Q4 2019 Earnings Call
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Thank you. Please note that this call is being recorded today October 29, 2019 at 830 am Eastern time, I would now like to turn the call over to Jennifer Smith Director of Investor Relations and Hexcel Corp. The Smith you May proceed.
Good morning, and Jennifer Smith, the director of Investor Relations for EXL Corp. Thank you all for joining US. This morning for 2019 Q4 earnings call. We will start with the presentation by our CEO Sebastien family.
Followed by a recap or a fourth quarter results by our CFO , Steve for wash before opening the floor to questions from financial analysts.
Before we begin I would like to remind you that today's presentation contain forward looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectation.
The forward looking statements are based upon and include the company's current internal estimates plans expectations opinions forecasts projections targets guidance or other statements that are not statements about.
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Planned renewed required permits licenses and related regulatory compliance matters implemented growth strategies of team to maintain financing on acceptable terms maintain and renew required licenses maintain good business relationships with its customers distributors another strategic partners keep pace with changing consumer preferences protect intellectual property.
Managing integrate acquisitions retain key personnel and released the company's competitive advantage mint advantages the development of new products and product format for the company's product changes in law rules regulations, and the absence of materially adverse changes in the industry or global economy, a more complete discussion of the risks and uncertainties facing the company appear in the.
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Factors could cause actual events performance or results to differ materially from what is projected in these forward looking statements. You are cautioned not to place undue reliance on these forward looking statements, which only which speak only as of the date of this presentation. The company disclaims any intention or obligation except to the extent required by law to update 'em revise any forward looking statements.
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Boston.
Thank you Jennifer good morning, everybody I.
I'll just start by highlighting what an incredible year 2019 has been for the cannabis industry as a whole.
We just passed the one year anniversary of recreational marijuana legalization in Canada. This is something you see once in a lifetime or.
For the past year, we've made significant steps forward, Canada became the first G country to legalize adults used cannabis.
Axles first plants were moved into our new Bienaime expansion on January 20, 905 quarters. After the project was announced.
We signed on long term lease for state of the our manufacturing center or center of excellence in Melville and began retrofitting that facility.
Closed our acquisition of Newstrike brands.
We significantly increased our distribution across Canada. The nine provinces, we strategically expanded our brand portfolio with both up and original stash.
Together with our partner Molson Coors, we made significant progress towards launching beverages in Canada in anticipation of cannabis 2.0.
We're just getting started.
Our company still young despite all that we've accomplished we've had some shortfalls, we recently retracted our fiscal 2020 guidance.
Our fourth quarter revenues came in below our original expectations and we hold ourselves accountable to that.
We'd hope to achieve 400 million in revenue for fiscal 2020, there were several factors that contributed to the retraction of this guidance so lets walk through the major once.
The retail store rollout in Canada has been slow to develop particularly in Ontario, and Quebec, which represents approximately 60% of the Canadian population and currently less than 10% of the stores, while bolt provinces are committed to improving access to legalize cannabis. This has been slower than originally expected to develop SDDC store rollout.
Was less than originally expected and Ontario is now considering changing their distribution model.
We don't believe the Canadian market will successfully penetrate the black market and see meaningful sales numbers until we can address the issues around access to legal cannabis and the in store experience.
I do want to add that the stores despite having a slow rollout. This is a first across the world and we still have quite the success.
There are still customer lineups around most sq Dcs.
Our contract with Sq DC originally contracted for pardon me. So SDDC originally contracted approximately 58 tons for year, one from all license producers due to supply shortages initial sell through is expected to be a little less than half of that amount.
I want to stress that hexcel was part of that reduced amount. So shipping about 10 tons in of our 20 ton initial commitment, but what I think is more important is to point out that hexcel maintained a 33% market share in come back. So our original 20 ton commitment out of the 50 a ton we've had.
That market share if not the volume.
Our contract required us GDC to purchase that tonnage and while we didnt achieve those quantities. We don't think it would be responsible as a partner to demand that full 20 tons were in this for the long haul with our partner Sq DC and we're more interested in what we can do with revenues over the next five to 10.
One years versus the next five quarters.
Sales from the first year provided us with invaluable data in terms of consumer taste. We're learning a lot about different strains, we're growing both from THC content and pricing and also taste.
Additionally, we originally expected to double our Q3 revenues in Q4 2019.
Unfortunately, we were not able to achieve that goal.
In addition to the factors mentioned above subsequent to the end of the fourth quarter. We made a management decision to set up a reserve provision to address possible returns from the provinces. This included price adjustments as the result of a reevaluation of our pricing strategy. This is becoming standard in the industry, but since there is no historical guidance to based this provision.
And we estimated at $3.8 million.
While we've not seen returns in this amount we felt it prudent to record this in the fourth quarter and we'll continue to monitor this going forward.
Important to note that we also saw at wholesale return of $2.9 million during the quarter and that made up most of the delta to to where we thought we would hit that quarterly double.
To further complicate matters, our sell through was a bit lower than anticipated and we expect a gym generate a fair amount of wholesale revenue.
That did not materialize I think that as we're starting to see the industry rationalize wholesale revenue will become more and more difficult as the key driver of company success will be market share in store in province.
Until the market matures and the retail channels are built out.
We will refrain from providing guidance.
Despite these uncertainties, we continue to believe that the long term outlook remains very attractive the black market remains strong in Canada, and we feel that we're well positioned to leverage our legal assets and products to attract those customers and grow the legal market.
We're ensuring that our company's properly capitalize to achieve our near and long term objectives. In fact, we recently announced a 70 million dollar private placement that is now committed and is expected to close earlier, but next month.
In addition to outside investors most of the board of directors and myself participated.
And we're also in the process of setting up an aftermarket financing to raise additional equity to build a capital reserve and fund our high priority initiatives.
As we move forward, we're realigning our strategy to address changes in the market in the near term we're focused on the following priorities driving sales through new product offerings and leveraging increase the analytics for decision, making we're taking a multi brand approach to the market. That's focused on customer demand, we're broadening our domestic market penetration by working.
With the potential regulatory authorities to lift hexcel up and our new original stash brand in provinces from coast to coast.
Last week on the anniversary of legalization, we introduced original stash, we've developed original fast with a focus on attracting existing black market consumers. These are new consumers that typically do not walk into legal store fronts original stash has been a resounding success selling a 28 gram bag or one ounce.
For approximately $125 at retail taxes included this is 10% below black market pricing and is it profitable product.
We're pleased of course to be the first LP to do that Hexcel has always been on a series of first and we continue that tradition here.
Our second priority will be achieving operational excellence, we brought on new leadership focused on demand planning and production, we're implementing more effective techniques to streamline operations, we're using automation, where it makes sense and expect meaningful improvements in our yields overtime.
Our third priority is rightsizing, our operational expenses to drive towards profitability, we're restructuring our operating expenses to align with our near term revenue expectations. Our operational expenses increased at the end of our 2019 fiscal year to support prior near term growth expectations. We've taken the first steps to bring these back in line with current market conditions.
Last week, we made the very difficult decision to say goodbye to approximately 200 members of our staff across our facilities, while it's never easy to make a decision like this these were necessary short term actions to ensure the long term success of heck. So.
We've scaled back our cultivation facilities to 1.1 million square feet with a temporary suspension of activity at our Niagara facility and reduction of 200000 square feet in Ghana.
Additional cultivation space is not currently required to supply the Canadian market today, we're able to continue to drive improvements in our yields and processing capabilities in our facilities when market conditions improve we can bring the suspended facilities back online as required.
Our current annualized run rate is 80 tons a year comprised of approximately 45% to 55% dried flower with the balance comprised of high quality trim, which can be used in a variety of value added products.
We're continuing to recalibrate operational expenses, taking a hard look throughout the organization to ensure we are lean and focused on core priorities to drive long term value creation.
Fourth priority is commissioning our state of the art manufacturing facility in Bellville, Our Bellville Center of excellence is key to the development and rollout of our 2.0 products and driving our overall production costs down our construction teams have been working tirelessly, finishing the leasehold improvements and preparing the space for our teams last Friday variable.
Used to announce we received our Belveal license. We're in the process of submitting the amendment required to sell all new classes of edibles produced under the license and our pilot facility and got no is fully licensed for kind of is 2.0.
Our strategy. It's important to note is a national portfolio launch, which means waiting for bellville to be fully online before launching our 2.0 products. Our first 2.0 products are now expected to hit shelves within the first six months of calendar 2020, So there's still some regulatory risk associated with that date.
Continuing to invest in R&D and intellectual property.
We're in this for the long term and firmly believe that R&D and IP or critical assets. Our team is focused on developing an improving on our cannabis technology for our portfolio of derivative products important to note that hexcel now has a 38 patents filed and at that list as growing we're making unbelievable progress on.
Things like a modification emulsion nanotechnology and visits.
All these technologies will empower our six priority future partnerships through powered by Ekso strategy. We've made good progress with our partnership with Molson Coors Trust now has six brands ready from planning to formulation the beverages taste, absolutely amazing they look the mouth feel and with our new R&D.
The license were able to actually try the they're fantastic.
Last week, we saw the first of these brands announced flow Globe, we're super excited to partner with flow water on a line of CBD beverages, we believe that the key there the rollout and have a successful brand presence internationally is through powered by X.. So we think that the key priority is to invest in regulatory access IP and cannabis.
Based technology and to flow through that technology to Fortune 500 partners throughout the world to lever their distribution and brand presence.
We're still on track the launch our first products in the us during 2020 with one or two partners. We had initially targeted entry into eight states and Weve updated that plan to have a more concentrated effort.
I want to stress during all this hard work in time and focus on operations, our dedication to corporate social responsibility.
As we grow and move into new markets, we need to think about more than just our products and prices. We also have examined the way our operations in fact, a natural and social environment on a local provincial and national level. These include monitoring and reporting on our greenhouse gas emissions setting targets to reduce those emissions and also offsetting our footprint.
Stay tuned for some big news to share on that front later this year.
As members of the global cannabis partnership also be reporting on other environment, social and governance impact areas based on global reporting initiative standards.
That attitude translates into how we create products at hexcel.
For example, our product development teams are working on creating new products, including THC vapours that contain intellectual properly developed by hexcel and this is focused on addressing the safety of that category.
Legal extract product will be stringently tested for contaminants like heavy metals and solvents, which is not a process currently done in the black market.
We understand that thinning agents PGP GBG found in some cannabis extracts are under increased scrutiny for having negative health impacts as such to produce high quality vase hexcel will not developed products that use these carriers.
We believe that we can consciously and positively drive change, while driving profitability and creating long term value and amazing products for our consumers.
In closing I'd like to save on them credibly excited for the future pack. So today were stronger our brands are unbelievable our capacity is in line with where we needed our teams are strong.
And our technology now is world class.
We intend to keep strengthening our position within Canada and internationally.
We're just getting started.
I'd like to now hand over the floor to Stephen Byrd wash, our CFO . So he can talk a little bit about the numbers Steve. Thank you Sebastian Hi, Good morning, everybody Q4 was an incredibly busy quarter.
The total gross revenues were $20.5 million for the fourth quarter, an increase of 29% over Q3 net revenue was 15.4 million.
Gross adult use revenues increased 30% from the prior quarter to 19 million up from 14.6 in Q3.
I don't use sales volume increased 45% to just over four tons from 2.7 tons in Q3.
Flower and drive products accounted for 89% of Graham and gravel Graham equivalents sold during the quarter with oil accounting for the remaining 11.
We achieved oil adult use revenues diagram of 4.74, a decrease of 0.55 over the last quarter. This is due to a provision for sales returns and price adjustments as Sebastian earlier mentioned.
The provision is reflective of a general best estimate provision for returns and price adjustments based on our assessment of sell through and slow moving inventory.
Based on the assessment the company has taken a $3.8 million provision.
On the based on the estimate impact of returns on inventory held by provinces and price adjustments.
As a result of a revaluation of hexcel is pricing strategy.
We saw shift in our geographical reach with 971 kilograms being sold to LGC record, representing 24% of adult use volume during the quarter.
The closing of the new Newstrike acquisition partway through the quarter also added 396 kilograms, representing 10% of the out years volume and 15% of gross out use revenue.
Cost of sales increased 56% to 10.3 million compared to the prior quarter, which was at 6.6 million.
As a result of increase sales volume, partially offset by transformational cost saving as of the result of shift and product mix.
Cost of sales included the cost of drive flower transformation costs related to oil and value added products.
The fair value adjustment on the sale of inventory with 7.3 million, which was an increase from 4.7 in Q3.
This is due to the increase in sales, which was offset by lower fair value per gram on the idle used market.
The fair value adjustment on biological assets or the negative 5.3 million compared with a negative 20.1 million in Q3 as a result of a change that estimates.
The company recorded an impairment loss on inventory of 16.9 million in Q4. This is due to price compression in the market. The impairment loss was realized on Canada has purchased in fiscal 2019 to help meet the demands of the adult use market.
And the original cost of this inventory now exceeds the net realizable value.
Gross margin before fair value adjustments for Q4, 19 was 5 million on 133000 or 33% of that revenue from sale of goods compared to 6 million, 440049% in the prior quarter.
As a result of the previously mentioned provision adjusted gross margin before fair value adjustment for Q4 adjusting for the sales provision we mentioned.
I would have brought the the.
Gross margin to 8.561 million our 45%.
Adjusted net revenue and sale of goods adjusting for the sales provision that we may.
Gross margin after fair value adjustment on biological assets was a negative $13.7 million.
Now I'll run through our operating expenses.
DNA increased $22.4 million in Q4 19 from 10.5 in Q3.
This reflected the scale up of our operations as we continued to strengthen our general finance and administration administrative staff for an increase of 1.9 million.
We added $3.3 million and costs related to the new strike acquisition and an additional 4.1 from the addition of new strikes DNA activity during the period of Q4.
Professional lifting and legal expenses increased by $1.1 million as a result of increased financial reporting and regulatory requirements from the TSX Nic.
Insurance increased by $1.5 million due to increase in property plant equipment being covered and Dino premium increase as a result listening on dicey.
DNA as expected D to decrease through 2020 from Q4 2019 levels as we right size the business for lower revenue expectations, we're striving to refocus the business on achieving operational excellence by developing lean repeatable and scalable processes by leveraging IP.
Marketing and promotion increased to 9.5 million in Q4 from $5.1 million in Q3.
This increase is primarily related to seasonal activity Activations and brand marketing to build brand recognition in the adult used market.
Newstrike contributed contributed an additional 800000 in Q4.
We are reevaluating the way, we deploy our capital across marketing and expect us to decrease significantly as a percentage of revenue in 2020.
Stock based compensation increased to 10.2 million in Q4 19 from 8.2 in Q3 19 during the quarter. The company added the Unvested outstanding options of new straight to the extending bell, which country with which contributed an additional $1 million of expense in the period.
The net loss from operations.
Was $60.7 million in Q4, compared with $2.3 million in Q3 19.
The increase was driven by increased operating cost due to the expanding scale of operations of the company as I've outlined as well as the previously mentioned provisions for sales price adjustments and returns and the impairment loss on the purchased inventory.
As Sebastian mentioned earlier management is reducing operating expenses with a focus on becoming.
EBITDA positive in calendar 2020.
We ended the year with $139 million in cash and cash equivalents, including short term investments.
We have just announced as Sebastian mentioned to $70 million convertible debentures private placements.
Looking ahead to fiscal 2020, we have an additional capital expenditures of 102 $110 million, primarily bellville, but also with the completion of being nine.
We anticipate Q1 net revenues to be in the range of 14 to 18 million.
The reason for the range is that it could be subject to retroactive pricing adjustments as we continue to reevaluate our pricing strategy across the country.
We excel expect sales to grow starting in Q2, and a stepwise fashion and combined with our operational rationalization. It should lead our business to be adjusted EBITDA positive in calendar 2020.
This is these are estimates based on the assumptions, we have today regarding store count operational improvements and cost savings.
Well I'm new in this position I have been at Ekso since March of 2019, and I'm extremely excited to have his new role.
I know some of the analysts and I look forward to meaning all of you in the upcoming months I'll now turn the call back to jet.
Thank you Steve.
We will now take question from our analysts.
Thank you, ladies and gentlemen, as a reminder, should you have any question. Please press star followed by one on your Touchtone phone.
And your first question is from Tami Chen from BMO capital markets. Please go ahead.
Yes, Thanks, Hi, everyone first question Im just trying to understand.
Setback.
How and where do things.
Go wrong, because you'll have you started off with a sizable supply contract from pullback.
Greenhouse was constructed on time, we saw that sell through data in August look pretty good. So just wondering what's going on here why are you calling out this drastic pricing headwinds you in pricing and product strategies like the original stash is it something specific to your product mix, that's maybe not hitting the right.
Mark.
And David Thanks for the question I don't think it's specific to hack. So I think tax always there had been weve. If you remember last quarter I talked about pricing headwinds I was foreshadowing that actual would drive this.
The pricing penetration strategy.
So we were the first to do it other competitors will have to adjust now I think in the broader context, what's important to note is that we've maintained market share. So if I bring you back to a quote I've said in a few different conferences. The challenge for investors right now is not whether cannabis will be a huge and.
Industry or not we know that that's a that's a pretty clear fact that might be a bit slower than we thought but cannabis is here to stay what's less clear now is of the 150 or so companies in Canada, which ones will be Amazon and which ones will be the pets dotcom and forgotten.
And I think if you look to the metrics and the way hexcel was managing and its business the way, we're making hard decisions on operations and the market share. We've managed to keep that tells a much stronger story than the quarterly revenue numbers and so im more confident than ever that within.
The next year as we see that number of license producers dwindle drastically and as we see only a handful of license producers with a cost structure that are able to compete at prices that hexcel is already at.
We are almost certain to be one of those survivors setting the stage to be one of the winners I think that right now we're in a very challenging pullback in the market and I think that Thats, a very healthy thing I think that if again to take that analogy from the tech days, we're seeing the end of a first bubble and now we're seeing the.
Real operating companies emerge and I'm extremely pleased that we've achieved and maintain our 33% Sharon cut back at despite of course, a slower store rollout.
Okay got it thanks and my second question is on the cash position. So I think you noted that.
Ill Cobra, you ended with about $64 million of cash.
And then adding on to 70 million dollar financing you here now.
At the current rate that you're burning through cash got would last you two more quarters I recognize you're now rightsizing the business, but can you help us understand.
Thank you gave some color on the capex, but how about other on asbestos. This operations working capital investment what are other big upcoming span and you mentioned, an ATM that you're working through on what that provide you sufficient capital to keep you going to should you require additional funding.
So capex is the largest driver in our business by far I mean, if you. If you look historically EXL was raised about $400 million, including this latest 70 million dollar convert that's all the money that's gone into the company and Capex. So you'll see in or buildings improvement leasehold everything is already over 250 million.
It's almost 75% of our cash as gone to Capex.
With the current cash balance, including the the investment led by insiders and myself that we've made into the company, we have sufficient cash to hit adjusted EBITDA profitability.
And that the that takes us through the next 12 months. The ATM is really about building additional capital reserves and is going to gauge how fast we can do international expansion. So I'd have mentioned on the call that we are concentrating our efforts in the us specifically coming down from the eight state target and that's largely a function.
Of capital. So if if the ATM provides more capital that provides more speed and more reach and if we need to be more cautious that we go more concentrated we do have sufficient capital to go into the us even without the ATM.
Okay. That's it from me thank you.
Thank you next question is from Rupesh Parikh from Oppenheimer. Please go ahead.
Good morning, this is actually Erika Iraq for pass thanks for taking your question.
I was hoping maybe you could sell your latest thoughts on the advanced product that I mean, obviously, a lot of David Hi, Brian parenting.
So I was curious if you could share your thoughts on the vaping marker and then how you see the advance product, maybe particularly on the baby try.
Turning out from here from your perspective.
Absolutely. So first of all when we look at hacks or philosophy is safety quality speed and from a safety perspective to us that is non negotiable. So our faith technology has been concentrate on delivering nothing but cannabis. So our innovation team has.
Exceeded in putting together formulations that will add that don't have any carriers and that is that technology that we're looking forward to elaborate on as we continue to make progress on some various patents, we think that from where we sit today. That's one of the only ways if not the only way to do safe vapor.
It's by providing consumers with only what's in naturally occurring in the plant. So were tremendously excited about that technology that moves us away from all the solvents and excipients that are used especially in the black market because I'd note that most of the worst occurrences on vape happened in black market.
But it's not sufficient for us to just say were better than black market, we want to deliver safe products and our clinical evaluation team is also hard at work on actually proving that out so we'll get some preliminary data and over the years, we'll continue to invest to make sure that all our offerings are as safe as possible.
Okay, Great and then.
Given the dynamics that are happening right now.
Any updated thoughts you could share on gross margin tear the intermediate term.
Absolutely. So I think that hexcel can comfortably deliver a low 40% gross margin business from a portfolio perspective, and that's a mix obviously some products.
Like our original stash, which are the lower end of the margin scale, but then some higher end products like beverages, and vape, which bring that margin up we won't be disclosing individual product margins for competitive reasons, but we're very confident in the 40 low fortys gross margin on a go forward.
Okay, great. Thank you.
Your next question is from Adam bucket from Scotiabank. Please go ahead.
Good morning, Thanks for taking my question.
So just on the outlook I was wondering if there would be possible to share some of the assumptions I've gone into deposit you. The positive EBITDA guide, particularly on the storefront expansion are you expecting Ontario, and Qubec too just six Chan to 75, and 25 stores or what are your assumptions there.
Okay.
Okay.
Thank you were just pulling the exact number for you just give us Morgan.
Okay.
[noise].
So specifically in Quebec, It's 43 stores by March is what we're expecting so thats the near term.
The the Canada wide store count within the next 12 months is expected to be north of 700 stores.
Great. Thanks.
So obviously you guys had a big ramp here and gionee in the quarter.
With the adjustments to your operating structure, how do you think this comes down over the next two quarters.
So there's a lot of abnormal expenses in the Q4 number.
For example, the Newstrike acquisition costs and the new strike additional expenses that came in we also had marketing R&D was sort of the first full quarter of having an R&D group.
The depreciation and insurance are also up and then staff and energy in a in general.
That said as we move forward in 2020 , we've taken a very hard look at all of our expenses to ensure that our expenses will line up with what we expect our revenue number to be and we as you heard from Sebastian we made the hard decision last week of actually adjusting our workforce and adjusting our cultivation.
We believe by doing those things and ensuring operational effectiveness.
We can get to positive EBITDA by calendar 2020.
Great. Thanks, just one final question and I'll jump back in the queue. So I was wondering if it might be possible to get an idea what the severance costs are associated with the.
The change and C suite executives post quarter.
We won't share specific severance cost that this time, okay. Thanks.
Okay.
Thank you. Your next question is from John Zaro from CBC. Please go ahead.
Thanks, Good morning, I wanted to ask what the inventory impairment.
So it seems related to product you purchase in the wholesale market and you mentioned the price compression you've seen there.
I guess, what I'm wondering is that given the lack of stores and sell through isn't where you want it to be what's the thinking behind buying so much product on the wholesale market at this time.
Well, John I'd say, the purchasing that product was before we had full visibility on the store count and so.
Quite frankly in hindsight, that's a missed it permanently in that product was mistake.
Okay understood.
And we moved the pricing so I guess two parts first can you confirm that three I think is $3.51 per gram on a net basis that is reflective of the.
Provision you're taking.
Secondly, just just broadly what do you think about pricing for the next year, particularly in Qubec, Yeah, just any thoughts there would be helpful.
I think what's critical is to keep keep being very competitive with black market, especially when we are targeting those specific consumer so that's about half your consumers.
The the pricing seems fairly stable on the legal market consumers. So current the current legal market consumers.
But that does put pricing pressure overall as I indicated last quarter, and but we think that should stabilize as a blend of the low fortys.
Okay. That's helpful. Thanks, and then just to confirm Sebastian you referenced the 30% or 33% market share and get back in year one.
With that true also in Q4 and hasn't moved around.
Getting as legalization.
Yes, it's certainly moved around so when we when we first launch and come back I mean, there were just to Lps that we're supplying hexcel was one of them. So we took 60% share right off the bat, 60% share is not sustainable I believe that any one player will never get above 40% share in any sort of rational market and.
So our contract commitment was to put us at about a third market share. So we varied in and out we've gone lower than that number temporarily and we're this 33% market share numbers. The number we're getting directly from Sq DC at the state for the past year. So thats a blended number that that takes into account.
The year.
Okay, and if I could sneak one more in how do you feel about your positioning for derivative products given cutbacks more restrictive approach on edibles and Topicals and how do you plan to gain share among the other brought into this offset that.
Our investment in technology has really been fantastic and so I'm really excited about our beverage launch with trust, we're very well positioned in income back for beverages.
Our our gummies line has been Downscaled. So we're going to do that as a proof of concept for our next fortune 500 partner. So when we do the full international and National rollout for Edibles, and we're expecting to do that with a partner we may do some pilot stuff on gummies and gummies, obviously not allowed into back so we.
We'll be more challenging from a revenue perspective, our veight formulations are all complete and we're standing up that line as we speak in Melville.
So that the that will be very positive because a from from what I'm hearing we're only one of the to license producers that are that are providing safety profiles of the provinces and so we're getting a really favorable response to that were being a little more bit more cautious and putting our consumers first.
So quite excited about the 2.0 lineup. We're also continuing to upgrade our aloxi you're offering both from a cost reach restructure. So you saw as drop the price significantly on Alex here to be more competitive while maintaining margin. So there was a function of the scale up but we're also working on Alex here 3.0, which includes some of our nano mocha.
Which will make it work faster taste, better et cetera that we can do under the new technology. So we're quite excited about our 2.0 offering and I think that the provinces are as well.
Back to is really our first and home base, but we are looking forward to the rollout in especially in Ontario, where we only fully got lifted with all our products really a few weeks ago. So that's also a story I think is very important to think that not only do we have 33 share and come back but that this revenue that you're seeing now is.
Sensitive partial penetration in Alberta, and a full penetration and come back we still haven't shown what we can do in Ontario, but that is on its way now that all our flower skews our fully listed in every store.
Okay. That's helpful. I'll pass on thank you very much.
Your next question is from Alan Bennett from Jefferies. Please go ahead.
At this time next question is now from Brett Hundley from Seaport Global. Please go ahead.
Hey, Good morning, guys. Just a couple quick questions on the EBITDA Bridge and then a more of a philosophical question for you Sebastian So just first on the EBITDA bridge.
Does does your target of positive EBITDA within calendar 20 assume production restarts.
At Niagara and got no.
No it does not.
It does not and then secondly.
Can you give us a sense of what percentage of sales mix.
You're baking in for original Stash, I mean, what do you have that kind of growing too as a percentage of your of of your sales mix going forward.
Or maybe a maybe a better way to ask that question.
I would be you know when you model out pricing across your portfolio.
The into calendar 20.
Are you kind of assuming a steady state as everything is today are you assuming things go down go up related to 2.0 can you just give us some color work on that.
So I'll stay away from specific color, just because we've gotten burnt in the past with guidance and basically talking about the future given where the stores rollout. So what we know a few things about original stash.
We know we know where works we know what the target consumer is and I'm not sharing that here because I don't necessarily want to tell my competitors how to how to compete.
But that product has had a resoundingly success in specific markets. So we're going to double down on that we think its can be very popular. The reason I can't give you specific number or that I will share what's in our forecast is because depending on where the stores rollout and how that rollout is accomplished it will meaningfully affect the percentage of original stash.
But we do think it'll be a stalwart of our business. So looking forward to what the next 12 months I bring so we can look at it and talk hard numbers.
Okay No I appreciate that.
And then Sebastian just my my philosophical question for you is.
Do you think.
So is at an important crossroads here in so far as rebranding itself and its strategy you know.
As you guys have come to market.
You've been strategizing around this hub and spoke model and even today, you're continuing to mention potential fortune 500 partners. The hub and spoke model just doesn't seem to be gaining traction.
And so I'm, just curious to kind of getting assessment from you on.
Whether or not you are at that crossroads, and try and get a sense of what you still believe in your company's role in the future kind of this market. Thank you.
Thank you for that.
So first of all the non negotiable is we have to be profitable in Canada, and we have to be top two brand in Canada that means 20% market share nationally and I believe that we have the assets. The people the cost structure to do that that'll give us the base by which to reinvest in our technology. The second thing I build.
Even that has never changed is that we cannot succeed in cannabis by being farmers only.
So we do have a nice regulated barrier to entry to cultivation out we have technology and know how around our cost structure of cultivation, which are nice market hedges theres only by my estimate say for license producers today that have a cost structure that even near Ekso and so we're very confident that we're going to be one of those top branded players on the flower.
Aside, but that's not enough and that's not what shareholders are asking for thats not what consumers are asking for and so from a powered by hexcel perspective, we've delivered on quite a few things. We now have emulsion technology that we're using with Molson Coors that works better than anything else I've seen in the market.
Works better than anything else that exist in the United States you will see how we enter the west with our partners in the future that strategy is a capital light model and I think it's a strategy that will be differentiated from what's currently happening from the retail dominated MSR space in the U.S.
I still think it's the right way to go I certainly agree with you that from a.
An uptake it's taken a lot more time and still taking a lot of time to deliver the full wheel underpowered by hexcel.
I don't think that we should jump to conclusions now on that model, especially in the wake of us delivering our first spoke with Molson Coors. So were tremendously excited to get to their earnings and then the subsequent to that to share more news with the market and what we're doing our relationship with them as them has a stronger than ever and.
Products are absolutely fantastic, having done that experience, having lived that with Molson I'm convinced more than ever that had we tried to do beverages alone. We would not have come up with something as wonderful as what trust has delivered and so I am convinced that the model is sound in terms of executing that model remains.
Challenging but.
I remain committed to it.
Thank you.
Yeah.
Thank you. The next question is from Alan Bennett from Jefferies. Please go ahead.
Good morning, guys and couple of questions. Please first of all just it just on the outlook.
I mean, I guess, what you're trying to convince is for the market to really get conviction in your outlook around positive adjusted EBITDA and I'm, just kind of I mean hit that I mean, you don't even gave adjusted EBITDA Covenant Lee and by my estimate SIFI group companies come from around minus 10 and instead.
Cool it to minus 15, now and in the fourth quarter. Thank you could just come fan now and then secondly, I think to get conviction nation now for you guys to be held accountable to auction actual operational excellence in delivery.
You need to gives you more specifics around the assumptions youre, giving stopped positive EBITDA intensive yes, there's still a pound Steve quonset quantity of cost savings coming fee Webmd ice 20% market share because I just feel is when you pull back on the 400 isn't easy skews to blame the retail store out because we have they gone specifics in terms of what you assumptions we own.
Deliberately not and see how that's just kind of if you could give similar specifics around how you will get side your Citibank.
And what you're actually going to not currently which I think is around minus 50, and then second each kind of a more out of name when he spoke about the gross margin support from beverages as I understood before that biggies future loss was being below the line as you JV is not changing going forward now for that to impact those margins. Thank you.
So a lot in their own thank you and grid suggestions in giving more feedback so on the adjusted EBITDA line. Your math your map looks looks right that had a quick glance here.
So in terms of sharing more details that we certainly shared the store count now today and.
I think the transparency that we're giving today is a step in the right direction I don't think where we are where we need to be I think over the next 12 months hopefully we get more visibility into the market hopefully we could resume guidance at some point.
But again until the market stabilizes I don't think today that any cannabis companies in position to give you those will specific numbers.
Would certainly invites you to engage in specifics on a follow up analyst call and we can.
We can discuss the specifics you're looking for I will take that into advisement for the next quarterly in the sharing broader sharing assumptions more broadly.
Great question, sorry on cross sells margin yes.
Yes so.
Sorry could you just repeat that question again.
Yeah as I understood before choice was always going to be but below the line into JV template to impact gross margins now intends to beverages poets AAM is not changing valuable cannot and over the line.
Okay.
No no. So that has not changed the trust share should be booked as a it'll be booked as an investment so you're correct that won't hit gross margin.
Okay said about 40%, we said to support from beverages and not.
Yes. So beverages are your you are correct. So I misspoke. So the beverages are a higher margin product on their own but will not individually affect our gross margin on the hexcel financials, but you are getting the investment on the hexcel aside from the trust JV, which should be meaningful.
Okay cool thanks very much.
The next question Eskom map Bottomley Canaccord. Please go ahead.
Thank you just wanted to touch again on cannabis 2.0, Sebastian if you could just give us a little more color I know you touched on in your prepared remarks over where you are logistically and getting your products approved for Canada is 2.0, and then the timing within that six month period of what province, as you think you'd come online first and then maybe the product classifications that you will.
Targeting as a part of that initial launch.
So health, Canada gave us our 2.0 license for our gotten off campus now the got no campuses pilot scale. So what that would allow us to do would allow us to pick off say a couple different product streams in a cup in a couple of specific markets, but.
But it's not sufficient capacity for our strategy for 2.0, we believe that the products will be differentiated enough. So when we look at vape, we'll actually have safety profiles lot better technology. So when we actually launch that I'm not in a rush to be first to market I, rather have a fulsome national launch for that I need.
Bellville facility, a licensed or kind of is 2.0. So we just got license for 1.0 in Bellville on Friday. So 2.0 should follow a relatively soon which is putting us in timing for national rollout in that first half of 2020 .
Obviously, if regulatory and licensing goes quickly it's towards the front end to end and there is risk that its towards the backend, so thats where were giving that broad range.
And what's your view just on the risk of I guess being obviously, you don't want to be rush to market. If there's going to be stumbling is or if you have a better sort of national platform that you'd be looking at but just in terms of in terms from a legal perspective no. One in Canada has had a legal they pen yet so not being first in the out of the gate with but those.
First branding initiatives will be how do you assess the risk of.
Of being further behind and maybe some of your peers with respect to getting those branded products to market.
So we're continually elaborate a bit on legal theyve been just just being you mean that because there is no based on market. Billy I, just really that did it as sort of average person on the street doesn't really have.
Any sort of brand awareness when it comes to any derivative products, yet so I imagine getting first to market right into the gate in January will be an important consideration in getting mindshare and I'm. Just curious how you view the market dynamics playing out given that this is going to be a first for pretty much everyone that chooses to participate in the legal channel.
I'll tell you one thing so one thing we know how to build brand I mean, we've done it on flower you have people walking into cut back now with our third share they're asking for HETLIOZ, they're asking for lagoon. So that's been very successful I can tell you as well that the thing that keeps me up at night is losing that brand value.
And you can have the best Veight pen rollout in the World on day, one if you hurt somebody you will vaporized your brand and that is unacceptable to both tax so to our shareholders and for consumers. So I'm less worried about that first to market I'm more worried about the quality and on the quality side, we've got some.
Amazing technology coming down IP back patent protected really looking forward to talk some more about that over the next quarter or too.
Great appreciate that and last just maybe a housekeeping item on my end.
Normalizing for you for some of the reserves this quarter going back to a gross margin.
40, or 50% I think you guided in the in the future contacts to be closer to 40.
Is there any sort of margin drag we should be factoring in for next quarter, specifically given that there might be some less utilization in the facilities, you're taking your foot off the pedal on and if so what sort of magnitude should we be looking for.
We're not guiding quarterly margin, Matt, but again, the kind of medium term I think a low fortys margin is where this business should stabilize.
Okay. Thanks again.
Thank you. Your next question is from Chris Kelly from Bank of America. Please go ahead.
Hi, Thank you very much.
So.
Can you hear me.
Yes, Chris Thank you.
So I hear you on the.
On the comments around cash flow expectations over the kind of say just think about fiscal 20.
But I suppose.
If I take.
The cash level.
As of October and the credit facilities, and the $70 million private placement with cash burn over fiscal 20, I'm still kind of coming up with.
Negative cash and so.
The ATM was quoted as being additive to how to bolster cash levels.
So is there something that I'm missing here or.
Or perhaps you can comment on your expectations for operating cash flow over that time period, because clearly capex is going to remain.
At least over $100 million over the course of this fiscal year given your capital projects.
Okay.
Thanks, Chris So again getting into that dicey territory of guiding without guiding so we're going to stay away from that one because they give you too many numbers and that we box ourselves in.
Based on the modeling that we're doing based on the store count that we're seeing based on the market share that we expect to have in the various jurisdictions.
We're confident that without the ATM. So if I don't raise another dollar we make it the profitability.
So we're confident that that's going to happen.
As for specifics, we're going to sit tight while the market stabilizes before we get into more detail.
Okay.
Perhaps as as more visibility on this front emerges then there'll be an opportunity to provide a bit more clarity on on that line item going forward because I do think it's a.
It's a key item for the market right now given the capital environment I agree with you is critical and I think a specific also critical is in this space and back to my comment of which license producers are going to be around for the long term I think it's important to note, which which companies are able to raise money in an up mark.
And of course, EXL was one of those companies, but perhaps more important is which company is unable to fund its initiatives and hit profitability in a down market and actual was demand demonstrated a resoundingly confidence from its shareholders from its insiders with the 70 million dollar private placement and so I'm very encouraged by that and.
That commitment will remain so the shareholder base Thats, there is absolutely phenomenal and I think thats one of actual strengths.
Okay.
And if I could.
You've commented a couple of times on the 20% market share dynamic and.
My Best guess I suppose is is that.
The market shares trending more in the high single digit range, if not mid single digit range right now.
I fully appreciate that.
Many moving pieces and.
And there's a level of variability that comes with that sort of estimate but.
It does appear to me at least that there's an implied.
Big ramp in market share relative to current levels.
I suppose some of the new strategies are with original Sosh and others are are meant to address.
But it but if that is the case.
And I'm sort of extrapolating or 700 store count model on on my own.
Market model.
Seems to me maybe street estimates are still a bit too high hot far too high for accelerate now unless you can hit that 20% number and and actually I fully appreciate that you don't want to guide and I think that's actually very smart given us or the current uncertainty.
I guess, if I, if I just sort of think about the puts and takes here.
It does imply that you need quite a big ramp on on share in the context of 700 store environment with the cutback rollout that you should note noted on to hit to hit kind of numbers, where they are today.
So maybe you can just comment on whether.
That sort of framework is.
I'm, not not justified or whether that sort of share ramp is not how you see it.
Yeah, Chris I think you make a lot of very compelling points. So first of all so on share.
Your ballpark math, I mean, whether you know the plus minus in assumptions, but ballpark national share where you're at now yeah, you're probably.
We can dissect a couple of different ways, but we're probably around that from a national share perspective.
So how do we get to 20% plus and that's all based on a framework I believe that three companies will control, 70% share eventually based on a rule threes 42010, right 42010 share both companies are going to be bandits right because no matter what happens we know the industry sticking around and if you survive and make it to be Mt. Todd.
Three.
You have a phenomenal platform for worldwide growth, which then justifies a pretty accretive multiples, which in this current market we're not seeing.
How do we get that share. So we've already demonstrated that we can hold a number one spot. So we're holding the 33% chairman come back and I think Thats why you want to bet on this management team and on Hexcel products because as I've said, we're not we weren't listed in these numbers, you're not seeing any meaningful share in Ontario and that was.
Really a function of time to get everything list at an in store. That's done now so you should start to see that market share creep up as we level, Ontario and level, Alberta, you should start to see that contribute and note that I don't need to get to 30 plus percent plus share in those specific markets to achieve a 20% plus national average.
On what that means from an estimates perspective I'll leave the estimates two years to yourself on where the stock prices should be but I wouldn't note that if you take a look at market share and you take a look at some of our could go take a look at the market share in adults use cannabis of our top six competitors I could pick two or three of them that have a mark.
That cap, that's about three or four times higher than Exos and no meaningful additional market share in fact, some of them have less market share than hexcel. So I think whatever happens in the estimates as we flush out as come competitors fail in the next 12 months and we'll have lots of them failing, especially the small ones and I think that.
Opens up a space for an equilibrium in the LP space, where we will value license producers based on that share and I'm still confident I mean hexcel as a top four player today.
And that's certainly not reflected in our market caps lots of upside from a relative value basis.
I appreciate you tackling that one and if I could just one sort of.
Cleanup question so to speak.
There's a growing concern about this.
And finished inventory that is building up in the channel.
Yes, the stack indebtedness, we put it that I think over 380000 or being 25 months of inventory at the current run rate.
But I guess, what I also hear from companies your peer companies.
It is that.
Matt on finished inventory number includes a lot of on Sellable flower, maybe that stocks or molded material or ceded to material.
And I Wonder if you could talk to what you think is.
In that that on finished inventory number or whether that's something that the market needs to be concerned about from a from standpoint of pricing and maybe inventory write downs on on a go forward basis.
Yes, I think your instinct Bang on Chris the market should absolutely be concerned about that inventory at hexcel, we've taken steps and again, we're talking work term.
Market be yes, right manipulating quarters, we're not doing that we're taking a 3.8 million dollar reserve this quarter, having not seen returns by the way. This is just being conservative and preparing for this.
Our inventory at Ekso is good and but we'll make whole given pricing do you need to do pricing adjustments, we've been proactive and taking on that pricing adjustment just like last quarter I was proactive in foreshadowing the reduction in pricing.
Unfortunately that came true this inventory.
This inventory situation will come through as well and some of our competitors had been less proactive in adjusting that which means that on aggregate absolutely thats something investors need to start taking a look at sell through becoming incredibly important versus sell in and something that I think the numbers.
Hard to see in the numbers, but if you really if you dig in behind the numbers for our quarter. At this has been a pretty good a pretty good improvement this quarter despite missing the guidance.
So forget about a year I mean going from five to 50 million, but look at the quarter sell through.
This quarter Q4, Didnt have meaningful sat Liam it was all meaningful sell through and so that bodes well for reduce channel stuffing real volume real growth and so I'm very happy we're actually was positioned I think a lot of my competitors will have to adjust to position themselves that we actually is doing so they haven't gone.
Through that pain, yet, we've now taken that pain and that's reflected in our stock price. Unfortunately, but also creates a buying opportunity.
Thanks, so much for.
Yeah.
That concludes today's Tony you May proceed with closing comments.
Everybody. Thanks, very much for your questions and continued support and interest in hexcel.
I think that the key thing that is easy to forget.
And in a world, where we were talking about a certain number and obviously, we're not going to hit that number and that's on me, but whats easy to forget as we went from 5 million revenue last year the 50.
And next.
As far as I know, that's the fastest growing revenue company in the entire outerwear gotten a region. This is a growth story and despite the sad news that we had to let go 200 employees. We still have a thousand strong workforce of dedicated people that are moving mountains to come up with the next product.
The next technology and being first with new offerings to market, we're penetrating new consumers everyday seeing this market evolve where we know for a fact, it's a billion dollar market today and it's growing towards about 7 billion dollar target.
Cannabis worldwide is here to stay and will transform the world Hexcel was right. There were at the door step we have some work to do to improve and I'm looking forward to share the journey with you. Thank you for listening.
Ladies and gentlemen, this concludes today's call. We thank you for participating and we ask that you. Please disconnect your lines.