Earnings Transcript for ETRGF - Q3 Fiscal Year 2023

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

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.

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.