ECS Botanics Holdings Ltd (ECS) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us for ECS Botanics' Q4 Investor Update. I'll pass you across in a moment to ECS Botanics' 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 to Nan to walk us through the results of the quarter and the progress that ECS has made. So go ahead. Nan, welcome.

Thank you, Tim, and thank you, everyone, who's joined. I really appreciate your time. I see we've got 20 participants, which is wonderful. So thank you for taking time out this morning to have a chat with me. First of all, just a disclaimer. You're all very aware of this, but just to make sure everybody's aware that things I talk about in this webinar are certainly not investment advice, and there may be some forward-looking statements, which obviously are not -- need to be taken in context that things can change. But most of this, as we know, is looking backwards because we're looking at the Q4. So for those of you who are new to ECS, just a very [Technical Difficulty] company. We are a little bit different from many other medicinal cannabis companies and particularly in Australia, but even globally. And that is because we grow slightly differently. We grow in soil under the sun. We do have greenhouses, as you can see in that photograph, that's in one of our greenhouses, but they are relatively passive. So we use a lot of the energy in the sun. This greenhouse photograph actually is worth talking about because it's winter time now, and there's not a lot of sun. So you can see we've got the grow lights on the plants. This is something that we put in place last year to be able to grow through the winter. So this photograph was actually taken a couple of days ago. And you can see that we're doing pretty well, growing through the winter, but we don't have as much product in the ground. It is more expensive to grow in winter because one of the highest costs of growing medicinal cannabis is actually the energy cost. So you can imagine people in indoor grows have very, very high electricity bills. And that is one of the things that makes us different. We also have a large outdoor grow as well. We are EU GMP, which again is something that is -- I think there's only 3 or 4 in Australia that are EU GMP. That means that we can send our product into Germany or into Europe without having to have any additional processes. And I'll talk about that a little bit later. We invested very heavily in FY '25 to put in an additional 9 of these new greenhouses. And that's all behind us. So we're now really trying to sweat these assets and maximize the value that we can get out of them. And then I think I might have mentioned, we also do an outdoor grow, which is summer. So we plant in sort of December, early December, and we harvest in April, May. And that is a very, very inexpensive way of growing and allows us to supply things like our OzSun range. And this year, particularly, and I'll probably talk about it a little bit later, we had a very, very good outdoor crop. When I say very good, it wasn't so much in the yields, but the quality of the flower was exceptional. Something that we worked on every year to get better. When we started ECS Botanics and there was Murray Meds in those days, we were growing outdoor for oils or for extraction. So the quality of the flower wasn't that important, but we've now improved our genetics. We've proved our technology and our techniques, even our harvesting techniques. And as a result, we've got a really good outdoor crop as well. So overall, we produced about 10 or 11 tonnes. I say roughly. The real value of the flower is actually once it's trimmed. And so until we've trimmed all the flower, we don't know exactly how much we got in terms of trimmed dried flower. You can imagine a flower that has -- that's very leafy that has to be trimmed will then lose a lot more biomass than a flower that is grown in a greenhouse that doesn't have -- that's been deleaved long before it's harvested. So just on a high level Q4 FY '26, we had another operating cash flow positive quarter. And obviously, that was not a surprise to us. We kind of knew it was coming, but really pleasant result, particularly because it was a reasonable increase on the prior quarter. So we're seeing an improvement in our cash flow every quarter. A lot of the turnaround that we see there, you can see $5.9 million turnaround in cash is really because FY '25 was a pretty investment-intensive year. So it wasn't that we -- versus FY '24, it's not that much different. But FY '25 was an investment year where we pivoted, we changed from being B2B to B2C. And as a result, we had to put on board salespeople who, at that stage, didn't have any sales. We had to put on -- launch a lot of products, which will cost money. And then on top of all that, we did the investment in the additional facilities. So it was a very big investment year for us. And FY '26 is really showing the benefits of that, and we'll continue to do that in FY '27. The change to B2C was -- the pivot that we made has been in absolute godsend. If we hadn't done that, I think we would be in a lot of pain at the moment. The branded products get better margin. We also can control what is said on the label and what we can say to the doctors. So when you're selling in a B2B model, you can only -- typically, your customers would be selling -- would be purchasing product from all different places. And so they won't be able to say it's Australian grown, organic, et cetera. So you lose all those value propositions that ECS has been able to bring to the table. So having our own brands, we know that the doctors are particularly keen on supporting the Australian industry, and they come to the farm and they can see exactly how we produce things, and that gives them a high level of confidence around the quality and the way we go about things at ECS. We're getting traction in Germany. We launched OzSun in Germany, and it was sold out within a couple of weeks. There have been some changes in Germany subsequent to that shipment, and I'll talk about that a little bit later, but it's getting tougher and tougher to get into the German market. And so it's great that we've got these contracts, but we still got work to do. We launched Gelonoidz here in Australia, and I'm very confident we'll be launching that in Europe as well over the next couple of months. That launch has gone really well. It is a very high-quality flower. We've learned from the first time we launched the Terphogz product. We imported product from Thailand. It was a misfire. The quality probably wasn't as good as what we would have liked. But also in addition to that, the price point that we set it up was probably a little bit on the high side. So we've learned from that experience. The slot of Gelonoidz is going really well, and it's getting very good reviews. And then just in terms of the cultivation, I mentioned earlier, we had a good crop. We had 43% increase in our poly tunnel or our greenhouse production. That is really because in addition to the improved yields, we've also got more greenhouses. So obviously, you would expect us to get more production and also having the ability to grow through the winter period. But our yields are also improving, and the yields are really going up because of the actual new greenhouses being higher performing, but also the genetics that we have now. We're very selective in getting genetics that deliver good yields, but also good quality flower, easy to trim. So the 3 criteria that we look at every single strain, and we measure every single batch we do is against how much did it produce, how easy was it to trim and then what is it in line with consumer expectations. Just a snapshot of the company overall. I think the 4 green blocks are really where we need to focus. As I mentioned before, we've had 4 positive operating cash flows. And that might not sound so fantastic. But in the cannabis industry, it's pretty impressive. So we're very proud of that, and we will continue to focus on making sure that's the way we operate the company. We've got $4.5 million of available funding, which gives us a nice buffer and also allows us to do things if we want to. At this point in time, there's nothing specifically set aside for that money, but it's nice to know that we've got it available to us if we need it. I mentioned about the B2C growing so significantly and also we invested very heavily in infrastructure projects, not only in those PCEs, but the head house has to also grow to match what's going on outside. So we had to put in a big curing room, more drying capacity, all those things and they all cost money, but that's all behind us. There's no large investment projects ahead for the short term anyway. I'll say the short term in FY '27.

Nan, sorry, the screen was just on the highlights slide then, but now it's on the financial performance slide. That's all good. Keep going.

Sorry, guys, I don't know. I can't control Starlink.

No problem.

All right. Financial performance. So I've spoken about this a little bit before, the fact that we're cash flow positive. We've also got good -- really good customer receipts. I do need to put into context that the market, particularly in Australia, is in decline. The market grew very, very rapidly. And I think primarily because of the changes that APRA has made, the focus on doctors and clinics that are overprescribing and being a bit reckless in how they approach the market has been reined in by APRA and the TGA. And as a result, the volume of prescriptions that are being issued are going down. So for us to continue to even keep ourselves where we are and to continue to grow. We've grown 8% year-on-year in revenue is a really good thing in a very tough market. Now do I expect that to sustain? No, I think it's a correction that needed to happen. ECS has always been a little bit uncomfortable with some of the reckless prescribing that's been going on. It's certainly not aligned with how we see medicinal cannabis and the benefits that doctors working with patients can generate. And so I think it was just like a reset, I guess, from that very, very rapid growth that we saw in the past. The rest of this, I think I've spoken about, we got $1.7 million cash. We still got the NAB funding. NAB are extremely supportive and have actually extended our term on our loan. Let me know if it change. Does it change, Tim?

Yes, that's good.

Okay. So this chart really just shows a lot of what I've been talking about with the operating cash flow. You can see FY '25 was a pretty tough year for us as we went through all that investment phase, but we are on the other side, and now we're continuing to generate cash and improving in the amount of cash that we're producing. Why is it happening that the cash is getting better? Well, clearly, obviously, the level investment plays a part, but also the switch from B2B to B2C is important because we have better margins in B2C. So we take more of the margin as opposed to what we've had with margin on margin in the B2B business. We've also been very careful in how we spend our money. In managing our operating expenses, we focus every dollar is kind of checked on. But having said that also, as we continue to launch products, there are still going to be additional operating costs associated with that, but very little capital and a lot less even in terms of the operating cost expenditure around new product launches. So we're really starting to sweat those assets, I guess. So we've spoken about this, at least we've touched on it, the increase in production in those -- in the greenhouses or the protective cropping enclosures. The outdoor harvest, as I was talking about before, real improvement in the quality of the flower. So volume isn't everything, particularly when you're trying to sell flower. What happens is that in previous years where the flower isn't as good, we still sell it, but we have to sell it at a much lower rate. So the expectation this year is this outdoor crop this year, all of it will be sold as flower, whether it will be A grade outdoor or B grade outdoor, it will definitely be sold as flower and not used as biomass. One of the things I haven't spoken a lot about because I tend to focus on all the positives is that the market for biomass and resin is really, really tough. It's very difficult to compete with the imported product. We're not 100% sure how companies overseas are achieving the very low prices that we're seeing in the market for resin, but it is tough. But on the positive side, there is a positive side to that, the market has moved away from oils towards vapes, gummies or pastilles and flower. So it's not -- it is tough for us because we're selling a lot of -- we're selling a vast range of products. But certainly, the original idea of the outdoor grow and extracting it and selling it as oils or extracts has become very, very challenging. And particularly as well, even with CBD, which is not something we grow anyway, but with CBD, most products are made with isolate and not with resin. So again, it's much less -- it's much -- well, it's actually not possible for us to manufacture isolate. But even if it was, it's much cheaper for us to import it than to manufacture it ourselves. So that's the downside. But the upside is that as I said, the outdoor flower is now salable as flower, so we don't have to process it as resin, and that gives us a home for that flower. And OzSun has done really well, as most of you are probably aware. We also launched Aussie Smalls. Aussie Smalls are really for the bee buds of the outdoor. So these are really small flower, but they're still really good flower or even some of the bee buds from the greenhouses that are very small that in the past, we would have said we're too small to sell. We're now selling them in 30-gram bags, and they're going really well. So there's a market for that as well. Those of you who have been on quarterlies before, webinars before, these charts would be -- you'd be familiar with them. I think overall, you can see 71% revenue growth in B2C. So that's year-on-year and 31% versus Q4 this year versus Q4 last year. So it's -- sorry, 71% of the revenues coming from B2C, and there's a 31% growth year-on-year quarter -- same quarter last year. So we're continuing to grow. Obviously, that level of growth will probably flatten out, although my team are fairly optimistic with the additional products that we've added that they'll continue to see very, very positive growth in revenues in the B2C channel. We've obviously launched the Gelonoidz. We've launched Ava, and we've just launched recently the vape. So there's a lot of new products that are coming through that allows us to capture more market share as well as the thing -- we're launching more OzSun products into the market as well. So we're doing a good job at capturing share. Unfortunately, the market isn't growing, as I mentioned earlier. But in terms of taking share, we -- according to NostraData, NostraData is a platform that shows product that's sold through pharmacies. It's certainly not a comprehensive or entirely accurate view of the world, but anyone we have at the moment. They're showing that the market has declined by about 15.8% in calendar year '26, and we've grown at 18.1%. So it is certainly a case of ECS is taking share. So this chart has got really busy. So we've stopped putting little things on the end, and we put them all on the top. So this is what we've done in Q3 and Q4. We've launched the Aussie Smalls that I spoke about. We've also launched oils and now the 2-in-1 vape under the OzSun range. Under the Avani range, we've added additional flowers and also we've got a vape in there as well. And then under AVA, which I think most of you who follow ECS will be aware, we launched the women's health range. Our first products were just flower and oil. So there wasn't really anything unique. But this last quarter, we launched our Pastilles. That's been really well adopted. We've had a lot of prescriber engagement and webinars to promote that product, and it's going really well. And it's a clear differentiator in the market. So we're building out this AVA wellness space. There will be more products that we look to add into that space. And then Terphogz, I mentioned earlier that we've launched the Gelonoidz. And we've already -- those photos that you saw in the greenhouse, one of those is actually a product called Watermelon Z, which will be the next product that comes out under the Gelonoidz brand -- I mean, under the Terphogz brand. And there's another one called -- I think it's called Blooberry, spelled B-l-o-o. So an interesting product line, but yes, really, really good genetics, great quality. And we're very proud of the fact that Terphogz have endorsed what we're putting out. I spoke about this previously as well, so I apologize for going around in circles a little bit. But the market is definitely coming under some pressure, not just here, even in Germany, price is a big issue in Germany at the moment. There's a lot of volume, but there's certainly pressure on pricing in Germany. So they are a little bit behind us. Probably where we were in 2025, they are there now with massive price compression challenges. But we're still managing to get our product because we're still very cost effective compared to some of the suppliers that they're buying from, which would be coming through a GMP process where they're not necessarily manufactured under GMP, so they have to go to another facility and they're getting GMP'd for one of a better word. And that adds costs. So we're still very competitive. And I have spoken about it, and we'll talk about a little bit more about the changes in the German regulations. So I've touched on this, how we see the growth of ECS. The market -- this is a chart from the Pennington Institute. Unfortunately, they will only put out a chart the next update in a couple of weeks' time. So it's too soon for us, but we'll certainly communicate that. And we'll see that trend. You can see the trend there, how it's come down. So that was up till the end of December. You can see that it was already a sharp change. So the market is definitely contracting, and it's great that ECS is growing. And I think although it would be nice if the market was growing well, it's also like most young industries, I think it's a period of time where some companies will be -- will survive and do well. And hopefully, it certainly looks like we're one of them. And then there will be other companies that will find it a little bit more difficult to be competitive in this market. We haven't seen any more price compression in the last quarter. I think that the prices are pretty much stabilized, but we do have a very large range of products. So we have from the Aussie Smalls, which are really a value brand right through to the Gelonoidz now, which is sort of in the other end. So we're able to meet every price point. Sorry. So Germany, so yes, we launched with Nimbus with OzSun and that went very well. It was all sold out very quickly. However, subsequent to that initial delivery and today, the German regulator has come out with the new regulations saying that you can't GMP wash, but also that you have to have tighter micro specs. And this is a challenge for everyone, including ECS. So the new micro specs are very low. Now for those of you who have been listening or following ECS, you know that in Germany, they don't like irradiated flower. They want the flower to be unirradiated. If you can irradiate it, you can meet very, very tight micro specs. In fact, Australia has some of the tightest micro specs of all the countries. However, Germany had a reasonably -- it was still tight. It was still tough for everybody to meet the micro spec, but now they've reduced it even further. So we have to perform additional treatment in order to meet those new micro specs. So we're working on that at the moment. And that's the next challenge that's facing us. Now obviously, if we can do it, and I'm sure we can because we've already done some preliminary trials, and we believe we will be able to do it, then the market in Germany just becomes tighter and tighter and harder and harder to get into. So again, there's pros and cons in all these things. It's great that they've changed the GMP guidance to say that you have to manufacture or dry under GMP, which is really good for us. These micro specs will be challenging for everybody, including us, but we're working on that at the moment. And I don't envisage that it will be a massive issue, but there's a lot of work going on at ECS to make sure we can meet those new micro specs. Right. The good news in terms of our exports. So we've started supplying extracts into New Zealand, which was really positive for us. It's the first delivery of a 10:10 CBD THC oil, which has gone and they've already placed the order for the second one. Poland has been a story we've been talking about for a very long time. We have been advised by our Polish customer that the regulator has accepted our product. However, they're still reviewing the label. So we've made the step forward. On a really positive note as well, though, they have asked us to start looking at supplying them with the same 10:10 product that we're supplying into New Zealand. Interestingly enough, New Zealand and Poland have very similar requirements in terms of getting products registered in their countries. You have to have 10 -- sorry, 3 batches on stability and quite a lot of additional work compared to, say, registering a product in Australia. So that New Zealand registration kind of helps us a lot in terms of getting into Poland. We've spoken about Germany. I also want to just focus -- mention that we are looking at other international markets for our OzSun product. We're not ready to announce anything, but we're doing some work in the background. So there are some shipments sold out very quickly in Germany, and we're working on our next shipment now that we're about to delivery. We're just waiting for a permit. This is the announcement from yesterday. So hot off the press, these all-in-one vapes. So the real benefit of these all-in-one vapes is it's a rosin blend. So it's a blend between rosin and distillate. So it doesn't gunk up. It's very easy to use. It actually triggers by inhalation. So there's no buttons to press. If you suck, it works. They are very discrete. They're called leaf and they actually fit in the palm of your hand. So they're very discrete. And although it's obviously up to the doctors and the TGA, the TGA have approved this. It is actually a very, very healthy way of consuming cannabis in that you're not burning it, you're just warming it up. So it is a good, a more healthy way of consuming cannabis than flower. However, obviously, there's still a very strong loyal following for the flower. But we see this market growing rapidly. And this product is manufactured by Ichor in Canada. They supply us on a consignment basis. So it's a relatively low launch -- low-cost launch for us. But we see it as very much a part of the next growth module, I guess, in the cannabis industry, pastilles or gummies have obviously grown really well, but we think that these vapes will follow pretty soon afterwards. So I snuck in a picture here of our own live rosin. So on the left-hand side, you might recall that we announced we got a government grant for a live rosin facility. We can produce really good quality live rosin. It's not GMP'd yet. And the reason why we haven't done that is we've just had so many projects on the go that we had to pick which one we do first, but it's very much ready to go. We need to get GMP approval. We did get -- we did have a GMP audit recently and everything went well. But if we do this live rosin, which we will do, we will need to get another GMP audit. So we have to put all that, that takes time. But the idea is to use our live rosin facility to manufacture Terphogz vapes. So we continue to use the Ichor ones for the mainstream. But for the Terphogz genetics, which we grow locally, which do really, really well in vapes as well, the plan is to use our live rosin facility. But you can see the other things we're doing. I've spoken about the OzSun in Germany and other international opportunities. We're going to have to focus on that microbiological treatment that I spoke about because the import specifications are so tight. And as I said earlier, that affects everybody, not just ECS. We will continue to expand the AVA range. We've got our all-in-one vapes. But really, I guess, what this is saying is there's no major big ticket things we're going to work on this year. There's no major investments. It's a case of really growing with -- growing our business sustainably without having to spend too much cash and sort of protecting that cash position. And then I think the market will pick up again. In fact, I have no doubt the market will pick up again. It was just a reset, and we'll see strong levels of growth in the market in 2027. So just in summary, I think what we went through in FY '25 was very necessary in terms of resetting the business. We're starting to reap the rewards of those changes, and we'll continue to see that in FY '27. A large portion of our growth in this financial year, I think, is going to come from Germany, United Kingdom and Poland because these are new products or new markets for us. So big opportunities for us there, also bringing in these additional products and also continuing to build out the AVA range. So there's a lot of product innovation, a lot of expansion within our portfolio of products, but not a large amount of investment required, which I think is critical for us as we go with the market and allow the market to stabilize and then we could go from there. So I think that's it.

Excellent. Thanks, Nan. And thanks, everyone, for participating. We've had some great, very specific questions come in through the Zoom platform. So certainly encourage everyone to put your questions through, and Nan will address as many of them as we can. So first one that's come in, just -- and apologies in advance if I jump around a little bit. Just in terms of licensing, you've mentioned a number of times, the EU GMP status and the differentiation that presents. The question has been asked if that EU GMP license relates to both indoor and outdoor cultivation.

It does. It does. The GMP, so growing is actually -- cultivation is actually what they call GACP, so good agricultural practices. GMP starts at the time of the product coming into that. If you're looking at the photograph, there's a building in the middle with a lot of solar panels on it, the lower building, that's Building 3. That's where all the processing takes place and that's GMP and then Building 4 has got a drying room and a curing room and that's also under GMP. So in those facilities, everybody is ganned up and everything is followed through with GMP. But outside, it's GACP.

Yes, makes sense. And while you've got that nice aerial photo of the facilities up, another question on the mechanics of it. So the question has been asked with outdoor trim yields up 12% and PCE greenhouse production up 43%, how close is the company to its dry weight permit limits? And are the regulatory caps restricting any growth that you might have planned? Or is there sort of sufficient headroom?

No, we've got plenty of capacity to still grow further under our permits. And also the discussions that we have with the Office of Drug Control, they would be very happy for us to produce more. The reason why we're not producing more really or expanding is we need to understand what they're going to do about the imports and controlling imports, but the regulator is very supportive and there will be no -- there's no issues in terms of our caps.

Yes. Sounds good. And again, on the facilities, the comment has been made that the major infrastructure CapEx is now largely complete. And the question is, does ECS have any short- or medium-term plans to monetize the adjoining land at Murrabit or expand your permits? Would you look at agricultural leases?

It's a great question. I mentioned in my previous response that if the TGA -- sorry, the Office of Drug Control puts in some reforms around imports and the market then the demand is there. The demand is there today. In Australia, we've got demand. The problem is that the demand is impacted to a certain extent by lower price imports. So you've got to balance that out and make sure. So there are a number of cultivators in Australia that are pushing the regulator really hard to try and level the playing field as we call it. But it's really around saying, for us, I think the next step is if our Germany OzSun product takes off, our growth will not come out of Australia. We'll still get normal growth in Australia, but we'd see significant growth in Europe. And that, if we need to expand, we can absolutely expand. It's just I want to make sure that we get that market running. We had a good yield this year, good crop. Let's -- it's the start of the season for us. I know it sounds a bit weird, but we did all the harvests in sort of May, June, drying. Now we're trimming and processing. So we've got the flower now to sell, and that's really where we're focused at the moment. But yes, the opportunity to expand. I don't think we're going to -- I had a look at potentially people using the land, but the risks around security and the return on what you can get in this area is just not worth it. So we'd rather keep it ready for us to expand when we need to.

Yes. Excellent. Question on Sun Pharma. So asking for an update on the Sun Pharma extractor sale and tolling arrangements. The question is, has the original extractor purchase price offset been fully realized? Or is that agreement underutilized?

It's underutilized. So took Sun Pharma a long time to get their machine up and running, various reasons for that, but mainly because they struggle to get contractors down at Port Ferry. But it's now more -- the ball is in our court because of the low cost of imports. It's -- we kind of like having to temper how much we produce because producing -- using that arrangement that we have with Sun Pharma is not really commercially great for us. It was when we did it. When we did the agreement, extraction was $8 or $8,000 a kilogram. It's now about $2,000, $1,500. So we did a deal with them, which was less than half of what the market was, but the price has come down. So we're working through that at the moment. But it is -- unfortunately, it is one of those things. It's not costing us money, but we haven't realized the benefit that we would have thought we would have realized, and we're working through that slowly. We certainly can't sell the resin, which is what we were hoping to be able to do. You can use it for ourselves, but we can't sell it. You just can't get margin on it.

No worries. A question on Poland, comment being made that the regulatory approvals are progressing to the product labeling stage over there. Can you talk to what scale of order volumes and revenue contribution you anticipate once the commercial supply sort of gets cranking hopefully by the end of this year?

They're looking at possibly -- they obviously don't know either, but they're talking about probably 40 kilograms a month or every 2 months. That's the sort of the indicative volumes. I think they just don't know. There's no volume commitment other than they will lose exclusivity. So they do need to meet those volume commitments if they want to retain exclusivity. But knowing how hard it is to get a registration in Poland kind of works both ways. So I would -- if I had to put a number on, I'd say that they're probably going to be in the order of $1 million a year, maybe $2 million a year going forward. But it's going to take some time for us to get there. And obviously, they're going to keep adding more products.