Q1 2020 Earnings Call
Good morning, and welcome to Hexcel, Corp.'s first quarter fiscal 2020 earnings conference call.
After the presentation, we will conduct a question and answer session.
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The press Star then the number one on your telephone keypad.
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Thank you. Please note that this call is being recorded today December 16th 2019 at 830, <unk> am eastern time.
I'll now looks kinda conference over to Jennifer Smith Director of Investor Relations at Ekso quick misled you May proceed.
Thank you good morning, and Jennifer Smith director of Investor Relations, perhaps so corp. Thank you all for joining US. This morning for 2020 Q1 earnings call, we'll start with a presentation by our CEO Sebastian family.
Load by a recap of her first quarter results by our CFO , Stephen Byrd wash before opening the floor to questions from our financial analysts.
Before we begin I would like to remind you that today's presentation. Its forward looking statement that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations.
The forward looking statements are based upon any who the company's current internal estimates plans expectations opinion forecasts projections targets guidance or other statements that are not statements about.
Any statements contained herein or discussed during today's session that are not statements of historical facts may be deemed to be forward looking statement.
Such statements can often but not always be identified by the use of forward looking terminology and similar words and expressions that or predictions are indeed indicate future events in future trends, including negative and grammatical variations thereof, or statements. They contain certain events or conditions may or will happen or by discussions with strategy.
These statements should not be ready the shirts is a future performance or results such statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements to be materially different from those implied by such statement.
Those risks or uncertainties include but are not limited to those relating to the company's ability to execute its business plan renew required permits and licenses and relate regulatory compliance matters implemented growth strategies obtain and maintain financing on acceptable terms maintain or new required licenses may take good good business relationships with it.
Customers distributors other strategic partners.
Keep pace with changing consumer preferences protect intellectual property manage and integrate acquisitions retain key personnel and related to the company's competitive advantage the development of new products and product format for the company's product changes in laws rules regulations, and the absence of materially adverse changes in the industry or global economy.
For two weeks discussion of the risks and uncertainties suite and the company appears in the company the annual information form and the company's management discussion and analysis for the three month period, ending October 31st 2000, and I'd, which are now available under the company's profile on SEDAR.
The other companies. These forward looking statement on assumptions that believes are reasonable it cautions readers that the actual result can devote including the company's results of operations financial condition and liquidity and the development of the industry in which the company operate may differ materially from those NATO suggested by the forward looking information contained herein a number of factors could cause actual events.
Performance or results to differ materially from what is projected in the forward looking statements. You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the data. This presentation. The company disclaims any intention or obligation except to the extent required by law to update or revise any forward looking statements are the result of new information or feature that.
Or any other reason.
Any forward looking statements contained herein or discuss during today's session is expressed we qualified its entirety buddy above cautionary statement I'll now turn the floor over just the Boston.
Hi, good morning, everybody.
During our Q4 call a few weeks ago, we signaled several several changes in market conditions at assumptions.
Created significant challenges for the legal market in Canada, we looked at seven short term strategic priorities that hexcel was initiated to ensure that we're addressing these challenges while preparing for the 2.2 markets and targeting profitability in calendar 2020.
In Q1, we're very pleased to highlight that are increased focus on controlling our expenditures and Casper resulted in a decreased yeah decreased operating expenses of 25% that's excluding restructuring costs.
Revenue growth from the Canadian market continues to be hindered by slower than expected store openings. The government of Ontario announced this week that they'll scrap the lottery system and started issuing licenses and did you hear.
He GLC will issue up to 20 retail authorizations per month stores that are ready there could be approximately 250 stores opened by the end of calendar 2020.
Additional store openings and come back we'll start to alleviate market access constraints on the license producers. However, we don't believe that the retail channel will be substantially built until the end of 2021 or partway through 2022, the elicit market channel. We continue to thrive until retail access has brought to the majority Canadians.
Pricing levels have continued to decrease since legalization EXL has taken an aggressive stance on our pricing to increase our market share. We've launched original stash of value brands now available, both Ontario, and Quebec, that's designed to combat the legal market and increase our overall share of the market.
Our aggressive pricing policies are designed to produce product returns that drive consumer sell through while addressing the needs of consumers that typically shop, you will be looked at market.
While this has affected our net revenue in our gross margin over the last quarter, we feel that by doing this will be able to significantly reduce the levels of unsold products currently in the supply chain improve overall sell through and continue to increase our market share across the country. This is having a short term impact on our gross margins and we expect the overall margin to increase once we're able to launch our two point.
Oh products.
We're changing the strains we're growing in production and bringing to market to meet consumer demands based on realized sales data from the last 14 months that help you sales fiveg products continued to drive demand given the nature of candidates production product mix changes can take anywhere from three to eight months before they're ready for consumers.
We are national player. We're now listed in all 10 provinces in Canada, and as I mentioned original stash isn't both after making Ontario and will soon be available in Alberta NBC.
Remain the preferred supplier into back and hold approximately 33% market share.
Together with our partner Molson Coors, we've made significant progress towards launching beverages in Canada and the first half of calendar 2020, looking forward to making more announcements regarding specifics as we get closer to launch date beverages will be sold under several brands in a variety of flavors, which include THC CBD and combine teach seat.
BD and minor cannabinoid products.
We pride ourselves for our commitment to innovation and quality, ensuring our consumers have access to the most reliable consistent safest cannabis products as such our proprietary bake liquid formulation contain cannabinoids at plant derived tervita. That's it we understand that the routing agents founded some kind of this extracts are under increased scrutiny perhaps.
In potential negative help impacts were conducting further research on safety given the reports of tape related illnesses and we already have a robust product development protocols that include clinical testing aligned with good production practices and pharmaceutical grade are in the reiterating that our base will contain nothing but.
Alex found in tenet is.
We expect other form factors to follow that will include hash gummies chocolates other edibles.
Along with taking steps to increase our topline were also refocusing on reducing that controlling our operating expenses and Casper during the last quarter, we were able to reduce operating expenses by 25%. While this reduction is impressive we've taken further measures to keep costs under control, but we still continue to face the challenges within the infrastructure stated market.
Our team has been focused on streamlining operations to continue to drive down costs through the organization implementing a capital light structure, where it strategically makes sense for the business driving operational improvements in existing infrastructure, reducing underutilized space and optimizing automation.
Diligently working towards reaching our goal of becoming adjusted EBITDA positive in calendar 2020.
Our Melville facility, a key component continuing to drive down our cost structure. While also ensuring that we can meet the growing demand for our products by scaling up our processing infrastructure.
Received a license for the first phase of the facility and are continuing construction on the second phase this would be for kind of is 2.0 products.
Submitted our edibles licensing amendment that are looking forward to beginning production at the facility upon receipt in the short term completing test runs and preparing for the market in our gotten a pilot facility, which is license for 2.0 products.
To ensure the capital needs of the company are met recently closed a 70 million dollar convertible debenture offerings. In addition to outside investors. Several members of the board at myself participated in the offering supporting our belief in the future Ekso.
Additionally, we are in the process of setting up an aftermarket financing program or ATM to raise additional equity to build a capital reserve and fund our high priority initiatives.
We have is limited to 10% of the closing market cap of the company the previous month.
While these have not traditionally been used frequently in Canada, there an excellent vehicle for a long management increased flexibility in the capital raised to lessen the impact on the market typically incurring lower transaction costs with less onerous capital structures are becoming more and more popular kind of us companies to used to raise capital.
As we prepare for the 2.0 market we've taken a hard look at our forecast demand based planning needs at current inventory levels in light of the changes in demand downward pressure on the price of dried flower and the wholesale markets. We have impaired our inventory this quarter by 25, and a half million dollars by addressing these issues now we're looking to provide greater transparency to our investors and.
More accurate financial statements.
As previously disclosed on November 15, 2019 upon discovery of the licensing issue with block B of the company's Agra facility inventory from block be was quarantine and held back from sales inventory was kept on the books and although destruction was a possible outcome. The company has reassessed any risks related to such inventory and concluded that it is cleared for sale and.
I will not be subject to destruction note that block be in the Niagara facility is now fully licensed by Health Canada.
I'd like to have the forward our CFO , Steve for a wash to discuss our first quarter results. Thank you Sebastian good morning, everyone.
Let's start at the top of the income statement with revenue. The total gross revenue was 19.3 million for the quarter. That's a decrease of 6% over Q4 gross revenue net of 1.2 million in price concessions as we continue to assess our pricing to drive sales volume and sell through and our term provision of 700 Kate.
To provide for possible unsold inventory and supply chain.
Net revenue was $14.5 million.
I don't use sales increased 5% to 4196 kilograms from 4009 kilograms in Q4, we're expecting to see overall volumes continued to increase if the introduction of an original stash at the end of Q1.
Distribution of original Sosh has expanded pass you back Liftings in Ontario, and at the end of November BC, and Alberta will also have original slash.
We achieved I don't use revenues per Gram of 4.3 $5 per Gram a decrease of 39 cents over the last quarter. This figure includes the provision for price concessions, which resulted in a reduction of 30 cents per gram.
And provision for sales returns, which resulted in 17 cents per gram reduction.
Cost of sales decreased 3% to 9.9 million compared to 10.3 million in Q4 19.
Fair value adjustment on the sale of into inventory was 6.7 million a decrease from 7.3 million in Q4 19 due to a slight decrease in total grams sold.
The unrealized gain on the on changes in fair value of biological assets was 7.1 million compared to 5.3 million in Q4 19.
As a result of an increase in estimated deals and production rates I've got no.
This was offset by higher costs to produce in Q1, typically lower yielding period due to human conditions in the summer months.
In Q1 2020, the company recorded an impairment loss on inventory of $25.5 million in the quarter.
16.4 million of this impairment related to excess supply of trim and mill products on hand, when compared with our short term demand needs.
$4.4 million related to bulk purchase products.
3.4 million related to a surplus of oil products and $1.2 million related to finished goods samples.
Which are required to be archive by health Canada.
We are closely monitoring inventory levels as well as assessing applications for inventory in our 2.0 products continue to keep you updated on a quarter by quarter basis regarding any further impairments that may be required.
Gross margin before fair value adjustments for Q1 20.
I was $4.6 million or 31.5% compared with a net revenue from so compared with a net revenue from sale good compared to 5.1 million, 33% in the prior quarter.
This decrease as a result of the previously mentioned provisions on pricing and possible returns.
We expect margins to improve and the launch of 2.0 products begins blue shield, the higher margins and drive flower.
Gross margin after fair value adjustments and the impairment was a negative $23.4 million.
Operating expenses.
In January we decreased to $16 million in Q1 from $23 million in Q4 19. This reflects some of our cost control measures payroll was reduced by 1.5 billion as a result of the consolidation of some of the Newstrike operations, we were able to reduce costs by a total of 2 million.
Professional liftings and legal expenses decreased by 1 million.
Q4 included an additional 3.5 million costs related to the Newstrike acquisition, which was not present in Q1 20.
DNA is expected to continue to decrease through 2020 from Q4 2019 levels as we continue to rightsize the business and refocus the business on achieving operational excellence.
Developing lean repeatable and scalable processes by leveraging IP.
Marketing and promotion decreased to 6.2 million in Q1 from 9.5 million in Q4, 19 2.7 as related to a decrease in marketing and promotional expenses during the periods as well as a reduction in payroll of $700000.
We are continuing to evaluate their marketing activities.
Stock based compensation decreased to 8.2 million in Q1 20.
10.2 million in Q4 19.
Overall amortize compensation remains relatively consistent 2.7 million was capitalized inventory during the quarter as it related to production in place.
Loss from operations in Q1 20.
Was 58.5 million compared to 60.7 million in Q4 19.
Decrease is primarily related to the 25% decrease in operating expenses, we've discussed discussed sorry, which was offset by 25.5 million inventory impairment loss.
We are still focusing on reducing operating expenses and streamlining operations.
In Q1, there was a restructuring costs of $3.7 million, primarily related to severance and other payroll related termination costs.
Our cash position at the ended the quarter, we had 73.5 million in cash cash equivalents in short term investments subsequent to the ended the quarter, we closed our $70 million convertible debenture private placement.
And as we have previously mentioned, we expect to launch at the market financing in the near future.
We are expecting additional capital expenditures at $60 million to $80 million, primarily in bellville and completing our work on the be nine expansion and gotten off.
We expect sales to grow starting in Q2 and combined with our operational rationalization it should lead our business to be adjusted positive.
EBITDA in calendar 2020.
This is an estimate is that based on the assumptions, we have today regarding store count operational improvements and cost savings.
And these statements the coupon statements for 20 or 20.
We have released the press release and then also the financials, which have included a change in the deferred tax provision of approximately 14.4 million in Q4 19.
We will be restating, our Q4 19 financial statements in the next few weeks.
The adjustment is the result of an amalgamation of Newstrike into hexcel operations subsequent to the end of the fiscal year.
Effects to the deferred tax liability and share capital were it are realized.
I'll now turn the call back over to Jeff.
Thank you Keith.
We will now take questions from Randlett beautiful large number of analysts joining us today I would ask you to limit your questions. She wouldn't time, you're welcome to rejoin the queue. After we do that thank you I'll turn it over now to our first question.
Thank you. The first question is from Adam Bucklin from Scotiabank. Please go ahead.
Good morning, Thanks for taking my question. So I was just wanted to start off on Capex is there any changes to the 100 to 110 million Capex program for 2020 and can you provide some color on the magnitude as they expected step down in 2021, I understand it's far out but any color you can provide would be helpful.
Yes, we have a couple of changes to the to the 2020 capex budgets. They are items that we believe we need to do strategically.
And they are in the budget, but not a proof to spend until we have the right the market conditions right.
Conditions.
I think 21.
We don't really have a lot of visibility as to what the capex would be in 2021, but it is not the same level up building Melville and got no.
Okay, perfect. So just to clarify there.
You are saying that there's additional capex required to 100 million or you're deferring at some of it.
So we have identified a couple of project that would add to the 100 million, but it will depend on market conditions in 25.
Okay perfect.
And then just following up on S.G.N. and marketing.
So you're going to continue to control costs here going forward, but with 2.0 coming online how should we be thinking about any additional cost that would be associated with side throughout 2020.
I think with 2.0, specifically you have to look at most of our cost related to that is you already see in or in our Aegean eight R&D lines. So we are investing in the 2.0. The formulations are all mostly developed.
In terms of Capex, there's a there's a limited amount, but that's within that 100 million dollar budget, you mentioned and what we're confident we'll deliver our 2.0 strategy to capital light.
Okay, great. Thanks.
Thank you. The next question is from Johns compiled from Sad to see please go ahead John .
Thank you good morning, Sebastian the pass you made comments about partnering with other fortune 500 partners beyond just Molson Coors, Canada can we get an update on those plans. Please I'm just wondering are those conversations still happening and if so what's the major roadblock for other industries getting involved.
Yeah, Thanks, Don that conversation still definitely happening in fact more more players than ever that are interested in ekso strategy. The structure behind the strategy. We're certainly reevaluating. So in terms of or partnership Molson Coors was a was a joint venture, which we're very proud of them that has a that's executed.
So to some really nice beverage portfolio that I'm looking for speaking about but the what weve learnt because that's a joint venture structure was quite heavy from a partnering perspective. So there's a lot of work that went into the structure itself. So we're starting to open it up with in our discussions with a fortune 500, we're speaking with as do other possible structures and that seems to be resonating.
So a lot going down that path for the moment.
Okay understood and then one housekeeping question in terms of working capital in the Trust JV with what do you expect your capital contributions to be towards those over the next 12 months, let's say.
Yes. So trust has been funded with an aggregate about $80 million to date, hexcel, providing 43% of that capital.
And that we have a little bit funding left to go away.
I think at an aggregate talking about 26 million wants to go and not that total so which would leave heck sold with a 43% of that I call. It 12 million Bucks and that covers both capex and Opex also the Capex has been deployed the trust facilities are gorgeous 180000 square feet of state of the art beverage manufacturing unit.
No facility.
Great. Thanks, and sorry, just if I could squeeze one more that sort of working capital you expect over the next 12 months.
Outside of working capitals, including in that 80, but we're not breaking it down to.
Okay. Thank you.
Thank you can next question if I'm glad that I know it from a capital. Please go ahead.
Yeah, Hi, good morning, Thanks for taking my questions here I, just wanted to dig a little bit deeper within the 2020 outlook a expectation there and I know, there's a number of underlying assumptions and and I was curious as to whether that considers the current derivative market environment in Quebec spin.
If we with what looks like I've done way and the rollout of apes and tighter limits on the restrictions around animal products. Thank you.
Yeah, Doug So that's a good points were adjusting to that reality, which.
Obviously puts a bit of downward pressure in the short term.
As we're still planning out on rolling out our base products, although that will obviously be outside of come back at first and we do expect that I. Once we can share are the results of our clinical trials with the government cutbacks that will prompt good discussion.
Okay. Thank you and then my second question here is with respect to original stash and you know trying to look at the margin profile on that product and that becoming margin accretive on a consolidated basis I'm could you help me understand sort of where the margin profile on that product is now and based on.
All the work being done in the further efficiencies you're looking to drive at your existing facilities. How that's expected to trend over time, because you know doing the simple math right now in terms of where a cost per gram sold doesn't imply that there is a you know very accretive margin I'm on on what the expected selling price would be.
Beyond that prior to any color would be helpful. Thank you.
Yeah, we still think our total portfolio margin will be low fortys over the long term a there's some some headwinds in the short term as we continue to.
Get out the market as we continue to work costs, we've been able to strip $25 million in cost out of the business in one quarter I'm extremely proud of that and we're just getting started there there's tons of efficiencies to go get and that's a big part of the original assessed story or something that will grow in margin overtime as we remove costs.
While continuing to deliver something that meets all black market pricing.
Okay. Thank you.
Thank you. The next question is found that bottom Lee from Canaccord. Please go ahead, Matt good morning, Thanks for taking the questions.
Sebastian just wanted to touch base on some of your commentary from last quarter, and then obviously topping up for this on on the derivative rollouts in the leveraging of your Bellville facility. So my understanding is that's probably going to be a mid calendar year 2020 implementation at scale. So what's the best way or what are the maybe the leverage we should look at that could potentially move.
The current run rate that you're out on your topline I think that your net top line of a 15 million is it Ontario old store rollout for the other factors that analysts should look at to try and handicap, where exactly your your topline might go prior to Inflecting product out of your Belfield facility.
Yeah, I think I think are hitting the two factors right. There Matt. So the is one ones external is the store growth that has to hit the assumption right. We're thinking a thousand stores nationally still by yet by the end of the year here, but the other one is internal which is getting our belgo facility fully ramped and I think your assumption to mid summer is.
Is a good one here until we really see that's starting to kick in the good news is that from the original prototyping, we're seeing the step change in cost structure is phenomenal.
We're we're really seeing like our packaging throughput, which used to take at you know to do a unit I'll say within specific numbers, you'll see them in coming quarters, but where we used to do X units with a why people you're you're doing now kind of Forex units with a 10 for the people silhouette they'll they'll facility is gonna be.
We're very excited about but it is taking a little bit of time to get everything up and running here.
Okay. Thank you and just a follow up on more housekeeping just your cash balance I'm not sure. If you put out there what the number is today I know you did last quarter. So is it appropriate to look maybe back at the envelope. The 70 odd million you had as of period and the 70 million you closed and then if you look at sort of what your historical Capex and Opex burn was the last couple.
Of quarters would that kind of put where your balances today I sort of have up between 90 and 100 million I'm. Just wondering if that's appropriate if you can comment on that yeah. You're Rangers. Good were just over 90.
Okay. Thank you.
Thank you. The next question is from Chris carry from Bank of America. Please go ahead Chris.
Hi, good morning.
[laughter]. So it's I guess, it's clear to me what the.
Current strategy is for the you know predominantly flower portfolio and your three quarters in Quebec, right, but I guess I'm trying to figure out what.
Differentiation or the pitch is to the other provinces right because it for 2.0, because you're not really going to be able to leverage the core Quebec presence right when you're going out with me and beverages and so.
You know I guess for the back half of calendar 20, you're going to be going up against a lot of other companies also.
Rolling out vape predominantly I, I guess I see the differentiation with with beverages, but.
What's kind of the pitch right and how do you see your portfolio differentiated relative to some others given that I think you know predominantly people are kind of focused on the same thing.
Yes, So I think it says it's a two part answer there Chris on the first part is the strategy overall when we're approaching the provinces is to take a portfolio long term approach. So the idea that in dealing with X. So we can provide some better service a better full range portfolio to address the various segments. So that's when you start to see in our in our branding with our up products all the way down to the valley.
Brad originals fashion or hexcel in mid market, we really touch on the whole portfolio same strategy is going to come in with beverage, but also with a 2.0 product. So having a full range. So you can shop in one place lowers costs for the province is lower shipping costs makes it more efficient and we kept gift products and product consumers on a better price. That's the first part vendors individual strategy.
He's on individual product lines. So specifically I mean beverage has has really been a quality and segmentation strategy and when we roll that out with trust you'll understand.
Definitely one of the best beverage portfolio is a in the world right now when that gets rolled out on the based strategy has been one of safety. So we start with base with our clinical trials to my knowledge. We're still a one of only two companies that are doing safety trials for adverse reaction on our base.
Well one of a handful of companies that is delivering a beep liquid that is pure cannabis. So no oils, the vitamin acetate et cetera.
So we were making a good bet on that all bought in the context of cost control. So as we've seen in flower 2.0 will be extremely cost competitive.
Appointed it's not lost on us I mean, it maybe there's currently well over 600 skews being presented a provinces. So we're coming right out of the gate as a hyper competitive launch and this is symptomatic of having to compete against the developed illicit market and having many companies in the running I think that starts to alleviate over.
And next year as we see more and more of the smaller producers really have to pick and choose where they focus.
So prepped for that part I think we're in good shape.
Okay. Thanks for that.
And then I guess secondly, and this has been asked in several different ways, but maybe I'll try another approach I'm just thinking about it.
The revenue cadence into kind of the and how you get to the back half of calendar Tony.
And I think there's a reasonable case to be made that volume should continue to see quench really grow, especially with the new stores coming in Ontario.
Around Q1, 20, we'll see when exactly they come out, but but I guess your pricing is also going to sequentially go down just for no. Other reason that mix right. If original sashes better your average pricing should continue to trend down and so I'm just trying to think about you know, it's just the the situation where.
Our revenues could be flattish to slightly up for the next couple of quarters or or if they're you know there's a case to be made that you know volume should really accelerate with with some of these new stores coming online.
I think Chris we've talked about those are two main factors right backward Matt pose this question and so definitely we need more source, that's a that's guaranteed and now you're seeing Ontario delaying.
Store openings until April so so that's definitely a factor that could potentially you know affected while not not potentially that will affect our ability to earn revenue.
The near term in the medium term, we need to look at all mining or facilities I mean, we've got $130 million sitting in bellville.
Of Capex of deployed Capex that is not operational right now that's a ton of operational efficiency that were not living which includes an ability to survive volume across the country.
And that also not not showing up in the near term that's showing up in the medium term, which which puts us about six months out I think that the third inflection is really be one of competition as I've said the previous quarter orders plural.
I think we are going to see more consolidation in the industry I think we're going to see a majority of a license producers in the industry being troubled and that will in the longer term lead to a bit of a release fell on the competitiveness, so which will will give us more room so very.
Confident now having the re.
Popped up a cash balances to make sure. We're one of the ones that make it all the way because I still see a future where there's a four or five large license producers hexcel being one of them, capturing a 20% plus share of 7 billion dollar market, it's a rocky path to get there.
Okay. Thanks, guys appreciate it.
Thank you. The next question is from Scott Fortune, Oh from Roth Capital. Please go ahead.
Good morning, real quick any updates on the CBD are they didn't seem to be offering in the U.S. and strategy. There you guys know about going forward here 2020.
Yeah strategy progressing really well Scott thanks for asking and Steve was talking earlier about some specific capex initiatives that we're starting to reserve money from so that is specifically U.S. focused.
Formulations again, all the R&D work, we're doing is going to applying our platform technologies that we can sell two fortune 500 companies, so that progressing very well and that's going to be a stay tuned and a in the medium term for the next steps on or U.S. strategy, but we remain that we remain focused now that we've delivered 10 provinces in Canada.
I'm starting to focus on opening up the U.S. market.
Okay, and then real quick follow can we expect revenues.
Sometimes and second half of next year phone from this is suffering in the U.S.
I think I'll, let has demonstrated the revenue I don't want to get into pseudo guidance. We're definitely focused on getting supply chain robust and then we'll start hitting the quarters is that from our results basis.
Okay. That's it for me thanks.
Thank you. The next question is from David Kelley from Altacorp Capital. Please go ahead David.
Hi, Good morning, Thanks for taking my question just a couple of quick ones here I'm wondering if you could provide any guidance with respect to your product mix specifically a in going through some of your Mdna. This morning, a with your key products you from APAC, So and the original staff is there any.
Trends, you're seeing in the current marketplace that suggests a what the relative percentages of of customers purchasing patterns or.
Yeah, David I think I think you really have to look at what consumers want that we've got a pretty good idea.
That has to be measured against both store openings availability and also regulatory ability to go in front of consumers. So with 2.0 I think most of the governments are still relatively cautious in their approach and more loosening up the regulations in the correct spots I will allow us to.
Get closer to what consumers are actually demanding a into goes all black market and to put numbers around it I don't think it's changed overall I think we should expect 50% to the market to be flower I think the balance a of your 2.0 products will be heavy baked heavy beverage and then a mix of edibles and innovative so roughly split I've heard a third a third.
Between based beverage and then a variety of other things that include that pills patches et cetera.
Okay. That's helpful. Thank you and I had a question also as well just based on the Ontario governments announcement that came out last week Thursday night I'm, just wondering hex those position here, we see now with with the with the government opening up dispensary throughout the province, but what are your thoughts regarding when it comes to the privatization or the whole.
Mostly all model, we see as a scouts one for example, where are the Lps, whether its texts or any other have direct conversations with the say the dispenser is what does hexis position on the Ontario governments are still having the so called the bottleneck in place even though we saw good news coming with with the number of dispensers increasing.
There is still the government as the middle person in the middle So to speak. So if you could just give any color with respect to what your position on that is.
No I think the government's an incredibly difficult position much like license producers today. We're we're in a transition piece. After this first year of Legalisation, where we've been Mac that a lot of changes you've seen an x. So right weve strip out of time, a cost where we're putting our capex online that will bring more operational efficiency, we're lowering price, but you don't see them the numbers.
The next so many months and I think what the government has the same idea, they're making a good strategic shifts to go into privatization, but there's still some meaningful improvements they need to do the distribution channel and Ah I think that will take a number of months to surface.
Very helpful. Thanks for taking my questions.
Thank you. The next question is from Brett Hundley from Seaport Global. Please go ahead.
Hey, good morning, guys, Steve I should have two questions for you.
My first is on.
The timing and 20 20 million my expectation is that you guys would.
Reach that profitability during the back half of the calendar year.
Well I guess I guess, a late summer and.
My question is do you think that we will see that profitability and one of your later quarters during the fiscal year or do you just anticipate reaching that profitable level at some point during the year.
Yeah. So what we've guided is ever going to reached a positive EBITDA in calendar 2020, we haven't pinned down any further than that.
Okay, and then I'm separately. It did you guys I'm run an impairment test for Niagara during the quarter or will it will that be pushed to the end of the fiscal year.
We ran an impairment test in the 10-Q, one okay great. Thanks, so much.
Yeah.
<unk> is from John to update Chardan. Please go ahead John .
Hi, good morning, So Subash and you mentioned that you took out a lot of opex costs in the quarter, but you also said that there's tons of other efficiencies that you can get as well can maybe some more details on that and how quickly do you see.
Yes, you know a efficiencies being a being drawn under the system.
Yes. So the early focused John was really to cut the.
Cut at the senior level make the pyramid, a little wider and less or less pointing at the top though from a well known as DNA perspective.
Still you've seen a lot of a severance et cetera built into a to those cuts c.. We haven't started to lift that at the future cost saving I'm talking are really above the lines on a gross margin. So as we start to online I talked about Belden. For example, you got to $130 billion of capital. There, that's really just going to drive efficiency. So once that so.
Yes, they hit I.
I think it hits really about the margin there some nuances still to do something massage into do below the line so into our as DNA still as whole keeping an eye on that but the majority of the costs below the line have been that have been taken tariffs.
Okay, and then just on the the price adjustments in the sales or return provisions that you've been taking I mean are we starting to see that set of down a bit or.
Or is there still more to go in the upcoming quarter.
I think the pricing we've taken a really good direction on it I think we're working better than ever with provinces in figuring out how the price things. So that it moves we've moved away from channel stuffing very well. So I now would where we're loading the S loading the stores, it's what consumers want them they could start to purchase there's still some more.
Work to do especially outside of come back and actually getting those pricing adjustments and from consumers. So.
There was a nuance where a pricing adjustments in stores for example in certain stores in alternative Alberta, even though we can cut or adjust our pricing that pricing hasnt been presented to consumers because the stores don't have a way to leave that pricing adjustments. So I don't think of it is hard work itself through channel, but then we should be in pretty good shape.
In terms of a.
Got a future proofing against future price adjustments I don't think it's safe to assume that they're all done, but we've added might work closer than ever to good price and a good indicators that were below black market pricing. So once that happens you lose one of the key reasons. They keep driving about below so I think you'll you'll see pricing stabilize.
Were around what we are now.
Okay. Thank you.
Ladies and gentlemen, as my my does she have any questions. Please press star followed by one.
And the next question as a follow up from Chris County of Bank of America. Please go ahead Chris.
Hi, Thanks, so much for taking my follow up question.
I just had a question on the partner strategy I guess, you know a couple of years ago.
When you know legalization of cannabis and other markets.
Wasn't so obvious.
You know the this strategy be is kind of clear to me you know get develop competitive advantage is.
A follow up IP et cetera, but you know as we get closer to say, maybe U.S. legalized federally in the next one to two years other countries globally to be determined.
How how is that conversation evolved them I I guess you know.
In a similar vein of a question I asked earlier you know what's what's the pitch to you know fortune 500 company today for them to invest into heck so versus.
Say, you know waiting another year, so until the legal landscape as a bit clear. Thank you.
Yeah, so quality supply chain and technology is really the pitch that we're making to these to our future partners.
So from a quality perspective, one of the biggest mistakes we've seen in the U.S. markets have been emerging brands starting to sourced from multiple different producers and losing track of their quality a we've seen some of the top brands just vaporized because of that axle can solve back for fortune 500 companies.
So we're going in and we can provide steady supply we can guarantee pesticide free and we can guarantee the same quality across various states. The next piece on the supply chain is a chain of custody in a world, where there's gray market black market white market and everything in between EXL was able to valid.
The supply chain for a fortune provider partners I think an extremely complex regulatory environment guarantee that our partners our operating illegally the third as one of technology. So we are well ahead of the curve with our motion technologies in a few more platform based technologies that we can include as part of the supply.
So that we can make innovative products that taste better work better and get in front of consumers. All these things lead to an advantage. This way beyond one year I think that a fortune 500 companies or any company that choose to go without a candidates partner will will face extreme headwinds and I think that'll become clearer and clearer as our portfolio.
He was with both partners like Molson hit the market.
That's helpful. Thanks fashion.
Thank you know no further questions you May proceed.
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