US strategy shift causes growth pains for Elixinol

US strategy shift causes growth pains for Elixinol

One of Australia's leading medicinal cannabis companies saw 19 per cent year-on-year revenue growth for the first half of 2019, but the outcome would have likely been better if it hadn't pulled out of a low-margin private label business earlier this year.

Major cannabidiol (CBD) and hemp player Elixinol Global (ASX: EXL) notched $18.3 million in revenue for the period, in comparison to $22.6 million in the second half of 2018.

Elixinol also announced a loss of $9.8 million compared to a slight profit of around $100,000 in the first half of 2018, but the company is still upbeat. Its wholly owned US subsidiary continues to gain distribution in nationally recognised retail outlets, and scored a coup in May by signing on Albertsons/Safeway into the fold. 

Elixinol's products are currently sold in more than 1,000 natural, specialty and conventional national retailers in the US. This is positive for the group but challenges abound with cheaper competition on the market. 

"As the CBD market in the US continues to experience unprecedented growth, a lack of product regulation and quality standards creates a difficult environment for consumers to make informed choices and certain competitors are offering lower quality products at discounted prices," Elixinol said in today's announcement.

"Elixinol continues to promote consumer education and the highest quality practices in anticipation of an impending Food and Drug Administration (FDA) regulatory framework creating appropriate barriers to entry and set standards which are likely to correct the market."

Excluding the private label business which Elixinol exited for strategic reasons, normalised year-on-year revenue growth would have been at 34 per cent.

"In line with the Company's shifted focus from low margin, private label products to higher margin branded products, Elixinol has seen 63 per cent revenue growth from Elixinol branded products to $7.5 million in H1 FY2019 ($4.6 million in H1 FY2018)," the company said.

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In the half Elixinol also purchased a 25 per cent stake in pet products business Pet Releaf and entered a joint venture with global food ingredients manufacturer RFI

"These strategic relationships are expected to continue to drive growth in H2 FY2019 revenue," the company said today.

The group is one of several ASX-listed companies that have been establishing themselves in Europe. However, the deployment of capital to accelerate growth in Europe led to $2.8 million in net operating cash outflows in the half.

"Elixinol Global's Dutch based wholly-owned subsidiary Elixinol B.V. continues to make strong progress in Europe with co-branded products sold under the "Naturopathica" brand which are now available via Europe's leading health and wellness retailer, Holland & Barrett's online store, and in over 800 Holland & Barrett retail stores.

"Created in partnership with prominent UK-based company, PharmaCare, the Naturopathica CBD+ range encompasses six capsule-based SKUs that blend with Elixinol's high strength, full spectrum CBD products with specific vitamins and minerals to target different areas of health and wellbeing.

"The Company is in the process of fulfilling a second order of 60,000 units which will be recognised in H2 FY2019 revenue."

A $50 million capital raise in early June has meant Elixinol now has a balance sheet with net cash of $47.9 million - a reserve management believes will help drive growth across the business.

"During H1 FY2019, the Company continued to invest in key areas of the business to pursue its strategy and focus on increasing its distribution of branded products," the company said.

"The focus of investment to date to achieve increased distribution has been growing brand awareness through marketing activities, as well as investing in appropriate supporting infrastructure to be able to capitalise on future demand.

"In anticipation of increasing consumer demand and regulatory driven catalysts, the Company significantly increased its inventories and placed sizable deposits for raw material supply contracts in the USA which incurred operating cash outflows of $17.3 million during H1 FY2019."

Even though a significant increase in hemp farming acres is anticipated in the US, the group has also made a strategic decision to mitigate the risk of typical first and second year crop failures, partnering with well-established hemp farmers who utilise leading agricultural practices.

"Risk of stock obsolescence is mitigated by extracting biomass into CBD oil which then has up to a 3-year shelf life," the company said.

EXL shares were up 5.37 per cent at $2.55 at 10:13am.

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