IM Cannabis Corp. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Cost Management: Reduced overall operating expenses by $4 million (17%) in 2024 to $18.7 million. This builds on a 43% decrease in 2023, with a cumulative 53% reduction in operating expenses since 2022. The reduction in operating expenses was most impactful in Q4 2024, showing the initial impact of savings initiated during the year.
• Integration: Fully integrated marketing and supply teams to build operational infrastructure and a stable supply chain for growth in Germany in 2025. Added three new suppliers and launched 16 new strains in 2024.
• Germany Performance: In Q4 2024, adjusted EBITDA was a gain of $0.5 million versus a loss of $4.3 million in Q4 2023. For the full year 2024, adjusted EBITDA loss was $1.1 million versus $8 million loss in 2023.
• Israel Performance: Mitigated the impact of the war on business, launched/relaunched 27 strains across six brands, moved to a different production facility to reduce production costs, and cleared slow-moving non-premium stock, with no anticipated similar scale of write-off in 2025.

Segment Performance

• Germany: In 2024, Germany's revenue contribution significantly increased. In the second half of 2024, Germany made up 40% of IM Cannabis' total revenue, up from 11% in all of 2023. Q4 2024 German revenue increased by 280% compared to Q4 2023. Total revenue in 2024 was $54 million, with Germany contributing an increase of $10 million in revenue. The company imported 11 new strains in the second half of 2024 with an integrated supply chain, leading to a 14% upside in sales in Germany.
• Israel: Revenue in Israel in 2024 was $15.5 million, an increase of over 183% compared to 2023. However, revenue was affected by the Oranim deal cancellation, which reduced revenue by approximately $8.5 million in 2023. Excluding the Oranim revenue in 2023, Israel revenue increased by approximately $3.7 million or 12%. The company launched or relaunched 27 strains across six brands in 2024, moved to a different production facility, and cleared slow-moving non-premium stock for about $3.9 million.

Guidance

• Management expects Q1 2025 to be the best sales quarter in Germany to date, thanks to the new solid integrated supply chain.
• Focus remains on driving growth in Germany while maintaining efficiency and agility in the lean structure.
• Margin expectations are to improve from 2024 levels, with Uri Birenberg noting that 2024 margins were affected by one-time inventory events and 2025 margins are expected to be better.

Risks

• The German market is dynamic and competitive, with potential price compression, which is factored into the company's plans.

Q: Hi. Thank you very much for the questions today. So first question for me, just wanted to touch on Germany. So great to hear that 1Q is off to a great start. So just if we just touch back on 4Q and again this is specifically on Germany. It does look like it was a little bit softer. Obviously, you've had tremendous growth in 2Q and 3Q for Germany. It looks like some of that growth stopped still hit about $5 million from what I'm seeing here. But can you talk about were there dynamics specifically in the quarter that slowed some of that growth that seems to have come back in 1Q or just some of the dynamics that's going on within the German market there that might have led to some -- you're seeing.

A: Okay. Thank you for the question, Aaron. So like you said we started with a very strong growth in Q2 and Q3. In Q4, we had some delays. And but we -- I think that I said that it was just a delay and Q1 looks very good. And it's not something that is part of the ongoing. I think that it's part of building the supply chain. It's a long process. And I think that the target was to be very stable with the supply in '25. And we are going into '25 with a much stronger supply chain. And I believe that we will see it also in the quantities in '25.

Q: And then can you comment on any changes you're seeing in the competitive dynamic for Germany? Obviously, there's a lot of operators internationally that are putting a lot of focus on the German market. So changing competition, whether it be pricing or otherwise that you're starting to see?

A: The German market is very dynamic. I think that what we see is that the market is changing from week to week. There is definitely a competition in the market. It's still -- we see more or less the same leading competitors. And so this is what we feel right now. The German market value products are very successful in the German market and it's very clear. So I don't foresee a very big change. The market will be competitive. It's part of our plans. I believe that there will be a price compression, there is a price compression. And it's part of what we took in our plan from the beginning.

Q: Okay. I appreciate that color. And then just kind of piggyback off of that, with the price compression, how should we think about the margin profile? So we still had 20% gross margin for the quarter, EBITDA positive there. So how should we think about the margin progression for the year as we think about potential growth, but also some pricing pressure?

A: So it's very difficult to know how the market will develop because also there have been some political changes in Germany. But I think that we don't think that we will go down with the margins in our estimates. We even think that it might be better than it is now. Uri Birenberg: If I may add you cannot take year '24 as a reference for future expectations regarding gross margin simply because of the onetime event related to inventory over the year. So we cleaned all our old inventory and we are set for new inventory to sell and there is a big demand in Germany also in Israel. So I'm expecting it to be better than what you see in 2024 for sure. To say exactly how much, it's a little bit complicated, but 20% that you mentioned is not the levels that we expect.

Q: Last question for me just on Israel. It seems to have stabilized a bit there. I had seen a little bit of softness. So are you feeling comfortable with that market now? I know there's been a lot of shakeout between competitors fewer products coming from Canadian LP. So just commenting quickly on the broader Israeli market and how you're expecting for that to evolve in 2025.

A: So as of now, we don't foresee any significant growth in the Israeli market. So we think that it will be more or less stable unless we will see some regulations change and the focus on growth for us is mainly in Germany.