CA - Entourage Health Corp (ETRGF) Q3 2023 Earnings Call Transcript

2023-11-28 12:33:04 ET

Entourage Health Corp (ETRGF)

Q3 2023 Results Conference Call

November 28, 2023 10:00 AM ET

Company Participants

Catherine Flaman - Director of Communications

George Scorsis - Chief Executive Officer

Vaani Maharaj - Chief Financial Officer

Presentation

Operator

Good morning, everyone, and welcome to the Entourage Health Corp Third Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode and 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, Galen, and good morning, everyone. Welcome to Entourage Health's third quarter 2023 results conference call. Please note, this call is being recorded. For copies of our press releases and supporting documents filed or to retrieve a recording of this call, please visit the Investor Relations page on our website at entouragehealthcorp.com. The replay will be available later this afternoon.

With us on today's call is George Scorsis, Chief Executive Officer and Executive Chair of Entourage Health; and Vaani Maharaj, our Chief Financial Officer. Today, we will review the business highlights and financial results for the third quarter as well as discuss recent developments. Following formal remarks, we will open the floor to 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 security laws, the company does not assume any obligation or update or revise them to reflect new events.

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 for joining us this morning. It is my pleasure to be with you today. Let me begin by highlighting the business transformation our company has undergone. Entourage today stands distinctly different from just a year ago. Over the past year, we've not only adapted, but also refined our business surmounting the challenges that the industry has once again thrown our way.

A pivotal decision shaped our trajectory, a strategic move away from cultivation. As we delve into our Q3 story, it takes a significant turn.

We've made remarkable strides in refining our business operations. Through the streamlining of processes, procedural enhancements and efficiencies, we have focused on minimizing the necessary costs forging a solid foundation for our business. This marks just the beginning of our journey.

Let me take you through a quick snapshot of our milestones. Overall, the rise in our gross margin is evidence of our ability to maximize the value of each revenue dollar achieving 27% in Q3 2023, a significant leap of 149% year-over-year. Notably, our cost of goods COGS has steadily declined by $8.6 million or 58%. At the same time, our strategic efforts in streamlining SG&A have resulted in 12% reduction. Alongside these accomplishments, our EBITDA has seen a 71% improvement.

I'll let Vaani speak to our financial accomplishments in more detail in a few moments.

But for now, I want to touch on how we got to this point. The focus for us has been the enhancement of both our capital structure and operational efficiencies revolving around three key levers: strong fundamentals. Our commitment to simplicity goes beyond restructuring. We have developed an approach focused on disciplined cost management to reduce expenditures, increase our cash position and meet positive EBITDA goals. Focused product portfolio.

We continue to analyze the ever-evolving consumer trends and preferences that shape the market -- with this understanding, our approach enables us to meet current demand and anticipate future needs, a product portfolio that consistently delivers a strong sales performance through an exceptional quality of our brands. Let me be clear, we are never going to sacrifice quality for market share.

Thirdly, sustainability and financial over our financial future. Our strength in the financial future reflects the success of our strategic decisions and our ability to weather challenges in this dynamic market, setting us up for ongoing success.

Now let's take a closer look at the decision to exit our cultivation, allowing us to focus running a leaner, more efficient operation. This shift involved eliminating unnecessary expenditures and fine-tuning processes. I wanted to discuss some steps we have taken that speak to this. Increased production. Having introduced pre-roll automation at our Aylmer site, we have boosted our production rates to over 1.6 million pre-rolls per month with 2 million pre-rolls per month by the end of the year, meeting the demand we are seeing in this ever-evolving and quickly growing category.

Advancements in the inventory and supply chain management have allowed us to adjust forecast more effectively, thereby improving our market agility. We are adjusting our forecast with greater precision, ensuring that our inventory aligns seamlessly with market demands, aligning our labor resources with organizational goals, ensuring a balance between workforce productivity and cost effectiveness.

Entourage is effectively engaging in a collaborative and productive process with a senior secured lender to restructure the senior debt. This move is driven by a desire to ultimately improve the company's financial health. These substantial measures represent ongoing initiatives poised to enhance our bottom line. We are already witnessing improvements in our P&L and anticipate further enhancements over consecutive quarters.

Now shifting our focus to the commercial side, we observed a decline in net revenue in the adult-use market. However, this dip is not without purpose. We conducted a thorough portfolio analysis strategically withdrawing certain margin-dilutive SKUs and redirecting our focus towards products thriving in the market. Our scrutiny extended into retail partnership programs, identifying areas where the return on investment was not optimal while exercising prudent management of sales and marketing expenses. We know this will set us back on the right track to having a well-rounded product portfolio in 2024.

Added to that, our strategic focus is the pre-roll segment, one of the fastest-growing categories. As previously mentioned, our commitment to capitalizing on -- is evident in our ambition to plan to produce over 24 million pre-rolls in 2024. Notably, our Color pre-rolls have secured a spot among the top 10 brands nationwide holding on to the #6 position. The success has been directly linked to the proactive efforts of the sales team. We have expanded product distribution in retail outlets as well as the focus on larger format pre-rolls packs.

This not only underscores the popularity of these offerings, but also solidifies our position as a key player in the market. To note, we have a diverse portfolio catering to budget-conscious consumers as well. We recently introduced Dime Bag branded pre-rolls, garnering significant attention and making a notable impact in Ontario with 250 stores carrying this product across the province. The reception from our consumers is a testament to the success of the strategy showcasing how premium products at cost-effective prices are now commanding the spotlight.

Looking ahead, we are rolling out our top sellers, including the new high THC cultivars infused pre-rolls, Additionally, our recently launched holiday Advent Color cannabis calendar deserves a mention. Our first shipment sold out in record time.

With that said, we are strategically expanding our market reach. We aim to establish a strong foothold in areas with high-growth potential by identifying key regions and demographics. Both our Color Cannabis and Saturday Cannabis products are thriving, probably displayed across 80% of the retail market. Our market penetration signifies the strength of our brand and the widespread acceptance of our products, positioning us as an upcoming competitive force in the industry.

Turning our attention to the medical side of our business. We achieved an 87% patient renewal rate over the quarter. Revenues in Medical increased 2% in Q3 year-over-year despite a backdrop of declining medical cannabis sales in the Canadian market. Starseed experienced an uptick in new patient acquisitions. Our efforts in customer patient acquisitions or renewals have grown, supported by our extensive portfolio of 45-plus products, including Albo cannabinoids that we have just entered into our portfolio that have CBG and CBM. Additionally, we launched a line of controlled delivery inhaler products, which have shown high patient demand for controlled dose discrete delivery methods.

In short, while we are expanding our patient base, we are also improving our platforms, product offerings with tailor-made solutions that bring forth a patient-first mandate. In our recent expansion into the global market, our medical cannabis fulfillment to Australia has proven successful. Considering the Australian markets emergence as one of the fastest-growing medical cannabis sectors, we aim to capitalize on this momentum with plans for a second shipment in the coming months.

Before passing it over to Vaani, I want to mention that these early outcomes are a testament to our entire team's collective and dedicated effort as well as hard work. In summary, Entourage stand strong with a promising narrative. Our strategy over the past year has proven its alignment amid inflationary trends and operational complexities. We anticipate to see steadier growth moving into 2024. We know that the next steps we took over the next year will align with our long-term goals for sustainability and profitability.

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

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

As we discussed in our first two earnings calls for the fiscal year, 2023 has been focused on our transformational initiatives as highlighted in our MD&A. The Q3 financial results clearly demonstrate this. These initiatives have resulted in our second consecutive quarter of lower cost of goods sold and a dramatic reduction in cash burn. In fact, whereas in Q2 2023, one quarter ago, the company used $5.4 million to fund operating activities. In Q3 2023, our operating activities generated $0.9 million of cash.

Cash conservation while meeting quality requirements and order timing remains our focus as we push through to bring in the fiscal period.

To start, our third quarter total revenue decreased by $1.2 million or 9% to $12.3 million compared to the same quarter in 2022. Net revenue, which is revenue less excise duty, decreased by $1.3 million or 13% to $8.8 million compared to the same quarter in 2022. On a consecutive basis, total revenue decreased by $1.2 million or 8% compared to Q2 2023, consistent with current adult-use industry experience. The net revenue decrease was largely driven by adult-use channel softness, contributing a shortfall of $1.4 million or 20% and relatively flat medical channel contribution. Shortfall in adult-use revenue is partially due to the strategic realignment in our product offerings as well as continued evolution of market preferences.

For the 9 months ended September 30, 2023, net revenue fell short of prior year by $1.4 million or 4% due to sustained softness in the adult use market contributing $1.1 million as well as timing in the medical channel, which contributed $0.4 million to the shortfall. Despite lower than prior year adult-use revenue, the company's distribution in retail is higher than prior year by 3%, with 80% of retailers carrying our products, and 52% of those retailers carrying at least four products, an improvement of 11 points.

For the 3 months ended September 30, 2023, our average selling price per gram after excise duty was $2.23 per gram, reflecting a decrease of $0.55 or 20%. This is largely due to a $0.35 decrease in medical due to the mix of products sold. This is as a result of redirecting patients to different formats as well as a $0.64 or 24% decrease in adult use pricing due to higher discounts and promotions.

For the 9 months ended September 30, 2023, average selling price was relatively flat to prior year, showing a $0.02 or 1% increase. We continue to expect our average selling price on an aggregate basis to remain stable or improve over time as we introduce more premium innovation and formats and as we continue to explore opportunities with international bulk sales.

Gross profit before changes in fair value was $2.4 million for the 3 months ended September 30, 2023, compared to negative $4.9 million for the same period in 2022, which is an increase of 149%. The same metric for the 9 months ended September 30, 2023, reflected growth of $9.2 million or 550%. This change is the result of our reduction in cost of goods sold driven by the following initiatives.

First of all, whereas for the 3 months ended September 30, 2022, the cost of biomass input was an average of $1.24 per gram and mostly internally sourced. For the 3 months ended September 30, 2023, 80% of biomass used was externally sourced at an average of $0.58 per gram, and 20% of total grams sold through were internally grown at an average rate of $1.94 per gram. This improvement has reduced the cost of our product significantly.

Secondly, while we continue to pursue initiatives aimed at reducing our temporary labor, our

overall labor has decreased by $2 million, while our daily pre-roll production has increased by 362% due to our pre-roll machine improvements.

From an SG&A point of view, Q3 total SG&A was lower than Q3 2022 by $0.8 million or 12% and $0.5 million or 2% for the 9 months ended September 30. This reduction is largely due to the restructuring initiative 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 third quarter with cash and cash equivalents of $9.3 million or flat to December 2022.

All in all, the financial results of the quarter are strong despite virulent market conditions. Our focus on cash preservation, operational efficiency and consumer needs will continue to keep us afloat as we continue to weather market conditions.

And with that, I'll turn the call back over to George for closing.

George Scorsis

Thank you, Vaani. Before we transition into our Q&A session, I want to leave you with this final thought. While many have chosen to exit this market as they cannot compete, we are confident we have the right people, assets, processes to emerge as a profitable leader in the industry. This perspective aligns with our positive outlook. The sector has emerged from its downward spiral and is now presenting itself with an opportunity.

I believe Entourage is prime to ride the wave of the next growth phase, instilling fresh confidence in the future of Canada's cannabis industry.

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

Question-and-Answer Session

Catherine Flaman

Operator

Catherine there appears to be no further questions. This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. George Scorsis, CEO of Entourage Health for closing remarks.

George Scorsis

Thank you once more for joining us today. As the holiday season draws near, we invite you to discover our latest cannabis offerings. Whether you're drawn through the return of our Color kit calendars intrigued by the budget-friendly options of Dime Bag products or looking to add something extra to your upcoming holiday party with our Saturday Night, mangled diesel and PRJs, we have something for everyone.

Wishing each and every one of you a safe and happy holiday season. I want to thank you on behalf of Entourage.

Operator

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

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