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spk02: Good morning everyone and welcome to the Entourage Health Corps second quarter 2023 results conference call. At this time, participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity for analysts and members of the media to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. A replay of this call will be available on the Entourage Health website later today and will remain posted for the next 90 days. I would now like to turn the conference over to Catherine Flamin, Director of Communications with Entourage Health. Please go ahead, Catherine.
spk01: Thank you, Arielle, and good morning, everyone. Welcome to Entourage Health's second quarter 2023 results conference call. Please note this call is being recorded. For copies of our press release and supporting documents filed on August 29th, 2023, or to retrieve a recording of this call, please visit the investor relations page for our website at entouragehealthcorp.com. The replay will be available later this afternoon. With us on our call today, George Scorsese, Chief Executive Officer and Executive Chair of Entourage Health, and Bonnie Marogi, the Chief Financial Officer. Today, we will review the business highlights and financial results for our second quarter, as well as discuss recent developments. Following formal remarks, we will open the floor for questions. I would also like to remind everyone that during today's call, we will discuss our business outlook, which will contain certain forward-looking statements. Actual events or results could differ materially from those expressed or implied by such forward-looking statements due to several risks and uncertainties. including those mentioned in our most recent filings with CDAR. These comments are made based on predictions and expectations as of today. Other than as required by social security laws, the company does not assume any obligation to update or revise them to reflect new events or circumstances. Now, at this time, it is my pleasure to introduce George Scorsese, Entourage Health CEO and Executive Chair. George, please go ahead.
spk05: Thank you to everyone joining us this morning. Once again, it is my pleasure to be with you today and here's to hoping you're having a wonderful summer. Before delving into our recent performance, I want to share a high level mid-year market update, aligning our strategic stance and progress. As we are all aware, the initial months of this year were marked by unparalleled challenges. The external landscape grappled with elevated inflation and deceleration in the global growth that rippled across industries. Concurrently, our sector faced its unique challenges with heightened competition, pricing pressures, and surplus supply. However, as we enter the later half of the year, Entourage stands strong with a promising narrative Our strategy has weathered the storm, aligned effectively amidst inflationary trends and operational complexities, and we are starting to see the market turn. This is where I want to begin this Entourage recap and journey with our messaging today. In the later part of 2022, we initiated our business transformation plan, recognizing the necessity to pivot. After careful consideration, we determined that collaborating with a reputable third-party supplier was the optimal path forward. The tangible benefits of our growth strategy are progressively taking shape, evidenced by reduced expenses, notable enhancements in our gross margin, and an upswing in our cash performance. This meticulous and comprehensive approach is directing us toward a more streamlined and effective operation. Envisioning an annualized cost savings exceeding $10 million represents a cautious estimate, underscoring the prospect of achieving even more substantial advantages. The second quarter positioned us strongly, expanding on this. I would like to briefly highlight some of our financial accomplishments, a topic that Vani will delve into more comprehensively in just a moment. Our enhanced gross margin is evidence of our ability to maximize the value of each revenue dollar by eliminating expenditures wherever possible and fine-tuning processes. We are not only effectively managing costs, but have also achieved remarkable gross margin of 21% in Q2 2023. This is a significant leap from 5% recorded in Q2 2022. Notably, our cost of goods, our COGS, has exhibited a steady decline, surpassing $1 million in savings. While our strategic efforts in streamlining selling, general and administrative expenses has resulted in a substantial 13% reduction. Alongside these accomplishments, our EBITDA has seen a 28% improvement. Our fiscal understanding is mirrored in the vitality of our cash performance. The cost reduction measures have orchestrated an improved cash flow and undeniable gauge of financial stability. This is pivotal in fulfilling our commitments and seizing opportunities. Additionally, we orchestrated significant enhancements to our capital structure, debt management, and liquidity position throughout the quarter. Our valued partner Leuna Pension Fund supported the company with a further $14.6 million in repayment of the remaining balance of our BMO loan after the sale of the Strathroy facility. These early outcomes are a testament to the collective dedication of the team and our unwavering commitment to fiscal responsibilities. As we witness the benefits, we have an opportunity to ensure a secure and thriving future for our business in the cannabis industry. Now, let's move on to our commercial objectives. Again, although we're seeing shortfalls in the industry, the cannabis market is showing a positive trajectory. In fact, by 2027, the Canadian cannabis industry is expected to be worth $8.8 billion, with the biggest markets being Ontario and Alberta. Ontario is a particular province of opportunity as it is also expected to lead growth in 2023 with a provincial compound annual growth rate of over 20%. Let's dive into this more and how we are responding to this market growth. First up, The adult use market. While we have a diverse portfolio of products, we noted early in the year that premium flower and pre-roll market segments are the two fastest growing segments. In fact, our overall pre-market alone increased 45% year over year. This is outstanding. Our pre-roll sales accounted for 65% of our adult use total revenue. We stand steady at market share of 3% overall. Our color pre-rolls are a top five brand across Canada. This demonstrates a strong demand for and popularity of our pre-roll offerings, solidifying our position as a leading player in this category and market. In response to our budget-conscious consumers, we have recently unveiled Dimebag branded pre-rolls, just released last week, and we're already making a splash across Ontario. These new additions are strategically designed to enhance the existing offerings of colour and Saturday cannabis brands, further enriching the company's growing product line. Our partnership with our third-party supplier contract coupled with our premium production are poised to satisfy the surging demand for our brands, facilitating growth in the Canadian marketplace. Our pre-roll success has been fueling our distribution drive, producing over 1.4 million pre-rolls monthly, well on our way to our target of 2 million. Now, I want to take a pause here to make something very clear. We pride ourselves on producing quality products. It is important to emphasize our dedication to consumer research. Our continuous commitment to enhancing product quality through data evaluation and market analysis reflects the strong demand for our offerings, our relentless pursuit, and further supporting by valuable insights gained from consumer data points and recent reviews. Notably, a recent lit research partnership gathered customer reviews and highlighted an impressive 80% average approval rating for the quality, taste, aroma, and overall experience of some of our leading cultivars, underscoring the impact of our focus on consumer preferences and satisfaction. Having established brand loyalty in the market, we are now capitalizing on this opportunity as our color cannabis and Saturday cannabis products flourish, adorning the shelves of over 2,100 stores across Canada. Turning our attention to the medical segment, we experienced the anticipated seasonal decline in sales from Q2 to Q1. However, our efforts in customer patient acquisition and renewal have shown growth, supported by our extensive portfolio of 45-plus products, including novel cannabinoid profiles such as CBG and CBN. Additionally, we are excited about our upcoming collaboration with Remedos, introducing a line of controlled delivery inhaler products to the medical market. Q2 marked a milestone for the company with a seamless sale, execution and fulfillment of its first international order, an impressive 100 kilograms of bulk medicinal cannabis dispatched to Australia through a partnership with Life Australia. Four of the company's premium strains will now be available to medicinal cannabis patients through life, cementing our global market presence and accelerating our strategic growth agenda, as well as our international expansion. For us to provide safe, reputable, high-quality cannabis products, we continue to put the consumer and patient at the center of everything we do by ensuring we understand them. In addition to this data-driven approach, our innovative pipeline provides the right products for the market at the right time. Before passing it over to Vani, a brief recap. Entourage's growth journey remains steady. Our strategic blueprint for 2023 and beyond focuses on margin amplification, revenue growth, and pioneering product innovation. With that, I conclude my opening remarks. I will now turn it over to Vani, our CFO, to provide an overview of our financial performance for the period.
spk03: Good morning, everyone. Thank you, George, and thank you to everyone joining us in our call this morning. Please note that for the course of my financial discussion today, all financial information is prepared in accordance with international financial reporting standards and is in Canadian dollars unless otherwise stipulated. Our first half of 2023 has been focused on our transformational initiatives as highlighted in our MD&A. The good news is that we continue to see these efforts pay off in our financial results. During the three and six months ended June 30th, 2023, we completed the divestiture of our cultivation operations, consummated the centralization of all debt under one lender, and implemented further automation initiatives at our Elmer facility. These initiatives resulted in the reduction of our cost of goods sold and more importantly, our cash burn. In fact, whereas in Q2 2022, the company used $9.8 million to fund operating activities, in Q2 2023, our operating usage was 5.4 million, representing a 45% improvement. Cash preservation, while meeting quality and order timing, remains our focus through the second half of 2023 as we ride the momentum of our success through the first half of the year. To begin, our second quarter total revenue increased slightly by 0.2 million or 1.4% to 13.4 million compared to the same quarter in 2022. Net revenue, which is revenue less excise duty, increased by 0.5 million or 5% to 10.2 million compared to the same quarter in 2022. On a consecutive basis, total revenue decreased by 1.7 million or 11% compared to Q1 2023, consistent with seasonality experienced in prior years. Our year-over-year net revenue growth was largely driven by the adult use channel growth of 0.4 million, or 8%, and our international bulk sale contribution of 0.2 million, slightly offset by lower medical channel contribution of 0.2 million, or a 4% decline. The growth in adult use was due to our pre-roll sales. Lower medical revenue reflects an updated product allocation policy, which we expect to smooth out over the course of the fiscal period. Our total net revenue was flat for the six months ended June 30th, 2023, compared to the same period of the prior year. For the six months ended June 30th, 2023, our average selling price per gram after excise duties was $2.70 per gram. reflecting an increase of 27 cents or 11%, largely due to international bulk sale price growth, which contributed an incremental $2.05, as well as a 12 cent growth in adult use due to mix. These were slightly offset by the medical business selling price decreasing by 46 cents per gram due to higher discounts and promotions. We continue to expect our average selling price on an aggregate basis to remain stable or to improve over time as we introduce more premium innovations and formats, and as we explore the opportunities with our international bulk sales. Gross profit before changes in fair value was $2.2 million for the three months ended June 30th, 2023. compared to a gross profit of 0.5 million for the same period in 2022, which is an increase of 354%, whereas the same metric for the six months ended June 30th, 2023 reflected growth of 1.9 million or 60%. This change is the result of our reduction in cost of goods sold driven by the transformational initiatives as follows. To begin, Whereas our pre-cultivation divestiture cost of biomass input trended around $2 per gram and was mostly internally sourced, for the three months ended June 30th, 2023, 62% of biomass used was externally sourced at 65 cents per gram, and only 36% of grams were sourced internally at a rate of $1.94 per gram. this improvement has reduced the cost of our product substantially. Secondly, while we continue to pursue initiatives aimed at reducing our temp labor, our overall labor costs have decreased by 1.4 million, or 46%, while our daily pre-roll production has increased due to our pre-roll machine investments. This result was simply not possible without the perseverance and efforts of our production team in Elmer. From an SG&A perspective, Q2 2023 total SG&A was lower than Q2 2022 by $1 million, or 13%, and 0.3 million, or 2%, for the six months ended June 30th. The reduction was largely due to restructuring initiatives undertaken, such as reducing headcount, subletting certain office spaces, rethinking consulting work, and trying to drive value from every dollar we spent. Turning to our balance sheet, we ended the second quarter with cash and cash equivalents of $9.4 million, consistent with December 31, 2022. In each of these calls, I mentioned our sustained effort to improve our capital structure, and this quarter is no different. During the quarter, we paid down our debt to BMO using proceeds obtained from the sale of the Strathroy facility. The remaining balance of the debt was then assumed by LPS, creating a more streamlined debt structure for the company. This provides us the runway for the company to continue to recover and to build on the success of the last six months. All in all, financial results of the quarter are strong, despite virulent market conditions. Our focus on cash preservation, operational efficiency, and consumer needs will keep us afloat as we continue to weather market conditions. With that, I'll turn the call back to George for closing.
spk04: Thank you, Bonnie. Before we transition into our Q&A session, I'd like to leave you with a final reflection.
spk05: The year ahead will be a crucible for companies, separating those who exit the industry from those who rise as exceptional operators. Those who survive will operate with unwavering determination, resilience, and a resolute focus on value. The future leaders of cannabis will capitalize on the market share vacated by our less fortunate counterparts. This perspective aligns with our positive outlook. The sector has emerged from its downward spiral and is now presenting itself with an opportunity. Entourage, I believe, is primed to ride the wave of the next growth phase, instilling a fresh confidence in the future of Canada's cannabis industry for both the consumer, patient, and our shareholders. With that sentiment, I pass it over to Catherine to guide us through the Q&A session.
spk00: Thank you, George.
spk02: Certainly. Analysts and members of the media who wish to ask a question may press star, then 1 on their touchtone phone. You will hear a tone to indicate you're in the queue. If you're using a speakerphone, please pick up your handset before pressing any keys. If you wish to remove yourself from the question queue, please press star, then 2. Once again, to join the question queue, please press star then 1 now.
spk00: To join the question queue, please press star then 1.
spk02: This concludes the question and answer session. I would like to turn the conference back over to Mr. George Scorsese CEO of Entourage Health for any closing remarks.
spk04: Thank you all again for joining us on today's call and for your continued support and confidence.
spk05: We look forward to sharing our progress with you in Q3 as we grow and evolve further into 2023. If you have any further questions, please reach out to Catherine and our investor relations team. Stay healthy, safe, and continue enjoying the last few days of this summer. Thank you and have a great day.
spk02: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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