Elixinol Wellness Limited (EXL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elixinol Global Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Oliver Horn, CEO. Please go ahead.

Thank you very much, moderator, and good morning, everyone. Thank you for joining us. I hope you all found a really quiet place to work from home today and are keeping well given the very challenging COVID environment. My name is Oliver Horn, and I'm the new incoming CEO for Elixinol Global. Prior to joining, I led the ANZ North American Swisse Wellness business for the H&H Group listed on the Hong Kong Stock Exchange. Prior to this, I worked at Treasury Wine Estates for 13 years in various global leadership positions, lastly as General Manager based in London, managing large parts of the EMEA region. Now I joined Elixinol Global because I'm a firm believer in the global CBD opportunity and because of Elixinol's established reputation and quickly developing global reach. And I'm here today, I've been very enthusiastic to give you an update on our strategy, together with our CFO, Ron Dufficy, as we're seeking your support in raising $11 million to further support our global expansion. Now I hope you all have the presentation in front of you. I'd like to draw your attention now to Page #5, the executive summary. At Elixinol, we will continue a much cleaner and simpler strategy towards an Elixinol-branded nutraceuticals CBD consumer business that is firmly focused on brand consumer channels with a view to margin accretion. And that's a continuation of the strategy that we have been driving, and we're just going to accelerate that now. At the heart of this strategy is to continue our Elixinol brand store relaunch and drive distribution and consumer awareness. And very importantly, this launch focuses largely on using our new e-commerce platform in the U.S. and Europe and expanding global pharmacy distribution as our priority. Furthermore, we're continuing our European expansion, focusing on the large CBD markets of Germany and the U.K. And naturally, and admittedly, given our disappointing recent performance, we continue to focus on managing costs tightly and being as effective as possible in our capital management. Now as I said, Q1 was a disappointing quarter for us at $3.3 million, down 25% on Q4. The decline was largely due to challenges in transitioning our e-commerce platform, a problem that now has been fixed. Importantly, though, our retail channel showed good growth as we are focusing on branded consumer channels while we are deemphasizing bulk and private label channels. To further drive efficiencies and in recognition of the softer revenues, we've also taken the opportunity to rightsize the global team by over 40 team members. And I emphasize here, this is rightsizing. We have great team in place to deliver on our strategy. We're now seeking $11 million in new funding by an entitlement offer at an offer price of $0.20, leaving the company with approximately $21 million in cash. And this investment will be used to finance our normal operating costs in support of our Elixinol-branded consumer strategy. And I'd like you now to turnover to Page 8, which references our strategy and how we continue to grow our business. Our global strategies are very consistent from market-to-market, and there are 4 essential drivers in here. The first key pillar is building a global Elixinol-branded nutraceuticals consumer business. And that really means taking Elixinol out of the specialist CBD segment that we have been in historically and positioning it within the mainstream nutraceutical supplement section. Our new range combines highly -- high-quality hemp-derived CBD with vitamins and minerals to target different areas of health and well-being. This new range has simple naming conventions like Stress Less, Good Night or Immune Booster to make it easy for consumers to navigate. The brand launch will be supported by digitally-led marketing campaigns under the new Kind of Amazing campaign. Our global channel strategy will prioritize pharmacy and e-commerce channels that allow us to educate consumers as well as improve margins. That also means deemphasizing bulk and private label sales. In addition to our U.S. strategy, we are rapidly cementing our footholds in Europe by a large-scale pharmacy distribution agreements with a focus on Germany and the U.K. And we are very proud of the fact that Elixinol is the first global nutraceutical full-spectrum CBD brand listed by one of our major distribution partners in the U.K. Our second strategic global pillar will be continued investment in innovation and portfolio development. We will continue to develop new products and technologies under the Elixinol consumer brands that respond to consumers' wellness needs. Going forward, we will split our portfolio in 2: dietary supplements and topicals or skincare products. And I'd like to draw your attention here to Page 12 and to 14 in the investor presentation. In H2, we will be launching a completely new skincare range consisting of 8 great products, each carefully designed to utilize the power of Elixinol CBD. Our skincare launch in H2 is particularly exciting as topical CBD products has less restrictions placed upon them and can be more widely distributed. As you can see from Page #14, going forward, we will be strongly positioned as a modern and fresh, consumer-centric wellness brand, and that's something that we are really excited about. Our third global strategic driver is the continued investment in our operations, our e-commerce and of course, our key talent. We're very proud to have new senior leadership in the U.S. with our new CEO, Tom Siciliano. Also, we've implemented a new ERP system, which gives us much better reporting analytics and inventory management. Another key investment has been and will continue to be our Magento-based e-commerce platform. And obviously, as you're all aware, during the COVID environment, having a working and very slick e-commerce platform is now paramount. Our fourth priority, globally consistent, will be constantly improving cost control and compliance. We will continue to reduce cash burn, aiming for breakeven, looking to creating a more efficient organizational structure and drive a compliance culture, which is so important in a rapidly developing regulatory environment across the world. Now -- I'd now like to talk in a bit more detail about the U.S. and the European market separately. Both markets follow the same 4 strategic drivers that I just talked about, albeit in a very different market context. We would now turn to Page #9, the United States. In the United States, we're an established player, enjoying roughly 2% market share and are the second most trusted brand. Over time, we have invested in a future-proof infrastructure with 12,000 square feet facilities, modern CO2 extraction, a strong local team with a new CEO, a new Magento platform and a new ERP system. Importantly, and I'd like to emphasize that we've got approximately $25 million of inventory here, 3/4 of which can go directly into our existing product lineup. I do also like to emphasize though, that this inventory cannot be used for our European business. Whilst having to deal with significant COVID impact and some issues transitioning our e-commerce platform, we're now looking forward to an improved H2 as we have further increased our pharmacy and retail distribution and COVID's restrictions are expected to ease. We're also looking forward to an increased level of regulation as we believe it's more established and compliant players like Elixinol and will eliminate opportunistic growth players, which are currently cluttering the market. I will now turn to Page #10 to talk about Europe in more detail. We've been in Europe for some 18 months now, invested about $10 million and have a 15 strong diverse team on the ground. Our priority markets are Germany and the U.K., 2 of the biggest CBD markets. Our channel strategy is consistent with the global strategy in that it focuses on pharmacy and owned e-commerce, but with the addition, we are also getting good results from home TV shopping channels. And we had a fantastic start in one of those channels, selling over a period of 4 hours, just 8,000 units, which is a truly remarkable result. We are particularly proud of our relatively new but wide reaching pharmacy distribution network in Germany and the U.K. In Germany, we partnered with MedVec which has access to 22,000 pharmacies. In the U.K., we just signed a new agreement with one of the largest wholesale distributors supplying pharmacies, doctors and health centers. And as mentioned before, as far as we know, we're the only global full spectrum CBD brands in their network. It is important to emphasize that we're operating on a capital-light model in Europe. We source biomass locally, use 3PL contract manufacturers who are readily available and provide competitive services. That way we can focus our teams on sales and distribution to build the Elixinol brand franchise. I also like to mention that as of 2021, the beginning of the year, CBD companies need a Novel Food Authorization. This is a very extensive and cumbersome process, and we believe that it suits mature companies like ours and will become a barrier for entry for others. In summary, our European business is now ready to bear the fruit of almost 2 years of investment. We're enjoying good reach, have differentiated new products and operate with an agile supply chain. I would now like to pass over to our CFO, Ron Dufficy, to give you an update on our financial performance.

Thank you, Oliver. I'll now turn to Page 15, revenue breakdown by channel. The quarter demonstrates the continued execution of our strategy, whereby 82% of our revenue was generated from higher-margin Elixinol-branded products compared to 77% in the previous quarter. Our retail channel revenue grew by 62% to $1.3 million from $0.8 million in the previous quarter. And the number of distribution points in the U.S. grew by almost 2,000 to 3,325, which has been led by the penetration into large national pharmacy. The highlight of our quarter, by far, was the launch of our new product range and the Elixinol rebrand. However, as Oliver alluded to, the transition to the new technology platform for our website was poorly executed causing traffic to our website to significantly decline. Those adjustments have been made, and we believe we've now corrected the issue. It's worth noting that if had e-commerce continued at historical rates, we'll be presenting a quarter approximately flat on the previous quarter in a tough COVID environment. I would now like to provide some details regarding our capital raising, starting at offer details shown on Page 17. The structure and size of our deals is a 1 to 2.51 (sic) [ 1 for 2.51 ] pro-rata accelerated nonrenounceable entitlement offer, seeking to raise approximately $11 million. The offer price is $0.20 per share, which represents a discount of approximately 48.1% to the closing price. The Institutional Entitlement Offer will open today. Substantial shareholders have -- notably Mr. Benhaim on behalf of Raw with Life have reaffirmed his commitment that was made to the ASX on the 18th of December 2019, whereby the intent -- the commitment is to not sell more than 10% of its holdings in the first 6 months after January -- 8th of January 2020 and no more than 10% the following 6 months after that. The record date of the offer is 7 p.m., Thursday, 7th of May 2020. Now turn to Page 19 to talk about the capital raising timetable. Effective today, the company is in trading halt. The record date for the Retail Entitlement Offer is 7 p.m. on Thursday, the 7th of May, and the offer will open at 9 a.m. on Tuesday, the 12th of May. Retail offer booklets will be dispatched that day, same day. The Retail Entitlement Offer will close on Thursday, the 21st of May. And the results of -- will be announced on Tuesday, the 26th of May. The new shares will be issued under the offer and will commence trading on the ASX on Wednesday, the 3rd of June. I'll now pass back to Oliver.

Thank you, Ron. Look, before we wrap up and move over to questions, I think you see in front of you a very new Elixinol. I sincerely hope that I've clearly articulated our very simple and straightforward strategy of building a global consumer-centric nutraceutical wellness brand that you understand the difference between the established U.S. market and our new frontier, the European market that we're really excited about. In each market, we've laid solid foundations and have a good team to deliver our strategy. And I'm now looking forward to applying my global consumer brand experience that I'm bringing new to the business as we build the global Elixinol brand franchise. And if I leave you with the reference to Page #13, have a look at the range and our new products that are outlined there. And this is a new look and feel that will propel us into a different category and reach more consumers around the world, and we're excited about the future and the opportunity that it provides. Thank you very much for your time, and we will now open for questions.

[Operator Instructions] Your first question comes from John Hester from Elixinol (sic) [ Bell Potter ].

It's John Hester, Bell Potter. Oliver, just with regards to the U.S. strategy now, and you've announced that it was one of your major new pharmacy deal. What products is that going to cover? And how many SKUs will it generate?

Yes. So it's 2 products. They're balms or topicals at the moment. And if I'm correct, it's 1,700 distribution points in the U.S.

Okay. So 1,700 distribution points. And...

That' right.

So no CBD product at this point?

It's -- no, it's balms, including CBD. They have a CBD component in them. That is -- yes, you're right, John. It's not dietary supplement. It's topical.

Yes. Okay. And just with that classification now of dietary supplements, I mean, there was a lot of discussion last year about the FDA's position on dietary supplements and whether CBD is a dietary supplement or is not a dietary supplement. Can you just perhaps give us an update of what is the latest in that development? And what, if any, progress the industry is making with regards to moving forward with the FDA and reclassifying CBD as a food-type product?

Yes. John, admittedly, I'm not that close to the regulation just yet, having just landed in the seat over the 2 weeks. But I can refer to sort of the industry conversation that's happened and has continued is that the expectation is that regulation is going to be in place that gives a tighter regulatory framework to the limit of THC in products, which should check up some of the players that can't manage their ingredients. And that legislation is supposed to be in place over the course of the next 12 to 18 months. And the whole industry has been waiting for that. It's a bit slow in the making, but I believe the Senate is discussing it. And that's a move that we're welcoming as we think we benefit from that greater regulation.

Okay. Okay. And just in relation to the U.S. market more generally, there's been a lot of change in the last 3 months even. Are you aware of any statistics there around the marketplaces as in number of brands that are now out there, whether that's still increasing or it's decreased?

Yes. So we have a statistic from our U.S. team that's about 1,900 -- 1,900, sorry, new entrants entered the market during the course of 2018, 2019, so creating a very flattish environment really. But we're now hearing from our team on the ground that companies are closing down and foreclosing both on the manufacturing side, but also on the branded side as the competitive environment just doesn't allow for value creation anymore. So we are seeing certainly the start of an adjustment and that was the well-financed and well-operating organizations. But to quantify an exact number, I can't give you that, John.

Okay. Okay. And just finally, in relation to deal you've done with the U.S. pharmacy distributor. You've got a couple of topical products there. And what sort of price point are you talking about for those sorts of products?

John, I might refer to Ron, our CFO, if he knows. I don't know it. Sorry. So I think they are around the $30 mark. But I might be wrong there.

Yes. There's -- the 2 products, the Hemp Balm and our Extra Strength Balm. And yes, I think it's $40 to $50.

Okay. That's U.S. dollars, right? Yes, of course.

Yes.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Horn for closing remarks.

Great. Thank you, moderator. I thank you all for your time today and learning a bit about Elixinol, if it's not as an investor, hopefully, as a consumer. My new team, myself, we are terribly excited about where we're going to be taking this company towards. And while we all appreciate that at the moment, the environment is more challenging. We all expected or wanted it to be. I think we're making the most of it and laying the foundations and coming out of the starting blocks in H2 with a very good new product range, new distribution agreements, more innovation to come out, good systems in place, stock in our warehouses and be ready for an H2 that is going to be truly exciting and defining for us as a company. I thank you all. Wishing you well in this COVID environment. And thank you very much for your attention.