Auxly Cannabis Group Inc. (XLY) Earnings Call Transcript

Thank you. Auxly Cannabis Group Q2 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 13, 2026. I would now like to turn the conference over to Mr. Hugo Alves, CEO. Please go ahead.

Thank you. Good morning. I'm Hugo Alves, Auxly's co-founder and Chief Executive Officer. I'd like to welcome you all to Auxly Cannabis Group's Q2 2026 conference call and webcast. Joining me on this call today are Travis Wong, our Chief Financial Officer, and Marc Charbin, our Head of Investor Relations. Today, I'll share highlights from the quarter, and then we'll open up the call to questions from analysts and answer some questions that have come through the investor relations inbox over the last few days. Before we begin, I'd like to remind you that our remarks may contain forward-looking information and actual results could differ materially. Forward-looking information is subject to many risks and uncertainties. Certain factors or assumptions applied in the forward-looking information can be found in our latest Annual Information Form and Management's Discussion and Analysis. These documents are available on our website and at sedarplus.ca. More generally, if you have questions once the call is complete, please reach out to our investor relations. Our contact information can be found at the end of our earnings press release. Moving on to our financial results, our Q2 2026 financial results represented a quarterly record in net revenue, adjusted EBITDA, and cash flow from operations. Net revenue reached $45.8 million, an increase of 18% year-over-year. Gross margin on finished cannabis inventory sold increased to 55%, up from 52% in Q2 2025. Adjusted EBITDA was $14.3 million, an increase of 24% year-over-year, representing an EBITDA margin of 31%, and cash flow from operations before working capital changes reached $13.4 million, an increase of 31% year-over-year and representing a 94% conversion from adjusted EBITDA. Our net revenue growth is driven by continued strong demand for our core portfolio, led by Back Forty's strength in flower, pre-rolls, and vapes. Our gross margin reflects continuing improvements across our operating footprint, strategic procurement initiatives, and a favorable product mix. And we believe that the operating leverage we are delivering is structural. We have the operating assets, the scale, and the cost discipline to deliver best-in-class margins, and these results demonstrate that. Our improved profitability is translating directly into cash flow with a 94% conversion rate between adjusted EBITDA and cash flow from operations before working capital. Our balance sheet remains strong with $38 million in cash and $44 million in long-term debt. This cash balance also reflects the deployment of $5.7 million in the quarter to repurchase 2.6 million post-consolidation shares through our active NCIB program. And of course, in July, we completed our 14-to-1 share consolidation, an important step forward in aligning our market profile with the quality of the business we have built. We are encouraged by the response from shareholders and the confidence that has been reflected in our share price performance since the consolidation took effect. Looking forward, our outlook for 2026 is unchanged. We believe Auxly can continue to grow net revenue above market rates through investments in distribution, innovation, and increased quality and capacity at Auxly Leamington. In July, we launched a new sativa cultivar under our Back Forty brand, Galactic Jack. And the early consumer response has been tremendous. We have additional innovations across our core categories planned for the seasonally stronger back half of the year. We continue to invest in operational efficiency and maintain rigorous cost control across the organization to support continued profitability. And we expect improved cash conversion through the reduction of interest expense and working capital to remain similar to last year with modest increases to support net revenue growth. In the outlook section of our Q2 MD&A, we have outlined a longer-term capital program of approximately $30 million over the next 3 years to increase yield at Auxly Leamington by approximately 30% over 2025 levels. This program is a project that will be continued in the next 3 years and includes the $10 to $12 million we had previously guided towards for 2026. We are undertaking this expansion because of the continued strong demand we are seeing for our products, and the investments are expected to be funded comfortably from our cash from operations. Even with our improved capital markets posture, we believe our share price does not yet reflect the intrinsic value we have built. We have sufficient capacity and available cash from operations to continue repurchasing shares under our NCIB program as part of our disciplined capital allocation framework, and we are committed to earning the confidence of our shareholders through execution and results. To conclude, the Auxly team is focused and aligned in our pursuit of quality, innovation, and profitability. We are delighted with our record Q2 2026 results and seeing continued strong demand for our products as we head into the back half of the year. I'd like to thank our teams in Leamington, Charlottetown, and Toronto, whose commitment, passion, and resilience are the driving force behind Auxly's emergence as an industry leader. We are also grateful for the continued support of our shareholders, vendors, and partners. We are building to last. We are excited about the future and believe the best is yet to come. This concludes our prepared remarks. We're going to take calls from analysts, and then we'll answer questions that our investors have sent to us over the last few days. Operator, please open the call for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Neal Gilmer with Haywood Securities. Your line is now open.

Hugo, maybe if you could expand on both what you referenced in the MD&A about the 30% yield in Leamington, that's a pretty significant jump. What sort of things are you planning on doing to achieve that?

Yes, Neal, thanks. So as discussed before, it is to build out additional post-harvest capabilities in Leamington and also to bring an additional grow zone online and add to the infrastructure, things like the HVAC that has to go into those systems, pieces of infrastructure, but it's effectively additional cultivation and significant additional post-harvest capabilities. We're seeing very strong demand for our products, and I think as our demand picture becomes clear and our thinking evolves, we thought it was right to share our longer-term ambitions with shareholders as they are constantly asking us for our longer-term growth plans. So we wanted to share those as they are baked into our strategic plan.

That's fair. Thank you for that. So you say through to the end of 2028, so will we still start seeing some of those yield improvements in 2027?

Yes. Through the end of 2028, we'll have the whole thing done, but you will see yield improvements throughout the course of that 3-year period, of course.

Great, thanks. Maybe you turn it to the income statement here. I think it's 5 quarters in a row you're at an EBITDA margin of 31%, so clearly, it looks sustainable and clearly above most of the group in Canada. So, maybe elaborate a little bit on how you're able to achieve that, #1, but #2, do you feel that that's continued to be sustainable? It's quite a good level, but I imagine with some of the dynamics in the market, there may be some challenges along the way. Maybe just talk a little bit about the puts and takes there between gross margin, operating leverage, and where you're ultimately achieving the EBITDA margin there.

Yes, sure. Hi Neal, it's Travis here. Yes, I think we break down the EBITDA margin overall as sustainable. It's really driven in our minds by 3 main components, of course, net revenue being the first one. We continue to guide that we will and target stronger-than-industry growth in that segment driven by our innovation, our ability to read our consumers. We do believe that those revenue growth rates will continue to be above industry guidance. Here's the margin, I think this is where we really stand out. A lot of the improvements in our gross margin are structural in nature. So we continue to see higher cultivation yields from last year, we've improved our manufacturing processes both at our Leamington facility and at our Charlottetown facility. And then lastly, we have engaged over the last 18 months in strategic procurement initiatives to really lower a lot of our input costs in our portfolio, including, for example, our [ vape API ] costs. And then lastly, the SG&A is the final factor in protecting that EBITDA margin. We've always guided to maintaining SG&A growth at the same rate as revenue growth, particularly on an annual basis. We continue to target that. We think that's achievable. As we get bigger, we will invest in our sales and marketing group, but we do think we've kind of figured out and right-sized our SG&A for the business that we're growing.

Great, thanks Travis. Last one for me, maybe just you know what your current thoughts on international are as far as obviously you're executing great in Canada, I know that's going to be your, or expect that's going to be your focus. Any thoughts or plans on looking at the international markets?