Auxly Cannabis Group Inc.

Good morning, ladies and gentlemen, and welcome to the Auxly Cannabis Group Q2 2026 Financial Results Conference Call. At this time, all lines are in 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, August 13, 2026. I would now like to turn the conference over to Mr. Hugo Alves, CEO. Please go ahead.

Thank you. Good morning. I'm Hugo Alves, Auxley's co-founder and chief executive officer. I'd like to welcome you all to Auxley Cannabis Group's Q2 2026 conference call and webcast. Joining me on this call today are Travis Wong, our chief financial officer, and Mark Charbent, our head of investor relations. Today, I'll share highlights from the quarter, and then we'll open up the call to questions from analysts, and answer some questions that have come through the 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 the call is complete, please reach out to our investor relations. Our contact information can be found at the end of our earnings press release. Moving on to our financial results, Our Q2 2026 financial results represented a quarterly record in net revenue, adjusted EBITDA, and cash flow from operations. Net revenue reached $45.8 million, an increase of 18% year-over-year. Gross margin on finished cannabis inventory sold increased to 55%, up from 52% in Q2 2025. Adjusted EBITDA was $14.3 million, an increase of 24% year-over-year, representing an EBITDA margin of 31%, and cash flow from operations before working capital changes reached $13.4 million, an increase of 31% year-over-year, and representing a 94% conversion from Adjusted EBITDA. Our net revenue growth is driven by continued strong demand for our core portfolio led by Back Forty's strength in flour, pre-rolls, and vapes. Our gross margin reflects continuing improvements across our operating footprint, strategic procurement initiatives, and a favorable product mix. And we believe that the operating leverage we are delivering is structural. We have the operating assets, the scale, and the cost discipline to deliver best-in-class margins, and these results demonstrate that. Our improved profitability is translating directly into cash flow with a 94% conversion rate between adjusted EBITDA and cash flow from operations before working capital. Our balance sheet remains strong with $38 million in cash and $44 million in long-term debt. This cash balance also reflects the deployment of $5.7 million in the quarter to repurchase 2.6 million post-consolidation shares through our active NCID program. And of course, in July, we completed our 14-to-1 share consolidation, an important step forward in aligning our market profile with the quality of the business we have built. We are encouraged by the response from shareholders and the confidence that has been reflected in our share price performance since the consolidation effect. Looking forward, our outlook for 2026 is unchanged. We believe Auxley can continue to grow net revenue above market rates through investments in distribution, innovation, and increased quality and capacity at Auxley Leamington. In July, we launched a new sativa cultivar under our Back 40 brand, Galactic Jack, and the early consumer response has been tremendous. We have additional innovations across our four categories planned for the seasonally stronger back half of the year. We continue to invest in operational efficiency and maintain rigorous cost control across the organization to support continued profitability and we expect improved cash conversion through the reduction of interest expense and working capital to remain similar to last year with modest increases to support net revenue growth. In the outlook section of our Q2 MD&A, we have outlined a longer-term capital program of approximately $30 million over the next three years to increase yield at Auxley-Leamington by approximately 30% Thank you for joining us. To conclude, The Auxley team is focused and aligned in our pursuit of quality, innovation, and profitability. We are delighted with our record two Q2026 results and seeing continued strong demand for our products as we head into the back half of the year. I'd like to thank our teams in Leamington, Charlottetown, and Toronto whose commitment, passion, and resilience are the driving force behind Auxley's emergence as an industry leader. We are also grateful for the continued support of our shareholders, vendors, and partners. We are building to last. We are excited about the future and believe the best is yet to come. This concludes our prepared remarks. We're going to take calls from analysts, and then we'll answer questions that our investors have sent to us over the last few days. Operator, please open the call for questions. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Neil Gilmer with Haywood Securities. Your line is now open.

Yeah, thanks. Good morning and congrats on a good quarter here. It continues to look quite constructive and positive. Hugo, maybe if you could expand on both what you referenced in the MD&A about the 30% yield in Lington, like sort of that's a pretty significant jump. What sort of things are you planning on doing to sort of achieve that?

Yeah, Neil, thanks. So as discussed before, it is to build out additional post-harvest capabilities in Leamington and also to bring an additional grow zone online and add to the infrastructure things like the HVAC that has to go into those pieces of infrastructure. But it's effectively additional cultivation and significant additional post-harvest capabilities. We're seeing very strong demand for our products. And I think as our demand picture becomes clear and our thinking evolves, we thought it was right to share our longer-term ambitions with shareholders as they are constantly asking us for sort of our longer-term growth plans. So we wanted to share those as they are baked into our strategic plans.

That's fair. Thank you for that. So you say through to the end of 2028, so will we still start seeing some of those yield improvements in 2027?

Yes. You know, through the end of 2028 is when we'll have the whole thing kind of done, but you will see yield improvements throughout the course of that three-year period, of course.

Great. Thanks. It made me turn to the income statement here. I think it's five quarters in a row you're at an EBITDA margin of 31%, so clearly it looks sustainable and clearly above most of the group in Canada. Maybe elaborate a little bit on how you're able to achieve that, number one, but number two, do you feel that that continues to be sustainable? It's quite a good model, but I imagine with Some of the dynamics in the market, there may be some challenges along the way. Maybe just talk a little bit about the puts and takes there between gross margin, operating leverage, and where you're ultimately achieving the EBITDA margin there.

Yeah, sure.

Hi, Neil. It's Travis here.

Yeah, I think, you know, we break down the EBITDA margin overall at Sustainable. It's really driven in our minds by three main components. Of course, net revenue being the first one. We continue to guide that we will and Target, stronger than industry growth in that segment, driven by our innovation, our ability to read our consumers. We do believe that those revenue growth rates will continue to be above industry growth. Here's the margin, I think, where we really stand out. A lot of the improvements in our growth margin are structural in nature. So we continue to see higher cultivation yields from last year We've improved our manufacturing processes both at our Lincoln facility and at Charlottetown facility. And then lastly, we have engaged over the last 18 months in strategic procurement initiatives, really lowering a lot of our inputs in our portfolio, including, for example, our rate API costs. And then lastly, the SG&A is the final factor in protecting that EBITDA margin. We've always guided to maintaining SGA growth at the same rate as revenue growth, particularly on an annual basis, and continue to target that. We think that's achievable. As we get bigger, we will invest in our sales and marketing group, but we do think we've kind of figured out and right-sided SGA for the business that we're in. Great.

Thanks, Travis. Last one for me, maybe just, you know, what your current thoughts on international are as far as obviously you're executing great in Canada. I know that's going to be your – or expect that's going to be your focus. Any thoughts or plans on looking at the international markets?

Yeah, I mean, our – I don't think our perspective on international has changed since the last time – We spoke with shareholders.

We believe in those markets.

We believe in the sort of long-term potential and growth opportunity there. But we also believe that they're young markets. They're still very dynamic in terms of their regulatory framework. And things can change. Dynamics can change very quickly, including pricing. So our strategy is to win at home. you know obviously our vision is to one day be a global leader so we do think it is a part of our future right now we're prioritizing the Canadian market we're prioritizing winning at home we see very very strong demand as you noted earlier we're generating you know best-in-class margins so we're comfortable with our strategic focus we will continue to to advance our international ambitions in terms of learning by doing and establishing the partnerships and relationships needed to be successful there. But we're not going to get distracted in terms of the market we're trying to capture. We think that serving the Canadian consumer is our highest return option right now. And I would just again note that We have Imperial Brands as a strategic partner. They're a global CPG company. And, you know, when the time is right and these markets are more mature and we can deploy capital there with greater certainty, you know, we'll have a big advantage in this market. So we're not in a rush. Our view hasn't changed. We continue to be focused on winning the home.

Okay, great. I appreciate that context, Keller. Thanks, Hugo, and congrats again on the quarter. I'll pass the line. Thanks a lot. Really appreciate it.

There are no further questions at this time. I will now turn the call over to Hugo for closing remarks.

Hi, everyone. Mark Charbin here. Just a few questions from investors. First on innovation, we've seen some new products in market. Can you give us an update on how your recent innovations are performing?

Yeah, Mark, great question. You know, innovation is a key driver of our growth, one of our core competitive advantages. You know, we've taken innovation leadership, in our core categories of pre-rolls, flour, and vapes. And I think the results we're seeing from each of our recent launches and over the years that I think demonstrate that we understand our consumers and our customers, and we're able to create great new products that are incremental to our existing portfolio. And, you know, innovation is a team sport at Auxley. It takes a whole organization. to deliver great products to our consumers. So I'll use this as an opportunity to shout out again the great Auxley team for their continued performance. But Liquid Imagination has now been the top selling stream in Canada for over two years. We recently, as I mentioned, launched Galactic Jack. That was in mid-June. Our sales team has already won over 1,400 points of distribution, and the product is getting rave results, rave reviews from consumers. Southpoint is already a top 40 flower brand nationally with two SKUs and we're excited to be adding a new strain to the brand later this year and of course back 40 pre-rolls have quickly become Canada's favorite pre-roll and I'm really excited about an innovation that we have launching imminently there so innovation is performing great it is a core competency it's a discipline at Auxley and I think one of our real key competitive advantages.

Thanks, Hugo. Secondly, on profitability, there's a decrease in net income, yet I just need the DAW and cash flow increased. Can you please review the factors that cause that?

Sure. This is why we focus primarily in guide investors to review our EBITDA and cash flow as our main KPI. Net income for the quarter was $7.7 million, essentially flat to our 8.3 last year, Q2 2025. But if you exclude the non-cash fair value adjustments on our biological assets inventory, which are effectively non-cash mark-to-market accounting entries that do reverse over time, then our underlying net income would have improved meaningfully year over year, driven by the higher gross profits, lower interest expense, that are partially offset by higher SG&A to support our growth. Excluding these fair value swings, underlying net income would have improved $2.2 million, and on a year-to-date basis, net income would have improved by $8 million, driven by those same underlying strengths, higher gross profit, lower interest expense, offset by higher SG&A.

Thanks, Travis. And lastly, on capital allocation, how are you thinking about the NCIB going forward? Are you going to use the whole 5%?

Yeah, look, I think, as I mentioned, we have a disciplined framework for capital allocation, reinvesting in organic growth, pursuing selective and organic opportunities, repurchasing shares through our NCIB. We're still going to prioritize our capital investments as those improve yield, quality, and profitability, as I noticed earlier. are all listed on our website. look, as our share price increases, the return that we can generate from repurchases may decline. So as I've stated previously, we're going to continue to evaluate our NCIB within the range of available opportunities that can advance our strategy and deliver returns in excess of our cost of capital. And I'd also add that we're also committed to maintaining a strong balance sheet so that we can fund these initiatives, including the NCIB, from our own cash flow without the need to access equity markets. So thanks for that, Mark. If there's no other questions, I want to thank everyone for joining us today. And please don't hesitate to contact us if you have any questions. Thanks.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.