Auxly Cannabis Group Inc.

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Good morning, ladies and gentlemen, and welcome to the Oxley Cannabis Group Q1 2026 Financial Results Conference Call. At this time, all lines in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 14th, 2026. I would now like to turn the conference over to Hugo Alves, CEO. Please go ahead.

Thank you, operator. Hello. Good morning. I'm Hugo Alves, Oxlea's co-founder and chief executive officer. I'd like to welcome all of you to Oxford Cannabis Group's Q1, 2026 conference call and webcast. Joining me on the conference call today are Travis Wong, our Chief Financial Officer, and Marc Charbin, our Head of Investor Relations. Today, I'll share key takeaways from the quarter, and then we'll open the call up to questions from analysts and answer some questions that have come through our Investor Relations inbox over the last few days. Before we begin, I'd like to remind you that our remarks may contain forward-looking information and actual results could differ materially. Forward-looking information is subject to many risks and uncertainties. Certain factors or assumptions applied in the forward-looking information can be found in our latest annual information form and management discussion and analysis. These documents are available on our website and at cdarplus.ca. More generally, if you have questions once this call is completed, please reach out to our investor relations. Our contact information can be found at the end of our earnings press release. Turning to our financial results, our Q1 2026 financial results represented seasonal records in net revenue, adjusted EBITDA, and cash flow from operations. Net revenue reached $39.8 million, an increase of 22% year over year, against a backdrop of industry growth of approximately 2% over the same period. Gross margin on finished cannabis inventory sold increased to 55%, up from 48% in Q1 2025. Adjusted EBITDA was $12.3 million, an increase of 65% year-over-year and representing an EBITDA margin of 31%. Cash flow from operations before working capital changes reached $11.3 million, an increase of 102% year-over-year, and representing a 92% conversion from adjusted EBITDA. Our 22% net revenue growth is driven by the continued success of BAC40 as Canada's number one cannabis brand by dollars sold, a position BAC40 has held since December of 2024. The seasonally slow first calendar quarter of the year typically results in a sequential decline in net revenue for Oxley of 3% to 6%. In Q1, 2026, our sequential decline was less than 1%, just shy of an overall quarterly record. We are seeing strong demand across the board for our flour, pre-rolls, and vapes. Consumers continue to be drawn to the backboard 40 value proposition of high THC and consistent quality at a competitive price. Compared to Q1 2025, we are also benefiting from higher incremental volumes across the portfolio and improved pricing in the flour portfolio, which was partially offset by price compression on vape products. Our gross margin of 55% and EBITDA margin of 31% reflect improved manufacturing processes to reduce operating costs, higher cultivation yields, efficiency improvements across the operating footprint, strategic procurement initiatives that further reduce costs, and a relatively fixed overhead cost base. We believe these margin improvements are structural and sustainable over the long term. Our improved profitability is translating directly into cash flow with interest expense down by almost half relative to Q1 2025 and little change to working capital as compared to year end. Oxley ended the quarter with over $42 million in cash and $45 million in debt on the balance sheet. This is the strongest our balance sheet has been in years. Our outlook for 2026 is unchanged from when we reported Q4-25 results just two months ago. We believe Oxley can continue to grow net revenue above market rates through continued investment in distribution and innovation and increased quality and capacity at Oxley Leamington. We plan to maintain profitability through continued investments in efficiency and rigorous cost control across the organization. And we expect the conversion of profitability to cash flow from operations to improve through the reduction of interest expense and stabilization of working capital investments. And the continued strong demand for our products gives us the confidence to keep building for the future. through a $10 million to $12 million capital program at Oxlade-Hamilton to increase quality, capacity, and efficiency, and also give us greater optionality for international sales in the future. As our financial position strengthens, capital allocation is becoming an increasingly important part of how we create long-term value. Our trailing 12-month cash flow from operations before working capital was approximately $44 million, and we plan on improving that figure over the next 12 months. After considering our full CapEx budget of $10 to $12 million, we expect significant free cash flow in 2026. What do we plan to do with that cash? In April, we updated the market that our stocking horse bid for the assets of IRCAN. another Canadian LP, was not selected as the winning bid and we declined to increase our offer for the assets. We weighed the opportunity cost of diverting organizational focus away from a business that is delivering strong organic growth and industry-leading profitability and determined that we would rather be patient and disciplined than stretch on a transaction. While we are not the winning bidder for the Aracane assets, We believe cannabis markets will continue to present attractive acquisition opportunities, and our shareholders can expect that we will continue evaluating inorganic growth opportunities that can advance our strategy and deliver returns well in excess of our cost of capital. In April, we also announced the initiation of a normal course issuer bid, allowing Oxley to purchase up to approximately 4.9% of its issued and outstanding share capital. With Oxley shares trading at approximately 4.8 times EV to EBITDA on a trailer basis, we believe that our current share price does not reflect the intrinsic value we have built in that repurchasing our own shares can generate a compelling return on capital. Beyond our NCIB and selective M&A, we will continue investing in the organic growth that is driving our results. whether that's capital projects that support additional capacity and quality, continued innovation leadership in our core categories, or working capital investments that fuel revenue growth. We are thrilled with the growing demand we are seeing for our high-quality products domestically and the progress we're making against our winning-at-home strategy. We are also seeing strong demand for our products internationally and believe that international channels – remain a compelling opportunity for continued growth and profitability over the coming years and underpinning all of this is our commitment to maintaining a strong balance sheet so we can fund these initiatives from our own cash flow without the need to access equity markets to conclude the oxley team is focused and aligned in our pursuit of quality innovation and profitability We are delighted with our Q1 2026 results and seeing continued strong demand for our outstanding products as we head into the summer months. I'd like to thank our teams in Leamington, Charlottetown and Toronto, whose commitment, passion and resilience are the driving force behind Oxley's emergence as an industry leader. And we are, of course, also grateful for the continued support of our shareholders, vendors and partners. We are building to last, and the best is yet to come. That concludes our prepared remarks. We are going to take calls from analysts, and then we'll answer some questions that our investors have sent to us over the last few days. Operator, I ask that you please open the call for questions.