Auxly Cannabis Group Inc.

Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Oxley Cannabis Group's Q3 2021 earnings call. Note that 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 financial analyst. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star then number two Thank you. Ms. Cannon, you may begin your conference.

Thank you, Operator, and good morning, everyone. Thank you for joining us for Oxley Cannabis Group's third quarter 2021 financial results conference call. A replay of this call will be archived on the investor relations section of Oxley's website. We will start the call with a presentation and corporate update by our CEO, Hugo Elves, followed by a recap of our third 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 would 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 Oxley's disclosure. I note that all references on this call are to Canadian dollars unless otherwise stated. With that, I'll turn it over to Hugo, our CEO. Hugo.

All right. Thanks, Julie. Always tough to follow such a scintillating introduction, but I'll just say welcome everyone to our Q3 earnings call. Look, we're excited to host you for this call and share with you the results of what's been another record quarter for Oxley. So let's get started. I am going to turn us to slide six in the presentation. We're going to do our best to keep the presentations consistent quarter over quarter each year so that you have a better basis upon which to assess our progress. And as you know, during the calendar 2021 year, we're trying to achieve five key strategic objectives, maintain our leadership in 2.0, build to leadership in dried flower and pre-rolls, become a top five licensed producer by share of market, improve our margins and grow revenues, and achieve adjusted positive EBITDA. So in terms of our 2.0 market leadership, we continue to be the number one 2.0 company in the country. And we grew our market share this quarter to 15.6% of overall markets, up slightly from Q2. We continue to dominate in the vape segment and increased our share of market by more than a full percentage point over the quarter. We finished with 24.7% of the national vape market. And we're also making tremendous inroads into the concentrates category, one of the fastest growing categories in the industry where we're now the number four, fourth-ranked licensed producer nationally. But the big story this quarter is really the tremendous progress that we've made to building to leadership in dried flour and pre-rolls. And look, I want to couch the discussion by saying Oxley's still building its base portfolio in flour. We grew our SKU count during the quarter at the OCS to a whopping seven SKUs. And I think that's an important point for you to note because our competitors have multiples of those SKUs, right? They have flour portfolios that they've built over years that have 30, 40, in some cases, over 50 SKUs in their portfolio. So we're still building our base portfolio in dried flour. But because we've stayed keenly focused on the consumer, we've built the most efficient dried flour portfolio in the market on a sales per point of distribution basis. That means our SKUs sell more dollars per SKU than any other flower portfolio in the country. So over the quarter on a national basis, we increased our position from 12 to the number nine LP nationally growing our share to 2.7% of overall market. But in order to really get a flavor of how our launch has gone, you have to double click into Ontario because Ontario is really our home, our test market. It's where we have our full SKU portfolio launched. And when you take a close look to home in Ontario over the last 12 weeks, ending October 30th, it paints a different story. So in Ontario, we've moved into the fifth spot overall in dried flour. And pre-rolls tells a similar story. Nationally, we increased our standing from the number 19th producer to the number 11th. But in our test market of Ontario, which notably was the only market that had our back 40-40s product during the quarter, Oxley is now the third largest supplier of pre-roll products. So our thesis in 1.0 is working and the results have been very encouraging. As at the end of Q3, we were not yet a top five licensed producer. We exited the quarter as the number six LP by overall recreational cannabis market share. We grew that share from 4.9% to 5.6% as at the end of Q3. but we've continued to gain share month over month. And I'm very happy to report that we finished the month of October with 7.3% share of overall market. And we did move into the number five spot and we're confident that we're going to continue to increase share over the coming months through increased distribution of our dried flower offering. And as we recently announced on November 10th, we have 18 incredible new SKUs that we're adding to our product portfolio over the course of So we remain on track to finish the year with between 7% and 9% of national market, and we're confident that we can exit the year in the number five spot or higher. Brian, on the financial metrics, Brian is going to give you a lot more color later in the presentation, but I'll note here that we organically grew net revenues from recreational cannabis sales to $24.5 million, and we managed to keep spending relatively flat. However, we did encounter some operational challenges during the quarter which negatively impacted our gross margin. Those challenges were related to the scale-up of dried flour in pre-roll operations and especially delays out of our control in the delivery and commissioning of key automation equipment, which resulted in lower than anticipated volumes and higher than anticipated production costs. And while we have improved, Patrick Corbett- And will continue to improve in navigating those operational challenges we do expect some of them to persist throughout Q4 and part of Q1 2022 and regrettably that will impact our adjusted EBITDA target but i'm going to leave that to Brian to discuss with you in greater detail during his part of the presentation. Patrick Corbett- So with that overview in mind let's turn to slide eight of the presentation, where. As I've already stated, we remain the number one LP in 2.0 product segment. And we continue to be the undisputed leaders of the vape segment, close to 25% of total market. And one point that won't show up on this paper is that unlike our flower, where we're still building a base portfolio, we have a robust portfolio of vape SKUs. In Ontario, we have 21 SKUs. But just like our flower portfolio, even where we have an increased SKU count, we still have one of the most efficient portfolios in the country. So even with a robust portfolio of SKUs, our portfolio is highly efficient and each SKU is very hardworking. For example, in Ontario, our 21 SKUs represent 7% of the total vape category listings in Ontario. But our vapes represent 26% of all vape sales in the province. I think that's important to note because we're winning through quality and being consumer-centric rather than sheer quantity. At a more macro level, on the right, we exited the quarter as the number six licensed producer in the country. And year to date, no cannabis company in Canada has gained more market share than Oxley. And that is a testament to our focus strategy, the tireless efforts of our people, and our commitment to putting the consumer first in absolutely everything we do. And that winning formula continues to bear fruit because we continue to see increases in market share. As I mentioned, we finished the month of October with 7.3% share of overall market, and we moved into the number five spot. And we continue to see strong consumer demand for our product. To give you a bit of color on that, most recently in our test market of Ontario, I can tell you that Oxley has just exited this past week in Ontario as having the number one flower SKU in the province, the number one pre-roll SKU in the province, the number one vape SKU in the province, the number one overall SKU in the province and Oxley exited the week as the number one licensed producer overall in Ontario. So we're heading in the right direction. Moving us to slide nine, you know, driving a lot of our growth is our expansion into 1.0 product formats where our offering has enjoyed tremendous consumer success so as i mentioned we are paying extra close attention to our flower performance in ontario is that as our home and test market where our entire seven ski portfolio is listed and so with that in mind if you look at the 12-week period that ended october 30th and you compare it to the previous 12-week period in ontario right so pre and post kind of oxley flower you start to get a sense of really of the traction. So during the most recent 12-week period, the overall flower category in Ontario grew about 10%. Oxley's flower portfolio during the same period grew 188% and accounted for 42% of total category growth. So for every additional dollar in flower sales in Ontario that were incremental during the period, Oxley accounted for 42 cents of that. And on a brand basis, it's equally as impressive. Back 40 is now the fastest growing flower brand in Ontario. It's grown 191% over the last 12-week period. It's now the fourth largest flower brand by dollars in Ontario. CoLab Project, you know, it's a bit more sluggish. It only grew 175% during that same period and is now the 16th largest brand in Ontario. And Pre-Roltz tells a similar story, right? While we have launched our much awaited 40s product in Ontario, it's again important to stress that just like dried flour, we're building our base portfolio. We currently have four pre-roll SKUs in Ontario. Our competitors have many more, like two and a half times to 10 times our SKU count. But just like flour, we have a highly efficient portfolio. So even with a tiny SKU count in Ontario, the only province where our 40s product was available, We're currently the third largest supplier of pre-rolls, and we believe our rankings would have been even higher, but for the operational challenges caused by equipment delays. So we do expect to see further share growth in the balance of the year as availability increases and we minimize out of stock positions. I'm going to move us to slide 10. So this slide's intended to give you a fast visual representation of our market share progress in our chosen categories. And I want to note here that this talks about national share, right, so that you can see how we're performing across the country. And as you can see, we grew our share in every category that we participate in, except edibles, where we lost a bit of share. And I would address that by saying it's not something we're overly concerned with. Historically, we have not expanded our edibles portfolio. In fact, in Q4 of 2020, we scaled back on edible SKUs to allow us to focus on the higher margin products like vape. But we've now turned our attention back to the edibles category with new SKUs launching late Q3, performing very well, and some more SKUs launching over the balance of Q4. But we intentionally back-end loaded our edibles innovation to Q4, and that was really to allow us to focus on our flower launch and also to address chocolate seasonality issues during the summer. So we think we're going to be able to win back some share as our new edible products hit the shelves. I've already talked about flour and pre-roll, so I won't say anything about those on this slide. I would note here on this slide that we continue to make very solid gains in concentrates. It's one of the fastest growing segments in the market. We're now the fourth largest producer nationally of concentrates, and we feel great about continued share expansion in this category. We recently launched our live terpene sticks, another first-to-market innovation by the Oxley team. And we're launching caviar and live rosin jam over the balance of the year, and we think that those will have tremendous consumer success, just like our CoLab Diamonds product. We've also made tremendous strides in oils and capsules. We believe our Doscan branded products are superior to similar products in the market. in terms of potency format value and benefits so we're quite bullish of the growth prospects for oils and capsules as we build distribution and as our consumers become more educated right like it's now been almost two years in 2.0 so people are starting to get a little bit more comfortable with these formats look i'm going to say a few quick words about our brand performance and our innovation pipeline then i'm going to turn you over to brian Slide 12, one of our key aspirations is to build authentic connections with our consumers through our brands. We want our consumers to trust and love our brands, and we work hard to win our consumers' brand loyalty each and every day. And I'm delighted to report material progress on this front as well. From a market share perspective, all of our brands are represented in the top 10 brands of each product segment that we participate in. Our three vape brands are all in the top five brands nationally with Back Forty continuing to be the most relevant vape brand with 14% share of national market on its own. Back Forty and CoLab Project, as I mentioned, are the fastest growing brands in dried flour and pre-rolls. And our Dosecan brand is really gaining traction as we drive distribution for our oil and capsules products. While we believe it's still too early to draw definitive conclusions about brand health and brand relevance, we do believe that we've invested in the right capabilities to enable us to build meaningful brand connections with our consumers, believe our brands provide us with excellent coverage among our targeted consumer segments, and that based on early signs, our brands are connecting with our consumers and building trust and loyalty. Turning to slide 13 in our innovation capabilities, look, I think this slide speaks volumes, not only about our innovation capabilities, but our consumer insight strength. By the end of this year, we will have launched 52 new SKUs into market. That's comprised of the 34 new SKUs already launched and then the 18 SKUs coming in Q4. That is a Herculean measure by any means, but it is even more impressive when you consider the nature of the innovations. We're not just adding a new size to an existing flower SKU and calling that innovation. We're listening to our consumers and then trying to address a particular problem, need, state, or occasion. And when you look at these 52 SKUs that we'll have introduced by the end of year, only 14 of those are line extensions, predominantly different sized vape cartridges. 38 of the SKUs are entirely new products, a new concentrate. And 10 of those 38 SKUs are first to market innovations, like our live resin gummies, our live terpene sticks. And I've already noted earlier in my presentation the efficiency of each SKU on a spend per point of distribution perspective. And when you combine those two things, how prolific we are at innovation, plus the success that each new product enjoys when it enters the market, it's not by luck. This is the result of having a focused strategy an obsession with our consumers, and then having the right people, assets, and capabilities to execute on that strategy. Slide 14, I'm not going to say much here. This is a visual representation of our product portfolio by brand, and it sets out the balance of innovations that we plan to release throughout the year. So unlike last earnings calls where we left out some more commercially sensitive innovation SKUs, this chart is now complete. I know some of our investors like to use this slide as a checklist of sorts. So I've included it here again so they can follow it along, follow along for the balance of the year. But I'm going to stop here and turn it over to our CFO, Brian Schmidt, to deliver the rest of the presentation. Thank you for your attention so far. And Brian, over to you.