Cann Group Limited (CAN.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cann Group Half-Year Results Webinar for FY '23. [Operator Instructions] Presenting on behalf of Cann Group today, we have the Chairman, Allan McCallum; CEO, Peter Koetsier; and CFO, Deborah Ambrosini. The presentation today will last approximately 15 to 20 minutes and will allow some time for the Q&A session thereafter. To begin, I will now hand it over to Allan McCallum. Please go ahead.

Thanks, Matt, and I'd also like to welcome our shareholders to Cann's half-yearly results presentation. The half year has s Cann achieving significant milestones with the completion and commissioning of the Mildura production and GMP manufacturing facility, which will enable us to produce high-quality and consistent medical cannabis. The team led by a recently retired CEO, Peter Crock , has given Cann the platform in which to deliver this high-quality medicinal cannabis to domestic and international patients of this scale that will create opportunities for appropriate shareholder returns in the future. As we approach the completion of Cann's construction phase, it was clear that we would be entering a commercialization phase, requiring a different set of skills and emphasis. The Board appointed an executive search firm, which -- with a mandate from an experienced pharmaceutical executive to lead Cann into this next phase of growth. We announced on January 10 that Peter Koetsier was appointed from a strong field of candidates to take on the CEO role as we focus on commercializing our genetics through Mildura to customers and patients. In welcoming Peter to Cann, I'd once again like to acknowledge all employees both past and present, who have contributed to building the Cann platform. So a brief backdown on Peter, he did commence with us on January 16 this year. He has over 30 years of experience in biopharmaceutical and commercial leadership roles, including general management and global marketing. His previous role was as Head of Asia Pacific and Australia, New Zealand for French biopharmaceutical company, Ipsen. He has a strong record in developing and enhancing strategy, processing culture to capture unrealized opportunities and to accelerate revenue growth. He is commercially minded with a relentless focus on customers and partnerships, which is coming through already. His education wise, he is a Bachelor of Science from Pharmacology and Immunology from Monash University and General Management Program from INSEAD in France. So with those few words, welcome, Peter, both to today and to Cann, and we look forward to our relationship blooming. Over to you.

Thanks very much, Allan, for the introduction, and I'm really pleased to be joining the Cann Group. It's such an exciting time. Whilst it's only been 6 weeks in the job, I wanted to provide some of my initial observations and discuss a few of the key short-term priorities that I've already agreed with the team. So my early impressions that -- as we entered 2023, much of the heavy lifting has already been done, and we now have an opportunity to have an operational world-class facility in Mildura. And we're in a position really now to shift our emphasis to quality production at scale. As part of that, we now have the ability to develop products from genetics to finished goods, allowing the opportunity to become a leading B-to-B partner for our customers. Since arriving, I've been consistently impressed by the talent and commitment of the Cann team and their focus on patients and importantly, on commercial success. The market for quality distal cannabis is clearly growing, and we have a big opportunity to be part of that. Specifically in my preliminary discussions with customers, it is clear there's an unmet demand for consistent quality, reliable supply. And as we scale up at Cann and continue to produce consistent quality products, we're in a great position to deliver this for our customers. And with scale comes an opportunity to -- , obviously, to improve efficiencies and margins. So with that, let me hand over to Deborah regarding the financials.

Thanks, Peter, and welcome, everyone, again to our half year results presentation. As Allan mentioned earlier, I'll provide an overview of the half year results and then hand back to Peter, who will discuss the progress of Cann further. Revenue invoiced to 31 December 2022 increased to $5.82 million, representing an increase of 83% from the prior corresponding period. We are also pleased to say that this also representing 91% of the full year revenue build in financial year '22. Admin and corporate costs increased in line with our expectations after we began the process of scaling at Mildura during the current year. As part of this process, employee numbers became -- increased from 85 at December '21 to 121 at 31 December 2022, and Mildura now employs over [ 40,000 ] members. Research and development costs increased due to progression of the S3 clinical trial during this period. The majority of the 257 patients were recruited and processed during the half year, with the last batch completing the trial in November 2022. It should also be noted that depreciation and amortization increased significantly from the prior year as we are now depreciating the Mildura facility and its associated assets [indiscernible]. The company closed the half year with cash reserves of $7.2 million after the recent share purchase plan, which raised $8.2 million. Funds from the sale of Southern land and buildings will be received upon settlement and the balance for assets will be received later in the calendar year once those acquisitions have been made. The total agreed consideration for the sale of Southern was $5.48 million. I will now hand back to Peter.

Thanks for that, Deborah. Now I also wanted to provide an update on the situation regarding Satipharm and the recent trial results. During my first week at Cann, we received word from the research organization that the preliminary results were not showing a statistically superior response for Satipharm versus placebo on the co-primary inputs. Well, there was a mean improvement in patients taking Satipharm CBD versus the baseline -- their baseline, this improvement was not statistically superior to placebo. And without the statistical superiority, this trial on its own would not be suitable to submit to the TGA for an S3 registration as we obviously hoped. In the next few days, I'm looking forward to actually receiving and having presented to us the full result data set, which will include all the primary and secondary endpoints as well as the safety data. And from here, we will start to undertake a series of conversations regarding what is the future going forward. So it is -- would be premature to make any statement about what's next -- without having seen the data set, but that's coming soon. And then obviously, we'll start discussions with Haleon as they also see the data about what are the next steps. And so whilst the outcome of the trial was clearly disappointing, we remain committed to the Satipharm platform. This is a unique patented technology, and it provides an opportunity to bring the benefits of cannabinoids to patients in a form that is perhaps more familiar as a medicine, and we expect, as a result, will bring confidence and potentially more patients and doctors to the medicinal cannabis space. In addition to the current CBD formulations, we're working on potentially extending the range to better meet the needs of our customers, and that work is actively happening right now. So whilst our financial results and some of the discussions so far has related to the first half year to December, obviously, prior to my arrival, I wanted to provide some of the exciting progress that has been made in Mildura just this last few weeks in this year of 2023. That creates significant optimism about the future for me and the team here at Cann. In the last quarter of 2022, our first dried flower crops were cultivated and manufactured in Mildura, which was obviously a milestone, and this showed the potential of the site to produce high-quality flower and volume and has been followed by some exciting achievements already in 2023. And I would say the pictures here that you can see are all pictures from our crops that have been grown during 2023. And -- and I think visually, it already tells a pretty powerful story about our progress, about our scale. So specifically, in February, the team of Mildura produced the largest single crop harvest that we have made in Mildura, which was a cause for some celebration. And now we know that, that is quality material. So it's not just about producing the largest crop. It's also about large crops at quality levels. As you can clearly see, the crop health is -- the crop is healthy and that consistency that we've seen in the past few weeks and largely steps off the consistency that we're seeing in the microclimate for the realization of the glasshouse structure, and that stayed within the boundaries of ideal parameters. And clearly, in Mildura, there's been a few summer days. So that's been a very, very happy result for the team. And our manufacturing at the same time has also stepped up in Mildura, and we saw the full packing lines put in, and we now have the opportunity to label to print on site, which is a big step forward in our manufacturing process also. So I'm sure you'll agree that this has caused for considerable optimism regarding the future of Mildura and our plans to scale up from here on in, but a great success for the team there. So looking forward, the Cann team are preparing to work pretty hard to deliver on some of this optimism. And I wanted to just cast our minds forward into the future, what does it look like? And as I've been discussing, the plan looking forward to scale up production of Mildura is well and truly underway. And this should also help us to begin to realize the margin benefits that come with scale. Our immediate short-term focus is to really streamline the operations and to ensure we gain these efficiencies and that the investment is directed towards this growth. As I said earlier, there's a big opportunity for us to build market share. It's a growing market. And if we can become reliable, consistent and deliver quality, we will capture market share, there's no doubt. And if we get the right significant upturn in sales, as we've seen in the December quarter, in the recent months, this will be the beginning of a growth pattern driven by better meeting our customer needs. And obviously, those revenues will start to flow. So what is it that we want to do in the short term? And very much at the moment, the team is focused on the near-term priorities. So the Cann team are focused very much on, firstly, scaling up, clearly the production from Mildura so that we have more quality product to sell, working even more closely with current and potential customers to meet their needs. And as I said, the themes of quality, reliability and consistency are critical for us, and that is how we want to be known in the marketplace. Streamlining operations to direct investment towards that future potential growth. And lastly, doing our best to achieve sales with a view that one day, we will become cash flow positive. So with that, that's the conclusion to everything that we wanted to say. So, Matt, maybe it's now a good time to transition to questions. I did -- before we sort of launch into those, I did want to make a point, we've seen some questions from various people regarding technical aspects of the production and some of the products that we produce. Clearly, the people on this call perhaps are the right people to answer those questions the way they should be answered. So we'll be referring those questions to the appropriate people internally, and we'll make sure that the relevant shareholders are given the correct answers. So with that, Matt, questions?

[Operator Instructions] Thank you, Peter, and thanks also to Allan and Deborah for your contributions there. As you mentioned, we'll now jump into the Q&A segment of the webinar today, and thanks again to all who submitted questions for this. The first question is, when can shareholders expect a dividend?

Look, our objective at the moment is to grow revenues and profitability. And if we can do that to the point where value can be returned to shareholders, that would be fantastic, and that's certainly the ultimate goal. Any consideration of future dividend, that will be a matter for the Board to determine when the company is in a stronger financial position. And our aim is to get to a point where those options are on the table. And that's certainly our goal -- our future goal.

The next question is, what impact do you expect to see from the potential legalized recreational use of cannabis.

Look, there still remains a huge amount of uncertainty about the progression of various bills relating to both the prescription and the potential recreational use of cannabis. We'll -- we obviously keep a very close eye on what's progressing regarding legislative change. But our current focus is providing quality product for the medicinal cannabis space and increase in that ability in Mildura. So that's our current focus.

Thank you. First question is, was the company in a position to know and communicate the preliminary results of the S3 clinical trial prior to the most recent capital raise.

Absolutely not. In fact, the preliminary results came the third day of my tenure in this job, and we immediately went to the market with the results knowing that even though we'd only seen the very preliminary cuts of the primary end points. We thought it was really important as soon as possible to let the shareholders know. So if you recall, the share purchase plan closed on December 1, which was many weeks prior to actually us seeing the first results.

Thanks, Peter. The next question is the pace of revenue growth has been much slower than expected, and these half year results indicate that costs have jumped up significantly. What's the basis of your confidence that we can grow sales to the point of profitability within a reasonable time frame?

Probably the source of my optimism comes from 3 aspects as we sit here today. Firstly, we've now done a lot of the heavy lifting phase in Mildura in that site. And look, there's always things to be done at Mildura and there's always going to be improvements, but we're now in a great position to scale up. And as we scale up, then we get those efficiencies. The second part is the market is really searching for reliable, consistent products. And we're right in that phase where we're going to start to produce that. And as we do that, we'll capture more market share and we'll make happier customers, and we'll have more of them. And then the last one is, I passionately believe in partnering with our customers. And I think the shift in emphasis -- we've built a loyal customer base already. So we've proven we can do this. And I believe that the more we develop our customer-centric approach in this business, the greater will be our success.

Thanks, Peter. The next question is, does the company see a near-term opportunity to register an S3 product off the back of this trial if secondary endpoints are met?

It's probably premature to really make any specific remarks regarding that, having not seen the full data set. It's clear that without the co-primary endpoints showing statistical significantly better than placebo that, that alone won't be sufficient as we might have hoped to submit for an S3 listing. However, as we start to look through the data and secondary endpoints included, we'll be able to better understand what our next steps are in this regard. And obviously, we have those conversations with the Haleon group as well.

Thank you. The next question is, have we secured new customers in Germany? Does the company anticipate these clients will require higher volume deliveries?

So -- the answer is yes to all the above. And to be honest, as we scale up our operations, we are certainly contemplating supplying overseas customers. I think -- and what I've asked the team, our overseas customer strategy is something that we need to define much more strongly, both from a customer point of view but also from a production point of view, so we're currently engaged with -- in the team in a full review of all the priority opportunities for overseas customers, and that includes Germany and how those things will be realized. You don't understand that there are some -- for each country that's overseas, there are different requirements and different regulations that we need to contemplate. And we need to make sure that we're set to go with those. But -- the answer is yes, overseas remains a high opportunity potentially in the future.

Thank you, Peter. Another question that's come through is would you take Satipharm to international markets as well?

Well, at the moment, we already have the pure CBD range in Europe, and that's sold, particularly in the U.K. But as we start to extend the Satipharm range, we definitely start to look at what opportunities exist beyond Australia. And that's on the planning. So will we? I haven't decided yet, but certainly, it's on the list of things that we want to pursue.

Great. We'll leave it at that for the Q&A. I'll hand it back to you, Peter, for closing comments.

Okay. Great. Listen, thanks for everyone for the questions. Thanks for your time today. And I'm looking forward very much over the coming months and years to provide greater update and greater detail as we start to advance our plans. I recognize that not only have we had some pretty loyal customers, but we've had some very loyal shareholders. And I come in with that history, and I take the responsibility for that. I would say that I'm very excited about the prospects and very optimistic as I step into this role, seeing what's potentially happening in Mildura, seeing the potential for scaling up and talking to customers and understanding the market, which has a huge unmet need. And I come back to the same 3 themes that I keep repeating, particularly, I think my team are getting sick of hearing it about: consistency, reliability and quality. And that's what we want to be known as. And I think as we progress through 2023, that will start to become realized. So thank you all for your time and look forward to our ongoing dialogue together.

Thanks, Peter. That does conclude today's webinar. Thanks to everyone for joining, and we look forward to seeing you next time.