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

Okay. Good morning, everybody. Thank you for joining today's move. I am Jenny Pilcher, CEO and Managing Director of Cann Group, and here with me today is Carlyn Villani, Cann's Head of Commercial. Today, Carlyn and I will run through our investor presentation, which should take approximately 15 minutes, and then we'll open up the webinar for questions. [Operator Instructions] Next slide, please. We do have some forward-looking statements in this presentation so just please bear those in mind they're estimates only. And of course, there is a risk that the actual outcomes may be different. So I think we can go to the next slide. Cann Group, who are we? So we were established roughly 10 years ago in 2014. Cann was issued with Australia's first cannabis research license and cannabis cultivation license early in 2017, and these allowed us to grow and produce cannabis for medicinal purposes. Our flagship production facility was fully commissioned in 2022. It's a world-class facility with a level of automation and sophistication that sets Cann apart from its competitors. And Cann is now successfully producing year-round medicinal cannabis and has cemented strong customer relationships and branding, providing it with the leading edge in the domestic market. So let's now take a closer look at the facility. Cann Group's facilities located in regional Victoria and is arguably the most technological advanced indoor full GMP medicinal cannabis cultivation and manufacturing facility in Southern Hemisphere. It boasts approximately 34,000 square meters of micro climate controlled glasshouse space. Roughly 7,000 square meters of this or 20% is currently operational which we call zones 1 and 3. Because it's indoor, we have year-round production. We have also invested heavily in automation with plant movement conveyors and propagation systems and automated filling machines. And we also have our own chemistry and microbiology labs. The next couple of slides just take a look at our R&D program. So where do our plants actually come from? Our R&D team is focused on identifying new cultivars with optimal growth characteristics, which can be transferred from our R&D facility in Melbourne to our production facility in order enhance our product portfolio. Deciding which cultivars to take forward, we evaluate patient desirables such as flavor, bud aesthetics, consistency, terpene levels and potency. We've got 2 main methods of cultivar development. Firstly, we have our own breeding program, which was developed in collaboration with AgVic as part of what's known as the CRADA program. Our second method is via our seed importation and phenotyping program, where we target leading breeders in North America predominantly. Genetics terpene sourced as traceable breeder packs from various leading breeders to guarantee authenticity in a market that has been dominated by inauthentic or copycat genetics. We've already completed our first cycle of patient assessment desirables from these packs and our second import of roughly 20 new strains are slated for commercial release by December this year. Now I'm going to hand over to Carlyn, who will take us through our product portfolio and service offerings and take a closer look at the medicinal cannabis market. All right. We're just trying to take Carlyn off mute here. Tell you what, I might just carry on. And then, Carlyn, if you can get your microphone working, just...

I think I've unmuted. Thank you.

Beautiful. Over to you.

Apologies for that. Technology, you've got to love it. So as summarized in this slide, Cann Group has a diverse product portfolio offering various delivery formats that include dried flower, oils, vapes and capsules. These formats vary in their cannabinoid content, primarily THC and CBD, thereby offering a range of options that meet prescriber and patient needs. Our sales are primarily led by our Botanitech brand and Satipharm brands. Botanitech, which is second from the left in your view, is sold as both 10-gram and 15-gram dried flower jars, 30 ml oils and also distillate vape carts. Satipharm, which is last on your right, is our patented capsule product, which is unique in its delivery format by a gel microsphere beads within the capsules, and these are available to patients as packs of 30 capsules. Cann Group medicinal cannabis products are available to patients who receive a prescription from their health care provider via the TGA's authorized prescriber or SASB approval scheme. Cann's branded sales are further supplemented with white label customer partnerships, being the products on the far left; and bulk dried flower sales, here shown as a 1-kilogram bag. These are sold to other manufacturers, distributors and the like. Next slide, please. So in addition to supplying bulk flower and finished products, Cann offers a range of contract services at its Mildura GMP facility. These services include contract growing. This can be tailored to use either Cann's genetics or customer developed strains, contract packing with both hand fill and automated fill capabilities and the capacity to manage small and large volume orders. This is a service that several customers currently utilize. And we now offer contract laboratory services through our on-site GMP-certified lab, where we have experienced scientists working in the lab, and this is a new service line we're actively marketing. Next slide. So understanding the relevance of this requires insight into the medicinal cannabis market. So the next few slides offer an overview of the Australian market and future growth drivers. What we know is it's estimated that 2 million to 2.4 million Australians use more than 650 tonnes of cannabis each year both legally and illegally. Of that, it's estimated that the legal medicinal cannabis market is now exceeding 100 tonnes per year. At a patient level, the current medicinal cannabis value is estimated to be between $500 million to $700 million, and this is growing at around 25% year-on-year. Flower remains the dominant format prescribed by health care practitioners through the SASB, an authorized prescriber scheme, still making up approximately 70% of the market. Next slide. So there's still significant room for growth in this market, and this slide talks to some of the growth drivers going forward. There is an improving perception of the role of medicinal cannabis for treating a variety of specific medical conditions. This is based on a growing body of scientific and anecdotal evidence and patient experience. Also, the strengthening reputation of Australian grown product, and this is leading to an increased number of prescribers who look to Australian grown and manufactured products for their patients. In addition, several regulatory and legal changes could further drive market growth. Potential changes to TGA regulations may restrict cheaper imports, therefore, creating greater opportunities for local producers. Reforms to driving laws allowing the use of prescribed medicinal cannabis would expand patient accessibility and improved coordination among local growers to represent the interests to government could further support the industry's development. So the increasing number of delivery forms through the diversification of products, both in terms of delivery formats and THC/CBD combinations, is making medicinal cannabis more appealing to a wider range of patients. For example, in aged care settings, capsules and oils are very well received. Non-inhalation products such as gummies, edibles, capsules offer practical alternatives for patients who prefer not to smoke or vape. And more generally, we're seeing an increase in the number of recreational unit -- users transitioning to prescription-based medicinal cannabis products for their consistency and quality despite the often higher costs. And finally, the expansion of export markets presents a significant revenue opportunity, particularly in high-growth regions such as Germany, the U.K. and Poland, which are becoming increasingly accessible. I'll now hand back over to Jenny.

Thanks, Carlyn. So Cann -- we believe Cann is well placed with its leading brand Botanitech and dried flower and oil customer relationships to take advantage of the $700 million market opportunity that Carlyn has just mentioned, particularly when there's growing demand for locally produced and high-quality product at attractive price points. But more specifically, the reason we think we're well placed is we have a strong knowledge of and reputation with regulatory and agencies, the TGA and ODC specifically. We've got experienced staff from cultivation, manufacturing and commercial. And obviously, full cultivation and GMP manufacturing capabilities on-site for dried flower that's capable of producing 10 tonne per annum with room for expansion. We've also got established pathways to market through our own brand Botanitech, which is gaining market share, and our white label customers and bulk flower sales channels. For the diverse product portfolio, dried flower, oils, vapes, capsules and also our contract services are gaining traction. And last but not least, we do have that long-term affiliation with the LaTrobe Uni and AgVic for our R&D program, which has given us imminent launch of multiple new high-quality genetics matched to market needs. Right. Before I take you through the strategy in FY '25 and beyond, I just want to quickly recap FY '24 results. Revenue, $15.7 million, continues to grow year-on-year, up 12%. FY '24 is really the first full scale up year at the facility. So we achieved 4.4 tonnes dried flower, which is up 100% on the year before. We are still loss-making as we continue to scale up, which is reflective of the 128% OpEx ratio and EBITDA loss of $13.2 million, but these metrics are both improving. The focus going forward is very much on these 4 metrics and continuing that improvement. For FY '25, we have a clearly defined plan to achieve revenue growth and deliver an EBITDA positive result for FY '25, so the financial year we're in. Focus were very much beyond providing consistent quality flower that meets patient expectations in terms of terpene levels, aromatics, aesthetics, et cetera; broadening our Botanitech range via the new plan cultivars, some of which are already in production and others are coming soon; and continuing to supplement that with our non-inhalable range, such as oils, vapes and capsules with our capsules actually set to have a THC/CBD combination and THC-only capsule available commercially by December. So whilst we continue to drive production and revenue growth, we will maintain a tight control of spend. We've already eliminated more than $3 million per annum of cost, following a rightsizing and efficiency program earlier this year. Slide 14. This is the key slide of this presentation really. And the graph on the left demonstrates that we are only at the start of our growth potential. In FY '24, as mentioned, we produced 4.4 tonnes in total, 100% increase on '23, but importantly, not all of the months of the year were operational. We're now on track to produce more than 5.5 tonne in FY '25 with year-round production. And with our -- in combination with our reduced cost base, we can deliver EBITDA breakeven. With production increase in beyond FY '25 firstly, and to in our existing zones 1 and 3, we can get to cash flow breakeven, free cash flow that is. And then with further expansion capital, we can ten scale production to the remaining 8 zones, which would see revenues exceed $100 million and providing market pricing holds, of course. And the picture out to the right just demonstrates the rooftop view of the facility, and you can see the zones 1 and 3, they're a different color in the remaining glasshouse space, which today is our unutilized, just to put in perspective how much growth potential there is that we haven't tapped into yet. So turning to the outlook for Cann. It's very much about continued production and revenue growth zones 1 and 3, deliver an EBITDA positive firstly, then free cash flow positive thereafter that mostly from the domestic market. We'll continue to expand our portfolio to meet market demands, and in the future growth comes from investing and build-out of additional zones and to meet local and export market demand. So why invest in Cann? Well, hopefully, you can all see that Cann is a growth story. More specifically, we have our own high-class R&D program determining which cultivars to grow that make the quality that's demanded by the market. We have a cutting-edge production facility that gives us year-round production that was not reliant on any others. We've developed significant in-house expertise in cultivation and supply. We've de-risked our revenues through product diversification and have demonstrated consistent year-on-year revenue growth. And the market in Australia is growing and plenty large enough for Cann to execute the strategy that I've outlined. And the export market, of course, remains an important opportunity going forward. And lastly, just a quick recap on the rights issue that Cann launched last week. It's an opportunity for shareholders to invest at an offer price of $0.04. Entitlement is 1 share for every 3 shares held. It is a free attaching option for every 3 shares subscribed for, and importantly, there's also a top-up offer available. So if you want to subscribe for more than your allocation, then you can apply to do so. And I will confirm that all of the directors, including myself, are participating in the offer. If it's fully subscribed, Cann will raise $6.25 million before costs. And that funding will largely facilitate our production targets that I've mentioned and allow us to manage working capital more effectively. The next slide, that just outlines the use of funds that I've just mentioned. And then the following slide gives you just a quick recap of the timetable, but the important date to note on this slide is the offer does close on next Thursday, the 24th of October. The directors do have the ability to extend that if required, but at this stage, that is the close date. So thank you all for your time today, and Carlyn and I would be very happy to take any questions. [Operator Instructions] Thank you.

I'll just take a moment for some of these to come through. So the first question we have is about an update from the sale and leaseback facility. So we did launch a marketing campaign of our agent for a potential sale and leaseback of Mildura. The expressions of interest closed on Friday, and our agent is still going through those and assessing the outcome of those, and they do vary on how much information each one has. So you can't -- we're just trying to get them to a point where we can compare. In terms of the sale and leaseback, it was really an opportunity for us to see if this was a viable option that might give Cann a better finance structure than it has today. It's not necessarily the be all and end all, and we're hanging everything on this. It really was just an opportunity for us to assess whether that option has any potential. So we will update the market once we have something more [indiscernible] to put out there. [ I'm reading more ] [indiscernible]?

Jenny, there's one that I'm happy to take if you like from Steve.

Yes, go for it. I can't see it at the moment. Sorry.

Okay. So there's been a lot of focus on the development and expansion of your own in-house brand Botanitech in recent months, which has never been a focus before. Can you explain the shift in strategy? So that's a great question. So Botanitech is actually been a brand that has been part of Cann for quite some time. It was our original oil brand that was launched, I believe, last year or even before that. The expansion of the brand has allowed us to utilize our cultivars in a different way and to actually meet market demand. And it gives us an opportunity to really present to the market what Cann can do. It offers the opportunity for us to put new cultivars into the market and also to allow white label customers or any other customers a chance to see our flowers in action, and also to present patients the opportunity to try our flowers, and our health care providers, have the opportunity to meet patient needs through all of the flowers that we have. So Botanitech really has become -- evolved into a brand that has been sought after and grown by itself because people have been seeking that as something for them to provide options for patients. In the sense of it driving the business, we've adapted to be able to accommodate the revenue stream that we've needed to. And now we've supplemented that with white label customers who continue to work very closely with us in the bulk flower opportunity. So we've just tried to meet what the market wants, and we've also been able to bring things in like vapes to add to that. So hopefully, that answers your question.

Thanks, Carlyn. There's just another one here asking about our Q1 revenue. We will publish that along with our quarterly activity statement, which is due out by the end of October. So not for this call, but it will be coming soon. There's another question here. Is the average -- current average sale price, $3.45 per gram, or why is that price mentioned? So it's a good question. For FY '24, of the flower that we manufacture at our facility, our average selling price was $3.45 per gram. And that just is there to give you the context on what the potential might be when you start applying that price to our production capacity or capability. But it is important to mention that, that is only a local flower produced, and we also have other revenue sources, so contract packing shouldn't be ignored the capsules, which don't come into that and various other imported products like vapes, for example. There's another one here, which I may defer to Carlyn, if that's okay. The question is around how we differentiate ourselves and compared to lower cost of overseas production that's coming through.

I think as mentioned in the presentation, the prescribers and patients are actually seeking Australian grown and manufactured products. In regards to the lower cost, in the end, it doesn't necessarily -- lower cost doesn't necessarily equate to quality definitely. And also, by the time manufacturers bring in products from overseas, there is often significant costs associated with that through to supply chain and consistency in actually delivering patients the products consistently. So I think from the sense of us competing and having competitive advantage, we know consistency in supply chain. We have a superior quality product and we know that patients can have access to these products all the time. I think the import strategies of the past are starting to settle down, and we can be confident that we can deliver on these for patients, and that's what we hang our hat on, and that's what we'll continue to do, so.

Yes, I would agree with that. Thanks, Carlyn. There's another question here. Shareholders have been promised a lot over the past 3 or 4 years and have been urged to remain patient. That is true. What can you say to convince investors that this time it will be different and that Cann will actually deliver? It's an interesting question. And my response to that would be the last 3 or 4 years have really been about, firstly, finishing the production facility, which remember, it was only fully commissioned less than 2 years ago, and then that subsequent 2 years has really been about the scale up, and we have been learning and learning a lot. This is the first year going into FY '25 where production is just happening. It's happening every day. We have the right team. We've built in all the automation that we wanted to with the multi-head filler and other things. We've implemented our hang drying process, which has had a huge impact on product, the efficiency of production, but also the quality of the product coming out of the other end. So that's why I think, Cann has -- is in [ bump ] right now to deliver on the targets that we've set for FY '25 and beyond. Okay. I think that's -- we don't have any more questions in review. So with that, I would like to, again, thank you all for your attendance today, and thank you, Carlyn, for presenting as well. And also, thanks for everyone for their continued support, and we look forward to keeping you updated as we go.