Edited Transcript of SLNG.CD earnings conference call or presentation 27-Aug-20 2:00pm GMT – Yahoo Finance

Aug 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Slang Worldwide Inc earnings conference call or presentation Thursday, August 27, 2020 at 2:00:00pm GMT

SLANG Worldwide Inc. - Director

SLANG Worldwide Inc. - EVP of Finance

Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation

Ladies and gentlemen, thank you for standing by, and welcome to the SLANG Worldwide Q2 2020 Investor Call. (Operator Instructions) I would now like to hand the conference over to Mr. John Vincic. Please go ahead.

Thank you, operator, and good morning, everyone. Our speakers on today's call will be Chris Driessen, President and CEO of SLANG; and Mike Rutherford, Chief Financial Officer. Joining them for the Q&A session will be John Moynan, General Counsel and Chief Operating Officer; and Peter Miller, Executive Chairman.

Before we begin, I would like to remind listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of SLANG Worldwide and its subsidiary, entities or the industry in which it operates to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

When used in this conference call presentation, such statements use words such as may, will, expect, believe, plan and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this presentation.

These risk factors are discussed in detail under the heading Risks and Uncertainties in SLANG's management discussion and analysis dated August 26, 2020, and filed on SEDAR. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required under securities legislation.

And now I would like to turn the call over to Chris Driessen. Chris?

Christopher Lee Driessen, SLANG Worldwide Inc. - Director [3]

Thank you. Good morning, everyone, and thanks for taking time to join our Q2 2020 earnings call. It's only been about 7 weeks since we reported Q1 results. And at that time, we obviously had a good idea of how Q2 was shaking out. I'm pleased to report that the expectations we set were accurate but came with significant pain as we took a punch with the brunt of the COVID-19 crisis impacting us in April and May.

That said, we finished the quarter strong and started to emerge from the depths of the crisis. More importantly, the comeback we saw in June has continued through the summer.

Second quarter revenues and gross margins were both consistent with the first quarter. My gut tells me this isn't too shabby as we were dealing with the effects of the COVID-19 shutdown for the full quarter compared to just the last few weeks of March. Remember, Colorado was one of the first hot spots in North America. We are widely distributed in some of the most desirable resort communities on the continent, places like Aspen, Vail, Telluride, not to mention cities like Las Vegas and various other resort communities up and down the West Coast.

When COVID hit these communities, which have a huge amount of tourism, we're disproportionately impacted by shutdown orders that were implemented in many markets. This was especially tough for us as this was the peak of ski season, which historically is one of our most active times of the year.

As we described last quarter, we maintained our operations throughout the shutdown as we were deemed essential. But some of our retailers who sell our products were affected. Most of the licensed dispensaries were also deemed to be essential and stayed open during the pandemic, albeit with numerous restrictions.

However, many other locations like smoke shops, tobacco shops and other alternative stores, which sell a lot of our hardware products, were forced to shut down in many states. Many of the dispensaries that did remain open saw a significant drop-off in sales, particularly if they were in locations that are highly dependent on tourism, many of which saw revenue declines in excess of 80%.

Dispensaries in non-tourism areas were also affected as they had to pivot in short order to curbside delivery or online-only models. The other key factor that affected our Q2 results was our ongoing business transformation from what we call a core market model to an emerging market model in states like California and Massachusetts. We are confident this emerging market approach of licensing and strategic partnerships will deliver sustainable and profitable growth, all while expanding market and brand leadership positions.

However, during the transition period, it effectively means that while our products remained available in certain dispensaries, we are not generating new revenue for the company in those markets. That's the main reason for our year-over-year revenue decrease in Q2 2020 versus Q2 2019. Those 2 factors, the COVID fiasco and our recalibration in certain markets, led to significant headwinds in the quarter. But we're a scrappy bunch and never lead out of fear or shy away from a challenge.

We did 2 different things to offset these challenges. First, we took decisive actions to streamline our operations. This process actually began last fall when we started pulling out of unprofitable markets. In total, we have taken out more than $10-plus million of annual cost from the SLANG network. Mike will go into greater financial details later in the call.

Secondly, we kept our foot on the gas in our core markets of Colorado and Oregon. We have more control of our destiny in these markets, and they represent the majority of our consolidated revenue. The order pace in these markets not only returned to pre-COVID levels over the summer, but in some cases, it has increased 100% over even the 2019 levels.

I know our investors will want to know what's happening with our pending acquisitions, and we've announced some super important developments in both of these markets over the past couple of weeks. But I'll get back to that in a minute. It will be worth the wait. I promise.

First, I'd like to address a couple of the strategic initiatives we have underway, which I expect are a key area of focus for our investors. We said last quarter that we expect to see growth in the second half of the year in comparison to the first half. One of our core values is ultimate accountability for victories and mistakes. I'm pleased to tell you that we will deliver on that promise. So far, Q3 has been kinder than Q2 and Q4 is shaping up to be even better.

Lately, you may have noticed that we've been squawking more than usual in regards to news releases with progress made in each of the key areas that will enable us to grow, including product innovation, strategic partnerships and corporate development. As a quick refresher, I'll start with new products.

Last week, we launched live resin cartridges in Colorado as an extension of our market-leading O.pen brand. Live resin has been exploding in popularity recently, especially among sophisticated cannabis consumers who appreciate the loud flavor and full spectrum effects. As a consumer myself, I'm damn proud of this product. The taste is great, and we expect it will continue to widen the gap between us and whoever is #2 in Colorado.

This product was our opening salvo into the live resin space, and we plan to take advantage of our hydrocarbon processing capabilities to introduce more products. We will also take this show on the road as we have the infrastructure to produce live resin products in Oregon as well.

We also launched Cookies Terp Sauce cartridges in Colorado in July and that follows the June launch of Cookies-branded flower in Oregon. As many of you know, Cookies is one of the best-known brands in cannabis, and they've been working with SLANG because of the distribution capabilities we can offer in our core markets and beyond.

Firefly 2+ vaporizers are now available at Trulieve Florida locations. This is an existing hardware or a non-cannabis product for SLANG, but it demonstrates yet another way that we can grow by bringing our products into new markets or channels. Trulieve is the leader in Florida, now with 57 dispensaries that account for approximately half of the flowers sold in the state. That makes it a natural fit for Firefly 2+, which offers Florida patients a first-class way to enjoy Trulieve flower in high fidelity. Our Trulieve partnership has been a very successful one that demonstrates the potential for our emerging market strategy, which we have repeated in multiple markets across the continent.

Like any CPG product, these product introductions and brand extensions take some time to build awareness in new markets. We expect to generate a growing revenue stream over time, which we have demonstrated over and over again. Another key success factor for SLANG is our ability to execute on partnerships, particularly in our emerging markets.

In July, we announced that our products are now available for sale in Oklahoma through our partner in that state, Elite Cultivation and Processing. This follows new strategic partnerships we announced during Q2 in Michigan with Gage Cannabis earlier this year with Wellness Connection of Maine and in Ohio with Standard Wellness.

We also announced that our investee company, Agripharm, received the sales license required to sell SLANG-branded products in Canada. They subsequently signed a supply agreement with the Ontario Cannabis Store, which is currently the biggest cannabis buyer in the world. These agreements with both Ontario and British Columbia paved the way for O.pen and Firefly-branded products to be sold into dispensaries located in those provinces. All of these recent emerging market partnerships are consistent with our capital-light strategy, which is designed to grow our branded unit sales, branded servings and total points of distribution, all while generating strong margins and/or high returns on capital.

I'll turn now to our recent progress on the corporate development side. Out of all of our recent announcements, the biggest potential impact in our financials is likely to come from 2 recent regulatory decisions in our core markets of Colorado and Oregon finally. In Colorado, we were recently approved for suitability. That means SLANG can own and operate licensed plant touching businesses for the first time. This will allow us to start recognizing plant touching revenue in Colorado.

And in Oregon, this morning's earnings release included confirmation that our proposed acquisition of Lunchbox Alchemy has been approved by the Oregon Liquor Control Commission. That was among the final requirements we have been waiting on to complete that transaction, which we first announced last year. This will allow us to start recognizing plant touching revenue in Oregon.

In contrast to emerging markets, where we license our IP to strategic partners, our strategy in core markets is to consolidate our supply chain. In other words, we want -- we plan to own the manufacturing, distribution and potentially some cultivation assets addition to the brand IP we already own. Basically, we want to be vertically integrated up through wholesale.

The core market strategy offers multiple benefits, starting with the unit economics. Under a consolidated model, we can recognize wholesale revenues, which are typically several times higher than the licensing revenue we recognize today. Gross margin percentage typically is a bit lower, but we expect overall gross profit and cash flows to increase in a material way.

From an operation standpoint, we will gain better control over resources and production planning with opportunities to benefit from efficiencies and economies of scale. By consolidating supply chain assets in our core markets, we will not only recognize a higher top line, but can also optimize profit through the consolidation and integration of disparate assets.

With the recent regulatory approvals in hand, supply chain consolidation activities have the potential to take a meaningful impact on our revenues as early as the fourth quarter of this year and certainly in 2021. I will now ask Mike to provide further details about our financial performance in the quarter. Mike?

--------------------------------------------------------------------------------

Mikel Patrick-Alexander Rutherford, SLANG Worldwide Inc. - EVP of Finance [4]

--------------------------------------------------------------------------------

Thanks, Chris. As Chris mentioned, our second quarter revenue and gross margin were comparable to those of the first quarter. Our cost reduction efforts led to meaningful sequential improvements in operating expenses, EBITDA and cash use. Revenue was $4.6 million in the second quarter compared to $4.7 million in the first quarter. This reflects a similar operating environment in both quarters. As Chris described, we felt the effects of COVID-19 for most of Q2 with signs of recovery starting in June. Revenue decreased 36% year-over-year compared to Q2 2019 revenue of $7.2 million. The decrease is primarily due to the recalibration in emerging markets such as California, a strategic decision we described in detail last quarter.

It's worth noting that we grew our business in several key areas. We grew in our core markets of Colorado and Oregon, as Chris mentioned. Our hardware sales recovered significantly from the first quarter when the COVID shutdowns at the end of the quarter caused delays in some expected major orders. Lastly, we've seen our licensing revenue increase as our emerging market strategy gained traction through June and into Q3.

Our gross profit in the second quarter was $2.8 million with margins of 62%. Those figures are consistent with Q1 results of $2.9 million and 61%, reflecting a similar mix of business throughout the first half of this year. On a year-over-year basis, we saw a significant improvement in gross margin from 45% in Q2 of 2019 to 62% this past quarter. This reflects our increased emphasis on higher-margin licensing revenues, which is consistent with the priority we have placed on sustainable and profitable growth in our emerging markets. We have the opportunity to maintain strong margins as we continue to grow the licensing business.

I'll turn now to the expense side. Since late last year, we have been focused on streamlining our operations and scaling the business appropriately for the changing market environment. We spoke last quarter about sequential reductions from Q4 2019 to Q1 2020 across most of our expense line items.

As expected, that trend has continued into the second quarter. We realized further reductions in salaries and consulting fees. Marketing expenses decreased as we transition focus from digital marketing to affiliate marketing as well as a reduction in other initiatives such as sponsorships and print media.

The largest decrease in terms of dollars was to credit losses. First quarter results included much of the impact of collectability. We -- no significant credit losses are expected throughout the remainder of the year. Depreciation was comparable to the first quarter but down significantly from Q2 of last year. As mentioned last quarter, we wrote down a significant amount of our intangible assets as part of the 2019 year-end audit, resulting in lower depreciation expense going forward.

In total, operating expenses in the second quarter were approximately $2 million lower than the first quarter. Expense reductions helped drive an improvement in EBITDA loss, which was $1.8 million in Q2 2020 compared to $2.7 million in the first quarter. EBITDA also improved compared to a loss of $2.1 million in Q2 2019 despite significantly lower revenues this past quarter. The year-over-year improvement reflects both cost savings and the benefit of our shift to a higher-margin business model as well as prioritizing the goal of profitability over top line revenue.

As mentioned last quarter, cost reduction initiatives to date are expected to result in approximately $10 million of annualized savings within the SLANG network. We believe that we have the appropriate cost structure in place to achieve profitability as our growth initiatives generate results in the coming quarters.

Turning to our balance sheet. We had total cash, equivalents and marketable securities of $11.1 million on June 30, 2020, which increased from $10.4 million on March 31. Our use of cash is decreasing due to the impact of cost reductions as well as the more capital-efficient emerging market business model.

As we mentioned in last quarter's disclosure, most of the cash use occurred in April and May when we felt the most severe impact of COVID-19 restriction. June was a stronger month. While we anticipate further fluctuations in monthly cash use, we are trending in the right direction. We remain confident that our financial resources are sufficient to fund our business plan. We continue to operate with minimal debt, which contributes significantly to our financial flexibility.

To conclude, we are through the worst of COVID-19 headwinds. If anything, the timing of that crisis, when we were already in the midst of evolving our strategy towards the core and emerging markets model, resulted in us becoming even more disciplined around expenses and cash.

As a result, we have emerged with a lean cost structure that is appropriate for the current environment while still affording us the resources to execute on our growth strategy. Given our focus on disciplined cost management, combined with a strong balance sheet, nimble operating model and the expected realization of new revenue opportunities, we are confident and optimistic for the second half of 2020 and beyond.

At this time, I'd like to turn it back to Chris for some concluding remarks.

--------------------------------------------------------------------------------

Christopher Lee Driessen, SLANG Worldwide Inc. - Director [5]

--------------------------------------------------------------------------------

Thank you, Mike. We are very well positioned for the second half of the year. Multiple growth initiatives are now showing expected progress and providing intended results. In most cases, they have been in the works for months, and we can now look forward to the positive impact on our business. It's been a long time coming, but the gains and performance we have long been expecting to deliver are on our doorstep.

Even more exciting is that we have reduced cost, marching ever closer to our goal of consolidated profitability along the way. We continue to stay on our path, expanding into new markets, developing new market-leading products and continuing to demonstrate brand leadership positions in markets across the country.

The operating environment is rapidly improving as we start to move past the challenges of the past 12 months. We're about 8 weeks into the third quarter and so far, the results are very encouraging. June was the best month in Q2 and July was stronger in June with August looking to be even better than July.

As I said earlier, Q2 was tough. So far, Q3 has been far kinder to us. And Q4, with the close of some of our pending acquisitions, will be even stronger than Q3. We are on the upswing, and I encourage everyone to be patient with our progress as we are on the right path. Our brand leadership positions in multiple markets provide a market share scoreboard that doesn't lie. We can't wait for Q3 earnings calls and beyond, where we expect to announce meaningful improvements in revenue and then further down the road profit.

Investors looking for growth catalysts in the coming months can watch for several things. Some of the final hurdles that have been cleared for us to complete acquisitions in our core markets, and we look forward to providing details on these acquisitions upon closing. We are in active discussions to expand our list of strategic partnerships into several new markets as well as working with existing partners to get products on the shelves. We throw punches in bunches. We are constantly evaluating new markets, new strategic partners and new ways that we can generate profitable revenue. We have internal goals to sign and activate one new strategic partner per quarter, and we hate not achieving our goals.

Our product and marketing teams are hard at work, developing new products and refreshing some of our existing brands. You will see the results of these efforts throughout Q4. Without giving too much away, we have some exciting new products coming to market in multiple categories. If you like weed, you're going to love what we got cooking in the lab. I know I sure do.

While no one knows what the elections in the United States will provide, we do know that cannabis will be a talking point amongst both candidates. There are simply too many voters that approve of cannabis, too many dollars changing hands and too many people being unfairly penalized for possessing a plant, not to have some form of positive change. There are several pieces of legislation being discussed, many of which have a positive impact on the cannabis industry as a whole.

In short, we will be very active for the rest of 2020. Like I said, we throw punches in bunches. We are on the precipice of making good on the opportunity that this business has always represented. And you can bet, we're going to make that happen.

The SLANG Gang, which is what I call our team, is a group of fighters. We don't like to lose and we damn sure don't back down from a scrap. COVID gave us the fight of our lives, but we overcame the adversity. They say adversity doesn't build character, it reveals it. And I think that holds true with us. We took the punch, we adjusted, we figured it out, and we're now in a position to demonstrate results that we can be proud of, and that's just what we're going to do.

We will now be happy to take any questions or comments from folks on this call.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question today comes from the line of Noel Atkinson with Clarus Securities.

--------------------------------------------------------------------------------

Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [2]

--------------------------------------------------------------------------------

It's great to hear some positive momentum coming out of SLANG here going into Q3. What do you guys need to do now to close the LBA and ACG acquisitions? Like what are now the next milestones? Is it just sort of final documentation?

--------------------------------------------------------------------------------

Christopher Lee Driessen, SLANG Worldwide Inc. - Director [3]

--------------------------------------------------------------------------------

Yes. Good morning, Noel, thanks for jumping on, and thanks for the question. I'm going to pass that over to our General Counsel, John Moynan, also COO, who's closest to that situation.

--------------------------------------------------------------------------------

John Moynan, [4]

--------------------------------------------------------------------------------

Yes. Thanks, Noel. So each of these transactions, in addition to the other consolidation acquisitions that we have planned for Colorado and Oregon are in different stages of the time line. As we mentioned, we received suitability approval in Colorado, which is the first of 2 stages that regulatory approval that you see in that state, and by far the most significant hurdle to overcome from a regulatory perspective.

But it means that each of those transactions can be submitted for the change of ownership approval, which we expect to happen on a much more expedited time line than suitability. In Oregon, it's just a one-stage approach, and we received that approval from the OLCC as we announced, and we expect that to move into the final stages of closing, and it's purely transactional at that point.

--------------------------------------------------------------------------------

Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [5]

--------------------------------------------------------------------------------

Okay. Great. So -- okay. So Colorado, so it's the second largest cannabis market in the world. We've seen some really impressive year-over-year growth in the last few months as reported by the Department of Revenue down there at the retail sale level. So the company treaded water for a while in terms of its branded servings that were sold in Colorado for like the last, I don't know, 4 or 5 quarters.

So now what do you do to really ramp scale to win market share? Is it just -- do you need to be able to capture more dispensaries? And what you do now to really start taking some substantial market share of probably, I don't know, a $1.5 billion wholesale market in Colorado?

--------------------------------------------------------------------------------

Christopher Lee Driessen, SLANG Worldwide Inc. - Director [6]

--------------------------------------------------------------------------------

Yes, great question. So Colorado has long been our fortress. It's where Organa Brands started. It's our home. It's where I'm standing, it's where I sweep at night. And I think it's important to remember when you say treaded water on the branded share or branded servings and branded unit sales, we've been #1 in vaping in Colorado since they kept score, period, and are extending on that position, obviously, with new cards coming out from Cookies, new things coming out with live resin, so we are expanding it.

You bring up a great point that over the summer, Colorado has had a really nice bounce back. April was tough for everybody here. We've got so many resort downs here. And when they shut down the ski areas in early March, really had an outsized economic impact because there's so many dollars that change hands. There are so many tourists that come in here to go to those places, spend money, consume cannabis, et cetera.

So especially for the folks that were in those towns, these guys are -- and ladies are friends of mine, people I know well, it was tough, not just for cannabis, but just in general for the economies of those towns. So they are starting to come back. They are becoming more frequently traveled and visited. You've got a lot of local tourism that's now going up to those places. So you've seen a really nice bounce back just in general in those mountain towns. And we're subject to the same.

When you have the largest market share, particularly in vape, we're disproportionately impacted when things are bad, and the same is true on the flip side. We're disproportionately impacted in a positive way on the comeback. So we expect to maintain that #1 market position in vape. We also are in the leaderboard, top 3, top 5, top 10 with several of our other brands and products and categories. And like I said, we expect to keep our foot on the gas and widen that. And the way we do that and all is with great products and really maintaining great relationships with our retailers here. So you absolutely should expect the gap to widen between us and #2.

--------------------------------------------------------------------------------

Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [7]

--------------------------------------------------------------------------------

Originally posted here:
Edited Transcript of SLNG.CD earnings conference call or presentation 27-Aug-20 2:00pm GMT - Yahoo Finance

Reviewed and Recommended by Erik Baquero