Q4 2020 Hexo Corp Earnings Call
[music].
Jones, who constitute walkie speaking.
These statements are based on the company's current <unk> you see.
<unk>.
Sure on assumptions.
These statements should not be rights assurances of future performance or results.
They involve known and unknown risks on southern piece on all the phone calls that could cause actual results performance or achievements before must be rally from current expectations unbilled implied by such statements.
We will also moved out to be utilized something wrong I, if our estimate hills, our financial report, which may be discussed on today's call reconciliations between any such non I, if our estimate heel, yes, Lucas before they I F. R S Mitchell's into that <unk> <unk> and beyond.
These people shop is qualified in its entirety by the cautionary note regarding forward looking statement I believe buckles sublet included at the end they'll be small and news release on our EM on <unk> on <unk> 's fields with a watchful for both twins when financial statements on the guidance.
Morning, I'm, which will also be filed on Edgar.
Please review these materials for more information about forward looking statements and the risks off the old that could cause actual results to differ materially from our current expectations and those implied by such statements.
Hey school disclaims any intention or obligation except to the extent required by law. So obese always price any forward looking statements are the result of new information or future events or for any reason.
I will now turn the call over to the CEO of HIFU keep 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 this global pandemic continues.
Very proud of hexcel and the team for their dedication as we navigate through the ever evolving and unpredictable environment.
Safety of our team is always our first priority and we're operating within the confines and processes, we put in place at the start of the pandemic witnessed.
We established a COVID-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 PB.
We also implemented travel restrictions and quarantined, 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 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 are half products and they have been overwhelming successes great quality reviews, and we are 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 covert unfriendly share pack 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 pack.
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 portfolio of brands a suitable for a wide range of beverage occasions, and its designed to appeal to both current cannabis consumers and those were just beginning to explore the category.
Whether it's helping people unwind, whether it helps to add energy to social occasions, or its part of your wellness routine 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 beverages in the three short months that hexcel when trust have 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 technicals quality and value and that includes a freshness component 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 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 at 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 product in market. So our customers can gain access to these actual products over and over.
We've 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.
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 today's 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 continue 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 Trent 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 in 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 has also has an opportunity to become one of the largest cannabis based companies in the entire world.
Our view is that companies in a new and growing industry have to first gain a top market position with high quality winning products.
They have to do so well controlled controlling EPS DNA.
At least if they hoped to achieve consistent robust EBITDA levels.
This has been problematic for the candidates industry at the outset most of the larger Lps scrambled to build out robust teams systems and infrastructure as if they were all going to be multibillion dollar companies Act. So we have gotten ahead of the curve and Rightsizing, our EPS GNS, 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 develop 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 the team off the back of a grossly high Depreciate Bowl capital base through.
Throughout history, there have been plenty of examples with pot of 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 cannabis Lps as time goes on at Hexcel.
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 depreciated asset base, especially when compared to our potential future EBITDA, which again is clearing the path for positive EPS.
Unlike many Lps, we want to stop Piecemealing, our inventory write downs, PPD impairments and goodwill and intangible impairment, we truly want it 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 user have turned to hexcel for quality products at retail our products have strong repeat purchase rates and consumers are loving our 2.0 products 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 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.
At this rate.
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 product, but across all products. While the top line growth. We are also focused on the foundational aspects are.
A bit of our business like IP IP systems and infrastructure. So we can reduce SDMA to become truly scalable.
From a liquidity perspective, we are in a great position, we have $223 million of working capital, including $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.
His 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 out updates as necessary.
Thank you and we will now open up the lines for questions operator.
So ask a question given to press star one on your insulin.
So we draw your question press the pound all hosking. Please stand by while we compile the Q on the roster.
Your first question comes from Iran. Gray of Alliance Global partner your line.
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.
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 you might have seen within your flower brands or whether it was hash and just wasnt I saw in the increase in your higher priced flower brand versus the original stash during the quarter. Thanks.
Thanks, Aaron we're really proud about the demand at the product or is this 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 in.
Increased driven by base, so you're correct in that assessment, but also by some new higher end flower products like original stash reserves and we're also driving we're driving a hash and 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.
So what's interesting about the raise in the average price per brand is that we are 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, thanks for that Thats Super helpful and then.
Just looking at sales provincially I know you know, Quebec is obviously big promised for you guys, but Ontario has been another market you guys have looked at so you're 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 I'd love to hear your insights in terms of opportunity within our Ontario. Thanks.
Yes, and so the strategy at EXL was always start in our home market have come back and we remain the market leader in come back and the preferred supplier to the Sq DC I think the EPS GDC itself is continuing to grow stores at a very very good pace as far as Ontario were.
Really excited about what Thomas.
Thomas and his team have are doing over the Lcs Big Big focus on store proliferation, and 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.
If you look about three quarters ago, we did not have any meaningful share and now hexcel fits that.
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 two about a 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 Hi, detail of HPV 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 wasnt, 5% of sales for hack. So I was saying into the overall, Ontario market Hexcel accounts were 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 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 list.
Nationally, but not with a full product offerings. So the next priority is really to make sure that the full product offering get 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 want to first of all just Versum housekeeping rectify something in your earnings release, It says sales.
For the quarter ended July 30, Onest accounted for about 7% of sales 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.
So far for consumer demand, which types of beverages have been the most popular as 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.
Looking at the quarterly numbers, but pre August we did have the very fell drops in market. So those account for the nominal sales. If you started to pick up in that 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 compare.
Jitters and really launching the full bore or half a full portfolio add nationally, but in those three months that measure that till sales hexcel and trucks are now the market share leader. So on a on a weekly basis, we are selling more beverages at the tail than any single competitor in Canada. So thats.
Phenomenal success and shows you the amazing work that trust team has done on the portfolio.
The portfolio is is quite balanced there's offerings for everybody. We have zero calorie CBD beverages in our facility in lemon and very well on the wellness line you have high THC beer products available in mobile, which is 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 our 2.52 0.5 so.
So a one to one blend which are made from real wine that's 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 household per 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 Myrsini product. So house of turbines Myrsini is a cocktail we designed to appeal to a flavor for cannabis kind of serves it pairs amazingly would stake and it's to go and replace kind of what you would typically take as a.
A strong alcohol occasion, so we what's been a really interesting is that first consumers didnt know where to place that brought up and the reactions were mixed. Some people were surprised 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 mercy and.
Got it so we're 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 youll that whether you are looking for zero calorie low calorie wellness better for you a tier CBD offering there's 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.
However, cash trend here, yes.
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 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 still putting money into 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 in Q1. 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 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.
The Sebastian's 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 setting ourselves up where customers are disappointed because they don't have product to to buy if theyre trying 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 candidates 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.
Last year, not not looking for guidance, but just anything just quality that we 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 statutory.
We 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 are thrilled to be with Molson on the beverage side and Thats working phenomenally out with.
Taking the number one spot of all LP is in Canada, and the <unk>, but overall I think if you focus on those four top categories you cover 80% of the market.
Okay, great. Thank you.
Your next question comes from Mark, but only have kind of continued your line is open.
Yeah. Good morning, Thanks for taking the question.
You get a bit more color on the inventory write off period.
Quarter, there was none.
Yes.
Well.
Hi, Matt.
Curious from.
Yes.
Legacy.
But we have not.
Okay.
Great.
Yes, Frank I'd like back.
Good.
Okay.
Okay back to drive.
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 at Q3 comparative to our peers was was I thought was relatively high.
Well wait 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, and where we think forecasted demand is going to be and we're in it just.
A very very very healthy place.
So the cross 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 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 frankly.
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 noncash distorting 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 in costs costs biological assets and cost inventory and then we have to adjust to 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.
Most part are 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 product 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 and as 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 <unk> producers have made we're still accumulate a massive inventories stockpile that you have for right.
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.
Okay.
Okay.
Really yes.
Hi, Jason.
Eric.
Yes.
Yes.
All 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.
Very attractive.
Candidate numbers, where every day on the Canadian industry that Andy Hi.
Month over month.
Nothing that's flowing through now and those probably retail stores are still getting higher higher patient.
Okay.
Yes, Matt.
I 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 gold of Lps. There we can grow within the current store environments. 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 hex.
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's still as well and I've talked about this last quarter.
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 Lps like hexcel it'd be smaller produce.
Shares 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 market 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 help.
Your next question comes from John number of Citi. Your line is open.
Hey, Thanks, Good morning, I wanted to follow up on the question about sales performance in EPS Q1.
Your comments about wanting to get supply chain rate, making sure you're always in stocks should we interpret that you might not see as much of the sequential.
Will 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 blow out and that we move up that market share ranking so I'm much more interested in making the top three position for.
Our market share position that the not the specific number on the quarter.
Okay understood.
Maybe more of a housekeeping question can you help us understand.
How the accounting practice on Trups will play out over the next few quarters and when these results the transition to the equity pickup line rather than European though.
Sure let me answer that.
We're still working through the license process and it can't move over until that process has gone through the in its entirety. So once once it does get license it will become a separate legal entity separate legal entity now, but will it'll 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 from me.
Maybe you don't want to disclose an actual number and thats fine, but can you talk about how your large format value products with the original stash performed in the quarter versus pro.
Prior quarter. It does seem like like you said Sebastian other competitors, it's 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 in 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 Yes, I think when we made the move.
Last year, and we reset the whole market right like that there was no such thing as a two dollar Graham until hexcel created the category, where 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 prove that that product at could.
Hold a 40% portfolio margin and it was part of that portfolio margin strategy. We prove it again this quarter with the portfolio margin actually increasing that phase three so what's been interesting is all our competitors I'm kind of just.
Brainless Lee copied without understanding the strategy. What we did is we came back in over talk we thought with a better feature set. So we introduced original stash reserve, we're leveraging that now with the relaunch of our up brand. So we're super excited about that coming to market with the very clearly defined feature.
Sure Seth so up flowers actually going to market with a guaranteed 20% plus THC that's burst 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 phenomenal success in another opportunity to increase our price for grant so the strategy as a whole.
All you asked me am I trying to win value no am I.
Hi, trying to win low cost high quality product under original stash, yes, and am I trying to gradually increase my price program by bringing back new feature sets continuing to innovate and market, absolutely and thats 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.
Tens 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 stash products they've come in at $99 and we're still performing very well at $125. So I think you see consumers, saying Oh Wow, you know the best value in that in that mid market is really is.
Really original stash and then we have an opportunity of course, the price even higher with the original stash reserves.
That's very helpful.
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 if you add back. The charges you do have kind of have capitalized inventory growing 2 million, but I was kind of continues because a lot of that was also a big draw down on purchase inventories I wanted to get it on.
Understanding of kind of where you were from supply demand in balance on kind of 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 again 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 straight, 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.
Yes look to we unlike a lot of our competitors want to and 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.
We could go to market at the time and with some demand for for the ATM. We took it took that opportunity we want 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 never say never but we're not we're in a great place and so our debt.
That is not high we have very low secured the secured debt 30 million, we've taken care of the convertible debentures on our balance sheet. We've we've.
We've increased our cash reserves, we have strong working capital we've written down our AR 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. Your line is open.
Yeah.
Good morning, Sebastian trends.
Just.
As it relates to production capacity in Belgrade. It looks like you have some significant plans here and there.
With your ability to get to number one on the beverage side just want to make sure that you are 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 the 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 kind of a 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'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 the selection.
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 that.
The large company 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 products. 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 at Cannes.
We don't want that at 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 loans are either our five milligram kishi 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 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.
Continue to 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 the hexcel does behind the scene and the value that we contribute to the partnership.
And now I'm going to follow up on Sebastin, because what happens is that once people actually try the product 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 where the retail background such as myself I know that retail is about shelf space. Its about getting it 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 get.
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 build up because we're getting great repeat purchase and the.
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 children 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 as 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 then there is a process of waiting for that growth cycle to complete.
The cultivation part of that meeting supply demand in place so that the bottleneck of that supply side is just kind of little bit further 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 it.
It's not and let me qualify that so.
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 the fun consumers look for something new they want to induce trial some product they love more than anticipated right and a lot of 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 in L.
All the 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 part of the genetic to your point and that's part of our blank for genetic lab, where we're continuously innovating and breeding new best in class.
Strains that by the way is working behind the new up launch in our ability to bonus.
20% THC and on that then leads into our muscle greenhouse, which we've made tremendous progress in improving as the as the cultivation team has 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.
Correct. So.
You're 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 to gain year.
This combined packaging strategy.
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 invested heavily so hexcel has invested quite a bit in that bringing top CPG demands planners pop CPG.
Supplied liners into 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 Nathan and cash margins were a drag so the it looks like it slowed and flour 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 from maybe just going there.
Good idea of how they might rank in order of Birgitte 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 this year lock up volume, we will provide him off.
Marginal were very broad based.
So the margin looks artificially low both.
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, if I want to circle back to some of that commentary on on kind of strengthening that internal supply chain and the stock would issue that you are kind of variance in the quarter. Just wondering if you could maybe just quantify a bit more of a kind of an impact socket has had and then 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 instance, 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 a multiple rightly you. Your sales then go it would not be unrealistic to say, we can 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 hexcel his 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 thats, a wind event and so should really provide.
A solid foundation for us to continue to grow sales.
Got it. 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 the pain that is health, Canada license and a standalone 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're 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'll improve greatly and contribute positively overtime to net income.
Two it will not impact the gross margin impact so as soon as trust gets their license because that will come off 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 for me if we look at the quarter, it's hard to tell from your end, but with the consolidation of trust negative to adjusted EBITDA or what was it back as the calculation and if it wasn't negative can you quantify the amount.
Yes, no there was no negative.
The way we account for trust is that trust actually owes us back the net cost and burden on our PNM also there is an EPS and 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 we're 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 and then into 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.
PML 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.
Good.
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'm Super pleased with our number one position in beverage our number one position in harsh.
So thats 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.
It's against all three of those pillars. So.
Again closing the gap on that top three delivering a adjusted margins are without the beverage of 42% at a gross margin level and on the innovation side being first and a number of categories. It's 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.
[music].