22nd Century Group Inc. Q1 2023 Earnings Call
Okay.
Welcome to <unk> second century group's first quarter conference call and webcast. At this time all participants have been placed in a listen only mode. The floor will be opened for questions. Following management's prepared remarks for our covering research analysts on the call. If you would like to ask a question after that.
Time deeply process far one touchdown selling if at any point. Your question has been answered you may remove yourself from the queue by pressing star zero and we ask that you. Please pickup your handset to allow optimal sound quality.
Lastly, if you should require operator assistance. Please press star zero and it's now my pleasure to turn the call over to Matt Kreps Investor Relations for it so in the second century leased again.
Thanks, Brian and good morning, and welcome to <unk> second century, <unk> first quarter earnings Conference call. Joining me today are Jim mesh CEO , you Camden, CFO and John Miller, President of our tobacco business.
Earlier today, we issued a press release announcing our results for the first quarter 2023 the release.
Presentation, and 10-Q are available on the investors section of our website at X X II century Dot com.
I will start today's call with prepared remarks from Jim John here before moving into a Q&A session with our analysts.
Given the limited time for today's call and Q&A, we will again focus on commercial advancements driving revenue in our BLA in tobacco and GBP hemp cannabis business. Yes, if you have questions about our business not addressed on this call.
Welcome to email Investor Relations using my contact information is provided in today's press release.
On slide two a few reminders for today's call.
Some of the statements made today are forward looking forward looking statements are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements additional information regarding these factors can be found in our annual and quarterly reports filed with the SEC.
Also during today's call, we may discuss non-GAAP financial measures, including adjusted EBITDA.
Defined as earnings before interest taxes, depreciation and amortization as adjusted for certain noncash and nonoperating expenses.
For more details on these measures please refer to our press release issued earlier today.
With that I'll turn the call over to Jeff beginning from slide three.
Thanks, Matt and good morning, everyone.
We continue to execute our operational plan to grow the tobacco and cannabis business and transformed the cash positive in 2024.
We recognize that there are many key questions from our shareholders that we will answer today.
These include.
Clear guidance on revenues and how and when we get there.
<unk> distribution and more important store count in commercial sales.
Hemp cannabis ingredients and distribution ramp up.
We also get a lot of questions about cost cutting I can assure you that this is a constant part of our discipline to focus dollars only where it leads to our goal of operating profit.
Just this quarter for example, my staff has been reduced by 30%.
And we have ongoing cost programs across the business.
Now that said, we will not cost cut our way to success.
We are a growth company.
We're off to a great start this year on revenue in Q1.
Once the business interruption insurance for Q1 has received here in Q2. It will result in us exceeding plan on revenue gross profit and operating results for the first quarter.
I am proud of this team and our continued execution of our plan that will drive gross margin improvement and operating performance.
Recall that we have been consistent that Q2 would be when we gained real traction on commercial sales of <unk> based on the flight planning process and timing of our retailers.
It's important to understand that the <unk> rollout follows a detailed process.
But it is happening at twice the speed of a typical tobacco product rollout.
John will detail, our aggressive commercial rollout of our FDA authorized BLA and reduced nicotine cigarettes. This.
This includes the highly anticipated launch covering thousands of stores across California, Texas, and Florida with the number one U S. C store chain supported by National scaled distribution providers.
Additional new retail chains are already scheduling product launches planned for 2023 to ensure their position with us.
And our hemp cannabis business, we're focused on growth initiatives to capitalize on our dominant market position in cannabinoid ingredients and our new sales and distribution services.
We again reported record cannabinoid ingredient volumes and recently signed two transformational CMO plus D license agreements with industry leaders cookies and old Pal.
Combined these agreed agreements are worth at least $140 million in sales over their three year term with very attractive margins and additional deals are well into the pipeline.
We're also restoring our capacity lost in the grass Valley fire. Meanwhile, business interruption insurance will cover our margin impact in Q1 and Q2, we will see significant margin expansion in the second half of 2023 due to this restore capacity.
Combining these facts our confidence in our growth outlook as us introducing our first revenue guidance.
Following for full year 2023 revenue of $105 million to $110 million. This represents a 69% to 77% increase from the $62 million in 2022.
Leaving that goal plus execution on several cost cutting and margin improvement initiatives already in progress.
<unk> is a clear pathway to achieve cash positive operations from both businesses in 2024.
Slide four provides a snapshot of this path.
In tobacco products, we secured major national scaled distribution agreements with a number one and number two distributors that expedite putting zealand into hundreds or even thousands of stores at a time across multiple states.
This enables the launch we are working on now with thousands of C stores and the three largest state markets and for us to expand our relationship with the number two C store and also opens up a massive funnel with more than 100 retail change interested in BLM.
Q2 is where the commercial sales and store count will take traction and recall that we just need to hit an annualized run rate of $1 2 million beyond carton sales to generate positive cash flow in our tobacco business unit.
And hemp cannabis, we continued to deliver record ingredient volumes as the dominant leader.
We are driving increased demand for our <unk> services and have now secured the first two exclusive fully vertical is sales and distribution agreements with major brands combined.
Combining with several cost cutting and margin improvement programs, we are tracking to our goal of cash positive in the first half of 2024 in this business.
So I would say with continued confidence and stay confidence that we will deliver on the company's full potential and cash positive operations.
With that let me turn it over to John to discuss our tobacco business activities in much more detail John .
Thank you Jim and good morning, everyone.
We are rapidly scaling an incredibly disruptive product and on track to move quickly from 500 stores carrying <unk> to five.
And that's just to get things started.
And while the path has certainly changed along the way and we'll definitely continue to evolve as we learn more about this incredible product we are 100% committed to success.
Turning to slide six.
It is important to appreciate that at this time last year, we were in less than 30 days into our <unk> pilot we.
We need to confirm how best to take this exceptional product from FDA authorization to scalable distribution to full consumer acceptance.
I think every category is ultra competitive with <unk>.
National distribution is a multi phase time consuming and complex product in the adult smoker acceptance will be driven through sales and marketing actions that drive awareness education and trial.
Early sales exceeded industry expectations and drove our continued market research activities and testing through the remainder of 2022.
I came onboard last may and in the fall began to hire our team are deeply experienced tobacco industry professionals, helping our mission to be the last cigarette adult smokers ever purchase.
By December we knew that there was an opportunity to make a major shift international scale distributors with Geo focus to retailers and the sales and marketing activities that will drive consumer acceptance. We understood. This process will require some time, but would also greatly accelerate our capabilities for 2023.
We have now done that and our new launch plans for thousands of stores will be the proof that the time patients an incredible effort that has taken place behind the scenes. These last few months was 100% worth it.
Slide seven explains why you've seen this map what is different is that we now have the number one in the naphthalene distributors signed up and shipping, allowing us to place dealing with the thousands of stores within weeks. This.
This is critical as the opportunities our teams have worked on for the past five months. It can take us from 500 stores to 5000 stores in a single agreement and Thats the start.
This distribution has also opened up the floodgates and retailers are scheduling product launches across the rest of 2023.
This includes not just C stores, but also a pharmacy baked box club stores and military sites all drawn for more than 100 retail change now at various stages in our sales pipeline.
Support is growing SaaS. For example, we have just been approved by the National Coalition of franchise associations behind one of our key retailers even before launch this.
It gives <unk> access to franchise owner groups covering more than 7500 stores across the country.
As another example of the benefit of taking the time to properly build a national distribution network, we expect to be rolling VLA to several Marine Corps basis. Later this month. The bases are located in southern California, Arizona and North Carolina. This provides an entry point to expanding with other branches of the armed forces domestically and internationally.
And supports a key department of Defense initiative, that's helping our military personnel reduce smoking.
These military facilities are all serviced through our new distribution agreements.
Moving to slide eight.
Underpinning this phenomenal market access and acceleration, we have refined and enhanced our consumer marketing based on what we have learned that we can maximize these incredible opportunities.
Our research last year helped us to understand how smokers are not just addicted to nicotine, but also the active smoking itself.
Further most current cessation tools only address the nicotine addiction and utilize negative messaging, which works against success by smokers.
<unk> offers a new tool and a positive optimistic approach to reducing smoking, we empower smokers to constantly and capably take control of their habit break the nicotine addiction, and then move away from the behaviors as well. This is a critical distinction for BLA.
Youll also notice that the AD sample captures those same strengths that would be on our part.
Confidence capability freedom, and a lack of pressure from tiara failure.
It's really an incredible opportunity to get power back to adult smokers. So.
They can succeed on their own terms.
And turning to slide nine.
As part of getting the word out about this incredible new tool to reduce smoking, we're going heavily digital with hyper targeted awareness campaign designed to educate and encourage trial.
We can be very precise with our placements, reaching just our target audience or key influencers by utilizing videos native banner and image ads. These another dynamic engagements that are designed to convey the BLS product position value proposition and reinforce brand credibility.
One of the things we learned is that many smokers are absolutely interested in switching once they learn about the OLED and incredibly difficult feat with smokers, who are among the most brand loyal consumers.
It is accretive to how powerful Zealand can be.
Moving to slide 10, we'll complement that engagement with the revamped the brand site testimonials continued positive reinforcement and encouragement plus local PR efforts to generate public awareness and proactive conversations about smoking harm reduction and highlighting a new tool that can help smokers reduced their smoking by still smoking until they know.
<unk> see a decline in their consumption.
We're also looking to build and reached Influencer communities.
In addition to macro social Influencers and clinical leaders. It's also micro influencers and peer to peer influence such as family members and transit smoker, who complained enrolls in education awareness and continued support along this journey.
And final 11, so can we do it that's the key question and the good news is that we not only have an incredible runway of exciting new relationships market data marketing campaigns in retail stores. We also have a good predicate to demonstrate these channels can work.
Clinical is a new premium store brand designed to offer better value to smokers not yet ready to quit it's also a great proof point that we put a new product into thousands of stores across more than 20 states and quickly gain share which is exactly what we're doing with BLM.
Pinnacle launch of the top five C store chain was 1700 locations rolling out in just weeks through one of our new distribution agreements early sales are robust even before the <unk> began promotions.
Moving toward a run rate of several hundred thousand cartons per year. This experience illustrates the path for <unk> with more retailers more stores and a more differentiated story in short, yes, we can launch the number one chain across thousands of stores in multiple states. All we need is the greenlight to go.
On slide 12, we update several other initiatives in place designed to expand and improve our business results. Many of you are keeping close watch on our national efforts, which are moving forward.
We've launched a test in Switzerland, the product has already shipped to our Swiss distributor and the more than 200 targeted stores will receive <unk> and later this month.
In Japan, we have cleared all major regulatory hurdles and are preparing to shipment to our Japanese distributor to begin to test an approximately 200 stores in June .
And our efforts in South Korea continued to move ahead, we learned a lot from the initial program.
We've updated the packaging and product attributes to align closely with that market and we will again be shipping Midsummer for additional retail program.
Slide 13.
On the operational front, we're taking actions to improve our margins and profit. This includes rotating out of lower margin filtered cigar business and allocating greater production capacity to our growth markets and premium products like <unk> and pinnacle.
<unk> already increased ahead of retail placements as distribution centers prepare for their customer sales and replenishment orders you will start to see this activity in the Q2 results and growing thereafter.
Turning to slide 14, we have talked extensively about the benefit of federal regulation in both the U S and overseas and believe these policies are moving closer to reality.
First action is the Fda's proposed ban on menthol slated for final rule status in August we believe that our VL and menthol King's cigarettes could be the only combustible menthol cigarette on the market exempt from federal Menthol ban.
Longer term, a federal reduced nicotine content mandate, such as that adopted by New Zealand with BD, even more effective in reducing the harvest of smoking.
We are excited about New Zealand groundbreaking policy as not only a great policy for their country, but as a template for other countries to pursue similar action, we announced the seed growing program sufficient to supply the entire New Zealand cigarette market approximately 2 billion sticks. This shows that it's the only feasible, but actually workable to scale up a full federal.
Reduced nicotine program in a relatively short period.
<unk> opportunity for public health benefit.
So, bringing all together on slide 15, we're rapidly accelerating toward our goal of achieving cash positive results. In 2024, we are driving to exponentially increase the line's availability.
Leveraging our new distribution agreements and an incredible pipeline of retail stores wanting to carry the product. These efforts are backed by a new consumer awareness marketing engagement and Influencer campaign designed to empower and a firm smokers encouraging them to take control and achieve success.
Our campaigns will support the adult consumer and positively reinforce our efforts and along the way we are optimizing our operations to transition our capacity toward these better margin growth opportunities scale of the <unk> capacity and generate results for our investment in the team driving the deal and ramp.
Success here drive scale margin improvement and ultimately cash positive results in 2024.
With that I'll hand, it back to Jay.
Thanks, John that's really an incredible update and should give everyone listening a clear understanding of the massive amount of activity and line of sight to revenue and our <unk> programs.
I'm excited to say, we're also seeing similar results in our hemp cannabis division.
Starting on slide 17.
<unk> is the market leader in North America for the manufacturing of hemp derived active ingredients finished product servicing the consumer packaged goods nutraceutical and pharmaceutical industries with a global footprint.
Sales of ramped strongly and we believe we'll continue to do so driving to cash positive operations in the first half 'twenty four.
This is driven by key actions in motion.
First we continue to set new records for ingredient volumes and sales delivery quarter after quarter.
Second our new CMO plus distribution model provides a complete vertically integrated solution between 20, <unk> century and brands.
Third our new extraction unit is online.
The new distillate unit is coming online in Q2, putting us on track to replace capacity and recover margins. Following the grass Valley fire last November .
And fourth we're taking several other actions to both ramp up our volume capability and reduce costs to improve profitability such as new contract farming of our own hemp biomass.
Moving to slide 18.
We continue to set new records in ingredient delivery, each quarter and don't see that trend slowing this quarter.
We delivered more than 68000 kilograms of ingredient. This is four times, what GBP delivered in the quarter a year ago and we see continued growth ahead, even beyond this exceptional number.
This has placed us in a dominant position for North America, and our deliberate decision to ensure we maintained all customer deliveries and volumes.
Even though the short term cost store margins was absolutely the right path, especially when the first business interruption insurance is received in Q2 applicable to Q1 gross profit.
And I want to point out again that we're doing this without our in house production facilities. So as our own capacity comes back online those margins will return to positive territory. We can further improve them through our internal optimization efforts already in motion.
On slide 19.
We announced last week, the second of our transformative CMO plus D agreements now encompassing both industry leader cookies, and the well known old tell Brian .
These exclusive license agreements cover branded hemp derived cannabinoid consumer products and accessories.
Second century provide single source integrated production sales and distribution leveraging our industry, leading formulation ingredients in manufacturing infrastructure, plus the company's turnkey sales and distribution platform for a complete go to market solution.
The brand can then focus on customer engagement and marketing, while we provide expansive access to mass market channels urgently seeking new high margin products to meet growing consumer demand.
I continue to think that the market is underappreciated this opportunity as we estimate the combined value of our two agreement signed to date is potentially more than $140 million a significant increase in revenue over the next three years from just the first of these opportunities.
On slide 20.
Making those agreements possible is our industry leading infrastructure.
We believe that as our world class extraction facility in prime those scales. It will displace our third party crude purchases in the market.
For our new distillate facility in Prime Bill will be online this quarter with isolate production capacity to come in either late 'twenty three or very early 2004.
Our new campus approach will increase total capacity efficiency and productivity generating a better capability than our original facilities.
There are 40000 square foot Las Vegas manufacturing site will leverage our vehicle end market sales and distribution teams for the new CMO plus D agreements.
We've also opened new facilities in Europe and acquired RSP in the UK to create a strong footprint for landed ingredient sales and the higher margin European market.
And finally slide 21.
Bringing it all together, we're tracking two exciting growth and a clear path to cash positive operations in the first half of 'twenty four for this business unit.
We will do that by a steady and dedicated focus on operating performance enhancement internalizing and capturing margins across our growing volumes plus.
Plus the new CMO plus D business agreements that significantly scale up our revenue and enable us to capture a greater share of the margin change.
We're augmenting these immediate actions with developments for the future, including path to pharmaceutical sales as new facilities come online and positioning for the future food Nutraceuticals market opportunity once the FDA in Congress establishes the new regulatory pathway.
Is not dependent on this this is all upside.
With that I'll turn it over to Hugh to cover the financials Q.
Thank you, Jim and good morning to everyone.
Starting off on slide 23, with first quarter financial results net sales increased 144% quarter over quarter to $22 million, reflecting the addition of GDP revenue.
Net revenues are expected to increase steadily through 2023.
And by increased <unk> sales growing GBP bulk ingredient revenue and new CMO distribution agreements.
Gross profit is projected to improve significantly in Q2, 2023, reflecting higher margin product mix for tobacco business unit as well as the return of production capabilities, establishing the funding program and new distribution agreements for hemp cannabis.
Moving to slide 24 and.
<unk> revenue for the first quarter remained relatively unchanged at $8 9 million.
With gross profit decreased slightly to 18000.
The planned reallocation of production capacity towards a higher margin product mix, including <unk> and conventional cigarettes.
On slide 25, and canvas revenue for the first quarter grew 85% to 30.
$14 million from $7 million due to continued strong customer demand for bulk ingredient products.
Gross profit decreased to negative $1 2 million, reflecting the impact of the grass Valley fire gross profit will improve immediately in Q2, reflecting our new extraction facility and the return of distillate capabilities.
And gross popular and continue to expand it throughout the year due to the new farming program and return to isolate production in Q4 2023.
On slide 26, you'll see a few key highlights from our balance sheet.
Total assets of more than $124 million includes approximately $51 million of goodwill intangibles from the GBP and Rx pharma Tech acquisitions.
And the balance sheet includes $23 7 million in cash balances, including proceeds recently completed $21 million senior debt facility.
The new credit facility.
<unk> working capital needs, reflecting significant growth in both the BLM and the hemp cannabis business lines.
And it should be noted the company received insurance proceeds of $5 million from the grass Valley fire in Q1 this year.
With additional proceeds of approximately $8 million for business interruption to be received beginning in Q2 2023.
Finally, slide 27, reaffirms our revenue guidance for fiscal year, 2023 of $105 million to $110 million.
Both tobacco and hemp candidates franchises are tracking to cash flow breakeven in fiscal year 2024 reflect strong demand for dealing product.
Canvas bulk ingredients as well as accelerated unit sales from our new distribution agreements.
And with that the operator will now open the call to any questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press thus far followed by the number one on your Touchtone phone you will hear a detailed acknowledging your request if you would.
To withdraw your request please press the star followed by the number itself.
If youre using a speakerphone please.
Handset before pressing any key.
Please note you're allowed to have one question and one follow up Dan will be joined the queue.
One moment. Please for your first question.
First question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning, and thank you for the questions. So first question for me just wanted to start off on VL and.
Thanks to that it looks like you'll be transitioning to more revenue generation for them just to give more color at the shelf resets have an impact there and are you already in place for that for your retailers, you're happy with the shelf space that you're going to be expecting there and then in terms of the revenue growth you will be expecting from tobacco off of that $40 5 million.
Dollars base of last year, it looks like based on the graph it would be about in the low fifty's yourself is that how much of that is driven by BLM versus by the pinnacle. Thank you.
Hey, good morning, Erinn this John .
I can take the question on the shelf right now we're going to be merchandising, yes, everyone that we're going to market with.
Worked into their sets we are part of the merchandising.
A lot of them are truly understood. The story that we're seeing out there about what our brand is about and they want to provide a solution to those.
35 million smokers, who want a solution.
So yes. This is all encompassed within the schematics and again talks about the process.
<unk> talked about the <unk>.
Extensive process the complexity around.
That involves obviously planet grants resets kinetics.
So <unk> will be part of those sets and I guess, you could probably answer the revenue question.
Sure will do.
Just to give you some guidance.
Yes, a significant portion of the income non increases related to BLA.
I'd say.
Probably 60%, 70% of that and the remainder is due to clinical growth.
Okay. Great. Thanks, that's really helpful. And then secondly for me just in terms of the contracts that you have with all Palin cookies strong brands with the THC market now chasing some of the other cannabinoid. So as we think about the $140 million over the three years, how do we think about the timing and the ramping of that and how it.
Might impact the P&L.
One of the reason I ask is because again kind of looking at that top line guidance. It would imply hemp sales again in the low $50 you guys did about $13 million. So that kind of maintains that <unk> 2023 run rate. So not sure. If there was some shipments that might have impacted the timing that benefited the quarter that might not repeat or how to think about that segment going forward. Thank you.
Sure I can take that.
So.
Obviously, we recently signed the agreement there and so the shipments will start in Q3 of this year.
And it increases pretty rapidly.
Yes, the way to think of it as I would say the bulk ingredients are pacing along lastly, you said it might even be a little higher quite frankly.
And we will start layering on the contract revenues.
Yes.
We'll fine tune the production and supply chain cycle.
And then from there ramp the business accordingly, especially with the incremental penetration in our retail stores.
So.
Probably the way to think of that as you know ramping.
Lately in Q3, starting to really ramp significantly on both contracts in Q4, and then I would say I wouldn't call it hitting a steady state because it looks like it will continue ramping.
Meaningfully throughout 2024, and probably hitting a steady state sometime in mid 2024, and rapid steadily but really really big ramp will be in the next two to three quarters for each of those contracts.
Okay, great. Thanks, appreciate the color I'll jump back in the queue.
Thank you. Our next question do we have the <unk> in Asia, but Gd Cohen.
Please go ahead.
Hi, Good morning. This is vikram on for Vivien Asia and thank you for the questions.
So first off with the launch of Pinnacle can you. Please comment on price positioning given the downturn, we're seeing use cigarettes. Thank you.
Okay.
Yes.
<unk> discussed on the call Pinnacle's is.
Brand for one of our chains.
And they're pricing it.
I would say probably the.
The best positioned as they like.
Probably around Lucky strike.
It seems to be in terms of that in terms of there.
Pricing strategy on that product that's super premium tier.
But.
Great around that position.
Great. Thank you and then can you provide an update on the <unk> launch in the states, so youre getting ready for our last quarter, namely, Arizona, New Mexico and Utah.
Correct as we continue to roll the product out.
Continue to refine the plans.
We had the product in Illinois, and Colorado, we continue to make progress in those states.
Certainly still on the radar moving forward with all of those.
Specifically those three states are part of the 18 priority states that we're going to continue to ramp.
And we are continuing to see obviously the retailer.
Demand for that.
Moving forward part of Aaron's question really it was very good because when you look at sort of some of the complexity around getting into the stores. It has been about timing.
We are subject to resets to matic changes planning grams.
All of that is part of the discussions we're having with these major retailers in those states. So it continues and we feel we are on track to be exactly where we said we would be in those 18 states and property to others.
Great. Thank you I'll hop back in.
Thank you.
Okay.
Next question, we have Alex Fuhrman with Craig Hallum Capital. Please go ahead.
Yeah.
Hey, guys. Thanks for taking my question wanted to ask about as you expand into more states. What have you seen in terms of the mix of menthol.
And as you think about expanding to date that you have.
Statewide or local city bans on menthol, how has your marketing strategy going to be different.
Good question Alex.
We saw a 2022 and menthol still represented about 30, 35% of the market.
Obviously, when you have states like California, and quite honestly some of the other local bands I think ethane on our last call. We talked about over 100 initiatives were in place in the state to ban menthol flavors and things like that.
Certainly, it's having an impact on the category.
In terms of mix for US are menthol has always either been right at the market level or maybe slightly higher.
Which is pretty normal I think for a new product like this.
We're continuing to monitor it.
And then you work through it.
We certainly have put some things in place.
Try to position <unk> as it should be which is a solution for menthol smokers one of the biggest issues. When you ban menthol. It doesn't mean menthol smokers stop smoking.
50% to 60% of those smokers just transitioned to another product. So we're getting the case out.
In front of the legislative bodies. So we're looking at this as saying why is the LNG solution not only on the federal level, but we know it's also important on the state levels.
So again working within these but these in California, where were definitely moving into.
Dave ban menthol.
There is still a need for the Zealand solution.
That's great. That's really helpful. Thank you and then can you comment on now that you've been in more states that have preferential tax treatment for <unk> and are you seeing any kind of different in velocity or profits for you or the retailers.
Well were definitely utilizing.
And it's different by state it depends on the state on how the retailer wants to utilize and how we position the product.
Initially in Colorado, we positioned it at par with.
Marlboro mainline.
We started working with circle, K, and smoker friendly and Colorado and some different pricing strategies.
So were sometimes using that money now to get.
You get better initial introductory offer is something that to consumers. We're also testing some things in Chicago with circle K to where we're actually getting the price.
With circle K support about what does it look like in Chicago.
If they were to remove an attack against <unk> products now and getting a test going on that so we're actually it's giving us some ability to be flexible to giving us the ability to try different things.
It's getting the message out not only about the product, but also about how do we get people to try it.
Repeat purchase things like that.
Okay, Great. That's really helpful. Thank you.
Thank you. Your next question will be half, Brian White with Broadcom to Pam.
If you wish to ask a question. Please press star one.
Thanks, Good morning.
I understand a little bit more about the comment about the.
Processing being.
Did I hear that right on the distillate in the fourth quarter. So just wanted to kind of understand.
Now, what's going to drive that incremental gross margin improvement and then <unk> in the second and third quarter and what are those steps.
Aware of.
Sure Ken.
Take that one SKU and maybe chime in with the details, but thanks for the question Brian .
Just to refresh everyone's memory right now, we're purchasing and reselling, both the distillate and isolate.
The first big impact on margin improvement will come as now our new World scale extraction unit is online and operating well continue to ramp that up so that makes a big impact on margin improvement.
The rebuild of the distillate facility now moving very quickly in Prime Bill that comes online in Q2, so that relieves any of the purchase resale we go internal again.
We continue to see margin improvement dramatic margin improvement on top of that especially now fed by our own extraction crude material.
And then we've been expediting.
Bringing the new isolate facility online.
We had put a stake in the ground for Q1 of 'twenty four.
We see pathways with pulling that forward and we're executing on that it's not definitive yet, but I do think we have a good opportunity to get that fully operational by the end of the year, which will further improve margin. So the margin improvement is stacked as we get into Q2 now with the extraction and.
Distillate.
And then into Q4 Q1 on the isolate.
Time for at least Q1 and Q2, the business interruption insurance heavily impacts.
Yes.
Financials.
It's a bit retroactive because.
Q1 sales are covered by.
Insurance that we're receiving now in Q2.
Great. Thank you.
Just wanted to understand that you had made some comments about.
Some cost efficiencies and some reductions in gist.
Was that just your staff or where their broader kind of actions and just any kind of.
Quantification on kind of.
Efficiencies there.
Yes, it's more of a constant process across all the functions all the business units both business units.
We're looking for every opportunity to control our costs in a very disciplined manner.
Making every attempt to make sure every dollar goes towards our our single go which is operating profitability. So it cuts into every function has touched into every location.
And it takes it takes many different forms whether it's.
Attritional loss that were not back filling.
Taking a proactive measures on.
On the SG&A basis.
On Capex programs et cetera. So every dollar spent.
Is under very high scrutiny for both myself, and Hugh and and John and others. They are functional leaders, whether it's innovation et cetera. So we're looking for every way to control our costs, we know theres not an endless stream of capital out there, especially in today's market.
Our intent is to.
Drive this towards operating profit.
With no further dilution, so I'd say all hands.
<unk>.
On a on a weekly basis to make sure every dollar is being maximized.
Great. Thanks, and then just just just one last one if I could.
The <unk> sales, but I think youre going to be pretty significant and as far as the overall tobacco business and just like if you thought about like timing as far as when you think youll start officially kind of breaking out those those sales.
Yes, I think that's probably a very good question Brian .
I think we prefer to kind of get it until a little bit more of a steady state to such a significant incremental ramp for <unk>.
Over the next two to three quarters sequentially. It's probably yes. There is there is.
Theres thought that we'd probably start breaking out separately sometime Q.
Q3, Q2, Q3 next year.
Okay, great. Thank you so much.
Yeah.
Again, ladies and gentlemen, Nancy want to re prompt for questions. Please press star one.
Question that we have Jim Mcilroy Dawson James Please go ahead.
Yes, Thank you and good morning.
So.
In Q1, you did 68000 kilograms of bulk ingredients once you get.
All of your.
Reconstruction and construction plans completed.
What will be the bulk ingredient capacity relative to the Q1 levels are you just replacing what <unk> been buying online or is it going to be replacing and adding.
Yes, I can take that Tim.
We'll have the capacity once we have all of our.
Sure.
Yes disciplined.
Like capabilities include Abbott cream extraction capability online.
Equal to up to that and of course, a lot of it's incremental we can always keep layering on it think about capacity going forward, but we will have.
Yes.
<unk>.
Is that first quarter and probably five times as much as we wanted to on a run rate basis.
Okay. That's helpful. Thank you and.
Can you.
Can you help.
We understand what gross margin.
You think you will exit 2023, and 2024 App for both the <unk> and the tobacco business.
Yes, I'd say for hemp tobacco 2023, and so much of its weighted towards the back end as far as margin expansion for the reasons Jim had mentioned.
Yeah.
That probably is somewhere in the high single digits again, if you take fourth quarter run rate that much.
Much higher.
Out of 2024.
And because of that full year benefit of return of all our <unk>.
Function capacity.
Not to mention the farming program, which caps that per unit raw material costs, which are significant.
And the flight.
Solidly in the flavors that possibly moving towards 30%.
And then back out.
<unk> thousand <unk>.
<unk> again.
Because we're ramping up the line and it's happening.
Yes.
Q2, and in the second half of the year.
Got that.
That plus the fact that that pinnacle and other.
Tobacco products that are higher margin than say just disruptive cigars.
Margin will still expand to 20% and then.
Can it be much higher than that go into that in play for us the weighted average.
The majority of the weighted average sales are going to be geared towards <unk>.
Understood great. Thank you.
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