Earnings Call Transcript - INCR Q1 2022

Adam Haliva, Communications Officer

Thank you, Josh. Good morning, everybody and welcome to InterCure’s first quarter 2022 results conference call and webcast. A copy of the company's earnings press release is available on the News & Events section of our website at www.intercure.co. With me on today's call are Alex Rabinovitch, InterCure’s Chief Executive Officer; and Amos Cohen, the company's Chief Financial Officer. Today, we'll review the highlights and financial results for the first quarter ended March 31, 2022, as well as more recent developments. Following these formal remarks, we will be prepared to answer your questions. Before we begin, please let me remind you that during this conference call InterCure’s management may make forward-looking statements made within the meaning of applicable security laws. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors contained in the company's filings with SEDAR and the Securities and Exchange Commission. Please also note, any forward-looking statements made here are as of today, and except to the extent required by law. The company assumes no obligation to update statements as circumstances change. Also, please note that all amounts expressed during this call are in Canadian dollars or new Israeli shekels, unless otherwise noted. Now, I will turn the call over to Alex Rabinovitch, InterCure’s CEO. Alex, go ahead please.

Alex Rabinovitch, CEO

Thank you, Adam. Good afternoon everyone and thank you for joining us for the first quarter 2022 earnings call. I’m proud to report a great start to 2022 with strong first quarter results demonstrated by total growth, continued positive cash flow from operations, positive adjusted EBITDA, and continued progress in scaling our operation across all segments. We continue to successfully execute what we have stated, providing the highest quality critical branded cannabis products, while delivering profitable growth. Our strong balance sheet, and our vertically integrated seed-to-sale platform position us as a leader in the industry and we are well set to execute on strategic opportunities in the current environment. The third quarter of 2022 was our ninth consecutive quarter of profitable growth with a total revenue of $34 million, almost 3x greater than the first quarter of 2021, representing a sequential growth of 9% and an annual run rate of $138 million. Our adjusted EBITDA in the first quarter was $8 million, representing more than 100% growth, and our first quarter EBITDA margin was 24%. This is our seventh consecutive quarter with positive cash flow from operations, and a ninth consecutive quarter of high profitable growth. In addition, we reached during the quarter record profits before tax of almost $8 million, representing 250% growth year-over-year. We ended the first quarter with $91 million cash in hand. These excellent results are mainly due to organic growth in our world-class medical cannabis dispensing operation fueled by solid demand for our high quality branded products, and supported by a dynamic international supply chain, which now consists of more than six cultivation sites around the globe. Before I turn over the call to Amos Cohen, we will discuss in-depth our financial results. I want to go over some of the highlights and milestones for the first quarter. During the quarter, we continued scaling up our operation across our platform, including our cultivation sites in Israel, which utilized our unique genetics and protocol, producing some of the highest quality and most demanded products in the space. Organic growth was supported by more than five successful product launches during the quarter, including the first-ever 100% pesticides-free new family of products. We continue to launch blended products, providing doctors and patients a product portfolio which meets the needs of different patient segments from the ultra-medical to the highest quality life medical products. Our international supply chain continues to scale in delivering high quality supply for our branded products, which are highly demanded in Israel and many other markets. However, we are still far away from making the strong demand for our branded products even in the Israeli management market, which is fueled ahead of all other markets and in this quarter we’re still in charge of our revenue. We are seeing demand for our branded pharmaceutical product portfolio coming from Germany, the UK, Australia and many other emerging markets. In fact, we could have shown much more if we had more supply. We are constantly continuing to scale up our supply chain, including Israel and beyond. During the quarter, we had an exclusive strategic partnership with Clever Leaves. Through this partnership, InterCure’s high GMP medical cannabis products will have additional supply access to several medical cannabis markets. The important partnership cleverly will cultivate InterCure high quality strength to launch EUGMP compliant branded product, within the EU, UK, South American markets, and our home base in Israel. Establishing extensive long-term strategic partnerships with world-class partners to support our International expansion plan, and our positive growth strategy without having to invest heavily in infrastructure. And during 2022, we will continue to scale our supply chain. We are very proud of the unique vertically integrated platform, which is now expected globally. As we stated, we are focused on duplicating our model into every territory which supports the regulatory framework. And in the first stage, we are focusing on four key territories: the UK, Germany, Australia, and Austria. We are making great progress on this front and I want to thank our teams in Europe. We are preparing to launch our first retail location in Vienna as part of our strategic partnership with Cookies. The upcoming launch of Cookies Vienna is an important step as we duplicate our seed-to-sale model into targeted markets which continue to develop. Throughout 2022, we expect to launch our first branded dispensing operation and pharmaceutical products in the UK, Australia, and Germany. We expect that our global expansion will have an accretive impact on our financials, especially during the back end of 2022. In our home market of Israel, we continue to solidify our undisputed leadership position. The Israeli market is the largest and most advanced pharmaceutical grade medical cannabis market in the world, representing an annual run rate of over 50 stores for its current products. During the quarter, the Israeli market added approximately 3,000 new patients, about 4% growth to over 112,000 patients. This is despite the loss of key physicians responsible for over 120,000 monthly subscriptions as the Minister of Health has changed the license to prescribe medical cannabis. This creates a temporary bottleneck as the eventual medical cannabis prescriptions remain solid with at least 3% to 5% of the population eligible for medical cannabis under the current guidelines. This is compared to 1.9% of the population currently. Israel is currently the largest importer of medical cannabis globally, and import regulations are evolving. We expect the new importation protocol known as the new 109 will add more barriers and complexity to the already complex import process. These new requirements will be implemented by the end of this month and may have an impact on the local markets. We are well prepared for these challenges as we invested heavily and scaled both in our depth and reach of our domestic supply chain as the largest cultivator in Israel. Furthermore, our teams are working diligently with top international pharmaceutical labs during these new requirements and I am confident that we are the first company to collect the previous 109, where we will be the first to meet the new 109 protocols. During the quarter, we added an additional three new pharmacies to our one-of-a-kind pharmacy chain dedicated to serve the medical cannabis patient community. This brings our chain to a total of 22 locations, 14 of which are actively dispensing medical cannabis during the first quarter. Excluding the temporary negative impact of eight pharmacies, which we are developing and in the process of receiving the first medical cannabis dispensing licenses, and one pharmacy activity which was temporarily halted, gross margin for the first quarter was higher than 42% and EBITDA margin was higher than 26%. During the second quarter, the halted pharmacy resumed to full cannabis dispensing activity in one of the eight pharmacies we see with the necessary medical cannabis dispensing license. We operate in a highly regulated space and we expect to receive the needed licenses for the remaining seven pharmacies before we do, and we expect that each additional pharmacy will have a positive effect on our financial operations. More cannabis reforms are underway in Israel. During December 2021, the Israeli Minister of Health announced that CBD products will be removed from the Dangerous Drugs Act. We expect the Israeli Minister of Health will follow and implement regulations which will include specific product registration required to sell. This process is expected to complete in 2022, and our team is prepared to be the first company to register CBD products in the country, including the highly anticipated new branded products. With the goal to lead this new market, we’ve entered a strategic partnership during the first quarter with Altman Health, the wellness market leader in Israel, with unmatched shelf space of OTC and nutrition supplements at over 1,700 pharmacies and points of sale across Israel. As the leader in this space, we also are leading the consolidation process. During the quarter, we announced that we have signed a definitive agreement to acquire 100% of current holdings known as Better, marking the first major consolidation in the pharmaceutical grade medical cannabis space. The production is expected to close in the third quarter of 2022, subject to customary closing conditions, as well as specific approval from the IMCA and other regulatory agencies. In the current environment, our strong balance sheet, fiscal discipline, and our clear strategy position us to take advantage of opportunities arising for further strategic acquisitions. Before I end my commentary, I will share with you that these are exciting times for InterCure, an International Cannabis market as many major countries outside North America are adopting favorable cannabis regulations and reform. More than 40 countries are in these stages of implementing the pharmaceutical grade medical cannabis regulation, which we believe over the coming years will establish us as a global standout. In parallel, Israel and Germany are advancing a reform for the opening of adult use cannabis. In Israel, part of the growth consumption has been decriminalized by the Minister of Justice on April 1, a major step toward moving the regulated recreational market. In Germany, we are all aware of the new government's and Minister of Health announcements to legalize adult use cannabis in the country. We believe this creates a ripple effect with many countries to follow. Year-to-date, we made great progress and we are all set to reach and maybe exceed our growth for 2022. As the leading profitable and total growing cannabis company outside North America, InterCure is focused on execution, taking a major role in shaping the exciting International Cannabis market. And with that, I will now turn the call over to Amos Cohen, CFO with InterCure for more details on our first quarter results.

Amos Cohen, CFO

Thank you, Alex, and good morning, everyone. I am very pleased to be sharing our financial results for the first quarter of 2022 with you today. Our focus continues to be execution, expansion, and scaling up our unique vertically integrated platform globally. We just reported another record quarter with revenue of $34 million or NIS 87 million, close to 3x greater than the first quarter of 2021 revenue of $13 million or NIS 33 million, and up by 9% sequentially compared to the fourth quarter of 2021. Revenue growth during the first quarter of 2022 reflects increased market share and growing patient demand for our branded products, same store sales growth, and the strength of our medical cannabis dispensing operation. Our gross margin for the quarter reached 41%, compared to 44% in 2021, as we do not capitalize any expenses of any pharmacy in the process of obtaining medical cannabis licenses which have a negative impact on our financials. Excluding the temporary negative impact of 9 pharmacies, which were active, but with no medical cannabis dispensing license, gross margin for the first quarter was higher than 23%. As I noted earlier, we expect all those pharmacies to begin medical cannabis operations during 2022, and to be accounted for in our financials. Our reported IFRS operating profit for the quarter reached a record of $8 million, representing 250% growth year-over-year. Turning now to adjusted EBITDA. We believe adjusted EBITDA of the cannabis sector, a non-IFRS measure, provides valuable insights into our operating performance. Adjusted EBITDA excludes from net income as reported, interest, tax, depreciation, amortization, non-cash expenses, share-based compensation, acquisition and transaction costs, fair value adjustments, and other income or expenses. For the first quarter of 2022, adjusted EBITDA was $8 million or NIS 21 million, which is 24% of revenue, more than double compared to the first quarter of 2021, which ended with $4 million or NIS 10 million. Excluding the impact of those 9 pharmacies, EBITDA margin for the quarter would be over 26%. We are proud of our seventh consecutive quarter with positive cash flow from operations, demonstrating the strength of our platform and our financial discipline. We finished the quarter with one of the strongest balance sheets in the space, with $90 million or NIS 231 million cash on hand. Looking forward, we expect revenue growth to continue in the second quarter and throughout 2022. With a proven track record of executing profitable growth, we are well-positioned to continue scaling up and building shareholder value as a leading cannabis company outside North America. This concludes our prepared remarks. We would like to thank everybody for joining us today for today's call and would now like to open the line for questions.

Unidentified Analyst, Analyst

Hi. Good afternoon. This is actually Victor on for Vivien Azer and thank you for taking the questions. So, you had mentioned in the past that the domestic medical supply in Israel is unable to keep up with the growing medical demand. Given the IMCA stance on prioritizing domestic cultivation over foreign imports, what do you think the impact will be on pricing and product availability in the near term?

Amos Cohen, CFO

I mean, the local market has been growing in the last three years rapidly and the local market expects quality to continue to improve. Part of the reason importation is playing a big part in the digital market is the fact that in the early days, the Israeli quality of, especially the right flower, was much lower than what they imported, but during the last three years, we are seeing some improvement. Basically, we believe that InterCure's ability right now and quality in our local cultivation are even higher than the quality that we are importing. Having said that, I mean, the market is still very dependent on imports. So, if the new regulation will slow down or even stop the importation to Israel, we expect prices to go up, especially in the highest quality products.

Unidentified Analyst, Analyst

Great. Thank you for the color. And as a quick follow, how do the new import regulations from the IMCA affect your collaboration with Clever Leaves in Israel along with the cultivation and wholesale strategy, if at all?

Amos Cohen, CFO

So, it's still hard to speculate what will be the impact because again, we are in the process of correcting those new regulations. We are putting a lot of effort. I can only look at a little bit at our past experience and performance. The last time we had like a similar new regulation in place, it took us a couple of months to correct them and we were the first company to actually resume importation. Basically, we are well prepared both with our local cultivation abilities and also with our team that are totally focused on adapting to those new regulations.

Matt Bottomley, Analyst

Good morning, everyone. Thanks for taking the questions. Just wanted to chat a little bit about the cash flow and potential uses or needs for capital going forward. There's been an acceleration here of a lot of initiatives you're doing and it seems like you're still on the whole operating at a fairly CapEx-like model. Given some of the initiatives in your partnerships to get into the UK and the store opening in Austria, as well as some of the more recent partnerships with Clever Leaves, etcetera. I'm just curious if you think that your free cash flow will be sustained as you continue to grow here, or do you think we're going to have to dip into uses of that cash flow in order to support some of these growth initiatives?

Alex Rabinovitch, CEO

Hi, Matt. Actually, it’s afternoon here. So, good morning to you. We are on the other side of the world, but yes, of course, regarding our cash flow – so looking forward, we expect positive cash flow from operations to continue, but we believe that we will invest in CapEx. That's part of our strategy and CapEx will translate into growth. We are not working in a virtual world. Retail dispensing points cost capital and also scaling up operations, but I would say, we are well prepared. We don’t see any different or big difference from our past experience where we scaled up our operations in the last two years. So, I think we can expect 2022 to align with what we've seen in the past starting in Q2. Of course, we want to use our cash position strategically in the current condition and current markets. We are seeing more opportunities for M&A and more strategic opportunities. And basically, we want to use the cash position to enhance our profitable growth.

Matt Bottomley, Analyst

Great. Appreciate that. And then just a second question for me, just because we heard a lot from a lot of the Canadian LPs talking about Germany, just your thoughts on, you know, outside of your prepared remarks, the potential for legalization. Is there investments that can be made upfront of that happening that you think are worthwhile to consider? Or is it just the medical opportunity is more than enough for the time being and everything on top of that is sort of too speculative?

Alex Rabinovitch, CEO

Okay. So, yes, I would say that we really believe that the markets not only Germany will eventually evolve into adult use. It's a process that has started with the decriminalization of adult consumption. So, right now, in Israel and Germany, consumption of adult use has been decriminalized. So eventually, this process will lead to regulation. For us, part of our strategy in pharmaceutical grade is building up brand equity for our product, and we saw that for some of our brands. So, we will utilize the current regulations in Germany and also in other markets to build up this brand equity and brand awareness, and of course the operation. And again, it's hard to speculate now how those regulations would look like: will it be in pharmacies or in dispensaries, but for us, it’s not a question of this, it is only a question of when. Thank you everybody for joining us and following our exciting journey. We’ll be really happy to see you again in the next call.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.