Latest / Higher Exchanges / Auxly CEO Hugo Alves on Building Canada's #1 Cannabis Brand

Transcript

Auxly CEO Hugo Alves on Building Canada's #1 Cannabis Brand · Higher Exchanges

0:28
SPEAKER_03: Welcome back indeed.
0:29
SPEAKER_03: I am Jesse Redman, Chief Strategy and Investor Relations Officer at Leaf Brands.
0:35
SPEAKER_03: I'm back with the wise and crystal vet, a man not phased by stays or delays.
0:48
SPEAKER_03: Yeah.
0:48
SPEAKER_03: Morgan, how are you, man?
0:50
SPEAKER_02: I'm good.
0:50
SPEAKER_02: I was just looking, you guys have nice clean haircuts, and I'm looking a little shaggy, but uh, I'll get that sorted out this week.
0:57
SPEAKER_03: It's funny doing the show, man.
0:59
SPEAKER_03: You pay attention to stuff like that.
1:00
SPEAKER_03: You're like, do I have a good shirt clean?
1:02
SPEAKER_03: Did I brush my teeth?
1:03
SPEAKER_03: Did I comb my hair?
1:04
SPEAKER_03: There's things done Thursdays I think about where I'm a little more relaxed during the week.
1:09
SPEAKER_02: Yeah, this is all pro-production here.
1:15
SPEAKER_03: Got expense that haircut, Morgan.
1:16
SPEAKER_03: Maybe you can roll it off.
1:19
SPEAKER_03: Or change of gears did it a little bit, Morgan.
1:21
SPEAKER_03: Usually we are USA MSO guys.
1:24
SPEAKER_03: That's most of the conversations, but there's a bunch of interesting stuff going on in Canada.
1:28
SPEAKER_03: So today we're heading north.
1:29
SPEAKER_03: We are out of MSO land and we are thrilled with Hugo Alves, CEO of Oxley on the show.
1:36
SPEAKER_03: Hugo, welcome, man.
1:37
SPEAKER_03: Thanks for being here.
1:39
SPEAKER_01: Hi, Jesse.
1:40
SPEAKER_01: Hi, Morgan.
1:40
SPEAKER_01: Thank you very much for having me.
1:41
SPEAKER_01: It's a pleasure to be here.
1:43
SPEAKER_03: Yeah, we're excited to talk.
1:44
SPEAKER_03: As you have seen, we have an absolutely packed agenda for the show today.
1:48
SPEAKER_03: But before we dig in, Morgan, can you please tell me how FlowHub could help protect my very precious margins?
1:55
SPEAKER_02: You got it.
1:56
SPEAKER_02: Year over year, summer was slightly softer as customer traffic held.
2:00
SPEAKER_02: Spend per visit dropped and discounting crept up due to industry-wide price compression rather than a demand problem.
2:06
SPEAKER_02: Summer rewarded stores that brought people back more often, but it didn't reward discounting on event days.
2:12
SPEAKER_02: As we head into the holiday season, some of those same insights apply.
2:16
SPEAKER_02: Peak days like Green Wednesday and Black Friday bring in a massive wave of first-time customers rather than the usual regulars.
2:22
SPEAKER_02: By keeping holiday discounts lean and focusing on fast checkouts, you can protect your margins and turn those new holiday shoppers into steady January regulars.
2:31
SPEAKER_02: Visit FlowHub.com to see how retail data can help your dispensary win this holiday season.
2:38
SPEAKER_03: Nothing is worse, Morgan, than when you do a promotional discount at your dispensary and all that happens is your usual customers pay less and you get lower margins.
2:46
SPEAKER_03: I've been through that before, so very good point.
2:48
unknown: Yes.
2:49
SPEAKER_02: Yeah, they had some really good data from throughout the summer over the different holiday events, but um trying to keep it tight for the for the show today so we can get in with Hugo here.
2:58
SPEAKER_02: But uh there's plenty more you can check out with Flow Hub.
3:02
SPEAKER_02: So why don't we dive right into it talking about Canada?
3:05
SPEAKER_02: And I gotta tell you, Hugo, I um I was early uh investing in Canada.
3:10
SPEAKER_02: Um I was I did uh or Poseidon, we did um we were early in Africa, and I know we're gonna talk about Leamington in a little while, but I went to Leamington quite a few times in those early years, and um I'll never forget the time I was there in February, and it was sub-zero, freezing cold, and you go into this bright, sunny greenhouse, and it's a very nice temperature in there, and there was a lot of beautiful cannabis growing in there.
3:38
SPEAKER_02: So I'm curious to hear how it's going in Leamington.
3:41
SPEAKER_02: I know that's considered the what do you guys call it, the Florida of Canada?
3:46
SPEAKER_01: It's just the southernmost point of of Canada, right?
3:49
SPEAKER_01: It has a uh I've never heard it called the Florida of Canada, being honest, but uh it is the produce capital of Canada.
3:55
SPEAKER_01: It's where the most greenhouses are, so very conducive to greenhouse growing for sure.
3:59
SPEAKER_02: Yeah.
4:00
SPEAKER_02: I grew up in Youngstown, New York, so very close to that part of the world, right across from Nagarrand Lake.
4:04
SPEAKER_02: But anyway, talking into Canada a little bit more here.
4:08
SPEAKER_02: I mean, Canada's multi-billion dollar industry at this point.
4:12
SPEAKER_02: Um, you know, it's kind of gone through some um things that I think are starting to happen, or we're the U.S.
4:18
SPEAKER_02: is just kind of a lagged cycle of what's been going on up there, but um, you know, it's still a growing market.
4:24
SPEAKER_02: You've seen quite a bit of uh of a tailwind with um the export market.
4:29
SPEAKER_02: But just kind of stepping back, how do you think about the Canadian market today?
4:33
SPEAKER_02: How do you frame it as the opportunity set?
4:36
SPEAKER_01: Yeah, um, good question.
4:38
SPEAKER_01: So I think the Canadian market, which is where we're focused, is a great market.
4:42
SPEAKER_01: It's a growing market.
4:44
SPEAKER_01: We think uh continues to grow at a rate of 5% a year until 2030, getting us to like an over$7 billion market.
4:52
SPEAKER_01: But I think um, you know, also it's a maturing market.
4:56
SPEAKER_01: It's more stable, right?
4:58
SPEAKER_01: From a regulatory dynamics, consumer dynamics, pricing dynamics, uh, there's greater stability.
5:04
SPEAKER_01: And I think as I mentioned, it continues to grow.
5:06
SPEAKER_01: That growth is underpinned by increasing social acceptability, right?
5:10
SPEAKER_01: More and more Canadians are choosing cannabis as their form of recreation.
5:14
SPEAKER_01: Uh capture from the illicit market, which is still 30% of our total addressable market.
5:19
SPEAKER_01: So that, you know, that takes some time, but it is happening.
5:23
SPEAKER_01: Um, and of course, I think Auxley can do much better than grow at 5% a year.
5:27
SPEAKER_01: I think we can, given the strength of our products and brands and sort of our best-in-class assets and capabilities, we think that we can do better than uh that that sort of 5% industry growth.
5:39
SPEAKER_01: Um, and also, as you mentioned, you know, the competition getting a bit more unfocused with uh the the sort of evolving international markets isn't a bad thing for domestically focused producer like Oxley either.
5:51
SPEAKER_02: Well one thing just to note for everybody the numbers we'll be talking about today, whether they're dollars or or yeah, when we're talking dollars, we're talking Canadian dollars.
5:58
SPEAKER_02: So when you said 7 billion, that was Canadian, correct?
6:01
SPEAKER_02: Correct, correct, yeah.
6:02
SPEAKER_02: Yeah, so we don't have to say it every single time.
6:04
SPEAKER_02: Yeah, we're just talking Canadian dollars.
6:06
unknown: Yeah, yeah.
6:07
SPEAKER_02: Um and and that so do you know, have you like dug into the data when that five percent how much of that is um just straight unit growth?
6:16
SPEAKER_02: Is there still price dynamics happening, or is it have we really seen a pretty pretty much a stabilization?
6:22
SPEAKER_02: How do you look at between price and unit?
6:25
SPEAKER_01: Yeah, look, I think there are there are like shifts happening, right?
6:28
SPEAKER_01: Like I think from a pricing stabilization perspective, we have seen the impacts of that, uh especially in dried flour, where you know, I think because of of price competition, um, if you do not have the right type of asset, if you if you don't have a scaled cultivation asset, you really kind of um have been priced out of that sort of like higher volume flour category, which is the sort of you know moves the most uh dollars in volume.
6:57
SPEAKER_01: Um, so yeah, I do think that pricing is stabilizing.
7:01
SPEAKER_01: We are seeing the benefits of like a tighter supply, like pricing in flour did is did increase last year and it has remained stable.
7:10
SPEAKER_01: Um, you're also starting to see some category shift, right?
7:13
SPEAKER_01: I think this year was the first year that uh pre-rolls uh became the number one format, right?
7:19
SPEAKER_01: They overtook dried flour.
7:21
SPEAKER_01: Um, and I think you know that's been a good area of growth for Oxley, given our areas of focus and expertise.
7:29
SPEAKER_01: Um you're also, as I said, I think you're starting to see some illicit market capture.
7:34
SPEAKER_01: There have been uh some meaningful advances made in in some jurisdictions with other provinces now kind of uh more focused on it.
7:44
SPEAKER_01: So yeah, I think uh from from uh the industry is shifting, but again, it's stabilizing and maturing.
7:52
SPEAKER_01: So we think operating in Canada is a great market.
7:54
SPEAKER_01: It's become a lot more predictable and profitable for producers like Oxley.
7:59
SPEAKER_02: When you and when you talk about price stabilization, is there like a plus-minus?
8:02
SPEAKER_02: Like, is there do you guys have a Croptober effect?
8:04
SPEAKER_02: Is it kind of like a plus-minus 20%, but it's still kind of within a band?
8:08
SPEAKER_02: Or how do how does kind of what does pricing look like in in this market?
8:13
SPEAKER_02: Um, because and again, I think this is super interesting because this is what we all would like to see in the US is not just continued price declines, but eventually a stabilization that just kind of fluctuates in some range.
8:24
SPEAKER_02: But I'm just curious if there's if you've seen uh enough data around that to you know kind of.
8:29
SPEAKER_01: Yeah, look, I think you know, analysts like AGP, right?
8:32
SPEAKER_01: Like uh Aaron Gray does a good job of sort of monitoring wholesale flour prices and in the CCX as well.
8:39
SPEAKER_01: Um so you know, it's been stable for for months at around that four, like we're talking about wholesale um or or like bulk flour at at retail at around four dollars a gram.
8:50
SPEAKER_01: But of course, like the cost to the producer, right, is about uh, or the price to the producer is about half of that once you sort of vent into your customer and then the the various markups apply before you get to retail.
9:02
SPEAKER_01: Um, but you know, to give you an example, last year, um Oxley is the the sort of uh you know, with the the number one brand in dried flour back 40, um, we were able to take price, right?
9:15
SPEAKER_01: And um all of the competition followed us up, which I think is uh an encouraging sign for the maturity of the market, right?
9:23
SPEAKER_01: Where you know producers are are more recognizing the value to the consumer and not just trying to compete on price.
9:30
SPEAKER_01: And I think that is again greater stability in the flower dynamics because the number of players that can actually compete in you know with a facility like Oxford Leamington are you know increasingly few.
9:42
SPEAKER_02: Yeah, yeah.
9:43
SPEAKER_02: So is that just as an example, was that like from$350 a gram to$4 a gram, or was that you know what just kind of any kind of framing around that?
9:51
SPEAKER_01: No, we well, I think we increased price by five dollars for a 28 gram bag at retail.
9:58
SPEAKER_01: So um you know that would that would be you know, divide that by 28.
10:04
SPEAKER_01: You you you know, do you don't get a massive increase, but it was an increase, which has been a marked departure from what we've seen up until that year, where it's like uh you know, pricing is is going down.
10:16
SPEAKER_01: And I think look like price compression has happened in the US, it's happened in Canada, it's happened in Australia, it'll happen in every market once there's real competition.
10:24
SPEAKER_01: 100%.
10:25
SPEAKER_02: And what do you think has been a driver of the illicit market conversion?
10:29
SPEAKER_02: Is it more um enforcement from the from the Canadian side?
10:34
SPEAKER_02: Is it just price has been more parity with illicit?
10:38
SPEAKER_02: Like how are you guys able to start capturing this illicit market?
10:42
SPEAKER_01: Um, I think access, you know, it starts with access, just having access to legal regulated product.
10:49
SPEAKER_01: And you know, I think in some parts of the country that access still isn't as great as as you'd like it to be, but it is improving.
10:57
SPEAKER_01: Um then especially the quality and price of the product, right?
11:00
SPEAKER_01: Like I think we've shown that we can compete with the illicit market on price.
11:06
SPEAKER_01: And generally speaking, right, consumers are gonna want to have the comfort of regulated, tested, uh, quality controlled supply relative to not really knowing much about the product other than you know what what your dealer or or uh what the website says about the product.
11:24
SPEAKER_01: So I think it's it's access, it's you know, as consumers know more.
11:29
SPEAKER_01: Like one of the big drivers too when you you look at surveys as to uh you go, why aren't we capturing the illicit market faster?
11:37
SPEAKER_01: A lot of consumers don't know the difference between legal and illegal product because the illicit market tries to mimic um legal products, right?
11:45
SPEAKER_01: They put the same warnings, they put the same logos, etc.
11:48
SPEAKER_01: on there.
11:48
SPEAKER_01: They're like also it's not perfect, you know, but in certain it's better in some formats than others, like flour free rolls are better and vaped than than edibles because there's a regulatory restriction on how much THC you can put in per per unit of edibles in Canada.
12:06
SPEAKER_01: But generally speaking, yeah, it's it's access, um, consumer awareness, and then just our ability to consistently offer a high quality product at a great value.
12:16
unknown: Yeah.
12:16
unknown: Yeah.
12:17
SPEAKER_02: Do you have the issue where, like in the US, we have unregulated um hemp stores that uh have popped up and proliferated?
12:25
SPEAKER_02: Is that kind of do you have a similar thing as that when you're talking about access and legal versus illicit?
12:30
SPEAKER_02: Like, are they doing that or is it how are you?
12:32
SPEAKER_01: Yeah, and it operates slightly different than the US.
12:35
SPEAKER_01: Like we don't have like a farm bill loophole.
12:37
SPEAKER_01: Cannabis is described as all cannabinoids, whether you know there's no distinction.
12:42
SPEAKER_01: Like hemp is regulated the same as cannabis, which I think is you know where the we'd like to see that do um in the US.
12:50
SPEAKER_01: Um, so we don't have that regulated.
12:53
SPEAKER_01: What it is is like actual cannabis bricks and mortar stores uh operating either just blatantly, like we don't care, come and shut us down.
13:01
SPEAKER_01: Some operate under sort of uh native sovereignty, um, right?
13:06
SPEAKER_01: And then a lot is online, right?
13:07
SPEAKER_01: There's a lot that that is kind of the next frontier from an enforcement perspective.
13:12
SPEAKER_01: I think the governments have done a decent job of getting the sort of bricks and mortar um dispensaries to kind of be less prolific, but online is still a big driver to that market capture that it works at longer.
13:28
SPEAKER_02: Okay.
13:29
SPEAKER_02: How how is the health of like the retail, the legal retail ecosystem in Canada?
13:36
SPEAKER_01: Uh it's highly competitive, right?
13:38
SPEAKER_01: It's highly competitive, uh price sensitive.
13:42
SPEAKER_01: But again, I think it's the same.
13:43
SPEAKER_01: It's it's improving, it's stabilizing.
13:46
SPEAKER_01: I think the maturity of the retailers in their approach to merchandising and business planning is also greatly improved.
13:55
SPEAKER_01: So it's not without you know, it's issues, and just like the LPs, you know, we we have to, you know, we have to deal with XIs and things like that.
14:04
SPEAKER_01: So they have their issues as well, but I do think see greater stability, and you're starting to see larger national account players um and larger regional accounts.
14:14
SPEAKER_01: So maturing and stabilizing as well.
14:17
unknown: Okay.
14:17
SPEAKER_02: It's the theme of the show, maturing and stabilizing.
14:21
SPEAKER_02: Uh yes.
14:24
SPEAKER_02: What and where are we in the cycle from like a consolidation?
14:28
SPEAKER_02: There was quite a bit, uh, a few, it feels like a few years ago now.
14:31
SPEAKER_02: I don't know, COVID has warped my my history, but um, but what is what's kind of landscape like in in Canada from that perspective?
14:39
SPEAKER_01: Yeah, look, a part of our thesis is that there has well, so there's been significant kind of forced exits out of the market through uh CCAA, and then people will pick up you know the assets or the company on a distress basis.
14:54
SPEAKER_01: So there's been lots of that.
14:56
SPEAKER_01: Um but our thesis going into the year is over the next two years, you see an increasing number of opportunities, whether those are CCAA driven or whether those are just ongoing concern, high-quality businesses that you know have reached a peak or have reached a certain size beyond which they would need significant capital investment.
15:16
SPEAKER_01: We do think that there's good opportunities for inorganic growth over the next two years, which is one of the reasons why you know at Oxley we're you know, we prioritize strong cash flows and a strong balance sheet to be able to transact on those opportunities if you know if they advance our strategy and meet our return thresholds.
15:32
SPEAKER_02: Have there been any announced deals this year?
15:35
SPEAKER_02: I'm trying to think offhand.
15:37
SPEAKER_01: Yeah, canopy acquired MTL, right?
15:40
SPEAKER_01: Okay, and of course, of course, you know, you're uh Tira is trying to acquire Aurora right now through a uh a sort of uh bid process.
15:47
unknown: Right.
15:48
SPEAKER_01: Um and then there have been CCAA transactions.
15:51
SPEAKER_01: We we were the uh debtor in possession lender and the stocking horse bidder in the IRCAN CCAA process, which means we we lent them the money we lent them the money to continue operating during the period that they were in CCAA and searching for a sale, and we made a bid on the assets.
16:11
SPEAKER_01: Ultimately, someone came in and and bid more than us.
16:14
SPEAKER_01: I think we were happy to take the assets at our price, but um you know we weren't uh interested in bidding more, given you know our expectations on return and the margin of safety around, you know, which is a tougher, you know, it's tougher to forecast a sort of CCAA acquisition.
16:33
SPEAKER_01: So we remained disciplined, um, did not bid and you know kept our cash to uh be ready to allocate to other opportunities.
16:42
SPEAKER_02: Do you uh and sorry, Jesse, I'm not trying to I'm I'll keep things get into your next section here in a second.
16:48
SPEAKER_02: You're good then.
16:49
SPEAKER_02: Um on CCAA, is that kind of do you know is that similar to like a receivership in the US?
16:54
SPEAKER_02: I'm just trying to think of like what does that mean?
16:56
SPEAKER_01: So CCAA means the Companies and Creditors Arrangements Act, and it's a process by which uh a company can apply to the court for a stay, and that stay really means hey, everyone that I owe money to can't cut me off as long as I continue paying going forward on a kind of COV basis, while the company tries to find a bidder or a solution to be able to sort of pay its existing creditors and basically in trade hands, right?
17:26
SPEAKER_01: Um, and it typically ends in a change of control.
17:30
SPEAKER_01: Someone will buy the assets from the receiver.
17:33
SPEAKER_01: Uh, in some cases, there are no bidders, and then it goes into liquidation, but it's kind of a you know, a uh a lot an ability, it gives the the company, a legal person, uh a last chance to restructure their affairs without having their creditors enforced, uh, kind of like a step before bankruptcy.
17:52
SPEAKER_02: Got it.
17:54
SPEAKER_02: And um what what's any kind of insight around what what are you looking at from a valuation perspective?
18:00
SPEAKER_02: Is it on assets, on cash flow?
18:02
SPEAKER_02: Is there like kind of like a market-based uh like EB to EBITDA kind of multiple that's considered market right now?
18:10
SPEAKER_01: No, I think like look, we look at all of that.
18:12
SPEAKER_01: I don't think there's anything that's uh like a market multiple.
18:16
SPEAKER_01: Um you know, people we you have to make that valuation assessment on a case-by-case basis.
18:21
SPEAKER_01: And that includes, you know, considering what valuation the market attributes to your business, right?
18:27
SPEAKER_01: Um so you know, we think that uh we we probably trade at a lower multiple than some of our competitive peers that we we outperform in market.
18:38
SPEAKER_01: Um, so that is a consideration for also, right?
18:41
SPEAKER_01: It'd be difficult uh to sort of pay more than we're valued at, but we look at everything.
18:45
SPEAKER_01: We look at obviously the the sort of quality of their earnings, the quality of the assets of the people.
18:51
SPEAKER_01: Can you take an internal view on valuation and then also an internal view on what you can you you can afford as a potential purchaser?
18:59
SPEAKER_02: What are what's your views on the international opportunity?
19:03
SPEAKER_01: Yeah, I think it's a significant long-term opportunity.
19:07
SPEAKER_01: Um it's not our focus right now, right?
19:10
SPEAKER_01: I think our our approach at Oxley is that you have to consistently show that you can win at home before there's a reason to believe that you can compete internationally.
19:19
SPEAKER_01: Um, we're our backgrounds before we got into operating a cannabis company.
19:26
SPEAKER_01: We're like lawyers, investment bankers, but I've been in regulated cannabis since the beginning, since regs were introduced in 2013.
19:32
SPEAKER_01: I was a senior partner at Bennett Jones where I helped advise on a lot of the early deals in the sector.
19:39
SPEAKER_01: Um and look, like what so I've seen like the genesis and evolution of the Canadian market.
19:46
SPEAKER_01: I've seen the genesis and evolution, you know, of the Colorado and then market and then the rest of the states.
19:53
SPEAKER_01: Uh so you know that has to count for something.
19:56
SPEAKER_01: And when I look at international markets, what I see is highly dynamic evolving medical markets, right?
20:02
SPEAKER_01: So it's still very early days.
20:05
SPEAKER_01: And in those markets, there's like I said, there's there's a lot of their dynamics.
20:09
SPEAKER_01: Everything from how are regulations going to evolve, how are the consumers going to evolve, how are the counterparties, how's pricing going to evolve?
20:18
SPEAKER_01: And so we've seen price compression in every single mature market, right?
20:22
SPEAKER_01: It would, I think, foolish not to expect that there's not going to be significant price compression in these international markets.
20:29
SPEAKER_01: Um, they're but they're an attractive long-term growth opportunity.
20:33
SPEAKER_01: We're not in a rush to get there, given that you know we're we're doing great here in Canada, like we're generating higher margins, more cash flow, better returns than our competitors that are focused internationally.
20:44
SPEAKER_01: Uh, we are taking measured and deliberate steps to you know learn by doing.
20:50
SPEAKER_01: So we've made shipments to the UK and to Israel, we'll make you know a shipment to Germany shortly.
20:56
SPEAKER_01: Uh, we've met all of the counterparties.
20:58
SPEAKER_01: And this is, you know, taking small steps.
21:01
SPEAKER_01: Does our product resonate in those markets?
21:04
SPEAKER_01: You know, are the working capital cycles too long, too short?
21:09
SPEAKER_01: What's the risk that you'd have to sort of put into your calculation?
21:14
SPEAKER_01: Um, and then, you know, how are the counterparties, right?
21:17
SPEAKER_01: Like here in Canada, I sell to provincial governments that are, you know, credit worthy counterparties.
21:23
SPEAKER_01: You can finance the receivables if you want, etc.
21:26
SPEAKER_01: Whereas, you know, you're dealing with distributors uh primarily who are private parties in these countries, and uh a lot of them are just starting out, right?
21:35
SPEAKER_01: So, you know, less balance sheet, less cash.
21:39
SPEAKER_01: Um, so you've got considerable, I think, revenue at stake.
21:42
SPEAKER_01: And then it takes a lot longer to get your cash.
21:44
SPEAKER_01: So you have like a much longer working capital.
21:46
SPEAKER_01: So I think great opportunity for the long term.
21:49
SPEAKER_01: The work that we've done in international markets today, I think, you know, reaffirms our belief that it's a good long term opportunity.
21:56
SPEAKER_01: And also that all the things that make Oxley competitive here at home.
22:00
SPEAKER_01: Right, great brands, great products operating at a cost where you know you can compete, you can deliver great value.
22:08
SPEAKER_01: And that you know, Imperial Brands is our strategic partner, right?
22:12
SPEAKER_01: They own 19.9% of our stock.
22:15
SPEAKER_01: They are a true global CPG company.
22:17
SPEAKER_01: They operate in 120 different countries, including all of the ones that have pathways to cannabis legalization.
22:24
SPEAKER_01: So we think you know, there's no need, no benefit to rushing in.
22:28
SPEAKER_01: We're gonna stay nice and focused.
22:29
SPEAKER_01: Um, and when the time is right, we think again, we're we're very well positioned to be competitive.
22:35
SPEAKER_03: Is Leamington a GACP facility?
22:37
SPEAKER_03: Yes.
22:38
SPEAKER_03: Okay.
22:39
SPEAKER_03: Have you done anything on the GMP side for the drawing, or are you doing that intermediary somewhere?
22:45
SPEAKER_01: Um well, so you know, this is perfect, Jesse.
22:48
SPEAKER_01: It's a perfect example of of regulatory uh uncertainty, right?
22:54
SPEAKER_01: Like that is a position that two regulators, two of the regional regulators in Germany have taken.
23:00
SPEAKER_01: My understanding is that they're either met or are meeting this week to just with the other regulators to discuss on a unified position.
23:07
SPEAKER_01: But, you know, you tell me, do you do you need to drive GMP or do you not need to drive GMP, right?
23:13
SPEAKER_01: Like I think if you talk to certain producers that have made investments in driving GMP, they'll tell you one thing.
23:19
SPEAKER_01: Uh, certain regulators will tell you another.
23:21
SPEAKER_01: And this is the exact type of of like a point in fact as to why we we say, you know, look, like we we need to stay focused because these are still young markets and there's still a lot of opportunity to make the wrong move, right?
23:35
SPEAKER_01: And we want to be we want to be very prudent and conservative with our capital because cash is very hard to come by in our industry.
23:41
SPEAKER_03: And meanwhile, Hugo, I'd argue you're you tell me, but I would think you're capturing a second order effect where we're was it April of 24 when Germany opened to imports and flowers started flowing out of Canada and prices started to go up fairly meaningfully over the next year.
23:57
SPEAKER_03: So are you kind of harvesting, nice pun, Jesse, that second order effect in terms of the price increase by others exporting?
24:04
SPEAKER_01: Uh you know, look, absolutely the the sort of divergence of a flower out of Canada to international markets has had a positive effect on price.
24:13
SPEAKER_01: I don't, but I don't think it should be you know too overstated, right?
24:18
SPEAKER_01: It's uh again, it is um I think over time we've seen price compression, right?
24:24
SPEAKER_01: Like Australia used to be the hot market everyone talked about.
24:27
SPEAKER_01: You don't hear people talking about Australia anymore because prices have compressed significantly, right?
24:33
SPEAKER_01: And if you can't if you can't be competitive at a certain price domestically and you're chasing higher prices internationally, like that over the long term is going to be a losing game.
24:43
SPEAKER_01: So I I don't want to overstate the impact.
24:45
SPEAKER_01: Yeah, it had a stabilizing impact, but it's not like prices went up 50%, right?
24:51
SPEAKER_01: Or anything like that.
24:52
SPEAKER_01: It it was you know, they went up from a buck 10 to a buck 25, right?
24:57
SPEAKER_01: Something like that.
24:58
SPEAKER_01: So had a positive stabilizing impact, but you know, there is a risk of overstatement there because international prices have compressed and are compressed.
25:09
SPEAKER_03: Yeah, and if I could put on my investor hat for a second, when I think about the landscape for G A C P GMP export, I go back to the conversations, and I've said this in a lot of podcasts lately, but I think it's super important.
25:24
SPEAKER_03: Conversations with Deepak and An, congratulations on your new position at Village Farms.
25:29
SPEAKER_03: Previously was a consultant in the industry, and he gave shared this term, your right to win.
25:35
SPEAKER_03: And as you guys see more prosely releases coming out in the next six months or a year about DEA licenses, you're gonna steam about GACP, you're gonna steam about GMP.
25:45
SPEAKER_03: Don't think that that's like a magic wand and just because you've you successfully got these acronyms DEA, GACP, GMP, that all of a sudden that business is gonna go in and conquer these markets.
25:55
SPEAKER_03: You have to ask the fundamental question, which is what is your right to win going into these markets?
26:00
SPEAKER_03: Is it a cost advantage?
26:01
SPEAKER_03: Is it a quality advantage?
26:02
SPEAKER_03: Is it a unique product?
26:04
SPEAKER_03: Is it you're from a sexy region, you're from Humboldt County in California?
26:07
SPEAKER_03: There's a whole bunch of reasons you could have a right to win, but I think you that might resonate with you, Hugo, that it's not like these acronyms are a magic wand that create instant demand at higher prices for your products.
26:17
SPEAKER_03: You need those necessary acronyms, but you need to partner those with that right to win.
26:23
SPEAKER_01: Yeah, I think it just we're saying the same thing, right?
26:26
SPEAKER_01: Like you're not winning at home, right?
26:29
SPEAKER_01: If if you're you're like, hey, I can't, I can't win here, but no one's in this other market, so let me go there and what like what a great market.
26:38
SPEAKER_01: Like eventually the competition shows up.
26:40
SPEAKER_01: So I just keep going back to if you're not winning at home, and we're saying differently, what is the reason to believe you can win internationally over the long term?
26:49
SPEAKER_03: Yeah, let's dig into the winning at home, Hugo.
26:52
SPEAKER_03: Oxley is now the number two LP nationally, and back forward he is the number one cannabis brand in California.
27:00
SPEAKER_03: I don't want to ask, like uh, you know, Rugged.
27:02
SPEAKER_01: I wish he was number one in California.
27:04
SPEAKER_01: That would be that would be quite an achievement.
27:07
SPEAKER_01: Uh yeah, but yeah, California, what's the big size?
27:11
SPEAKER_01: But one day, sorry, but one day it's burning it it's burned into my brain.
27:15
SPEAKER_03: Like, oh, I think about as California.
27:17
SPEAKER_03: Okay, so you are the number one cannabis brand in Canada.
27:21
SPEAKER_03: And that's just super hard, man.
27:23
SPEAKER_03: Like, set aside like the you know scripted questions, scripted answers mindset, just like talking as two industry people, like what an accomplishment that is and what a journey that must have been.
27:34
SPEAKER_03: When you point to the drivers of that success, like what stands out, Hugo, in terms of the journey and like what it's taken to get there.
27:43
SPEAKER_01: Yeah, look, I think it's it's um it's people.
27:49
SPEAKER_01: Uh, I think like, you know, so just uh shout out to my my my team, but my entire organization, because you know, uh it it we we we're very focused.
28:00
SPEAKER_01: And I think you know, at a macro level, it is focused.
28:03
SPEAKER_01: We focus on three product formats dried flour, pre-rolls, and vapes.
28:08
SPEAKER_01: Those are the three fastest growing, most popular formats in Canada account for about 85 to 90 percent of total industry sales on any given month.
28:16
SPEAKER_01: And they're the formats that are growing, and everything else is shrinking.
28:20
SPEAKER_01: So I think because of that, because of that focus, we've gotten great at those three things, right?
28:26
SPEAKER_01: We've built our entire platform, structured our people around being great at those things.
28:31
SPEAKER_01: So everything from our assets to our brands to our innovation um is centered around a very narrow kind of group of products and consumers.
28:43
SPEAKER_01: And um so I think that really helps you focus in on your consumer and what's important to them and what's going to drive continued trial and uh adoption of your products and brands.
28:56
SPEAKER_01: Um and then I think what has to be coupled with that focus is just what are you focused on, right?
29:03
SPEAKER_01: Like how do you measure success?
29:05
SPEAKER_01: What do you celebrate?
29:07
SPEAKER_01: Um, and at Oxley, you know, we talk about market share and being number two or number one, but you know, those are outputs of what we're really focused on, which is how are we operating?
29:21
SPEAKER_01: You know, how profitable are we?
29:23
SPEAKER_01: How much cash flow are we generating?
29:25
SPEAKER_01: Because in order to continue growing or to continue innovating, you you need capital.
29:31
SPEAKER_01: Um, it's hard to get.
29:33
SPEAKER_01: And you know, we want to we want to fund it from our own cash flow.
29:36
SPEAKER_01: So having that sort of strong profitability mindset where you're very focused, where what you're measuring at a KPI level, what people are celebrating is efficiency and profitability.
29:46
SPEAKER_01: Um, I think gives you that flexibility to continue funding growth and allocating capital.
29:52
SPEAKER_03: And how is the category evolution in Canada, Hugo?
29:57
SPEAKER_03: Um, I was just talking about California.
30:00
SPEAKER_03: And the trend that we're seeing here is that what I'll call finished flour, which is what a guy like me likes.
30:05
SPEAKER_03: I like to grind up flour and vaporize it.
30:07
SPEAKER_03: I've got an old school volcano over there.
30:09
SPEAKER_03: That's my jam, but I'm a drinking part of the market.
30:12
SPEAKER_03: Like that guy who's buying flour, rolling his own joints, you know, vaporizing flour, smoking bomb rips, whatever it is, that's getting smaller and smaller over here, Hugo.
30:21
SPEAKER_03: Pre-rolls are getting bigger, but the big thing here, man, is vapes.
30:24
SPEAKER_03: Vapes, vapes, vapes.
30:26
SPEAKER_03: Vapes eclipse flour in California this year.
30:29
SPEAKER_03: And the youngest generation here, Hugo, I don't know if you've seen this stat, spends twice as much money on flour or on vapes as they do flour.
30:36
SPEAKER_03: So everything is telling you to use the Wayne Gretzky quote because you're Canadian, I'll be cliche.
30:40
SPEAKER_03: It's gate to where the pocket's going, not where it's been.
30:43
SPEAKER_03: It seems like flour over here is coming in.
30:45
SPEAKER_03: Pre-roll is doing pretty well because people are lazy and those are convenient.
30:49
SPEAKER_03: But man, vapes are driving, you know, driving the growth on in uh Canada or California.
30:53
SPEAKER_03: Sorry, man, I'm confused.
30:55
SPEAKER_01: Yeah, so interestingly, when we started as a company, we still had we knew we had just started building our cultivation facility.
31:02
SPEAKER_01: We knew a number of years off.
31:04
SPEAKER_01: Um, but we're reg experts.
31:06
SPEAKER_01: So we also had a very strong belief that the government, um, and this is now going back to like 2019-ish, 2018, 2019.
31:15
SPEAKER_01: We also had a strong belief that the government would legalize vapes in other sort of derivative product formats.
31:22
SPEAKER_01: So we actually our our strategy was to get to the starting line of that 2.0 market at vapes and and edibles and stuff with a compelling portfolio of properties that are or um products that would get us into the conversation, right?
31:38
SPEAKER_01: Like if we're waiting around for three years for our cultivation facility to get up and running, it's not going to be a lot to talk about with anyone.
31:46
SPEAKER_01: So uh we started in vapes.
31:48
SPEAKER_01: We we've been in vapes since day one, and we've been, you know, top one, two, three company in vapes ever since.
31:55
SPEAKER_01: And one of the things that drove our conviction into vapes was the US market data, right?
32:01
SPEAKER_01: We saw that when derivative product formats were introduced into like markets like Colorado, they they quickly kind of displaced close to 50% of the market.
32:08
SPEAKER_01: In Canada, that did not happen, right?
32:11
SPEAKER_01: And it didn't happen because of our marketing restrictions.
32:14
SPEAKER_01: So you're not allowed to market or advertise, so it's very difficult.
32:18
SPEAKER_01: Like these derivative product formats generally at the onset require a little bit more education and awareness, right?
32:25
SPEAKER_01: As opposed to like guys like me and you that we kind of know what flour is and that's what we want.
32:31
SPEAKER_01: Um, so in Canada, the vape adoption has been slower, right?
32:36
SPEAKER_01: Here, pre-rolls are the number one format, followed by flower and then vapes, but vapes are gaining traction, and I think in large part that's due to innovation.
32:46
SPEAKER_01: So vapes were a stagnant 14% share of market category for years.
32:51
SPEAKER_01: Uh, late 2024, early 25, Oxley released the all-in-one vape to the market, to the Canadian market.
32:59
SPEAKER_01: And that's been a game changer in terms of driving demand.
33:01
SPEAKER_01: Now vapes are about 19% share of total marketing growing.
33:06
SPEAKER_01: So we we also obviously look at uh the consumer evolution.
33:11
SPEAKER_01: And for us, look, like the the sort of transition of flour to pre-rolls, which is a higher price product per gram than dried flour, works great for us.
33:20
SPEAKER_01: We're the number one brand in pre-rolls, the number one pre selling pre-roll skew in market is a backpackers, is a back 40 backpacker product.
33:31
SPEAKER_01: And we're also innovation leaders um in pre-rolls, where you know, we again, you know, our strategic partnership with Imperial Brands uh has enabled us to really work with uh large-scale tobacco equipment manufacturers to develop what we think is the most advanced, highest throughput pre-roll capabilities in the industry, total industry, not just in Canada.
33:55
SPEAKER_01: Um, and I think that sort of deep product focus and the investments that we've made in those capabilities uh not only set us up well now, but also for the future.
34:06
SPEAKER_01: So we we really believe in the pre-roll category, really believe in the vape category.
34:10
SPEAKER_01: Vape is about a third of our business.
34:13
SPEAKER_01: Um so those trends, those trends you know are very favorable for Oxley.
34:18
SPEAKER_01: And yeah, we we see them happening here too.
34:20
SPEAKER_03: Do you do extraction uh in-house, Hugo, for that vape line?
34:23
SPEAKER_01: No.
34:24
SPEAKER_01: We used to do extraction in-house, um, but from a working capital perspective, it's not efficient.
34:32
SPEAKER_01: And um I would say when you look at the the sort of value chain in cannabis, uh, those sort of uh derived molecules probably what is what has been commoditized at the greatest rate.
34:46
SPEAKER_01: So uh, and then you couple in the fact that we control vast quantities of the input product for the that extraction, high potency trim, right?
34:55
SPEAKER_01: Because our trim is is very high potency because it's it's coming from our flour, not from sort of outdoor feedstock.
35:02
SPEAKER_01: Um, and we're able to get a much better financial return both both from like a margin and a working capital perspective by working with partners to source our our our sort of uh distillate and diamonds and things like that.
35:15
SPEAKER_03: So you're running you're running some of your own material through other extraction partners.
35:21
SPEAKER_01: Uh yes, right.
35:23
SPEAKER_01: Whether in a tolling arrangement, it's usually in a sort of tolling arrangement.
35:26
SPEAKER_01: Yeah, exactly.
35:26
SPEAKER_01: So we do we we do just buy open market as well.
35:29
SPEAKER_01: Like, I mean, at the end of the day, like if you're going down to distill it, this is molecular.
35:32
SPEAKER_01: Like yeah, there's no real like restraining benefit there.
35:36
SPEAKER_03: Yeah.
35:38
SPEAKER_03: So as I'm thinking about quotes today, I think about the late Troy Datcher from the parent company.
35:42
SPEAKER_03: And he had this saying, Hugo, I don't know if you've heard it before, where he said, through growing great flour, we get permission to do other things.
35:49
SPEAKER_03: And I just love that quote because as somebody that cares about the plant and consumes it myself, like the last thing I want is just, you know, a bunch of infused garbage products that are not even related to the original source and you know, trying to use a bunch of tricks to make the flower work for other things when the flower itself wasn't great.
36:06
SPEAKER_03: And I think about you guys and I think about that, you know, Leamington facility that you have.
36:10
SPEAKER_03: Can you talk about, you know, you said your pre-I I thought about the Detroit quote, Hugo, because your pre-rolls are doing so well.
36:15
SPEAKER_03: And I'm guessing if the flower of going into those pre-rolls wasn't awesome, you can't trick people with the packaging.
36:20
SPEAKER_03: I find over and over again, Hugo, stoners are smart.
36:22
SPEAKER_03: Like we figure it out.
36:23
SPEAKER_03: If it's not a good product, eventually, you know, it's gonna end up leaving the market.
36:27
SPEAKER_03: So can you talk a little bit about that Leamington facility, what makes it special, and kind of how that drives the success, not of just the flour, but some of the other products as well?
36:35
SPEAKER_01: Yeah, I I like I agree with that sort of overall framework, right?
36:39
SPEAKER_01: Like just um Yeah, you have to grow a high quality product, right?
36:44
SPEAKER_01: Unless you you know you can grow crappy tomatoes and make them in tomato sauce, I guess.
36:49
SPEAKER_01: Um so Auxley Leamington, I think, is is really two things.
36:54
SPEAKER_01: And first is exactly what you think it's scale, right?
36:57
SPEAKER_01: 1.1 million square feet of 38, 19 NFL football fields.
37:02
SPEAKER_01: Put it in sort of uh those terms.
37:05
SPEAKER_01: We're we produce about 100,000 kilograms of dried flour out of there and growing.
37:11
SPEAKER_01: We think we can increase that output significantly, you know, by at least 30% over the next three years within the existing footprint.
37:18
SPEAKER_01: We we're allocating some capital uh to projects that that will get us there.
37:23
SPEAKER_01: Will not only unlock that capacity, but also improve our efficiency and our overall quality.
37:29
SPEAKER_01: Um, everything the the difference with Oxley Leamington is every single thing in that facility, from the material we used on the floor all the way to the back of the house cooling, chilling, HVAC capabilities, has been purpose-built for Canvas.
37:45
SPEAKER_01: There's nothing retrofitted, there's nothing borrowed, everything over a three-year period has been thought out, tested, and then implemented in that facility.
37:53
SPEAKER_01: And so that gives us a great scale cost advantage.
37:58
SPEAKER_01: We're produced very economically.
38:00
SPEAKER_01: We think we're the lowest cost producer, but you know, look, I mean we people don't disclose their cost of cultivation.
38:05
SPEAKER_01: So let's say we're one of the lowest cost producers.
38:09
SPEAKER_01: But as I always you know say, if if your product's low quality, low cost doesn't matter, right?
38:14
SPEAKER_01: Outdoor cannabis is cheaper than green, you can grow it cheaper than greenhouse cannabis, but it doesn't resonate with the consumer.
38:22
SPEAKER_01: So if you don't have high quality, I mean it's it's not worth the squeeze.
38:27
SPEAKER_01: And I think that is where the facility truly shines, right?
38:31
SPEAKER_01: It is consistently producing high quality, and the truth is in the results.
38:35
SPEAKER_01: Don't take it from me, take it from the consumers.
38:38
SPEAKER_01: The number one product in Canada, total market, is the back 40 liquid imagination 28 gram bag, right?
38:47
SPEAKER_01: So raw agricultural product.
38:49
SPEAKER_01: Number two is the back 40 fire breath 28 gram bag.
38:54
SPEAKER_01: And then when you look across cultivars at the cultivar level, like across all pack sizes, irrespective of how many different SKUs are in the market, three of the top 10 selling cultivars by dollar sole is a back 40 cultivar that's coming out of Oxley Leamington right now.
39:12
SPEAKER_01: And our recently released Galactic Jack strain is going to be there very, very soon if it's not there already.
39:18
SPEAKER_01: Right?
39:18
SPEAKER_01: That is unrivaled.
39:20
SPEAKER_01: No one else can even come close to that.
39:23
SPEAKER_01: Right.
39:23
SPEAKER_01: And I think that demonstrates that it's not just cost, it's also the consistency and the quality that we get out of that food.
39:31
SPEAKER_03: I love the idea of that galactic jack.
39:33
SPEAKER_03: I assume you're talking some Jack Harrer type thing there.
39:36
SPEAKER_01: Yeah, it's a cross.
39:36
SPEAKER_01: It's a Jack Harrow cross.
39:37
SPEAKER_01: Yeah, I love it too.
39:38
SPEAKER_01: It's my it's my current favorite in the lineup.
39:41
SPEAKER_03: Yeah, that turp file, that bright terp file, turp that bright terpene profile on that jack is absolutely one of my favorites, which galactic jack sounds interesting.
39:50
SPEAKER_03: Morgan, I could keep going, man.
39:51
SPEAKER_03: But why don't I kick it over to you to dig into uh earnings margins and some of the balance sheet stuff.
39:55
SPEAKER_03: That's what you do best over there, Morgan.
39:57
SPEAKER_03: You're the analyst.
39:59
SPEAKER_02: Ah well, that was really interesting.
40:01
SPEAKER_02: I wouldn't you guys could have kept going.
40:03
SPEAKER_02: But uh well, I'm gonna start in a little bit of reverse order since I like to start with the balance sheet.
40:09
SPEAKER_02: And um, and I think this is uh very notable, um, Hugo, because what what you guys have been able to accomplish is definitely very um, you know, is incredible.
40:21
SPEAKER_02: Um, because basically you guys were at a point um where you were able to convert 123 million of debt with Imperial into, as you said, uh it was a 19.9% ownership?
40:33
SPEAKER_02: Yes.
40:34
SPEAKER_02: So how did you go through that process?
40:37
SPEAKER_02: Because I mean, obviously that was a an incredible improvement to the balance sheet.
40:42
SPEAKER_01: Yeah, so I think the Imperial debt, the the transaction was structured as debt, um, but you know, it's strategic.
40:51
SPEAKER_01: So I I don't think we ever were ever uh you know or Imperial never you know threatened to call her debt or anything like that.
40:59
SPEAKER_01: They were they actually extended it uh twice um to allow us to continue sort of working on the balance sheet.
41:08
SPEAKER_01: Um look, I I think we got there through financial discipline and focus, right?
41:13
SPEAKER_01: Again, it's it's about what you measure, what you celebrate, and we prioritize cash flow.
41:18
SPEAKER_01: Um, and then we use that cash to over a two-year period repay all of the sort of high interest debt that we had, sort of short-term high interest debt.
41:27
SPEAKER_01: We had um three facilities, each one was kind of like in that five to six million dollar range.
41:34
SPEAKER_01: So, first it was it was the capital allocation, it was a pretty easy decision, right?
41:37
SPEAKER_01: It's like, what do you need to operate the business, do your maintenance capex, and then every other dollar repay your your high interest debt.
41:44
SPEAKER_01: Um, I think that coupled with our increased stability in terms of where we were in market and and the efficiency of operations, I think that gave Imperial a lot of confidence then to say, hey, you know, we will uh convert our debt without um being afraid that you know the company goes insolvent or or something like that.
42:08
SPEAKER_01: So it was a three-year project.
42:11
SPEAKER_01: Um, but we were successful in the end, and that allowed us to clean up the cap table this year.
42:16
SPEAKER_01: And I I will say, like, you know, Imperial uh was great throughout the process.
42:21
SPEAKER_01: They delivered exactly what they they said they could deliver.
42:24
SPEAKER_01: Uh, you know, we had to do our part too.
42:26
SPEAKER_02: Yeah, yeah.
42:27
SPEAKER_02: Well, congrats, because um, it sounds like a great partner to have too.
42:32
SPEAKER_02: Um, I imagine there are plenty of folks down here quite envious of being able to accomplish that.
42:38
SPEAKER_02: Um, but I think it's a it's a good point about you know the capital discipline and focus.
42:45
SPEAKER_02: And um, because today, you know, obviously correct me if I'm wrong with any numbers, but today you're around, or as of last uh print, uh 39 million of cash and 45 million of debt.
42:57
SPEAKER_02: And so I mean that's a that's a very good balance sheet at this point.
43:02
SPEAKER_02: Um so thank you.
43:05
SPEAKER_02: Yeah.
43:06
SPEAKER_02: Well, it's it's I'm sure that was uh an incredible experience.
43:11
SPEAKER_02: You probably could write a book about it, uh going through all that.
43:14
SPEAKER_02: But um, you know, now that you're you're in this position, as you mentioned, like you're already whacked away at some of the higher interest rate.
43:21
SPEAKER_02: Um, you've got this nice um business that's generating cash.
43:26
SPEAKER_02: Um for example, uh in the second quarter, you had 45.8 million uh revenue up 18% with 55% gross margin, um, which is also a very strong margin profile.
43:42
SPEAKER_02: Um, I'm not a big fan of adjusted EBITDA, but you had nice operating cash flow, as you mentioned, or as as it was a 13.4, and that's um before working capital, but still very healthy working or um operating margin.
43:56
SPEAKER_02: Um so it just leaves yourself a lot of optionalities you're mentioning about for From a capital allocation perspective.
44:02
SPEAKER_02: Where I guess do you see most of your opportunities?
44:05
SPEAKER_02: Is it reinvesting in the business?
44:06
SPEAKER_02: Is there are are there things you're still trying to accomplish from the um balance sheet perspective?
44:11
SPEAKER_02: I mean, you know, pretty low leverage at this point.
44:14
SPEAKER_02: So, you know, where how do you kind of weigh your allocation decision making at this point?
44:19
SPEAKER_01: Yeah, I think look, we operate on a capital allocation framework that's return focused, right?
44:25
SPEAKER_01: So it really is taking an internal view on our intrinsic value and then using that to drive decisions on where we allocate capital.
44:34
SPEAKER_01: I think um we believe currently allocating capital to organic growth is our highest return dollar for stakeholders.
44:42
SPEAKER_01: So that's the capital program of 30 million over three years at Oxley Leamington.
44:47
SPEAKER_01: That's continued investments in distribution, et cetera.
44:50
SPEAKER_01: Uh, we also think that repurchasing our shares at current prices is a very attractive return.
44:55
SPEAKER_01: And again, that's that's based on our internal view on valuation.
44:59
SPEAKER_01: We have a standing normal course issuer bid program that we are very active under.
45:04
SPEAKER_01: Um and while we can you know generate returns above our thresholds, that's a great place to put capital.
45:10
SPEAKER_01: Um, we're also, as I as I mentioned, happy to consider inorganic options, right?
45:15
SPEAKER_01: But we want to be able to fund those from cash without without dilution.
45:20
SPEAKER_01: And then also happy to continue strengthening the balance sheet, right?
45:23
SPEAKER_01: Like I think um uh you know we we've continued to do that.
45:28
SPEAKER_01: We it is always up for discussion.
45:30
SPEAKER_01: So lots of places where we can put capital.
45:32
SPEAKER_01: And if we're unhappy with uh, or if you know we we think we're not going to generate as good a return or the the margin of safety isn't appropriate, then we'll continue to to um improve our balance sheet so that we are in a position to be able to transact on opportunities that we find compelling.
45:49
SPEAKER_01: Because again, part of our thesis is they will arise over the next couple of years.
45:53
SPEAKER_02: Yeah.
45:53
SPEAKER_02: What do you how do you think about your kind of that hurdle rate?
45:56
SPEAKER_02: Is that is that like your cost of capital hurdle rate?
45:59
SPEAKER_02: Is it uh your growth rate?
46:00
SPEAKER_02: Like how do you kind of think about that?
46:03
SPEAKER_01: Yeah, we generally use uh the cost of our capital, right?
46:07
SPEAKER_01: So there has to be, you know, has to beat the cost of capital with a like a margin of error, margin of safety.
46:13
SPEAKER_01: Um, and we have a high cost, you know, like I think everybody in the industry has a high cost of capital.
46:18
SPEAKER_01: It's getting better, right?
46:19
SPEAKER_01: Uh in Canada, Schedule One banks are starting to take more constructive views on providing debt, you know, conventional debt to the industry.
46:28
SPEAKER_01: There's still a fairly narrow focus on the collateral base, but improving.
46:33
SPEAKER_01: You're starting to see some institutions take a more constructive view of sort of like cash flow lending, like can you service the debt as opposed to like how much is is your asset worth if I have to sell it for scrap?
46:45
SPEAKER_01: Um, so I think again, that that's also improving.
46:48
SPEAKER_01: But yeah, we look at our cost of capital and then you know how much of a margin of error do we want above that?
46:52
SPEAKER_01: And we we set a threshold that we we align on internally and with our board.
46:58
SPEAKER_02: Do you speaking of that with cost of capital?
47:01
SPEAKER_02: Um you know, in the US, it can be, I think the the lowest costs, I think are what, eight, nine percent, and then anywhere as we go from there, 20s, 30s, 40s.
47:13
SPEAKER_02: I mean, especially if you're talking factoring.
47:14
SPEAKER_02: Where's the cost of capital kind of landing uh in Canada?
47:19
SPEAKER_01: Yeah, I think you have banks that are sell that are lending now kind of in that six to seven percent, right?
47:24
SPEAKER_01: And then I would say kind of institutional private credit is probably like SOFR plus like five to five fifty basis points.
47:32
SPEAKER_01: And then you have you know the sort of specialty and sub debt kind of uh community where like like you said, it can go as high as they uh as high as they can sell it for, right?
47:42
SPEAKER_01: So um, and and look, it's about finding the right balance uh to match to to the risk that the lender's taking.
47:51
SPEAKER_01: But I think for companies like Oxley, where we've shown that you know we can operate profitably over a long period of time, right?
47:57
SPEAKER_01: We we're even a positive for 12 consecutive quarters, and we've been tax flow and net income positive over the you know nine consecutive quarters, um, you're starting to see you know changing views into you know uh how good a credit uh we we can provide to a lender.
48:15
SPEAKER_01: So I think encouraging from that perspective as well, right?
48:18
SPEAKER_01: Like we are starting to see cost of capital come down and capital availability become um more available in for the right producers.
48:28
SPEAKER_02: I'm envious hearing all this.
48:32
SPEAKER_02: Because we availability of capital is basically almost non-existence for so long in the US.
48:38
SPEAKER_02: And I know kudos to Jesse because they just went through and were successful in securing capital at a time where you know it's just not the pipes are frozen and they've been frozen for a long time.
48:49
SPEAKER_02: And obviously that impacts consolidation to your point.
48:52
SPEAKER_02: As you were mentioning, Hugo, like a lot of companies just end up in receivership, and that's kind of the the clearing.
48:58
SPEAKER_02: There's not much you know, healthy company-company kind of acquisitions yet.
49:05
SPEAKER_02: There's been a little bit of an improvement.
49:06
SPEAKER_02: Obviously, Virio has been very active, but outside of them, it's been very small and you know, more like tuck-in kind of things, um, because of companies of such size do have the means to do it, but um, you know, capital is still not available and tight.
49:22
SPEAKER_02: And you know, it'll be interesting to see with to your point, like some of these credits are based off a sofa plus spread, and you know, now rates are going higher.
49:30
SPEAKER_02: And so, you know, how does that impact everything?
49:33
SPEAKER_02: And um so we'll just have to see from from that.
49:37
SPEAKER_02: But um, Jesse, why don't I hand it back to you on uh the stock and what comes next?
49:44
SPEAKER_03: Yeah, perfect.
49:44
SPEAKER_03: We were talking backstage here.
49:46
SPEAKER_03: You mentioned that you've been um out talking to investors.
49:48
SPEAKER_03: I forget the name of the conference, the microcap something something conference you were at a week or two ago.
49:53
SPEAKER_03: And um just curious how those conversations are going.
49:56
SPEAKER_03: Like, you know, Morgan and I, you know, Morgan's saying he's a little bit envious um of the markets, but I also think you guys have a pretty clean story, you know, haven't done the deep, deep dive on it, but on the headline numbers, it looks like a pretty solid story when you're talking down with folks.
50:08
SPEAKER_03: Like, what's been the what's been the response lately?
50:11
SPEAKER_01: Yeah, look, I think um we while we focused on turning the business around, you know, we we didn't do a lot of like external outreach because we're focused on the business.
50:24
SPEAKER_01: And I think once we got comfortable with the stability profile, really after we accomplished the recapitalization last year, um, I think that was again getting better.
50:36
SPEAKER_01: Now we have a solid business, solid story to go and tell investors about.
50:40
SPEAKER_01: And I think it's been very, very well received, right?
50:42
SPEAKER_01: And I think evidence of that is we we did a recent share consolidation.
50:47
SPEAKER_01: Like we we had a very large flow trading at sort of penny stock um levels.
50:53
SPEAKER_01: And of course, that presents various challenges in terms of improving your kind of like market posture and who are the shareholders are going to attract and you know what risks does your stock become susceptible to.
51:05
SPEAKER_01: Um, we resisted doing a consolidation for a while, even though you know it was always the number one thing we would hear from investors in terms of like barrier to investment.
51:17
SPEAKER_01: But there had been you know 20 plus consolidations done in the Canadian cannabis industry prior to us doing it.
51:23
SPEAKER_01: And the outcome was universally um negative in terms of what happened to your stock.
51:31
SPEAKER_01: Like on average, some people obviously you know did much worse, but on average you lost 10% relative to market, irrespective of whether market was going up or down.
51:40
SPEAKER_01: Um, we, you know, so we planned our consolidation out for a full year.
51:46
SPEAKER_01: Um and thankfully, like in you know, cornerstone of delivering great results.
51:51
SPEAKER_01: I think we were the first consolidation in Canadian cannabis.
51:54
SPEAKER_01: Uh, you know, we did a 14 to 1 consolidation.
51:57
SPEAKER_01: I think our price on consolidation was 252, and it's never gone below that, right?
52:02
SPEAKER_01: It's done very well um in the post-consolidation uh era.
52:06
SPEAKER_01: So I think all of the reasons in terms of improving our market quality that underlied our decision to consolidate the shares, I think those it has improved our market quality, you know, better trading, more orderly trading.
52:20
SPEAKER_01: Um, and I think also demonstrates the support of the shareholders that uh in our stock to irrespective of the consolidation to support a fin market.
52:31
SPEAKER_01: And you know, we we've done very well.
52:33
SPEAKER_01: And you know, our intention is to repay that faith by continuing to deliver very strong results and strong year-over-year growth.
52:41
SPEAKER_03: And what's the tough toughest feedback you get, Hugo?
52:44
SPEAKER_03: And I mean that the context, if if you do a hundred investor meetings about your company, you'll hear objections.
52:49
SPEAKER_03: We'd be like, okay, well, they don't get this, okay, they don't get that.
52:53
SPEAKER_03: And there's sometimes a fundamental misunderstanding of cannabis, or they haven't done enough work on the company.
52:58
SPEAKER_03: And so you feel like, oh, that's more on you than it's on me, or maybe I can explain it better, but that person just doesn't get it.
53:04
SPEAKER_03: On the other side, every story has a touch of hair on it, or every story has, in my opinion, a bit of a valid objection, or it's not an objection, just a little bit more of a concern.
53:12
SPEAKER_03: Tell me a little bit more about that part over there.
53:15
SPEAKER_03: Like, okay, not perfect.
53:16
SPEAKER_03: We're working on it.
53:17
SPEAKER_03: Do do do do do.
53:19
SPEAKER_03: When you look at the story for Oxley, is there anything that resonates as a valid objection or a part of the business you're still trying to improve?
53:26
SPEAKER_01: Well, like I I think like our culture is that you can never be satisfied with where you're at, right?
53:32
SPEAKER_01: Because you you have to constantly be looking to improve, right?
53:38
SPEAKER_01: We have all sorts of great acronyms that we use, like town halls and things like that.
53:42
SPEAKER_01: But it's this concept of look, like this is still early days, right?
53:46
SPEAKER_01: Yeah, there's some some there's been challenges, there's been ebbs and flows.
53:50
SPEAKER_01: But when you think about this as a consumer product and where we are, even at a domestic and certainly at a global stage, these are early days.
53:59
SPEAKER_01: So, you know, it's this, it's not letting yourself believe that you've arrived, that you've won, you've accomplished you, you know, you you have to, especially when you're doing well.
54:10
SPEAKER_01: Uh, you know, the the the Japanese have a proverb, you know, in the midst of the battle, tighten your tighten your helmet strap.
54:16
SPEAKER_01: Right?
54:17
SPEAKER_01: It's just when you think you've won, that's when people come for you and they come hard.
54:21
SPEAKER_01: So it's maintaining that sort of edge.
54:23
SPEAKER_01: But I think uh with some investors, because we've had such a good run in our in our share price, right?
54:31
SPEAKER_01: Sometimes it's about uh, you know, being what is the long-term growth trajectory of the business?
54:38
SPEAKER_01: And you know, I think we have a very attractive long-term growth profile, right?
54:41
SPEAKER_01: Like as I've stated, I think we grow much better um than market in domestically.
54:49
SPEAKER_01: And I think all of the things that make us competitive in Canada and then and our imperial relations grants relationship uh give us a great long-term market uh to grow to grow into.
55:01
SPEAKER_01: So I don't think uh I think you know we are starting to people are starting to recognize the stability and durability of our business and the results.
55:11
SPEAKER_01: But of course, look like you know, cannabis investors have had a half decade of being in a really, really tough spot, right?
55:21
SPEAKER_01: And that's in Canada, it's in US all over the world.
55:23
SPEAKER_01: So they're shell-shocked.
55:25
SPEAKER_01: So yeah, you know, I think it's just we have to get half a decade.
55:30
SPEAKER_01: I know it feels longer, but you know, I our team always talks about like you know, it's only been yeah, it's been three years that we've been profitably operating, but there was there was you know years before that that we weren't.
55:44
SPEAKER_01: So it's about continuing to put distance uh between those bad results and what consumers or what our investors now expect.
55:52
SPEAKER_01: I think our investors now expect us to deliver strong growth and profitable results, and we can't let them down.
55:59
SPEAKER_01: We have to keep doing that.
56:00
SPEAKER_01: Um, there's often people talk about like why are cannabis multiples not the same as tobacco multiples or alcohol multiples.
56:08
SPEAKER_01: I feel that, and I think we should I think we should get a premium to those multiples because we're in a growing industry and they're in a declining category.
56:16
SPEAKER_01: Um, but they've got a hundred years of like profitable, you know, growth and delivery.
56:23
SPEAKER_01: So they've earned those multiples.
56:25
SPEAKER_01: And I think we have to be patient and be focused um and just keep growing the business and and and those returns will come.
56:33
SPEAKER_03: And you mentioned um Imperial brands again as being a valuable asset.
56:38
SPEAKER_03: Can you explain a little bit more about how you think moving forward they strategically fit in and benefit the business?
56:45
SPEAKER_01: Yeah, so I think for sure.
56:47
SPEAKER_01: So I think Imperial, you know, first of all, they're they're breadth of operations, right?
56:51
SPEAKER_01: They they they are already in all of these countries and their level of you know connectivity, visibility, whether at a regulatory or operational level, what far exceeds anything in this company uh in the world.
57:08
SPEAKER_01: I think they also have great technical know-how, whether that is in you know logistics, whether that is in root to market, just boots on the ground, salespeople.
57:21
SPEAKER_01: Um, you know, one of the Oxy, I think we we do a great job in root to market in in Canada and distribution.
57:28
SPEAKER_01: I think we do a great job working with our key account partners to to you know not only advocate for the strength of Oxley products, but also how those products can drive greater value to our retail partners.
57:43
SPEAKER_01: And I think that that is something that you know for sure we've talked to Imperial about.
57:49
SPEAKER_01: Um, they've always been willing to help us and guide us whenever we've asked for help.
57:53
SPEAKER_01: And then, you know, so for now, it gives us great perspective, it gives us good visibility, you know, it gives us uh experience that we can lean on.
58:01
SPEAKER_01: And I think in the future it gives us facets and capabilities that we can lean on in those markets.
58:07
SPEAKER_03: Yeah, and I'd like that you've been eating your own eating your own cooking too.
58:11
SPEAKER_03: It's a closing bell over there on Morgan's side.
58:12
SPEAKER_03: Ding ding ding.
58:13
SPEAKER_03: I tried to mute it.
58:15
SPEAKER_03: I like it.
58:16
SPEAKER_03: Um you've been eating your own cooking.
58:17
SPEAKER_03: You know, one thing I think all of us as investors like to see our alignment of interests get in the game on a personal level, and you're going further at the company level.
58:25
SPEAKER_03: Can you talk a little bit about the inspiration for the stock buyback and how that execution has gone so far?
58:31
SPEAKER_01: Yeah, look, I think the inspiration for the stock buyback is just we're generating cash, right?
58:37
SPEAKER_01: And so we have allocation decisions and where can we get the best return?
58:41
SPEAKER_01: So our view, you know, obviously as the share price goes up, the view on return and kind of where it ranks relative to other capital allocation options is something you have to monitor.
58:51
SPEAKER_01: Um, but our belief is that you know we're undervalued in relative to to peers and relative, most importantly, relative to our internal view on our intrinsic value.
59:02
SPEAKER_01: So if we can get a great return by allocating some of our cash there, we absolutely will.
59:07
SPEAKER_01: I think this year it also served uh an additional purpose of maybe taking some warrant shares that were like we knew there was a big, a big um tranche of warrant shares that were maturing in June, uh held by financial players, right?
59:22
SPEAKER_01: Like not long-term holds.
59:23
SPEAKER_01: So the NCIB gave us the mechanism through which we were able to repurchase those shares um and sort of get that overhang out of market.
59:33
SPEAKER_01: And I think that has been an important driver, right?
59:36
SPEAKER_01: We would see it in our we examined our trading patterns over a long period of time.
59:42
SPEAKER_01: And you know, you would see positive momentum, increases in liquidity.
59:47
SPEAKER_01: Um you know, you would see sales selling activity pick up, right?
59:52
SPEAKER_01: Because these are, you know, liquidity was not liquidity is muted, and then you have a large sponsorship share to get through if you're a financial player.
1:00:01
SPEAKER_01: So even though exercising discipline of just kind of not trying to hurt the price, you never get the momentum of your good results.
1:00:09
SPEAKER_01: So taking, I think, that overhang out of market was very helpful.
1:00:12
SPEAKER_01: But that wasn't the primary purpose.
1:00:14
SPEAKER_01: Like we wouldn't have done it if obviously you know we were trading above intrinsic value.
1:00:18
SPEAKER_01: Um, but I think it again, it's just a capital allocation decision.
1:00:22
SPEAKER_01: And for the time being, we think that's a great place to allocate capital.
1:00:26
SPEAKER_01: We're buyers.
1:00:28
SPEAKER_03: And any thoughts, Hugo, on stuff going uh on in the States, you know, in the world over here, obviously rescheduling is super topical.
1:00:37
SPEAKER_03: You know, we have medical done.
1:00:38
SPEAKER_03: We're heading towards adult use, hopefully.
1:00:41
SPEAKER_03: You have this DEA export channel is super interesting to certain companies, you know, thoughts of interstate commerce.
1:00:47
SPEAKER_03: When could that happen?
1:00:48
SPEAKER_03: Maybe we get involved in the export business here in the U.S.
1:00:51
SPEAKER_03: as well.
1:00:52
SPEAKER_03: So there's a lot of interesting regulatory shifts potentially going on here.
1:00:55
SPEAKER_03: Any thoughts with Oxley about getting into the US, or do you give that much mind share at this point?
1:01:01
SPEAKER_01: Yeah, look, I think we do follow what's going on in the U.S.
1:01:04
SPEAKER_01: carefully, right?
1:01:06
SPEAKER_01: It is uh it is Imperial's number one market globally.
1:01:10
SPEAKER_01: And um so we we do follow it, follow from a regulatory perspective.
1:01:14
SPEAKER_01: You know, I'm interested in those things just as uh I like to leak out on on regulations, but uh I think overall, look, good news for the sector is good news for Auxley, right?
1:01:25
SPEAKER_01: Capital coming back into the sector, I think, will eventually um you know look at all options and we'll we'll see the strength of our operating platform and you know what what we've built.
1:01:36
SPEAKER_01: So I think that that's good news for us.
1:01:39
SPEAKER_01: Um I don't think you know rescheduling has an immediate impact on the Canadian market or even Oxley, you know, for for that for that fact.
1:01:48
SPEAKER_01: But in terms of is it an interesting market?
1:01:50
SPEAKER_01: Absolutely.
1:01:51
SPEAKER_01: But you know, we're we're very also aware of how that there are incumbents in the market that are very, very strong, that it is a much larger market that requires a lot of capital to really operate in.
1:02:04
SPEAKER_01: So it's very interesting.
1:02:05
SPEAKER_01: We'll all obviously monitor the situation and um you know stay in close touch with with Imperial on its evolution.
1:02:12
SPEAKER_01: But I I think it's great what's happening in the US.
1:02:14
SPEAKER_01: You know, I hope that the adult use cannabis follows uh medical cannabis rescheduling, um, and that uh yeah, you have a more more sort of like open open market.
1:02:28
SPEAKER_01: Yeah.
1:02:32
SPEAKER_03: And if it's October 28th, it's October 1st, 2026 today.
1:02:36
SPEAKER_03: If it's October 1st, 2028 in two years, because that's how the calendar works, Hugo.
1:02:40
SPEAKER_03: If we're looking back, we have you back on the show.
1:02:42
SPEAKER_03: Welcome back.
1:02:43
SPEAKER_03: You know, last time you're on, hopefully you come on before two years, but we're looking two years back.
1:02:47
SPEAKER_03: What should we be looking at in terms of milestones, key numbers?
1:02:51
SPEAKER_03: Like what are the key metrics?
1:02:52
SPEAKER_03: Hugo, if you're an investor, you take a position in Oxley today, how should we monitor that position?
1:02:57
SPEAKER_03: What are the key metrics and numbers you'd you'd encourage an investor to keep an eye on?
1:03:01
SPEAKER_01: Yeah, well, look, I'll reiterate what I've what I've you know guided, um, what we've guided the market on.
1:03:07
SPEAKER_01: So I think, did we grow at a greater rate than overall market?
1:03:12
SPEAKER_01: Right?
1:03:12
SPEAKER_01: Did we grow at that greater than 5% rate?
1:03:14
SPEAKER_01: We told the investors that we operate in a margin envelope of 50 to 55 percent, right?
1:03:20
SPEAKER_01: And that we want our sort of EBITDA margin to be in that sort of close to 30% range.
1:03:25
SPEAKER_01: Um, so I think those are key metrics.
1:03:28
SPEAKER_01: And then most important, the KPI we're most focused on at the executive level and you know at the board level is what's your rate of conversion?
1:03:36
SPEAKER_01: Are you are you you know, is that EBITDA converting to cash?
1:03:39
SPEAKER_01: Because it if it's not, it's not as meaningful to us.
1:03:42
SPEAKER_01: So cash, were we able to generate um significant cash flows from our EVITA, which continue to grow um at an efficient rate?
1:03:54
SPEAKER_03: Well, this has been great, Hugo.
1:03:56
SPEAKER_03: Uh really appreciate all the conversation.
1:03:58
SPEAKER_03: We've talked a ton about Canada today, but as you guys can always tell by the mistakes I make, California is always on my mind.
1:04:05
SPEAKER_03: And next week I'll be at the Ignited Market Spotlight.
1:04:08
SPEAKER_03: That's going to be in LA.
1:04:10
SPEAKER_03: And we're we had our panel prep this morning, guys.
1:04:12
SPEAKER_03: And one takeaway that I took from it is that retail in California dispensaries continues to be really challenging, and they're fighting for every point of margin that they can get.
1:04:22
SPEAKER_03: That means your tech matters, your system matters, and running tighter retail operations matters.
1:04:28
SPEAKER_03: That's exactly where FlowHub can help, guys.
1:04:30
SPEAKER_03: Give your team a better tech stack, run your stores more efficiently, and as Morgan talked about earlier, protect those margins.
1:04:37
SPEAKER_03: Go to FlowHub.com and book that demo today.
1:04:41
SPEAKER_03: Thank you to FlowHub for continuing to support higher exchanges.
1:04:45
SPEAKER_03: That's it, guys.
1:04:46
SPEAKER_03: Morgan and Hugo, thanks for the time today.
1:04:48
SPEAKER_03: Great show.
1:04:49
SPEAKER_01: Thank you very much for having me on.
1:04:50
SPEAKER_01: Really appreciate it, guys, and all the best.
1:04:53
SPEAKER_03: Listeners, thank you for your loyalty.
1:04:55
SPEAKER_03: If you have not, do us a favor, hit like and subscribe on our YouTube channel.
1:05:00
SPEAKER_03: That really helps us out.
1:05:01
SPEAKER_03: YouTube has been a big growth engine.
1:05:02
SPEAKER_03: We appreciate the support.
1:05:04
SPEAKER_03: But subscriptions and hitting that like button does more than you can imagine to get the show out there to a broader audience.
1:05:10
SPEAKER_03: That's it.
1:05:11
SPEAKER_03: Have a great day, guys, and we'll see you back here in a couple of weeks.
1:05:15
SPEAKER_03: The views expresses podcasts are provided for informational purposes only.
1:05:19
SPEAKER_03: Nothing we said should be considered research nor recommendation.
1:05:22
SPEAKER_03: All investing involves risk, including the loss of principle.