Auxly Cannabis Group Inc.

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to Oxley Cannabis Group's Q2 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, There will be a question and answer session from the company's analysts. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Ms. Cannon, you may now begin your conference.

Thank you, Operator, and good morning, everyone. Thank you for joining us for OxyCannabis Group's second quarter 2021 financial results conference call. A replay of this call will be archived on the investor relations section of Oxy's website. We will start the call with a presentation and corporate update by our CEO, Hugo Alves, followed by a recap of our second quarter results by our CFO, Brian Schmidt, before opening the floor to questions from our financial analysts. I encourage you to follow along with the presentation slides, which are posted on our website under the investor section under presentation. Before I turn the call over to Hugo, I'd like to remind everyone that our discussion today includes forward-looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from the views expressed today. Management can give no assurance that any forward-looking statement will prove to be correct. Forward-looking statements during this call speak only as the original date of this call, and we undertake no obligation to update or revise any of these statements except as required by applicable law. Management refers you to the cautionary statement and risk factors included in OXLU's disclosures. I note that all references on this call are to Canadian dollars unless otherwise stated. And with that, I'll turn it over to Hugo Alves.

Well, thank you, Julie. And good morning, everyone. I'm delighted to welcome you all to Oxley's inaugural earnings call. And we're very excited to host you for this call and share with you the results of what has been a record quarter for Oxley across revenue, adjusted EBITDA, and market share. So let's get started. I will be using the slide deck as a reference tool here. And with that, I would turn you to page six of the presentation. And I thought that it would be helpful to really start by grounding everyone in the five strategic objectives that Oxley is trying to accomplish during calendar year 2021 and how those were advanced during Q2. So in 2021, to recap, Oxley is focused on maintaining leadership in the 2.0 product segments, building to leadership in dried flower and pre-rolls, what's known as the 1.0 product segment, becoming a top five licensed producer by national share of market, improving our margins and revenue with low to no overhead growth, and achieving positive adjusted EBITDA by year end. And I am very happy to report that we made substantial advances in Q2 towards achieving each of those objectives. In terms of 2.0 market leadership, we continue to be the number one 2.0 company in the country with 15.4% share of total 2.0 market. And we continue to extend our leadership in the vapor segment with 23.4% share of market in Q2, a percentage that continues to increase month over month. For reference, we finished the month of June in Q2 with 25.6 share of market. We're also very excited about the progress that we've made in dried flower and pre-rolls. By leveraging our core capabilities of insights, innovation, branding, and route-to-market excellence, we've quickly established one of the most efficient flower portfolios in the market. The test SKUs that we've launched under both CoLab Project and Back40 Brands have enjoyed fantastic consumer success. And now that we've launched an expanded flower portfolio nationally, with additions to both the CoLab project and BAC40 brand portfolios, and of course our much anticipated BAC4040's pre-roll launch in Ontario last week, we should really start to feel the impact of those SKUs on our earnings in Q3. We are not yet a top five licensed producer, but we continue to move in the right direction. In 18 short months since the start of our commercial operations, we have risen to the number seventh ranked LP by overall recreational cannabis market share and finishing the quarter with 4.9% share of overall market. Importantly, we finished the quarter in the month of June with 5.4% share of overall market and moved into the number six spot overall. Our goal is to be in the 7% to 9% share of market range by end of the year and consolidation notwithstanding, we believe that that will be sufficient for us to achieve our strategic target of being in the top five. Brian Schmidt, our CFO, is going to give you more color on the financial metrics later in the presentation, but we continue to improve the cash flows of the company. We significantly improved net revenues from recreational cannabis sales to $21 million, improved our margins to 38%, and we continue to be laser-focused on cost optimization on a number of fronts, reducing the cost of goods through automation, optimizing supply chain efficiency, and of course, eliminating all non-value-adding costs. We're working hard to contain costs and most importantly, focus our spending on the capabilities and activities that are most impactful. And hand in hand with the continuing improvement in revenue and cost, we've also made significant improvements in our adjusted EBITDA. We finished Q2 with an adjusted EBITDA loss of $3.3 million, a significant improvement over both Q2 2020 and Q1 2021. So we are getting close to our positive adjusted EBITDA target, and we believe that we're on track to achieve this objective by calendar year end. So with that high-level overview in mind, I'm going to turn us to page 8 of the presentation. As already stated, we remain the number one LP in the 2.0 product segment with 15.4% of total 2.0 market. And it's worth noting that we have beat out much larger competitors, maintain leadership and continue to expand market share organically and not through consolidation. And we've done this by having a focused strategy and investing heavily in the capabilities that we believe are necessary to win in the consumer market. And because of that focus and strategy and because of the complementary and reinforcing capabilities that we've developed, we've seen our market share continually increase. It's already stated we finished the quarter with 5.4% share of market, moving us into the number six spot overall, and we believe if we hit our target of between 7% and 9% share of market by end of the year, that we will be able to move into the top five. Moving us to slide nine, this slide is really to give you an idea of how we're performing across our key categories, and also to help set some baselines for you to consider moving forward. So as you'll note here, we rank very highly in vapes and edibles, the formats that we've been in the longest. Moving us to concentrates, at the beginning of the year, we resolved to test launch into concentrates as we viewed it as an attractive growth category among certain consumer segments that we target with our brands. And we're very pleased with the results of our tests. We think we've gotten a value proposition for our CoLab consumers spot on. Our CoLab Project Diamond product was launched to universal consumer acclaim and has quickly propelled us to the number five spot nationally in concentrates, and that's with just one SKU. So you can expect to see us launch some exciting new innovations in this category over the balance of the year as we try to push deeper into this category. And of course, dried flower and pre-rolls where we're just getting started. And these numbers are really ended here as more of a baseline to enable you to see how our market share improves in these formats over the balance of calendar year 2021. You know, I would point you in particular to our pre-roll market share, which we expect to jump significantly over the balance of the year. One final point before I leave this slide is about our continued focus on driving distribution for our portfolio. We work tirelessly with our distributor, Kindred, every single day to increase the breadth and depth of our distribution, both in terms of total number of stores and number of SKUs within each store. And over the quarter, our products are now sold in approximately 2,000 retail locations across the country, representing approximately 92.5% of all retail locations across Canada, excluding Quebec. And that growth in the quarter represented a quarter-over-quarter increase of about 28% in distribution. Moving us to slide 10, I'm not going to dwell here, as most of you are familiar with this data, but what the data here underlines is some of our confidence in our ability to continue capturing market share. So on the left hand of the slide, what it shows is we really believe that our leadership in the 2.0 segment will result in material share of market gains over the course of the next three to four years as the 2.0 market continues to become an increasingly larger part of the overall market. And then, of course, now that we are building a portfolio of dried flower and pre-roll products, we're also very well positioned to address the 1.0 segment, which still accounts for over 70% of markets. Okay, so moving us along, I'm going to wrap things up here for my portion of the presentation by giving you a very high-level overview of our brand performance and our innovation pipeline for the balance of 2021. So I'm going to turn your attention to slide 12. As some of you may know, one of our key aspirations at Oxley is to build brands that our consumers love and trust. Our brands are targeted at specific consumer segments, and then we work very hard to stay close to our targeted consumers, build authentic connections with them through our brands, and then evolve our brands as our consumers evolve in order to maintain that connection. As I've already stated, consumer understanding is a core capability that we've invested heavily in. While we do use a variety of agencies and services for data and consumer research, We've also invested heavily in bringing key insights and data analysis functions in-house so that we are always keenly focused on our consumers' wants and needs, present and future. And I'm delighted to report that our efforts are slowly but surely paying off. I'm going to use the vapor segment here as a proxy only because, as many of you know, the vape category is uber competitive with lots and lots of SKUs and brands and market participants across the country. So it's every bit as the dried flower segment is, but yet we've been able to continually increase our share of market in that segment and maintain relevance of all three of our vape brands. At the end of Q2, all three of our vape brands were in the top five brands nationally for vape. Our Back 40 brand being the clear market leader in vape market share with a whopping 13.3 share of total market as a brand. Colab and Foray ended the quarter fourth and fifth ranked brands nationally with 4.6 and 4.4 share of market respectfully. And in our largest market, Ontario, on a rolling 12-week basis at the end of Q2, all five of the top five selling vapor SKUs in the province were Oxley branded SKUs. So the takeaway here is really that while it's still too early in the market to draw definitive conclusions about brand health and brand relevance, We believe that we've invested in the right capabilities to enable us to build meaningful brand connections with our consumers and help us win that first moment of truth. We believe that our brands provide us excellent coverage among our targeted consumer segments. And we believe that early signs are very encouraging in terms of our brands working towards our aspiration of building trust and the admiration of our consumers. Turning us to slide 13, one of the key ways that we're going to continue building brand relevance and share of market is by leveraging our innovation and manufacturing capabilities to bring new and exciting products to market under each of our four brands. I'm not going to point to any individual product or brand on this chart because, as it clearly illustrates, we're launching exciting new innovations across all of our brands. But I will point out three quick things here. First, this is not an exhaustive list of the products we anticipate launching during the balance of 2021. We have purposely left out a number of products here because we consider the information competitively sensitive. Second, not all of these products will launch nationally at the outside. As with all of our new product innovations, We will soft launch some of these in select markets to gain consumer feedback, refine and prove our concept before we scale up production and distribution. But then finally, and it should come as no surprise, like our brand development, our product development is targeted to specific consumers that we address under each brand. Whether it's our back 40 brand where we focus on simple quality, inhalable and edible products for consumers who are looking for quality at affordable prices, our CoLab project premium products, which focus on higher potencies and true-to-plant experiences, Foray, where we create approachable, balanced, convenient products focused on the novice consumer, and of course, Doscan, where we really target a wellness consumer. And so even though on this chart it's not an exhaustive list, what you can see is that we have a very robust innovation pipeline planned for the remainder of 2021. with lots of first-to-market products. And we believe that our innovation and manufacturing capabilities, our ability to take consumer insights and turn them into product differentiations is one of our keys to the success. We think we do it better than any other cannabis company on the planet, and we think it's the key reason why we're confident that we will continue to win with consumers and continue to capture market share. So I'm going to stop there and turn it over to our CFO, Brian, to deliver the rest of the presentation. Brian, over to you.