FLUENT Corp. (FNTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. And welcome to Cansortium's Third Quarter 2021 Conference Call. Joining us today are the Company's CEO, Robert Beasley; and the Company's CFO, Patricia Fonseca. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay in the Investors section of the company's website at www.getfluent.com. Please note that certain subjects discussed on this call, including answers the company may provide to questions may include content that is forward-looking in nature and therefore subject to risks and uncertainties, and other factors, which could cause actual future results or performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings, which can be found on SEDAR.com. The company does not undertake to update or revise any forward-looking statements, except to the extent required by applicable securities laws in Canada. In addition, during this call, the company will refer to supplemental non-IFRS accounting measures, including adjusted gross profit and adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. These non-IFRS measures are defined in the company's press release, as well as in the MD&A as filed on SEDAR. As a final reminder on today's call, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. I would now like to turn the conference call over to Mr. Robert Beasley, the company's CEO. Sir, Please go ahead.

Thank you, Terese, and good afternoon, everyone. Q3 was another productive quarter as we work to complete various cultivation expansion projects while opening new retail doors in both Florida and Pennsylvania. We generated 9% year-over-year revenue growth to $15.6 million in Q3 and increased adjusted EBITDA by 34% to $4.9 million. In fact, this was our eighth consecutive quarter of increasing adjusted EBITDA on a year-over-year basis, which reflects how far we've come these past few years, and particularly through 2021 during our expansion. In Florida, we opened 2 new dispensaries during this quarter, Deerfield Beach and Fruitland Park. Both locations present excellent opportunities. Deerfield Beach store services high-growth neighboring cities like Boca Raton and Palm Beach, while Fruitland Park location is strategically located 10 miles from the largest retirement community in the U.S. called The Villages. As mentioned on our last quarterly update, we have identified 4 additional retail locations in Florida and have those locations under LOI at this time, anticipate those to be opened by mid next year, bringing our total Florida footprint to 31 stores by mid-2022 with the goal of 33 stores by the Q3 of 2022. Also during the quarter, we received approval from the Florida Department of Health to commence operation on all of the indoor rooms at Sweetwater facility and the remaining greenhouse bays. This makes the Sweetwater facility fully operational at this time. Products from these expansions hit the shelves earlier this month, and this is in line with the timeline that we provided on the last quarterly update. Now we continue to refine the grow process and environmental controls at the Sweetwater facility, and it continues to produce higher and higher product quality with significantly better yields. The yields at this date are double our initial projections. In Tampa, we've added an additional 5,000 square foot of indoor grow that will come online in early next year, I anticipate March of 2022. We've continued to see construction delays on this site, both with the grow portion and the production and processing production. But this additional grow space was not contemplated in our 2021 guidance. So there is no impact aside from having the additional capacity come online in 2022. Our focus point remains to be quality and it's now resonating with our patients. New patient capture rates have dramatically improved. We continue to take more and more of each new patients as they register, percentage-wise. And our -- we have revitalized our physician outreach program, which is reaping great success now. All said between Tampa and Sweetwater, we continue to expect having the facilities all dialed in and running to maximum production by February 2022. I've actually given Valentine's Day as the goal date for that, as stated in our last quarterly update. I cannot emphasize the importance of having this new growth capacity enough in our company history. For the first time in company history, this company will be in a position of having a strong, robust inventory in all stores at all times and a continual flow of a full range of products going to the stores. We have set up logistics distribution centers to accommodate servicing all stores with equal and ample supply of material. This component increased capacity changes the dynamic for Fluent going forward. Quickly touching on the competitive dynamics we saw in Florida during this quarter, and it's been a much popular and talked about topic, which was the price competition among the several MSOs. From our perspective and our viewpoint, this was viewed as more of a liquidation event than an all-out price war. We had several mergers, the 2 mergers of the 2 large MSOs with local Florida companies caused a price disruption, causing that disruption as a result of liquidations that were forced by the regulatory transfer of the licenses. Prices now seem to have normalized, and we have returned to a normal scenario and normal competitive pricing, although competition is heating up. We no longer see the dramatic price discounting that we witnessed in late August and September. Looking at our other markets. In Pennsylvania, we recently opened our second dispensary in the state in Mechanicsburg. This has had a very well received brand opening. Each of our 2 stores in the states are trending towards $9 million to $10 million annual run rates, and we expect to have a third location opening soon in Anvil. Construction is underway in Anvil. We have completed the demolition, and the plans are approved. We have greenlighted the contractor to begin and all permits are obtained. We anticipate completing the build-out in the end of Q1 2022. In Michigan, we sold 2,600 pounds of biomass from last season and our final 700 pounds of flower during the third quarter. The flower was sold to an entity, Green Standard that's not yet consolidated into our books. So the revenue from the flower sale is not reflected on our revenue figures. However, this sale results in approximately $300,000 in adjusted EBITDA. In this year in Michigan, we've turned out a great crop. We're presently in the harvest and bucking process. We are at about 1,900 kilograms harvested so far with flower ranging from 14% to 25% THC levels. Overall, the crop will be much larger than last year. If you recall, we last year started about a month and a half late, this year we are on time with the crop, and actually a little early for the market. We anticipate about 17,000 pounds total harvest over 5,400 plants. However, pricing continues to be volatile in Michigan. We are still continuing to face the type of price fluctuation that we witnessed last year, although a better understanding of the market allows us to be better prepared. In order to deal with the hold pattern that we found ourselves in to allow pricing to return that we found ourselves in last year, unintentionally, we have intentionally prepared for that by preparing to have the adequate equipment to treat, process and seal the product in order to strategically time sales throughout the year with anticipation of the market prices continuing to return as we get towards spring and summer as they did this year. Michigan pricing continues to be volatile as an outdoor harvest state, and we continue to suffer from regulatory, really a lack of regulatory oversight in that state. As outlined in our press release earlier today, due to the lower flower sales in Florida, we're revising our 2021 revenue guidance for the year-end, and expect now a total range between 63 and $66 million. However, we're holding our adjusted EBITDA guidance and expect to come in at the low end of our original forecast between 18 and $26 million. Despite lower sales in Q3, due to the competition issues we mentioned earlier in Florida and other issues with regard to production and construction delays, we still expect to exit the year with a strong run rate with more flower and oil hitting the shelves this quarter than ever before, and the full production of expanding cultivation hitting the shelves in February 2022. Particularly, I could say that our Thanksgiving was a phenomenal period of time. We reached record sales and experienced the full volume of the production ramp that has now graced our shelves with full product. With that, I'll pass the call to Patricia to walk through the details of the financial results, and then we'll open the call for Q&A. Patricia?

Thank you, Robert. Thank you. Good afternoon, everyone. Please note that all figures are in U.S. dollars and all various commentaries on a year-over-year basis unless otherwise specified. So I'll go in to results. Third quarter revenue increased 9% to $15.6 million compared to $14.3 million. The increase was largely driven by increased retail footprint in Florida, which went from 20 stores last year to 27 this year in the third quarter, as well as improved throughput as we continue to see better production yields. This led to a 4% increase in total revenue to $13.1 million compared to $12.6 million, with the growth partially offset by the market dynamics that Robert just mentioned in this call. Adjusted gross profit in Q3 increased to $9.8 million or 62.7% of revenue, which compares to 9.5% in 2020 or 66.6% of revenue, with the variances there, driven mostly by the market pricing in Florida. Third quarter operating expenses totaled $8.5 million compared to $9.7 million, reflecting a 12% reduction. As a percentage of revenue, OpEx decreased significantly to 54.6% compared to 67.6%, with the improvement driven by more efficient G&A expenses, lower stock-based comp. Third quarter net income totaled $7.4 million or $0.02 per share compared to a net loss of $8.7 million or $0.04 per share in the year ago quarter. Adjusted EBITDA increased 34% in the third quarter to $4.9 million or 31.4% of revenue compared to $3.6 million or 25.5% of revenue in 2020, with the increase resulting from our continued focus on profitability and diligent cost management. Turning to the balance sheet at September 30, 2021, we had $13.8 million in cash and unchanged total debt of $71 million. From a CapEx perspective, we continue to anticipate total CapEx of approximately $20 million to $25 million between 2021 and 2022. And through September 2021, we deployed approximately $15 million of that $20 million to $25 million, which leave us about $4 million to $9 million in 2022. And as Robert mentioned, we have adjusted our full year revenue guidance for 2021, and we now expect revenue to range between 63 and $66 million, with the good news being, we didn't change our EBITDA range of $18 million to $26 million. We're going to come in the lower range there, but still within the range. This reflecting margin improvements mentioned earlier. Growth of approximately 23% and 114% for revenue and adjusted EBITDA at the middle point. So a good progress here on the adjusted EBITDA, as mentioned by Robert. Operator, we'll now open the call for Q&A.

[Operator Instructions] The first question comes from Jon DeCourcey with Viridian.

Congratulations on the quarter and continued execution, particularly in Florida. So Robert, so I guess just a couple of questions out of me. First off, can you just kind of touch on the typical seasonality that you -- or the seasonality that you had been expecting in guidance, you saw the drag in the third quarter. And from the pricing issues, it sounds like that wasn't repeated in the fourth quarter, but then you cut the guidance a bit despite having a few more dispensaries open. So can you just touch on kind of where the puts and takes are for the fourth quarter expectations on the top line.

Seasonality is a good way to put it, especially if you use the typical pattern. So typically, what we would expect in the Florida market is to see an increased amount of sales actually seasonal. So because Florida is blessed with a tremendous snowbird population, which have residences, which means they qualify for cards, we do see an uptick in sales coming into late October, early November. And so we anticipated November to be a good strong month for us and it has been. What we did not anticipate was what happened in August and September. We had 2 different MSO transactions. We had to harvest Trulieve transaction, and we had the Curaleaf transaction, both of which put deadlines on disposing of assets, biological assets for various reasons, mostly regulatory reasons. Those assets in Florida cannot be transferred between MSOs, there's just no provision to do it. So you have a scenario where you have 2 of our major competitors coming in the market. They both were stockpiling product because they were waiting to get their transaction approved, and then they both had deadlines, different driven deadlines, I will tell you. But in the case of the Trulieve harvest deadline, we saw a 40%, 50%, 60%, 70%, 80% off sale, running into a deadline of a 5 o'clock closure deadline, and then it all ended. And so we didn't expect that, didn't have a way to plan for it and never knew it was going to happen. And so we didn't -- we found ourselves in a liquidation environment where we had this try our best to be competitive. Fortunately, the ramp that I've been speaking of the last few quarters was there, and we were starting to receive a more robust supply from our production center. And so it allowed us to be competitive. Oddly, it didn't give us the top line revenues that we were expecting but because we were well fortified, we can be competitive in that time period, it just did not result in a lot of top line revenues because of the competition. So that's what occurred. We then came out of that, we returned to a more aggressive pricing that's going on. It's a little bit more aggressive on sales and discounts, but not so aggressive that it's not -- and we're not in a position to be competitive. Again, this is our Q3 call about Q3 and not Q4, but I can tell you that it has -- the winds have changed, and we are really happy with what we're seeing now.

No, that makes sense. And that leads to another question is just do you expect with so many MSOs having entered the market this year and then operators like yourself scaling cultivation capacity and production capacity. At what point do you expect pricing pressure -- persistent pricing pressure beyond just kind of the liquidation kind of sentiment that occurred in Q3. Is that something that is a 2020 [T story] line? Or is that something that is still further out as the state continues to expand?

I anticipate just having been to competitors' facilities and so forth and generally understanding where they are is we are -- our expansion and our growth is about 12 to 15 months ahead of those larger MSOs that have come into the state. The supply chain issues we're having globally, the labor issues we're having impact those as well as anyone. And unfortunately, having capital isn't enough. You can have all the dollar bills in the world, but it doesn't get your supplies off the boat any faster. And so they're running -- they're suffering from what the whole market, the whole entire world is suffering from. And so I think you're seeing about 12 months, probably see that price compression really start to pick up in Q4 of '22. We're feeling it now in other areas. Right now, we're feeling it in materials and inventory type as they construct their facilities, we start to feel it. We feel it an employee pressure, a lot of employee poaching. So we kind of feel where they are if that makes sense. And where they are right now is ramping up their production and constructing their facilities. So I think you're going to see a Q4 price impact. And I anticipate pricing will start to settle down over Q4 '22 and into '23. It's a natural occurrence. We've tracked what happened out West, and the curves are interestingly comparable to what's going on in Florida. I think price compression will continue. It will find its own level as we all continue to be more efficient, operate at a larger.

Okay. And then just one more question on me. Just a clarification. As you kind of just referenced the scaling cultivation capacity and production capacity. One thing I didn't quite understand on the commentary or just maybe misheard. I was looking for a clarification on Tampa is delayed until about March, but you seem to have said that the full ramp of production capacity was still on track for February. I think we've talked or you've talked in the past about getting to a roughly $200 million annualized run rate for Florida in the second half of next year. Does that temperable delay impact that at all? Or kind of where -- what is the Tampa delay?

Thank you. And maybe I should have been clear. I guess my point was that there is a small -- so Tampa, when we talk about it, there's our existing main grow, but practically what is in Tampa that is a grow and processing and production facility and kind of our main hub facility. Adjacent to that is a 20,000 square foot building, most of which is being built to streamline and clean up the campus as far as packaging and processing and taking us from 2 methods of processing to 4 methods of processing. It's our BHO center, if you would. There is, in the back of that building, there is about 5,000 square foot of grow that is coming online. That grow space, that canopy space was not part of our 2021 calculations. It is part of our 2022 second quarter calculations -- I'm sorry, second half calculation. So what I intended to say was while that building is delayed and will not be done until March, it was not part of our Q1 '22 or our Q4 2021 guidance anyway. When I mentioned full production capacity, I was talking about Sweetwater indoor, Sweetwater outdoor, which have all now been fully approved, and they're all running on all cylinders. We just harvested our final bay outdoor, and now we're in full production.

The next question comes from Bobby Burleson with Canaccord Genuity.

So just a couple of quick ones. Outside of the merger-related liquidation activity in Florida, what is the current competitive dynamic that you're seeing there? Maybe just touch on that one more time.

Sure. You have to set aside this last week of August and basically most of September as an anomaly. That is when Harvest was dumping out their materials and Curaleaf was dumping out their materials. And so you set that aside for a minute, then you see what resumed in October was a fairly aggressive 30%, 40% off strategy by Trulieve and others to regain some of the market share that was lost during the price war, if you would. And now that's kind of settled. Interesting, in Florida, we do not see pricing competition. We've seen discount competition. And so pricing has remained pretty steady even during that August and September period, but you see the discounts. The difference now between then is during that time period, it was off all products, 40% off everything. Now we've gone back to selected product discounts, kind of trigger events, 40% off cartridges this weekend. Those -- that is more like what we witnessed in Q1 of 2020, but now the 20% have turned into 30% and 40%. So you can see there's another 10% to 15% comp competitive discounting that's going on now. That's probably where we're going to stay. We're going to stay at a slightly more competitive pricing into Q1 and Q2. And then it's that Q3, Q4, I think you'll see further price compression.

Okay. Great. And then when you think about the production ramp that you guys are achieving in Florida and how that's really going to be a game changer for you in terms of capacity. Can you kind of give us some context in terms of average store performance that you would have been able to do? And how much have you been leaving on the table theoretically without that capacity that you now are putting in place?

Okay. It's tremendous. I think that we've said before and I've said before to you, which is if it were not for the race for footprint that's going on in Florida, I would not open another store because we would -- if we were in a vacuum, we would spend this year maximizing our existing store shelves to realize what those store ceilings are. We've not yet had -- and even today, have not yet had the opportunity to take a store and have it at full robust inventory all day long every day. We're still somewhat juggling and balancing all the way up into the last 3 weeks. And now we're getting there. So if you could ask me that question again in a month, I would be able to give you some deltas that would be good, solid math. Right now, all I can tell you is we were operating -- I couldn't give you a number, but we were operating at probably 40% capacity at our existing stores when I came in, in September of '20, and now we're closer to operating at 85% capacity as far as shelf capacity. So it's been a doubling of our overall capacity. But at the same time, I'm adding more footprint. So as you can see, I'm getting broader as I'm increasing capacity. So the math is a little tricky. But I can just tell you it was substantial. I mean, I think we had stores that just did not have the inventory to satisfy those customers on a full-time basis.

And then is there -- just one last one. Is there some speculative interest in investing in Florida right now ahead of eventual legalization of recreational use. Is that keeping that market interesting, do you think, for MSOs? What are you guys seeing in terms of the overall investment environment in Florida as it relates to eventual [rec] sales.

So I believe that could be one of the events. Florida has seen a series of legislative triggers that have allowed more patients to come on. And now it's kind of curved off at the 630,000 mark. Yet our sales are still increasing robustly. And so the amount of market share is now starting to be traded around a little bit between us. But there are still more legislative events other than legalization. And I've spoken on this before, I think a reciprocity, which is a very simple administrative amount. If you think about the number of cardholders from other states that come to Orlando, Miami, Tampa and Jacksonville, just a reciprocity measure, which could be an easily regulatory move, which could happen any time now. It could be a 30% sales increase across the board without one new patient. So there are regulatory initiatives that could happen short of recreational that would dramatically increase Florida. Then there's recreational. So I think what I'm seeing is the bigger MSOs are here, investors are here. Everyone's here. Everyone is building more grow space. Florida still remains a very untapped market. We are nowhere near saturation on number of stores, number of square footage of canopy space. It is still a fast-growing market.

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.