ECS Botanics Holdings Ltd ($ECS)

Good afternoon, everyone. Thanks for joining us today for ECS Botanics' Q3 Investor Update. I'll pass you across in a moment to ECS Managing Director, Nan-Maree Schoerie, to kick off our discussion of the company's progress. We'll have a presentation from Nan today followed by an opportunity for Q&A. [Operator Instructions] So to kick things off, I'll hand over now to Nan to walk us through the results and the progress ECS has made during the quarter. Go ahead, Nan.

Thanks, Tim, and thank you to everyone who's joined. I think some people are still joining, but we'll kick off. So just hopefully, it's not too easy. The photo in this introductory slide is probably a good one to start us off. We just finished our outdoor cultivation. So that is flower from outdoor. You can see that it's very healthy, and we're pleased to say we had a really good quality of product this year. So that picture is a really good indication of what we actually achieved. So just the normal disclaimers. Hopefully, everybody is across this. So a little bit about ECS for those -- for many of you joining in we know a lot about ECS, but perhaps there's some new people on the call. Just to give you a bit of an overview of the company and why we think we've got something well worthwhile and a little bit different to what other medicinal cannabis companies in Australia have. We -- first of all, we're certified organic. And that obviously has value in that organic certification, particularly of value in Europe. But it's becoming more and more important even in Australia because there have been some reports, some of you might have seen in the media where some of the imported product has been grown using grow PGR. So plant growth stimulus, and they are not good for humans and certainly not something you'd want to have in your cannabis. So having an organic certification does give our patients another level of confidence around the quality of the grower and what we're using because everything is obviously certified by organic certifier. So that's helping us even more than what we had in the past. Obviously, also being Australian in this instance is very valuable, and there are a number of Australian producers, but it is helping us counter some of the pressure that we've had in the past around imports. And pharmaceutical grade GMP. So our facility from the time it comes off the farm into the facility is all done under GMP. And again, this is something that comes at a cost actually. It's a little bit more expensive, significantly more expensive than a GACP grower, which would be you wouldn't have any GMP certification. But it is working in our favor. What we're hearing coming out of Europe is that the European regulators are getting a little bit concerned about what they call GMP washing, where companies are actually putting flower through a GMP facility and saying that it's GMP, so they might do a single small step in a GMP facility and call it GMP. In Australia, it's not such a big issue because Australia only requires the flow is packed under GMP. But this is a very big thing for us in the European market, and it's great to hear that the European regulators are stepping in to make sure that non-GMP companies are not providing product into Germany specifically. It's an interesting one because we've got a relatively expensive way of producing with GMP and organic, but we also have a low-cost advantage. And that is because we grow a lot of our product outdoor, but also in PCEs or poly tunnels, if you want to call them. So they are relatively asset-light facilities and relatively low cost to produce because we use the sun a lot. So in the outdoor grow, obviously, there's no artificial lighting. In our greenhouses, we don't use artificial lighting in the main season, so autumn, summer and spring. In winter, we do add additional lighting in some of our greenhouses, and we've spoken about that how we've managed to get a full 12-month cycle out of those greenhouses by using artificial lighting. But nonetheless, most of our flower is produced under natural light. And as a result, our electricity bills are significantly lower. I'm talking about orders of magnitude levels. It's about 50x less energy to produce cannabis the way we do to if you have an indoor growth. The other point here is we think we are at a point now where the business is doing really well. We've dialed in the genetics. We've dialed in a lot of the procedures that we use. The quality of our product is really good. And what we want to do is now really leverage the assets we've got. But we do have in the back of our mind, our ability that we can expand the facility if and when, I should want to say when the demand requires us to do. So we're on 15 acres, and we have 176 acres. So we've got a lot of room to grow and also to expand the full-year production. A quick highlight of the quarter. It was cash flow positive. which is a goal for us, and we're doing what we can to continue that trend. So major reason for that is the change from B2B to B2C model. You can see 71% of our revenue came out of the B2C business. The B2C business, as I've mentioned before, is more profitable, and we have much better control over it. So this is allowing us to get better margins, and that always drops down to the bottom line. So really, the cash flow positive, I think, is not by surprise, it's by design as we're starting to get more margin out of these products despite the fact that we do continue to see pricing pressure coming from imported products. The industry, unfortunately, is declining or is contracting, and that's mainly because the TGA have put a lot of -- and Aon have put a lot of focus on I guess you could call them rogue prescribers or uncontrolled prescribing and not enough due diligence. So that has impacted the market overall. Obviously, it impacts us as well, but we are in better positioned than most in that our model has always been to sell to doctors to treat our medicinal cannabis more as a pharmaceutical product and have very much pharmaceutical sales. So we educate our doctors. Our doctors then understand the value of the product. And so we're not doing these large vertically integrated clinic models, which many of the -- I think is the area where many of this contraction has occurred. And then some good news. We've sent our first product into Germany. Now we have been supplying in Germany for a while, but this is under the B2C model. So OzSun is now about to be launched in Germany. What we did was we sent a batch ahead to make sure that it passed all the testing because it's unirradiated so we got to make sure that we meet the specification in terms of unirradiated because this is outdoor crop. So we wanted to make sure we were kicking all those boxes before we sent this main shipment. Unfortunately, the lab in Germany had some issues and they delayed about 2 weeks in terms of getting the testing done. So we missed the permit for the shipment. So a new permit was applied for by the permits, and we'll get one within the next couple of weeks, and we'll send that shipment over. So there's no negatives that all passed, everything was good. But unfortunately, we work on this permit system and permits are only -- they have to get a permit and we have to get a permit and that window is 3 months. So it gets narrower because of the 2 permits. But the new one has been applied for. And we see this as a big opportunity, particularly now that we've seen the quality of our outdoor growth this year has been really something to write home about. So we're very excited about that. The plan is to look at how we grow in Germany, but also to replicate that model in other overseas countries. We also did our first shipment of oil to NUBU. So not going to be sees stations, but I think a really important indication of our continued expansion of our products into overseas markets. This is just a snapshot of the corporate side of things. This is our third quarter of being cash flow positive. We've had a significant amount of investment, and that investment wasn't only in terms of the new greenhouses. It was also in terms of the B2C model. We had to launch new products. We had to hire salespeople. All of that took a significant amount of investment, and that is primarily behind us. There's still some small investments, for example, at the moment, we're about to acquire another generator. This is just a backup generator to make sure that we have a pathway that we can keep the lights on. We already have one, but because we've grown, we need, but those are sort of $30,000, $40,000. We're not talking about massive investments anymore. So the big investments are behind us, and we can now continue to just leverage those investments. In terms of our shareholders, nothing has really changed. We still have the same top shareholders, a little bit of movement. But in terms of Flowerday Holdings and my own scurf is that we are -- I'm the largest shareholder. And then -- but the others are very stable and have been around for a long time, which is good news. Just in terms of the financial performance of the half year, I think you would have all seen this in the previous webinar, but we were profitable. We had an increase in EBIT and also our revenue was up. We expect to continue that trajectory in terms of revenue. I have been sharing with people in the market that one of the challenges we have with our type of industry is our biological assets are valued at market value. And so if the share price -- sorry, not the share price, if the cost of product goes down, we then have to adjust the value of our inventory, even though it's a paper exercise. So I'm always a little bit mindful of just explaining that. I think the important things here are we profitable in terms of true profit, which we are, obviously, but also just making sure that everyone is aware of how it works in where you have biological assets, it's a little bit more complex. Difficult to explain. But hopefully, you understand when I say we actually value the inventory at what they call fair market value. So if the fair market value declines, then so we have to adjust our profit. And that's what happened last year and the year before. So I mentioned about being cash flow positive. I see this as the new normal. A lot of that red section there was really where we went through that investment phase. We started our B2C business in Q1 of last year. And obviously, that level of investment caused quite a lot of pain in terms of the of cash, but also in terms of releasing all the products we released, but also at the same time, we were building all the additional PCEs as well as a big curing room and another drying room. So there was a major CapEx investment as well as a major amount of investment in our new sales team. That's all behind us, and it's really starting to deliver the results, which is why I expect this trend to continue. Just anyone who is particularly interested, the picture is along the top there. When we harvest the outdoor crop, we buck the flower. So the picture right on the left-hand side is freshly bucked flower. We then put it through a trimmer and then we grade it to different sizes based on the size of the flower. So that's a typical harvest of the outdoor crop. That's what it looks like. That is all what we call wet. So it hasn't been dried yet, then that flower will be put into the drying rooms to grow. So all the rooms are operating now. The outdoor crop has been harvested. So it's behind us. I haven't got the final numbers yet. But my anticipation is that the size of the harvest will be very similar to what it was last year, but the quality of the harvest is going to be significantly higher. And that is very important for us as we export this product to Germany that we make sure that the outdoor crop is of very high quality. The reason why the harvest is not bigger is because we actually kept the plant a little bit smaller this year so that we could really focus on the quality. So it was kind of yield offset by quality. And it seems to have paid off. I think we're going to have some really good flower this year. Well, I know we are because we can really see. In terms of the B2C strategy, obviously, for those of you who have listened to these webinars before, this has been a game changer for us. I've always believed that brands where it's at. And you can see it here that we've the brand, the B2C business has continued to grow. OzSun is a very well-known brand in the market now. AVANI less so, but in AVANI, we make higher margins on. So it's kind of volume, again, volume versus the actual margin that you make. We continue to do well with our VESIsorb products and our capsules. So all of those have continued to grow nicely. One of the things that we think will help us going forward as well is if the TGA gets stricter about how much around the cannabis industry and what we're supplying, we feel that the capsules are probably going to be a very safe place for doctors who are a bit nervous about prescribing flower. And ECS is definitely the leader in the space of supplying capsules to the market. So continue to build more prescribers and developing very strong relationships with the market. We have -- sorry, not farmers, but we have doctors that come and visit us on the farm. And without exception, every one of them goes away very impressed, but also a very loyal prescriber after that. So it's one way that we continue to build engagement with our prescribers and pharmacists. I spoke about the level of investment that we needed to make. You can see and we've spoken about this before, the number of products that we had to launch over the last 12 months has been significant. They've all been successful other than the TerpHogZ was less successful. And the good news is we'll be relaunching TerpHogZ within a month or so. So that was a bit of a misfire, unfortunately. But otherwise, everything has done really, really well. And we've continued -- our pastules are now in the market and are growing well. as well as all the other OzSun products and AVANI products. I did want to just note that these are actually Q4 releases, so a little bit premature in talking about it as part of the Q3 quarterly. But we've launched Aussie Smalls. So what Aussie Smalls is really the product that the flower product that was not really salable. We decided it was too small crumbly or just didn't make -- it wasn't pretty. That is now going to be sold as Aussie Smalls and it will be very, very low price so that to allow people who can't afford to buy -- cannabis is not cheap. And so this allows them to get a product without having to spend a lot of money. So that's being launched at the moment. And then we've also introduced Pastilles into the average range. So this is the first dedicated women's product that we're launching and this has just been launched at the moment. It's already in market. And we're hoping that, that will also help us grow that women's health business. There are more products that we were looking to build, bring out in the women's health space. So the next sort of movement forward with products will be in the women's health space, but also we have another kind of advancement, I guess, in terms of looking at vapes that we'll be talking about soon as well. So we spoke about the fact that the market has declined. And what does that mean? Do we panic or not? I think we've been flagging that this is going to happen. And in fact, I've been a very strong advocate for better control in the cannabis industry, not so much in terms of cultivation because we are highly overly regulated. But in terms of the control of imports and also the control of prescribing, it's very important that there's a level of, I guess, due diligence with patients and making sure that the brand of medicinal cannabis isn't damaged. So we see the changes that have been made as being not necessarily bad in the long run. They will be bad in the short term because people will need to adjust how they interact with patients. But ultimately, we see this as a positive. And I think the market will start growing again. It's very, very well accepted now that medicinal cannabis has major benefits for patients. And we can only see that the market will continue to grow. But it's going to stabilize or retract for a short term while they reset the regulations. But from our side, we don't see that as a massive negative. And at the same time, our focus is very much on, as I said, introducing new products, looking at women's health and also into that export market, both into Germany and then into other international markets in the coming months. So we see that as being the way that we will offset this, and we don't expect it to significantly impact our growth. In fact, we expect in the sort of medium term to see significant growth in terms of volumes of flower sales. I spoke about the market contracting. And I think it was important just to share that the B2C sales for us continued to grow. So our brand or we're taking market share, I guess that's basically what this chart shows is our brands are taking market share, which is a really positive thing for us. And expanding those brands into Europe, I think, will make a big change or big opportunity for ECS as well as we take the same brand and we replicate what we've done in Australia into the European markets. You can see the size of the European market. I don't know if you can see the size of the German market. It's growing rapidly. Imports are surging and that will obviously stabilize, but it's still a very, very big market and continuing to grow significantly. So we are already part of that. What we want to do now is to really try and capture more of that share, not just grow with the market, but take some market share. I spoke about the oils going into New Zealand. The picture on the right, I thought it would be worth sharing with you that, that is what we provide our B2B customers in Europe. This is an overview of one of the flowers that we're just launching at the moment called Blueberry Fumez. It really is -- for those of you who know anything about cannabis will -- that the quality of these products is superior. It's as good as anything you can find in the market. These are genetics that we've had for a couple of years now. What you have to do is once you get the seeds, you have to grow them out and then you have to phenohunt and then you grow them out and then you phenohunt until you end up with the flower that really is the one that you want. And so it takes about 2 years to go from seed to sale as it were. But they are coming through now and the quality of the flower that cultivators are producing at the moment is exceptional. And so we're getting really strong feedback from the market. We launched a product in the U.K. I think it's called permanent fees, and it's selling like crop cakes is what the customer says. So yes, we're very happy with that. So these are new genetics that we've been working on. They're not our genetics, but it takes a long time when you import seeds go all the way from the seed to actually having a product in the market, and we're starting to get the benefit of that. So very proud of our products. We certainly can compete with anything that's in the market at the moment. Here's a picture, another different picture of the farm. You can see all the greenhouses are now complete. That was taken a couple of months ago when the plant is still young. Those fields are all empty now. But I guess the important part about this slide is just saying that we've got -- we're at a point now, we're at this inflection point where we've done all the investment. We've built the brands. We've got great products. We've got new products coming through. And it's really now just about how do we expand that? How do we leverage that. And I don't see a lot of headwinds for ECS at the moment. Obviously, there's a headwind in terms of the TGA clamping down on the volumes of sales. But for ECS, the quality of our product, the fact that we're GMP, the fact that we're Australian organic and we have a relatively low production cost means that we're very, very well positioned to continue to grow in this market. We still do have a strong B2B business, and we don't overlook that. The B2B business has become more of an export business for us. We do have a couple of very loyal B2B customers in Australia, but most of our B2B business is export and growing. So we sort of went through this retraction as we went from B2C to B2B -- sorry, B2B to B2C, there was a retraction to a certain extent in the local market for us for B2B, but that was driven more by the cheap imports that came in rather than by losing customers. It's just that companies were taking advantage, I guess, of getting very low cost now from places like Thailand, South Africa and Colombia. So the B2C business basically replaced that. But our export customers are growing. They're all growing. They're doing really well. Ilios Sante has been a little bit quieter because they've had to do some reregistration of the product, but we've got Nimbus on there as well now. So continue to see significant growth in our B2B business, particularly as we launch our own B2C products through the same channels. So we will be working through the same channels to get our own brands into these overseas markets. We still haven't got product registration in Poland. I think I've been talking about it for every review for, I don't know how long. We're waiting again for the regulator. There's no negative. It's just a very, very slow process, and the regulator has been sitting on it for a very long time. So just in terms of highlights of where ECS is at, I think we've gone through the hard yards. We've made the investments in the infrastructure. We've made investment in the B2C. We're starting to take market share. We're starting to see better margins. We're starting to see better cash coming through. And I really believe that we're now able and already demonstrating that we're leveraging these changes to the benefit of the company, and that will continue to happen. And that's it. Now open for questions.

Excellent. Thank you, Nan. Operator Instructions] So let's dive straight in. So one question here, Nan, is asking if we're able to explain the German export arrangement. Is it a trial order? Or do we have or expect repeat orders there?

Yes. So this is the Nimbus-OzSun deal. So no, it's not a trial order. We sent a small 1 kg batch of each. Well, there are only 2 of 2 different strains across, and we sent them through for lab testing ahead of sending the main shipment. Just to ensure that we were 100% sure that we'd have no recall based on the quality of the results based on their laboratories because we have to test it in their laboratories. Going forward, we see this as a repeat business, a significant part of our business. Our German partners are excited, and we think that it's going to be -- OzSun will be a big thing in Germany.

Good stuff. Thanks, Nan. Another attendees asking a question. Are we concerned that pushing for B2C through our international B2B partners could cannibalize our own sales?

Good point. So, in the German market, we're looking at a completely different demographic. So we're using OzSun, which is the budget brand. And our other sales into Germany are actually more of our AVANI level product. In other markets that we're looking at, we're looking to partner with our same partners, existing partners. So we don't see this as cannibalizing our business. We see it as getting a bigger share of wallet.

Good stuff. Thank, Nan. So you've highlighted the shift towards those higher-margin B2C sales. How should investors think about how the margins evolve as you continue to gain scale, particularly given as you spent some time in the presentation on somewhat price compressing market? So is there a simple way to think about that as we scale?

Yes. I think we've seen, I guess, the bottom out, I believe, of the price compression in the market. I think that what's starting to come through is that those very low prices were possibly not really backed by a level playing field in terms of quality, et cetera, et cetera. I think we're at a point now where we're not going to see significantly more price compression, but I think we have to live with the prices we've got now. And the way we can grow our margins from where they are now, which, as I said already, the B2C has made a difference is really by just continuing to focus on yield and quality, less waste, all those things. And also, what we're doing is we're using all of our product, right? We're going all the way from the premium high end right through to the the stuff that we would have thrown away it's now in the market. So I think those are the other ways that we can continue to grow. Also, we are doing a hybrid model in that we don't manufacture our capsules. We don't manufacture our gummies. We won't be manufacturing our vapes. So those things allow us to sort of balance and offset Australian production costs with getting less expensive imports where it's not directly a flower.

Got you. Good stuff. Another investor is asking, does ECS send flower to Germany in finished jars? Or is it done as bulk and packaged over in Germany?

No, it's done in bulk. So the way it works in Germany is you actually send bulk flower to a pharmacy and the pharmacist has to pack it. So what we do is, we do -- we provide them with the branding, but they actually pack it in the pharmacy. So we send it in bulk. The bags are 2 kilogram bags. So we ship, I would say, 20, 30, 40 kilograms, but they consist of 2 kilogram bags or 1 kilogram bags depending on the pharmacist and the pharmacy, and that's what they then buy -- they buy the bulk.

Yes. Makes sense. That's good. Another question has come in, making the point that more focus on control over discretionary costs is going to be important while the industry is going through this rationalization process. So the question is, are you comfortable with how this process is going? Or are there further cost control opportunities under investigation?

Yes. I think one of the things that many shareholders ask the question about is we spend quite a lot on payroll and salaries and wages. I think what people don't understand is just how labor-intensive cannabis is. So we have anywhere between 60 and 100 employees on site at any one time. That's depending on where we are in terms of harvest, et cetera. So there's a large payroll of entry-level people, for one of a better word, that are used to harvest, plant, trim. All those activities are very manual. We -- I don't see that it's going to change. I think what will change is that we'll continue to expand volume. We've got a good team. We -- as we expand our products, we're bringing in more products, all of those things will end up just having the denominator gets smaller and smaller as it was.

Yes. Lots to look forward to. We've just got one last question, which has come through. If attendees have any further questions, please pop them in. Otherwise, this will be the last one. So just looking ahead, what would you point to as the key catalysts that investors should be watching over that could create value over the next couple of quarters?

I think there's 2. One is the expansion of our product range in Australia and AVANI AVA that is going to be a whole new segment for us. And then I think also our pivot in exports, and I say pivot, it's not really -- I don't want to get the impression that we're not going to do the B2B, but that expansion in exports into those existing markets. I think, is going to be high volume. So what we've seen up until now into the export market is relatively low volume. And what we're seeing going forward is doubling, tripling what we were doing in the past in terms of volume. So that's really where we see a lot of the flower that we used to produce in the outdoor would end up in biomass and oils. And if you think about that now, this particular harvest, we think that a good 90% plus is actually going to end up with patients as a flower. So that is a huge change for us. And having those markets opening up just at this point in time, I think, is significant.

Lots to look forward to. I spoke too soon. We've had one more question come in for now. So delving back into Germany, the comments made that they have strict microbial standards -- microbial standards over there, sorry. How does the OzSun meet these standards? Is life freezing enough to suppress or is radiation completed in Germany?

Yes, it's a great question. Thank you very much for asking. So there is some irradiated flower in Germany. And I know some of the Australian companies that export into Germany are actually irradiating their flower because they can't achieve the micro specs that are required. ECS doesn't irradiate the flower, so the patient gets unirradiated flower. That's what the market prefers and they're prepared to pay for that. They don't like irradiated flower. We have, through this particular harvest this year, we have very high confidence that we're going to be able to achieve the micro specs. There's an enormous amount of work has gone into it. And yes, that's where all the focus has been for us to make sure that our actual flower meets that standard, the same standard that our PCE flower has been achieving for the last couple of years. So we're confident. We have done tests. Obviously, it's not just blind faith, and that was part of why we sent the flower across there to have a check and it all passed. So we're very confident that our actual flower will meet the specifications.

Very good. All right. Well, that is all the questions that have come in. So I think we'll wrap it up there. On behalf of Nan and the company, I'd really like to thank everyone for tuning in for the ECS Botanics investor update today. If you do have a question that we didn't get to today, please reach out. Nan and myself will be happy to discuss further off-line. And we will also make the video recording of this session available online at the NWR Communications YouTube channel. Looking forward to the opportunity to talk to you all again. Nan, I might pass back to you for any closing comments.

Yes. No, just thank you, everyone, for dialing in. I know we gave you a relatively short notice for this webinar, sort of came on us all of a sudden, but I really appreciate your interest. And hopefully, you can see a lot of the things that we've been talking about over the previous quarters are starting to materialize and lots to look forward to, as Tim would say. Thank you for your attendance.

Thanks, Nan. Thanks, everyone. We'll just see you again soon.