InterCure Ltd. (INCR) Q4 2022 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to InterCure's Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer. [Operator Instructions] I would now like to hand the call over to [Ori Mendelbaum] (ph), Investor Relations. Please go ahead.

Thank you, Latif, and good afternoon, everyone, and welcome to InterCure’s fourth quarter and Full Year 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 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 fourth quarter and full year ended December, 2022, as well as more recent developments. Following these formal remarks, we will be prepared to answer your questions. But 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. Also, please note that unless otherwise indicated all amounts discuses in this call and expressed today are in Canadian dollars or new Israeli shekels. Additionally, please note that the results mentioned are deemed solely to the company's operation in the cannabis sector unless otherwise specified. And with that, I will turn over the call to Alex Rabinovitch, InterCure’s CEO, Alex, please go ahead.

Thank you, Ori. Hello everyone, and thank you for joining us for our fourth quarter and full year 2022 earnings call. 2022 was a rather successful year for InterCure as we continue to solidify our position as the largest fastest growing and profitable cannabis company outside North America. In line with our profitable growth strategy, we executed well on all fronts. This resulted in a strong financial and operating results, while further positioning InterCure for continued growth. In 2022, our revenue exceeded $150 million with adjusted EBITDA of $32 million, a significant achievement considering pharmaceutical-grade recognition was only introduced less than five years ago and our first GMP prescribed product was dispensed in the pharmacy only in late 2019. Our remarkable profitable growth is a proof of our team's ability to execute with strong dedication to excellence, as demonstrated by our successful implementation of skilled professional decisions, capital investments and strategic legal and regulatory victories. I'm very proud of our team delivering continued solid performance. These strong results are especially impressive when you take into account the slowdown in new patient procurement in Israel during the first half of 2022. This was mainly due to the loss of physicians responsible for more than 20,000 market prescription as the Ministry of Health halted their license to prescribe medical cannabis. In the early days, we chose to focus first on leading the Israeli market as we believe that any global leader has to dominate its home market before expanding internationally. Although Israeli is well known for its medical cannabis research, it's also developed and implemented the most advanced medical cannabis regulation to become to date the biggest and most advanced pharmaceutical grand market globally with about 45 tons dispensed yearly. After four years since it was introduced, pharmaceutical cannabis represents about 15% of all prescribed pharmaceuticals in Israel with a clear runway for this goal to continue. We expect market growth to resume as the Ministry of Health announced a new reform known as the prescription reform that will cancel the need for a special license and will allow any physician to prescribe medical cannabis under the public health care system. Of the latest INCB U.S. guidance, the Israeli Ministry of Health is expecting major growth of the market in 2023 to 85 tons up from 49 tons in 2022, marking expected growth of over 70%, assuming this reform implemented. As the new government in Israel assembled, the new Ministry of Health stated that the new reform would be implemented soon and while patients suffering from current bottom neck of lack of prescribing doctors, many companies in the industry are struggling from continued losses and lack of capital. Companies are exiting the market and liquidizing their products with some short term effect, especially on low and mid quality product, which Amos will elaborate more on the financial results. Eventually, for 2022, patient count grew only 18% while InterCure grew 77%, emphasizing the strength of our leading platform and we believe this condition represents an opportunity to grow our leading share organically and inorganically even before barriers were lifted and the market growth will resume. During 2022, we've also scaled up our upstream operation by upgrading the southern facilities post-harvest nursery and growing areas. This further solidified Canndoc's southern cultivation site as one of the largest and most advanced facilities of its kind in the industry. Our expert teams have also successfully added and produced tones of new highly demanded strains into their growth cycles, including premium high THC Cookies cultivars, [hubble] (ph) genetics, and some of the industries top shelf products. In the total, during the day, we successfully launched more GMP products than any other company in the industry. To meet the demand, we remain focused on increasing not only our local cultivation in Israel, but also our global exclusive strategic partnership. During the year, we have been able once again to be the first company to meet the strict new 109 protocol and resuming importation from our partners to Israel. Although the Israeli regulators are constantly hardening the importation process, we are well prepared for future evolving regulations with the best stains and pharmaceutical labs globally. As our core markets are growing and evolving, we are also increasing the high quality supply of our existing strategic partners and evaluating new potential strategic partnerships. We have extended our successful exclusive partnership with Organigram, a world leading indoor grower to supply us with up to 20 tons of our chosen genetics, extending its reach into our core markets in Europe and UK. We also announced expansion of the company's partnership program forming a collaboration with the leading cannabis brand Binske to develop and offer range of non-flower cannabis products, which we believe will significantly enhance our product portfolio and further strengthen our market position. Both the Ministry of Health in Israel and the Ministry of Economic have eased the process of exploitation, enabling us to ship pharmaceutical-grade cannabis products in any format to any legal markets in the world. I'm happy to update that our teams have made great achievement and successfully completed export of InterCure's products to our EU hub, preparing for EU GMP commercial launches in UK and Germany. We expect commercial export shipments to ramp up in the coming quarters. We have built a unique international supply chain that can supply every core market with our winning branded product portfolio and we will continue to scale up our upstream operation in the coming quarters. Moving on to downstream. Keeping with our seed-to-sale model, we've expanded our one of its kind dedicated medical cannabis dispensing operation during 2022. At the end of 2020, our specialized medical cannabis pharmacy chain was comprised of only three locations. As of December 2020 [indiscernible] includes 28 doors. We have developed 26 locations across Israel major cities out of which 20 are actively dispensing medical cannabis and six are in the process of obtaining the license to dispense. Growing our cannabis dispensing footprint more than 9 times in the last three years has positively impacted our businesses, while ensuring patient receive the highest quality service from more than 90 highly trained specialized pharmacies. In 2023, we expect to add several more locations and with that all currently 26 will be fully running at operationally, our leading pharmacy chain will have a full national footprint. During 2022, we have developed two new locations outside Israel, which included Cookies branded shop in Vienna, Austria, which is up and running and the pharmacy under development in the heart of London, UK. International supply chain is one of our main goals ahead. As most of the world has taken a medicalized approach towards cannabis, a rapidly growing number of countries are adopting our unique and strict pharmaceutical cannabis regulations. In fact, this includes more than 40 countries that are in various stages of adoption. Pharmaceutical-grade cannabis regulation is indeed becoming a world standard. Improving by avoiding other company's mistakes, we carefully expanding our reach by duplicating our winning model in the U.K., Germany and Austria. All of these markets are in early stages, a few yields behind the Israel market in product quality, but with similar competition and regulation. Our 15 years of know-how and execution, proven model and leadership position set us up to succeed in every territory with supportive regulatory framework. Before I hand over the call to Amos, I want to note that 2022 has concluded 16 years of organic growth and one of our best year to date. During 2022, InterCure achieved record revenues of approximately $150 million, 77% more than the revenues of 2021. Our gross profit increased to over $60 million, representing 41% of revenue and adjusted EBITDA increased to $32 million, representing 22% of revenues. Net profits after tax were just under $70 million, generated $20 million cash flow from operations and we ended the year with $95 million cash in hand and a solid balance sheet. As our target markets are evolving, we remain focused on execution with financial discipline, while navigating through regulatory barriers and market challenges. While favorable regulatory cannabis reforms are on the horizon in Israel, Germany and many other markets, we expect our growth journey to continue as we remain focused and committed to expand our leading platform, building shareholder value and improving quality of life for patient, communities across the world. And now, I will turn the call over to our CFO, Amos Cohen, following which we will open the line for Q&A. Amos, the floor is yours.

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 of 2022. Our focus continues to be execution, expansion and building our unique vertically integrated model centered on our high quality branded products, while keeping financial discipline. We delivered record full year revenue of $150 million or NIS389 million, increase of 77% compared to $85 million in 2021, an impressive growth as patient count grew only by 13%. During 2022 we continued to expand our vertically integrated platform, we scaled up our cultivation production facilities, expanded our logistical capacity and added eight new locations to our leading medical cannabis dedicated pharmacy chain, exiting the year with an industry leading platform of 28 locations, out of which 20 are actively dispensing medical cannabis and for the first time, two international locations. We also reported another record fourth quarter revenue of $41 million or NIS106 million, an impressive growth over 30% greater than the fourth quarter of 2021 revenue of $31 million or NIS80 million and up by 6% sequentially compared to the third quarter of 2022. Revenue growth during the fourth quarter of 2022 reflects increased market share and growing patient demand for our branded products and expansion of the -- and the strength of our medical cannabis dispensing operations. Our gross margin for the year 2022 reached 41% compared to 44% in 2021, while for the first quarter, the gross margin was 35%. During the fourth quarter, we have witnessed financial weakness affecting many players in the industry. Financially struggling companies and companies exiting the market sold low to medium quality products at lower prices to liquidate their inventories. This had an impact primarily on our ultra-medical and legacy products, while the prices for our top selling high quality products remained stable. In the first quarter of 2023, we continue to see strong demand for our high quality products and continued shift from legacy mid quality to value products. We believe that these market conditions and completing the licensing of the eight pharmacies which are yet to dispense medical cannabis, positioning us to further increase our leading market share and will revert in the coming quarters as the market will consolidate and the prescription reform will pass through. Turning now to adjusted EBITDA. We believe adjusted EBITDA of the cannabis sector, a non-IFRS measure provides valuable insight into our operating performance. Adjusted EBITDA excludes from net income as reported interest, tax, depreciation, amortization, noncash expenses, share-based compensation, acquisition and transaction costs, fair value step-up of inventory and other income or expenses. For the full year of 2022, adjusted EBITDA was $32 million or NIS84 million, which is 22% of revenue compared to $22 million or NIS57 million for 2021. For the first quarter of 2022, adjusted EBITDA was $7 million or NIS19 million, which is 80% of revenue. A slight decrease compared to $9 million or NIS22 million for the third quarter of 2022, demonstrating the strength of our platform and our ability to execute. And we continue to invest in scaling up our platform, CapEx in 2022 totaled $18 million or NIS48 million. We expect 2023 CapEx will be at least 50% lower than 2022 and we mainly focus on our global expansion as we expect launching our branded product in Germany, UK and other territories and continue development of our leading medical cannabis dedicated pharmacy chain to about 35 locations. We are very proud with our third consecutive year with a positive cash flow from operation generating in 2022, $20 million or NIS51 million, proving our financial discipline. We ended the year with a solid cash on hand of $95 million or NIS246 million, compared to $83 million or NIS217 million in 2021. In addition, our balance sheet includes $25 million of loans granted to companies, mainly associated with several uncompleted M&A transactions. We are financing about 70% of our CapEx with long term loans from Tire 1 banks in Israel. These are [indiscernible] build during years of execution. As interest rate environment is changing, we are constantly revising our financing structure. 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 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, which are available under the company's profile on SEDAR and through EDGAR. This concludes our prepared remarks. We would like to thank everybody for joining us today's call and would now like to open the line for questions. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Vivien Azer of Cowen. Your question please, Vivien.

Thank you. Good afternoon, good evening. I wanted to talk about the dynamism that you guys referenced in the Israeli market, please. Understanding that some of the wholesale discounting that you were seeing with some competitors is going to be short lived in nature. Can you offer some color on what the mix for the category looks like today by price point and how that compares to your own portfolio? Thank you.

Hi, Vivien. Thanks for the question. Basically, we don't have official numbers for the Israeli market categories. I mean, we have some BI and internal evaluation. We think the market is probably about 70% on the high quality, some people call it premium and about 30% is on more discounted product. And I mean, yes, I must elaborate about it. I mean, we've seen a trend of struggling companies exiting the market selling their inventories in lower than cost sometimes and affecting the market. We are seeing this trend since Q4 affecting the market prices and movement towards those more value products. Eventually, the mix didn't really change. I mean, the mix is still about 70-30, but this reflects on our portfolio. I would say our portfolio is close to the market portfolio, about 70% of our product is on high quality and above 30% are more on the size of, what we call, ultra-medical or legacy product. And basically, Amos also stating that we have seen this trend into also 2023. Eventually, we expect those inventories either to sold out or to expire as eventually the market will clean up. We have expiration dates on pharmaceutical products and also we are seeing most of those player exiting the market. So basically, we are expecting the cleanup to occur towards the mid of the second half of 2023.

Thank you. That's helpful. And certainly that helps to explain some of the margin degradation that you guys saw sequentially in 4Q. But as I reflect on kind of the evolution of your gross margin on a multiyear basis, it would seem reasonable to think that there's also a margin drag from your international operations. So, can you just talk about your perspective on gross margin from here? How much of a recovery can we see as the Israeli market gets cleaned up? And then the offset, of course, being what kind of incremental gross margin headwinds should we expect from your international expansion efforts? Thank you.

So yes, we think again, like, it's hard to speculate right now. I mean, there's couple of trends that that may affect gross margin. We expect the prescription reform to be implemented and one -- this second, this might have a crucial effect -- crucial positive effect on the gross margin and really hard to speculate when this reform will be implemented. Regarding our international expansion, as we will -- I mean, prices in Germany and in the U.K. are much higher than the Israeli market, we are seeing prices that are sometimes doubling with much lower quality. So we expect margin -- positive impact on our gross profit margin as we will scale up and launch more products in those territories.

Okay. That's helpful. And then just my last question, sticking with international. I think it's been our experience that progress in international and in this instance European cannabis market, has certainly been slower to progress that clearly informs what your differentiated strategy is to be sure. But can you just reflect back on what your expectations were for international progress heading into 2022 and how you may have tempered your expectations around regulatory change in Europe for 2023? Thank you.

Yes. As I stated, we are taking careful steps toward our international expansion, learning from basically the markets and other companies' mistakes. There are some niche markets at the moment for us at Europe. I mean, German market is about [indiscernible] at the moment. And we are expecting a new reform there. So for us, Germany is a nice target market where we are competing basically with the same competition, with the same companies that are playing here in Israel, supplying the market in Israel. But the quality in the German market, I would say, it's where Israel used to be about two years ago, Israel is much more competitive in terms of quality. UK market is in initial stage, but growing fast, representing a good opportunity for us also. But again, it's a small market yet. We are launching the first pharmacy in the heart of London to actually have a physical inventory. We've seen a big change in Israel once we launch a high quality product in the market. We've seen the market grow because of that offering. And yes, we believe that once medical cannabis products in high quality will be offered in the UK market in decent prices, of course, comparing to the local market conditions, we will obtain a good market share and eventually, the market will grow because of the same trends that we've seen in Israel in the early days.

Understood. Thank you very much.

Thank you, Vivien.

Thank you. [Operator Instructions] Our next question comes from the line of Matt Bottomley of Canaccord. Your question please, Matt.

Good evening. Thanks for all the color so far. I'm just wondering with respect to the -- particularly on the gross margin side of things. I know you sort of explained some of the dynamics that are happening in the market that are causing some headwinds. But given that Q1 is sort of already in the rearview mirror here, typically when we see some of this price erosion or some just difficult dynamics with respect to pricing, it's not typically a one quarter event. And I know you expanded on this a little bit more, but I'm just wondering whether it's on margins or maybe any other sort of guidance quantified or not, if you can give us indications of how Q1 has trended and any sort of expectations into the back half of the year with respect to the cadence of pricing in Israel?

Hi, Matt. So as I said, it's really hard. And again, we are not giving any guidance. So I can give some colors and try to speculate a little bit about the trends. So as we stated, we are seeing the trend into the first quarter of 2023. And again, it’s hard to speculate where the market will cleaned up and when the new reform will be implemented. The best guest of ours right now, this is the best we can give is in the second half of 2023. As we are seeing companies exiting the market and some consolidation process already started, eventually leaving more room for us to grow our market share. But again, it's hard to speculate right now about in what quarter we will see the inflection point.

Okay, got it. Thanks for that. And then my other question just relates to the potential for pretty significant growth profile into next year on legislative changes for prescriptions. So one, can you just give us any description of how this process relates relative to other legislative endeavors in the past? I know for the last couple of years there's speculation of maybe adult use that's kind of been kicked down the road and there's been various sort of elections in the interim that have probably delayed that, but sort of how concrete is the actual catalyst of sort of an easier access to patients when it comes to those that can prescribe? And the second is just the ability to service that, assuming that it does happen an overall 70% increase in market demand. Is that something that would require more capital investment? Is it something that you think although it might alleviate pricing pressure is something that the operators in general overall in Israel can support that level of growth in one year, should it occur?

Okay. Thanks for the question. So the prescription reform is built after probably two years in the Ministry of Health. They've examined the biggest bottleneck in medical cannabis market, which is the doctor prescribing licenses. In Israel, the physicians need to have a license to prescribe, also the patient needs a license, but the main bottleneck is this license to prescribe that has given to about 200 physicians. Out of them, we have about got only a couple of 10s which are actively prescribing. So we have about 123,000 patients and that means doctors have to prescribe the 240,000 prescriptions per year divided into 45, 50 physicians, you get a huge queue. Also, the regulation calls for maximum cost for each prescription, which is about $70, while the actual price, again, because, of course, other demand on supply, the actual price is sometimes triple the price. And that caused a lot of constraints. Many doctors charge much more than the regulation. And from time to time, the Ministry of Health is halted and canceling their licenses in the first half of 2022. The Minister of Health has canceled the license of several doctors who were in charge of 20,000 patients, that basically brought the market to a stable line with our growth and we saw -- we see this happen again in the beginning of 2023. And this will continue to happen unless we solve this bottleneck. So a comity was called and the comity is unpolitical, it's totally professional and the committee concluded as the Minister of Health has announced this reform. And then we went into elections and in the new government, the new Ministry of Health in the first day stated that this reform will be implemented. So again, it's a huge suffering for patients. Of course, it's also a big concern of the industry. But again, the patient community in Israel is also a big political power. And yes, we have all the -- yes, we have the reason to believe that this reform will be implemented soon. Again, no crystal baller for the timing, but this is a big concern and a big surprise for the patient community.

Got it. Appreciate it. And just on the part of the question with respect to the ability to service the market, if there's a 70% increase, I know you have relationships for various import arrangements out of Canada, but just how you're situated, should that growth come in faster than you're anticipating relative to your own capacity internally?

Okay. I didn't explain also that the reform will cancel the need for a specific license and basically every physician under the public system, the Israeli healthcare system would be able to prescribe at least the second and go on prescription. So this, of course, will eliminate the bottleneck and the market, I mean, the Ministry of Health is expecting the market to grow by the 70%. This is official number. So yes, I have to say that we are preparing ourselves for this reform. We scaled up our operations, cultivation operations here in Israel. We signed up with third parties also and we scaled up also our supply agreements with Organigram and other international partners. So I would say we are basically ready for this reform. And I hope that this reform will be implemented soon. So we can exercise on everything we did here.

Okay. Well, thanks so much. I’ll step back.

Thank you.

Thank you. Our next question comes from the line of Pablo Zuanic, of Zuanic and Associates. Your line is open. Pablo?

Hello, Alex. Look, just one question regarding this prescription reform. Obviously, it sounds like a big catalyst for the industry, but I guess, I'm thinking in the case of Germany, all the doctors there are able to prescribe, but very few do, right? And in the case of Israel, we are calling this a bottleneck, but these doctors there that didn't have a license, they were free to try to get a license to prescribe cannabis, right? So explain to us why is this different and why it would be such a big catalyst?

Okay, Pablo. Thanks for the question. So there's a big difference between the Israeli regulations and the German regulation. Also regarding the doctors, I would say, enthusiastic to prescribe the cannabis. Basically, the huge difference is that, Israel has a clinical practice where the doctors can use this this green book and use this clinical practice and be, I would say, protected. We have to understand that most of the doctors they didn't learn about [indiscernible] medical cannabis in their universities. So yes, the big difference is this clinical practice that Israel is using. And again, I mean, Israel is much more advanced in terms of accepting medical cannabis. We by the Ministry of Health medical cannabis has become first line of treatment in some indication, not like in Germany where you have to first of all use many other pharmaceutical and only if that doesn't really help you, the doctor can prescribe you medical cannabis. So there's a big difference. I think eventually Germany, not only Germany, a lot of other countries only even including the FDA, we look into the Israeli regulation and the Israeli chemical practice and actually we are expecting a new book that will be issued very soon by the Ministry of Health that will be more scientific. And this time it will be in English. And I know that many regulators around the world in Australia, in Germany and even in the U.S. are waiting for this book. And basically, this is, I would say, the most advanced regulation and -- regulation in the world. So Israel is, as I said, is ahead of any other markets in terms of accepting and developing this regulation.

Thank you. And I think you said that there's only 200 doctors in Israel that had this license. Why do you think the number was so low? I mean, was it very difficult or expensive to get the license, [indiscernible] time that we have to spend to get the license? Can you explain that?

Again, it's hard to explain why there are only 200 physicians that got the license, probably it's because of the process. The Minister of Health need to go for a special course and then to go to exams. And we are seeing the young generation of tradition accepting that. And the old generation usually won't follow those [indiscernible] and eventually physicians in Israel are accepting medical cannabis, but to prescribe medical cannabis, as I said, you need this specific license, you need to report. It's again, it's a biography process, it's not like prescribing regular narcotics. You have to be connected to the Ministry of Health with the special system. So all those biography were lean and hangover the market, not only the market, it's basically -- this is basically why a lot of patients are suffering from [Qs] (ph) and from prices that are much higher than the regulation has stated.

All right. It sounds like a big catalyst. So just to be clear, in terms of stores, you are at 18 in Israel and I think you aim to finish with 26 by the end of 2023. Is the opening of the stores going to depend a bit on when the prescription reform comes in? Or do you have already pretty much the schedule lined up for the year?

So we have -- in Israel, we have 20 actively dispensing stores. It's not stores, it's dedicated pharmacies and another six that are in development. The development phase of those pharmacies actually does not depend on the reform. It's again, it's a very biography process. Sometimes it can take six months, sometimes it can take two years depending on the district in Israel. So, yes, this reform might open also the bottleneck for the pharmacies that's part of the reform. But again, it's not the biggest constraint. And actually, we expect to end up deal with more than 26 activity dispensing services.

Thank you. And 1 last one. I saw you canceled the deal in Australia with Better. Can you just remind us what was the original logic of that deal and what could you be doing in Australia in the future? Thanks. That's it.

Yes. Right now, the issue with Better, because again we loaned some $2 million, $2.5 million dollars to Better. And the issue with Better is right now on hold. We are swing better. So it's kind of hard for me to get into details. Yes, I would say we had a very good logic in turning into this M&A, some of it is better presentations about Australia and their license, they're the second active license in Australia. Unfortunately, this did not mature because of many reasons not related to InterCure. And I don't want to dive into it because it's right now on court.

Okay. Thank you.

Thank you.

Thank you. And ladies and gentlemen, that does end today’s Q&A session and concludes today’s conference call. Thank you for your participation. You may now disconnect.