Earnings Call Transcript - INCR Q3 2021

Operator, Operator

Good day, everyone, and welcome to InterCure’s Third Quarter 2021 Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow management's remarks. This conference call is being recorded and a replay of today's call will be available on the Events & Presentations section of InterCure’s website and will remain posted there for the next 30 days. I'll now turn the call over to Mr. Phil Carlson of KCSA for introductions and the reading of the Safe Harbor statement. Please, go ahead, sir.

Phil Carlson, Conference Call Moderator

Good morning, everyone, and welcome to InterCure’s third quarter 2021 earnings results conference call. The 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 Mr. Alex Rabinovitch, InterCure’s Chief Executive Officer; and Mr. Amos Cohen, the company's Chief Financial Officer. Today, we'll review the highlights and financial results for the third quarter 2021, 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 Mr. Alex Rabinovitch, InterCure’s CEO. Alex, please go ahead.

Alex Rabinovitch, CEO

Thank you, Phil, and welcome everyone to InterCure’s third quarter 2021 earnings conference call. I'm delighted to be hosting our first earnings call as a NASDAQ listed company. This is an exciting time for all of the InterCure family, as we continue to execute our profitable growth strategy, establishing our leadership position, achieving new firsts and new records. This includes seven consecutive quarters of high-digit growth and improved profitability, five consecutive quarters with positive cash flow, crossing one-ton mark in GMP medical cannabis products dispensed monthly, over 70,000 patients served and achieving an annual revenue run rate of over CAD 100 million, increased gross profits and an adjusted EBITDA run rate of CAD 23 million. This is one of the strongest performances of any NASDAQ listed cannabis company. Before we dive into the highlights of the third quarter earnings and other recent developments, I would like to briefly introduce you to InterCure and how we became who we are, the leading profitable and fastest growing cannabis company outside North America. Today, Israel-based InterCure is a leading global cannabis company, with over 14 years of organic growth. They are one of the world's two cannabis pioneers. We are Israel's largest licensed cannabis company and we were one of the first to offer good manufacturing practices certified and pharmaceutical-grade medical cannabis products. For our participants from the United States who might not be familiar with these terms, I would like to explain a bit more. Besides the U.S. and Canada, all major countries are in different stages of implementing pharmaceutical standards and regulations of medical cannabis. These standards, which are also known as EUGMP or GMP, are much stricter towards the entire supply chain from genetics, cultivation to distribution and dispensing. For example, GMP medical cannabis is a physician prescribed pharmaceutical narcotic product dispensed only to authorized pharmacies by a licensed pharmacist. Although Israel is known as a world-leader in cannabis research, it's also a leader in developing and implementing a federally endorsed regime for pharmaceutical medical cannabis. Since the implementation of this regime, pharmaceutical medical cannabis is prescribed by a growing number of physicians and medical experts for more than 60 medical indications, for some of these pharmaceuticals, cannabis becomes a first line of treatment, setting a stage for a consistent three to four average monthly goal of patients. Medical cannabis is now the largest out-of-pocket Rx product sold in Israel with a run rate of over 40 tonnes dispensed annually. This medicalization process combined with growing public support is also setting a clear pathway for legalization of adult use. Israel is a few years ahead of all other international markets, representing the future of the international cannabis industry. These are exciting times, as GMP medical cannabis continues to expand globally in Europe, UK, South America, Africa and the Pacific. While policymakers are slowly implementing similar regulations, we strongly believe that as a proven leader, we are well positioned to capitalize on this global cannabis revolution, which began with GMP medical regulation and we believe it will be followed by legalization of adult-use. We have built a market leading international supply chain with a profitable, scalable and vertically integrated model to sell GMP standards operations and executed 14 years of organic profitable growth. We achieved much more than record profits during those 14 years. We have gone from approximately 10 employees when we first began cultivation to over 320 employees today, with more than 60 of them being specialized pharmacists. Additionally, we expanded cultivation from our original 2,000 square feet to over 355,000 square feet of advanced climate-controlled facilities with a maximum capacity of 2 million square feet. Those are one of the largest and most advanced in the space, producing a diverse product range from ultra-medical strains for treating children with severe autism to high THC premium cookie strains. We are constantly developing and launching new cultivars and ramping up production to meet the growing demand for our branded products. We increased our pharmaceutical-grade distribution operation, which now covers a significant percentage of the Israeli, UK, and German market. In parallel, we’re continuously expanding our unique pharmacy chain focused on dispensing medical cannabis, which now includes 20 pharmacies, 14 of which are licensed to dispense medical cannabis. Leveraging the company's integrated unique operating model dedicated to serve the growing medical cannabis patient community, the company’s branded pharmacies are among the top performers in the GMP regulation globally. Additionally, during the month of October, the company reached a record of 1 tonne of medical cannabis products dispensed in one month. This represents our leading position with approximately 30% market share of the Israeli medical cannabis market. Since 2018, we have increased our revenues from CAD 3 million to a run rate of over CAD 100 million, which is 33 times higher and keeps growing. A key part of our strategy is our strategic partnerships with some of the leading international pharma and cannabis companies, including S.L.E. of TEVA Pharmaceuticals, Novolog, Tilray, Organigram, Fotmer, Charlotte's Web and Cookies. These strategic and exclusive partnerships emphasize our commitment to being the best-in-class across all verticals. We are currently duplicating our winning model into new territories with evolving supportive regulations, and this includes Germany, the United Kingdom and also Australia. It's important to note that Israeli regulators have recently begun implementing a reform on the exportation of pharmaceutical grade cannabis, enabling us to export our products for the first time in bulk. This will have a tremendous positive effect on our international business, especially as the target markets continue to evolve and implement GMP medical cannabis programs. Behind all this success is InterCure’s management team and dedicated employees with significant proven experience, building leading international companies in highly regulated markets. Our Chairman, Mr. Ehud Barak, who served as Israel's 10th Prime Minister, is also a significant part of our success. With that said, I would like to now move to our third-quarter results. I'm very proud to share that InterCure reported revenue of CAD 25 million or ILS 62 million for the third quarter of 2021, three times greater than the third quarter of 2020 and up 36% sequentially. This also represents the company's seventh consecutive quarter of high-digit growth, and its fifth consecutive quarter with positive cash flow from operations. EBITDA for the third quarter of our cannabis sector was approximately CAD 6 million or ILS 14 million, an increase driven by revenue growth, improvements in gross profit, and operating profit. These are impressive results and analysts will speak more about our financials shortly. In addition to our strong financial results, I would now like to focus on some of the milestones we achieved throughout the quarter. On September 1, we were pleased to commence trading on NASDAQ, a significant milestone for our business and a testament to our success we have accomplished so far. In addition to the status of trading on one of the world's leading stock exchanges, this listing also provides us with important capital to fuel our future growth. This NASDAQ listing also expands our visibility and access to both US retail and institutional investors, sharing our execution and profitable growth journey, as federal legislation and regulations are evolving in the US and around the world. During the third quarter, we acquired Cannomed retail assets. This includes two medical cannabis dispensing pharmacies, with another pharmacy in the process of receiving its license, as well as adding another medical cannabis patient support center to our operation. This acquisition is part of our consolidation strategy of the Israeli medical cannabis market, which began with our previously announced acquisition of the Israeli licensed cannabis producer, Better. Since the integration process of these assets began, I'm happy to share that their revenues and profitability increased by more than 30%, representing the strength of our vertically integrated structure and our ability to execute. We were also the first company to meet the new importation requirements set by the Israeli Medical Cannabis Agency, also known as 109 regulations. Being able to meet the 109 requirements enabled us to resume importation from our strategic partner. Since then, we have successfully landed and released shipments from Tilray, Organigram and Fotmer Life Sciences. These impressive shipments support only part of our leading dispensing operation capacity and the growing demand for our branded products. We expect to continue leading importation to Israel, while meeting the evolving challenging regulatory requirements. We ramped up our cultivation and manufacturing in our southern facility to full capacity. Together with our northern facility, we are now the largest cultivator in Israel today to continue meeting the growing demand for our high-quality branded products. We've began the process of expanding our southern facility, including Phase B of our post-harvest. During the third quarter, we completed a number of successful new product launches. It is worth noting that these new high-quality and high THC products quickly became some of the most requested in the top-selling products, showcasing the strength of our brand positioning within the market. In addition to these milestones, during the month of September, I purchased over 420,000 shares of our stock in the open market, valued at over CAD 3.7 million. I did so because I believe that the company in Tokyo is undervalued, considering our leading position, financial performance, strong balance sheet, and proven ability to execute our strategy. Finally, post-period end InterCure received 5.2 million shares back from the sponsors of the SPAC transaction. According to the agreement, the shares were subjected to free forfeiture from the SPAC sponsor based upon share price target criteria. The return of the shares to the company without cost adds significant value of approximately CAD 56 million by current share price to all InterCure shareholders. We look forward to continuing our strong momentum in the remainder of the year and throughout 2022 as we remain focused on operational excellence and executing profitable growth. I will now hand it over to Amos to discuss our financial results in more detail, after which I will have some more closing remarks.

Amos Cohen, CFO

Thank you, Alex, and good morning everyone. I am very pleased to be sharing our financial results for the third quarter of 2021 with you today. Our focus is on sensitive production of GMP regulation, execution, expansion, and building our unique vertically integrated model centered on our quality branded products, while executing our profitable growth strategy. We just reported another record revenue quarter of CAD 25 million, an impressive growth close to three times greater than the third quarter of 2020 revenue of CAD 9 million and up by more than 36% sequentially compared to the second quarter of 2021. Revenue growth during the third quarter of 2021 reflects increased market share and growing consumer demand for our branded products, same-store sales growth, expansion and the strength of our medical cannabis dispensing operation. On an apples-to-apples basis, excluding the impact of consolidating the trading house operation acquired last quarter, our normalized gross margin for the quarter reached approximately 45% compared to 42.6% in the second quarter of 2021, representing a better product mix as we are implementing our vertically integrated model and sending more through our dispensing operation. With this, I have to note that on a fully-integrated model, our branded product generates a much higher gross margin and we still practically dominate 100% of the market. As our supply, including imports couldn't keep up with the growing demand for our branded products and the accelerated growth of our dispensing operation, we still add to supply third-party final products so there is still plenty of upside once we are fully integrated. This was our first fully-consolidated quarter of the trading house operation. We generated lower margin from third-party inventory as added in the acquisition and yet to be fully integrated into our model. Together with the impact of the trading house operation, our gross margin was 40% in the third quarter. Going forward, as the integration process continues, we expect the trading to serve our internal medical cannabis dispensing operations and contribute to our margin. 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 compensations, acquisition and transaction costs, fair value step-up of inventory, and other income or expenses. For the first quarter of 2021, adjusted EBITDA was CAD 5.7 million, which is 23% of revenue, an increase of 20% compared to CAD 4.7 million for the second quarter of 2021. We are proud of our fifth consecutive quarter with positive cash flow from operations generating CAD 3.9 million, demonstrating the strength of our financial discipline. We ended with a strong cash balance of CAD 85 million compared to CAD 81 million in the second quarter of 2021 and CAD 90 million in the third quarter of 2020. With the strength of our balance sheet and our solid performance, including cash flow generation, we are well-positioned to continue executing on our profitable growth strategy, leveraging the foundation and leadership we have built to capitalize on global expansion and consolidation opportunities. For further information on our financial and operating performance, I encourage you to review the company's financial statements and management discussion and analysis for the three and nine months ended on September 30, 2021, which are available under the company's profile on SEDAR and EDGAR. With that, I will now hand the call back to Alex for his closing remarks.

Alex Rabinovitch, CEO

Thanks, Amos. We've achieved so much, but our journey has just begun. As more and more major countries are implementing medical cannabis programs, we can clearly see the cannabis revolution expanding to every region on the globe. We will continue to grow our pharmaceutical-grade leadership globally, duplicating our winning model to every territory with evolving favorable regulations. Alongside the global expansion, we believe CBD regulations are just around the corner in our territories, and together with our strategic partner, Charlotte's Web, we intend to become the leading player in this arena. Looking to the future, legalization of adult-use cannabis is the next natural step following medical, representing another major growth engine for us. With the current political climate in territories such as Israel and Germany, it is not a question of if, but rather when. As all of us know, there is a growing consensus in the US surrounding federal legalization. The current administration has been consistent that medical comes first. We believe that upon federal legalization, the FDA will regulate medical cannabis in the US and in fact, the FDA is showing interest lately in the Israeli GMP model. With a proven record of operating under the most strict regulatory framework, we will be thrilled to see this scenario happen and pharmaceutical-grade cannabis will be available to American patients throughout pharmacies. Last but not least, we will continue to lead the consolidation process of the international cannabis market and shape the future of our industry. To conclude, as a company, we have executed solid profitable growth over the last 14 years. Through a clear strategy, financial discipline, execution, and hard work, we've achieved our leadership position from a small pioneer licensed producer to the leading profitable and fastest growing cannabis company outside North America. I would like to thank our shareholders for their support during this exciting time for InterCure, as well as our entire team for their efforts in achieving these outstanding results. We expect growth to continue in the fourth quarter and throughout 2022 as we will remain focused on executing our profitable growth strategy, building long and short-term shareholder value. This concludes our prepared remarks. We would like to thank everybody for joining us on today's call and would like now to open the line for questions. Operator, please open the line for questions.

Operator, Operator

Thank you. Our first question comes from Vivien Azer with Cowen and Company. Please proceed with your question.

Vivien Azer, Analyst

Hi, good morning, or good afternoon.

Alex Rabinovitch, CEO

Good morning, Vivien.

Vivien Azer, Analyst

Gross margin is continuing to improve significantly. You mentioned that in comparison to the normalized margin you reported this quarter, with full vertical integration, it would be substantially higher. Can you provide some specific numbers on that? Additionally, could you discuss the path to achieving that fully optimized gross margin? Thank you.

Alex Rabinovitch, CEO

Yes, hi Vivien. So, we cannot provide specific numbers as we are moving to the integration model, but we clearly see that once we are selling our products through our supply chain and eventually supplying to our dispensaries, we are seeing a much higher gross margin and this will naturally be above 50%.

Vivien Azer, Analyst

Okay. That's helpful. And then for my follow-up, you noted at the end of the prepared remarks that you have an outlet for continued strong top line growth that has certainly been evident in your results in 2021 to date. Do you have any incremental color that you could offer in terms of the cadence of your top line? Certainly, triple-digit growth comes tough to comp at some point. So how should we think about growth in percentage terms perhaps for either the upcoming quarter or for the next year? Thank you.

Alex Rabinovitch, CEO

Well, yes, I mean, we are definitely seeing a continuance of our momentum throughout the rest of this year and into 2022. Regarding the scale, I think, it's about how fast regulation will evolve, not only in Israel but also in territories like Europe, where we are extending this stage.

Vivien Azer, Analyst

Understood. Thank you very much.

Alex Rabinovitch, CEO

Thank you, Vivien.

Operator, Operator

Thank you. Our next question comes from the line of Shaan Mir with Canaccord Genuity. Please proceed with your question.

Shaan Mir, Analyst

Hi. Good afternoon. My first question, so I just wanted to touch on the acquisition of the trade house that was announced in the last quarter. I believe at the time the acquisition was expected to be accretive starting in Q3 of this year. So I was just hoping to get any sort of update on any innovation activities undertaken are currently in process as it relates to that transaction. And then maybe even a higher-level view of how this asset fits into your Israeli cannabis infrastructure and the capabilities that are enabled as a result?

Alex Rabinovitch, CEO

Okay, Shaan, so good morning. First of all, yes, we acquired one of the leading titles here in Israel with a clear focus to fully integrate the trade house into our model. We expect the acquisition to be accretive starting at 2022 as we inherited some of the inventory during the acquisition, and like in the third and fourth quarter, we will see some clearance of this inventory. Besides that, the main focus of operating the trading house is to serve our dispensary and walk it internally to be our purchasing arm, as well as all our pharmacies.

Shaan Mir, Analyst

Okay. Thank you. And then in your prepared remarks, you noted that the company is now at 20 retail pharmacies, 14 of which are licensed to dispense medical cannabis. I was wondering if you could help us understand what the processes or hurdles are ahead, if you were to enable those remaining locations for medical cannabis dispensing? And then potentially what a normalized timeline would look like in that sort of process?

Alex Rabinovitch, CEO

Good question. So the process really depends on the district. Israel is divided into six districts and every district has its own regulations. In some districts, we expect a very short process to license a regular pharmacy to sell cannabis. This could take a 6-month process with some of those pharmacies that we have already started. In other regions, the process can take a year or more, and this is again part of the reason there are only about 160 licensed pharmacies in Israel out of about 2,000.

Shaan Mir, Analyst

Thank you for the color. I'll pass it on.

Alex Rabinovitch, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Pablo Zuanic with Cantor Fitzgerald. Please go ahead with your question.

Matthew Baker, Analyst

Good morning. This is Matthew Baker on for Pablo. We have two questions. Could you provide your best estimate for the current size of the Israel market now in tonnes and dollars and what your estimated market share is?

Alex Rabinovitch, CEO

Hi, good morning. So, we estimate the current run rate of the Israeli market to be over 40 tonnes and growing. In terms of market size, the market is nearly CAD 300 million. This varies from month to month, with some months seeing better inventories and a little bit of higher volume. So about CAD 300 million as a market and growing. We do not provide a specific market share, but we noted that we reached a 1-tonne dispensing mark in one month, which should be around 30% market share.

Matthew Baker, Analyst

Alright. Thanks for that. Also, how much of the domestic demand is being met by imports and how much is by local production?

Alex Rabinovitch, CEO

Again, there are no clean numbers for that from the authorities. Importation is a fluctuating process. As you know, we had nearly seven months of no imports into Israel since the implementation of the 109 Regulation, and the market did grow. We assume that importation serves about 30% to 40% of the market once the gates are open.

Matthew Baker, Analyst

Okay. And if I could just ask one more follow-up. What do you think the realistic regulatory changes could be that might occur over the next 12 to 18 months in Israel?

Alex Rabinovitch, CEO

We expect a kind of a cannabis reform, as for the first time cannabis is part of the coalition agreement. Part of it will be reform in medical cannabis, where the process of obtaining a license should be streamlined, and we hope that regarding the manufacturing of pharmaceutical-grade cannabis regulations will evolve, adopting a similar framework to the EU-GMP. At the moment, Israel has much stricter regulations than EU-GMP. There is a process of equalizing the Israeli GMP to the EU-GMP. Additionally, there is a reform on the exportation of cannabis from Israel. This was already agreed upon and voted by the government, and we expect to start shipments under the new exportation regulations beginning this December.

Matthew Baker, Analyst

Thanks for the color and congratulations on the quarter.

Alex Rabinovitch, CEO

Thank you.

Amos Cohen, CFO

Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Rabinovitch for any final comments.

Alex Rabinovitch, CEO

Thank you all for your questions. In closing, we are extremely proud of our achievements over the past quarter and we look forward to continuing this momentum through the rest of the year and into 2022. Thank you.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.