Q3 2020 Hexo Corp Earnings Call
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And the conference over to your moderator for today, Jennifer Smith Director of Investor Relations. Please go ahead.
Good morning. Thank you all for joining US. This morning Bar 2020, Q3 earnings call. We will start with the presentation by our CEO Sebastian thing Lee followed by a recap of our third quarter results by our CFO Siedenburg wash before opening the floor to your questions from our financial analysts.
Before we begin to remind you that today's presentation contains 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 target guidance or other statements that are not statements if.
Any statements contained herein or discussed during todays session that are not statements of historical that may be cool any forward looking statements.
Such statements can often but not all we've identified by use of forward looking terminology and other similar words and expressions that our prediction or indicate future events than future trends, including negative include medical variations thereof, or statements that certain events or conditions may or will happen or by discussion to strategy.
These statements should not be read as assurances of future performance or results such statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements that materially different from those implied by such statements. Those risks and uncertainties include but are not limited to those relating to the company's ability to execute its business.
Plant running required permits licenses and related regulatory compliance matters implemented growth strategy obtain and maintain financing on acceptable terms, maintaining renew required licenses means in this business relationships with its customers distributors and other strategic partners keep pace with changing consumer preferences protect intellectual property management.
Great acquisitions, which means in personnel and.
The company's competitive advantages the development of new products and product formats that accompanies product changes in laws and regulations and the absence of materially adverse changes and just for your global economy, a more discussion of the risks and uncertainties facing the company appear in the company's annual information form and companies management and discussion analysis for the three and nine months.
And the April Thirtyth, 2020, which are available under the company's profile on SEDAR, Although the company as these forward looking statements on the assumptions, but at least re are reasonable a cautious the readers that actual results and development, including the company's results of operations financial conditions liquidity and the development of the industry in which the company operates may differ materially.
From those newer 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 forward looking statements, which only speak to the data presentation. The company disclaims any intention or obligation except to the extent required by law update or revise any forward looking statements as a result of more.
Isolation or future events or for any reason any forward looking statement contained herein or discussed on today's session is access to qualified in its entirety by the above cautionary statement I'll now turn the floor over to Sebastian.
Thank you Jennifer good morning, everybody like to start by wishing everybody a save time and good health and two thank and acknowledge the incredible effort and dedication of our entire team and heck. So as we navigate through this pandemic caused by cobot 19.
The global economy has seen a dramatic reduction in GDP.
Agreeing unemployment numbers, what's encouraging at least in our industry that we've been stable and even more than stable we're growing.
Our team has rallied to meet the challenges as presented and actually exceeded expectations. We've continued to introduce new products and we continue to increase our volumes as we gain market share on our competitors. The company has implemented rigorous safety protocols to mitigate the potential exposure and provide a safe a work environment as possible to all our employees.
Our team members have demonstrated an incredible resolve to ensure we continue to execute at the highest levels and achieve operational excellence remain vigilant and we'll continue to proceed with caution.
While we continue to operate during a pandemic, we continued to be cautious about future expectations. Our plans to achieve adjusted EBITDA positive in the first half of fiscal 2021 or the end of the calendar year will depend on the growth of retail stores in our two largest markets, Ontario, and Quebec, it's difficult to determine the timing of new.
Licenses for new retail stores in Ontario, and the build out of additional stores in Quebec, but we're very encouraged by these huge progress that both our provincial partners have made.
With only a limited number of physical stores. The revenue numbers that were published this week by Sq DC and Lcs demonstrates the tremendous potential of both markets SDDC reported sales of 47 tons of.
Product and profits up $26 million with less than 50 stores I want to congratulate sq DC and jumped off about the hall on tremendous results and we're very proud to remain their preferred partner and for our participation in Qubec success.
On the Ontario side, we're Super encouraged by the amazing work that talent as team have done on analytics and providing the market with detailed market share analysis by product and we look forward to continuing to see more.
Our industry continues to grow during the pandemic and Thats, a testament to the consumer demand for safe and legal product offered by license producers Statistics, Canada reported that sales reached $181 million in the month of March and we're seeing steady demand in the months, but have followed while the March figures only lead to annual run rate of approximately two point.
2 billion. Most studies have reported that the true market in Canada is closer to $7 billion to $10 billion annually.
There is a great deal of work to be done by license producers and governments at each level to safely provide all our products to consumers.
The products that consumers are clearly demanding to be able to get to the full potential of this legal market.
We need the governments to either continued to build the retail infrastructure or allow the private sector to provide the service the consumer demands the license producers need to lead the way forward by creating and delivering products that compete effectively with the elicit market.
Our next so we're determined to be leaders in adults use market in Canada, and other legal markets, where we play.
Our philosophy is to go a mile deep instead of a mile wide in each market that we participate in and with each product that we launch.
With this approach that led us to negotiate a significant preferred supplier agreement with the province of cut that we wanted to be the dominant player and achieved leading market share we've done that.
We've maintained market share north of 30% and we continue to provide outstanding service to the surprise market and at this point with the new success. We've had operationally we're poised to expand nationally and to start to provide that same level of service and other markets.
There is other examples of how this approach of going narrowing deep has led to successful outcomes for hexcel.
We led the way and creating the 28 brand package format and pricing it to compete directly with elicit market. Our competitors have followed suit, but we've achieved strong market share with original stash.
We've been selective in our launch of 2.0 products and our hash product has been an overwhelming success.
We've established a dominant position with this product category.
Very pleased to share that our bellville facility is now fully licensed which includes the trust beverage facility. The state of the our facility is highly automated it's ideally located to serve both largest markets in Canada and has a national scale.
It has the capacity to grow along with our business and our partners.
The key effect of this facility is it is shifting hexcel to a true manufacturing company, while keeping our roots in agriculture in gets nil in muscle.
We were one of the first companies to partner with a Fortune 500 company. We created the trust joint venture our joint venture with Molson Coors and this company will launch a series of products from a newly constructed state of the our bottling and tanning operation at the Bell site and it should lead to being one of the very few players in Canada with Sig.
Inefficient market share in the cannabis beverage market.
We've also expanded our partnership with Molson Coors with the creation of trust USA as per our philosophy, we're going to focus on a first market to dominate in Colorado and to test and learn.
During the later half of 2019, it became clear that the capital market environment for kind of as companies have changed access to capital was going to be much more restrictive ekso led the way by being one of the first companies to rationalize our operations. This was also significantly impacted with a slow rollout of Canadian retail infrastructure, but we.
We adapted very quickly we were leaders in the following meaningful ways.
We provided exceptional service to the province of tobacco.
We moved up the ladder in market share and as you know I've often stated our goal is to become a top two player in adults use market share in Canada, EXL has moved quarter over quarter from a top five spot to now be top four spot nationally.
We've cultivated new high THC streams that are clearly in the demand from the consumer we have some new hexcel plus products in market now achieving 26% THC.
We've stabilized and improved our gross margins being ahead of plan by delivering 40% this quarter.
This has allowed us to launch and lead the path and the value segment without our margin deteriorating.
We have reduced cash operating expenses to achieve our internal targets and we've done all of that in less than 12 months, a big thanks to the team.
We've also created products that utilize all the components of our cultivation efforts. So that inventory does not grow excessively and consume our cash flow actual was making substantial progress towards the trim problem that we all facing this industry. The our inventory impairment has been minimized and we'll continue to monitor.
Roll forward.
We have a lot of work the do it hexcel, but the good news is that our revenues are growing our yields and volume sold have improved our gross margin has increased and our costs are coming down.
Our adjusted EBITDA losses under $5 million and we hope to be EBITDA positive. This year, we've achieved all that while moving up the ladder in market share and taking the top four national adult you share spot.
With the series of financings, we have completed since the end of the last calendar year. Our business is on solid financial footing. We look forward to building on those strengths, Steve I'll turn it over to you to speak about our financials.
Much Sebastian.
Good morning, everybody as Sebastian mentioned Q3 demonstrated significant improvement in a number of different ways as we move to closer to our goal of becoming adjusted EBITDA positive.
On the revenue fronts revenue from sales in the quarter increased by $7.1 million or 30%.
$30.1 million from 23.8 million in Q2.
Total revenue from sales in the quarter increased by 15 million or 94% when compared to third quarter of the previous year.
Net revenue increased to $22.1 million from $17 million in Q2 and from $13 million in Q3 2019.
Gross revenue from the adult use channel was 29.8 million and that represents an increase of 30% from the previous quarter to sales of 23 gross idle used sales also increased by 104% when compared to the same period in 2019.
Our value brands original stash continues to drive our sales with a little less than half of the sorry, with 48% increase from the previous quarter.
Sales of this products were introduced in the profitable central on other channels continue to growth.
The increased sales of original stash also contributed to the reduced price per Gram before excise tax, which fell by 9% to 319 from 349 during the period.
Newly launched cash in the quarter compromised approximately 19% of overall sales.
Quarter over quarter, Similarly oil extract drop drops contributed 7% to overall adult U.S sales growth.
I don't use volume sold in this period increased 42% to 9.3 tons compared to 6.6 tons in Q2.
Sales volume in the third quarter fiscal 2020 increased 238% from the 2.8 kilogram tons equivalent sold in the same quarter of fiscal 2019.
Cost of sales.
Cost of sales for the quarter were 13.4 million compared with 11.3 million in the previous quarter, representing an 18% increase the increase is the result of the increased sales in the period offset by realized benefits of reduced direct and indirect labor.
Some of the factors that contributed to the labor costs decreasing were covered 19, which allowed for reduce labor inputs to our cost per Gram and also activity in our bellville facilities for packaging.
The cost of goods sold for the third quarter of last year were 6.6 million the 100% increase in Cogs. This trend is still trending with the 94% increase in sales.
Gross margin.
For fair value adjustments for Q3.
On each Lenny was 8.8 million or 40% compared with net revenues from the sale of goods compared to $5.7 million.
33% in the prior quarter. This increase is due to the reduction in the cost per Gram as a result of the decrease packaging and irradiation costs as well as the improved yields per square foot.
When we have a while we expect it to be fluctuations to our quarterly gross margins as we ramp our activities in belveal and introduce new products over the next few quarters review, we view this as a significant indication that we will be able to achieve the long term sustainable portfolio wide margins of 40% that we've targeted.
Gross margin after fair value adjustments and impairments was 5.7 million compared to negative 7.9 million in Q2.
Our operating expenses continued to decrease through the quarter to 26.8 million from 281.5 million in Q2 I remember in Q2 included a large number of nonrecurring expenses that came about as a result of changes in the conditions of the Canadian market.
For that reason you look at our operating expenses in two of segment's core and nonrecurring.
For our core operating expenses, we saw a decrease of approximately 9% $25.7 million in Q3 from 28.1 million in Q2.
It was down from our peak.
The amount of 46.9 million in Q4 2019.
We've continued to focus on reducing expenses, where possible and ensuring that each dollar we spent as opposed to its best possible use.
DNA decreased to 11.2 million from 14.5 million in Q2, 2020, due to reduced consulting and professional fees.
Ill and insurance costs.
Marketing and promotion increased to 2.1 million from 400000 in Q2 as mentioned last quarter. The Q2 expenses were reduced by the reversal of and over accrual.
Current spending is more in line with future expectations.
Research and development decreased to 1 million from 1.2 million as a result, a reduction in headcount and consulting fees.
No quick look at the nonrecurring expenses you saw.
An additional 865 gain restructuring costs related to continue the continued rightsizing of the team we continue to focus on ensuring that we have our teams properly staffed.
Correct number of people sharing the workload and are appropriately rewarding those top performers who are helping us to achieve our goals.
We also had a loss on disposal of assets.
To do with the equipment that has been sold at of our Niagara facility that number was 3.2 million.
Loss from operations of 21.1 million in Q3 compared to 289.4 million loss in Q2, 20, if we normalize the operating loss and excludes certain noncash and nonrecurring items this decreased to $20.7 million compared with 23.2 million in the prior quarter.
Yes.
The decrease in losses, primarily related to an increase in gross margin and a decrease in operating expenses.
We remain focused on becoming adjusted EBITDA positive.
Focused on driving revenue as a market leader in the markets, we serve and reducing expenses through operational excellence.
Cash position.
We ended the quarter with $95.3 million in cash cash equivalents and short term investments.
Subsequent to the end of the Carter, we closed an additional financing which added over $50 million to our balance sheet.
After a reassessment of our capital plans, we have reduced our requirements dramatically and expect to incur the majority of expenditures in capital over the next three quarters.
With the reductions realignments and operational changes we've made our recent financial raises and the strategic use of our ATM will allow us to fund our Canadian operations.
I'll now turn the call back over to Jennifer.
Thank you.
We will now questions from our analysts due to the large number of analysts joining us today I would ask you to limit your questions to two at a time, you're welcome to rejoin the queue. After that thank you.
At this time, if you'd like to ask a question. Please press star one on your telephone keypad.
Aaron Gray with Alliance Global Partners. Your line is open.
Hi, good morning, and congrats on the quarter.
Thanks, and good morning.
So I guess my first question would go along with receivables the license at the Belveal facility I know that you guys had been waiting for that and.
Those a lot of things that could come along with its just wanted to get some further color on what you expect in terms of kind of the topline profile the shift from more automated.
Packaging and how to kind of flow through to the top line the timing of that and then also on the top line I know you kind of gave some color in terms of.
That being dependent on.
Whether or not and get more brick and mortar stores in Ontario, and Quebec, but how also do you feel like the Belvac facility licensing helps you to expand market share and some other promises outside of the two main once you have right now thank you.
Thanks, Aaron Super excited about Bellville getting its full licensing now so fully operational facility.
So the first thing short term slight negative on gross margin I remember that now that that's an operating assets that were going to take an amortization hit so that will show up next quarter. So expect a little bit of pressure on gross margin now medium term, what's what's super exciting is that the efficiencies the double is bringing to the table.
Just completely make up for that and more.
We've got automated packaging going in substantial reduction of LIBOR to productivity.
Cogs are going to continue to go down and Thats just on direct cost savings. The most significant thing is touching on the market share increase that you were alluding to and what that Bellville Ken.
What bubbles going to do there by creating new products and so with the capacity that we have for bellville. The single most important impact the EXL is that it's allowing us to create more 2.0 products convert more of our trim. That's on our balance sheet into sellable product at till sales, which results in more products on the shelf.
And more diversity for consumers. So we've already started to see that and looking forward through a rolling out the full suite of products over the coming quarters.
Alright, great and looking forward to see those kind of come out and just want to kind of my second question just continuing on with 2.0 products. Now you do have bellville rolled out you come out with cash we're seeing spin off to a great start.
You know how to think about those additional 2.0 products coming online and kind of impacting the sales line bearing kind of any color you could give in terms of what you're seeing right now in the marketplace from two for now products have come out from some of your peers and competitors and where you think the opportunity is for hack so to comment when it comes out with its own products. Thanks.
Yes, so well really happy I mean hack so for years as has been first to market with a lot of product categories right. We recently defined with the 28 Gram.
We're now being first with.
Hash offering this national so we know those things work, so we're doubling down getting leaner on existing product lines. So that we can keep upping the quality.
Our original SaaS product now has better humidity and better at THC that we've ever seen in it and so really happy to be able to continue to offer pricing the beast of black market with a better quality, but now as well as successive.
Hi, which tend to look at other categories. So look to us continue to expand on our pre roll line, our baseline make sure that was at work well and perhaps even more importantly.
Celebrating the launch of our beverages with.
Trust. So we're super excited as you have received the trust license. So in the next step short, while we're going to becoming out the market with the full portfolio across branded products Super exciting ready to drink beverages were already in market with some ready to drink beverage drops so our very well drops are available today, they're fun.
Nominal I mean, you can add a couple of drops to any flavor drink and it turns any drink or whatever you prefer into academies drink and you can customize the formulation. So those have been a great success as well so we're going to double down on those and of course, we're we're keeping a couple surprises for consumers downstream so you'll have to wait for those.
Alright, great. Thanks, I'll hop back in the Q.
Tami Chen with BMO capital markets. Your line is open.
Well thanks, good morning, everyone.
First question is especially I was wondering if you could speak a bit more to what industry and maybe your sales trends are looking like now there was a lot of noise with the Kobe pantry loading in March testing now settled back to pre co lead levels and any color among the different provinces would be helpful. As.
Well.
Yeah, I think what has been and again I mean I commended.
Yes on their report I think more of that will be will be super useful I think at that gives us great clarity of them on what's happening in our industry, we continue to grow.
Yes, we had a little bit of noise around pantry loading for Covanta I think sales of cannabis just continue to go up we are in a growth category. There is no doubt in my mind, yes, we have to keep working through logistical challenges, but no sign of slowing down here at XL, So quite happy with how our proceedings that being.
Said, there's a lot of pricing pressure in the next year as we have a very fierce competition and.
Getting to that pop to spot is a very difficult journey, while assuring profitability. So we have a hard task ahead of us by Im sure the team will deliver.
Got it okay, that's helpful and.
So that you mentioned the pricing pressure so it's going to be my next question is any talk about what you anticipate about the del Valle ramp in the near term on the gross margin hitch, but I wanted to get your thought on as you think about this competition any industry, especially in value do you anticipate or do you think you might need to get more competitive.
On the pricing profile of your original stash going forward and when you think about this potential gross margin volatility at minimum from the bellville ramp.
Are there still leverage in your Opex for you to reduce to achieve that positive EBITDA over the next quarter or too. Thanks.
Thanks, Dan Yes originals, that's really interesting case study I think we launched original stash has a black market killer. It was not launched as a value brand. It was really launched as a way for us to offer consumers something legally controls better quality at the same prices whether.
Already paid what happened is from a legal market perspective, the positioning and pricing. We're just so aggressive I mean, we were 40% better price than almost all our competitors. So it really forced a shift of the entire legal market down.
What I think is going to happen as you are initiating ecosystem create around original stash with some value products that will come out below original stash and the reason I'm I'm separating the tubes for quality of original stature just phenomenal. The humidity control is bang on the THC percentages are amongst the highest in the country.
And so it's it's a very very high quality products I think theres definitely room for true value plays below that hexcel was not in a rush for the race to the bottom in in terms of that category also given that our greenhouse asset is producing subtract while high quality product I think we have a lot of opportunity for actually higher quality products.
So you just launched we've just launched hexcel plus in in come back. So that's been a quite a success with 26% THC products. So more Karen attention. There. So I think a whole market is going to shift down original stash is going to take its place as a.
A mid market black market filler with that kind of value bargain basement call. It 10% to 15% THC product set below that at a better pricing and I think actually still has a ton of opportunity in both growing original staff market share and introducing new premium products on the Opex versus Cogs question Opex is starting.
To get very lean for what we want to build remember that I'm set out over the next 10 years to build a global top player with hexcel. So that means I need significant executive bench strength and we have that today, we have a phenomenal team we've added.
We've added the food CPG experienced G.M. that every site.
And so those people are critical to the success of the organization, so a little bit a rounding around the edges on opex plus the Cogs opportunity in what Bellevue is going to deliver is still tremendous so I'm really not worried about pricing pressure.
Got it thank you.
Sean's apparel with spy BC your line is open.
Thanks. Good morning, my questions also around the value segment than competition more broadly.
So with net pricing down around to 25, a gram this quarter I'm. Just wondering do you think this is a floor for hexcel pricing I know the prior comment maybe it was more around the industry being into deep value category, but.
Do you see kind of like for like pricing on Ekso products seeing a floor here or do you think there's more room for that the decline given it does seem that said that you were early to the category for value, but some competitors seem to be chasing that as well.
Yeah, let Jon let them Chase I invite them to chase I mean at the end of the data consumer will drive pricing and I don't think the consumer has a floor in mind. So as we continue to to achieve efficiencies and the whole industry, including Ekso is still in its infancy now we've done very well our we're one of the lowest cost producers all in in the whole countries.
You can see that in our gross margin are reflected in our pricing, but if you look at what we shipped in the quarter I mean over nine tons of product. If you look at our market share by volume axles, a top player like forget top forward in that and I won't specify exactly which competitor on against but we're right up there as one of the top players so less.
Price shocks settled and you will see hexcel emerge I think it in that top two scenarios. If we need to continue to use our cost advantage to lower pricing to ensure we stay in that top to spot. We will do so but I don't think of this thing in terms of our pricing floor, because hexcel doesn't need a pricing floor, we still have some.
So much upside on Cogs consult with our Belbel facility that we will continue to deliver better quality to consumers a better prices for for at least in the next few years.
Okay. That's helpful. Thanks, then my second question is on the capital contributions required for.
For trucks and for the U.S. JV I know these are build is being generally capital light I think it's around $30 million and contributions. This year, just trying to get a sense if I'm much more as necessary to.
On that project at least given your current game plan and okay expanded future years that given what you're trying to do now how much more do you think you'll have to contribute to the JV.
Yeah, we learned so much from Molson Coors and the U.S. exacts are absolutely phenomenal in approaching a capital light model. So whats really exciting about what we Didnt, Colorado as we took all the lessons learned from Trust, Canada, which had a significant investment right you're talking about $90 million.
42%, which was X. So in the balance which was molten intended to build kind of this world class assets, but on the hexcel side, we've been innovating we've been building a patent portfolio on a multitude of et cetera, we can take all that IP, we're moving it down to Colorado, the regulatory environment in Colorado allows us to use pre existing molson Coors assets for distribution.
And so what.
What's really exciting is we're using.
Installed capacity to be able to distribute in that market. So.
Capital call is in great shape for now the strategic plan of Trust and Trust USA is fully funded I do expect but as we prove out the Colorado market. We will want to expand further regulations permitting of course, and making sure we stand on side with EBITDA as we've done so far and I expect that.
That time will be presented with more capital deployment opportunities.
Okay understood. Thank you very much.
Rupesh Parikh with Oppenheimer. Your line is open.
Good morning, Thanks for taking my questions. So just going back to your commentary about hoping to achieve positive adjusted EBITDA in the first half of fiscal 2021, as you look at Ontario, and Qubec. How many stores are there today and what level do you think you need to you need to see to get positive EBITDA.
Rebecca I think that.
Given our given our market right now I mean, we have de coupled ourselves a little bit from store openings in terms of being able to put forward are positive EBITDA is going to come through incremental market share gains out of the existing stores. So I mean, I don't think it's fair for me to say.
You know we're counting on the on our potential partners to open next stores in terms in terms of us too to achieve that I think we're going to achieve that adjusted EBITDA no matter the store count the story, obviously gets better if the if our partners open more stores, which they're doing so we'll just keep an eye on that.
And then and then I guess just a second follow up question. So you're what are your portfolio a lot of progress on the value side. So that's why are you happy with your portfolio positioning and then where you are from an inventory perspective.
No.
I'll be happy when the inventory coming off aligned goes right to the til and gets sold in two weeks and everything is fresh with nothing older than three days. So no absolutely not happy with that said the progress. We've made has been absolutely fantastic and as I mentioned I mean, most of our products on the shelf now is that well.
Less than a few weeks a fresh so we're talking a we're talking a massive improvement from early days of legalization way better quality for the consumer so that im thrilled lift.
Okay, great. Thank you.
Graham Kramer with eight capital your line is open.
Hi, Good morning, and thank you for taking my questions here Sebastian I wanted to go back and just explore a little deeper your comments about the positioning of original stash I understand your distinction you made between it being a black market foster versus a value segment, but do you think.
There is a risk of the overall consumer just grouping all of the offerings and that offering has also increased in competition.
As value and you could potentially see another iteration of what we've seen on some of the mid grade products, where consumers and have just differentiating on price as opposed to brand or price in terms of dollar per cent THC. So are you worried at all.
To put it another way that increased competition on the lower bound.
Of that segment could actually erode original stashes position or is the pie of this market going to grow substantially enough, where it ends up being a smaller slice put up a much bigger pie. Thank you.
Yes, so it's twofold and there's a there's a bit about third part to it so with original Thats. The whole market is going to shift down there's pricing pressure across the board right as companies live efficiencies are provincial partners are certainly remaining very competitive, forcing the best possible product for their consumers at the best price. So there's nobody.
Is going to get away with you know just continuously reducing their costs, but not flowing that through to the consumer.
So thats one piece the other pieces most of the competitors in the country don't have manufacturing assets of the sophistication is what hexcel has at our Bellville facility. So I don't think that the existing 300 license producer.
System is going to continue going the way it does it simply impossible for a small tail scale producer with no manufacturing capacity to compete with a with a company like EXL. So I think that that'll continue to mean meaningful improvement for the consumer and third part of that is as we continue to see.
Yield improvements at our cultivation centric, but thats not just from a manufacturing perspective, we're making progress.
As we continue to put out more product Hexcel also has some opportunities in introducing new brands that are positioned at a better value.
That's been original stashed, so we're really starting to look at that sector as a total growth opportunity.
While out while seeing originals bash as growth, but yes, you are entirely right to say that it's what we launched basically defined the market I mean, we had 11 of our competitors following the four to six months after we launch.
But you know EXFO is not new to that where those same thing happened. When we did a Alex year, a couple of years ago, and I expect that to beat the theme for the coming years, but if I'm always six months ahead of everybody I think thats going to be good for EXL.
Okay. Thank you for that I appreciate the color. There. That's helpful. Just as a follow up to that I could you share with that's what the total percentage of original stash sales were up to 9.3 tons sold in the quarter and what the specific gross margin on original stash sales was.
The original fashion was that was about half what we'll give you a round numbers in terms of volumes and in terms of a margin, we don't share byproduct and but I can tell you obviously, we're targeting that 40% portfolio and the great thing this quarter as I don't need even to talk about targeting.
Because we achieved at 40% gross margin across the board.
Okay. Thank you very much for that.
Scott Fortune with Roth Capital Partners. Your line is open.
Thanks, Thanks for the call can you provide a little more color outside Quebec, I know you maintain 30% plus market share there what about the other provinces and gaining market share with your products and the other provinces moving forward here.
Yeah, absolutely. So we are going on market by market right. So we're being selective so the idea is not to be.
Not to be the into the number one player in every single market in Canada. The idea is to assure that were top two in the markets in which we operate so we're rolling that out.
Obviously, staying close to two our friends in Ontario, that's a very large market, but also active in the Maritimes and out west. So we're looking at the major markets. We've started to roll out 2.0.
Our full portfolio of products is is being made more and more available. We just we just appointed a new as VP of sales Super excited too to have them start building up.
Our presence outside of Qubec and look forward to building share there.
Okay, and then a follow on 'em, we know in Cana got to legalize Hill, the Florida inventory kind of ramped up from that standpoint.
The problem is they're taking a little more cautious approach on on the 2.0 products from that standpoint.
How are they viewing kind of orders Reorders for 2.0 from that standpoint, and then what are kind of the discussions around.
The potential beverages as you roll that out them down the road here.
Yeah, our beverage portfolio is just had an absolute rezoning success, because what we're taking that portfolio approach basically going to the.
The distributors and saying we have your one stop beverage solution right you can deal with one or two suppliers, but one of them is going to be hack. So and you can have a complete beverage offerings. So thats really resonating as we're touching on north of 80% of consumer occasions, with our beverages and so we're not short on orders so were Brazil.
Very happy to see that full license in bellville, so that would get going on ready to drink.
We have a number of fridges and a lot of retailers as well so we'll be able to offer cold drinks to consumers. So thats all part of the hexcel promise a quality.
On the sorry first part of your question again.
Okay. How are you seeing the reordering of.
2.0 products and I know Theres, a conservative the delta or inventory too much there how the Canada, we kept Ken acceleration there.
Yes, so the reorder so really the provinces in what they're doing is uncomplicated right. There reordering what sells at the till so we've we've put that boots on the ground to really understand what the pill sales are we're looking at the velocity rates and we're being very careful to keep the channel lean our goal is to get to just in time system where something.
Comes off the line gets produced goes into store maximize freshness maximize quality and reduce costs.
Okay. Thanks to the color appreciate it.
Andrew Carter with Stifel. Your line is open.
Thanks, Good morning, I guess I wanted to ask given the progress to date pretty strong sales growth plus 30%, 40% gross margin right very narrow and EBITDA on your EBITDA loss you close to breakeven. We what are the main kind of an impediment to getting there I mean, the next two quarters bellville coming online, but you're getting efficiencies there.
Do you continue at that rate if sales growth you get them higher margin products coming online.
I'm, a little surprising and I know you talked a little bit away from it still kind of predicated on store growth, but it seems like this this would be pretty achievable target just growing at the market in the next upcoming quarters.
Andrew the certain key behind Ekso has never been higher so your read I think is accurate we've been focused on reducing variability on go forward and to get.
To mature as an organization right, we're coming off of a seven year explosive growth startup and as as we put a ton of effort in putting top CPG executives in place axle was really matured its planning process and yes, I agree with you I think that our plan is more realistic than ever and obviously that the theres still.
Some large caveats like coal bid, which is still out there. So we've got to be careful with those types of things and plan very carefully, but we're putting health and safety first style, which I should mitigate some of that risk very confident about future.
Great and then second question I think I believe the previous guidance at the high end had capex. It 110 for the year is that still the case and I wanted to ask given given the liquidity situation. Much improved are you going to accelerate any or capital plans or is it still a very meaningful step down coming next year.
Everything we're doing is driving to revenue Andrew so meaningful step down for sure.
We're really taking a philosophy on capex of making sure we get a good return on capital so any new incremental projects I'm, having the team presents a full case and I've told them don't even bother presenting me something that doesn't have a three year payback. So we're targeting two years or better.
And.
That's really setting the foundation for more responsible spend and tying into that narrow and deep philosophy that we haven't had so.
Thanks I'll pass on.
Matt Bottomley with Canaccord Your line is open.
Hi, good morning, Thanks for taking the questions just wanted to.
Clarify something on sort of the the value segment of the market and we're happy to look too.
To put its effort in various categories. Those the batches wondering if you can comment on how this translate your 2.0 offering obviously a lot of new edibles coming to market.
In around now january's, the start ramping up some of your product how do you view pricing or value segments, they're hard to tell just from looking at some of the provincial website, but it does seem that a couple of the.
Book value right edible some of them that are better price.
It's again.
Haircut to the overall average seem to be gaining the most volumes, which makes sense as well. So are you going to have a similar philosophy and those products to start or just any sort of the indication on what types of pricing point, you're going to be focused on any initial.
Yes, I did I did invite everybody to think a little bit broader than just value in high end I think the most critical piece to understand our original stash strategy is black Hawk displacement. So when we think about $4 per Gram for example.
In the context of the legal market that sounds like value in the context of the elicit market Thats, just what people pay and so for a high quality Gran that's really the mission of original Sosh that the line extension you've seen us take that into hash. For example, now we happened to be the only product and asked today on a national scale, which.
Which is quite exciting, but weve priced cash. Despite the fact, we have no legal competitors to speak of we are delivering value to consumers, we've priced cash at the black market price and that's our philosophy surrounding everything we're going to do under the original stashed flagship now we'll have some opportunities to do some fully.
Disruptive premium things so when we come up with 26% THC flower for example that were slotting into our hexcel plus brand and because that's simply do you see percentages that the black market can deliver today.
At least from the tests were running so theres a lot of opportunity still for premium in these products again, when you think are ready to drink beverages, a lot of opportunities there, but I also want to make sure that in the long term, we're offering consumers beverages that are familiar to them and that are in a in a segment that's approach.
Okay. So.
A few years out I would love for somebody to be able to pick up a case of trust powered by hexcel kind of as beverages for.
A dollar or to attend I think that would be a critical for that to open up though we need to distribution to evolve where we can sell case quantity to really deliver that value in the 2.0.
All of this on on the on the debt.
For.
Remember.
There are that the government has allocated there.
Crazy.
Five gram equivalent per ask for 10 milligrams that go into a bottle, which is taking a hard for consumers to buy.
Before let's say one day product and that's something that is weighing on the potential penetration of these products or is it sort of noise in the interim.
No no you're right I mean that that's certainly an impediment right now and the regulatory work I mean.
Remember that health, Canada has been presented with brand new legislation first to legalize first introduced 2.0, introducing in your their AD right at the intersection of food and candidates is a very complicated operate. So so I think in that context, we have to give them some leash to understand the how to it.
Evolve the regulations in the right way the regulations today are not where they should be there are still some inconsistency in terms of concentration to your point. If you walk into a store you might be able to buy five ready to drink beverages that doesn't make a lot of sense. If we're if we're looking at a risk based policy.
The total amount of THC and those five drinks would be less than what you could buy and an equivalent that extract for example, so there's some harmonizing to do while putting public safety first and I think those avenues are available I think the industry Association I think a heck so have been pushing for those evolution and I know health, Canada is working hard on doing it so that that will.
Come and it will help the market.
Thanks, and if I could just that quickly I know you touched on it.
Back to capital allocation to $150 million as you currently have right now you've talked about certain elements that it might be applied to but can you get sort of maybe a larger view our.
You have how much of that is earmarked for interim Opex burn.
Actually funding from other initiatives, you're doing versus what might be considered blocking better some rainy day.
Yeah, well, we're certainly being efficient with our capital. So I don't think I don't think the idea is is to do any rainy day money, but in terms of specific breakdown them out we're not providing the capex opex break down at this time.
Okay. Thank you.
David could that go with Altacorp capital Your line is open.
Hi, good morning, congratulations on the quarter I'm just a couple of questions here. The first is on a trust I'm just wondering Sebastian if you can just give a little bit of some color with respect to the timing of the rollout Amin also is your intense you're just from a strategic perspective to deploy.
Beverages across Canada, all ones are you looking more to phased approach, maybe starting with your home province payback.
Yes, so well that the interesting thing I mean truss, although obviously were half of the partner their trust as its own company with its own management team in so capex has been incredibly important market for trust, but they're really looking at this at the national place with that being said trust as being very selective than where it goes for distribution and making sure that.
It has the right type of distribution deals in place, obviously logistics a lot more complicated with a ready to drink beverages, and we're leveraging wilsons experience. There we do expect to be in most of the nation. When we launch and the launch is coming soon for specific data left the Scott Cooper This year of trust.
Take that Thunder.
In the in the next short block.
Okay. Thank you I.
I don't see meeting interesting comment as well during your prepared remarks regarding text, so really being a manufacturing.
Organization, but not beginning to reach so as being in agriculture, I'm, just wondering what your thoughts or for the medium to long term should we still think of cultivation is being obviously key to to really all candidates companies.
And if so do you do you think altogether moving forward is cultivation something that extra would likely.
Good itself them altogether.
Well so the interesting question and would we get rid of cultivation I mean see a radically if you weren't good at it yeah you'd want to get us in that business, but hexcel is one of the best in the country if not the best so in terms of cultivating were phenomenal added like the quality is great but cost is best in class and we keep improving.
Right like so our T. shield that talk about it but now we're now putting 26% she had a degree now so.
Quite a big kudos to my cultivation deal so in that context, no I do absolutely not getting rid of cultivation, we're going to keep it because it's a it's a big driver of profitability I do think you're on the right track boat and thinking of China bus companies not as a one size fits all I think you have cultivation companies I think you have manufacturing companies I think you have IP comes.
Monies and that's why it's so important for hexcel to be top market share leader and that's why we're so significant to move from number five to number four and on our way to top two is because we are a full service offering license producer we have one of the most robust IP portfolio is in the space as were invested in innovation or one of the last call.
Producers on the cultivation side and now with the Bellville asset were possibly one of three or four companies that have the scale and manufacturing expertise to deliver true manufacturing. So we're playing in all those in those three segments manufacturing will start to take more and more importance as we go forward and what's really exciting about manufacturing is that it.
Uncoupled the value of the company from the value of or the scale of the cultivation. So were before all these companies were valued on okay. You can grow 50 tons. For example, so your value is that with Bell then ill and our manufacturing we can manufacture more products that we can grow so what ends up happening as prices continue to grow.
As we see other competitors specialize in agriculture and cultivation. If they don't have manufacturing will be able to provide that service for them and then we'd just created upside revenue potential that beyond our cultivation ceiling.
Thank you that's helpful and if I can just ask one more question going back to original Sosh I'm. Just curious when you mentioned Sebastian you do have a high THC product that will enter the market or might be in the market now.
I'm going to assume just for this question that we can call it a premium high purity product and if so.
When you're looking at customer preference your consumer preference when it comes to original stash being meant to really get rid of elicit market product altogether. When you introduce now a high teach the product and also calling that hexcel plus I think you mentioned is are there any potential issues with the consumer.
How they're thinking about original stash being an actual product versus hexcel, plus hi, THC product and any sort of a challenges that just for the consumer to kind of integrate with on the one hand original stash being kind of.
Lower quality type product compared to a higher THC product.
Yes, Okay, a lot to unpack there Dave thanks.
The.
The actual plus product has a brand promise of a minimum 20% THC. So we noticed in market that consumers were asking and taking what we don't want these broad THC ranges and sometimes we don't really know what we're getting until we have the packaging our hand, so thats why we introduced hexcel plus there's not a gram in hexcel, plus that's under 20% and in fact most of them or.
To be north of 25, 26, as I've said, so but there is a brand promise there now that comes with a a premium pricing scheme.
On original stash, what you have to compare to is the true quality of illicit market right.
When we look at broad testing of illicit market objective data elicit product is coming in at 13 or 14% THC. Our original stash currently is sitting north of 16%. So when it is incorrect to name it's a lower quality. It is much higher quality and whats available in the black market and of course Taryn country.
Whole any.
Humidity and of course, the lack of pesticides are you get all that added value. The challenge is telling that to consumers because the illicit market's been telling people for years that that they're growing 35% DC product that is not true, but the consumer does believe it today. So overtime as we educate I think there's a lot of work for us on our per ventral partners to get that message across to consumers.
And as we do that will be more and more successful with our branding.
Thank you that's very helpful principal.
Douglas My him with RBC capital markets. Your line is open.
Thanks, Good morning.
Two questions.
Two.
No products and we're growing importance in the market can you.
Maybe talk about.
Yes.
And then within.
Clearly acute and engineering you were really the for first mover advantage when you turn it but we're going to market.
On a same.
The rebate payments or something like that.
Thanks, Doug so well folks Super excited we've got our disposables are in market and Albert US. So we're we're currently at pilot scale on our manufacturing. So we will at some point I'm sure taking our bellville facility to to do the flipped a cost on its head and go to the next level.
But more so more importantly from a quality perspective, our vape southern extensively tested no adverse reaction for our clinical trials. So we have actual data. So we're very confident and putting those in from consumers. They are made from all natural ingredients. So theres, no extraneous chemicals or anything that might or might call.
As those adverse reactions were very very happy and our innovation teams done a phenomenal job on the flavor profiles. So we're getting their rave reviews at the moment and we've actually manage to.
To really deliver specific experiences with the mix of flavor a flavor all and turbines. So in our disposables I mean for example, our train wreck product that's a disposable they've that's currently in Alberta is.
It's coming back with reviews people are calling at some of the strongest base they've ever tried and so we're very very happy with our quality now the question will be how do we scale that up from a manufacturing perspective, and so I think it's a completely different strategy with vapor and and original stash from the approach to the market.
As vape is a much more complex manufactured product you also have a ton more upside once you automate so it's going to be exciting to see that one rollout.
Okay and makes perfect sense.
Christian just trying to do is going up to commercial levels and every time.
Okay.
Whether or not.
Yes, consistency and variability I guess.
And then.
Hanson.
Perhaps some of your competitors.
Okay.
Launching at scale.
No. It thanks for that no and in fact and this is this is why I'm. So happy we partnered with Molson Coors, because if I have tried to do these beverages on my own I would've had the same issues as my competitors.
The Molson guys or I mean, they've been doing beverages for 300 years. They came in and they installed a five parts per billion oxygen control system in our system. So we have now we now know when we've known for a while that.
Oxidation of cannabinoids is a problem for quality there simply theres next to no oxygen in our system, which is phenomenal for quality and consistency our shelf stability is very strong.
The the flavorings that we're using our very stable, we're very very pleased with the quality I think we're we're leaders very well, we'll need to see in market, how the consumer response, but certainly from a production standpoint.
The Bellville Russ beverage facility is the most advanced cannabis beverage facility I've seen on the planet.
Okay, great. Thanks, very much matching.
Pablo Zuanic with Cantor Fitzgerald Your line is open.
Yes, good morning look a couple of questions.
Should we think about do you know these huge increase expected by the full in outdoor kind of his cultivation.
Is that going to its going to affect the floor when continuing value or even pre roles that we should just sometimes I go to oil and extract mostly I'm just trying to think how that affects it got to 40 different formats, I'm, particularly a value segment.
Flowers or maybe not at all.
The really it's been really interesting to take a look at some of the outdoor gross stuff.
First I don't think anyone's figured out how to do it profitably like if you look at the margin profiles of some of the outdoor growers their gross margins half of that of the hexcel. So the you know until that so there's some work to do just on the supply chain. That's number one so it's not ready to go once it is ready to go.
Little bit of impact the far market I don't think so.
Consumers don't want outdoor products at at really at any price you're also going to have a lot of quality issues with that product. So.
No I don't think it's going to significantly impact of flower markets to your point, how does it come into play with extraction I think that's something we need to keep a close eye on does it displace hemp and that's why it's so significant for us to be installing massive extraction capacity ourselves at our bellville facility truly moving to being manufactured.
The company axles not going to invest in outdoor we're not taking that risk, but in the case, where its successful we can become a net buyer of outdoor product run it through our world class extraction processes, and then feed our 2.0 offerings and for us will be agnostic, whether we get those cannabinoids from an outdoor Canada's grower.
Outdoor have grower or a synthetic biosynthetic producer down the line, what's important to help so being able to manufacture great products formulating IP protected experiences and having consumer market share.
And one more.
Just remind us what percentage of your sales came from new equipment province, if you're going to close that for the quarter I'm not sure characterize you know how quick performance you ought to get in.
Bush the March one two loading in April may even June compared to other provinces right about into that was the restrictions for their money could perform better but just from what quarter over there in terms of on the last few months for for Greg versus Westwego.
Yes, I mean tobacco is still our primary market over 80% of our sales are were in Qubec. There this quarter.
And because we've kept that as a as our as our top top priority market, but that was also capacity constrained historically that capacity constraint is largely lifted now so you'll see us starting for rollout as I mentioned in other markets, but we're being selective to make sure that if we do go into a market we want to play in that top to position.
Yeah, but can you comment in terms of how the market perform in the last few months versus the other markets. It sounds like it's been a much stronger market, which is restrictions and I'm tardio NBC. Another provinces for that's on this is only two and that's what the front.
No really the margin improvement has come through cost control. So it's really minot.
Yes, it was really not the margin, but im talking or the market what appeared from other provinces. He said because of the stores.
Shutdown some restrictions were because we know market thats being.
Better performing as as we know major shutdowns compared to other provinces I'm just trying to understand.
It seems like yeah solitaire sorry, Thank you yeah, so well comment publish their numbers right. So 47 tons shipped and then you compare and I think thats the top market in Canada right now.
And I mean, Ontario has done a phenomenal job as well as they shipped 35 tons, but obviously if you. If you adjust for population I think come back is clearly doing a has made the right choices in terms of getting to the most amount of people.
And then one last one if I may I ask is of course respectfully.
And we did away with the offerings in the last two mines plasterboard conversion to one conversion June your shareholders. You know those with the wheel to stock back in February March where they use it by about 64% right. That's myself, but maybe that's of course, you know to raise capital into surviving this industry, especially we over all the opportunities that you have.
Do you know after that and today in the gold you're thinking about making use of ATM into future and just pricing that you need to give you more quartering does it go people should think about the from the recent were they loosening the months issue.
Can you comment on that they'd be more I mean, do you didn't really exactly the capex number and if it was one Dan or 150, but I'm just trying to feel more comfortable that there's no more major dilution coming and going into next few months. Thanks, that's it.
Thanks for that I think what's important and I've said this for the last seven years hacks always set out long term to build a globally dominant cannabis player those companies will require over the long term billions of dollars of capital now I think we can safely revise that type of thinking because weve law.
So much and we're learning how to get a lot more capital light so years ago why throughout a number if you wanted to build as one of the top three global cannabis companies across your $6 billion. That's a number throughout I think the numbers lower them not today, because I think we've done a lot smarter in how we approach and a lot more capital light we've had some internet.
Rational sales now it heck so that you will see rollout in the in the following months, you'll see that show up in our in our revenue line and we're doing those rights from Canada with no assets installed no employees installed internationally. So we're getting a lot smarter, but that in mind. When you look at the global cannabis opportunity and let me scale it back to even Canada.
The top three players in Canada will be splitting at 10 billion dollar market.
Here in the country.
Now our share that license producer share of that market's going to be $5 billion right takeout excise tax take out margins. So you've got three Blair splitting a 5 billion dollar market give 1 billion of that market to other small players might then didn't on majors I'm playing to be a major player.
Actual is successful we will have a significant share of a 4 billion dollar revenue stream the dilution needs to be controlled but it's a bet and making it to that top three we'll make that dilution irrelevant because the success will be resounding for long term holders of core.
First we are in a hyper volatile markets and I certainly wish we would not have had this global pandemic, which put us in a position to where yeah. We raised the terms that were unfavorable but you've seen us recover from that no longer doing unit deals. So you could be rest assured that that's off the table. We now have our ATM launching with.
Unbelievable volume, so, giving us access to capital as needed and more importantly, we're moving towards that adjusted EBITDA positive. So theres not an opex stream I've also talked about our capital prioritization, if we're deploying capital at a 30% to 50% return in the future add the dilutive effect of becomes.
Additives, not dilutive and so I'm very confident in that strategy does that answer your question.
Our final question comes from the line of John Chu with days, you're doing your line is open.
Hi, just one quick question still previously you had mentioned the delver facility was that to act as that facilitator to bring on new 500.
Pat or top new partners.
In the market.
CPG perspective.
Sorry gone now did you finished your thought.
Hi, last year, TPG perspective, Oh, Yeah, I'm, just curious about that how discussions Darwin, new CPG partners now that the beltway facilities up and writing.
License, yes.
Well, we havent toward the yet, but they are all asking which is super exciting. So we're still our conversations ongoing.
Those are long pole conversations that very complex deals I'm still at the table with major World class companies and we're still very excited about the potential. We've got now about 400000 feet of manufacturing space add that's in a licensed facility world class kind of.
Center of excellence right next to another Fortune 500, right next to trusts all in the same building.
Next to Hexcel operations, that's available to those fortune 500 partners. So we'll be giving tours probably sometime in the next couple of months.
For for not only those potential fortune 500 partners, but also other partners investors et cetera. So looking forward to showcase that facility in yeah for sure I think thats gonna have a positive impact and landing some partners.
There are no further questions at this time I would now like to turn the call back over to our presenters for final remarks.
Thanks, everybody. That's all we had for today, a very excited about a quarter. Thanks again big thanks to the team and look forward to talking to everybody in Q4.
This concludes todays conference call. We thank you for your participation you may now disconnect.