Little Green Pharma Ltd (LGP) Earnings Call Transcript & Summary

Welcome, everyone, to this webinar for Little Green Pharma, which trades under ASX ticket code, LGP. I'd now like to introduce Little Green Pharma's CEO, Paul Long, who will provide an update on the half year results for the company and provide commentary on its market outlook and focus areas for financial year 2024. At the completion of the presentation, Paul will be answering a number of questions. Paul, over to you.

Thanks, David. Yes, today, I'd like to take everyone through our 30 September half yearly results, which we released to the ASX earlier this morning. But before reviewing the half year results, I'd just like to extend my thanks to the Little Green Pharma team and their families. Everyone at Little Green Pharma has contributed to our ongoing growth and development. And our team's hard work and dedication is greatly appreciated. And for those new to Little Green Pharma, welcome. We started in 2017, and we're a leading global medicinal cannabis company. And we're one of the most trusted brands in the Australian market. We have large-scale production assets both in Australia and Denmark. And we have a wide product portfolio of over 17 different cannabis medications. And we have extensive European distribution network and a really strong market presence in Europe and a highly experienced commercial and operations team in both hemispheres. We're one of the most trusted medicinal cannabis brands globally. And we're incredibly well positioned to capitalize on the growth here and in Australia and certainly up into Europe. Let's jump on to Slide 3 there, please, David. Thanks. Okay, so just turning to the agenda today. I'd like to review the highlights of our financial performance, followed by some commentary on the market outlook and some focus areas for financial year 2024. Let's jump to Slide 5 there, please. Next one. Thanks. Okay, looking at our key metrics, we saw 112% increase in relation to our adjusted EBITDA with the highlight being the achievement of our first positive adjusted EBITDA since acquiring the Danish facility totaling more than $700,000. The company continued to show strong revenue growth during the first half with revenue increasing 40% from $9.2 million to $12.8 million. And that included a $250,000 that was related to revenue associated with Reset's strategic alliance with HIF, which has been included in assets held for sale. The company's gross margin before fair value adjustments increased 10% from $5.1 million to $5.6 million. However, the gross margin percentage before fair value adjustments decreased from 55% to 44%, despite a 30% reduction in the cost of production at the Danish facility. And now this was predominantly due to the sale of higher cost flower inventory during the period, which was cultivated during the commissioning phase and on hand as at 31 March 2023. When comparing the cost of sales plus commissioning and R&D in totality, these costs were down 14% from $11 million to $9.6 million, despite the increase of revenue. So it was a great result. Turning to loss after tax. Our revenue -- our increase in revenue, combined with the completion of the commissioning of our Danish facility and a 41% reduction in R&D costs, that resulted in the company reducing its net loss from ordinary activities by a massive 72%, up from $7.8 million down to $2.2 million. And a substantial portion of that residual net loss came from noncash costs, including share-based payments, depreciation and amortization and net fair value movements. Jump on to Slide 6 there, please. So moving on to the revenue metrics, our diversified revenue base continues to demonstrate growth. The Australian revenue hitting $10.8 million, so up 36%, and the European revenue hitting $2 million, up 61%. Next slide. Now consistent with market trends, our flower sales represented the majority of the growth globally with sales up 90% compared to the prior period. Of these, a highlight was our newly introduced vaporizer product with sales continuing well since introducing that particular range of products into the market mid-2023. Next slide, please. Okay, moving to our balance sheet. The company continues to enjoy strong balance sheet, featuring low debt and high working capital balance. Now during the period, the company repaid its remaining $4.1 million debt to Canopy. And that was relating to the acquisition of the Danish facility, leaving the asset debt-free, which is -- and as well as selling the two properties adjacent to its production facility in Western Australia for $2.7 million to extinguish a $1.9 million of debt that we had on those properties in the Southwest. And lastly, I'd like to draw your attention to Reset Mine Sciences' demerger, which is expected to take place before the end of the year. In our balance sheet, this has been classified as a disposal group held for sale. And upon demerger, Reset will be required to repay its intercompany loan to Little Green Pharma from future capital raises within 3 years with any outstanding loan balance converted to shares in Reset at the end of the term. And that loan is for $1.7 million. And that was as at, obviously, the end of 30 September. Next slide, and again. Great. So looking now at Little Green Pharma's short-term outlook, we remain really confident in the continued growth of the Australian medicinal cannabis market while expecting that the current market competition will result in consolidation as well as increased numbers of market exits. And we've seen a few of those just recently. Also the possibility of an Australian adult-use market is on the horizon with some potential upside, of course, for existing cannabis market producers, particularly if traditional consumer goods industries such as alcohol and tobacco manufacturers are actually excluded. Meanwhile, we're really confident in the continued growth of Europe and the medicinal cannabis market, particularly into the new markets of France and Poland. We also believe that we're starting to see some improvements in the U.K. market sentiment after a few flat years in that market. In addition to this, we would expect the SAFE Banking Act to be passed in the U.S. sometime next year, which is likely to bring -- to be a significant catalyst and bring some tailwinds to the industry. Our long-term fundamentals remain incredibly strong. We have an excellent reputation and brand. We've got scalable in-house production capabilities in really low-risk jurisdictions, which is important. We have a deep genetics pool now, thanks to our R&D in Denmark, of generating consistent and exclusive supply of products, in particular, flower products, our long-standing distributor networks and considerable European market experience, our wide-ranging product portfolio, our inhalation and oral dosage usage forms, our loyal and independent Australian prescriber network and our highly experienced commercial and operations team. Next slide. So having previously undertaken a campaign aimed at significant cost reduction over the past 24 months, our primary focus for the coming period will be about growing revenues in addition to the expansion and diversification of our product offering, in particular, into new markets, France and Poland, as well as continuing to supply into Germany and the U.K. and further into Scandinavia, at the same time, as relentlessly pushing for market share in Australia and across all our product categories. Thank you. And I hope this presentation has really helped you understand the key insights from our half yearly report. And as always, I'd like to thank our Little Green Pharma shareholders for your continued support over the years. Thank you, everyone.

Thanks, Paul. Great presentation, great update. And clearly, the company is moving in the right direction. A number of questions for you. So for the Australian market, what are you seeing in terms of consumer interest in oils versus flowers? Clearly, your revenue split was showing flowers increasing in interest. And how is Little Green Pharma taking advantage of these changing consumer demands?

Yes, so that trend, the trend from oil to flower now, we've seen not just in our portfolio but across the board. And we have access to TGA data on these numbers. And we've actually seen a significant increase now, in particular, the rise of the authorized prescriber in the Australian market and a big percentage of scripts coming from authorized prescribers, which are doctors that are able to write scripts, an increase in flower sales. So we think that the authorized prescribers are up around 17%. For us, we're really well positioned. When we acquired the Danish facility a number of years ago, we doubled down our investment on that genetic R&D. And so we now have a whole portfolio of genetics, including crossings, which are unique and exclusive to Little Green Pharma. So we're really well positioned for that R&D investment that we've made historically to capitalize on that growth of the flower market into the Australian market.

Looking at Europe, a number of companies, particularly Australian listed companies, have talked about or are heading into Europe. How do you have a competitive advantage? And what is that advantage over your peers?

Yes. Look, we were sort of the first mover from Australia into many of those markets. We delivered Australia's first oil product into Germany. We delivered the first product into the U.K. We had the first product available out of our Danish site into Denmark. We were one of only a few companies to win a tender into Italy. And of course, the French opportunity, we're one now of only three within that French pilot. So that first mover has been absolutely critical for us. But we also have a very -- most of the European territories have a very high-water mark on quality expectations when it comes to good manufacturing practice. And we've been able to continue to enhance that and to our benefit into those markets. And I use the French one as the best example, whereby, as I said, there's only three companies that are in the pilot. And from April next year, we now know that, that will roll into a transitional phase and a great opportunity for Little Green Pharma. And then beyond that, there will be an opportunity for companies to submit dossiers. But of course, we've proven our position into that market and our quality through dossiers. So that's really interesting. Poland is another one, where we've said to the market we're due to ship our first delivery into Poland relatively soon. That's a process of a significant quality dossier that's taken a number of years to get approved. So as a result, there's limited competition. There's probably only 10 products on the market at the moment into that Polish market. And we don't expect to see this huge wave of competition we see in those markets like Australia and Germany.

And how important is the Danish facility to that play? How important is it to have two facilities of such a high quality in the two hemispheres to be able to help you sort of meet the needs of both markets?

Absolutely. And we have a really now known and trusted source of high-quality, exclusive genetics coming out of that site and repeatable products that we can deliver into the market. So that site is incredibly well positioned. It's a 2.5-hour drive from the German border. The German market alone is due to go through some big changes next year. So in April, the first thing we'll see is a delisting of cannabis as a narcotic. And that is expected to significantly open up the market into Germany. And so with a huge site capable of producing up to 30 tonnes of biomass, it's a great opportunity for Little Green Pharma. But more broadly, if you look at the broader European market, it's 350 million people. And we now know, we can see in Australia that this is not a blue sky operation anymore. We know the size and what happens in the market. We know this product is helping patients. And so those emerging markets are really exciting, getting in there first position with high-quality standards. And so we're really confident that, that acquisition is already paying significant returns and dividends for us but significantly into the future.

There's been a pretty interesting trend in recent times of the large Canadian players and North American players, who traditionally had large footprints in Europe and operations in Europe, sort of leaving that market and honing back to the North American or the Canadian market, in particular. Why is that occurring? And what opportunity does it leave for Little Green Pharma in the European market?

Yes. Look, I can't obviously speak for those companies. But anecdotally, really I think it's driven around their access to significant capital, so went through growth phases of, "Let's employ a team in every market around the world." And we think that we're seeing that those organizations are refocusing on more of a recreational opportunity into the North American markets and a reduction of available capital, so as they've been thinning out the organization. So that's a great opportunity for us because we haven't been focusing on the North American market. For us, it's the highly regulated markets into the European pathway with our mutual recognition agreement to begin with out of Australia. That's been our focus. So we genuinely believe we've probably got the most trusted brand now in Europe and one of the most trusted brands here in Australia. So it's created an even bigger opportunity with those bigger Canadian companies deciding to retreat, for sure.

Some investors or a large number of investors will have noticed and seen the amount of investment both in terms of time and cash that you've put into Europe, both through trials and other activities and acquisitions. When is the big tipping point? When is the big inflection point that you see that the foundation laid yields significant growth opportunities?

I think we're going to see some significant change in 2024, like I think we're getting close. I mean, it's important to remember, we have been delivering. We've had an increase in sales from that side into Europe with some significant customers that we're working with, well-known customers and obviously down into the Australian market. But I think in 2024, there will be some big changes. Obviously, I mentioned the German change with the delisting of cannabis as a narcotic. Most of the pundits in the industry are expecting a two- to tenfold increase in potential demand into that market after that change. And we have, obviously, our site close to the border. But the French one is interesting when that pilot study really finishes, as I mentioned, at the end of March. So from April onwards, we really expect that, that market will continue to open up and provide us opportunity. U.K. is another classic example. It's been a pretty flat market for a period of time. But we believe that's beginning to change. And the big gateway to opening that up will be hopefully a transition from specialists to GPs. Now we don't have a set timeline on that. But we have a view that, that market will continue to grow and open up into 2024.

Last question. You've spent a lot of time on balance sheet strengthening, bringing down debt, reducing costs and really focus on really strengthening the balance sheet. And I don't want you to talk about peers, but there's certainly a lot in the market that were very growth-focused that are now holding a balance sheet with significant debt or limited cash. Is M&A an opportunity? Do you look around and see some of the companies in the sector that are finding it hard to get capital maybe holding debt or having a weakened balance sheet that you can look at and think, "Well, maybe we do bolt-on something to help us grow further"?

Look, I think the reality is there's over 100 brands -- 100 companies in the market here, just here in Australia at the moment, and across maybe 700 different brands in the market. So it's inevitable that there will be consolidation in a growth market. We know those cycles outside of medicinal cannabis. So we don't have to reinvent the wheel on where we think this goes is our view. So consolidation will absolutely happen. But also, there will be some significant exits from the market. So whilst the market is growing and it's a fantastic opportunity, we do believe that the evolution of this market will be no different to any other market in that you end up with a number of large providers into the market over a period of time. So yes, we'll be actively looking to be part of that growth strategy. And like I said, we expect a few of the smaller players in the market to drop out in the not-too-distant future.

Strong balance sheet, strong strategy big growth opportunities and a quality team in place. That does bring to an end our webinar for today, Paul. Thank you for your time.

Thanks, David.

And thanks, everybody, for watching. Have a great day, and we'll look forward to keeping you updated in the future.