Auxly Cannabis Group Inc.

Ladies and gentlemen, thank you for standing by. Your conference call will begin momentarily. Please do not disconnect your lines and your patience is appreciated. Once again, the conference call will begin momentarily. Please do not disconnect your lines. Your patience is appreciated. Thank you. Good morning, ladies and gentlemen. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Oxley Cannabis Group Q4 and full year 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 analyst. 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. Mr. Schmidt, you may begin your conference.

Thank you, operator, and good morning, everyone. thank you for joining us for oxley cannabis group's fourth quarter and full year 2022 financial results conference call my name is brian schmidt cfo of oxley cannabis group and joining me today is hugo alves ceo a replay of this conference will be archived in the investor relations section of oxley's website i encourage you to follow along with the presentation slides which are posted on our website in the investor section under presentation Before I turn the call over to Hugo I would like to remind everyone that our discussion today involves 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 assertion that any forward-looking statement 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. Manager refers you to the cautionary statement and risk factors included in Oxley's disclosures. And note that all references on this call are to Canadian dollars unless otherwise stated. And with that, I'll turn it over to Hugo to commence the presentation.

Thanks Brian and good morning, everyone and welcome to our fourth quarter and full year 2022 earnings call. i'll start the presentation on slide five. 2022 was a challenging year for the cannabis industry increasing competition fragmentation and an oversupply of cannabis continue to create pressure on pricing. and this is exacerbated by global economic hen wins, punitive taxation, and unreasonably restrictive regulations, which continue to help prop up a strong illicit market. Oxley was certainly not immune from the impacts of these dynamics, but despite those challenges, we are happy to report that 2022 is a strong year of growth and progress for Oxley. We were the fifth largest LP over the course of 2022 and also maintained our number one position in the 2.0 product segment for a third year in a row. And importantly, in order to better position Oxley within the current market realities, we evolved our strategy at the end of the third quarter by streamlining our portfolio to focus on consumer favorites and the largest product categories of dried flower, pre-rolls, and vapes, enhancing our capabilities and automation at our Leamington facility to deepen and further leverage our high-quality, low-cost cultivation and manufacturing advantage, reducing costs throughout the organization, and internalizing our sales team to focus exclusively on Oxley products, improve relationships with retailers, and increase distribution. Turning to slide six. Dried flour, pre-rolls, and vapor products account for approximately 85% of all industry sales and represent the largest opportunities for Oxley. We are leaders in the vapor market. Oxley finished 2022 as the number one vapor company on a full year basis, the third consecutive year that we have managed to achieve that standing. We have three strong and differentiated vapor brands at different price points, with all three brands being in the top 10 vape brands nationally. And thanks to the success of all three brands, our products are broadly distributed nationally, and we have refocused on vapor innovation and are happy to report that our new Ice Series vapes under BAC4E and our Blunt Flavored vapes under CoLab have enjoyed broad consumer success since launch. And since acquiring sole ownership of our Leamington Cultivation Facility at the end of 2021, we have started to lean into dried flower and pre-roll products and are making excellent progress in establishing our brands within those product segments. We feel that we have natural competitive advantages in both formats. We have made incredible strides in product quality and operational efficiency at Oxley Leamington and believe it is now one of the lowest cost producers of high quality cannabis in the country. and we have made significant investments in pre-roll and manufacturing and packaging, R&D, and automation to develop what we believe is a best-in-class product in terms of quality, consistency, and price. In 2023, we'll continue to participate selectively in other product categories, but our organizational focus and resources will be largely dedicated to our dried flower, pre-roll, and vapor products. Moving to slide seven, We continue to be committed to building lasting brands that resonate with consumers, and we will continue to make investments in insights, innovation, and brand development so that we can ensure we are helping our consumers live happier lives by consistently delivering phenomenal products at a great price under brands that they can trust. We have a well-rounded brand portfolio which addresses various consumer segments, product formats, and price points. Back 40 continues to be our largest and strongest brand. Consumers continue to love the brand's value proposition of simple, high-quality cannabis products at a great everyday price. Back 40 products are widely distributed, being found in over 90% of retail locations in Canada, and as a result, Back 40 has consistently been a top five brand nationally by revenue over the past 12 months. In the back half of 2022, we added a fifth brand to our portfolio, Parcel, to compete in the fast-growing ultra-value pricing tier. We have seen the ultra-value price tier grow rapidly in 2022 as consumers look for increased value for money in the face of economic uncertainties. Approximately one-third of dried flower volumes are now transacting at the ultra-value price segment. And Oxley-Leamington's high-quality, low-cost advantage allows us to offer consumers high-quality single-strain flower at ultra-value pricing while maintaining profitable margins. And we are delighted with the early performance of parcel products, and we will work hard to increase the breadth of parcels portfolio and distribution over the course of 2023. Turning to slide eight. As consumer preferences continue to evolve, innovation and new products continue to drive both customer and consumer purchasing behavior. Over the back half of 2022, we successfully launched 30 exciting new SKUs to market across all product categories. In 2023, we'll continue to innovate to meet the evolving needs of our consumers, but we will focus intently on dried flour, pre-roll, and vape product formats. We will look to increase the breadth of our product portfolio in those key categories to set the stage for continued growth and further leverage the competitive advantages that we believe Oxley has in those three product categories as outlined earlier in the call. In Q1 of 2023, we've already increased our SKU count in those three product categories by 30% on a blended basis. We will continue to seek additional listings for exciting new flower, pre-roll, and vape products throughout 2023 and leverage our new internal sales team to build retailer excitement and distribution for those products. Turning to slide nine, Oxley-Leamington is one of the premier cannabis cultivation facilities in the world. There are very few competitors that can match our mix of high quality and low cost, and we plan to leverage this advantage to continue building to leadership in dried flower and pre-roll segments and improve our overall gross profit margin. Through continuous improvements in cultivation strategies and genetic selection, we have seen overall product quality and potency increase over the course of 2022, and importantly, we have seen those improvements translate into increased sales and market. As already mentioned, we've increased our focus on flower innovation and have a portfolio of commercially ready strains for launch over the course of 2023. Turning to slide 10, we've also made significant advancements in enhancing our automated manufacturing capabilities. We successfully installed and commissioned our second pre-roll filling machine at our Leamington facility, doubling our filling capacity. We've been working with these machines for a couple of years now and have developed what we believe are best-in-class operators and know-how, and we are seeing the results of that gained experience and the increased quality and consistency of our pre-roll products. We have also been working collaboratively with one of the world's largest tobacco equipment manufacturers to develop a much larger, first-of-its-kind filling machine that which will again materially increase product throughput and efficiency and make us one of the largest manufacturers of cannabis pre-rolls in the world. We have completed factory acceptance testing of this machine. It is in transit and we look forward to taking delivery and having it commissioned in the back half of 2023. Our automated pre-roll packaging equipment is also now operational at our Leamington facility and producing units. We continue to work with the equipment's manufacturer to increase speeds to specification, and we expect to see continued increases in production of pre-rolls in Q1 2023 and beyond. I'll stop here and now turn over the presentation to our CFO, Brian Schmidt, to walk you through the financial results. Brian, over to you.

Thank you, Hugo. If I can get everyone to turn to slide 11 for a quick snapshot of our revenues and product sales mix. Starting on the left side of the page, revenue was $24.7 million in the fourth quarter of 22, approximately $4.6 million lower than the same period of 21, however, $4.9 million higher than the third quarter of 2022, which helped the company achieve a milestone by becoming the top licensed producer in the sale of cannabis 2.0 products for the third consecutive year. In addition, Oxley broadened Its distribution of dried flower and pre-roll products commenced limited B2B sales while transitioning to a tighter product portfolio focusing on dried flower, pre-rolls, and vapes. On the right side of the page, Oxley reported net revenues of $94.5 million as compared to $83.8 million during the same period in 2021, an increase of 13%, which was slightly below industry increases of 18%, primarily as a result of declining vape sales throughout the first three quarters of the year. During the year, Oxley's share of market declined to seventh position during the third quarter, in part due to lower sales in industry consolidation, but has since improved to number six during the fourth quarter, with further strength in Q1 of 2023 to number five per headset data. Our strategy to shift category sales to be in line with the overall industry by leveraging OxyLeamington's advantages is starting to pay off. During the course of the year, the percentage of flower and pre-roll sales increased from 30% to 42%, an improvement of approximately 40%. Lastly, our revenue distribution with our three primary customers, British Columbia, Alberta, and Ontario, remained consistent at approximately 85%. The next slide captures several key financial metrics for the company. Beginning on the left side of the page, gross profit margin of 3% for the quarter was lower than the fourth quarter of 2021 due to impairments of inventory, which were slightly lower than 2021. And by the non-cash unrealized fair value gains on biological assets, and realized fair value losses on inventory, which amounted to a net loss of $4.6 million in 2022 versus a half million dollar gain in 2021. For the year, gross margin was 17%, which was the result of changes in biological and inventory impairments, which were impacted by the first quarter charges related to the closure of Oxley Annapolis facilities. The graph below includes the impact of depreciation, however, excludes all other non-cash and fair value adjustments. And it shows much stronger margins of 30% during the fourth quarter of 2022 versus 20% in the prior year. Cost of finished cannabis inventory sold margin also improved during the year at 23% in the first quarter and ending at 30%, resulting in the full year blended margin of 26% versus 25% in 2021. These improvements were achieved as a result of the company utilizing low-cost cannabis from our Oxy-Leamington facility and streamlining of cannabis 2.0 SKUs and operating costs. The middle section of the slide shows progress in the reduction of SG&A to $9.5 million during the fourth quarter, down from $12.7 million the year before, with reductions in several categories, including wages and salaries of $1.8 million, resulting from the streamlining of operations and supporting staff as we focused our product portfolio. For the year, SG&A increased by $2.3 million to $46.6 million. The inclusion of Oxley-Leamington for an additional 11 months in 2022 as compared to 2021 was partially offset by reductions from the closure of the Oxley-Annapolis facilities and cost savings implemented in the fourth quarter of this year. Adjusted EBITDA losses were below $1 million in the fourth quarter of 2022. This represented the company's best performance to date and was approximately $5.3 million better than Q4 of 2021 and $5 million better than the previous quarter. These improvements were driven by stronger margins on costs of finished cannabis inventory sold and lower SG&A. The full year impact of $4.8 million, the full year improvement, sorry, of $4.8 million to negative $16.9 million was primarily a result of the fourth quarter improvements. Net losses for the fourth quarter were $16.1 million, improving by $2.3 million, primarily as a result of lower gross profit, income tax recoveries, and lower total expenses. As adjusted EBITDA improved to within $1 million of breakeven, substantially all of the fourth quarter net losses were non-cash inclusive of interest expense where approximately two-thirds of the total expense is due to accretion on the company's convertible debentures for the year net losses were 130 million point three hundred and thirty point three million dollars an increase of 96.6 million dollars which stems from gains of 20.3 million dollars in 2021 and losses of $45 million in the third quarter of 2022 related to the impairment of goodwill and other assets, and $25.7 million in losses related to the closure of the Oxley Annapolis facilities. Despite the increase in net losses, cash used in operating activities improved significantly. During the fourth quarter of last year, cash used in operations was $13.3 million as compared to cash provided by operations of $5.8 million this most recent quarter, a net improvement of $19.1 million. For the year, cash used in operations declined to just $2.5 million as compared to $49.8 million used in 2021. And this was primarily accomplished through working capital management and improving operating results. Lastly, the fourth quarter was a very positive quarter for the company, and we are seeing further sales momentum in the first quarter as indicated by headset data. We recognize that we operate in a dynamic industry with unique challenges. However, we are focused financially on what we believe to be a balanced approach to revenues, margins, and SG&A, and look forward to building upon the success of Q4 into 2023. With that, I'll turn it over to Hugo for concluding remarks.

Thank you, Brian. Turning to slide 13. As I mentioned at the start of this presentation, we operate in a highly dynamic and challenging market. In order to best position Oxley within that reality, we are entering 2023 with improved earnings performance, increased focus on key product formats, lowered costs and increased efficiency, which we expect will yield positive results. And with those actions in mind, our overall overarching goal for 2023 is to achieve sustainable profitability and By increasing our net revenue by 15% through our focus on key product categories, building portfolio depth within those categories, and growing distribution and excitement by leveraging our internal sales team. Improving blended gross margins to 35% to 40% by leveraging Oxley Leamington's high-quality, low-cost cultivation advantage and continuing to enhance our automated manufacturing capabilities. We're going to continue to vigorously take cost out of our business and build on the savings realized in Q4 of 2022 to keep SG&A to below 40% of net operating revenue. And of course, we'll continue to prudently manage the company's balance sheet and streamline assets where possible. We are excited and optimistic for 2023. We believe that we have a great plan that is built upon proven demand for our products, outstanding employees, top-tier assets, and an underlying desire to continue to put our consumers first by delivering safe, effective, high-quality products that help them live happier lives. As always, I want to thank you for your time and your interest in Oxley, and now I'll turn it over to the operator to open the floor for Q&A from our analysts.

Thank you, ladies and gentlemen, we will now begin the question and answer session, did you have a question, please press star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request should you wish to decline from the polling process, 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 Jones of ATB Capital Markets. Please go ahead.

Thank you. Good morning, Hugo and Brian. Thanks for taking my questions. My first question is on your margins. So this quarter, the gross margin came in at around 30%. which, if I remember correctly, is in line with the guidance that you had previously provided. Now, for 2023, you are guiding for margins in the 35% to 40% range. So can you talk about what is making you more optimistic on your margin side? Is it maybe driven by limiting performing better than you initially expected? Thanks.

Thank you, Fred, and good morning. It's really a couple of things. You're absolutely correct. We are starting to see the benefit of Oxford-Leamington and what we believe to be one of the lowest cost producer facilities in the country. And as we've shifted, started to see the shift in our flower pre-roll sales, as we indicated, 2021 was about 30% and this year was 42. You know, we're starting to get that benefit come through in our margins. In addition, we also, at the start of Q4, really started to focus our 2.0 product category and streamline some of those products and innovations and really looked at the cost structure in that facility and made some changes that started to pay off in Q4, as you can see by our results. And that's really giving us, you know, the comfort that we can achieve the 35% to 40% range for 2023. Okay, thank you.

My second question here is on vapes. As you mentioned, Hugo, you led the vape category in 2022, but I think that the market share has eroded over the past year from what we see in the industry data. I'm curious on whether you think that share has stabilized now or would you expect, you know, to go down further and what would be the strategy, you know, in 2023 to maybe start regaining some of that share?

Yeah, hey, Fred. Thanks for the question. So you're right. We did see, as we talked about on previous call, our vapor share declined a little bit. We think that it's stabilized now. We've seen the results of that stability over the course of the last few months. Look, in terms of winning share back, I think I indicated during the call, we've refocused our innovation on vapes. We've started to put out new products that have been really well received in the market with our ice series and our blunt-flavored series. We're going to really focus on the targets that we put to you. We certainly could take a different approach, but we're going to look to grow share prudently, being mindful of volume versus margin trade-offs. that have not always been historically positive without automation and further expense reduction initiatives. So we are seeing our vape share stabilize. We are still the second largest portfolio of owned vapor products. And we're going to continue to refine and expand our portfolio over 2023. But certainly, you know, the focus is on our plan as opposed to just trying to win share for rankings.

Okay, thanks for that. And then on the flower side, you know, you have been gaining share in flower at quite a rapid pace for the past six months. In terms of the consumer segment in which you're gaining that share, would you say that most of that is coming from, you know, the ultra value side, you know, with Parcell? And could you comment on the margins you're seeing in that segment, you know, relative to the other segments that you have in your portfolio. I know given that no parcel, there's dried flour, milled flour. So can you talk a little bit about that?

Yeah, sure. So the increased market share is not coming as a result of parcel. Even though it's a new brand, we've just recently launched it. We're still working to refine you know, testing our products in market, making sure that we've got the value proposition right. You know, the increase is just coming from increased product quality and consistency out of our Leamington facility. You know, we're continuing to launch some new strains. We've deepened our product portfolio, as I indicated, especially, you know, it's 30% on a blended basis. It's about 55% in flour and about 40% in pre-roll formats. driving some of that growth. So it isn't coming from parcel yet. We do have strong expectations for that portfolio. It's coming from increased efficiency and throughput, increased product quality, and the increase of the breadth in our product portfolio in those product categories. I'll pass it over to Brian to comment on the parcel margin.

Yes, Chico indicated just quickly in parcel, of course, it's what we would call ultra value. So the margins will be tighter. We will manage our brand and portfolio mix as best we can to ensure that, you know, we have an appropriate tradeoff of not only top line, but gross profit, which is, you know, the critical element in our view.

Thank you. Just one last question here on your sales growth guidance. You mentioned 15% growth rate this year. This would be pretty much in line with the overall market, at least according to what we are expecting. It would imply that you're not gaining market share or losing, but rather remaining flat. How should we look at that guidance given that you have been gaining significant share on the flower side, which is the largest market, the largest segment in the market. So the guidance could be potentially overly conservative. So could you talk a little bit about the guidance and what's behind the driver there in terms of sales growth that you're expecting? Thank you.

Yeah, for sure. Yes, I would say that our estimate is perhaps conservative in light of some of the other broader industry estimates. But again, we created a plan that we articulated in the outlook that allows us to be adjusted EBITDA positive and cash flow positive near the end of the year. But we took a conservative approach because, you know, we want to have sustainable growth. We're not just chasing share. It is about gross profit margin and controlling SG&A. And then we have transitioned our portfolio, right? So we're still working through the transition. As Hugo indicated, we have several new SKUs, and our innovation for 2023 will be focused on the three primary categories. So, of course, we want to overachieve the 15% goal. However, there are, you know, a bunch of new initiatives, essentially, where we have new products and formats that have not yet been actualized with a long history of results. So we are confident in the plan. We think it's achievable. Yes, it essentially implies success. flat overall share, but as you know, there are elements to the product mix that differ. Certainly in the pre-roll category, we are looking to do much better than we have historically. But for the terms of the guidance for now, you know, we're going to stay with the 15%, and hopefully we wildly exceed that target.

Thank you. That's really helpful. Okay, those were my questions. I'll pass it along. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. There are no further questions at this time. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.