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

Thank you for standing by, and welcome to the Cann Group Investor Update Webinar. [Operator Instructions]. Beginning on behalf of Cann Group today, we have the CEO, Peter Koetsier; and CFO, Deborah Ambrosini. The presentation today will last for approximately 25 to 30 minutes, and we have approximately 10 minutes for the Q&A session thereafter. To begin, I'll hand it over to Peter. Please go ahead.

Great. Thanks very much, and thanks to everyone for joining today. I'm here with the CFO, Deborah as discussed. So tonight I've reached 3 months now, almost today with Cann Group and therefore, I thought it was a really good time to over and above our usual kind of reporting schedule, to update on the strategy and some of the next steps. In particular, kind of flesh out some of the priorities we have that defined together, and hopefully, that will form the basis of some pretty good understanding for all of you. Of course, the disclaimer slides. Just to remind you that some of what I'm going to be talking about, particularly today, is focused on our future and as such, there are no such thing as guarantee sadly in life. Whilst we've done a lot of work on building the plans, there's always the unexpected. So that's the disclaimer out of the way. So today, I'm going to touch on a few points, specifically our progress the next steps at the Mildura facility, how the market continues to offer an opportunity for us to increase our sales momentum, the incremental opportunity with Satipharm platform, and really focus a lot on what our short-term priorities are. And with that, you'll recall back in February about a month in, I gave my initial impressions and I'm pleased to say that they've been really well reinforced. We have a strong committed team, and that is really one of the great parts about being at Cann. We obviously have a big opportunity. And importantly, we have a pathway now to becoming an established player in the B2B space. And in fact, an opportunity really in the short term to become Australia's biggest grower in medicinal cannabis using the best quality technology. So let's share some of these plans and how they flesh out. To begin with, importantly, I'm pleased to report that Mildura is up and functioning and we're now ready to begin the process of realizing the scale of production that it really was designed for. The Mildura site provides competitive advantage because of this scale, but also because the controlled micro climate and increasingly automated systems creates the potential not only for more crops each year, but consistency as the plant growth is less dependent as it is in some places, on, say, the outside weather or the seasonality and that really is a competitive advantage. In addition to that, unlike most facilities and companies, our more than 50 trade staff are responsible for the steps all the way from cultivation to harvest, and for the packaging of finished goods right on that site, and unlike other companies, we've also had the needed analytical chemistry and microbiology lab testing right there at Mildura. That technology extends also to the fact that we can produce Satipharm right on that Mildura site. All of this adds up to the realization of a technologically advanced full GMP site producing high-quality medicinal cannabis and really, that is a flagship of our ability to really now go to the next level. So talking a little bit about the transition to the next level. Obviously, up until the end of 2022, we really were in start-up mode at Mildura and many of the key elements now have come together; including not just the amazing physical building itself but ensuring that the processes are right and they're GMP validated. And we've now hired and trained the right staff as well, which is a key component, obviously, of making it work. So since the first commercial crops were only actually planted mid-last year, we're not even a year into to planting commercial crops. We've made huge learnings and adjustments and now I'm pleased to report that the site and the team have proven the ability to produce high-quality crops and these crops are being very well received by our customers. So as we go into this year, this is obviously the year that we go to the next level, and that's scaling up and selling our products, which is really what we had designed the Mildura site to be in the first place. So in addition to my arrival as part of this transition and of course, my career has been built on leading teams to realize commercial potential and to move quickly to accelerate sales growth; we're now able to plan very large crops compared to where we've been. And not just that, but to meet the high standards that are going to be necessary to be successful. We are also moving very quickly to begin to start up our commercial team, and we need that to offer our current and potential customers the kinds of long-term partnerships and collaboration that I think will become the base of our core business going forward. So away from pure opportunistic and transactional to a fully functioning a facility that allows us to have strong collaborative long-term partnerships. And I think that, that allows us to realize the benefits that we've built there. And I think also something really important to mention is that the facility has also allowed us to realize the benefits of the continued work at the R&D hub on the side of La Trobe University, and we are on the verge of about almost ready to introduce new cultivars. And of course, the R&D processes have improved our growing techniques. To give you a sense of the magnitude of the scale. Well, I wanted to share this graph with you, which is something that we're very excited about. So just how big you can see the scale up is quite considerable, and it's very much in the coming weeks. Obviously, the right-hand side is planned, but it is a quantum step. It also shows our plan to fundamental. The output of the coming months begins in the next few weeks as we go to plant in Mildura. The relative orange and green bars also are an indication of how much of the product will be available. And this is a key measure of quality, but it also is in line with market needs. So indeed, we are on the verge of very incredibly exciting times. And I've also asked the team going forward to look at ways we can better share this progress rather than simply some of the financials that come as a result of this. I also would like those of you who are in the shareholders group and others to start to understand just how the progress is happening in Mildura and some of the excitement. Look for future communications on this as we go forward in the next few months. But even before this Mildura scale up comes online that we've obviously had a sales trend that's showing a pattern of growth based on strong market demand and the fact that we're growing with the market is asking for. Later this month, we'll share our quarterly revenue numbers leading up to the March quarter, and they're looking consistent with this strong growth trajectory. This revenue growth trajectory, combined with our future production output, creates real excitement for me and the team regarding our futures. Economy increases in scale and production are exciting, but what about demands. Well, first and foremost, it's always important to reflect on the patients that we are helping. All of us know people with the diseases listed here or indeed some of us are patients ourselves. That personal understanding of the debilitating nature of these conditions that motivates us to work hard to help more people. Furthermore, the market medicinal cannabis in Australia is growing rapidly so the need for more quality products is also growing rapidly. And even beyond some of these forecasts and predictions there are obviously potential short-term bumps in the growth and such as some of the proposed driving law changes in Victoria as an example. So the market is obviously in a period and a pattern of growth, which may actually accelerate. Sorry, the big growth and growing demand currently is largely served unfortunately by imported product as local production fulfills only about 20% of the Australian demand despite most cannabis companies and patients preferring local products if they can get it at the quantities and qualities needed. There's a huge opportunity for local producers like us but most local growers are struggling to scale up significantly based on the way that they're growing or indeed, they're months or even years away from having their facilities built and producing it at scale. And furthermore, is most use in this space is inhalation of dry flower, scale production requires higher quality, which can take time to achieve as we've discovered. As I've shown you, our Mildura facility is ready for scale, and we have achieved the quality we need to be successful. So this market and our ability to scale right now come together beautifully. The TGA has indeed made amendments and needs regarding the quality requirements of the digital cannabis products that come into force on July 1 and these changes really are a recognition that important product was not always meeting the rigorous standards of local growers. I'm pleased to say our GMP TGA-inspected Mildura site gives us and our customers the confidence that the Cann Group product already meets and, in some cases, exceeds these requirements. So we're in a very good place, considering. Above and beyond all of this huge opportunity and cause for optimism, of course, we have the unique Satipharm platform. As you know, the trial designed to help us gain an S3 registration for the lower dose CBD forms, coke patient sleep better but it didn't show a statistically significant difference between the treatment and placebo ones and as such, has put on hold our planned registration submission. Our discussions with Haleon and the next steps are continuing and will communicate resulting actions as they have decided. Over in addition to the lower dose CBD only range, this technology should also allow us to develop a range containing higher CBD amounts and also include THC. Both of which are consistent with the current doctor prescription market and the team is currently advancing these new forms and once developed this range could be part of a more mainstream pharmaceutical strategy, which, of course, is right in my wheelhouse. So all these adds up to 3 clear immediate priorities for me and the team. First and foremost, we need to deliver on the scale-up plans in Mildura as they're critical to allow us to meet the growing needs of the market. And as you would imagine, when we start to produce in Mildura at scale as the facility was designed for, our cost per gram come down substantially. Secondly, as with supply considerably increases, we have the opportunity to continue the sales momentum we've built. In addition to my commercial background, I'm pleased to announce we've hired Sam Chester as Head of Business Development at Cann Group, and Sam brings both experience in the medicinal cannabis space in Australia, but also overseas. And as well as this, he has very strong track record of sales and marketing, so a great addition to our commercial team. Thirdly, we are bolstering our range, as I've discussed and our offering to the market. And we're on the verge of bringing new cultivars of our own genetic stock. And as I've mentioned, we're working further to develop Satipharm platform but further to that, we are looking overseas and locally to make sure that we stay at the cutting edge of whatever the new wave are. So 3 very clear priorities: scale up, accelerate, and make sure that we are at the cutting edge of new development. So really to summarize, we are moving to scale production with a focus on quality, reliability, and innovation. And as I've described, realizing the promise of the investment in the Mildura facility will give us a competitive advantage and provide a pathway to further accelerating our sales and marketing. The market is growing and is looking for what Cann Group can produce, plus the Satipharm platform is an incremental opportunity. The team and I have a strong focus on scaling up of Mildura, consolidating and expanding our customer base and, of course, growing our revenues. I hope what I've said today gives you the same sort of excitement and optimism about the next stage of Cann Group that I and the team are really feeling right now. And I look forward very much to sharing more information and even greater communication over the coming months to help you understand and realize how we're making all of that happen. So with that, I'm now pleased to address any of the questions we've received either prior to this meeting or afterwards. And I've got, of course, Deb here to help me answer any of those questions. So let's pass go to the Q&A.

Okay. Thank you, Peter. [Operator Instructions] So the first question is approximately when is it envisaged that the company will be the cash positive earning company.

Obviously, a question that we are spending time looking at. But look, there are a number of variables, and I often see that as being an outcome. So there are a number of variables which will determine when we achieve positive cash flows. These obviously include the rate at which we can continue to scale-up production, the extent of additional sales-based efficiencies we can secure, and the timing size and nature of customer orders. Now the important thing is we can see a clear path to that milestone with a meaningful step-up in production volumes and customer demand really starting to become strong and growing. So our focus is very much on building the revenue base as quickly as possible and I'm confident that if we put all the key elements in place, that will take us to that cash flow positive place.

The next question is, can you outline the expected efficiency benefits you expect to gain as Mildura ramps up production.

Maybe, I'll ask Deb to answer that.

As Dan mentioned in his presentation, we are currently scaling up the Mildura facilities [indiscernible]. As we increase production [indiscernible], we anticipate cost savings and benefits to economy of scale by bringing in previously outsourced activities in-house. As Peter also mentioned, the anticipated cost savings from the increase production activity are expected to improve the growth margins on our products, while at the same time, process improvements throughout the facility will lead to increasing our operational activities. We've already seen this. There was evidence in the current quarter after we brought house labeling and jar packing in-house. There were activities previously outsource. As a direct result of that, that change can saw the jar packing increase 476% in the prior quarter. Other presence that we also noted was the increase in biomass production of nearly 69% of inhalable flower and nearly 19% for extraction gas sale. These improvements for a direct result of efficiency gains as we ramp up in Mildura facility.

And I would probably just add, obviously, the site was built -- much higher production than we've been putting through it. So not surprisingly, those efficiencies will come in the scale up.

The next question is if a new clinical trial is needed, does this mean making the capsule stronger and we expect competitors to build a dossier off the back of our trial work and follow closely behind us with the TGA submission.

So hopefully, I've covered off a lot of this already in the presentation, but we are, of course, working together with Haleon. We do have a chance to carefully review and discuss the data and reassess our S3 registration plans and we'll be in a much better place to answer some of these questions when we've had the proper time to do this with Haleon. In the meantime, as I've mentioned, we are continuing to develop the platform in terms of other potential prescription-based formulations, specifically including the addition of THC. As for the part about the trial data, the trial data belongs to us. It is proprietary. So other companies as much as they obviously have seen the results overall, they can't dip in and use our trial data to support their registration and specifically considering the platform is a unique presentation, that also provides significant proprietary protection for any of the data we create we set up for.

Next question is, do you need to do another capital raising?

I'll take that. Thanks, Matt. Cann has committed in place to conserve their cash at the moment while we continue to maximize the opportunities in the market and deal with the revenues that Peter mentioned earlier. We are fully aware that we need to maintain the right balance with capital conservation and continued investment in areas that we deliver profitable growth and continue to build the value for all of our shareholders. As we do these, we will continue to monitor the balance, and we will work to have funding in place that enables us to capitalize on the exciting opportunities ahead as Cann progresses through this next sort of transition size that we're in right now.

Next question is, what priority are you giving to export sales? And where are the best opportunities for Cann in terms of the export markets?

Look, we certainly see attractive opportunities for our products being legalized with these cannabis markets overseas and Germany is obviously a short-term one of those. Demand for good quality product is high in many countries, and it's certainly getting higher. But in the near term, our priority really is to meet the growing needs from our customers here on a B2B basis here in Australia. Once we've reached the level with some of our core base in Australia, then we'll start to cast our view across and have a look at other countries like Germany. Clearly, we do have a plan in the background to monitor and understand what would be necessary for export into a variety of countries. But right here right now, the focus is to scale-up for Australia.

Right. Thank you. The next question is, do you expect to see a consolidation and rationalization in the Australian market? And do you plan to participate in such consolidation moves?

It's a great question. Look, I think -- obviously, we keep a very close eye on the industry development in Australia and other parts of the world. And I would expect that consolidation will occur at some stage during -- in the local industry based on where the industry is and in its life. And of course, if opportunities present that genuinely add value for Cann Group and its shareholders, we will obviously carefully consider those opportunities always. But right here, right now, I think the best thing that I can say is we maintain [Audio Gap] that, first and foremost, the company is reaching a different place. So we need different management. Second of all, the team that I have has really grown and developed and I look, for instance, at Russell, who is running our Mildura facility and his capabilities, and I believe the team we have very strong. Having said that, the transition to myself and my commercial background, probably and now with the addition of Sam Chester probably signals a little bit of where the future build will be in the organization towards making sure that as we step up production that our commercial arm meets the needs of the marketplace and matches that production. So hopefully, that answers that question.

The next question is, has all building construction being completed and paid for.

I'll take that. No, not at the moment. We are, I would say, 95% there in my understanding. So we do have a few costs still left. But what I will say is that the costs that are within budget and they're all within our expectations.

Great. Peter, there's been a couple of questions come through live just around whether you can give an idea on the increase in scale and what that looks like in terms of kilos of cannabis produced at Mildura and when you expect to be able to reach that maximum production output.

Look, at this stage, you can imagine as we take the first step in really scaling up, it's very difficult to be definitive about the dates. Obviously, there's a production plan and there's a more aggressive production plan but until we take that really big step that we're about to make, where we're essentially planning twice as much in our crops. It's very difficult to tell you exactly when we will reach the 12.5% or even potentially more than that in the space that we've built. So having said that, you can see from the slide that I presented. We are about to essentially double in the course of the next period. So what I would say is I'm certainly planning on the fact that what we're producing this financial year will at least double that, if not more significantly, double at them in the following financial year. So it will be a quantum step but I would say the Mildura team are doing all they can to move production scale as fast as possible. And I will commit to come back to shareholders as we start to do that to communicate more and more about how we are progressing to that plan. But if you can give us a few more months and beside a few more months just to take the very big first step we're about to make from where we've been to where we're going, and report on that, then we start to have the line sight to the future a bit clearer.

Okay, final one with regards to the market in Australia, when do you expect to see the TGA start policing the illegal market in Australia?

I don't mention the TGA is responsible for police in the illegal market. The OTC is more likely to be responsible for that. I think that -- I mean there already is policing, of course, of the illegal market. And there are actually quite a number of prosecutions every year, which is surprisingly high for illegal use of cannabis. I think the TGA's focus at the moment is to increasingly ensure that the medicinal cannabis that is legally being prescribed in Australia as a sufficient quality. And that quality is potentially going to get better and better in Australia, which will move more people away from the suspect illegal market, I believe, to the legal market. Having said that, again, I'm super excited of the fact that Cann already meets the TGA standards that are required. So we're in a great place as we scale up to encourage that move from illegal to legal through the care and responsibility of a prescribing doctor.

Thanks, Peter. I'll hand it back to you to just give a closing comment.

Fantastic. Well, listen, thank you all for the time, and thanks for the questions, and please feel free to send us future questions as they come to you. Hopefully, today, I've given you a little bit of an understanding in a sense of what the next phase is for our business, and that is really to get Mildura, now that it's working, to scale up to the production levels that we've designed for and through that, realize some of the efficiency benefits, but more importantly, to deliver to our customers what is really being demanded, which is high-quality local growing product. So a very exciting time to be part of this inflection point for the Cann Group, and I'm really looking forward to continuing to share our progress steps towards realizing some of the kinds of expectations that we have for this business and thank you for your time. And as I said, if there are other questions, please feel free to share them with us.

Thanks Peter, and thanks to you as well Deborah. That conclude today's webinar. Thanks to everyone for joining, and we look forward to seeing the next time.