CNGGF - Cann Group Limited (CNGGF) Q4 2023 Earnings Call Transcript
2023-08-28 08:59:10 ET
Cann Group Limited (CNGGF)
Q4 2023 Earnings Conference Call
August 27, 2023, 09:00 PM ET
Company Participants
Georgina Freeman - Investor Relations
Peter Koetsier - Chief Executive Officer
Deborah Ambrosini - Chief Financial Officer
Presentation
Georgina Freeman
[Starts Abruptly] My name is Georgina Freeman, Investor Relations with Cann Group. With me today Peter Koetsier, the CEO, and Deborah Ambrosini, the CFO. This morning, we will run through a presentation with Peter and Deborah presenting. And then at the end, we will open up for Q&A. To ask a question, please type it into Q&A section on your screen, and at the end, we will make our way through these in turn.
I will now pass over to Peter. Thank you, Peter.
Peter Koetsier
Thank you so much. And it's great that we've got so many people participating, again listening in. Thank you very much for everybody for their interest.
Only a few weeks ago, of course, we were sharing a lot of information. Today's focus, of course, is on the full year performance for the business for financial year ending in June of this year. We'll talk a little bit about where we're up to, though, in addition to our progress for last year and the summary of the great achievements and progress we made. And then, we'll take a look forward a little bit to the current financial year we're in, which is clearly our focus.
So, as I look through the financial year '23 highlights, I think there are many. Here, we're focused on six. Firstly, our sales doubled to almost $13.8 million, which is a huge achievement, that's 115% up from the previous financial year and should be a strong indicator, I think, of our progress. In addition to that, we have taken major step forward in terms of our production, both in terms of quality and quantity and expanding our range, all of which will start to pay dividends as we move through this financial year. And when you contemplate that, we were around about 3 tonnes last financial year in terms of total production, and we're moving to 8 tonnes to 9 tonnes this year and then on to the goal of 12.5 tonnes. It gives you a signal as to the kind of direction and position that we're moving towards as we go forward. So, we're right at that point where things are starting to fly. I use the analogy sometimes of an airplane. The airplane has now taken off, and we're now trying to get ourselves as quickly as possible to cruising altitude and that will start to happen as we move through this financial year.
In May '23 as a key indicator as part of that, we planted essentially the biggest crop we've ever planted from a commercial point of view. That's about a year into commercial cropping in Mildura and that give -- should give everyone a pretty strong signal that we are headed in exactly the direction that we plan to be.
The other things that are a key note, obviously, thanks to our shareholders who continue to support us through capital raising, which is taking us to the destination and the purpose that we have Cann Group set up for.
One of the things that we ended the year on, which was a variation with a key customer. We signed a deal with Levin Health and that is more important from the point of view that it's a signal to where we're headed in the marketplace. And when you have capacity and quality, it allows you to then give assurance of that capacity and quality to key customers. And I will signal that our intention going forward is to sign many such longer-term agreements with people now that we can provide that level of certainty of quality and quantity. And I think that will start to build a base for our revenue, our sales going forward. That will give us a great deal of strength.
The other piece that making Mildura go to its capacity allows us to do, and that is the sale of Southern facility, a small facility in Melbourne. That allows us to double down -- more than double down in Mildura and realize some of the benefit as we did in '23 from the sale of that facility.
Importantly, as I said, more than 100% increase in sales to $13.8 million, the key components, though, as you break it down, you can see there that across the board that dried flower and oil were substantial. The dried flower is probably the most important thing to pay attention to in the sense that not only is that a signal of quality because dried flower needs to be at the highest qualities, but it also is directionally to where the market is. So, at the moment, the market is more than 70% in that dried flower space. And I anticipate that as a part of our business to continue to grow faster than the rest of it, but still a strong performance across the board in the big sectors of dried flower and oil.
So, you'll see a lot of the numbers there, which are all pretty impressive considering that we are still early in production. But we also sent our first small shipment off to Germany as really as a learning exercise, and that's something that we should look forward to in '24, is being prepared as we get to scale and we get to quality. The contemplation of overseas exporting is definitely on the agenda. But right here right now, the market in Australia is booming and the number of customers that are requesting quality, consistent flower is more than enough for us to meet our financial goals. The other thing that I mentioned, of course is, as part of that, we will attempt to sign longer-term deals with our suppliers that gives us certainty of supply and revenue.
So, as we look at Mildura, these are real photos from our facility in Mildura. And it is amazing how far we've come. And everything from the way in which our [mother stock] (ph) on the left-hand side is being handled and grown through all the way through to the size of production and the last picture there of the amazing quality that is coming out of our facility now. And I would rank some of the crops that we are now pulling out of the facility as the best in Australia. So that's an amazing achievement only 12 months into commercial supply from that facility.
So it's progressed all the way through. It's been a long process of build, but it's now being realized. And I think that's the key message here is '23 was the pivot point. And as we go into the rest of this financial year, we're on track to realize the volume that's in there. Importantly, we have staffed the facility in order to meet these new production quality and quantity needs. And increasingly, we're becoming a very important employer in the Sunraysia area, and we're very proud of the role we play in that part of the world.
So, it's been an evolution. And without going into huge detail, we have made amazing progress on our breeding, cultivating and genetics program for Australian quality product. We will continue to do that over time, we will continue to improve the genetics to increase our range. We are now in the place where we can offer a full service business all the way from growing plants, all the way through to packing at a GMP facility, which I would rank as the best in Australia at the moment.
And as we produce more product, it's not hard to understand that when you plant more product into that facility that we will achieve economies of scale, which will be substantial. And we will see improved margins as we grow more and sell more.
And then, lastly, the Board has evolved into a place where we now have strong support from management and through the Board membership to create a powerful future for this organization.
So, without further ado, I'll hand over to Deborah to just talk us through the top-line financial results.
Deborah Ambrosini
Thanks, Peter. Sorry, thanks to everyone [indiscernible] today.
As Peter mentioned earlier, Cann increased its revenue from sales of products and services by 115% or nearly 2.2 times to what it was in FY '22 to $13.78 million, due to increased new and repeat orders for our high-quality products coming out of Mildura at the moment.
Total income, including other sources of income for FY '23 grew to $21.68 million. Additional income recorded included accrual for R&D rebate -- for the R&D rebate of FY '23 and a gain on sale of Southern facility, land and buildings.
Operating expenses increased in line with expectations after the company officially brought the Mildura facility online, leading to increased cultivation, manufacturing and staffing costs during the year. As we now increased production [there as well] (ph), we anticipate achieving economies of scale into FY '24 should improve the margins in our products.
Other notable expenses recorded during the year included significant research and development costs incurred for the S3 clinical trial, which we have also included in our R&D rebate claim for FY '23.
Increased interest rate expenses as a direct result of the interest rate rises during the year and additional depreciation and amortization after the company began amortizing Mildura facility in the last quarter of FY '22.
I will now hand back to Peter, who will provide further details on the strategic outlook for FY '24.
Peter Koetsier
So, if you're like me, you are focused very much on the future, it's important to accelerate the achievements of the last financial year, but we are pushing very hard towards what we're going to be in the future, which is very exciting. And I think if you look at the trajectory that we've already made with respect to sales and even some of [indiscernible] amounts without really stepping into the space the way that we're intended, I think that sends a signal about the direction we're headed.
It's obviously been a long journey, and there may well be people on this call who've been with us for a number of years, who've supported us and allowed us to get to the place that we are. And I would say to you, thank you, and we're about to start to deliver on the promise and that with quality and quantity, the way that it was always designed to be. And that journey -- whilst I've only been here for half of the last financial year, that journey is really picking up pace now and creates a huge amount of optimism about where we're headed in this financial year.
So, there has been some change, including myself, in the last 12 months. And today, if you look at the ASX announcements, you'll see that Allan McCallum, who has been Chairman of this organization for more than seven years has decided to retire. And as part of that, the transition to an existing Board member, Dr. Julian Chick has taken place as of today at midday. And I'm very encouraged to be working with Julian. I think he brings some amazing skills and experience to help us on to the next phase of the business.
This slide I just put in just to remind us that we're right in the middle of the capital raise. And to remind you of the key points that we talk to about the market size and our trajectory. But maybe, I don't know, Deb, if there's anything right in the middle. So, I don't know if there's any updates you want to give.
Deborah Ambrosini
Yes, firstly I just want to thank [indiscernible]. But as we announced, we completed the raise back in August this year [indiscernible] where we raised $4.46 million through the non-renounceable rights issue. We now have three months from the close of that offer to place a shortfall to sophisticated and professional investors. And as we've previously announced, PAC Partners has been appointed to undertake this role for us. We have begun the initial discussions involved in this process, and we will update the market as we progress the process at this stage of [indiscernible].
Peter Koetsier
So, it really is nice to have an exciting message to take to the marketplace about where we're at. And as I said, the plane has taken off, and we're heading up in altitude to reach a new cruising attitude that is impressive.
For me, this next financial year has three key pillars. We need to make sure that the scale and quality of production continues on the planned trajectory. And so far, so good. Everything is progressing exactly as we would have hoped. In fact, I think the quality has come in, perhaps, a little earlier than people expected. And that is, for us, a signal of the future.
It also means that as we scale up, it allows us to extend our portfolio to meet the market needs. The market requires not just one flower or one type, it requires a range. And as part of that, we are -- we do have a huge history of genetic development, and some of those genetics are actually brand-new genetics have been grown in the Mildura facility right now and that we will continuously as we end this year, and as we get into the first quarter of next year, we will introduce even more genetics in two new ways. And that creates not just new and innovative products that are higher quality, but it also allows us to offer different things to different customers. So, it is a great opportunity for us moving forward.
And then lastly, the team, myself and everyone is 100% focused on getting revenue as part of all of this. So, we've produced great quality product at huge quantities compared to what we've done in the past with an extensive range. We are solely focused on making sure that, that product is sold and available to Australian patients this year. And as we do that, that fundamental change will see the cost of production per gram come down dramatically and also our revenue increases and that is taking us to the place that we must be, which is a better profitability as we move into the '25 financial year.
So, with that, not only because it was a few weeks ago, the story remains the same, which I think is a good thing, but it's important that we answer the questions that the marketplace has. And Georgina, maybe there's some questions that we've received during the presentation.
Question-and-Answer Session
A - Georgina Freeman
Yes. Thank you, Peter and Deborah. So, just a reminder for all those on the call to ask question, please submit your question into the Q&A section on your screen.
So Peter, we do have a number of questions. So, I will try to group them if I can. But the first question, says, well done on a great top-line result. Do you think you can sustain the current rate of growth?
Peter Koetsier
First of all, thanks to the person for the question and the complement on the top-line results. I think the answer is without really pushing the maximum production through the facility, we still managed to grow at 115% on the sales line, and that was at a 3-tonne production. And I don't want to necessarily promise what our revenues will be going forward. And I don't know that's necessarily appropriate. However, we are moving from 3 tonnes to 9 tonnes to 12.5 tonnes. So, I would be very surprised and very disappointed if our current rate of growth doesn't continue.
Georgina Freeman
So, the next question is more around the revenue by product. With oil and dried flower representing majority of sales in full year '23, can you provide insights into how you think about these products in terms of margins? And how do you see the category split evolving over time?
Peter Koetsier
Yes. At the moment, the split of some 77% of units being for dried flower seems to be pretty stable. There is likely to be launches of other forms in the next couple of years, things like vapes and edibles. But I think dried flower remains the mainstay for the short term at least over the next 12 to 18 months. And it is also the basis of good quality products. So that's where our focus will be. And you'll see, as a result of that, substantial growth being focused in that area in the business. Oils will always remain a strong component of the marketplace.
And from a margin point of view, the higher the quality product for patients, obviously, the more willing they are to pay for that. And high-level flower remains a higher-margin product, if we can make the quality the way that we are right now consistently over time.
Georgina Freeman
Thank you, Peter. The next question, how will the growth of these sales translate to investor ROI? Are there further investments planned? Or are the bulk of investing expenses finished?
Peter Koetsier
Yes. We're in a great place that the capital expenditure is largely complete for the facility. We will have -- and the remaining investment in the facility and in the business will be focused on operational acceleration. So, whether it's a multi-head filler, which allows us to put product into jars quicker or whether it's an increase in staff, we're already on the pathway for that to improve our outcomes, and those are obviously linked to more production and hopefully to more sales. So that's a key component of what we're going to be investing in the future.
But the facility itself is almost completely finished. So, it's never over completely, because there's always tweaks and improvements and changes and preventative maintenance. But largely, facility is built to get us to the 12.5 tonnes. So, my sole focus is to get Mildura production faster, bigger, better that's where all the money is being put aside. But maybe -- I mean from a total investment point of view, the ratio of sales to investment will obviously change dramatically as we reach production.
Georgina Freeman
So, Peter, this question actually goes back to your previous 4E for the year '22. The company's previous 4E stated a new high CBD cultivar is proceeding through commercial trials. Is this cultivar now available for patients as a flower product?
Peter Koetsier
It's a great, very specific question. And I would say the answer is, we haven't taken that as a priority, although we haven't given up on that by any means. In fact, we've got some great genetics for high CBD inhalable flowers. What we have prioritized though is where the market is, which is much more focused on the 20%-plus THC inhalable flowers. So, we've been moving very fast to try and meet the needs where the vast bulk of the market is at the moment, but there is a definitive plan to move the CBD flower ahead. And as I said, we do have some fantastic genetics in-house for that. It's just a matter of priorities. So, it's -- the answer is yes, just not quite yet.
Georgina Freeman
Okay. Thank you, Peter. So, this next question's got a bit of an introduction to it. Labor introducing a bill later this year to facilitate a trial aimed to test when users of medicinal cannabis can safely drive. The trial proposed to take 18 months has been criticized with the process taking too long and that medicinal cannabis patients need to be treated in line with any other patient taking prescription medication. Can you please provide a view on the proposed trial? And what would a change in legalizing prescription medicinal cannabis for driving mean for the business?
Peter Koetsier
Yes. It's a big question for a short period of time. I think this is both good and bad news, I believe. The good news is that there is a recognition that things need to move forward. There's a recognition that things need to change. And there is a recognition in the Victorian government that there needs to be a process to move towards allowing people who are getting medicinal cannabis legally through a prescription are treated like anyone else who's getting a prescription and that is with the test to be more about impairment than it is about just absolute use of the product. And I think that's probably the key component to it. However, it's understandable that there are a number of people who are very disappointed that, a, that the timeline is going to take so long; and b, that this is all done in an 18-month period out of the normal driving conditions.
So, I think I don't know that we've heard the end of this story. As I said, good that there's progress being made, but disappointing, I believe that it's going to take so long considering the evidence that we have in front of us and considering that all this being asked for is for people with these types of prescriptions [indiscernible] everyone else with a prescription. And I'm not sure that, that lack of fairness is necessarily appropriate. I can't understand that governments tend to be cautious and move slowly. But this seems to me like -- and we haven't seen the full details yet, it seems a little bit slow for patients I believe.
And from a market point of view, there's no doubt that is driving the most change that the market would accelerate even faster than it is right now and the market is growing very fast right now, both from the point of view of existing users being able to use more products through the day, but also there are probably people who are taking things like opioids and benzodiazepines right now who aren't switching to medicinal cannabis simply because of the driving rule. So -- and that in itself is obviously quite concerning. So, hopefully, things will be further debated. But as I said, good and bad news.
Georgina Freeman
Thanks, Peter. The next question, how is Cann going in meeting any sustainability requirements moving forward? Will more resources be required? And how will that impact the business?
Peter Koetsier
I think we all believe that we have to put more and more focus on sustainability. As a start-up business, it doesn't tend to be your core focus. But as we start to get into higher production, there are a number of projects that we need to prosecute with respect to our sustainability and our ESR platform -- our CSR platform.
I think there are some things that we could tick off as an organization that we're very proud of. Firstly, ours is an agricultural product, and it's grown without pesticides, without any interference. So it's naturally grown from that respect. We are, as we've talked about, a great employer in a rural regional area, which we're very proud of as well. We have a number of programs that allow all -- people from all walks of life to work in our facility in Mildura particularly but across the company, which we're also incredibly proud of.
Our view now turns to as we put production up to probably two key areas. One is the power consumption, and I've talked a little bit about that in the capital raise, but that's definitely a project that's already being worked on about how we can get more sustainable power into the facility. And then the second one is about waste. And there are a number of local growers who are talking about various ways that the waste product, which is plant material. So it's not horrendous waste, but it is waste that needs to be contemplated and how that might be reused, how that could be utilized in a number of different ways from fertilizer to animal feed, are all being contemplated by the industry right now.
So the answer is, it hasn't been naturally -- as a startup company, it hasn't been a massive focus, but it will become an increasingly important part of what we think about and do. And as I said, there are a number of projects that are already underway that will take a while to be realized. But I remain definitively committed to our CSR, ESR. We are -- this is not just a business, it's part of society and part of the community, and I want every one of my employees to come to work feeling proud of who we are and what we're doing for society, and that's something that we'll never stop thinking about.
Georgina Freeman
Thanks, Peter. So, turning back to the capital raise. With the capital raise, it didn't meet Cann's expectations? The target was around $13 million, but only $4.5 million was raised. Was this disappointing?
Peter Koetsier
Look, first of all, target is $11.7 million. We're right in the middle. So I think it will be really premature for us to make any, great, big comments about this. It's running until October. So let's maybe park that the answer to that question until we get through the next few months and understand where we've landed. The only comment I'd make is, I continue to be thankful to those shareholders that remain loyal and support us and very appreciative of their trust in us. And we will talk more about the capital raise when we get closer to the end.
Georgina Freeman
Thanks, Peter. This next question is short and sharp. How long before Cann is profitable?
Peter Koetsier
If only it was a short, sharp, understanding of a crystal ball that I could tell you exactly the day that we could all put in our calendar. The first answer to that question is as soon as possible. I have no -- my key focus is to get us there is absolutely as quickly as we possibly can. So no one on this call should have any misconception that we aren't 100% focused on making that happen. But if you look at the scenarios in terms of production schedules, and the way that we're moving through things, in that financial year '25, EBITDA profitability is entirely likely possible is definitely our goal. So, if we can get more profitable quicker, if we can move the timeline forward, believe me, we will do it. We owe it to everybody on this call and also to our total organization to be as profitable as quickly as possible.
Georgina Freeman
Thanks, Peter. So, the next question, what potential lies in the overseas market compared to the domestic market?
Peter Koetsier
Obviously, the overseas market is big, and it has great potential. There's always going to be changes. Germany has taken the first step potentially towards legalization and those things will change the dynamics. There are obviously lots of opportunities across Europe that we could participate in. But to be perfectly honest -- and we do have claims as we go through '24 to look at that more seriously as we have the capacity to do so. But right here right now, the market in Australia is fast and it's growing and that is our single focus at the moment is to provide the kind of quality and quantity that the local market is demanding of us. Once we start to get closer to that achievement, then we can start casting our eyes in '24 towards the overseas markets. Although we have sent some product overseas, and we will continue our work to develop and understand the future pathway forward, in '23, our focus very, very much is about local production and local sales.
Georgina Freeman
So the next question is on automation. Enhanced automation for manufacturing processes has been called out as a key focus for improving operating efficiencies. What current manual processes are you focused on to transition to an automated process? What is the timeline and what is the benefit?
Peter Koetsier
Again, quite a huge question to answer because there are multiple things, big and small that we're trying to do in the organization of the way we're doing things, particularly in Mildura in order to make that reality. The biggest one probably to focus on which is easier to explain is we've ordered a multi-head filler. And maybe next time, I can show a picture of it. It's quite an impressive-looking machine. And that, for instance, is probably our strongest example where there'd be a major step forward.
At the moment, we have our wonderful staff in Mildura hand filling with a scoop into the jars, weighing them, making sure the correct amount of product is in there before putting on the line for it to be automatically capped off and labeled. What happens instead is that, that staff can be liberated to do other things, and we really do need them to be liberated to do other things as we start to push production. And the multi-head filler automatically fills the jars at a much faster rate and with precision in a way that allows us to really do two things: firstly, substantially speed up the manufacturing process and production for finished goods, but it also allows us -- that multi-head filler can be used for other people's products.
So, as a quality GMP facility with the TG0 93 changes in July 1, there are a number of companies who are bringing bulk flower in or have bulk flower who would really like to have it packed off in a GMP facility. At this point in time, we're doing a little bit of that, but multi-head filler will change that. So that will be another revenue source for the organization as well. So the multi-head filler is probably the best and easiest to explain example of automation. But there are many others, big and small, as I said, that are all directed towards speeding operation and getting our production facility to maximum as quickly as possible and to improve quality.
Deborah Ambrosini
I will also say that it's not just automation that [indiscernible], we're also looking at different processes and different ways of doing things to cut time and improve quality. And we've already achieved quite a few things improving [indiscernible] better quality and doing it that right now since we opened up the facility back in April last year. So there's a number of things we're doing to cut costs and to improve the margins on the products.
Georgina Freeman
Thanks, Peter and Deborah. Next question, what is your strategy for increasing the customer base?
Peter Koetsier
Well, it's actually relatively straightforward to explain in the sense that if you have a broader range of really high-quality product at a consistent supply level, it's far easier to go to new and existing customers and ask them in a marketplace, which is demanding high-quality flower, particularly locally from Australia. It's actually pretty straightforward. The equation is quite simple. So more product at high quality allows us to improve existing and future customers.
And already as an organization, we are now -- as we stepped into financial year '24, we started to speak to a whole lot of new people who perhaps in the past either for quality or quantity reasons weren't necessarily with us. And we are hoping that over the coming months, we will start to -- and I feel pretty confident that we're going to start to attract a whole lot of new customers to improve our base. But importantly, not just new customers, there are existing customers who as we get better with what we're doing, and we provide a better range, existing customers will start to also want more than we've got.
So it's -- from here to the end of the financial year, assuming we do everything that we're planning and we're currently in the process of doing in Mildura, I feel incredibly confident that we're going to have a whole new base of customers going forward.
Georgina Freeman
Great. Thank you, Peter. We've now exhausted the group. I will now pass back to yourself for any closing remarks.
Peter Koetsier
Listen, I don't want to say too much except to say a huge thank you to my team, particularly the team up in Mildura, who in the financial year '23 did amazing things to turn that huge project on and to get it so quickly to the stage of such high quality and to really feel -- make us all feel really confident that the production levels that we're planning are very close. And then, as we progress in this financial year, we will start to maximize quality and quantity within the organization.
The other thing that I would love to say is that, and we've said it a couple of times, I am so humbled and appreciative of the support that our shareholders have given us. I know we've come back a few times to ask for money, and we've seen amazing support from those people. And I would say to all of those people and also anybody who is in the future wanting to invest us, we are at that exciting point that point where we are about to realize the dream and whatever the frustrations or impatience that have been there, we feel them, but we're right on the verge of making things that are exciting and really happen in that facility and in the marketplace.
And then the other part is, I feel very proud that we are helping patients. Every week, I'm reminded patients' stories of how significant it is, the product that we're making. This is not just any product, this for some people is life changing. So our commitment to quality is not just about making it available for sale, but it's also to the patients we serve.
As we go forward, we will continue to share more information with you. The two things I would encourage you to do is go on to the web page. We -- the team has done an amazing job to update our web page to reflect where we're up to right now. It also obviously contains the full annual report. You can download and read at your leisure, as well as news updates all the time. So, as I said I think a few times the last couple of calls, we are committed to try and keep everyone much more plugged into what we're up to because of the exciting journey that we're on rather than just waiting at the end of quarters or years to tell people about our progress. So, I'd encourage you to sign up on all the social media platforms on our web page to take a look at everything that we're doing, which we're really proud of. It's your company, stay plugged in and we'll commit to update you and share as much as we possibly can.
Georgina Freeman
Thank you, Peter. That now concludes the presentation.
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Cann Group Limited (CNGGF) Q4 2023 Earnings Call Transcript