Elixinol Wellness Limited (EXL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Elixinol Global's special investor briefing. My name is [ Juliana Roadley ], and I'm an Account Director at the IR department. It is a pleasure to be supporting Elixinol with Investor Relations through this exciting time. Presenting today will be Oliver Horn, the Global Chief Executive and Executive Directing Officer; and also Ron Dufficy, who is the Chief Financial Officer, to discuss Elixinol's signing of a binding agreement to acquire CannaCare. Now the formal part of the session will be followed by Q&A. If you would like to ask a question, we would ask that you keep those questions until the end of the briefing. And if you type them into the space below, in the band at the bottom of the screen, and we'll be able to answer those questions for you. Just to let you know that this session will be recorded today, and the recording will be available online on the Elixinol website after the event. Now I'd like to hand over to the CEO, Oliver Horn. Thank you, Oliver.

Good morning, everyone. And thank you, [ Juliana ], for the warm introduction, and welcome to all of you who joined us today. I'm grateful for your time. Look, we are very proud to announce a real transformational step towards realizing our vision of becoming a truly global hemp-derived health and wellness consumer business. Over the course of 2020, we rejuvenated our global business. We relaunched the Elixinol brand, retained and grew Hemp Foods Australia, exited low-value aspects of the business, reduced costs and built new capabilities to future proof our global business. On the back of this reset, we completed a very successful and oversubscribed capital raise at the end of last year, thanks to all your support. And this, in turn, has put us now in the most favorable position to sign a binding agreement in Europe's most promising CBD market, acquiring the strongest consumer brand, CANOBO, and thus vastly accelerating our global efforts in globalization and, importantly, positively contribute to our profitabilities targets. I'd now like to give you an overview of the proposed acquisition, its strategic rationale and the potential impact it will have on our global business. In terms of a transaction summary, the CannaCare business owns the CANOBO brand, which is arguably the leading premium CBD brand in traditional retail in Germany with over 4,500 distribution points, selling mainly oils, sprays and recently also launching a cosmetic range. It's a business that generated EUR 2.6 million in revenue at breakeven EBITDA that's equivalent to AUD 4 million. Very excitingly, and what really attracted us to this business, it's really the #1 brand, CBD brand, that invested in building a strong consumer brand with broad-reach media and supported by TV commercials. And please, if you Google CANOBO TV spots, you will see a very -- variety of those really testament to the great marketing capability that the organization has. The CANOBO business or CannaCare business is characterized by a capital-light outsourced supply chain model, very similar to what -- the one that we run in Europe. We know the supply chain model very well. We know the German market well, which gives us a high degree of comfort that we understand the business intimately. Very importantly also is the people dimension, the people behind the business that we've built a really strong relationship with over the last 3, 4 months as we went through extended due diligence, and we're very pleased to say that the leadership and the vendors are taking key positions in our business going forward toward sustainability and stability of the business to really realize its true potential. In terms of the purchase consideration and the price that Elixinol will be paying, there is a EUR 9 million upfront purchase price, which consists EUR 3 million in cash, EUR 6 million in Elixinol script. By the way, this is in voluntary escrow until the end of March 2022. And on top of that, if you take that number, the EUR 9 million, this represents about a 3.5x multiplier on 2020 revenues. If you compare that to just the last quarterly revenue outlook that the CANOBO business has, represents about a 2.2x multiplier, which, by the way, represents a very fair multiplier compared to other transactions in the market. And if you look at our market cap and our revenue at the moment, we are trading currently at a 4x multiple. So this compares very favorable. In addition to the upfront purchase consideration, the vendors can also earn a second-tranche earn-out of up to EUR 15 million, and this is very stringent to very strong performance hurdles. The business needs to, at least in 2021, deliver EUR 6.5 million at a 20% EBITDA level to get any form of earn-out and maxes out at EUR 12.9 million in revenue and 20% EBITDA to get the full EUR 15 million in earn-out. The earn-out will be paid entirely in Elixinol script at around March '22. So what does that transaction really mean for us? If you just take the AUD 4 million that the business delivered in 2020, that represents around 40% of our existing business, but importantly, it is at a breakeven EBITDA level, so contributing positively to our ambition to drive profitability at a greater rate. At the minimum threshold of the earn-out of EUR 6.5 million revenue delivery -- return delivery, it would constitute to around AUD 10 million, which would be around 40% of our global business and 66% revenue growth on our F '20 AUD 15 million business. So quite a seismic jump into our -- in our P&L, both in revenue and potentially also in profitability. But importantly, on top of that, we see incremental opportunities in synergies, how we run the business, and I'll come to that in a minute. Taking a step back. We had a long ambition to get into Germany, and we've been in the German market for a while now, which we've been sharing with you over the last couple of years. And the German market is highly strategic in Europe, simply because it's the highest-growth market in Europe. Europe in itself is the second biggest CBD market in the world, and Germany within that is the highest-growth market, expected to be at a level of around USD 600 million by 2025, representing about 47% CAGR rate. So highly attractive market for us, and we now have the opportunity with CANOBO to take a leadership position in that market. On top of that market -- national market opportunity and the growing consumer base that is really just jumping onto CBD at this stage, it is also a great access point for us to other German-speaking countries, namely Austria and Switzerland, which represent the third and the fourth biggest markets in Europe, giving us another opportunity to play the CANOBO portfolio in a German language environment. So all in all, a very strategic market, a very attractive market from the consumer dynamics. The most important thing, though, that really led us to this deal, though, is the first point here on the slide, is that the regulatory environment in Germany and in Europe took a really positive turn towards the end of last year. The European Court of Justice ruled that CBD is not a narcotic, and CBD products can now enjoy free movement within and across the European Union. And this is a binding directive from the European Union to all its member countries. That means that, arguably, Europe now has the most favorable CBD regulatory environment, the most stable and the most positive from across the world, and that really led us to accelerate the conversations with CANOBO and CannaCare Health towards the end of last year when this regulatory environment was confirmed. Coming to CannaCare, the business itself and the product overview that you see here on this slide. It was a very young business, established in Hamburg in 2018, so just over 3 years old, and has a very extensive range of CBD products. On the left-hand side of the slide, you see really the half end of the products, the current existing portfolio, mainly around [ things such as ] oils and sprays, and that currently represents the main part of the portfolio. In the middle, you see the new skincare range, which is going to be launched towards the end of this month and has already reached 700 distribution points that are a great -- it's a great first sell-in and will be supported by a German media celebrity and further supported with a broad-reach media campaign, including television advertising, which has made the brand already so successful. This skincare range, by the way, is very accessibly priced between EUR 5 and EUR 14. So we expect that this really lowers the barriers to entry into the CBD skincare for consumers, warrants significant uptake and very early success, and that's what we get really, really excited about. On top of this really exciting portfolio, CANOBO has also made great strides into creating an organic offering. And some of the core product lines are already organic, and more and more of them will be certified organic over time. Through our due diligence, we took great care naturally in making sure that the products are regulatory compliant and the formulations are compliant. And we were really happy to see that the CannaCare business is undergoing, and the product is undergoing a very stringent testing regime with independent testing of all of their products into independent labs to verify result, giving us great insurance that the quality standards that the CANOBO range represents are in line with our expectation. One of the key attractions to the CANOBO business and a great success of the CannaCare team is the distribution that the team built across Germany nationally. And arguably, with 4,500 distribution points now, CANOBO is now the leading brand, the #1 brand in bricks-and-mortar traditional retail channels. Arguably, the crown in the jewel here is Rossmann, Europe's leading drug market chain and the #1 chain in Germany, and CANOBO enjoys full distribution in every store with 2,200 distribution points. Mueller, the third or fourth biggest chain in Germany...