CA - Entourage Health Corp. (ETRGF) Q2 2023 Earnings Call Transcript

2023-08-30 14:22:10 ET

Entourage Health Corp. (ETRGF)

Q2 2023 Earnings Conference Call

August 30, 2023, 10:00 AM ET

Company Participants

Catherine Flaman - Senior Director of Communications and Corporate Affairs

George Scorsis - Executive Chairman and CEO

Vaani Maharaj - CFO

Conference Call Participants

Presentation

Operator

Good morning, everyone, and welcome to the Entourage Health Corp. Second Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] A replay of this call will be available on the Entourage Health website later today and will remain posted for the next 90 days.

I would now like to turn the conference over to Catherine Flaman, Director of Communications with Entourage Health. Please go ahead, Catherine.

Catherine Flaman

Thank you, Ariel, and good morning, everyone. Welcome to Entourage Health's second quarter 2023 results conference call. Please note, this call is being recorded. For copies of our press release and supporting documents filed on August 29, 2023 or to retrieve a recording of this call, please visit the Investor Relations page of our website at entouragehealthcorp.com. The replay will be available later this afternoon.

With us on our call today is George Scorsis, Chief Executive Officer and Executive Chair of Entourage Health; and Vaani Maharaj, the Chief Financial Officer. Today, we will review the business highlights and financial results for our second quarter as well as discuss recent developments. Following formal remarks, we will open the floor for questions.

I would also like to remind everyone that during today's call, we will discuss our business outlook, which will contain certain forward-looking statements. Actual events or results could differ materially from those expressed or implied by such forward-looking statements due to several risks and uncertainties, including those mentioned in our most recent filings with SEDAR. These comments are made based on predictions and expectations as of today. Other than as required by applicable securities laws, the company does not assume any obligation to update or revise them to reflect new events or circumstances.

Now at this time, it is my pleasure to introduce George Scorsis, Entourage Health's CEO and Executive Chair. George, please go ahead.

George Scorsis

Thank you to everyone joining us this morning. Once again, it is my pleasure to be with you today, and here's to hoping you're having a wonderful summer.

Before delving into our recent performance, I want to share a high level mid-year market update outlining our strategic stance and progress. As we are all aware, the initial months of this year were marked by unparalleled challenges, the external landscape grappled with elevated inflation and deceleration in the global growth that rippled across industries.

Concurrently, our sector faces its unique challenges with heightened competition, pricing pressures and surplus supply. However, as we enter the latter half of the year, Entourage stands strong with a promising narrative, our strategy has weathered the storm, aligned effectively amidst inflationary trends and operational complexities, and we are starting to see the market turn. This is where I want to begin this Entourage recap and journey with our messaging today. In the later part of 2022, we initiated our business transformation plan, recognizing the necessity to pivot.

After careful consideration, we determined that collaborating with a reputable third-party supplier was the optimal path forward. The tangible benefits of our growth strategy are progressively taking shape, evidenced by reduced expenses, notable enhancements in the gross margin and an upswing in our cash performance. This meticulous and comprehensive approach is directing us towards a more streamlined and effective operation, envisioning an annualized cost savings exceeding $10 million represents a cautious estimate, underscoring the prospect of achieving even more substantial advantages.

The second quarter positioned us strongly expanding on this. I would like to briefly highlight some of our financial accomplishments, the topic that Vaani will delve into more comprehensively in just a moment. Our enhanced gross margin is evidence of our ability to maximize the value of each revenue dollar by eliminating expenditures wherever possible and fine-tuning processes. We are not only effectively managing costs but have also achieved remarkable gross margin of 21% in Q2 2023. This is a significant leap from 5% recorded in Q2 2022.

Notably, our cost of goods, our COGS has exhibited a steady decline, surpassing $1 million in savings. While our strategic efforts in streamlining selling, general and administrative expenses has resulted in a substantial 13% reduction. Alongside these accomplishments, our EBITDA has seen a 28% improvement. Our fiscal understanding is mirrored in the vitality of our cash performance

The cost reduction measures have orchestrated an improved cash flow and undeniable gauge of financial stability. This is pivotal in fulfilling our commitments and seizing opportunities. Additionally, we orchestrated significant enhancements to our capital structure, debt management and liquidity position throughout the quarter.

Our valued partner, LiUNA Pension Fund supported the company with a further $14.6 million and repayment of the remaining balance of our BMO loan after the sale of the Strathroy facility. These early outcomes are a testament to the collective dedication of the team and our unwavering commitment to fiscal responsibilities. As we witness the benefits, we have an opportunity to ensure a secure and thriving future for our business in the cannabis industry. Now let's move on to our commercial objectives.

Again, although we're seeing shortfalls in the industry, the cannabis market is showing a positive trajectory. In fact, by 2027, the Canadian cannabis industry is expected to be worth $8.8 billion, with the biggest markets being Ontario and Alberta, Ontario is a particular province of opportunity as it is also expected to lead growth in 2023 with a provincial compound annual growth rate of over 20%

Let's dive into this more and how we are responding to this market growth. First up, the adult-use market. While we have a diverse portfolio of products we noted early in the year that premium flower and pre-rolled market segments are the two fastest-growing segments. In fact, our overall premarket alone increased 45% year-over-year. This is outstanding. Our pre-roll sales accounted for 65% of our adult-use total revenue.

We stand steady at market share of 3% overall. Our Color pre-rolls are a top five brand across Canada. This demonstrates a strong demand for and popularity of our pre-roll offerings, solidifying our position as a leading player in this category and market. In response to our budget conscious consumers, we have recently unveiled Dime Bag, branded pre-rolls, just released last week, and we're already making a splash across Ontario. These new additions are strategically designed to enhance the existing offerings of Color and Saturday Cannabis brands, further enriching the company's growing product line.

Our partnership with our third-party supplier contract, coupled with our premium production, are poised to satisfy the surging demand for our brands, facilitating growth in the Canadian marketplace. Our pre-roll success has been fueling our distribution drive, producing over 1.4 million pre-rolls monthly, well on our way to our target of 2 million. Now I want to take a pause here, to make some things very clear.

We pride ourselves on producing quality products. It is important to emphasize our dedication to consumer research. Our continuous commitment to enhancing product quality through data evaluation and market analysis reflects the strong demand for our offerings. Our relentless pursuit in further supporting by valuable insights gained from consumer data points and recent reviews.

Notably, a recent Lyphe research partnership gathered customer reviews and highlighted an impressive 80% average approval rating for the quality, taste, aroma, and overall experience of some of our leading cultivars, underscoring the impact of our focus on consumer preferences and satisfaction.

Having established brand loyalty in the market, we are now capitalizing on this opportunity as our Color Cannabis and Saturday Cannabis products flourish adoring the shelves of over 2,100 stores across Canada. Turning our attention to the Medical segment. We experienced the anticipated seasonal decline in sales from Q2 to Q1.

However, our efforts in customer patient acquisition and renewal have shown growth supported by our extensive portfolio of 45-plus products, including novel cannabinoid profiles such as CBG and CBN. Additionally, we are excited about our upcoming collaboration with [Ramadoss] introducing a line of controlled delivery inhaler products to the medical market. Q2 marked a milestone for the company with a seamless sale execution and fulfillment of its first international order, an impressive 100 kilograms of bulk medicinal cannabis dispatched to Australia through a partnership with Lyphe Australia.

4 of the company's premium strains will now be available to medicinal cannabis patients through Lyphe, cementing our global market presence and accelerating our strategic growth agenda as well as our international expansion. For us to provide safe, reputable, high-quality cannabis products, we continue to put the consumer and patient at the center of everything we do by ensuring we understand them. In addition to this data-driven approach, our innovative pipeline provides the right products for the market at the right time.

Before passing it over to Vaani, a brief recap. Entourage's growth journey remains steady. Our strategic blueprint for 2023 and beyond focuses on margin amplification, revenue growth and pioneering product innovation. With that, I conclude my opening remarks.

I will now turn it over to Vaani, our CFO, to provide an overview of our financial performance for the period.

Vaani Maharaj

Good morning, everyone. Thank you, George, and thank you to everyone joining us on our call this morning.

Please note that through the course of my financial discussion today, all financial information is prepared in accordance with international financial reporting standards and is in Canadian dollars, unless otherwise stipulated. Our first half of 2023 has been focused on our transformational initiatives as highlighted in our MD&A. The good news is that we continue to see these efforts pay off in our financial results.

During three and six months ended June 30, 2023, we completed the divestiture of our cultivation operations, consummated the centralization of all debt under one lender and implemented further automation initiatives at our Aylmer facility. These initiatives resulted in the reduction of our cost of goods sold and more importantly, our cash burn. In fact, whereas in Q2 2022, the company used $9.8 million to fund operating activities, in Q2 2023, our operating usage was $5.4 million, representing a 45% improvement.

Cash preservation while meeting quality and order timing remains our focus through the second half of 2023 as we ride the momentum of our success through the first half of the year. To begin, our second quarter total revenue increased slightly by $0.2 million or 1.4% to $13.4 million compared to the same quarter in 2022.

Net revenue, which is revenue less excise duty increased by $0.5 million or 5% to $10.2 million compared to the same quarter in 2022. On a consecutive basis, total revenue decreased by $1.7 million or 11% compared to Q1 2023, consistent with seasonality experienced in prior years. Our year-over-year net revenue growth was largely driven by the adult use channel growth of $0.4 million or 8% and our international bulk sale contribution of $0.2 million, slightly offset by lower medical channel contribution of $0.2 million or a 4% decline. The growth in adult use was due to our pre-roll sales. Lower medical revenue reflects an updated product allocation policy, which we expect to smooth out over the course of the fiscal period.

Our total net revenue was flat for the six months ended June 30, 2023, compared to the same period of the prior year. For the six months ended June 30, 2023, our average selling price per gram after excise duty was $2.70 per gram, reflecting an increase of $0.27 or 11%, largely due to international bulk sale price growth which contributed an incremental $2.05 as well as a $0.12 growth in adult use due to mix.

These were slightly offset by the medical business selling price decreasing by $0.46 per gram due to higher discounts and promotions. We continue to expect our average selling price on an aggregate basis to remain stable or to improve over time as we introduce more premium innovations and formats and as we explore the opportunities with our international bulk sales.

Gross profit before changes in fair value was $2.2 million for the three months ended June 30, 2023, compared to a gross profit of $0.5 million for the same period in 2022, which is an increase of 354%, whereas the same metric for the six months ended June 30, 2023, reflects a growth of $1.9 million or 60%.

This change is the result of our reduction in cost of goods sold driven by the transformational initiatives as follows: to begin, whereas our pre cultivation divestiture cost of biomass inputs trended around $2 per gram and was mostly internally sourced, for the three months ended June 30, 2023, 62% of biomass used was externally sourced at $0.65 per gram and only 36% of grams were sourced internally at a rate of $1.94 per gram. This improvement has reduced the cost of our products substantially.

Secondly, while we continue to pursue initiatives aimed at reducing our temp labor, our overall labor costs have decreased by $1.4 million or 46%, while our daily pre-roll production has increased due to our pre-roll machine investments. This result was simply not possible without the perseverance and efforts of our production team in Aylmer.

From an SG&A perspective, Q2 2023 total SG&A was lower than Q2 2022 by $1 million or 13% and $0.3 million or 2% for the six months ended June 30. The reduction was largely due to restructuring initiatives undertaken such as reducing headcount, subletting certain office spaces, rethinking consulting work and trying to drive value from every dollar we spend.

Turning to our balance sheet. We ended the second quarter with cash and cash equivalents of $9.4 million consistent with December 31, 2022. In each of these calls, I mentioned our sustained effort to improve our capital structure, and this quarter is no different. During the quarter, we paid down our debt to BMO using proceeds obtained from the sale of the Strathroy facility.

The remaining balance of the debt was then assumed by LPF, creating a more streamlined debt structure for the company. This provides us the runway for the company to continue to recover and to build on the success of the last six months. All in all, financial results of the quarter are strong despite virulent market conditions. Our focus on cash preservation, operational efficiency and consumer needs will keep us afloat as we continue to weather market conditions.

With that, I'll turn the call back to George for closing.

George Scorsis

Thank you, Vaani.

Before we transition into our Q&A session, I'd like to leave you with a final reflection. The year ahead will be a crucible for companies, separating those who exit the industry, from those who rise as exceptional operators. Those who survive will operate with unwavering determination, resilience and a resolute focus on value.

The future leaders of cannabis will capitalize on the market share vacated by our less fortunate counterparts. This perspective aligns with our positive outlook. This sector has emerged from its downward spiral and is now presenting itself with an opportunity. Entourage, I believe, is prime to ride the wave of the next growth phase, instilling a fresh confidence in the future of Canada's cannabis industry for both the consumer, patient and our shareholders.

With that sentiment, I pass it over to Catherine to guide us through the Q&A session.

Catherine Flaman

Thank you, George. [technical difficulty]

Operator

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Mr. George Scorsis, CEO of Entourage Health for any closing remarks.

George Scorsis

Thank you all again for joining us on today's call and for your continued support and confidence. We look forward to sharing our progress with you in Q3 as we grow and evolve further into 2023. If you have any further questions, please reach out to Catherine and our Investor Relations team. Stay healthy, safe and continue enjoying the last few days of this summer. Thank you, and have a great day.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

Question-and-Answer Session

Q -

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