InterCure Ltd (INCR) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to InterCure 2021 Fourth Quarter and Year-End Earnings Webcast. (Operator Instructions)

I would now like to turn the conference over to your speaker for today. [Adam], you may begin.

Thank you. Good evening, everyone, and welcome to InterCure's Fourth Quarter and Full Year 2021 Results Webcast and Conference Call. 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 Rabinovich, 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 fourth quarter and full year ended 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 securities 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 the actual results to differ materially 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 expect -- 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 Rabinovich, InterCure's CEO. Alex, please go ahead.

Thank you, [Adam]. Shalom, everyone, and thank you for joining us for our fourth quarter and full year 2021 earnings call.

First of all, we are excited with our outstanding results for the fourth quarter, but I, first, would like to apologize for the inconvenience of rescheduling this conference call. We, at KPMG, wanted to ensure that everything is correct. As you might have noticed, our audited results came stronger than our preliminary expected results, which is in line with our commitment to continue delivering strong performance.

2021 was another successful year for InterCure as we continue to solidify our position as the largest fastest-growing and most profitable cannabis company outside of North America. In line with our profitable growth strategy, we executed well on all fronts. This produced strong financial and operating results while further positioning InterCure for continued growth.

The fourth quarter of 2021 was our eighth consecutive quarter with high double-digit growth and total record revenue of $33 million, almost 3x greater than the fourth quarter of 2020 and representing sequential growth of over 24% (sic) [29%]. Our adjusted EBITDA in the fourth quarter was $9 million representing 123% (sic) [40%] year-over-year growth, and our Q4 EBITDA margin was approximately 26%.

This quarter concluded a record-breaking 2021, with a total annual revenue of just over $89 million, with an adjusted EBITDA of $23 million, representing almost 230% and almost 250% growth over 2020.

As we [talked] there are any special [taxes or 2 ATEs], our strong positioning and financial discipline successfully generated cash flow operation sixth consecutive quarter in a row, more than -- and more than $10 million generated during 2021, and we ended the year with one of the strongest balance sheets in the industry with $89 million in cash. These are unmatched results in markets beyond North America, and I want to thank our team and management for delivering such a strong quarter and year.

Our performance offers the strength of our brands, global platform and our ability to focus on execution. I will take some more of your time and walk you through some of our recent milestones and the part in continuing to grow our business and deliver value to all stakeholders.

To support the growing demand for our branded products, we increased our upstream supply chain by scaling up production in our cultivation sites, especially in our southern facility, which is now one of the largest and most advanced, high-quality medical-grade sites in the space. We are very proud of reaching the highest-quality dry flower standards by successfully cultivating the first-ever pharmaceutical-grade Cookies-branded product.

In addition, we scaled up our strategic global cultivation with our exclusive partner, which extends over 3 continents, utilizing over 6 high-end cultivation sites, ramping up cultivation and production of our unique genetics support for our growth in the domestic and international markets. We expect further increase in our scale and depth in 2022, laying the groundwork to support increased demand for our branded products in our target market, Israel, Europe and Australia.

Keeping with our vertically integrated seed-to-sale model, we've expected our one-of-its-kind dedicated medical cannabis dispensing operation during 2021. As of December 31, 2021, our chain included 20 pharmacies in 5 locations in major cities across Israel and 4 pharmaceutical logistic hubs, of which 2 we own and operate, covering 100% of the Israeli market.

Since the beginning of 2022, we've added additional 3 new locations, totaling 22 pharmacies, 16 of which are actively dispensing pharmaceutical-grade medical cannabis. We expect to expand our dispensing operation within the current year in our domestic market and beyond, and we are duplicating our winning model to new territory.

Growing our cannabis dispensing operations to expand in the past year has expanded our reach while ensuring patients receive the highest-quality service. The effect of these was still, last October, as we reached a world record of 1 ton medical cannabis products dispensed in 1 month. This represents our leading position in branding, product and service, with approximately 30% market share of the Israel medical cannabis market, the largest and fastest-growing medical cannabis market outside of North America.

Our fast-growing vertically integrated model enabled us to disrupt the competitive landscape. Our expertise execution and rapidly scaling our high-quality branded product supply chain gives us a clear competitive advantage and an edge as we enter new markets.

In addition to expanding our production and reach, we successfully launched new high-quality branded products and introduced the Cookies pharmaceutical-grade medical products for the first time. Our combined portfolio includes a broad range of offering across patient segments, from ultra medical for treating specific health indication to high-THC globally recognized Cookies products. By offering a variety of products at the right price point with a professional assistant, we are able to meet patient needs and providing unmatched experience.

To meet the solid demand for our quality products in Israel, I'm proud that we were the first company to meet the new importation requirements set by the Israeli Medical Cannabis Agency, known as the 109 protocols. Being able to meet their 109 requirements enables us to resuming importation during the second half of 2021 from our strategic partners, and we have successfully levered shipments on Tilray, Organigram, Fotmer Life Sciences and others. These shipments mark a significant milestone in regard to the navigation and streaming of regulatory requirements and will support the growing demand for our branded products.

Regarding exportation, since we last spoke, Israeli regulators have begun implementing a reform on exportation of pharmaceutical-grade cannabis, enabling us to export our products in bulk for the very first time. The reform is a milestone moment that will have the tremendous positive ripple effect on our international business, especially as the target markets continue to evolve and implement GMP medical cannabis programs. Throughout 2022, we will continue to supply our branded products in new markets and expand distribution channels. In fact, there are currently over 40 countries in different stages of implementing pharmaceutical-grade medical cannabis regulations, and most of them are much bigger than Israel.

In addition to exporting products from our own facility, we utilize our exclusive strategic partnership with other global leading companies to provide new markets with our high-quality branded products. In that regard, we announced last week a new partnership with Clever Leaves, which now joins a prestigious list of partners. We expect to have more strategic partners as we continue to expand our international supply chain during 2022.

Another large part of regulatory change is occurring in the CBD front. In December 2021, the Israeli Ministry of Health announced that CBD products with THC threshold of 0.3% was removed from the Dangerous Drugs Act. In spite of the evolving Israeli political situation, we expect the Israeli minister of health to implement regulation, which aligned with their announcement, which de facto recognized CBD's benefits and to permit registration and retail sales of product containing CBD. We've been prepared for this change since December 2020 when we signed an exclusive partnership with a leading CBD company in the world, Charlotte's Web.

In preparation for opening the Israeli CBD market, we recently announced a strategic partnership with Altman Health, the wellness market leader in Israel, with unmatched share of space of over 1,700 pharmacies and points of sales. By taking action before regulation, we are positioned to lead the new CBD wellness market in Israel. As the industry evolves and matures, we believe that 3 to 4 players will come to dominate the pharmaceutical-grade cannabis market throughout the process of consolidation.

Throughout 2021, we signed a letter of intent to acquire one of the pioneers and leading licensed producers -- during 2021, we signed a letter of intent to acquire one of the pioneering and leading licensed producers in Israel and Australia, Cann Holdings, known as Better. Just recently, we announced that we have signed a definitive agreement to acquire 100% of Better's shares and expect that this historic acquisition will mark the first major consolidation in the pharmaceutical-grade medical cannabis space. The acquisition of Better is expected to further strengthen our leadership position in the pharmaceutical-grade medical cannabis market. In addition, the acquisition is expected to be accretive to our financial model, with revenues estimated at ILS 50 million or almost CAD 20 million.

And now, let's turn into our international expansion, one of our main goals for 2022. As I explained in the past, most of the world is taking a medicalized approach towards cannabis, and rapidly growing number of countries are adopting this unique and strict regulation. And this is, in my opinion, the most exciting cannabis market in the world today, with lots of barriers to entry.

We are duplicating our winning model into new territories with evolving supportive regulation. This includes Germany, Austria, the U.K. and Australia. During the fourth quarter, we expanded our relationship with iconic cannabis brand Cookies into Europe. We are opening our first Cookies-branded location in Vienna and London and many more European cities in the pipeline.

Looking into the future, we believe that the next step in most territories after medicalization is legalization of adult-use cannabis. Cannabis today is no longer a taboo and enjoys a broad support across the political spectrum. Just this year in December, Germany's new government announced its plan to legalize cannabis for recreational use, which we believe will start with the rolling out of the pilot program that could begin in the near future. This is a significant long-term growth engine for InterCure. Furthermore, we believe many countries will follow Germany, and some might even speed up the process to capitalize on the existing momentum.

We are encouraged by this trend in Europe, and we are monitoring the United States, the leading cannabis market in the world. Regardless of the recent events with the MORE Act, we expect that medical cannabis, once federally legal, will be regulated by the FDA. We believe that the FDA will establish similar regulation for medical cannabis to those we already comply with. In the upcoming year, we will plan to lay down the first foundations to our federally compliant U.S. operation.

In summary, the InterCure team delivered another strong performance in 2021. We continued our record growth of solid financial results, expanded our operation in Israel and abroad, set the foundation for continued international expansion and leading the consolidation process. As we had in 2022, I strongly believe that InterCure is well positioned for another great year. We expect revenue growth to continue in the first quarter and throughout 2022.

Opportunities ahead of us are significant, and we will continue focusing on delivering solid profitable growth and strengthening our position by providing value for patients, employees and shareholders. And for us, time is just beginning.

And with that, I will now hand it over to Amos Cohen, CFO, InterCure, to discuss our financial results in more detail. After, we will open the line for questions.

Thank you, Alex, and good afternoon, everyone. I'm very pleased to be sharing with you today our financial results for the fourth quarter and year-end 2021. Our focus continues to be execution, expansion and scaling up our unique vertically integrated structure, centered on our high-quality branded products while executing our profitable growth strategy.

We just reported another record revenue quarter of $33 million or ILS 80 million, impressive growth, close to 3x greater than the fourth quarter of 2020 revenue of $11 million or ILS 27 million and up by almost 30% compared to the third quarter of 2021. Revenue growth during the fourth quarter of 2021 reflects an increased market share and growing patient demand for our branded products, same-store sales growth, expansion and the strength of our medical cannabis dispensing operations.

Our gross margin for the quarter reached approximately 46% compared to 40% in the third quarter of 2021, representing a better distribution and product mix as we are implementing our vertically integrated structure and selling more to our pharmacy chains and logistic hubs. With this, I have to note that with a fully integrated structure, our branded products generated higher gross margins, and we still strategically sell -- serve 100% of the market as our supply couldn't keep up with the accelerated growth of our dispensing operations. We still have to supply third-party final products. So there is still plenty of upside once fully integrated.

Turning now into adjusted EBITDA. We believe adjusted EBITDA of the cannabis sector and non-IFRS measure provides valuable insight into our operating performance. Adjusted EBITDA excludes from net income, as reported, interest, tax, depreciation, amortization, noncash expense, share-based compensation, acquisition and transaction costs, fair value step-up of inventory and other income or expenses. For the fourth quarter of 2021, adjusted EBITDA was $9 million or ILS 21 million, which is 26% of revenue, increase of over 50% from the third quarter of 2021 and over 140% from the fourth quarter of 2020.

We are honored to be part of a company that has shown 6 consecutive quarters of positive cash flow from operations, generating over $10 million or ILS 25 million, demonstrating the strength of our financial and operational discipline. The growth was driven mostly by the expansion of our medical cannabis dispensing platform.

Over the course of 2021, we added 19 pharmacies, bringing our total retail location to 20, 14 of which are IMCA-approved to dispense medical cannabis, while the remainder are in the process of approval. Alongside our pharmacies, we've also added 2 logistics hubs, Greenzone and PharmaZone to support our growing chain of end patients. As a result of this expansion, we now serve over 70,000 recurring patients monthly in Israel alone.

We ended the year with a strong cash balance of close to $90 million or ILS 217 million. This is up over 370% over the first 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 our profitable growth strategy, leveraging the foundation and industry leadership 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 3 and 12 months ended December 2021, which are available under the company's profile on SEDAR and through EDGAR.

Thank you, Amos. This concludes our prepared remarks. We would like to thank everybody for joining us today on today's call and would now like to open the line for questions.

(Operator Instructions) Our first question comes from the line of Shaan Mir with Canaccord.

Congratulations on the quarter. The first question was related to your market share. And I really appreciate the color in the release highlighting the 30% over there.

One thing I wanted to ask is that in the Canadian market, we see market share leaders change really month over month still, just given the share volume of product coming to market. I understand that the Israeli market is less competitive from a supply standpoint than in Canada, but I was just wondering if you could help us understand how some of the market share movements have progressed in the Israeli market and if you have any sort of certainty that there is legitimate customer loyalty developing for certain products or brands. Or maybe you could help us detail some of the things you're doing to hold and maintain the market share. And if I could just tag on to that, what would the market share look like pro forma to Better acquisition?

Shaan, so yes, first of all, we are not [consolidating] Better, yet. So I mean this transaction is still in process. So everything we reported is, of course, without the Better acquisition.

Yes, regarding the market share, I mean, we do see a lot of patient loyalty. And basically, again, I mean, Amos has mentioned it, and we have like a very good visibility on patients. Patients are very, I would say, visible, and it's a very forecastable model for us. And also, Amos mentioned that basically, the demand for the products was much higher than what we could supply. So yes, coming altogether, I would say the pharmaceutical-grade medical cannabis is a very different market from the Canadian. Maybe it's closer to the medical side, but we are seeing a great loyalty support from patients.

And then if I could just pivot over to the retail strategy, congratulations on really growing the platform there.

As you -- my focus more so is on kind of expanding throughout the other EU markets. As you're looking across the EU markets and analyzing your expansion with that Cookies retail partnership, what would you favor in terms of -- are there any markets that intrigue you for entry? Or would you be looking to go deeper into some of the markets that you're in, such as the Austria and the U.K.?

So yes, there's a lot of barriers. I mean actually those markets are in infant stage. We also look at Germany as a kind of an infant-stage market. They are where Israel was about, I would say, 4 years ago, so almost no inventory in pharmacies and a couple of thousands of patients. But the good news is the market is growing. And since regulations are similar, we believe that same pattern that happened in Israel will happen in these markets once those pharmaceutical-grade medical cannabis will be available for patients and physicians can prescribe trusted brands.

So yes, we've seen this phenomenon in Israel. And I think like we have a very good chance of duplicating the same model in those markets.

Our next question is from Scott Fortune with ROTH Capital Partners.

Real quick, can you provide a little bit of color on kind of the patient growth that's continuing in Israel? Obviously, if the changes in some of the medical regulations, kind of -- what are you seeing the kind of current patient growth from that standpoint? And then just expand upon the CBD opportunity timing there and the potential opportunity in Israel for not only your own medical brand, CBD, but also the OTC side of the CBD opportunity there. That would be great.

Scott. So yes, I mean, first of all, regarding the CBD market -- I'll start with the CBD market.

So the CBD market is a fresh market. So we start from a clean, blank table. Regulations should be implemented very soon. If the minister of health has already declared on the standards, it will be a very long -- it will need a very long registration process by the minister of health. It's not going to be similar to the U.S. market when you don't need any registrations from the minister of health. It's kind of the Israeli FDA. So there will be a lot of barriers to entry. We expect some of the products, for example, cosmetics and some of the food supplements, it will very much longer to register.

And yes, for us, we think with the partnership we've established, we think that the economic model for this market will be similar to what we -- on what we are seeing on the pharmaceutical medical one. We are using strong partners. Charlotte's Web is our main partner for the SKUs, for the product. We will have to convert them into the Israeli regulation. We already started this process like a year ago. So I believe we are ahead of competition with that. And of course, Charlotte's Web is a well-known brand. So that gives us an advantage.

Also, the partnership with Altman. I mean we are starting from the get-go with the #1 market in shelf, in OTC products, and this is really important. We will use their logistics and their presence to enter more than 1,700 pharmacies, and the shops are around Israel. So we remain optimistic about the market. But again, every new market takes time, and new regulation takes time.

I appreciate that. And then real quick color on the patient growth continuing there.

Yes. So the patients enrolling is -- continue to grow. Basically, the demand is, of course, much higher than the current 1,012 patients in Israel, so we are seeing a run rate of about 3,000 new recruitments per month. This is around like 3% or 2.5% monthly. This is the current phase. We are missing some prescription -- prescribing doctors. Some of the leading doctors in Israel went into a hold like 2 of the most leading doctors went into a hold. That kind of, I would say, harmed a little bit the growth rate of the market. But the good news is the demand is out there.

There is a reform right now in the parliament in medical cannabis to ease this process and make it like a much more cheaper, and that's basically the intent of Sharren Haskel, the parliament member. Now with the Israeli political situation, it's really hard to assess the future of this reform, the future of this law, but the trend is to ease the process.

Got it. And then one more quick one. Just Alex, kind of big picture as you see Germany, some other markets looking to potentially go recreational or adult-use. How do you view kind of a long-term strategy with -- obviously, you can't export, what's it, adult-use because of the UN treaties in place. But how do you view that going forward with the UN treaties for adult-use versus the recreational side and kind of the strategy around that to be able to serve into these markets once they go rec.

Yes. So it's a good question. So I mean from the get-go, we established international supply chain. So we own and cultivate here in Israel. We own 2 sites. But besides that, we have more than 7 sites in -- some of them are in Europe. And basically, those sites can supply us with our products. We are working only with strategic partners, meaning we have a very deep relationship with them. We are not just buying inventories. So with this relationship, we can leverage their infrastructure to suppliers in many territories.

Our next question comes from the line of Vivien Azer with Cowen and Company.

This is Victor Ma on for Vivien Azer. For the 8 Israeli retail locations that are not currently dispensing medical cannabis, can you guys provide a time line on when you expect these locations to start dispensing cannabis, adding to the 15 locations that are currently doing so?

Yes. I mean, again, it's a good question. You have to understand, of course, that those pharmacies that are enrolling into the license, and it's a very long process, actually, are a lot of centers for us. We usually don't sell anything there, and we just, like, keep the personnel and keeping the regulations forward -- towards the medical cannabis dispensing license.

So yes, I can say that we just received 2 of them after first quarter ended. So now we're still waiting from 6 of them. And those ones should be rolled in with licenses this year. But we try to decide this 8. We develop more pharmacies. So we expect a number of about 8 to 10 pharmacies that are in development stage to be kind of in parallel to our dispensing operation throughout the year.

Got it. Thanks for the color. And then for the retail locations that you aim to open in the U.K. and Austria, how should we think about the margin profiles for these operations relative to your Israeli doors, specifically from the impacts of a more nuanced supply chain?

Yes. So as I mentioned, those markets are in infant stage, especially the Austrian one. I mean we will be probably the first one to currently enroll in a program there. So we look at them as the first deals of that -- of the regulations here in Israel, and I mean we expect at least the U.K. one to be profitable a couple of quarters after opening. These pharmacies will be supported by supply. We are already working on supplying them in the last 18 months or so. So as you know, registration takes a lot, but we do have partners and strong partners.

So yes, we think we will see probably the same phenomenon we saw in Israel. So every market starts with the connection between the pharmacies and the doctors. And that's basically how the market starts. But again, since we will be first movers in both markets, I mean, we expect, of course, those ones who have like a big splash and an impact on the patient community and the potential patient community. Those will be basically the first branded center with Cookies. And as you know, Cookies is a well-known brand. And from there, we will take it slowly, step by step, into more cities and more locations, very similar to what we did here in Israel.

Got it. Appreciate the color. And then just one last question. So on the Clever Leaves agreement, can you guys offer any more specifics for that deal and kind of how that fits with the relationships that you guys have with the other Canadian LPs?

Yes. So Clever Leaves has a very different infrastructure from the Canadian LPs. Basically, they invested a lot in South America area. This area is -- has been not in our top priority. So of course, with them, we look at this region, and they have also an incoming EU GMP facility in Europe, in Portugal. And besides that, as I mentioned, we are working closely with partners. So we think the partnership potential has a -- has also a potential to supply some size -- some good size to the Israeli market. So yes, I would say Clever Leaves is invested heavily in infrastructure in the past years. And together, we are much stronger.

Right. And then in terms of the specifics of the strategic partnership, is there any incremental information you guys can offer or no?

No, we can't disclose names at this time, sorry.

Our next question comes from the line of Aaron Grey with Alliance Global.

Congrats on the quarter. So kind of piggybacking off the last question, right, with Clever and opportunities there for Portugal or Colombia, kind of export flower. Just about pricing tiers within Israel, can you talk about the premium versus the mainstream and value segments and how you've kind of seen those kind of parsed out over the past year? So how do you see those evolving as the Israeli market continues to grow and continues to be supply constrained?

Yes. So we are seeing great demand for high-quality, basically dry flowers pharmaceutical-grade in Israel. And with this, that Israel has become the biggest importer in the world. The local market basically can't keep up with the demand. The Israeli market right now, the run rate is about -- is above, I would say, 45 tons yearly. So yes, it's not a small market to supply. We are seeing great demand for quality, and patients are willing to pay more for those quality. But quality that comes with brand, that's kind of a winning formula. Usually, most of the brands, I would say, are new to the patients, and it's really hard to get patient loyalty. But once you do have those highly quality, I'm not going to say even premium, it's enough to be high-quality. Together with the brand, we are seeing a lot of loyalty from the patient community.

So I would say the demand is more towards the quality, and patients are willing to pay for it. And on the high quality, we are not seeing, right now, a lot of competition. The market is still evolving, and the market still needs good product.

Right. Great. Thanks for the color. And then just going off of retail, obviously, you guys still have a number more to open. You've made some acquisitions in the past and now have a pretty good footprint. Do you guys think about M&A on the retail side within Asia? Or is that kind of more on hold now as you open up these other stores? Are you still looking to potentially add more retail? And that will be it for me.

No, we will -- basically, we are developing more retail locations, more pharmacies, and we look for more pharmacies to basically enroll our national-wide pharmacy chain. Eventually, we target between 30 to 40 pharmacies across Israel. And together with the national -- the online service, we will cover all of Israel, every major city of Israel.

Thank you. I'm not showing any further questions on the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.