NDVAF - Indiva Limited (NDVAF) Q3 2023 Earnings Call Transcript

2023-11-21 12:56:10 ET

Indiva Limited (NDVAF)

Q3 2023 Earnings Conference Call

November 21, 2023, 10:30 AM ET

Company Participants

Niel Marotta - CEO

Jennifer Welsh - CFO

Conference Call Participants

Andrew Semple - Echelon Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Indiva Limited Q3 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on the 21st of November 2023.

I would now like to turn the call over to Niel Marotta, CEO of Indiva. Please go ahead.

Niel Marotta

Thank you, operator. Welcome, everyone. Thank you for joining us this morning to discuss Indiva's financial results for the third quarter ended September 30, 2023. Matters discussed in this conference call include forward-looking statements. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements, factors and assumptions is available in our earnings press release issued today as well as the Risk Factors section of the quarterly MD&A and other public disclosure documents available on Indiva's SEDAR profile.

We're pleased to announce the best quarterly results in Indiva's history. In our third quarter, we achieved records in net revenue, gross margin percentage, gross profit dollars, record EBITDA and adjusted EBITDA and positive operating income. Q3 results were driven by the introduction of new products, including No Future Gummies and vapes, initial orders of Wana gummies into our contract manufacturing agreement and continued growth in our Pearls gummy lineup.

Note that Q3 was our first quarter that included results from the introduction of No Future products. However, this current quarter, Q4 will be the first full quarter, including No Future. In fact, No Future products only hit store shelves in Ontario in late October, so we expect momentum to continue to build for this in-house developed brand as well into 2024.

The introduction of No Future is an important one for Indiva as it marks our continued push towards in-house development of brands and products and a declining reliance on licensed brand as a percentage of our net revenue. In the past, Indiva may have been viewed incorrectly by some as a contract manufacturer due to our strategy of licensing successful U.S.

brands. However, it's very important to note that at all times Indiva is responsible not just for the production, but also for the provincial listings, marketing and sales activities for these brands in Canada. So while our strategy for branded product development has evolved and focus on in-house origination, reputation that Indiva has built as a manufacturer as well as with the provincial wholesalers, retailers and budtenders has been well established for many years from the backbone of our new product introductions. I can tell you that in my travels across Canada in the last few months, the reception from budtenders, buyers and customers for the No Future products has been extremely positive. Our production facility in London, Ontario, we continue to make incremental additions and improvements and commission further automation at our facility, further improving our low-cost producer status.

These improvements are evident in our adjusted gross margin, which hit a record 37% in the quarter. Data from Hifyre for the third quarter of 2023 shows strong sell-through of Indiva's’ edible products. With 18.5% share of sales across BC, Alberta, Saskatchewan, Manitoba and Ontario, Indiva holds the number one ranking SKU by sales and units sold in the Edibles category with Indiva's Pearls by Grön gummies. Further product ranking in Q3 2023 showed 3 of the top 10 edible SKUs are from Indiva's Pearls by Grön line.

Turning to October. Monthly data shows that Indiva ranks number one in market share in the Edibles category, with our market share increasing back up to 23%, driven by the introduction of the No Future Gummies and the continued growth in Pearls by Grön gummies. Further, in October, measured by unit sales, 4 of the top 10 products across all categories at the OCS were Indiva products, including Pearls Blue Razzleberry, which was the highest volume SKU in Ontario.

Turning back to Q3 2023 edibles market data and specifically in the gummy subcategory. Indiva's Pearls by Grön gummies ranked number one two in the Edibles category with 12.8% share based on sales and ranked as number one with 17.1% share on units. Further, No Future gummies recently launched in the period and already ranked as number two, in the Edibles category in Q3 based on sales and number 15 based on units.

Note that in -- by the end of October, Pearls hit 18% category share and No Future rose all the way to number seven with 4% category share. In the chocolate subcategory, Indiva held 37% total category share as Bhang continued to lead the chocolate category with 30% subcategory share.

In Baked Goods, Indiva led the biggest category with 66% subcategory share, driven by the success of Doppio Sandwich Cookies. Based on data from BC, Alberta, Ontario, Manitoba and Saskatchewan, the Edibles category decreased by 8% in Q3 2023 to $62 million in retail sales from $67 million in Q2 2023, and increased 7% year-over-year versus $58 million in the same period last year.

Turning to events subsequent to quarter end. No Future products became available in stores across Ontario, including four gummy SKUs and three vape SKUs. The company also received three additional No Future 1.2 gram vape for listing with the OCS, including Grape Ape Indica, Peach Punch Sativa and Pink Grapefruit Kush Indica.

Additional SKUs accepted for listing hitting shelves in Q4 in Ontario include Pearls Peach Mango CBD 25-pack, Indiva 1432 chocolates in Milk, Dark and cookies and cream flavors and Doppio Candy Cane Sandwich Cookie. The company received acceptance of three new No Future gummy SKUs for listing in Alberta, including the Red One, the Pink One and the Yellow One, which are expected to be in market by late November.

We also received three additional No Future 1.2 gram vape listings in Alberta, including Great Ape, Peach Punch and Pink Grapefruit. I'd like to take a minute to thank all of Indiva's employees, including our dedicated staff at our facility in London, Ontario for their continued hard work as we bring production of new products and brands, and our sales and marketing staff, including our partners and our sales agency who worked tirelessly to support the launch of No Future across Canada. Thank you. I'm sure cannabis enthusiasts everywhere in Canada thank you, too.

I'll now turn it over to Indiva's Chief Financial Officer, Jennifer Welsh to review the financial results in greater detail.

Jennifer Welsh

Thank you, Niel.

I'll review Indiva's financial performance for fiscal Q3 ended September 30, 2023. Gross revenue in the third quarter increased 24% year-over-year and 34% sequentially to a record $10.9 million, while year-to-date gross revenue increased 7% year-over-year to a record $29.4 million.

Net revenue increased 21% year-over-year and 30% sequentially to a record $9.8 million in the quarter, driven mainly by the strength in Pearl gummies, initial orders of Wana under our contract manufacturing agreement and the introduction of No Future gummies and vapes. Year-to-date, net revenue increased 6% year-over-year to a record $26.7 million. Overall, edibles accounted for 93% of net revenue in Q3 2023 and 87% on a year-to-date basis.

In Q3 2023, Indiva sold products containing 152 million milligrams of distillate and isolate, the active ingredients in our products, which represents an 85% increase when compared to the 82 million milligrams in products sold in Q2 2023 and 157% increase compared to 59 million milligrams sold in Q3 2022.

Gross profit before impairments increased 55% year-over-year and increased 65% sequentially to a record $3.6 million or 37% of net revenue versus 29% in both Q2 2023 and Q3 2022. The improvement in gross margin percentage was due primarily to higher sales, a favorable product mix shift and a lower unit costs driven by implementation of automated equipment in edibles processing and packaging.

Year-to-date, gross profit before impairments increased to a record $9 million or 34% of net revenue versus $7.7 million or 31% of net revenue in the corresponding period last year. Operating expenses in the quarter declined 6% sequentially and 10% year-over-year to a record low of 31% of net revenue versus 43% in Q2 2023 and 42% in Q3 2022.

Year-to-date, operating expenses declined by 8% to $9.5 million primarily due to lower marketing costs and lower share-based compensation costs, partially offset by increased general and admin expenses. EBITDA was a record positive $700,000 in the quarter versus a loss of $1 million in Q3 2022.

Adjusted EBITDA improved sequentially in Q3 2023 to a record $1 million versus a loss of $600,000 in Q2 2023 and $500,000 in Q3 2022 due to higher sales and higher gross margins. Year-to-date, EBITDA was a record positive $700,000 versus a loss of $3.5 million in the same period of 2022. And adjusted EBITDA was a positive $800,000 versus a loss of $1 million in the corresponding period last year.

Operating income in the quarter was positive for the first time ever at $13,000. Comprehensive net loss was $900,000 in the quarter, including noncash purchase for impairments of inventory of $600,000, offset by a $300,000 gain on debt modification. Cash balance at quarter end was $3.9 million. Looking forward, the company's Q4 2023 net revenue, excluding contract manufacturing to improve sequentially, driven by new product introductions, including our first full quarter of No Future sales across Canada. New SKUs coming to market include additional No Future Gummies and vapes, Blips as well as new 5-count and 25-count Pearls gummies.

Gross margins are expected to continue to trend higher over time as the company benefits from a mix shift to higher margin products and continues to achieve further production efficiencies, driven by greater utilization of automation and production and packaging activities.

Niel Marotta

Thanks, Jen. Operator, I think with that, we'll open it up to questions please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Andrew Semple.

Andrew Semple

Hello. Sorry, can you hear me?

Niel Marotta

Andrew we can hear you. We just lost the operator, but we can hear you.

Andrew Semple

Great. Okay. I'll go ahead then. First of all, congrats with the Q3 results and the great momentum in the quarter. I'm glad to see that you continue to find new hit products that resonate with the consumer. So you spoke to Q4 results being higher sequentially, excluding contract manufacturing. I guess, I understand the reason for that guidance, those order volumes are not under your direct control. But maybe you can comment on a high level directionally where you expect contract Wana manufacturing to go in Q4 and what might be the possible magnitude of those impacts on your Q4 results relative to what your own brands are doing.

Niel Marotta

Yes. So that's a good question, Andrew. Just to provide context, we're looking at our business now a little bit more sort of historically everything excluding Wana versus everything including Wana. Obviously, our results do include contract manufacturing activities. We had some initial sales that are unlikely to be repeated in terms of our partner filling the channel.

In terms of where we expected going forward -- sorry, just to back up a second, we looked at the last seven or eight quarters, and what we've seen is, excluding Wana, we've seen continued sequential growth with the exception of Q2 where we lost the lozenges. So our core business continues to grow sequentially, and we think that continues in Q4.

You're right, it's a little lumpier with contract manufacturing a bit out of our control, and we're just not sure everything from new innovation, timing to sell-through. It's a little bit out of our hands now. What we can tell you is that as a percentage of revenue going forward next year, we expect Wana will be, let's call it, 10% or less and maybe to be safe in Q4, probably 20% or less of our net revenue.

We're hopeful that we'll see sequential growth overall, but we're not committing to that in terms of guidance. So that should give you some parameters. What I would say is, if you look back two years ago, Wana was upwards of 75% to 80% of our total net revenue and to report record results where we're significantly lower than that as a contribution and looking at what we think will be a record year next year based on the new products we've introduced and continued momentum in our core brands, having Wana drop to, let's say, 10% to 15% or less of net revenue, I think, is a big accomplishment by the team. So hopefully, that's enough parameters to help you out, Andrew.

Andrew Semple

That's great, very helpful. Thank you. And as we speak, you're in the midst of your fourth quarter, which I guess will be the first full quarter of -- after the recalibration of the OCS product markup scheme. Just wondering if you can maybe comment on whether you've made any pricing adjustments since that change or whether you're seeing any other edibles producers making price adjustments since that came in.

Niel Marotta

Yes, great question. I think we have seen almost universally price declines from our competition. We've had -- actually, have not changed. On our biggest product on Pearls, we did not change the wholesale price. So we effectively realized about a 17% price increase as a result.

So for those who don't quite fully understand, we sell our products to the OCS. They sell them on to the retailers. The OCS has now standardized their markups on products and edibles that used to be a 45% markup, which is now 25%, and we did not change our wholesale price. So as a result, we're capturing a bigger price and a bigger margin. On our other products, we were basically flat.

I think we had a few minor wiggles to mine price some items that might have been priced differently in the past, but I would say that's the biggest impact would be on Pearls. And then the No Future products came in subsequent to those changes. So there was no change. They were -- they launched post that change.

Andrew Semple

Great. Understood. And then one final one for me and I'll hop back into queue. Just on operating costs, looking at the trend behind that, it appears that's been trending pretty consistently lower since Q4 last year. Do you think Q3 would be the trough to what we should expect for continued cost efficiencies there? Or do you think you can continue to further improve on cost -- operating cost efficiencies in subsequent quarters?

Niel Marotta

Yes. I think in absolute dollars, probably fair to call it a trough. We will probably need to spend more on marketing and sales as we support No Future. But hopefully, as a percentage of revenue, that trend continues to go lower, right? I mean we do expect pretty robust revenue growth into 2024 based on the new brands and the continued success of Pearls and innovation that hasn't hit market yet at all. So yes, so probably percentage, we hope it trends down. Absolute dollars might start ticking back up.

Operator

[Operator Instructions] There seems to be no further questions coming through from the phone lines at this time. So I'll hand back to our speakers for the closing comments.

Niel Marotta

Okay. Well, thank you, everyone, for attending the call. We're going to go and get back to work and look forward to speaking to you all again in the spring when we release our fourth quarter and full year results. Thanks, everyone.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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