Shopify Inc.

Q4 2022 Earnings Conference Call


spk03: Good morning, ladies and gentlemen. My name is Sylvie, and I will be your conference operator today. Welcome to Bizan Limited's fourth quarter and full year 2022 conference call. To ensure an enjoyable experience for all participants, all lines have been placed on mute. Following the presentation, we will open the call for questions. If you would like to ask a question, simply press star then number one. And if you would like to withdraw your question, please press star then two. Note that this call is being recorded on Monday, May 1st, 2023. And I would like to turn the conference over to Mr. Matt Millich, Chief Executive Officer. Please go ahead,
spk01: sir. Thank you, Sylvie. Good morning, and thank you all for joining us for our Q4 and full year 2022 conference call. Today, we will provide comments on our performance as well as an update on our operations and outlook. This call is being recorded and the audio recording will be available on the company website at Joining me on the call this morning is Sean Bovington, our Chief Financial Officer. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MDNA for more information on these assumptions and factors. With that, I will now turn to the financial results and our outlook going forward. Fiscal 2022 was a transformational year that has laid a foundation for the years ahead. The XAMP transaction that was completed in November 2022 has ushered in a new chapter in the company's history. The enhanced scale expands revenue generation opportunities while also serving to reduce operating costs. The integration is nearly complete and we have been pleased with the results to date. We have seen revenues grow materially and have crystallized the expected cost savings. As of December 2022, the XAMP increased its recreational market share to .7% compared with .4% in December 2021. And has since surpassed 5% market share, making XAMP the sixth largest producer in Canada by share. The Q4 results were negatively impacted by one-time restructuring costs related to the XAMP transaction, as well as certain year-end provisions and revaluations. We expect to see the investment thesis come to fruition in the quarters ahead as the streamlined operations serve to decrease costs and increase margins. When paired with the substantially increased revenue resulting from the enhanced product suite and distribution synergies, we believe that our objective for positive adjusted EBITDA and free cash flow in fiscal 2023 remains intact. In fact, Q1 2023 has already demonstrated solid performance with approximately $24 million in net revenue booked, representing nearly 40% growth from Q4 2022. Capital efficiency remains at the forefront of our strategic initiatives. During the year, management completed a comprehensive review of operations to reduce costs and identify revenue generation opportunities. Initiatives taken in 2022 include right-sizing headcount, minimizing reliance on third-party service providers, and monetizing redundant assets. During 2022, we were pleased to complete all necessary steps to obtain EU GMT certification with final approval now pending. The company has established strategic distribution partnerships for cannabis-derived medical products, and upon receiving final approval, we'll be able to execute on these relationships. With that, I will now hand the call over to Sean to take you through the Q4 financial results. Following this, we will give some brief comments on the outlook for 2023 before taking questions.
spk04: Thank you, Matt. Good morning, everyone. So with that, just going through some of the financial results, starting off with our gross revenue, which for the three months ended December 31, 2022, was $24.8 million, an increase of 100% compared to the same period in the prior year of $12.4 million. Quarterly net revenues for the fourth quarter increased by 82% -over-year to $17.2 million. This strong growth was driven by an increased demand for our core SKUs, the introduction of new products, and enhanced distribution channels. Of note, excluding the impact of the Bazaam acquisition from November 3, P-Gods brands' gross and net quarterly revenues increased by 28% and 21% respectively -over-year. This underscores the value of combining the two growing companies with significant momentum and complementary revenue basis. The company's direct gross loss before changes in fair value of biological assets for Q4 2022 was $2.7 million, representing a 15% direct gross loss margin. This loss was primarily driven, however, by non-cash adjustments for inventory provisions and depreciation. Normalized direct gross profit, excluding these provisions, was $3.5 million for the quarter, or 20%. This growth profit margin is expected to increase in 2023 as we increase capacity utilization and eliminate overheads connected to the redundant facilities that are currently held for sale. Cost control, as Matt mentioned, is a key focus for the company. Our team completed rigorous operational review during the year and strides have been made across the company to improve profitability. Notably, in fiscal 2022, the adjusted SG&A was reduced to 57% of sales from 80% of sales in 2021. And this continues to decrease as a percentage of sales in 2023. This was the result of rationalizing headcount, transitioning to a dedicated in-house salesforce team, and renegotiating our service level agreements with our vendors. The company ended the year with a net working capital position of $45.4 million, an increase of 77% from December 2021. The increase from prior year was supported by the inclusion of the exam current assets, allowing fuller utilization of our existing revolving credit facility. We expect the company's liquidity position to be further enhanced as the assets held for sale are monetized in the year ahead. This stable capital position provides a platform to execute on opportunities, which we are seeing throughout the cannabis sector. With that, I'll pass it over to Matt again to discuss the outlook.
spk01: Thanks, Sean. Before we move on to the Q&A, we would like to discuss the year ahead. The adult use cannabis market saw strong growth year over year with consumers spending $4.5 billion on products in 2022, nearly 18% increase from the prior year. And Statista is calling for another year of growth in 2023, with sales expected to grow by another 16% to $5.2 billion. The XAM is well positioned to take advantage of the growing adult use market. The company has doubled its portfolio of recognized brands to access a broader range of consumers. And 2023 is off to a strong start with quarterly net revenue expected to increase by nearly 40% from Q4 2022, reflecting the full quarter impact of the BASAM transaction and demonstrating the company's continued progress and growth. As I mentioned earlier on the call, a comprehensive operational review completed last year identified several opportunities to enhance revenue generation and streamline operations. This is outlined in detail in the NDNA. Some of these top initiatives include right-sizing the cultivation and manufacturing footprint to operate at higher capacity and thereby improve overhead absorption and increase profitability. In this regard, the company has exited the Valley Field facility, commencing hash production in the smaller Vaudroy facility in Quebec, and committed to sell the Maple Ridge and Poussinch assets. In addition, the company has developed a national operations strategy to improve efficiencies across all facilities, including building out a consolidated in-house sales team and optimizing freight by aggregation of shipments. And finally, the company has executed on procurement strategies achieved through the enhanced scale post-merger, resulting in improved purchasing and negotiating power. Our team has been hard at work building a company with a solid foundation for long-term value creation. We are committed to consistent improvements in product quality and efficiency of operations, using this as a guide for capital allocation decisions. We are very much looking forward to the opportunities in the year ahead. I would like to thank our employees for their dedication and hard work. I would also like to thank our shareholders for their continued support. With that, Sylvie, we are ready to take questions.
spk03: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you do have a question, please press star followed by 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions are pulled in the order they are received. And if you are on a speakerphone, please lift the handset before pressing any keys. And your first question will be for Noel Atkinson at Clara Securities. Please go ahead.
spk02: Hi, good morning, Matt and Sean. Nice to see the revenues accelerating into Q1. Nice to see that you guys have finished your integration already. First off, on that point, can you just refresh our memory on what is the dollar amount of cost savings that you folks have been able to crystallize? And now that the integration is complete, are you able to see all of that show up in the Q2 numbers? Or does it still take until later in the year to start seeing the full impact of the cost savings?
spk01: Sean, you want to take that one?
spk04: Certainly, yeah. So the majority of the cost savings have been achieved in that Q4 and the early part of Q1, roughly almost $10 million of annualized cost savings. As we crystallize the sale of Maple Ridge and Puslinches, as Matt mentioned, that removes some additional overhead. So we do feel there will be another half a million to a million dollars worth of savings still to come. So certainly in Q1, you'll see an impact on all the work that was done in Q4. But in Q2, absolutely we should see by far the vast majority of the impact of that. And that leads towards that positive EBITDA, that is one of our main goals.
spk02: Okay, great. And then also, given the strong organic growth that you seem to be seeing, can you give us a little bit, for Q1, can you give us a sense of where you're seeing the impact? And seeing the strength in terms of geographies and product lines, that would be great.
spk01: Well, it's a great question, Noel. In fact, we're seeing the strength where we had hoped to see it originally going into the merger. So, for example, we're seeing, we're having more success with some of the Teegot and Highly Dutch brands in the West. We've had success getting some new SKUs into Quebec. And really, we're sort of seeing it across the board. And certainly, we're really pleased with sort of the continued strength and growth of the Teegot and the Highly Dutch brands.
spk02: Great. All right, that's all for me. Thanks very much.
spk03: Thank you. Once again, ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by 1 on your touch-down phone. And your next question will be from Justin Dietrich at West Corp. Please go ahead.
spk00: Hi, I'm curious what is going to remain with the Galaxy brands. It says you're selling some of it. Are you going to retain the wild gummies? And how are those selling? I'm here in Los Angeles, and they're very wildly popular, as one might say. How are they doing in Canada, and are you going to keep the rights to those?
spk01: Good question. So largely, well, let's start with wild. Wild's terrific. The product's terrific. The brand's terrific. Working with the folks, the team from the US has been a lot of fun. We've managed to migrate all the gummy production to a facility in British Columbia, where I think we're doing even better and we're having even more success on the manufacturing side. So yeah, the plan there is to continue going forward, and everyone's in alignment there. For the Galaxy brands themselves and the original Galaxy facility, that's sort of all being phased out.
spk04: So that would be the Cruzee brands, because with the Bazaam having infused pre-rolls, and T. Gott, highly Dutch, introduced an introduction of hash-infused pre-rolls. It's just rationalizing that skew and variability and being able to incorporate the type of products that Cruzee has into Ness and the highly Dutch flower brands and pre-rolls already.
spk00: Thank you.
spk03: Thank you. And at this time, gentlemen, it appears that we have no other questions. Please proceed with closing remarks.
spk01: Thank you, Sylvie. I just want to thank everybody for joining us. And as we said, we're looking forward to 2023 being a very exciting year for the new combined company.
spk03: Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.

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