BLS Pharmaceuticals Limited (BLS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for BLS Pharmaceuticals FY '26 Results Webinar. I'm Mel Tempora from NWR Communications and I'll be hosting this morning's session. We will hear from Managing Director and CEO and Founder, Sam Watson; along with Executive Director, Chief Operating Officer. Jason Hine; and Global CFO, Guy Robertson. With that, I'll hand over to you, Sam.

Thank you very much, Mal. Welcome, everyone, to Gilles Pharmaceuticals Full Year Audited Results Presentation for the 2026 financial year, which ended 30th of June. My name is Sam Watson. I'm the CEO and Founder, as Mel mentioned, of BLS. Today, I'm joined by Jason Hine, who's going to take us through some of the operational highlights for the year, and by Guy Robertson, our Chief Financial Officer of the group, and Company Secretary, who is going to provide some commentary on the financials. So FY '26, a year of transformation, scale, international growth. We completed the change of name and our ticker code change to bills in July, consolidating our shares tender -- and the purpose of this was to align the corporate identity with the company's operational purpose, vision and its mission. A quick note on the disclaimer. This presentation does not offer, is not advice, they may contain forward-looking statements and opinions, which are not to be relied upon. So diving into it, FY '26 is the year that we transformed from Australia and the microcap business into a small-cap international pharmaceutical platform. Over the last 3 years, our revenue has gone from $8 million a year to $28 million to $74 million and I'm excited to go through the guidance that we just issued earlier in the week later on in the deck. But it's great to see that each year, our underlying EBITDA and profitability is also improving with that revenue growth as well as cash generation. So profitable, fast-growing cash flow positive a rapidly growing market as well. So we finished the financial year with $13.3 million cash at the bank with a further $3 million available in overdraft. So sufficiently capitalized enough cash on hand to continue delivering our growth strategy. But just going into those numbers, what's driving them. So we've stayed incredibly focused on executing our vision and strategy and being very precise in the manner in which we grow the business. Our purpose has been and remains manufacturing and distributing innovative medicines for the significant market of unmet clinical needs, both in Australia and internationally. And specifically, we target chronic pain, post-traumatic stress disorder and treatment-resistant depression. Those are the 3 primary categories we identify and management's estimate on the combined prescribable value of those markets globally is around $180 billion per year. So that feeds into the second of our 3 Ps, it's creating value for people. And that seems obvious that this ties into the purpose, our work, what we do, what we manufacture, the medicines we make have profound meaning to the lives of our patients. to the research organizations we supply to, who are developing new treatment options for unmet needs to our shareholders and our employees around the world. Those 2 first Ps feed into the last P, which is profit, a measure of how efficiently and effectively we operate as a business. Our profitability is derived from our economic promote. It's a combination of our licensing, our know-how, the intellectual property in the business the processes, the people, how we do what we do. And it's also a result of significant barriers to entry in the markets we operate. So we operate a highly complex regulatory environments. That's where we flourish. We like those challenges. Australia, Germany, the U.K., Europe, Latin America, in particular, soon in South America. They will represent very hard, very challenging markets to enter for what we are doing, novel medicines, minicam cannabis and psychedelics. That's where we find our sweet spot. So one other thing to note on profitability before we move on to the next layers. Our profit to date, a has been organic. Since the acquisition of the BLS Group by [ Axon ] as we were previously called back in May 2023, so purely organic. But they've also largely been attributed to our Australian business, Australian manufacturing and distribution business. And Australia is the most price competitive market in the world for what contributes 9% of our revenue, which is medicinal cannabis prescription medicines. So looking forward, as we see the international side of the business growth, we expect to see the underlying EBITDA margin in the business improve over time as it has done historically. So I'm going to pass it over to Jason to give a bit of an overview on the execution.

Thanks, Sam. Just to reiterate, last financial year was a year of transformation, but it was also a year of execution for us. We achieved an enormous amount. We set what felt like at the time, some pretty ambitious guidance between '26. And we achieved the top end of this target by leveraging our ability to scale and driving our growth strategy, which we're all stuck to and we will focus on. The first half of 2026 set us up for success, and we are continuing to scale and grow the business as we did all the way through the year. We've formalized a 2-year $50 million supply agreement with ADREXpharma. And this agreement and this relationship provides us with the platform for considerable growth into the European Canada market. We secured manufacturing contracts with some of the world's largest cannabis companies. And these contracts are continuing to build as demand increases across the multiple regions that we supply to. We also formalized a supply agreement for Costa Rica for our Dr. Watson branded products. We expect the first shipment will be dispatched shortly. There have been some delays due to some regulatory hurdles. But our distribution partner has informed us that -- this shipment that we are going to make is going to be the first ever shipment of finished municipal cannabis products into this country. So it's an exciting place to be with the first mover advantage. The build-out of our U.K. facility is basically complete. The validation of machinery and processes are now underway in anticipation of audits with the MHRA and the home office. And we expect that the site will be coming online early calendar year '27. The operational highlights from -- our current operations are based in Brisbane. And unlike many other manufacturers, we have the ability to scale and to grow the footprint of our operations on our Brisbane site as and when we need to. We are manufacturing many dosage forms across both cannabis and psychedelic and we'll continue to build on this suite of products in order to meet the customer requirements and demand. We've quickly become the go-to manufacturer in Australia for medicinal cannabis and testament to this is that some of the world's largest players are engaging us to fulfill their manufacturing needs but not just Australia but also for Europe as well. With Germany being Europe's largest municipal cannabis market, formalizing our supply agreement with ADREXpharma was a significant highlight for 2026. This relationship will enable us to grow and build our Dr. Watson branded products in Europe. The construction of the U.K. facility in the Scottish Borders is complete, as I mentioned before. We expect this to be operational in the next 4 months. This facility will initially service the U.K. market, which is larger in proportional size than the Australian market. But this facility will give us significant resilience in our global supply operations. Importantly, we are already supplying customers in the U.K. And when the U.K. facility does come online, at the start of next calendar year. We will be transitioning these customers to an in-country supply arrangement. So we're not starting in the U.K. from a standing start. We are -- we will have a significant amount momentum behind us as we switch on the operations over there. Over the last financial year, we've expanded our capabilities and services across product development, storage and distribution. And we've done that here in Australia because we are aware of significant tailwinds in the Australian market, which is partly driven by the changes to the driving laws in New South Wales and Victoria. Now these laws have passed the New South Wales Lower House and are scheduled to be tabled in the upper house this month. The impact of the driving those changes in other markets point to a significant uptick and in many cases, doubling of demand in markets where these laws have changed. And we have scaled up to be ready to meet this demand. I'm not aware of any other manufacturer who has the ability or the capacity to scale and source and store inventory like we have. in order to meet this demand as it's going to come. We currently have around 1,500 cubic meters of secure bulk storage space in Brisbane and adding another 700 or so cubic meters of vault storage space at the end of this month. So just to put that into perspective. Our 40-foot shipping container has 66 cubic meters of storage space. So effectively, as we currently stand at today's date, we have 23 40-foot shipping containers of bulk space at our facility in Brisbane, and we're adding further to that as we go along. So our ability to scale and to grow to meet the demand is significant and is unprecedented in Australia. While Australia has been and always will be the foundation of the business, we have always been mindful that international markets with similar regulatory frameworks and restrictions around the access to market and patients provide enormous opportunities for us. International markets are constantly evolving and the business will always leverage its capabilities and expertise to maximize this growth. Germany, the U.K. and Latin America provides significant growth opportunities for us and there's plenty of scope for us to grow further.

Jason I might just jump in. We might just ask some questions as we go through, if that's okay. In terms of the ADREXpharma supply agreement, can you talk through the pipeline for -- is that beginning to filter through essentially? So is that contract filtering through? And is there capacity to take on more international demand?

Yes, there is. The contract is what we're currently fulfilling demand and supply into Germany as of all that through since we formalized that agreement. And we're continuing to build that demand. We understand the German market is enormous in size to the Australian market. I think the demand there is about 200 tonnes. Is that right, Sam, across the entire year?

Estimated this year is probably between 160 to 200 tonnes.

Yes, there you go. And we're looking at 8 tonnes over the next 12 months to supply. There's another scope for us to actually build into that market. I think there's only a handful of companies that actually have the ability to supply to the German market. So we're scaling up our product sourcing and our capacity to be able to supply into Germany as we go. So this relationship with ADREXpharma is a significant opportunity, not just for us but for Australia to supply into Germany.

And just one more, while we're chatting on that particular -- on international supply is -- has the company explored potential sales to France, Spain, Italy and the rest of Continental Europe?

Don't want to be the one to say it.

Yes. We're looking at it. It's still -- there's not huge amount of clarity on those markets. They seem to be opening up, particularly France and Spain, highly interesting. We're just waiting for some more clarity on what exactly the regulatory position looks like, what products we're going to be able to supply and how we do that. But from Germany and from the U.K. as well as from Australia, we'll be very well positioned once we do go clarity on where those markets are going.

Thanks.

So just under this side of the scaling revenue, our revenue has increased from $5.2 million in FY '23 to $74.2 million in FY '26, which is the top end of our guidance. We have changed this from a purely organic perspective. So we've grown organically, and it's primarily from Australia. So it's pretty important just to recognize those points. There's a lot of scope for us to grow further internationally intentional markets. come on stream. This represents a 14x revenue growth over that '23 to '26 period. And just over the last financial year, it's over 160% revenue growth. We announced our guidance on Monday, which was -- which is $105 million to $115 million represents a significant amount of growth of 42% to 55% versus last financial year. So a lot of growth there.

Segue on to the guidance slide. So on Monday, earlier in the week, we released our guidance for FY '27, $105 million to $115 million, revenue up, as Jason said, 42% to 55% on FY '26. The FY '27 guidance is based only on continued organic growth taking into account both the Australian business as well as ramping up the export business to the U.K. and to Germany. Of course, the $25 million deal with ADREXpharma, it does not take into consideration forecast. Once the U.K. site is fully licensed, commissioned up and running, we anticipate that if we get licensed by early '27 calendar year, that is, we'll have a clearer idea on contribution from that site within the first few months. And so there's potential for uplift. So based on the current trajectory, the Board is confident in meeting this guidance, of course. And historically, we have a track record of underpromising and overdelivering. Jason mentioned before, tailwinds both in the Australian market, but also overseas. We see significant opportunity in the international markets, particularly Germany and the U.K., our primary focus. And building our revenue -- sorry, building our inventory to supply those markets is going to be very key, and we'll get into that in a minute. But just before we do, focusing on earnings for a minute. So our adjusted EBITDA increased 171% year-over-year from FY '25 to FY '26. So adjusted $19 million that's on a $15.4 million net profit after tax. So the additions, what we're adding back to that net profit of some noncash items, primarily share-based payments, we don't see that as necessarily a cost. It's more of an investment in people, and those people are delivering phenomenal results and executing. We have a highly dedicated team highly focused and they work very long hours, which is great. But they were rewarded for it. So in terms of operating leverage, we're seeing good operating leverage in the business with our fixed cost base growing slower than our revenue, and this is largely due to the investment we've made in our site and our capacity in Australia. We estimate our annual revenue capacity in the Australian site as is around $250 million per year. So significant room for us to grow into that. And we expect to see more operating leverage from every unit that we sell and the growth that we get over the coming year. Scaling our inventory investment into inventory as we have done over the last 12 months is key. It's going to be key to scaling towards that $250 million of annual capacity in Australia and moving clients from contract packing contract manufacturing services to our full procurement white label offering has already significantly started to improve our unit economics and margin capture but moving more of those clients across will require investing more in inventory, but it should continue to improve the unit economics. It's a value-add service for our clients. We manage and take over the full procurement import documentation side of things on the upstream supply chain takes up a lot of hassle for the companies that we're working with.

I'm just going to jump in. Why is EBITDA margin seemingly a little flattish despite the embedded operating leverage from the Australian facility. And I suppose the margin that was this year?

Yes, the international business, particularly the U.K. side of things, building that operation, so building replicating we've gotten Australia manufacturing site requires investment in team process. So there's some operating costs and fixed costs in that before it comes online. So we're wearing those costs. It's bringing down the adjusted EBITDA margin. But once that site is up and running, fully commissioned and operational, it should actually help lift that EBITDA margin higher. So we've given guidance of 23% to 26% adjusted EBITDA margin. And that anticipates worst case if the U.K. site is delayed and doesn't get fully up and running this financial year, it's unlikely, but it's a possibility. That's probably -- that's the range that we're comfortable with. Once it gets up and running, we anticipate good margin contribution from the U.K. operation.

I'm going to hand it over to Guy to run through some of the financials.

Thanks, Sam. Jason has spoken to the revenue number, FY '26 on '25, 161% increase. The profit before tax, $15.2 million, as Sam articulated masks a $1.2 million loss from the U.K., Europe. And once that comes on stream in FY '27. Then that will lift that profit before tax and EBITDA. The net profit after tax is the rationale for that small adjustment, Australia has some small additional tax losses and we've recognized the deferred tax benefit on those losses. You would note from the annual report that the foreign operations in U.K., Europe have additional tax losses, and we have not recognized those tax losses in FY '26, and it's expected that we will absorb them in the current financial year. The basic and diluted earnings per share, of course, reflect the a 1 for 10 consolidation that was affected on the 29th of June this year. And that, of course, creating some challenges in the annual report in comparison with the FY '25 results, which, of course, were on the ore basis. Moving forward. So 135% increase in cash receipts, which is very significant. However, the focus, of course, is all on the operating line, the operating cash line, which is $5.4 million. And while strengthening in the fourth quarter, I think we generated $6.3 million in the fourth quarter and ending with a strong cash balance. It shows the very significant -- very significant investment that we've made in working capital, both in inventory and in cash supply terms, which we'll cover shortly. So on the inventory, $3.6 million to $17.8 million, reflecting probably 3 to 4 months imagery on hand. This is a great team effort here in balancing this working capital management. Of course, you've got the tension between sales, production and finance. But I appreciate that it is a big focus of the company. And hopefully, we'll optimize further in the FY '27. But reflecting additional customer demand, continuity of supply better volume of manufacturing. Sam, you might want to say give comments here.

I suppose the question, I'd probably ask looking at this without understanding it is without being familiar with it is we delivered $15.4 million in net profit after tax, but only $5.4 million in positive operating cash flow. So why didn't we produce more cash? The main reason is what we're looking at here, strategic inventory investment and building that inventory level, and that is strategic to build the business, distribution and meet demand with customers both in Australia and overseas. We've made a big leap cross-department into the European and U.K. markets. You do the simple math on it by 1 unit of inventory for $1, do our value-add manufacturing work and services. We sell a bit in 3, 4 months for $2. Okay, well, that's a good investment of cash producing more cash within a relatively short time frame. And if you're assuming we have a stock turn of conservatively 3 times per year, holding inventory at cost selling for [ 40 ], 3x per year. It's $120 million of revenue on [ 16 ] of purchasing. We have the infrastructure we've done -- we've invested the CapEx to build the capacity we have. It's just pushing a button to keep purchasing keep selling and managing that effectively, which is what we have really focused on over the last 12 months is scaling that inventory conservatively, but also sufficiently to meet growing demand. that's going to be key. And it's also -- it's going to be critical going forward as well, continuing to scale up. Bottom line on it is we buy well, we sell well, and we're managing it well.

Thanks, Sam. This slide just reflects the waterfall chart of the movement in working capital from FY '25 to '26. So we started at 2.2%, increasing our trade receivables by $5.3 million. I think that's reflecting extending credit terms to customers as we gain greater confidence in them and allowing their businesses and ours to go a $14.2 million increase in inventory, small investment in tax and then offset by increases in trade creditors of 4.9% and contract liabilities and customer deposits of $1.6 million giving us a $15.6 million increase in working capital -- operating working capital over the year.

So Australia is and will be made for quite some time, the backbone of the business. As we -- as Sam and I have discussed today, the business has significant tailwinds. It's got huge scale and it's got the opportunity to meet the growing demand here in Australia. And we planned for that growth. This is not a matter of will we just have a thumb cycle and we've gone for it. This is -- we're actually -- this is -- we've seen this coming for quite some time. We've invested in it. and we plan for this to happen. We are the market leader or the go-to-market supplier in Australia. But while that's the case, the international side of the business, has enormous growth opportunities for us, and we are capitalizing on them, obviously, with the supply of Dr. Watson products into Germany. That's going to be a significant growth opportunity for us. We have invested heavily in our supply from our colovators. We've got people positioned around the world, auditing and ensuring that the supply of good quality product is consistent and maintained. The U.K. facility is, as we said, coming online, but we are already supplying customers in the U.K. We're not going to be starting from a standing start where we're going to be running when we push the button and start to move things through the move product through the U.K. operation. And the Latin American market is a typical, highly regulated market. There are hurdles to jump through. It's not easy. We've had to delay our supply by 2 months into that market in order to meet the regulatory hurdles. We will be supplying it into the market. We'll be the first mover into that market. But just understanding the hurdles that we've had to go through it's hard for anyone else to get in there as well. So there's a huge opportunity for us to leverage that going forward. So while the Australian operation is the backbone, international is going to be a huge growth opportunity for us.

I suppose Australia is also the blueprint. It's the blueprint for international -- it's the blueprint to our U.K. GMP manufacturing facility and it's the platform that we're leveraging to gain access into these European markets. As Jason mentioned, in the U.K., we are already exporting both bulk and finished goods to U.K. clients. and that's growing meaningfully and has grown meaningfully over the FY '26 period. Once the U.K. site is up and running, we expect it to really kick off. It's going to be exciting. So fingers crossed for the first -- or the beginning of calendar year 2027. So just touching on the German agreement briefly. There's a bit of a time line. So it's back 12 months ago where we initiated our first contract with our German partners, ADREX and another company called [ Pharmachem ]. The initial contract was for around $5.6 million. And it took us a few months to get the product registered in Germany to get the permits, import, export. Eventually, we've got product there. And we filled that contract in 2 or 3 shipments within a 6-month window, and that was supposed to be an annual contract. So through that period of time, ADREXpharma, we've qualified, would've been approved. We have EU GMP compliance under a mutual recognition agreement, but it took the 6 months to really test the pipe for us to make sure that we could supply consistently quality was up to spec. The specifications were we met from being there. And this contract we signed a few months ago for $50 million over 2 years, as Jason mentioned earlier, it's a small fraction of the total potential in the German market. It represents around 8 tonnes a year of potentially 200 tonne market for medicinal cannabis as well. So the opportunity for us to scale that contract significantly is there, and it's something we're very much working on. It is underway. We are delivering and ramping up. But we're on track to meet albeit that the first 12-month commitment there. The next move will be to expand beyond Germany and into other European countries. France, Spain, Italy, Czech, Malta, Poland. But the main focus at the moment, the 3 core markets, Australia, the U.K., Germany. What our international expansion in FY '26 shows is the strength of our Australian manufacturing platform, our procurement, our quality systems, our GMP infrastructure. It shows that we can play on a global stage. And it shows that what we have built is unique and special and is it built for the long time hyperscale?

Quick question, Sam, just while you're talking about other markets. The U.S. is obviously difficult. Is it part of a longer-term strategy? And what could a pathway look like?

It's a highly fragmented market with GMP manufacturing framework for medicinal cannabis. So states that have -- this is my understanding, it states that have a medicinal cannabis framework or regulations in place. There's no harmonized FDA GMP for medicinal cannabis medicines. That, for us, for the business today blocks the U.S. from exporting to Latin America, for example, or Brazil, another market we're now looking at. But then on a state-by-state basis, until the U.S. goes as federal, we are limited in our ability to export to the U.S. However, if it was to go federally medicinal, what I think would happen is the import market to us exporting from Australia or the U.K. into the U.S. that would become a big opportunity. And I think what we do have is significant cost and pricing advantage from Australia. From what I've seen in U.S. cultivation and manufacturing non-GMP, it is not as cost efficient is not necessarily as scaled. If it is, it's food grade, so it wouldn't necessarily make the cut from medicinal. So there's I think the first thing first, the regulations need to change and that needs to take effect, and then we keep processing the opportunity. But if there's an opening, we will take it. We will step in and figure out a way to get into the U.S.