Q4 2020 Hexo Corp Earnings Call
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John.
Who constitute forward looking statements.
These statements are based on the company's current <unk>, you see me expectation and assumption yes.
These statements should not be read assurances of future performance or results.
They involve known and unknown risk on southern piece on all the Softgel Buck who caused actual results performance or achievements desal must be rally from current expectations on those implied by such statements.
We will also move Daltrey each license among I, if our estimate hills in our financial results, which may be discussed on today's call reconciliations between any such non I, if our national Yeah. Lucas report that I, if our as Michelle I include that in our in the HM.
These discussion is qualified in its entirety by the cautionary note regarding forward looking statements.
<unk> structural stuff that into this at the end of <unk> and news release on our EM HM.
I I S fields, we are comfortable with those two ends when the final show it and then on the Dod This morning, I'm, which will also be filed on Edgar.
Please review these materials for more information about forward looking statements the risks off the old stuff could cause actual results could differ materially from our current expectations unbilled implied by such statements.
Hey school disclaims any intention or obligation except to the extent required by law. So obese all revise any forward looking statements as a result of new information or future events or for any reason.
I will now turn the call over to the CEO of HIFU see busting family.
Thank you. Please go ahead Sir.
Thank you operator, good morning, everybody I'd like to start by wishing everyone safety and health as their global pandemic continues.
Very proud of hexcel and the team for their dedication as we navigate through the ever evolving and unpredictable environment.
The safety of our team as always our first priority and we're operating within the confines and processes, we put in place at the start of the pandemic.
We established a cold and 19 response team, which manages the companys information flow of COVID-19 updates reviews public health and safety protocols and Weve developed action plans to mitigate risks.
We transferred all functions, which we can do to work from home and operate purely from that stay at home mode Web based and teleconferencing platforms, and our functions, which require onsite activity. We increased focus on social distant distant thing and we added personal sanitation station and provided additional bebe.
We also implemented travel restrictions and quarantines, while traveling and importantly, we initiated a hero pay program to support our cultivation and manufacturing employees, who continue to work during the pandemic.
Despite the many dire economic and social consequences. The pandemic has caused the cannabis industry continues to grow and Thats, a testament to the consumer demand for safe and legal product that we offer.
Industry has a 2.9 billion dollar run rate and continues to grow we are we remain in a top four market share position closing in on the third spot and increasing the gap between a number of ourselves and the number five and number six Lps.
We've been deliberate and selective in our launch of 2.0 products.
We've launched Basebands, our house products and they've been overwhelming successes, great quality reviews, and we're number one in the hash category.
We continued to lead the way with original stash, including our 28 Gram package format, which is a high quality consistent product price to compete directly with the illicit market. This was an industry first and hexcel reset the Canadian market for dried flower as a result, many of our competitors scramble to duplicate our efforts.
Our hash product is a market leader delay.
Delivering a phenomenal had high super clean very little body buds reminiscent of the best Montreal hash of the decade, we're the first company to rollout nationally and we have the largest market share.
Again, we're competing with the black market, but are delivering a high quality product at CPG scale, we have a plan for further hash line extensions to come.
We've also launched a colvin friendly share back of pre rolls setting the bar for competitors and lighting the way for consumers to enjoy a high quality pre rolls in an affordable 12 back.
Our products are a great example of our focus on Cogs, while we deliver more value to the consumer and begin to move up market, while introducing higher consumer promises.
We increased the average revenue per Gram this quarter from $2.22 net to $2. A 95 cents, we continue to focus on driving that as high as possible.
Beverage is a category that I am extremely excited about especially this last quarter.
Trust, our joint venture partner with Molson Coors is going very well and we're learning a lot about this exciting new product category. We believe beverage represents a huge opportunity in cannabis, especially over the next several years, which is why it was so important to have a world class partner such as Molson Coors.
In early August Trust began rolling out its range of THC and CBD infused beverages across Canada the <unk>.
Portfolio of brands is suitable for a wide range of beverage occasion, and its designed to appeal to both current kind of as consumers and those were just beginning to explore as a category.
Whether it's helping people unwind, whether it helps to add energy to social occasions or its part of your wellness from team expect to find trust products there.
While the cannabis beverage market continues to develop and distribution continues to build consumer feedback on the taste and performance of trusses beverages has been overwhelmingly positive as of October 2nd with only seven of 13 skews available trucks has shipped approximately half a million units of ready to drink better.
It is in the three short months that Hexcel, one trust had been in market with beverages, we have now become the market share leader at til sales.
Outside of Canada, we intend to penetrate the Colorado market and our current launch is teaching us a lot about becoming number one as powered by hexcel pushes into the USA with trust USA, we're proving our template for the low Capex capital light partnership strategy.
Internationally, we also began selling flower into Israel, which contributed to $1.3 million of net sales in Q4.
Beyond the top line. This year, we launched our truly World Class Center of excellence in Bellville, which also houses our trust operations.
It has highly automated manufacturing capabilities, which are aimed at ensuring hexcel products are not just meeting the sizable market demand, but that products will get to the consumer as fresh as possible.
Our customer demand, Texas quality and value and that includes a freshness components that competitors just don't have the supply chains to deliver.
Matching timely supply and demand down to the S.K. you level is critical this.
This is an area of focus for us and we believe we still need to get better we understand the frustrations of our customers when they we introduced a great product to the market and then it sells out and they can't get access to additional supply.
As such over the past several months, we've purposefully taken the time to better understand forecasted demand and to carefully optimize our production and supply chain.
Our goal is to keep our most popular and successful products end markets our customers can gain access to these hexcel products over and over.
We have been spending a lot of time, ensuring that we're the best positioned player to dominate the market in the future.
That means weve had to take some aggressive and proactive steps, particularly with our balance sheet at the end of the year.
Weve corrected our inventory levels to match supply to the market and have taken impairments on property plant and equipment.
These will be discussed in more detail of our CFO momentarily, but I'm very pleased with our current financial strength and liquidity.
While we strive for consistent positive EBITDA. We're also focused on learning from the past.
It's not our intention to overpay for assets or over build our capacity with todays announcement, we feel weve put ourselves on a path towards positive earnings per share.
Our capital light global strategy to partner with Fortune 500 companies continues while we arent announcing any new partnerships today, it's a top priority here at hexcel and we're in a meaningful in a few meaningful conversations with several potential CPG partners.
We have a lot of work to do but the good news is that our revenues are growing our yields in volume sold have improved our normalized gross margin is healthy and our costs continued to come down our adjusted EBITDA loss improved materially in the fourth quarter and we hope to be EBITDA positive very soon.
Lastly, we've made investments in our team and recently welcomed our new CFO trends Mcdonald and IMMU embryo to our board we have a fantastic team in place to capitalize on the opportunity in front of US Let me pass the call over and welcome trend now to run us through some financials.
Thank you Sebastian good morning, all.
I recently joined the company and delighted to be part of the management team.
Innovation and creativity and operational expertise I see here at Ekso is truly staggering.
I believe hexcel has an opportunity to become one of the largest cannabis based companies in the entire world.
Our view is that companies and the new and growing industry have to first gain a top market position with high quality winning products.
They have to do so while control controlling EPS DNA.
Least if they hoped to achieve consistent robust EBITDA levels.
This has been problematic for the cannabis industry at the outset most of the larger Lps scrambled to build a robust teams systems and infrastructure as if they were all going to be multibillion dollar companies and heck. So we have gotten ahead of the curve and rightsizing, our SG inane, but we're not done.
We cannot rest on our laurels, we continue to focus on this area ensuring that we have the right processes tools and people to scale, our topline without adding costs into the organization.
While our our company and the entire industry is focused on positive EBITDA. We also know this is only a first step.
We need to move past EBITDA and developed a clear path to positive earnings per share that is why it is so important to focus on our balance sheet.
To ensure our EBITDA isn't detained off the back of a grossly high Depreciate Bowl capital base through.
Throughout history, there have been plenty of examples with part of the companies with positive EBITDA, who had failed due to the consistent and pervasive erosion of book value through interest and depreciation. This has been and will continue to be a problem for many larger candidates Lps as time goes on at Ekso.
We feel we are extremely well positioned in this regard with today's PPD impairments. We believe we are or are near best in class in terms of depreciable asset base, especially when compared to our potential future EBITDA, which again is clearing the path for positive EPS.
Unlike many Lps, we wanted to stop Piecemealing, our inventory write downs, PPD impairments and goodwill and intangible impairment. We truly wanted to go into the next fiscal year with a strong balance sheet, putting the past behind us. So we can focus on the future I believe we've done just that.
And so Michael top goals are to ensure we optimize the business not just to get to adjusted EBITDA positive, but to achieve meaningful profitability on a per share basis, and I see plenty of opportunities to do this.
Starting at the top this was a record quarter and year for sales consumers, especially the everyday high volume users have turned to hexcel for quality products at retail our products have strong repeat purchase rates and consumers are loving our 2.0 product as Sebastian mentioned, we've sold out in many categories and as we enter 2021.
We are taking the opportunity to evaluate how to most effectively meet consumer demand at retail that means ensuring our production planning and demand for our cost forecasting is spot on we learned a lot about this in the fourth quarter and we are taking some of those lessons with us into Q1, we have and are deliberately taking the time to.
Get this right.
And our margins policies, while we are already a lean operator, we see opportunities across manufacturing, particularly packaging and in many areas like yielding concentration.
We have launched an internal war on Cogs with the goal to become best in class on a cost per Gram basis, we want to be able to maintain high margins as we continue to grow market share in a price competitive environment and not just on our core products, but across all products. While the top line grows. We are also focused on the foundational aspects are.
A bit of our business like IP IP systems and infrastructure. So we can reduce EPS DNA to become truly scalable.
From a liquidity perspective, we are in a great position, we have $223 million of working capital, including a $184 million of cash while our operational cash burn was only 3.8 million in Q4. In addition, we aren't burdened with high debt levels and the related debt servicing that goes along with it which as we all know can diminish a comp.
Please ability to focus on strategic investments.
So I believe we are the best possible position to drive long term shareholder value and can become the leading player in both Canada and beyond.
Lastly, I do want to speak to the reverse split we announced this morning in relation to our continued listing requirements from the New York Stock Exchange, we decided on a one for eight reverse split and we intend to have that completed shortly after our upcoming board meeting in December while we anticipate where we anticipate it will be approved we will put a updates as necessary.
Thank you and we will now open up lines for questions operator.
So ask a question you will need to press star one on your.
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So we draw your question press the pound all hash key please standby, while we compile the Q on the roster.
Your first question comes from Iran. Gray of online Global partners Your line.
Yeah.
Hi, good morning, and thanks for the question.
First one from me I, just wanted to dig a little bit into the adult use results. Excluding beverages looks like net sales were up about 10% sequentially I know faith was partially attributable to the sales growth.
As well as the average sales price, but even without it looks like sales were up sequentially with a higher ASP. So wanted to get some color on some of the shifts might have seen within your flower brands or whether it was cash and just wasn't I saw any increase in your higher priced flower brand versus the original stash during the quarter. Thanks.
Thanks, Aaron we're really proud about the demand of the product that's really all starts with consumer demands and the thing that is clear is that hexcel products are flying off the shelves. The biggest thing we need to work on to improve going forward is supply chain to ensure we're constantly in stock on all skews. So the revenue program is really.
Increased driven by base, so you're correct in that assessment, but also by some new higher end flower products like original stash reserves. We're also driving we're driving a passion 2.0 offerings, which are being very well received.
Although again not in market all the time, so the impact wasn't as big as we would have liked.
What's interesting about the raising the average price for grant is that were clearly showing the way now that this is not a race to the bottom that there is room for margin and that we are able to deliver that solid margin excluding beverage again at a 42% adjusted margin.
We're very pleased with what the team has been able to do while having one of the lowest average sales price per gram in the industry.
Alright, great. Thanks for that Thats Super helpful. And then just.
Just looking at sales provincially I know you know, Quebec is obviously big event Province for you guys, but Ontario has been another market you guys have looked at so you are just looking at retail sales data from Statscan, Ontario has obviously been an outperformer. The past couple of months in terms of growth as additional stores have come online. So curious as to your efforts to kind of pick up share in that region.
And how that's gone obviously, it remains rather competitive market, but a lot of opportunity there. So love to hear your insights in terms of operating free within our Ontario. Thanks.
Yes, and so the strategy of Hexcel was always start in our home market have come back and we remain the market leader in cut back on the preferred supplier to the Sq DC I think the SDDC itself is continuing to grow stores at a very very good pace as far as Ontario were.
Really excited about what.
Thomas and his team have are doing over the Lcs Big Big focus on store proliferation and that we're also excited to be a big part of that journey. We're only at the start of that journey. So this is maybe the second quarter, where we're really starting to build up in Ontario, and we've made some really significant progress so if.
You look about three quarters ago, we didnt not have any meaningful share and now hexcel fit threat.
Around 5% market share in Ontario, So a meaningful start and our plan of course is to hit a top two market share nationally, which would translate to to about 20 share in Ontario, We think with the investments in supply chain, we can get there over time.
Okay, great. Thanks ill jump back in the queue and pass along for others.
Your next question comes from David tied to kill off eight TB capital market. Your line is open.
Hi, good morning, Congrats on the quarter and thanks for taking my question. First question is just going back to the provincial split year, Sebastian So 5%, Ontario in this quarter.
Should we assume that the rest of the 95% is all come back or do you have some share in Alberta.
And any other provinces.
Yes, David So it's a wasn't 5% of sales for our Hec. So I was saying into the overall, Ontario market hexcel accounts for 5% market share.
Okay understood. So then maybe on that.
Yes.
Are you are you able to break up.
Your potential split then with sales nationally so.
So I won't give you the full breakdown in every market I can share that income back we remain the number one player by market share by volume, that's still north of 30% by kilograms by price it'll it'll fluctuate month to month and quarter to quarter. We we are listed.
Nationally, but not with a full product offering. So the next priority is really to make sure that the full product offering gets everywhere and that we remain in stock and Thats really supply chain driven so the good news is we have plenty of demand and there is no demand problem at the moment.
Okay great.
Another question I want to go down to beverages for a second here and congrats on the launch of Trust I.
I just want to first of all just for some housekeeping rectify something in your earnings release, It says sales.
For the quarter ended July 30, Onest accounted for about 7% of sales with beverages, but in your prepared remarks. The rollout occurred in August. So I just want to rectify if you're speaking of 7% sales for the quarter ended or since the commencement of the rollout which was in August and after that just my question is what have you.
Seems so far for consumer demand, which types of beverages have been the most popular is it CBD THC, hi, THC low THC any color would be would be helpful. Thank you.
Thanks, David Yeah. So so just that are the housekeeping piece, you're looking at the quarterly numbers, but pre August we did have the very veld drops in market. So those account for the nominal sales that you started to pick up in when we refer to as the launch in August that's the ready to drink portfolio and it's been a phenomenal success.
And so we were about three months later than some of our key competitors and really launching the full bore or half a full portfolio add nationally, but in those three months at measured that till sales axle and trucks are now the market share leader. So on a on a weekly basis, we are selling more beverages at.
Till than any single competitor in Canada, So thats a phenomenal success and shows you. The amazing work. The trust team has done on the portfolio.
The portfolio is.
It's quite balanced there's offerings for everybody, we have zero calorie CBD beverages, and our Sicilian lemon and very well on the wellness line you have high THC beer products available in mobile, which has a five milligram THC offering and then you have quite a few other occasions. When you start to look at our little victory products, which are.
2.52 0.5 so.
So a one to one blend which are made from real wine thats been the alkali so a very very high quality product a phenomenal taste and on the.
And on the kind of flavor forward profile that we went to house of turkeys. So house of her being has been a really interesting success. Our limonene is probably the highest seller in that category, but we're also starting to see an interesting uptake on our our more unique flavor profiles like our mercy.
Product so house of turbines Myrsini is a cocktail we designed to appeal to a flavor for cannabis kind of serves it pairs amazingly with steak and it's to go and replace kind of what you would typically take as a.
A strong alcohol occasion, so what's been a really interesting is that first consumers didn't know where to place that product and the reactions were mixed. Some people were surprised that there was a little bit of negativism, but as people have been trying the product and are learning to pair it with some heavier foods. They are really starting to enjoy that marine products or.
Are starting to see sales pick up what I think has really been successful in the trust strategy has been the portfolio approach, there's really something for everybody where youre that whether you are looking for zero calorie low calorie wellness better for you a tier CBD offering theres something for everyone.
That's great color. Thank you Sebastian I'll hop back in the queue.
Okay.
Your next question comes from Rupesh Parikh of Oppenheimer. Your line is open.
Good morning, Thanks for taking my question I want to start out with a question just on liquidity clearly you had a strong cash position at the end of June is there any color you can provide in terms of what you expect to spend for Capex and just how you're thinking about cash generation this year.
Hi protests trend here now.
Yes look we have a pretty robust investment plan on capital over the next fiscal year, we continue to invest in our.
And our bellville facility to to ready ourselves for things that are coming up for both troughs and potential potentially other CPG partners. We want to continue to have operational efficiency on meeting meeting product supply with that forecasted demand. So we're we're still putting money in.
Into that facility and believe there is a really high IR are that comes with that spend so we're not we're not scaling back at all on our on our path forward to capital investment.
Okay great.
And then.
Given that I think your Q1 I believe that your went just ended is there anything you can comment just in terms of just Q1, how to think about it from a top line and from a gross margin perspective.
Well, we're not really giving guidance.
No I think I think as as the as an industry that guidance has gotten a lot of people in the travel and so we're trying to we're trying to step back from that although we can we have said and Sebastian repeated early we are moving towards EBITDA positive and continue to move down that path. Our sales are healthy we have we.
Have been taking the time to invest in that forecasted demand and understanding it and making sure that we can match supply to us.
Bastards point earlier, we have launched lots of great products 28, Gram Alas original stash was a great example of that where we went into market.
Hadnt really anticipated the the forecast demand to be as high as it was and ran out of supply and then of course all of our competitors duplicate our efforts and jump in and take some share. We don't want that to happen were two innovative in terms of our product development and product launches lot of money and time and resource wind of that process and so we don't want to be set.
Ourselves up where customers are disappointed because they don't have product to to buy if they are trying it for the first time are coming in for a repeat purchase. So we're taking some some real time in Q1 to get that right to set ourselves up for longer term success.
Okay and my final question.
Maybe for Sebastian just just on cannabis 2.0, so clearly good progress this quarter just wanted to get a sense of how you're thinking about the mix as we go forward for vast year not not looking for guidance, but just anything just quality that you can share in terms of how you think about the yen is 2.0 contribution yeah, thanks for that and absolutely.
I can tell you where our focus is we've been we've really narrowed the focus over the last few quarters at Ekso in order to really go deep in the areas and when the categories in which we play as you saw us redefine the market on flower completely right you almost have half of the market now that team at behind US. After we launched original staff.
20, again last year.
And that you're seeing us do it again on on hash and extract so overall I think categories will be about 40% to 50% flower go forward I think thats, a solid number on dried flower pre rolls, probably 15% to 20% Vape, probably 15% then we think cash can be a very significant part.
Of what remains in the market and so those are really the four areas of our core focus that we do on our own beyond that and we're really looking for partners to add new products into market and this is why we're thrilled to be with Molson on the beverage side and Thats working phenomenally out with taking the number one spot of all Lps in Canada at the but overall.
Well I think if you focus on those four top categories, you cover 80% of market.
Okay, great. Thank you.
Your next question comes from month, but only have kind of continued your line is open.
Yeah. Good morning, Thanks for taking the question.
At a bit more color on the inventory write off.
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Quarter Theyre not.
Hi, Matt.
Are you from.
For legacy.
But.
Okay.
Okay.
Sorry.
Yes, Frank I'd like back.
Okay.
Okay back right.
Yes, again trend here.
Well.
If you look at what our Q3 balance sheet look like and we had been Piecemealing. This inventory write down as a lot of the Lps have been doing over the course of the past.
Four to five quarters when I came into the organization. It was the very first thing before I came the organization organization that was the very first thing that I was looking at and Sebastian and I had a great conversation the number of days sales in inventory that were sitting there Q3 comparative to our peers was was I thought was relative.
Lehigh It well way too high in fact, and I think thats still a problem across the entire industry and look we want to be able to move forward with a clean balance sheet and so it was imperative for us to get that inventory down to a manageable level from the days inventory and supply match that to our production plan for the coming year, where we.
Think forecasted demand is going to be and we're in it just a very very very healthy place.
So across different categories within it with inventories to answer your question, we looked at those that where it had been slower moving or getting a little bit age in terms of freshness, because that is a strategy of ours.
And took the appropriate write downs, where where applicable.
Again, the bigger broader strategy here is to have a strong balance sheet and set ourselves up for future impairments and future write downs, we want to come into the year with a clean strong balance sheet and just move forward and I think we've done that more more than anyone else in the industry quite for.
Thanks Lee.
Understood and then maybe do you have any color on because unfortunately, the accounting standard development.
Fair value adjustments that increase.
Do you have an estimate of how much of that is cash versus non cash just sort of the reversal of previously equity.
Equity earnings.
Alright.
Got it.
Well most fair value adjustments are non cash as you know, let's say that it's an accounting standard versus the us investing we we.
The we invest and costs cost biological assets and cost inventory and then we have to adjust the fair value based on the market trends and what we as management are getting from industry industry news and industry data and and we adjust the just the inventory carrying balances accordingly, so all fair value adjustments for them.
Those prior to noncash what's interesting I think Matt is that the work we've done that trend has led on the balance sheet. So is starting now to match the work happening and happening in operations, there's an overarching strategy at hexcel and my marching orders to the team are to make sure we deliver high quality products and that includes being able to deliver.
At the right cost at the right potency, but also with the right freshness, so making sure that consumers are continuously getting a fresh stream of product this quarter whats incredibly significant starting in Q1, not only are we starting from a clean balance sheet, but we're not adding to the problems over the next 12 months, what's coming out of the greenhouse on what.
Being transformed is being done on an as needed basis to the demand. So we are really getting close to being able to supply in on a one to one to demand and not repeat these mistakes of the past that all license producers producers have made were stopped accumulate a massive inventories stockpile that you have for right now.
Down so I think on a go forward. This is what really positions ekso to win is that we are matching supply to demand.
And just one more for me on that.
Hi.
Okay.
Really yes.
Hi, Jason.
Eric.
Yes.
Yes.
Hello grew.
Hi, Bob.
Different different skews and new product launches or not but.
But.
Maybe overall on average is that something that is flowing through now where.
I get back to you.
Candidate numbers on the Canadian industry that Andy Hi.
Month over month.
Is that something thats flowing through now and those probably retail stores are still getting higher higher patient.
Okay.
Hi, Matt.
Apologize if I don't precisely answer your question, you're breaking up a little bit at the front end, but I understand that you are asking like does the additional total Canadian market demand and is that flowing through to to Lps and I think definitely one of the changes in the industry narrative that's important to note now.
Sales at the license producer level are no longer limited by store growth I think our potential partners have done a phenomenal job opening stores I think they now have the most aggressive plan I've seen since the beginning of legalization to open more so don't misconstrue that.
There is additional upside to opening more stores, but the current growth of Lps. There we can grow within the current store environment. So there is the logistics are now in place for us to do our job, which is phenomenal in terms of seeing that flow through I think whats really exciting is you're seeing hec. So.
Being one of the very few license producers that are taking share. So again, if you look at the market share listing I mean hexcel quarter over quarter. We grew our net sales 17% that's best in class, we're right up there with the absolute best competitors and the.
Market that follows pretty closely with the market has done over the last couple of months.
What's what's interesting is we're starting to see most of our competitors falter, where hexcel has closed the gap with the number three competitor by market share we've increased the gap between ourselves and the number five in the number six there is still as well and I've talked about this last quarter.
Sure I think we're still going to see most smaller producers have a lot of difficulty over the next 12 to 24 months and at the moment those smaller producers account for about 30% of the total national share. So that's where you're seeing the national number grow faster than the top LPG like hexcel it'd be smaller produce.
Users that are still hanging around and getting liftings, but it's very challenging for the small producers to remain competitive they do not have the scale. They do not have the operating expertise and they do not have the portfolio approach. So I think a 12 to 18 months that rectified that frees up that balance 30% of the markets.
To be absorbed by the top performing Lps and we are hot on the tails of that top three spot to ensure we are here for a long time.
Thanks, Sebastian very healthy.
Your next question comes from John Jumper of CNBC. Your line is open.
Hey, Thanks, Good morning, I wanted to follow up on the question about sales performance in Q1.
Your comments about wanting to get supply chain right, making sure you're always in stocks should we interpret that you might not see as much mystic about the sequential increase in Q1 versus what you saw in Q4.
Just.
Yeah, John Thanks, we're working on it so with it we're not providing guidance either way, but for sure as part of an overarching strategy, we want to make sure that the year 2021 is a blowout and that we move up that market share ranking so I'm much more interested in making the top three position.
From a market share a position that the not the specific number on the quarter.
Okay understood.
Maybe more of a housekeeping question, but can you help us understand how.
How the accounting practice on Trups will play out over the next few quarters and when these results will transition to the equity pickup line rather than European.
Sure, let me add to that.
We're still working through the license processed and they can't move over until that process has gone through the in its entirety. So once once it does get US license it will become a separate legal entity well separate legal entity now, but will it will move to separate legal entity accounting.
And therefore to your point it will come off of our off of our results and come to equity reporting.
I don't have an actual timeline on that.
But but it is in process.
Okay got it and then last one for me.
Maybe you don't want to disclose an actual number and that's fine but can you talk about how your large format value products with original stash performed in the quarter versus.
Prior quarter. It does seem like like you said Sebastian other competitors really crowded category.
So I'm trying to get a sense of how that performed quarter over quarter and how much of a priority for you is it to win that category. It sounds like it's maybe not so much in that you're focused more on higher profit or more profitable items, but just would like to get your commentary there. Thanks.
Hi, John Yeah, I think when we made the move.
Last year, and we reset the whole market right like this there was no such thing as a $2 Graham until hexcel created the category with that 20 Gram offering and when we did it. The first comments were okay race to the bottom never going to make any money. The next step in that evolution of our strategy. We proved we could make money we proved that that product at could.
Hold a 40% portfolio margin and was part of that portfolio margin strategy. We prove it again this quarter with the portfolio margin actually increasing that's phase three so what's been interesting is all our competitors I'm kind of just.
Brainless lead copied without understanding the strategy. What we did is we came back in we're talk we thought with a better feature set. So we introduced original stash reserve, we're leveraging that now with the the relaunch of our up brand. So we're super excited about that coming to market with a very clearly defined fees.
Sure Seth so up flower is actually going to market with a guaranteed 20% plus THC. That's a first in the whole industry. So it's never been done where flower has had a defined feature set under a brand and we think thats going to be a phenomenal success in another opportunity to increase our price per gram. So the strategy as a whole.
All you ask me my trying to win value no.
My trying to win low cost high quality product under original fashion, Yes, and am I trying to gradually increase my price program by bringing back new feature sets continuing to innovate and market absolutely and that is tracking very well as we dial in our supply to our demand I don't really see.
The necessity to go invest in additional capital to build capacity for that race to the bottom the capacity that we have coming out of our flagship role in mass all honestly and got no is phenomenal product and so that allows us to compete in that 20 Grand format at a quite frankly, a higher price point than most value.
Brands of some of our competitors a lot of my competitors have come in on that 20 Grand format and this is on the against the base original SaaS product they've come in at $99 and we're still performing very well at $125. So I think you see consumer, saying, Oh Wow, you know the best value in that in that mid market is really is.
Really originals Ash and then we have an opportunity of course, the price even higher with the original stash reserves.
That's very helpful. That's all from me. Thank you very much.
Your next question comes from Andrew cover of Stifel. Your line is open.
Hey, Thanks, Good morning, I wanted to understand the inventory dynamics, a little bit because you did outline pretty specifically, where the write downs were in the quarter by purchase or Harvard is and if you add back the charge as you do have kind of have capitalized inventory growing 2 million, but I was kind of confused because a lot of that was also a big draw down on purchase inventories. So I wanted to get it.
Understanding of kind of where you were from supply demand in balance on kind of a kind of your supply chain internally as it stands today.
Thanks, Andrew Yes the.
Really overall, we're in phenomenal shape, probably best in class from a supply demand mix on a go forward basis. After these changes to the balance sheet.
Okay sounds good.
I would also ask because you completed ATM during the quarter of $34 million the prior to the ATM. They get a net net cash position of more than 130 million. You are clearly on track with the business in terms of your expectation that much larger goals in mind, then kind of the Straits, giving you credit for it so I'm not sure I understand why exhaust.
And issuance late in the quarter at essentially a dollar to dollar share. So could you help us understand kind of the capital allocation here.
Okay.
Yes look to we unlike a lot of our competitors want to and we again going back to the balance sheet ensure that we have is very very very strong balance sheet and so that means liquidity that means great working capital ratios and the cash was there we could we could.
Well to market at the time and there was some demand for for the ATM. We took it took that opportunity. We wanted to have the say that we've set ourselves up for the long term and we have and so you know we're not you don't need never say never but we're not we're in a great place and so our debt is not.
Hi, we have very low secured secure debt at 30 million, we've taken care of the convertible debentures on our balance sheet. We've.
We've increased our cash reserves, we have strong working capital, we've written down or our inventory we've taken our impairments. We don't have any goodwill on our balance sheet at all I mean, I would stay in that balance sheet up to any other of the larger Lps in the market and then some that's what I think people just have to do their homework here when you're thinking about ekso.
To your point.
Clearly, we're in a position of strength and so the ATM took place in it and it was the right thing to do at the time and now we're sitting in a tremendous position of strength.
Thanks, I'll pass along.
Your next question comes from Douglas theme of RBC capital.
Tom Your line is open.
Yes good.
Good morning, Sebastian trends.
Just as it relates to production capacity in Belgrade. It looks like you have some significant plans here in them.
With your ability to get to number one.
The beverage side, just want to make sure that you're going to be able to.
Supply in the market over the next few years can you maybe give us a few details on how things are going there and capacity utilization.
Yes. So thanks, thanks, very much Doug and good morning, So one of the advantages of having partnered with Molson Coors on trust is that they've come in with experience that did not exist and barely exists today in the cannabis industry as a whole what they've done with that trust facility.
Is staggering so capacity is not an issue for us there.
There's there's really there's really no.
We will bump up against any capacity constraints on our on our bottling and Canning lines for a long time.
Which was part of the strategy, ensuring that we could build a robust portfolio not just for for this year, but really for five years out because we think beverages could be between 15 and 20% of the total category now there's some meaningful things that need to change from a regulatory standpoint for that to happen. We're convinced they will happen, but it's a matter of time.
And these are for example, the five beverage limit to purchasing this is the broader distribution of CBD beverages outside of strictly Canada stores. So there's a couple there's a couple of dominoes that need to fall, but when that happens what's interesting. We've proven now we have the best portfolio now we.
We've proven out that we can produce at scale and so the question. We've proven that we can get the distribution so without regulatory when those regulatory hurdles come we are really well positioned to make sure. We're first and perhaps even more excitingly all those learnings can translate to the U.S. So so that whenever changes we see.
Following this election.
Will we will be able to take advantage there as well.
Okay perfect.
My second question just has to do with.
I guess.
We're now I'm interested in is how you've been able to move to a number one market share within.
And we know that there's not a lot of companies that are operating in the space on the beverage side, but maybe you could delineate why you believe that you've been able to.
Ill take that number one one share away from the.
The large companies in the space.
Darren I think it really comes down to better products I think the the product portfolio is broader so its more appealing to a wider range audience. I think we've done phenomenal work from a quality. So if you look at the actual capabilities of our facility, we have a better ability to control oxygen into the product, which means better stuff.
Realty better better taste, I think we've put a lot more work into the taste of the product. So for my personal taste. They taste better. So we don't have any lingering cannabis taste. Our emulsion technology is better I think that we've made a better a formulation from a calorie perspective. So if you look at most of our competitors products you're talking.
100, 150 calories a can.
We don't want that the millennials and younger generations nobody wants to ingest a 150 calories sugar. So this is what super exciting about taking a product like more low our either our five milligram kiichi offering or the light version a 2.5 each of those beers, which tastes great by the way.
The light beer, but a bit more complex than your typical say Coors light so little bit of complexity to it but that's a 30 calorie product. So it's absolutely phenomenal ride like when I was on my cottage. The other day I have some friends, having the chance to try it and they were blown away that between Molson and Hexcel at trust, we were able to create a product.
That was better tasting that a lot of the flagship beer products out there at.
A fifth of the calories that also delivered a phenomenal had high so I think its just been the it's a confluence of a lot of things and we have a lot of work to stay number one I think it's the number one leadership margin right now is still very tight it's not a large margin and so we'll have to work too.
Can you just stay there to continue to innovate and Thats, a big part of what we're doing with our powered by Hexcel investments and the R&D investments Hexcel does behind the scene and the value that we contribute to the partnership.
And now I'm going to follow up on Sebastien, because what happens is that once people actually try the products are coming back for repeat purchase because of all of the things that Sebastian just said, but let's let's not discount the fact that getting into markets across the country really comes down to our partnership with Molson Coors as well.
You know with the retail background, such as myself I know that retail is about shelf space. Its about getting bid spoke getting listings into market and if you don't have a wonderful partner like we do and Molson Coors, that's going to be difficult and so you're seeing that with lot of these other smaller Lps that are coming out with beverage they're not good.
In the listings are not getting the shelf space that a molson Coors is going to demand and so that's what's been extremely helpful for us in terms of landing ourselves in the number one market share and then you see all the things that Sebastian said that its at that are holding us there and are going to help the buildup, because we're getting great repeat purchase and.
Great uptake because of the flavor profiles and the mix of product.
Great. Okay. Thanks very much.
Your next question comes from John two of the challenging capital market. Your line is open.
Hi, Good morning, I, just want to continue to touch on this matching the supply and demand. So it sounds like we're still not quite there yet has enough I guess the end of October.
But it also sounds like you are readjusting, the strain that you're growing in terms of understanding what the consumers want so.
So there is a process of waiting for that growth to complete.
The cultivation part of that meeting supply demand in place so that the bottleneck of that supply side is just kind of look at front along the process is that the best way to understand that's meeting supply and demand process.
Yeah, John Thanks.
I think the.
The supply and demand that process is something we're going to be working on for Adler It not and let me qualify that so overall.
Overall to more directly answer your question.
We are better now than we've ever been and we keep improving on a day by day basis. However, the demand at the SKU level in store fluctuate. All this month consumers look for something new they want to induce trial.
I'm glad that they love more than anticipated right and then on the lot with Ekso, where we have a certain demand profile that we come up with our potential partners people go in and they try it and then it blows the lights out and all of a sudden they want four times more than what we thought they would and so that creates a problem. So our response to that strategically if you're focused on.
Having this freshness strategy, where we first start of the genetic to your point and that's part of our blank for genetic lab, where we're continuously innovating in breeding new best in class screens by the way is working behind the new up launch in our ability to bonus.
20% to achieve and on that then leads into our muscle greenhouse, which we've made tremendous progress in improving as the EPS of the cultivation teams done a phenomenal job there in improving consistency of yields quality of yields and also the constant availability of fresh flowers. So if you look at what's available in market growth.
So the you're always getting things that our package on fairly recently and then the last part of that which there's still a lot of progress to make there in the following few quarters will be our bellville manufacturing, which is primary pack and secondary packaging and our strategy is to over build in those areas. So we can move.
A new year, just combined packaging strategy. So once we get all those elements together, then when I talk about supply and demand as being an ongoing issue forever, it's really about having best in class planning ability and relationships with our potential partners in which we've invested heavily so hexcel has invested quite a bit.
In that bringing top CPG demand planners pop CPG supplied liner than for our organization and we believe over the long term model form a moat along with the top level relationships are performing with our partners. One of the reasons, it's critical to make it into that top three market share spot over the long term.
Okay Thats very helpful. And then just a second question. So it looks like the vapor and cash margins were a drag so it looks like it slowed and flower.
And maybe just give me a sense because I know its early stages for both of those products.
We'll margins get to a point, where the both will be hired and flowers that sales volumes for both of those products ramp up or maybe just give me an.
An idea of how they might rank in order of our Burger get margin generation.
Yes for sure. So so John I think the thing with margin is right now any new product launch and this is the thing that kind of is companies that were continuously launching new products. So the margins are are understated on the front end right. Because you were building for scale and so just by the sheer lack of volume we will provide him.
Marginal will vary from product to the margin looks artificially low but.
Both products over time and right I'm talking 612 24 months.
We'll be some of the Baltic that really drive margin to be superior.
So we're quite pleased actually with how thats tracking once it gets to scale.
Okay, great. Thank you very much.
Your next question comes from Jason Clark of Cormark Securities. Your line is open.
Hey, good morning, I, just want to circle back to some of that commentary on on kind of strengthen that internal supply chain and the stock owed issue that you are kind of guaranteeing the quarter. Just wondering if you could maybe you could just quantify a bit more of a kind of an impact on the stock has had and just kind of the the amount of time.
Strengthen those the supply chain capabilities to reduce this.
The.
The quantification I am not sure how relevant it is just because the numbers staggering right. So the unconstrained demand for hexcel products.
If we had an unlimited the on demand supply that was instant now that's impossible right like no no no company in the world in any business can do that but assuming you had unlimited supply instantly of anything.
You're getting through.
Multiple of multiple rightly you. Your sales then go at it would not be unrealistic to say, we could do connects and this is what in the past has gotten us in trouble because we did not understand our supply chain well enough to avoid those pitfalls of giving for example, unrealistic guidance because it was not constrained in the right way. So this is why.
We're taking our time now specifically through to Q1 and I think over the next six to nine months, you'll have another significant improvement in hexis was ability to deliver products to market, which will really unlock that demand now. What's that's also in the context of a competitive environment, where there are very few.
Companies I think that are focused on matching that supply and demand and so should really provide.
A solid foundation for us to continue to grow sales.
All right. Thank you that's helpful. And then just kind of turning to the the gross margin on beverage.
Just kind of wondering how we should maybe think about this on a steady state basis, and then just kind of the cadence achieving that.
Yes, the beverages are part of an eventual portfolio strategy at a 40% margin right. So you have to understand that this facility that we built with trust. So first step is being absorbed on the hexcel financials as trends discussed earlier when trust a pain Thats health, Canada license on a stand alone those financials will consolidate.
Eight up from Molson Coors, and some will come off of the Ekso.
The actual topline.
So we will hopefully about time see net income out of that business come back onto our financial statements.
But at the margin I mean, obviously you are coming in you are starting your dividing all that startup cost on a relatively low amount of beverages pulled through the market. So I think for one it will improve greatly and contribute positively overtime to net income and two it will not impact the gross margin impact. So as soon as trust gets their license because that will come.
Now for our financials.
Okay understood. Thank you.
Your next question comes from Adam Brooks of Scotia Bank Your line open.
Good morning, Thanks for taking my question. So just one quick question from me.
We look at the quarter.
It's hard to tell from your end users, but with the consolidation of trust negative to adjusted EBITDA or was was it back.
Calculation.
And if it wasn't negative can you quantify the amount.
Yeah, No there was no negative.
Way, we account for trust is that trust actually owes us back the net cost and burden on our PML. So there is an in and out so the net is a it's a zero sum balance.
It does obviously impact our margins as everyone has noticed and again to Sebastian point, that's because they are at low volume and.
Awareness see CPG environments, so you're burdening cost of goods with with overheads and so when you have those fixed costs being applied to cost to inventory and that flows through the pinellas caused.
Low volume clearly you're going to have negative margin, but thats just a scaling issue as we continue to go forward and scale and continue to put product into production in an at the market that takes care of itself. We anticipate fully that it's going to get to a healthy positive margin over time and that when it comes off of our.
DNL and that of our out of our books and we consolidate on an equity basis that it will be it will it will eventually.
Give us a really great return on that investment and that's why we're in it.
Great. Thanks.
There are no further questions at this time I'll turn the call back to management for closing remarks.
Okay.
Thank you for everybody for joining the call so great takeaway from our part a big thanks to the whole hexcel team for their continued effort I am Super pleased with our number one position in beverage our number one position in harsh.
So that's been phenomenal and again, we are tracking against our strategic objectives. So when I measure this quarter against the top three things. We said we wanted to do which was the top innovator operate with a very healthy portfolio margin and become a top two market share company, we've made progress.
Yes, I guess all three of those pillars. So.
Again closing the gap on that top three delivering a adjusted margins without the beverage of 42% of gross margin level and on the innovation side being first and a number of categories. If it really been a phenomenal quarter for hexcel, so looking forward to delivering more and being able to really align on that.
Over the following quarters as we start to talk about positive EPS and really show what this team can do thanks for your time and we will look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now.
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