would say is that, you know, when you look at, uh, depending on what period you're comparing to Puerto Rico, you know, you think year over year, there's a different pricing dynamic in the marketplace today, um, across pre-rolls of, uh, in all segments, frankly, than there was a year ago. We're feeling the impact on that, um, on college, more premium, uh, pre-rolls. And I think we'll be quickly, uh, quickly ahead of where we thought we would be based on the three points that Tyler set.

I'm not worried about that, feeling very bullish about the innovation we have coming in the next several weeks.

Okay, thanks for the call. I'll be back in a few.

Thank you. The next question is from the line of Michael Freeman with Raymond James. Please receive your questions.

Hi, good morning team and thanks for taking my question. I wonder if you could give a few tangible examples of how you've been enacting these cost-saving exercises, both the ones that you've actioned already and those that you are targeting in the future. And if you could give an example from the SG&A bucket and the COGS affecting bucket.

my question. I wonder if you could give a few tangible examples of how you've been enacting these cost-saving exercises, both the ones that you've actioned already and those that you are targeting in the future, and if you could give an example from the SG&A bucket and the colleagues affecting the bucket. Thanks very much.

Absolutely, that's a great question. Sunil, why don't you start and then I'll add on. Sure. I mean, you know, I think we highlighted on one of the slides in the material where, you know, you can kind of see where we're getting things from. We know we had a very acquisitive 2021, so naturally coming out of that, we did have areas of duplication and where we need to centralize things. So you heal all that reduction in some cases coming through SNA lines where…

there is some rationalization of cost, people cost, infrastructure cost that we've been undertaking through the first six months of the year. So that would be what we come through at SGA. On COGS, you're going to see a few different things. You're going to see the impact of lower input costs. We've been undertaking initiatives not just around contract growth, but when you come through it, things like reduced input costs in other areas, as well as the labor profile significantly changing. As we've installed a lot of CAPEX, we're automating certain areas. It is natural that.

the average cost of labor to make your product close down. So in some cases there are people's locations, in other cases it is my capital, in other cases it is sourcing, in other cases it might be infrastructure and overhead, but we are realizing savings in all those areas.

Okay, that's really helpful. I appreciate you outlining that. Now, I wonder, you know, you're undergoing these cost saving exercises at the same time as you're seeking to double revenue over the next year or so. Are there areas where you, or I guess how could you assure us that in reducing these costs you're not creating bottlenecks for...

So you cut out there for me. If someone else has fun, they're welcome to answer, but if you can repeat the question.

Yeah, I'll repeat it briefly. How can we be confident that as you are undergoing these material cost-saving exercises, you're not creating bottlenecks for growth in achieving your 20s?

the revenue guidance? Yeah no that's a great question and to be frank, Sunil you can add on as well. I would say this was always the plan like when you invest in automation and I'll use flower packout for an example we used to do call it 8,000 units a day now we're doing 2,000 an hour. We've invested in the CAPIC and really optimized the platform to really push and we're not cutting anywhere we potentially see bottlenecks and right now it's really just pushing on coarse youth that have a ton of velocity through.

It's really just recognizing the synergy of the platform that we've built and really pushing so we don't see any bottlenecks in any of the product line items that are going out in the foreseeable future.

Okay, thank you very much.

All right, go ahead, Sunil. I'll add on.

Yeah, I think to build on what Tyler was saying, I think what he's referring to is exactly like a scalable business. So sometimes you are reducing re-dosing, but we are building a scalable business, something that is more automated, fewer, bigger, better, more ability to get product out of the system, more ability for us to actually generate those revenues. And in some cases where you might be looking at areas like post acquisition, we just realized we could deprioritize a couple of areas, reduce overhead costs, etc.

Those are not the types of things that you would expect to have a material impact on our ability to grow revenue. So for the most part, the savings have been in areas that would not impact that. And Michael, it's Everett here. The other area I'd add on for you to double check on your research side, look at other companies like Organigram, like that has more revenue than us with almost half the SG&A. I think that you can look in the industry that with the automation we've invested in, it's not unreasonable to expect, especially.

Note that we doubled our SG&A, over doubled our SG&A last year with a lot of the acquisitions. So this is just realizing the cost savings and as Jeff mentioned in his part, we've delayed some of those and been more methodical through that process so we can continue that ramp in revenue and smooth that out over time.

That's terrific. Thanks for this color.

Thank you. The next question is from the line of George Tejarevic with mPartners. Please receive your questions.

Yeah, good morning guys. Just filling in for Nicholas Cordulucci this morning. So firstly, what product forms are you seeing most of the rebound in during June and July ?

Yeah, good question. Why don't Adam mute out of that one?

Tyler, sorry about that. For some reason my phone was, I apologize everyone for the tech problem there. The question was about where we're seeing the most bounce back in product format, just to confirm. Sorry.

Tyler, sorry about that. For some reason my phone was, I apologize everyone for the tech problem there. The question was about where we're seeing the product, the most bounce back in product format. Just to confirm, sorry. Traffic issue here.

We're seeing it actually, frankly, across all parts of the business. I think the one area where we're a little bit sluggish is on concentrates, but frankly, we're having a significant uptick in all of our form factors. Beech is leading the way, but very, very strong volumetric replenishment orders. Our dry flower business, similarly. The pre-roll business as well, our beverage business. Edible business, I would say, is normalized. Lots of opportunity still on there.

The question around what are we seeing on cash on hand for the next few quarters.

Yeah, in terms of using it.

Yeah, I think what we stated in our material was that we definitely expect the cash burn to reduce as the EBITDA goes down. So obviously, when you're EBITDA negative, as you glide down that path, you'd naturally just become promise free.

be some casual on the path, but you don't expect, you know, any material investment if it's like working capital or CapEx and whatnot. That's what gives us the confidence that we're on the path towards getting towards casual break-even and that will allow us to navigate through the balance of the year.

Got it, thanks.

Thank you. At this time, I'll turn the floor back to Tyler Robson for closing remarks.

Yeah, I appreciate it. Just want to again say thank you for everybody for the continued support and time. Obviously, this quarter was not up to my expectation. Even though we were doing basically what we said we're going to do cash burn is coming down, SG&A, we're doing everything we said. It's not happening quick enough. And with such a big opportunity that we missed on adult rec, we will bounce back and we will continue to drive the business forward. With that, again, I want to thank everybody. I'll turn it back to the operator to close the call. Thank you.

Thank you. This does conclude today's call. Thank you for your participation. You may now disconnect your lines at this time and have a great day.