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 Boston annually, followed by a recap of our third quarter results by our CFO Siedenburg wash before opening up large your questions from our financial analysts.
Before we begin reminds 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 is that.
Any statements contained herein or discussed during todays session that are not statements of historical Bob maybe any forward looking statements.
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These statements should not be ready to share insist that future performance or results such statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements 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 plan.
It really required permits licenses and related regulatory compliance matters implemented growth strategy obtain and maintain financing on acceptable terms maintaining renewed required licenses needs in this business relationships with customers distributors and other strategic partners.
Thanks, with changing consumer preferences protect intellectual property management, great acquisitions, which in personnel and really the company's competitive advantages the development of new products and product format that accompanies product changes in laws and regulations and the absence of materially adverse changes and just for your global economy.
Discussion of the risks and uncertainties spacing the company appear in accompanied annual information form and companies management discussion analysis for the three and nine month period, ending April Thirtyth 2020, which are available under the company's profile on SEDAR, Although the company based forward looking statements on the assumptions that at least re are reasonable a cautious the readers.
Actual results in 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 Naylor 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 presentations. The company disclaims any intention or obligation executive that required by law update or revise any forward looking statements as a result.
More information on future events or for any reason any forward looking statement contained herein are discussed in today's session is less qualified in its entirety by the above cautionary statement I'll now turn the floor over to faster.
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 efforts and dedication of our entire team and heck. So as we navigate through this pandemic caused by core with 19.
While the global economy has seen a dramatic reduction in GDP.
During the unemployment numbers, what's encouraging at least in our industry is 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 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.
Want to congratulate Sq DC and jumped off about at all 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 Cal and his 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 that have followed while the March figures only lead to annual run rate of approximately.
2.2 billion. Most studies have reported that the true market in Canada is closer to $7 billion to $10 billion annually.
As a great deal of work to be done by license producers and governments have each level to safely provide all our products to consumers.
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 continue 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.
EXL, 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.
It was this approach that led us to negotiate a significant preferred supplier agreement with the province of Tibet, We wanted to be the dominant player and achieve leading market share we've done that.
We've maintained a 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 narrow and 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 a beverage facility. The state of the art 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 those site and it should lead to being one of the very few players in Canada.
With significant market share in the cannabis beverage market.
We've also expanded our partnership with Molson Coors with the creation of Trust USA.
As for 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 us companies have changed access the capital was going to be much more restrictive.
So 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 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 Hexcel has moved quarter over quarter from a top five spots to now the 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 and 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.
Go forward.
We have a lot of work to do it hexcel, but the good news is that our revenues are growing our yield than 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 divestments.
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% in the previous quarter to sales of 23 gross adult 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 so 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 threenineteen from 349 during the period.
Newly launched cash in the quarter compromised approximately 19% of overall sales.
Quarter over quarter, Similarly, oil XTRAC drop drops contributed 7% to overall and ill use sales growth.
I don't use volume sold in the 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 in the result of the increased sales in the period offset by realized benefits of reduce direct and indirect labor.
Some of the factors that contributed to the labor costs, decreasing where covert 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 is trend still trending with the 94.
Percent increase in sales.
Gross margin.
For fair value adjustments for Q3.
2020 was 8.8 million or 40% compared with net revenues from the sale of goods compared to 5.7 million or 33% in the prior quarter. This increase is due to the reduction in the cost per Gram as a result of the decreased packaging and irradiation costs as well as the improved yields per square.
But.
When we have a while we expect it to be fluctuations through 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 with 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.
Selling 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 spend as opposed to assess 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 an 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 we 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 or nonrecurring items. This decreased to 20.7 million compared with 23.2 million in the prior quarter.
Sure.
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.
Equates 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 Pete we will now questions from our analyst 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 some receivables the license at Bell vote facility in 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 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.
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 Bellville 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.
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 outlets with super exciting is that the efficiencies the delta 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 Bellville Ken.
What doubles 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 trend thats 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 two panel products. Now you do have bellville rolled out 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 that have come out from some of your peers on competitors and where do you think the opportunity is for heck so to come in when it comes out but 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 are 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 that beat the black market with a better quality, but now as well as successive of hash were sent to look at other categories. So look to us continue to expand on our pre roll line.
And our baseline and 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 the 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 beverages drops so our very well drops are available today there for non.
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 keeping a couple surprises for our 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 and 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 testings, now settled back to pre coal that level.
And any color among the different provinces would be helpful as well.
Yes, 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 adds that gives us great clarity on on what's happening in our industry. We continue to grow yes, we had a little bit of noise around pantry loading for co bid 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 signs of slowing down here at hexcel, So quite happy with how are proceeding that being said, there's a lot of pricing pressure in the next year as we have a very fierce competition and get.
Adding to that pop to spot is a very difficult journey, while assuring profitability. So we have a hard task ahead of us I'm sure the team will deliver.
Got it okay, that's helpful and.
So as you mentioned the pricing pressure so it's going to be my next question is.
When you talk about what you anticipate about the bellville 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 stashed going forward and why.
Do you think about this potential gross margin volatility at minimum from the Bellville ramp.
It's 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 as 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 controlled better quality at the same prices.
They already pay 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're seeing echo system create around original stash with some value products that will come out below original stash and the reason I'm I'm separating the two the quality of original stash. So 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 it I think the whole market is going to shift down original stash is going to take its place as a.
A mid market black market pillar with that kind of value bargain basement call. It 10% to 15% THC product set below that at a better pricing and I think ekso 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 GM 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, but the Cogs opportunity and 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 CPC 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 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 but some competitors seem to be chasing that as well.
Yes, 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 that consumer has a floor in mind. So as we continue to to achieve efficiencies and the whole industry, including Ekso is still event in its infancy now we've done very well or were one of the lowest cost producers all in in the whole country.
You can see that in our gross margin and 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 let the price.
Shock settle and you will see hexcel emerge I think in the in that top two scenario, if we need to continue to use our cost advantage to lower pricing to ensure we stay in laptop to spot. We will do so but I don't think of this thing in terms of our pricing for the cause actual doesn't need a pricing floor, we still have so much.
Upside on cost control with our Bellville facility that we will continue to deliver better quality to consumers a better prices for us 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 trusts and for the U.S. JV I know these are build is being generally capital light I think it's around $30 million any contributions. This year, just trying to get a sense. If I'm much more is necessary to to fund that project at least given your current game plan to know can expand in 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 learnt so much from Molson Coors and the U.S. exacts are absolutely phenomenal in approaching a capital light model. So whats really exciting by 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 ekso in the balance which was molten in Canada 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 multi runs et cetera, we can take all that IP, removing it down to Colorado, the regulatory environment in Colorado allows us to use pre existing molson Coors assets for distribution.
And so what's.
What's really exciting as 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 that 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 are 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 push 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 access 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.
Okay, and then and then I guess just a second follow up questions. You. 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 the line 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 product on the shelf now is that well.
Less than a few weeks fresh so we're talking a we're talking a massive improvement from early days of legalization way better quality for the consumer so bottom thrilled with.
Okay, great. Thank you.
Graham Kramer with 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 our original stash I understand your distinction you made between it being our 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 and 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 as this market going to grow substantially enough, where it ends up being a smaller slice put up a much bigger part. Thank you.
Yes, so it's twofold and there's a there's a bit of a third part to it so with original thats the whole market's going to shift down there's pricing pressure across the board right as companies live efficiencies our potential partners are assembly 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 as we'll 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 scaled producer with no manufacturing capacity to compete with with the 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 center, because it's 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 clashes growth, but yes, you are entirely right to say that it's what we launched basically to find the market. I mean, we had 11 of our competitors following the four to six months after we launch.
But you know hexcel 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 of the 9.3 tons sold in the quarter and what the specific gross margin on original potash sales wise.
The original fashion was that was about half of what we'll give you round numbers in terms of volumes and the input 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.
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.
Good morning, Thanks for the call can you provide a little 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 we're going to 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 ideas 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 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 cut back and look forward to building share there.
Okay, and then a follow on 'em, we know in Canada legalized Hill, the flower the inventory kind of ramped up from that standpoint.
The provinces, they're taking a little more cautious approach on the on the 2.0 products from that standpoint.
How are they viewing kind of orders Reorders for 2.0 from that standpoint, and then whatever attended discussions around.
The potential beverages as you roll that out down down the road here.
Yeah, our beverage portfolio is just had an absolute rezoning success, because we're taking that portfolio approach basically going to the to 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 we're not short on orders. So we're very happy to see that full license in belveal, so that would get 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 that's all part of the hexcel promise of 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 here, how easy it kinda, we've kept Ken acceleration there.
Yes, so the reorder so really the province isn't what Theyre doing isn't complicated right. There reordering what sells at the tilt. So we've we've put the boots on the ground to really understand what the till 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 cost.
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 in EBITDA on your EBITDA loss from close to breakeven what are the main kind of an impediment to getting their these next two quarters bellville coming online, but you're getting efficiencies there.
Do you continue to rate if sales growth you get some 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 with the market in the next upcoming quarters.
Andrew the certainty behind Ekso has never been higher so your read I think is accurate we've been focused on reducing variability and go forward and to get.
To mature as an organization right, we're coming off of a seven year explosive growth start up 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 bed, 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 your capital plans or is it still 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 present, 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 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 question just wanted to.
Clarify something on sort of be the value segment of the market and we're happy to look Q.
To put its efforts in various categories. Those the batches wondering if you can comment on how this translate your 2.0 offering obviously a lot of you edibles coming to market.
In around now January so you start ramping up some of your product.
How do you pricing or value segment, they're hard to tell just from looking at from the provincial website, but it does seem that a couple of the quote unquote value right edible some of them that are better price.
Significant.
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 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 of that for dollar Graham for example.
In the context of the legal market that sounds like value in the context of the illicit market Thats, just what people pay and so for a high quality Gran that's really the mission of original Sosh that'll line extension, you've seen us take that into hash. For example, now we happened to be the only product at ash today on a national scale, which is.
Which is quite exciting, but weve priced posh. 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 truly.
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 dfc percentages that the black market can't deliver today.
At least from the tests were running so there's 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 approaches.
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 you know a dollar or two again I think that would be a critical for that to open up though we need to distribution to evolve where we can sell case quantities to really deliver that value in the 2.0.
All of this on on the on the.
For the number is out there that the government has allocated there's like some crazy.
Five gram equivalent per day for 10 milligrams that go into a bottle, which is taking a hard for consumers to buy.
Let's say one day product is that something that is weighing on the potential penetration of these product or is it sort of noise in the interim.
No no you're right I mean, 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 and 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.
To 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 the total amount of keep seeing 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.
Welcome and it will help the market.
Thanks, and if I could just that quickly I know you've touched on it just with respect to capital allocations as $150 million. As you currently have right now you've talked about certain elements that it might be applied to but can you give sort of maybe a larger view our.
View of how much of that is earmarked for interim OPEC burn.
Actually funding from other initiatives are doing well.
While it may be considered for lack of a better some rainy day Mike.
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 we're not providing the capex opex break down at this time.
Okay. Thank you.
David did that come with Altacorp capital Your line is open.
Hi, good morning, Congratulations on your 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.
And also as you intend to your just from a strategic perspective to deploy beverages across Canada. All at once are you looking more to phased approach maybe starting with your home problems payback.
Yes, so well that the interesting thing I mean truss, although obviously were half of the partner their trust has its own company with its own management team and so connects has been incredibly important market for trust, but they're really looking at this as a national place with that being said trust as being very selective and 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.
That Thunder.
In the in the next short law.
Okay. Thank you I.
I don't see meeting interesting comment as well during your prepared remarks regarding heck, so really being a manufacturing.
Organization, but not forgetting you reach so as being in agriculture, I'm, just wondering what your thoughts or for the medium to long terms should we still think of cultivation is being obviously key to to really all cannabis companies.
And if so do you do you think altogether moving forward is cultivation something that extra would likely.
So from 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 as best in class and we keep improving.
Right like so our T. shield I've talked about it but now we're now I'll put in 26% teach out of the greenhouse so.
Quite a big kudos to my cultivation do so in that context, no I did 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 cannabis 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.
Ladies 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 portfolios 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 bells and our manufacturing we can manufacture more products that we can grow so what ends up happening as gas prices continue to grow and.
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 stash I'm. Just curious when you mentioned Sebastian you do have a high Phd 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 that a premium hi, THC product and if so.
When you're looking at customer preference your consumer preference when it comes to original stash being met to really get rid of elicit market product altogether. When you introduce now a high teaches product and also calling that heck. So plus I think you mentioned.
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, but just for the consumer to kind of integrate with on the onetime the original stash being kind of.
Lower quality type product compared to a higher THC product.
Yes, okay.
A lot to unpack there.
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 bless thats under 20% and in fact, most of them or go.
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 illicit 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 at a lower quality. It is much higher quality and whats available in the black market and of course Taryn country.
All 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 Americas can you maybe talk about.
Yes.
Good thing.
Clear guaranteed and engineers you were really prefer it first mover advantage when you kind of undergoing market.
Good morning Fame.
For the payments or something like that.
Thanks, Doug So well first Super excited we've got a our disposables are in market in Alberta. 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 flip the 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 through our clinical trials. So we have actual data. So we're very confident in putting those in from consumers. There are made from all natural ingredients. So there's no extraneous chemicals or anything that might might call.
Was there was 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 Dave 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.
It does vape is a much more complex manufactured product you also have a ton more upside once you automate so you're going to be exciting to see that one rollout.
Okay and makes perfect sense.
Good question, just trying to do this going up to commercial levels on the beverage line.
Okay.
Whether or not.
Yeah, consistency and variability I guess and.
Experiencing similar issues.
Perhaps some of your competitors.
Well.
Launching at scale.
No.
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 dimension.
Pablo Zuanic with Cantor Fitzgerald Your line is open.
Yes, good morning look a couple of questions.
How 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 wondering 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 product add 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 two quick programs, if you're going to close for the quarter I'm not sure characterize you know how quick performance you ought to get in.
Bush the March bunch loading in April may even June compared to other provinces right about into the worst live restrictions for their money could perform better but just some more quarter over there in Kosovo Dusty months for for Greg versus with two of them.
Yes, I mean tobacco is still our primary market that over 80% of our sales are were and come back 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, where that's necessarily too and that's what the front.
No really the margin improvement has come through cost control. So it's really manav, it's not to us it was really not the margin, but im talking or the market what appeared from other provinces. He said because of the stores.
Shut down some restrictions were because we know market thats being.
Underperforming offices, we know major shutdowns compared to other provinces I'm just trying to understand.
It seems like yeah solitaire sorry. Thank you, yes, 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. It is clearly doing a has made the right choices in terms of getting to the most amount of people right and one last one if I may I ask is of course respectfully.
And with it the way 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 my soup, but maybe that's of course, you know to raise capital into surviving this industry, especially we over all the opportunities that you have but after that until the end the call your thinking.
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 them on for ship.
Can you comment on that they'd be more I mean, do you didn't really exactly you pick up X 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 we've learned so much.
Such 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 are cautious $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 international sales.
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 margin. So you've got three Blair splitting a $5 billion market give 1 billion of that market to other small players right then the non majors I'm playing to be a major player.
Hexcel is successful we will have a significant share of 84 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 is doing unit deals. So you could be rest assured that that's off the table. We now have already 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 to 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 a facilitator to bring on new 500.
Pat or top new partners.
In the market.
CPG prospectus.
Sorry gone now did you finish your thought.
Hi, last year TPG perspective, Oh, Yeah, I'm, just curious about how discussions are with new CPG partners now that the dollar facilities up and writing.
License, yes.
While we havent toward the yet, but they're all asking which is super exciting. So we're still our competition going.
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.
That's in a licensed facility World class kind of the 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 and yeah for sure I think thats going to have a positive impact and.
Having 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 have put today I'm very excited about a quarter. Thanks again big thanks to the team and look forward to talking to everybody in Q4.
This concludes today's conference call. We thank you for your participation you may now disconnect.