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spk06: Good morning. My name is Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the Oxley Cannabis Group Q3 2022 Earnings Results 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 financial analysts. If you'd like to ask a question during this time, simply press star followed by one. If you'd like to withdraw your question, please press star followed by the two. Thank you, Mr. Brian Schmidt. You may begin your conference.
spk01: Thank you, operator, and good morning, everyone. Thank you for joining us for Oxley Cannabis Group's third quarter 2022 financial results conference call. A replay of this call will be archived on the investor relations section of Oxley's website. Joining us today will be Hugo Alves, CEO. Mike Lickford, President, and myself, Brian Schmidt, CFO. I encourage you to follow along with the presentation slides, which are posted on our website under the Investoration section under Presentation. We are currently having some technical issues, so please bear with us, but we are looking to get that posted as quickly as possible. 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 upon assumptions that are subject to risks and uncertainties that could cause actual assumptions results to differ materially from our views expressed today. Management can give no assurance that any forward-looking statements will prove to be correct. Forward-looking statements during this call speak only to 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 the Oxley disclosures. I note that all references on this call are to Canadian dollars unless otherwise stated. With that, I'll turn it over to our CEO, Hugo Howells.
spk00: Thanks, Brian, and good morning, everyone, and welcome to our third quarter 2022 earnings call. Start the presentation on slide five. And as we've indicated throughout the year, our main goal for 2022 is to improve revenues and margins and achieve adjusted EBITDA profitability. Brian is going to present the financial results later in the presentation, but at a high level, we experienced a temporary setback during the quarter. While we maintained our cash-based margins during the quarter, we had lower than expected revenues. We were impacted by some external factors and the gradual decline of baked share of market over the past 12 months, primarily due to price and competition. While we were able to lower SG&A by 10% during the quarter of 1.3 million, we are still busy working in that regard. We have made a number of changes that we believe will improve results in an increasingly diverse and competitive market by remaining focused on product quality, continuing to innovate to meet the evolving needs of our consumers and continuing to improve our operating capabilities. In line with a rapidly changing industry, we are constantly evaluating and balancing our portfolio with the demands and needs of our consumers. And during the quarter, we took steps to optimize our portfolio by streamlining certain cannabis 2.0 products as part of a skew rationalization process to focus the portfolio on consumer favorites while improving gross profit. Moving to slide six, the top three categories of flower, vape, and pre-rolls now account for 85.2% of total recreational sales, with vape slightly declining and gains in pre-rolls coming at the expense of flower. But combined flower and pre-roll still represent 70% of all sales in Canada. Vape has been flat as a category and has seen a 48% price compression on average price per milligram year-to-date. As we stated last quarter, we have continued to see significant growth within the ultra-value segment in vape, with over 40% of brands now participating at this lower price tier. While this did impact our share of market in vape, we only took moderate pricing reductions in vape during the quarter. Pricing reductions across the industry began around this time last year, and prior to our recent change, we were at a premium to most competitors by between 13% to 33%. based on OCS retail pricing. Our brands continue to be consumer favorites, with Back Forty and CoLab Project and 4A being top three vape brands year to date, and we defended our number one spot in 2.0 products. While we will certainly look to regain lost vape share over time, we will not chase share at the expense of profitability, and what we are most encouraged by over the quarter is the increasing strength of our flower portfolio, despite some challenges with lower-potency product that was sold through at the end of the second quarter. We took pricing action on vape products as one of the last LPs to do so. However, this was following further cost savings implemented to ensure margin stability, which includes a reduction in our hardware pricing and optimization of our packaging. The continued low-cost performance of Oxley-Leamington as we look to significantly increase flour and pre-roll sales in these two must-win categories. And the fact that we have been able to maintain a leadership position in the 2.0 segment despite maintaining our pricing over the first eight months of the year and still remain the number six LP in the market. Turning to slide seven, as consumer preferences continue to evolve, innovation and new products continue to drive both consumer and customer purchasing behaviors. While product life cycles vary by category and price points, as many as 15% of top-selling SKUs in each category are new products launched within the given category. For the year, we will have launched 60 exciting new SKUs to market, with over half of them coming during the second half of this year. While many of our innovations in the first half of 2022 were focused on a broad range of products across all categories, you will see the majority of our innovation focus across The second half of the year is in our key growth categories of dried flour, infused and unfused pre-rolls, and vapor products. As we look to leverage our Leamington capabilities, new automation equipment, and all the development work that we've done in these formats during the front half of the year, including selecting several unique and higher THC potency genetics to expand our flour and pre-roll portfolio and the development of new infused pre-roll flavors. Moving to slide eight, you can see an overview of our well-rounded brand portfolio addressing various consumer segments, product formats, and price points. To add to our award-winning portfolio of brands, we are launching our newest brand, Parcel, that will participate in the ultra-value price segment, which makes up approximately 34% of the flour category today. With a focus on dried flour, Parcel will launch with two dried flour and two milled flour skews with high THC potencies and unique flavors designed in line with evolving consumer preferences. Leveraging Oxley Leamington, we can bring high quality strain specific flour to consumers at a great value every day. Back Forty continues to be our largest brand in the market with distribution in over 90% of retail stores. consistently ranking among the top brands in Canada, where we are a leader in flower pre-rolls and vape products. We will continue to grow the strength of the brand by delighting consumers with new and exciting additions to portfolio, including our new high-potency, bold-flavored vapes launching in Q4, and our newly launched infused pre-rolls, which derive their flavor profiles from our top-selling vapes, which consumers enjoy. have shown us repeatedly that they love and trust, such as our Kush Mint, the number one selling vape cart in Canada. Colab continues to round out our portfolio with a more premium offering and experience across the dried flower, vape, and pre-roll segments. A consistent consumer favorite, Colab has been one of Canada's most innovative brands to date, bringing many first-to-launch products, including the first one-gram vape cart and live risin' edibles. Colab will continue to participate in the premium segment with additions to flower and pre-roll SKUs in the second half of the year and a first-to-market launch with Canada's first-ever blunt-flavored vapes launching in Q4 with honey bourbon and banana blunt with elevated potencies and best-in-class hardware. Turning to slide 9, Oxley-Leamington provides us with a strong competitive advantage by producing high-quality, low-cost cannabis at scale. there are few competitors that are growing the same quality of flour with the efficiencies that we have in place at our Leamington facility, and we plan to leverage this advantage to continue building to leadership in dried flour and pre-roll segments and improve our overall gross profit margin. Since taking over the Oxley-Leamington facility last year, we have been focused on three core objectives, improving product quality, reducing production costs, and diversifying product portfolio. and we're pleased that our efforts are showing impressive results as we have continued to see improvements in our product quality through potency, moisture, and trim improvements. Our year-to-date flower production costs are over 50% lower compared to 2021 by making significant changes, such as improvements to our nutrient infertigation programs, ramping up production capacity, and executing on multiple operational efficiency projects across the facilities. We have successfully trialed exciting new genetics over the course of the year and expanded our commercial production from three to seven strains. And we are constantly testing and trialing new cultivars from our large genetic library with the goal of leading dried flower innovation in market. We are excited for consumers to try the new cultivars, the majority of which will be shipped to market in Q4 and include Panda Puff, Banana OG, and Apple Fritter. all of which we'll add to our back 40 flour and pre-roll lines and mint cream pie, which we will launch under our CoLab brand. Turning to slide seven, we have previously spoken of our plans to further increase production capacity as well as ramp up our pre-roll automation and the several manufacturer-related delays that we have experienced to date. We have now installed and commissioned our second pre-roll maker in Oxley, Leamington with one more larger scale unit scheduled to arrive in Leamington in the back half of 2023. This second pre-roll maker will double our capacity in pre-rolls in short order and we will start to feel the impact of increased throughput and enhanced product margins in Q4. We are pleased to announce that we are in the final phases of completing the commissioning of our pre-roll packaging automation. We have been working closely with our manufacturers since accepting delivery of the equipment earlier in the year. And while we are disappointed in the length of time this process has taken, we are close to the finish line in reaching fully automated pre-roll packaging, a competitive advantage that we believe will be difficult to replicate for many of our peers. We have also more than doubled our bagged flour capacity with the addition of a second flour packer, which has already been commissioned and is ready for commercial production to support our new packaging. flower offerings. I'm going to stop there and now turn over the presentation to our CFO, Brian Schmidt, to walk you through the financial results. Brian?
spk01: Thank you, Hugo. I'll start by providing a quick snapshot of our revenues with further details related to the quarter. Revenues for the quarter were $19.8 million, which were lower than anticipated, in part due to the temporary impacts of reduced orders from two of our largest customers, Ontario and British Columbia, as they worked through their respective data security and labor issues, and by a one-week closure of Oxley Charlottetown due to Hurricane Fiona. In addition, revenues were impacted by lower vape orders following price reduction notifications delivered during the quarter, and fewer dried flower reorders while lower potency dried flowers sold during the second quarter was being depleted. On the right side of the page, Oxley reported $69.8 million in net revenue year-to-date, an increase of 28% year-to-year. It continued to benefit from improvements in cannabis 1.0 sales and continued leadership in 2.0 products. During the third quarter headwinds previously noted, sale of flower products accounted for approximately 36% of net revenue, down by 4% from the second quarter. Lastly, our revenue distribution with the three primary customers remained consistent at approximately 85%. The next page captures several key financial metrics of the company. Gross profit margin, which includes non-cash impairments and fair value adjustments, was lower in the quarter, primarily due to the change in net fair value gains and losses on unrealized and realized biological assets and inventories. During the second quarter, net fair value gains were $4.8 million, whereas this quarter they were negative $.7 million. We recorded $2 million in impairments during the current period, primarily a result of skew rationalization and products not meeting quality specifications. Table below, cost of finished cannabis inventory sold margin, sorry. tells a different picture. This includes depreciation, but excludes non-cash items. From this chart, you can see a steady increase in margin to 25% over the last two quarters, with this quarter being impacted by lower flower sales, meaning less of the oxy-leamington low-cost benefit was captured this period. It should be noted, without depreciation, the adjusted margin would increase to approximately 28%. The middle section of the slide shows progress in the reduction of SG&A to $11.6 million in the third quarter from $12.9 million last quarter, with reductions in several categories, including selling expenses, professional fees, wages, and office expenses. These reductions partially offset lower sales for the period, resulting in an adjusted EBITDA of negative $5.8 million. which was lower than the second quarter, however, an improvement over the remaining quarters. Turning to net losses for the period, the company determined the existence of impairment indicators, which resulted in an assessment that the carrying values exceeded the recoverable amounts by $45 million. As a result, the company wrote off goodwill balance of $24.8 million, with the remaining $20.2 million allocated to other assets of the company based on their carrying amounts. Despite recent higher non-cash net losses associated with the sale of Oxley Annapolis facilities in Q1 and the current period impairment, cash used in operating activities has shown significant improvement with positive results in the second quarter and net cash usage of $2.9 million in the current quarter contributing to a year-to-date usage of $8.2 million. Lastly, we believe the factors impacting revenues in the third quarter are behind us, and that our new product offerings and enhancements, coupled with increased capacity being implemented in this quarter, will help us improve revenues while maintaining margins. We are leveraging OxyLeamington and look to make further substantial progress in sales of flower and pre-roll products to account for approximately 70% of all adult use sales. With that, I'll turn it back over to Hugo for a concluding remark.
spk00: Thank you, Brian. To summarize, Q3 was a challenging quarter for the company. Amongst significant competition, we remain the sixth largest licensed producer in market share and continue to defend our number one spot in 2.0 products. We continue to demonstrate success with insights-driven innovation and are focused on winning in our three key categories of dried flour, pre-rolls, and vapes, by engaging our consumers and expanding distribution and market share. With Oxley-Leamington's cultivation capacity, automation, and improved product quality, we will continue to leverage the economies of scale and expect to see continual improvement in our bottom line. I will now turn it back over to the operator for questions from our analysts. Thank you.
spk06: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your request, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Frederico Gomez from ATB Capital Markets. Please go ahead.
spk02: Hi, good morning, Hugo and Brian. Thanks for taking my question. My first question is just on your pricing adjustments. So maybe could you provide more color on that? What sort of impact do you expect that to have in Q4, both in terms of volume and margins? What are you seeing so far this quarter? Is that having a positive resonance with consumers so far? So any color there would be helpful. Thank you.
spk03: Hi, Frederico. It's Mike. Thank you for your question. We worked pretty diligently over the first nine months of the year to find ways to improve our margins in the vape category by finding reductions in hardware, optimizing our packaging, so really preparing ourselves for the continued price compression. To answer your question, we did end up taking price. It would have impacted near the end of September. So we do expect to see some momentum and an uptick throughout Q4 as retailers would have been able to pull the revised pricing near the end of the third quarter.
spk02: Okay, thanks, Mike. And then in terms of your flour on the flour segment, you mentioned that the potency for some of your products sold in the previous quarters kind of impacted sales in Q3. Could you talk about the cultivation in Leamington right now, the potency that you're getting there currently, and how are you seeing the ramp up there? Thank you.
spk04: Thank you.
spk03: It's Mike again. We did have a few challenges throughout the quarter where the market has shifted and potencies are going higher and higher. We see it amongst all the competition. We took measures to improve our potency. We've been able to do that with an average of around 15% across the category, so call it 2% to 4% in potency across all of our strains. The range on a go-forward basis with respect to cultivation on a Leamington, we're seeing anywhere from 20% all the way to some strains coming in at over 30% now. So we're very encouraged by the improved quality and our ability to get potency up throughout the quarter you'll start seeing those improved potency strains hit the market in early fourth quarter here.
spk02: Okay, then my final question is just on your SKU portfolio. So you mentioned that you're doing some rationalization there and outsourcing some of it. Could you give us some more color on specific categories where you believe outsourcing makes more sense and how does that impact your capacity utilization in those again? Thank you.
spk04: Thank you, Mike, again.
spk03: We look at all categories on the manufacturing side in terms of what could make sense to outsource. I would say there's a specific focus on 2.0 products, and when we're looking at utilization rates for outsourcing, We're going to ensure that if we select a product to outsource, that we would avoid any impact to the overall utilization rate. So it's something we're continuing to monitor and look at. To date, we've successfully outsourced three SKUs as a trial, and we have not seen an impact to the Charlottetown utilization rate.
spk02: Thank you. I'll head back to Nicky.
spk06: Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Michael Freeman from Remnant James. Please go ahead.
spk05: Good morning, Hugo, Brian, and Mike. Thanks very much for taking our questions today. My first question is on the pre-roll production infrastructure that you folks have been expanding recently. You mentioned that the new high throughput equipment was installed and commissioned and should impact fourth quarter sales. You're also talking about pre-roll packaging machines. I'm wondering if the combination of the quality improvements and cultivation, the install of the pre-roll manufacturing machine, and its packaging machine are all lined up such that fourth quarter could see a large increase in pre-roll sales. Thanks.
spk03: Thanks, Michael. Mike here again. Thanks for that question. And the answer is yes, we should start to see that coming through in the fourth quarter here. We certainly will have additional production capacity as we have as we're sitting here today.
spk05: Okay, and will this, do you think this will span the entirety of the fourth quarter or will it be a partial quarter of this capacity increase?
spk03: I would say partial.
spk05: Okay. Now, with expanding pre-roll sales and hopefully flower sales in the fourth quarter, I'm wondering if we can reflect on the EBITDA positivity targets aimed at fourth quarter still. I'm wondering what needs to happen during the fourth quarter in order for Oxley to get to hit positive EBITDA, reflecting on revenue levels that you might target for this.
spk01: Hi, Michael. It's Brian. It certainly remains our primary goal to be adjusted EBITDA positive. however you know the focus is on improving sales velocities a top priority and historically the fourth quarter has been most favorable quarter and we are optimistic about those trends for a lot of the reasons that we talked about on the call with respect to you know we have the new innovations pre-roll and flower SKUs coming online here in the fourth quarter and we have some of the the external factors from the third quarter being two of our three largest customers, issues behind us as well as Hurricane Fiona. So we're optimistic that the revenue will increase materially. And then we continue to work on reducing our production expenses and SG&A. So we have seen a downtick in SG&A. We continue to manage that. And as Mike spoke to, We have reduced operating costs going forward, so we look to improve our gross margins as well. So it's really those three things in concert that we're targeting.
spk05: Okay, thanks, Brian. And is there a revenue range that would give you a good chance of landing EBITDA positive next quarter?
spk01: Yeah, I think we've indicated before we are making significant strides in gross margin, particularly as we sell more flour. So again, our innovations for this back half of the year are predominantly focused on flour pre-roll and some vape enhancements in our SKUs. So we're very confident that we can increase the revenue and consequently then increase our margins. In terms of revenue, you know, we're targeting high 20s, low 30s to be the sweet spot here in the short term.
spk05: Okay. Thank you very much. And if you'll indulge, just one more question. Wondering about Oxley's sort of mantra of winning at home, home being Canada right now. Looking... Looking at where you distribute products, seeing that Quebec remains unaccessed, I wonder if you have further evolved views or plans to access the Quebec market.
spk04: Thanks.
spk03: Hey, Michael. Mike again here. Continue to find avenues. into that province. One of the ways we've been able to affect some progress early in the fourth quarter here is by affecting our first B2B transaction into the province, effectively marking the first revenue and first gram sold into the province through B2B transactions. Outside of that, we continue to submit for every SQDC product call and build a relationship with them and continue to try and get in from all different avenues.
spk05: Okay. Extremely helpful. I'll pass it on. Thanks.
spk06: Presenters, there are no further questions at this time. Please proceed.
spk01: Thank you for your attendance at our call today. We apologize for the delay in getting the deck up. It is up now, so we again apologize for that. Thank you for the call, and we look forward to speaking to you again for our year-end results sometime in March of 2023. Thank you very much.
spk06: Ladies and gentlemen, this concludes the conference call for today. We thank you for joining and ask that you please disconnect your lines. Thank you.
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