Q2 2020 Earnings Call
[music].
Good morning, and welcome back so quite second quarter fiscal 2020 <unk> earnings call.
All lines have been placed on mute to prevent any background noise. After the presentation. We will conduct a question answer session. He would like to ask a question. During this time simply press Star then the number one on your telephone keypad. He would like to withdraw your question. Please press the star followed by the queue. Thank you. Please note that this call is.
Being recorded today March Thirtyth 2028, 30 am Eastern time, I'd now like to turn the color I'll call over to Jennifer Smith Director of Investor Relations at Hexcel Corp. MS. Smith you May proceed.
Thank you just got good morning, I'm going to her Smith director of Investor Relations, Perhaps so corp. Thank you all for joining US. This morning for 2020 Q2 earnings call.
Let's start with a presentation by our CEO Sebastian family.
Slowed by a recap of our Q2 results.
Our CFO seasons or wash before opening the floor I've two questions from our financial analysts.
Before we begin I would like to remind you that today's presentation includes forward looking statements 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 and include the company's internal estimates plans expectations opinions forecasts projections target guidance or other statements that are not statements about.
Any statements contained herein are discussed during the presentation that are not statements of historical facts, maybe deemed to be forward looking statements such statements can often be but not always be identified by the use of forward looking terminology and other similar words and expressions that our predictive or indicates indicative of future events and future trends, including negative.
And grammatical variations there in a statement that certain events or conditions may or will happen well they discussion strategy.
These statements should not be let us assurances of future performance or results such statements involve known and unknown risks and uncertainties and other factors that may cause actual results performance or achievements be materially different from those implied by such statements. Those risks or uncertainties include but are not limited to those relating to the company's ability to execute it.
Business, Glen Burnie required permits and licenses and related regulatory compliance matters implemented strategies to maintain financing on acceptable terms maintaining renew required licenses.
Maintain good business relationships with customers distributors other strategic partners keep pace with changing consumer preferences protect intellectual properties managing integrate ex acquisition retain creep key personnel and related to the company of competitive advantages the development of new products products formats, where the company's products changes in laws rules break.
Relations in the absence of materially adverse changes in the industry a global economy.
A more complete discussion of the risks and uncertainties facing the company appear in the company's anyone's a nation warming accompanied management in discussion and analysis.
Well the six month period ended January 31st 2020.
What's your available under the company's profile on Peter.
Although the company.
These forward looking statement on assumptions, but it believes are reasonable cautions readers that the actual results and developments, including the company's results of operations natural conditions liquidity in the development of the industry, which the company operates.
May differ materially from those NATO suggested by the forward looking information contained here. It 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 date of this presentation. The company disclaims any intention or obligation.
Asian, except to the extent required by law to update or revise any forward looking statements as a result of the new information or future events for Glenn either reason.
Any forward looking statement contained herein or discussed during today's session is expressively qualified in its entirety by the above cautionary statement I'll now turn the floor over to Sebastian RCR RC CEO.
Thank you Jennifer good morning, everybody.
There's no way we can begin this conference call without discussing cobot 19.
Virus is having an enormous impact on humanity, it'll certainly had an impact on the global economy.
Majdic steps taken by our federal and provincial governments, along with most of the nation's of the world. It for the past few weeks I presented significant challenges for all businesses and ours is no different.
As for our press release of March 24th, but kind of a sector has been deemed into central service in Quebec, and Ontario, while we're fortunate enough to keep operating our business. We've created a set of priorities that will guide our actions during this difficult period.
Number one is to protect the health and safety of our employees.
To do continue to supply high quality candidates to our customers and number three for operational effectiveness strategic priority to focus on our near term goal of EBITDA positive.
It's difficult in these early days of social distancing itself isolation to know the long term impact on our business as long as we can keep our people healthy we're confident in our ability to produce the biggest challenge will be in our ability to forecast near and medium term demand as that will be impacted by the retail store environment.
Canopy is closed their corporate owned retail stores and many others have moved to a click and collect model at the moment demands remain strong, but the impact of significant job losses in our economy may affect the size of the market until this pandemic has abated.
A key component of our expansion plans would be expected increase in retail stores in Ontario, However, that's I'm certain that this time.
Vigilant and monitoring the market, what we expect uncertainty to remain present for an extended period of time, it'll certainly be weeks, but it could be much.
Now I'd like to move on and discuss our financial results for the second quarter fiscal 2020.
Two quarters ago, we noted challenging conditions that were contributing to a slower rollout of the legal adult use market. Our primary concern centered on the delayed licensing and build out of retail stores in both Ontario, and Qubec combined with the delay in launching the 2.0 products. These issues have significantly contributed to limiting access to the consumer.
For Canadian license producers, our company along with many of our peers had built or organizations on the assumption that retail channel will be licensed and built on quicker timelines.
During the past 12 months, we've also seen a dramatic shift in the capital markets and the ability of cannabis companies to issue equity considering these factors we've rationalized our operations in a number of ways.
We're completing capital projects that are necessary for us to become a leader in the Canadian marketplace.
We're introducing automation and implementing processes and procedures to drive efficiencies in those operations.
We're using new analytical tools to produce and sell products with current consumer demand in mind.
Reducing our cash operating expenses and we continue to drive towards adjusted EBITDA and cash flow positive operations in Canada as soon as possible.
I'm very pleased to see that were already beginning to see the results of that hard work. In Q2. We started net revenue grew 17% achieved gross margins of 33% and we decreased our operating expenses by 21%.
As we previously stated.
That we were taking aggressive stance on pricing to increase our adults use market share in Canada through the introduction of original stash. The first value brand on the Canadian market. We saw 57% increase in kilograms sold primarily in response to the successful launch of original stash, we're continuing this aggressive pricing strategy across or other products.
To reduce product returns and drive consumer sell through.
In order for the Canadian legal cannabis market to continue to develop we need to continue disrupting the illicit market. Our original stash proves that we can do that and do that profitably.
Several of our competitors have now entered the space with our own value lines, but we continue to believe that we will maintain a strong market share based on our operating cost and quality.
We've maintained our position as the market leader in Quebec commanding over a third of the sales within the province and from disposition, we're looking forward to strengthening our distribution across the country and just tablets ourselves as one of the top market leaders in Canada.
Aside from driving growth to our topline we've been focused on rationalizing our operations.
October we were one of the first companies to make the hard decision to scale back our workforce and expenditures on items, such as marketing, we had scaled our operations to surface a market much larger than what's currently available to us and our license producer peers.
These reductions resulted in a decrease of operating expenses of 25% in Q1 and 21% in Q2.
Although we've made structural changes to our business our operations continued to gain efficiencies and improve output in Q2, we produced 22000 kilograms of dried Graham equivalent that's a 38% improvement from previous quarter.
We've also improve the amount of dried flower, we produce compared to trim from each kilo harvested.
We're developing products that can consume more of that trim and alleviate the buildup of inventory we should see the results of that work in the next few quarters.
Key to continued improvement in our cost structure and our ability to serve the market is our bellville manufacturing facility.
Using advanced automation in our manufacturing and processing supply chain will allow us to increase output, while decreasing costs and will reduce our reliance on outsourcing.
We've received a license for the first phase of the facility and are continuing construction on the second phase we submitted our animals licensing amendment and are looking for debating production at the facility upon receipt in the short term, we're preparing to launch our 2.0 products from our got no pilot facility, which received its license in October.
I'm pleased to announce we've just shipped our first shipments of original stash cash to Ontario, which should be which have been on store shelves and have actually sold up very quickly for shipments and Weve reloaded, we're very pleased with that our shipments to come back and other provinces are following soon.
We're looking forward to announcing the release of more new products that vapours concentrates chocolates gummies over the next few months.
We believe these changes to our cost structure as well as delivering products through our three brands and the introduction of 2.0 products will allow us to achieve long term portfolio wide gross margins in the low 40%.
Together with our partner Molson Coors, we've made significant progress towards launching beverages in Canada, we're looking forward to making more announcements regarding service as specific size, we get closer to the launch date.
Beverages will be sold under several different brands and a variety of flavors. They taste great include THC CBD and other formulations.
And we look forward to bringing that to market.
Our decision on new strike and to curtail operations at the Niagara facility were mostly related to our opening comments on the current size of the Canadian market.
A number of our license producer peers have also halted construction or close certain facilities to rationalize operations, we decided to focus our attention on optimizing the operations in that gets you know in our methanol facility to meet current demand and we'll revisit Niagara once the Ontario, and Qubec retail Buildout as advanced and we.
Need that increased production.
To summarize Hacksaws main strategic objectives, despite a very challenging global environment remain alive and well.
So to summarize those to be a market share leader in Canada is well in our focus and very achievable. In fact, we continued to dominate in qubec market and prove out that hexcel is a top national adults use market share player.
From an operational excellence point of view I'm thrilled with our ability to post a 33% gross margin.
Including one time costs. So the normalized margin should be higher end, including original stash a product. That's our that's our value brand. We've also demonstrated an ability to reduce operational expenses and we're very confident that near term will be EBITDA positive.
Our third strategic priority has been innovation and innovative products and we've had another rousing success with original stash cash and we look forward to rolling that out nationally for quality of hexcel products came to keeps being well received and we're thrilled with the response from our customers.
With that I'd like to handle floor over to our CFO, Steve Byrne wash to discuss our second quarter results.
Thank you Sebastian Hello, everybody.
We'd like to go through our Q Tartar corner results and.
I'm happy to report that there's been some positive movement for hexcel.
So in the revenue area.
Total gross revenue was $23.8 million for the quarter, which is an increase of 23% over Q1 gross revenue is net of 200 K in price concessions as we continue to assess our pricing to drive sales volumes and sell through.
Our return provision of 1.2 million can provide for possible unsold inventory supply chain.
Net revenue was up 17% to 17 million compared with 14.5 million in the last quarter.
I don't use sales volume volume increased 57% 6.5 tons from 4.2 tons in Q1.
This increase was primarily driven by the expanded distribution of original stash during the quarter.
Due to the success of the results that we are continuing to expand the distribution of it.
It's now listen in Qubec, Ontario, BC, Alberta, Nova Scotia and found.
We achieved adult use net revenue per gram of $2.47.
A decrease of 77 cents over the prior period.
The decrease is primarily the result of increased sales mix Oh, yes.
We've been making changes to the strains we're growing with a focus on.
The ones with THC content greater than 18%.
As more of these harvest become available for sale that should drive increased volumes of that product sold under our heck, So and up brands that along with the expansion of our geographical distribution and introducing introduction of our new 2.0 products.
All in a positive shift in revenue per Gram and gross margin over the next few quarters.
Cost of sale increased 14% to 11.3 million compared to 9.9 million in Q1.
As a result of increased in the volumes sold which was offset by decreased in the cash cost per gram related to changes in yields.
Process improvement and a reduction of certain costs such as the radiation.
The fair value adjustment on the sale of inventory was $5.4 million decreased from 6.7 million. In Q1. This is due to the compression of fair value of dried Mark felt flower in the market, which was offset by the volumes sold.
The unrealized gain on changes in fair value of biological assets was negative 7.9 million compared with negative 7.1 billion. In Q1. This is as a result of an increase in estimate yields and production rate at the got no facility as well as a reduction in the cash cost per Gram as previously mentioned.
This results in a higher fair value adjustments.
Company recorded a write down on inventory of 16.1 million in the quarter compared to 23 million in the prior quarter.
11.8 of this impairment relates to on the tournament on concentrated bolt purchased inventory.
The company is currently undergoing litigation related to the supply agreement as we believe it is an onerous contract that was negotiated about Kate.
$3.1 million the write off due to an excess supply on hand, when compared with our short term demand.
We are closely monitoring our inventory levels as well as assessing application for inventory in our 2.0 products.
We'll continue to keep you updated on a quarter by quarter basis regarding any future impairments that may be required.
Gross margin before a failure fair value adjustments for Q2 2020.
$5.7 million, 33% compared with net revenue from sale of goods.
This compares to $4.6 million in the prior quarter or 31%.
This increase as a result reduction in the cost per Gram as a result of significant improvement in yields and our cultivation facilities.
We expect margins to improve in the long term through the launch of higher THC product.
Expanded Canadian distribution and the introduction of 2.0 products.
Gross margin after your fair value adjustment and impairment was a negative nine 7.9 billion compared with a negative 20.9 month in Q1.
Operating expenses were 281.5 million in Q2. However, these included a number of nonrecurring expenses that came about as a result of changes in conditions of the Canadian market for that reason, we look at our operating expenses in two segments par and nonrecurring.
For our core operating expenses, we saw a decrease of about 21% 21 28.1 million in Q2 $35.1 million in Q1.
As noted earlier, we had proactively works to reduce our cash operating expenses.
We had started to see demonstrated a bowl reductions in these overhead costs, our opex cash costs decreased to 16 million in Q2 from 24 million in Q1 that was 33% decrease.
In our DNA, we decreased to 14 point Fourmillion. Some 16 million in Q1. This is the result of reduced payroll and travel costs.
In marketing and promotion, we decreased 2.4 million from 6.2 million in Q1 2020. This is a direct result with decision to reduce our promotional spending in headcount.
There was also an over accrual based on a contract that we re negotiated in Q2 to allow us to reverse that accrual.
Research and development decreased to 1.2 million from 1.7 million in Q1, as a result of reduction in headcount and consulting fees.
Now I look at our nonrecurring expenses.
There was an additional $300000 and restructuring thoughts related Rightsizing, we began in Q1.
Secondly, there was impairments of property plant and equipment as well as intangible assets of 138 point Threemillion came about after we completed the strategic review of our cultivation assets.
And deciding.
Focus on driving operational improvement and yield got no facility to reduce cost Angeles Niagara for sale.
On an impairment of goodwill honored and 11 million 0.9.
After performing an indicator impairment test.
And an additional 3 million realization of an onerous contract related to a supply agreement that is currently the subject of litigation.
Losses from operations.
In Q2, our losses from operations were 289.4 million compared with 60.6 million in Q1 2020.
The increase is primarily related to the nonrecurring expenses I mentioned.
Which is offset by a decrease in operating expense of 7 million.
Combined with a decrease in the apparent lots and write off of inventory and biological assets of 11 million.
We are still focusing on reducing operating expenses and streamlining operations with a focus on becoming an adjusted EBITDA positive.
At the end of Q2, 2020, you had $81.4 million in cash cash equivalents and short term investments.
We will require additional capitalization in order to meet the companys obligations commitment and budgeted expenditures through 20 through January 31st 2021, we are considering a number of options and we hope to launch at the market financing in the near future.
Thank you very much now I'll now turn the call back over to Jennifer.
We will now take questions from analysts, there's a large number there's plenty of steady.
He didnt limit your questions to two at a time, you're welcome to rejoin the queue. After that thank you.
Thank you ladies and gentlemen, we will now begin the question and answer session. Since you have a question. Please press the star followed by the one on your Touchtone phone you hear a three tone prompt acknowledging you request and your questions will be pulled in the order. They are received should you wish to decline from the pulling process.
Please press star followed by the two if you're using speakerphone. Please leave the handset before pressing entities.
First question comes from David Hi, Deco without the quick please go ahead.
Thank you very much.
Then things hitting on behalf of baby.
Stuff on the congrats on the board boot.
Just wanted to know more to go do it wasn't being weak guidance, but going btwenty, one, but instead of the it would be useful goodwill you. It is to make it both in big revenue coming but I'm Gonna was good Institute and going to go into him onboard Angel growth. My again, you are expecting to it to do.
Thank you we are expecting to improve the amount of products that are coming from 2.01 derivatives and that that's the fundamental problem for all for our whole industry right now how much revenue can regenerate from trim, which is effectively a byproduct production.
In order to get the best portfolio margin available. So we're not giving specific numbers in our forecast. We can tell you will be improving.
In terms of a portfolio gross margin, we're targeting 40%.
Okay. Thank you every month.
Your next question comes from you and Great Lyons Global Partners. Please go ahead.
Good morning, and thanks for the question.
First I want to touch back again on gross margin, it's nice to see the sequential improvement during the quarter can you talk a little bit more you know what in terms what drove that I know you mentioned you know the change in yields but also heard you mentioned in a onetime costs or you're not should go away. So really you could kind of quantify that.
And then also going forward in terms of once the Bell No license is received how that helps to improve the gross margin as well in terms of like improved automation as well. So just any kind of coloring top quantifying the onetime.
During the quarter, how should we normalize thanks.
Thanks, Aaron So Dave so it's not just yield it's across the organization, we've taken that funnily enough. We found opportunity amidst of this this cold good thing we've had a renewed focus on health and safety, which is really driven efficiencies. So that that's been a that's been a huge success when when I say, one time costs I mean.
In the purchases in the quarter, some onerous contracts et cetera. So if you normalize it and if we only had sold in the quarter or at only needed to take into account current cost of our product current manufacturing cost. We can see the 40% right now and I remind everybody on the call, that's including original stash, which accounts for.
A large portion of our sales so very very bullish on our ability to drive long term portfolio margin at 40% that once we get these onetime issues out of away.
Okay. Great. Thanks, that's helpful. And then the second one would just be just touching on terms of market share for Quebec.
Much of the strong share again during the quarter, just let me could help kind of quantify you know the market share and how it's kind of comparing quarter over quarter for Quebec, and then just an increase in kind of.
Quarter to date, just with you know kind of the hoarding part that people so and that's the station of living in isolation recalled. The my team and then also just any color you could provide in Ontario. We also did launch original stashed on what you've seen in terms of market share trends are there as well. Thank you.
We're still completely dominant into back we've chosen to share the 33% number as we think Thats a.
That's a good sustainable conservative number some of the monthly data just blew that out of the water quite frankly, but we're waiting for that to normalize in any consumer packaged goods business, it's highly unlikely almost impossible that any brand will maintain above 40% market share.
And so so we're being conservative there, but we're definitely number one and not going anywhere in terms of Ontario the.
The introduction of some new products have worked very well, but we've really focused in our attention on a on servicing to come back market fully the other markets in Canada. We're really focused on 2.0 until we can properly serviced them with a flower so as a full line offering so.
Total national Marketshare, where amongst the top if you look at adult use market share you compare us to any of the top five names we're right in striking distance and we're quite pleased with those results and we anticipate that to continue.
Great. Thanks.
Your next question comes from the past Perry. Please open Heim. Please go ahead.
Good morning, Thanks for taking my questions. So I guess first Sebastian getting back to the comments on getting to a positive EBITDA near term.
Any any more granularity you can provide in terms of timing of achieving that target.
Oh right now we're still we're we're shooting for for within the next couple of quarters, but in terms of giving a precise window given all the uncertainty in the market no rupesh, where we're not giving more appropriate guidance. There what I can tell you is that at a with continuing increase in sales quarter over quarter.
And with a 40% gross margin and that ability to reduce opex.
It.
It's it gets very certain pretty soon.
Okay, Great and then on the operating expense Brian is there any more color you can find here is how you guys. Just think about unionized sequentially in marketing I, just keep during Q4 and.
Yes, just want to get a sense of what type of dollars, we should be thinking about going forward.
Absolutely.
What are the biggest successes to come out of a of our acquisition of new strike. We certainly had our challenges and you saw this quarter with the impairments, but one one of the greatest successes with the brand and we've come up with new marketing initiatives that are actually quite low cost and so we're very confident in our ability to keep those costs.
Under control go forward, while continuing to deploy those brands a nationally in getting residents. The brand will always rely on two things distribution first and then product innovation second that's what's going to build I believe a long term brand success.
And so on top of that we have great banners like original stash up and tax so to put this technology under and we're having great success in that with things like launch of original ash.
Great. Thank you.
Next question comes from 10, each <unk> with BMO capital markets. Please go ahead.
Yeah. Thanks first question is so just wanted to touch back on D. gross in the volume sold seem this quarter. So my understanding is most of it came from sequential growth in Quebec regulation or Skosh think the sell innovation mustaches somebody enterprise provinces. This quarter was a bit less than what I thought I just wanted to understand is.
Function I was just timing for when you launched into those provinces and at this point now are these other provinces are they now meaningfully increasing their ordering of original stash.
Well one of the challenges outside to back and I want to congratulate.
The Sq DC for how they manage their their supply relationships are there one of the few that don't have this issue, but one of the issues is as Lps shell into retail networks. So into other provinces outside of Qubec as those provinces load up the retail channel.
Some of the if theres any price adjustment or concessions need to be made or margin concession need to be made in the future those concessions don't flow through to the retailer and don't flow through to the consumer. So what that ends up doing is it ends up jamming the store with a bunch of inventory and then we can't reload. So in certain cases, we have.
Retail stores choosing to take a different manufacturer suggested retail price. So instead of taking the hexcel suggested price for original stash, they're taking prices that effective loss city and then in turn when we go to adjust then the province itself will present the price adjustment. So we are getting better on those things and we are learning more.
But that's causing the slowdown outside of cutback.
Okay. So we'll just be a continued but at the challenge for the next couple of quarters or is there something that can be addressed.
Okay. So just trying to threeq, yes, it's I think it's an industry wide challenge for the next for the next couple of months at least but we are seeing meaningful improvement.
In all provinces.
Okay. Thanks, and my second question Ed. Thank you adjusted some of the covenants and your term loan one of the ones. You mentioned was there some EBIT da related criteria within the covenants I'm just wondering your sand a if that has changed because I think in the prior credit agreement there were certain covenants related EBITDA.
That we're going to come in at certain point. So I just wanted to understand if you could kind of claims watch if Steve EBITDA covenants or if they change or what they are in the new covenant agreement. Thanks.
We're in full compliance of all our bank covenants and we're working very closely with our banking partners. There Super supportive. Both so you have you seen BMO been fantastic to work with.
Thanks.
Your next question comes from a win Benny with Jefferies. Please go ahead.
Morning, guys and your first question is just on the requirement for additional funding over the next 12 months.
Just hoping you could give it a bit more specifics around that assuming you hit your timeline for EBITDA positive how much cost you think you're actually going to need and then second wall.
It's just around or and <unk>. So those brands could you give any kind of color on the sales or market share trends that we're seeing today to bottom specifically thank you.
Thanks on from a cash need perspective, we certainly know what our wish list is versus the hard requirement from a wish list perspective, you'll recall I used to talk about for a global cannabis company.
Global kind of as dominant would require billions of dollars of capital axles now solely focused on being profitable in Canada, first and driving profitable operations here and to dominate in Canada into one of the top players a wish list number is about a $150 million.
The bare bones requirement could be quite a bit less than that significantly less so were worse waiting to see how the markets are going to respond how our ATM performs et cetera and in the short term. There is no cash pressure. So we're in we're in good shape in the in the very short term. So we have a lot of options as well as a strong supporting shareholders.
From a brands perspective, we're not breaking down the success of specific brands.
What I can say right now is original stash of working very well and we're working on an appropriate launch that we're super excited about that will tie into.
Introducing more higher margin product, but also more advanced a 2.0 products into market appetite and of course hexcel keeps doing very very welcome back.
Thank you appreciate it.
Your next question comes from Matt Bottomley, Canaccord [laughter] ahead.
Hi, good morning, everyone. Thanks for taking the questions Sebastian maybe just if you could provide a little more color on any sensitivity in pricing that you might have given that it seems like a lot of your peers are also starting to target. This value brand segment. I know you guys were first to do it but just does your recreational pricing seems to be offsetting overall.
Market penetration growth is there sort of the bottom line price or that you guys have set that would be of concern given where the market going or is the overall opex leverage and overall growth.
And your facility infrastructure expected to absorb a lot of that pressure.
Thanks, Matt I, I think that hacksaws assets or some of the best in the world quite frankly, I've seen most of what's around.
And I think we can rely on that on our processes in our methods that given a set quality I really don't think most of our competitors can compete at the same price. So we're going to continue to drive up gross margin, we're going to continue to drive down Opex and as we do that I want to keep flowing through that value too.
Our customers and our consumers.
And so as long as we maintain a portfolio gross margin above 40%, a we're quite comfortable continuing to lower prices I think that the overall price in the industry is starting to stabilize because we've achieved with original stash attack. So the.
The disruption of the black market and that has been a fundamental change and how people consume product and so I think we'll we'll start to see that stabilization on value add and I only think there's a heck. So when maybe one or two other license producers that can compete in that segment because they have the asset base in costs.
Structure to do so.
I appreciate that and just the second follow up question just respect with respect to your sales and marketing that basically came down to zero. This quarter over last from I think about 6 million. So can you frame how much of that might have been upfront investment during the launch of maybe candidates 2.0 versus any sort of change in strategy and how you allocate dollars tomorrow.
Getting.
Yes. The there was a there was a big change in strategy in terms of how we're doing a portfolio marketing. So we were marketing brands before really at the from out from a top level from a corporate level. We've stopped all of those activities and now we're taking product launches on a project by project basis, and being very selective and how.
We go to market and that's been very successful.
Original stash as one of the best performing product cannabis products of all time across all license producers and that was done on a shoestring marketing budget. So we are the marketing teams doing a fantastic job in doing more with less.
Great. Thank you.
Your next question comes from Johnson seasonal Bank capital markets. Please go ahead.
Good morning, just first question would be just on the positive.
Now previously you had mentioned 800 store retail store this kind of the benchmark for being able to reach that I believe we're we're over that number now across Canada.
So the question is is the current retail infrastructure enough for you to reach positive EBITDA or do you need more stores open and then Terry only and other provinces to get to that.
To get deposit EBITDA.
Well, John we'll certainly take more stores will make it easier I think the distribution of stores need some rightsizing, we're still probably overloaded a bit in Alberta and light in Ontario.
So at that needs to be adjusted a little bit given the the third pillar I really that that could balance out the store count is the competitive pressure. So as we start to see more and more license producers outside of Hexcel force filing for bankruptcy and failing.
That's creating less competition, which then allows us to gain more share and more sales and so given that continue to trend confident that with or without more stores weaken that we can get positive now without in mind that we do need more stores for the market in for consumers to be properly serviced in this country.
Okay, and then has called that 19 impacted the progress of del Valle in terms of construction and bringing in equipment and everything else and did I hear your rate that got no. It now they actually producing 2.0 products for for sale announced I thought that was really for more testing purposes.
Reducing far out distribution.
Yeah. So we are we are pilot scale and got no and so what we did as we took our testing purpose facility and we're going to market with certain products now. It's it's a more limited offering that will give you with our full scale and government.
The intention is to manufacture everything from Bellville, eventually and right now a construction is substantially complete which is why we've been able also to.
Reduce our capex ongoing and go forward.
But the Bellville facility has been it's affected by co bid just in terms of the timing of inspections etcetera. So I health, Canada, a of course completely occupied with accruing a virus and completely understand the we're working closely with them to see how we can address that for licensing topline et cetera, and we're quite happy to see that they're sold.
When they are good work.
Your next question comes from Douglas Mine with RBC capital markets. Please go ahead.
Yeah. Good morning, just wanted to go back to the stores for a second.
When you look at your EBITDA guidance with respect to say, Ontario, and I know that Ontario.
Talked about 250 stores, we thought that was going to be a challenge to begin with but.
Given the current setting.
Can you maybe tell us what Youre EBITDA positive outlook is based on is it based on the 250.
And let's say if it were half for that would you still be able to meet your EBITDA outlook.
Yes, I think on terrorists are going to have a lot of challenges getting to that number they need to fundamentally fixed distribution center distribution center can't really support more than 40 50 stores at the end of the day, so at that that needs to be fundamentally upgraded its not just a question of store count you also have the the reduced throughput of stores given the capital environment. So.
Which reduces that count so I think it's prudent to expect a slow rollout and that of course, all in the context of cobot.
So which is de prioritizing store openings for the Ontario government for for the moment.
So in terms of EBITDA positive as I've said I don't think the store count as the only factor you need to look at you need to look at the total competitive environment you needed the.
Market share of our of our new value offerings, and our entrance into the higher end segments with our brands that should contribute meaningfully.
And so I'm not overly worried we don't need to get through a 250 store count in terms of a specific store number we're not disclosing or specific plan that will because everything is moving so quickly that we're adapting and real time.
Okay, that's fair.
My other question just has to do you mentioned that you're having a real impact finally, Neolithic market, especially and come back can you expand on that to give us a bit more details maybe with respect to pricing what type of market share your taken from the elicit marketing.
Be very hopeful.
And I'll leave it there thanks.
Thanks for that we're really seeing new consumers come in where it comes down to an or conversations with Sq dishy, we're seeing consumers that I've never shopped at SDDC start to walk in in a significant amount and they're walking in asking for original Sachin axle products and so that's really where the first success comes from.
From a pricing perspective, everything we do with the original stash line revolves around attacking the black market pricing. So we'll go out and we'll look at what the cost per Gram is on dried flower will go look at what the cost per Gram is on hash for example, and we make sure to come in excise tax.
And with very competitive products anecdotally I get calls from a with the launch of original stash I got calls from black market dealers for the first times what are you doing to our business and so that's when I knew we were succeeding.
Perfect. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the way.
Your next question comes from Grand grandson of eat capital. Please go ahead.
Hi, Good morning, and thank you for taking my questions here I just wanted to follow up question regarding.
The ongoing capital needs as well the covenants I noticed some language guy in the financial statements about an additional cognizant that was put in about.
About the need for $40 million raised five on or before April thirtyth. So I was just wondering if that covenant in the language in there that includes the activities that were done towards the end of fiscal Q2, or if that sort of out within the next 30 days here. Thank you.
Steve.
Yep. Thanks for the question, yet so that that $40 million, it's something that's required new money before the end of April or the fund raising and capital raises we did in Q1 of I think it will get 130 million is outside of that and that they're going to be new money.
Okay. Thank you for the clarification there I'm just another question here.
Sebastian mentioned earlier on the call. This significant increase at 22000 kilogram equivalents.
In Q2 I was just wondering if you could provide the breakdown of what the flower versus the other equivalents, while we're in that number. Thank you.
Yeah, So really excited about that actually so this and it. This is what's really signaling to me the bottom of the trough.
Is that we're now over half flour and that trend continue so you'll see you'll see continued improvement in our next quarter I believe.
And so so that you have a number of factors your sales increasing.
Gross margin increasing at the same time that we can get additional penetration with a value product and our fundamental problem a flower versus trim is getting fixed a the guys an operation are going to create jobs. So it so all those things put together.
Coupled with the launch of new products is really giving me.
Giving me confidence here.
Appreciate the color. Thank you very much.
Your next question comes from Johns on par with RBC. Please go ahead.
Thanks, Good morning, I wanted to touch on your upcoming 2.0 launch I mean, the the majority or flower sales come from come back but of course, the provinces and allowing for most of the derivatives portfolio. So how do you think about capturing market share with your brands and other provinces.
So our brand strategy essentially is our original stash to displace black market and that's going to that's a national strategy, but as you've seen our launch in Ontario, which cash so we're taking products that.
Can be made.
So with other product than flower could come back is consuming most of the flower we produce.
And so we're we're maintaining that share we're going to add markets. One at a time from a flower perspective on top of that and then our 2.0 strategy is going to roll up into the upper brand outside of Tabak, which is going to have a full premium offering.
Is that were how we're planning on attacking attacking that so you should see that within the next two to three quarters from a full rolled up perspective, a full portfolio rollout.
Okay. Thanks to my other questions on trust your level of cash injections expanded pretty significantly in the quarter can you give us an update on where tresses in terms of.
Financing how much more it might need and also just how it's progressing on the operation side and when you might see those products marks nationally. Thanks.
Yeah, I Trust Trust facilities are absolutely amazing it is the largest as far as I know beverage facility in the world and most advance from an oxygen control perspective, which is critical when you talk about the quality control of your cannabinoids. So the beverages taste fantastic. There's a there's no added preservatives, which makes them.
Makes them, even more appealing we believe to consumers from a cash perspective trust has been funded with about $90 million. So far adds fully funded from both a capex and opex perspective for for the next while and that has been a of course those contributions came at 57% for Molson Coors.
Which remain a very actively engaged in interest. So we're all very excited about what that's going to bring from a from a product launch portfolio. We have multiple brands going out so definitely in this calendar year, you'll have a full product launch, but expect some some select launches of select brands in the meantime.
Okay. That's great. Thank you.
Your next question comes from Andrew Carter with Stifel. Please.
Hey, Thanks, good morning, where to ask we've all seen a the anecdotal evidence, suggesting surge demand in Canada, and then a significant increase where we had the visibility here the U.S. markets, but can you give us a sense of how the provinces are and retailers are managing inventories are you kind of seen a commensurate increase in orders from the provinces are they kind of taking a wait and see it.
Roche to the new environment.
So the new environment, especially with coal bid has resulted in the province is asking for bigger load ins I think the provinces are being cautious as to a as to their supply chain given this uncertain environment.
And but the demand is real so when we look at the tail sales were seeing meaningful throughput hexcel has been managing our provincial partners very closely because we have learned our lessons have not stuffing the channel.
And we are making sure to feed the stores with what they need and what they can sell through before necessarily responding to the aggregate purchase orders that are coming in so really focused on what sells through versus sell it.
Thanks, and then kind of second question now that you kind of transition to or doing some of your second generation products from getting now you. Obviously made that change a couple months ago kind of targeting a stronger kind of gross margin profile is this is this loss is leaning on this versus you know and <unk> waiting until theyre going to be a drag on that 40% gross margin target or could we expect.
The incremental launches here will be significantly increase accretive to your gross margin profile. Thanks.
No it's not a drag so does actually should when it first comes on there's going to be a couple of months of negative hit to gross margin. When belgo first turns on because we're going have to take on all that amortization.
But then then it rapidly correct del Valle, there's upside to our margin profile.
It's all a automated facilities, it's built for manufacturing it's in line processing to give you an idea to supply chain I mean today, our products get made in mass Sol go to Montreal for radiation go to Bellville for some packaging go back to mass all and then shipped out to come back. So it's a five point supply chain. Once bellville is fully license we actually in house. So.
Not irradiation, we in house other inoculation techniques and sold the product has grown MSR sent to bellville shipped to customers two or three points supply chain. So we're going to we're going to realize significant cost savings there.
Thanks, I'll pass it on.
Mhm people question at this time. Please proceed.
Okay, well, thanks, everybody for joining the call I'm going to a and again by a wishing you in your families. The best of health keep staying safe and washing your hands as best as possible.
In the meantime, extra will continue to focus on our market share our operational effectiveness and our product innovation and look forward to talking to you next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.