Auxly Cannabis Group Inc. ($XLY)

Hello. Good morning. I'm Hugo Alves, Auxly's Co-Founder and Chief Executive Officer. I would like to welcome you all to Auxly Cannabis Group's Year-end 2025 Conference Call and Webcast. Joining me on the conference call today are Travis Wong, our Chief Financial Officer; and Mark Charbonneau, our Head of Investor Relations. Today, I'll share key takeaways from the quarter and full year results, and then we'll open up the call to questions from analysts and answer some questions that have come through our Investor Relations inbox over the last few days. Before we begin, I'd like to remind you that our remarks may contain forward-looking information, and actual results could differ materially. Forward-looking information is subject to many risks and uncertainties and certain risks or assumptions applied in the forward-looking information can be found in our latest annual information form and management discussion and analysis. These documents are available on our website and at SEDAR+.ca. More generally, if you have questions once this call is complete, please reach out to our Investor Relations. Our contact information can be found at the end of our earnings press release. Stepping back, it's been almost 3 years since we held our last earnings call. We've been working hard in the meantime and are delighted to start hosting these calls again. This call reflects how much our business has changed from a company focused on stabilizing its foundation to one that is now profitable, generating cash and investing for growth. Since we last spoke, Back Forty has become the #1 cannabis brand in Canada by dollars sold. We have become category and innovation leaders in dried flower, pre-rolls and vapes with the top-selling dried flower, non-infused pre-roll and all-in-one vape products in Canada. We've increased net revenue by 50%. We've gone from EBITDA breakeven to generating $44 million in EBITDA in 2025. And we have fundamentally strengthened and recapitalized our balance sheet, removing a key constraint on the business and positioning us to invest in growth. None of this progress happens without our incredible team across Leamington, Charlottetown and our corporate group, all of whom have remained committed and executed with discipline over the last several years. Today, Auxly is a sustainably profitable company, generating strong cash flow and net income. We have the profitability to expand our operations through capital expenditures and allocate capital to other high-return options as well. With our portfolio of high-quality products, the #1 cannabis brand in Canada, efficient profitable operations and a stronger balance sheet, we're able to invest in growth and build durable value for our shareholders. Moving on to our financial results. 2025 was a record year financially for Auxly. Net revenue reached $151.5 million, an increase of 24% year-over-year. Gross margin on finished cannabis inventory sold increased to 54%, up from 46% in 2024. Adjusted EBITDA was $43.8 million, an increase of 64% year-over-year and representing an EBITDA margin of 29%. And cash flow from operations before working capital changes reached $38.6 million, an increase of 129% year-over-year and representing an 88% conversion from adjusted EBITDA. Our results in 2025 can be attributed to increased throughput and quality at Auxly Leamington, higher volumes on vapes and pre-rolls and a favorable pricing environment. The investments we've made in throughput, quality and state-of-the-art automation have allowed us to introduce successful new innovations like our Back Forty Backpackers pre-rolls and our new brand, South Point. We were also able to expand our distribution into Quebec, making our products available in 97% of retail locations across the country. We were able to achieve new records in cash flow and profitability resulting from strategic procurement initiatives, product mix and improvements we've made in cultivation and manufacturing processes to reduce operating costs. And thanks to a tremendous team effort, our overhead aside from selling expenses also remained relatively stable year-over-year. Turning to the fourth quarter of 2025. Auxly reported net revenues of $40.1 million, a new quarterly record and an increase of 16% year-over-year. Gross margin on finished cannabis inventory sold reached 56% compared to 54% in Q4 2024. Adjusted EBITDA increased 14% to $12.5 million and cash flow from operations before working capital changes was $11.9 million, a 39% increase over the prior year and representing a 95% conversion from adjusted EBITDA. Our Q4 revenue growth and improvements in profitability are attributable to the same factors that drove our full year performance. In terms of our outlook for 2026, we are expecting continued growth and profitability. We believe Auxly can continue to grow net revenue above market rates through continued investment in distribution and innovation and increased quality and capacity at Auxly Leamington. We plan to maintain profitability through continued investments in efficiency and rigorous cost control across the organization. We expect the conversion of profitability to cash flow to improve through the reduction of interest expense and largely stable investments in working capital, and we are excited to be investing for the future. We are planning to allocate $10 million to $12 million of cash flow from operations toward capital projects at Auxly Leamington to increase quality, capacity and efficiency through cultivation and processing and also add capabilities that will allow for international direct shipments in the future. We will remain focused on the Canadian market and winning at home. But over the long term, we expect to expand our strong foundation in Canada and grow into select international markets where we believe our products and brands will thrive. Finally, even after considering our capital expenditure program, we plan to have free cash flow available to allocate to other high-return initiatives. Our formula for success is consistent with many others in the CPG category. We'll continue to invest in products and brands that consumers trust and love. We'll leverage the durable moat we have established in cultivation and production, remain hyper-focused on efficiency and profitability. And with a strong balance sheet and consistent cash flow, we plan to reinvest into the business and allocate capital towards other high-return initiatives. One example being our proposed acquisition of the assets of , Ayurcann through a court supervised CCAA process. Auxly is the debtor-in-possession lender and stalking horse bidder for the Ayurcann assets, and we should know if our bid is successful over the coming days. If our bid is successful, we intend to fund the cost of the acquisition from our operating cash flows without impact to our capital expenditure program and with remaining free cash flow to improve our balance sheet or consider other capital allocation alternatives. To conclude, with a strong balance sheet, growing profitability and high cash flow conversion, we are now focused on building a durable business that can continue to grow profitably, generate strong cash flow and create long-term value. That concludes our prepared remarks. We are going to take calls from analysts, and then we'll answer questions that our investors have sent to us over the last 2 days. Operator, I ask that you please open the call for questions. Thank you.

[Operator Instructions] And your first question will be from Neal Gilmer at Haywood Securities.

Congrats on 2025. I wanted to see maybe if you could expand a little bit more on your international plans, maybe even layer into some of what your CapEx at Leamington will do to sort of help you move that forward.

Yes. Neal, thanks a lot for that. Maybe I'll start with the CapEx -- so we're planning on building a world-class post-harvest environment is really what the capital expenditure is for. That would be state-of-the-art drying, curing, processing and packaging. And that's going to increase our production capacity, add additional drying capacity will allow us to grow more flower within our existing footprint as well as allow us to bring some additional cultivation capacity online. And it will also improve quality and COGS. On the quality front, the improved process flow, the better technologies will result in a higher quality product, which will support continued growth in Back Forty and South Point. And in terms of our international capabilities, part of the infrastructure will be dedicated to sort of EU GMP standards and certifications. So part of the, the infrastructure we make will allow us to eventually ship directly internationally. And then in terms of the way we look at international, we certainly look at it as a compelling opportunity for the future. It's -- we are building the capabilities for it, but we're going to focus on winning at home. We will continue to test the market with small shipments internationally to see how the product resonates overseas with consumers to test counterparties. But we don't feel that we need to rush into international markets, and we're not going to compromise our domestic business. And over the longer term, I think as international markets open up, we also have a global strategic partnership with Imperial Brands, which is one of the world's truly global CPG companies that we'll be able to lean on in those jurisdictions to enter and scale effectively and efficiently.

I appreciate that, Hugo. I guess I don't know whether this question is too early. Obviously, you said you'd find out in the next couple of days on the Ayurcann stalking horse bid that you put in. Can you give some thought like what's sort of your strategy to layer those in, should you be successful in that process? Sort of what's your sort of integration approach for those assets?

Yes. Thanks, Neal. I mean, look, we don't want to say too much about the business that we're just a bidder at this point. But they are a significant player in our core categories and align well with our winning at home strategy and with our operating capabilities. So we think that if we are the winning bidder, this will be highly accretive to our shareholders, but we'll find out in a few days and have more to say at that time.

Fair enough. Maybe the last one for me just is on the income statement, just talking about the improvement in gross margins you're able to accomplish in 2025. I assume that, that comes from some of the various separate improvements you've made at Leamington. Safe to assume that we can expect sort of similar levels that you achieved for the annual basis of '25 into '26...

Yes. I think that's right, Neal. This is Travis. I think we view our margin profile as sustainable off the back of 2025. I think gross margin starting with 5% internally is our benchmark, but we don't want to set any expectations beyond that. A lot of the improvements we've seen are structural in nature. For example, of course, Leamington cultivation and the automation, the procurement that Hugo discussed as well as the product mix. These are not short-term factors. So yes, we do expect that margin to be elevated in the future.

And at this time, there are no other questions registered. I would like to turn the call back over to our speakers.

It's Mark Charbonneau here. We'll take a couple of questions that have come through the IR inbox over the last couple of days. Firstly, on revenue, how should we think about revenue growth going forward?

Yes. On revenue, as our revenue base gets larger, it will certainly be more difficult to achieve the 20-plus percent growth that we saw in 2025. We do expect the overall Canadian recreational market to grow about 5%. That's industry consensus, and we think we can do better than that. And that's largely driven by our innovation pipeline, our distribution and the yield and quality improving in Leamington over the coming years. We also expect prices to be stable as well. So we are optimistic about the revenue growth going forward.

Thanks, Travis. The next question is in respect to capital allocation. After the announced capital program, what are you planning to do with excess cash, reduce debt, accumulate cash, anything else?

Yes. I think as we say, we're going to evaluate a mix of opportunities for excess cash flow. We're still going to prioritize our capital investments as these will improve yield, quality and profitability. I think as disclosed that now includes also within that CapEx program, capabilities that will allow us to deliver to international markets. And then I think beyond that, Ayurcann is a good example of how we're approaching opportunistic allocation as it arises. This is a low financial risk relative to our cash flow, complementary products that are aligned with our strategy, which would be quite high return. But our first priority is going to be to reinvest in the business where we can generate strong returns. That's our 2026 CapEx program. I think beyond that, we will allocate capital based on return on invested capital, whether that's organic investment, selective M&A or other opportunities. The good thing is we're not capital constrained today, so we can be selective.

And last question we'll take here. With respect to consumer behavior, how do you describe it today?

I would say consumer behavior is strong. Demand is strong. Certainly, in our industry, there is seasonality with Q1 having the lowest number of selling days and coming off of Christmas. But what we are seeing is strong demand for our products. And then I think what we're also seeing just generally is life is becoming more expensive, right? And I think what consumers increasingly want irrespective of their budget is value. They want a high-quality product that works, that's consistent, that doesn't -- that meets their expectations when they spend their hard-earned dollars. And I think that's part of the reason why our Back Forty brand is the #1 cannabis brand in Canada. We are able to offer a very high-quality product consistently at a great price, delivering high value to our consumers. So I think as inflation, as life becomes more expensive, we are seeing consumers increasingly opt for high value. And that's a good thing for Auxly because that is exactly where our Back Forty brand plays.

That's all the questions we have.

Yes. So I think thank you for everyone who tuned in today. As I've mentioned earlier, being able to host these calls again is a milestone for the company, and we look forward to being back with shareholders to report our Q1 results in the near term. Thank you very much. Operator, I'd ask that you close the line.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.