Q1 2021 Hexo Corp Earnings Call
The Mi Sharon and I will be your conference operator today at this time I would like to welcome everyone to the Heck. So Q1 2021 the earnings call before we begin we would like to remind you that certain matters discussed in today's call or answers that maybe given to questions asked could constitute forward looking statements. These statements are based on the company's current internal of use estimate.
Expectations and assumptions these statements should not be read as assurances of future performance. The results they involve known and unknown risks and uncertainties and other factors that could cause actual results performance or achievements to differ materially from current expectations and those implied by such statements. We also note that we utilized certain non FRS measures in our.
Financial reports, which may be discussed on today's call and reconciliations between any such non IRS measures to their closest reported I Srs measures are included in our Mdna the.
This discussion is qualified assets in its entirety by cautionary notes regarding forward looking statements and the risk factors that are included in the at the end of this mornings earnings news release in and around the M&A F filed with our fourth quarter 2020 financial statements on seed. Our this morning, and which will also be filed on Edgar. Please review these materials for more information about forward.
Looking statements and the risk factors that could cause actual results to the differ materially from our current expectations and those implied by such statements Ekso disclaims any intention or obligation except to the extent required by law the update or revise any forward looking statements other than the result of new information or future events for or for any reason.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask the question during the times of the press Star followed by the number one on your telephone keypad, if youd like to address your question press the pound key items.
I'd like to turn the call over to Sebastian same Li CEO of Hexcel.
Thank you operator, and good morning, everybody.
Before we get going I'd just like to.
Wish everybody. Good luck for of course during these unprecedented times axle has certainly kept the safety of its employees of a paramount priority.
And we've taken many for cautions to ensure that everything goes smoothly and that we continue our central service of supplying Canadians with high quality candidates during this pandemic big.
Big Thank you everybody of hexcel for your role of supplying or consumers and customers.
Before we discuss Q1 I'd like to take two minutes and share with you a look inside our Bellville center of excellence.
I'm very excited to share with you what we've got going on inside.
Bellville of a game changer for us and we are now up and running.
Operator would you please start the video.
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The Molson.
Of course, it was thrilling to be able to share of virtual introduction to the site with you.
A few days ago and again today.
I promise you the feeling when you walk in is even more exciting. This facility is highly automated and we believe that it delivers the competitive advantage and it really leverages the capital of bolt that Hec So has erected in Canada.
With this facility we have the ability to go to market quicker than most competitors, we have the ability to ramp up new product lines and we have the ability to continue to lever economies of scale to push better pricing for our consumers.
We've been hard at work over the last few quarters, and especially in Q1 matching timely supply and demand and that's down to the skew level, we're really moving beyond talking about tons and kilos at Ekso and really starting to talk about the streak skews velocities sell through at retail.
And this is an area that's remaining top of mind.
We understand some of the frustrations that our consumers and our customers feel when we introduced great new products into the markets and then it rapidly sales out and they have to wait until we replenish with our Bellville facility now we are getting control over that SKU by SKU velocity and getting that additional sales.
Fly end market is really unleashing the potential of that Ekso has.
In the first quarter, we deliberately took our time to really understand the forecast of demand.
And to build the planning organization that can make sure that popular products and ready for products are available to consumers through out Canada at all times.
We're starting to see the early benefits of this you saw in our video secondary packaging has increased five fold.
So that capital mode and that ability to go quickly the market means that we're putting fresher product into market the manufacturing capability of taking a freshly harvested flour and bringing it quickly say under 60 days into a retail store.
Gives us an ability just simply have a higher quality product consumers started measuring quality by price and the obviously bellville contributes there and hexcel has been of price leader now for over a year.
They have also continued to measure quality by potency and Weve recently launched our up cannabis brand, which is the first brand to promise a potency guaranteed or consumers of over 20%. The next bastion, where we need to be able to.
So with his freshness and competitors of ours, the do not have access to the facility of the scale and complexity of bellville.
We will simply not be able to compete on that freshness, because you need of very.
Very nimble and complex supply chain to be able to take that fresh flower and bring it to market quickly.
Our goal is to keep the most popular and successful products and market share consumers gain access to the whole hexcel portfolio and that our customers of the boards.
Continue to rely on hexcel as a partner of choice.
We've had a phenomenal Q1 and start to the year record revenue.
$41.3 million, which is the highest in the company's history.
Were up 14% sequentially from the fourth quarter and all of more than doubled year over year.
Our net revenue was $29.4 million and is also up substantially from price prior periods.
More or maybe even more impressive the not of what really gets me excited is that we're proving hexcel his ability to win the important categories. We have one of the hash category. We are the clear number one national supplier of cash.
And resoundingly, we've just taken the number one position in beverage now this will be a highly fought for category I think it'll be a much more important to the industry than anyone realizes so far.
In fact, I'll talk about this a bit more on the call, but we are now as an industry rolling the beverage business at about 1.9 per cent of total market.
So some of you on the call might say well, okay, 1.9%, that's not a an interesting number and this is where I beg to differ and I think it's a very significant milestone.
For years now we've been talking about beverage as a piece of cannabis being between the one and one of the half percent in fact in the USA beverage occupies about a 1.4 per cent piece of the market. The fact that we have now demonstrated that by creating a best in class product with better taste with a.
Recyclable glass bottle and with a wide variety of portfolio in effects that we can overtake the.
The total category space that exists and debt in beverage in the U.S. proves how important this category, it's I'll talk a bit more about that during the call.
Our sales momentum has increased across Canada, and we are still holding the number one position in Quebec, So take that pick that in for a moment hexcel has been concentrated on being the number one supplier to come back and we are continue to achieve that we're still sitting on a 29% market share in our home province and.
We will continue to sort of come back as far as the preferred supplier to the cutback marketplace for years to kind of.
However, whats very significant this quarter is you're seeing a meaningful uptick in outside of Capex. So as our supply chain has become more robust we've been able to put attention outside of Tibet and you've seen us become top three now in Alberta, We're moving up in Ontario, where in six position the not market and we expect that trend to continue.
Revenue so that in future quarters, we actually expect that we will have more revenue coming from outside of qubec than in Quebec, while keeping our number one status there.
We're launching products that resonate with consumers we started the year with the original stash taking over price.
Price point, it really redefining the market when we launched original Sasha was a 28 gram format out of very competitive price point that product was met with a lot of market skepticism and today those types of 28 Gram of go.
Good value offerings are over 50% of the market throughout the chain.
Our cash product as I mentioned is number one and we continue to be able to out innovate. Our vapours are getting from the not phenomenal reviews and across the board Hexcel is seen as the leader by our consumers.
We really took time to match supply and demand and that meant some difficult decisions. So our up product for example.
Our offline re launched in Q2, so you don't actually see the benefit of the up relaunch in Q1.
The additional upside and it's going very well.
This is our sixth consecutive quarter of EBITDA improvement.
Our first quarter, where weve improved the 87% from the negative of 3.25 million in Q4 2000.
Two of negative of from the negative of almost well to the negative about $400000. So getting very tight on our EBITDA of control now losing under a million dollars.
Our gross margins the excluding adult beverage were 39% and continue to be very robust go forward and prove out the sustainability of a CPG of marijuana company.
And beverage itself has gone from a whopping minus 125% gross margin to 1% positive in just one short quarter.
Our CPG partnerships I think the most significant part about our deal with Molson in beverages.
Is that it really proves up a model that hexcel embarked on three years of it with our powered by Hexcel model. So hexcel believes that we will never be the best company of making coffee of beer of chocolate bar. We believe there are world class companies that make those products and we believe the heck. So it was a world class company at understanding consumer experience.
It is built from the molecules that come from marijuana.
And I think that this for a now into beverage with Molson Coors through trust has allowed us to demonstrate that that strategy is the winning strategy for less capital that some of our competitors. We've taken the number one spot in Canada. We've just recently launched at the United States. So we now have CBD beverages derived from him on the shelf and call.
The writer and we're very excited to see how that develops although today I will talk to specific numbers in that market because it. So this is very fresh news, but.
But we've been hard at work on these partnerships now for and we've never really stopped over the last three years. They are extremely complex partnerships to negotiate and that's what we've been doing so we believe that as we are able to land success of partners for Molson Coors that will really continue to price.
Additional upside for hexcel and our shareholders.
I'll now turn it over to our CFO to trend for Donald to go through a little bit more about the numbers.
Thats kind of.
Very much appreciate it.
And good morning, everyone.
The one of the it's the first thing a lot of the point that really was.
Oddly enough of the resolved itself, but the cleanliness of our PML I think that goes back to Q4, we meet the tough decision at the.
The end of the year around cleaning up our balance sheet. So we took a lot of write down a lot of big impairment, because we no longer want do what the industry tended to be dealing in the piecemealing. The cleanup overtime, we wanted to come into this year with an extraordinarily clean set of financing.
So that when we came to market as we did just now on Q1 people can see and digest the results the way they should be able to do and so what you see here is a very clean understandable PML.
And that is where we are going to continue.
The future the.
The each quarter successively from here on a day to show beautifully clean PML that people can digest that is very simple to understand.
If you look at our results getting into the our operational cash flow was only minus 6.1 million.
Add that to the.
Q Q4, and you're talking about a half of the the year, we've only gone through $10 million of operational cash flow a low.
A lot of that came from from inventory. This particular quarter, we did build up inventory, but I want to talk about that inventory has been an area of risk for LP not for us we've cleaned the that we had a great harvest near the end of the quarter and that was the higher yield or the higher.
Higher yield harvest than we had anticipated which was the great thing because since that point in time, we've been able to turn all of that into value added.
Standard finished goods at our Bellville facility, which are now out into the market, we're not creating any risk for the first time in our history. We are actually using more trim on a weekly basis than we can actually produce and I don't know of any other LP can say that.
We are in a great place in inventory and in that is that.
From the use of our cash in Q1, which we don't expect going forward. It was just the timing issue.
We're in a great place. So if you look at our total cash flow I mean, our total cash flow would.
Have been only a use of $11 million for the quarter had it not been for one thing and that's a 23 million dollar move from cash to restricted cash which was the fund a captive insurance policy for ourselves and our deal with sales up being $10 million to $15 million per year in premium so a great moving to be that of very high.
Return.
So right now, we're sitting with $150 million cash on our balance sheet.
Just think of both that in the 10 million we've gone through from the operations perspective in a half a year and we had $150 million on our balance sheet.
We are not doing anything dilutive from.
We have chosen causes we chose not to the anything the loop and to be opportunistic.
As many of the Lps have been over the course of the last several weeks when the industry has taken off as the result of much of which was due to what was happening in the United States.
And there are lots of LP through of absolutely no exposure to the United States yet for stock are driving forward.
Not low cost we have exposure to the United States.
And even still.
We are sitting in the place where we don't have to be opportunistic which is great.
And therefore, we can we have the cash to support what we need to do on an ongoing basis.
The one of the things we want to talk about is the.
The improvement in that EBITDA in that path. The EPA, So let's start with our war on cost.
Keep those margins at the.
The very healthy while we know that the market is the severely price competitive and we are a leader there we want to offer great products at a competitive price.
So that means we have to be extremely good on the Cogs sites that we can continue to deliver healthy margin.
Which we are doing the other thing is SDMA.
With the ex DNA, we have been doing a lot of things to control those costs.
In the in this quarter are if you look at DNA.
Marketing selling and promotion and R&D those of your three core EPS DNA that you see on the pace of the of the of the PML very similar to other LP for that figure was $15 million from total or 51% of net sales.
Down from 50 in the half during the Q for which at that point was 57% of net sales we need to be better there and we know that we've already made significant improvements in Q2.
We've done some restructuring and are going to continue to do some restructuring over the next two quarters beyond the to get to a place where we know we're going to be best in class in EPS DNA, we have some very high targets for ourselves in terms of getting that percentage down to a reasonable level of net sales.
Yeah.
Within a year and a half to two within the year and a half, we're hoping to get that down under 25% and even better.
Of of net sales that is a great target and the good place that allows us to have that clear path. The earnings per share earnings per share is where that is.
And when you look at market valuations today the.
There is what you'd call an implied level of earnings inside of the market cap and the you look at the industry like ours, where it's growing even at the said okay market caps are represent 40 times, an implied earnings stream on behalf of the company.
The you're talking about well if you look at that 40, and you just and I encourage people to growth and look at the okay. I encourage you to go to all the LP and.
And look at the market cap divided by 40 basis, what does that mean for implied range.
Then compare that to the reality for the realities the take margin yeah.
Non at those that EPS DNA I talked about earlier, but just the gionee marketing selling the promotion the R&D just minus that for margin and you say, okay. What is the what does that look like as the number and what does that the appreciable capital base that everyone's using to get that number. That's another thing we're under 300 million, we have been very diligent in.
Our way of managing the piano for managing the balance sheet others.
You can look of that for yourself billion multi billions of capital to breach of the capital to get their earnings Nada.
So you take that and you Mark you take that.
Net margin modest of yesterday modest of the depreciation and where are you what is that earnings like today, what is the reality and multiply that by for the quarter of ticket what does that look like for annual earnings and how does that compare to what was in the market cap.
You're going to get the disparity beginning of big disparities across the board between what the reality is and what the in the market valuation some of the LP, though there are tied $750 million of annual earnings of the disparity.
Not for US we are under $45 million for that that.
That is by far bar, none the best of all of the top five or six LP and non Corp. We have the lowest disparity between our valuation on the market and the reality of what we are delivered today, we have the path we are.
Headlong into this path of the.
Eliminating that disparity and then moving well beyond the with regards to earnings per share and that is extremely important to us and where we're going to continue the goal and we're going to do it off the back of the low capital base, while not being dilutive unless theres. Some type of strategic initiatives something that we can bring the mark is a this is why we need to dilute.
Because of your something Thats going to provide a very reasonable returns for our investors.
Net.
I do want to turn it back to the Bakken and thank you everybody for listening in and I think we're going to open up the questions.
Before we get the questions I'd like to again wish everybody safety and health as the global pandemic continues I'm. So proud of what the Hexcel team has achieved for the and also for their dedication as we navigate through an ever evolving environment.
Despite the many challenges that this economic and social construct as post here.
The kind of this industry continues to grow.
That's a testament to consumer demand for safe and the legal high quality products that are offered by licensed producers and zone.
The industry is running at about a 2.9 billion dollar run rate, that's just in Canada and it continues to accelerate.
We're in the top for market share position that hexcel, we're closing in on the top three spot, which I continue to believe will be necessary to be in those top threes to ensure a long term sustainable business with high value brands that can be leveraged international.
Please.
We've proven that now that the hexcel model of partnership is one that leads that can lead to being number one in the important categories.
We've shown that the U.S. story isn't the the all end all when you look at beverages. The part of the market in the US it's not just 1% it's not one of the half percent in fact after two months and market in Canada. It is 1.9% of Canadian sales that means that categories. When you hit the product.
Right when you truly create a proposition that delivers the consumers what they want.
You are able to redefine the market and create a larger opportunity.
We're currently number one in Canada it's.
It's possible for hexcel to be number one in the USA.
We can take what our Canadian run rate is and multiply it dramatically in Canada, but our strategy. Following us legalization of provides a ton of blue Sky.
And take in mind that are just the Canadian opportunities currently running out of 12 million dollar run rate annualized for hexcel that and that's just that's not the whole industry.
Remember that beverages, how the high capital moat around them that the technology and the manufacturing behind them cannot be easily replicated and the expertise that extra was developing and that our partners are contributing it's hard to match.
We've now proven our ability to win categories. We've proven the model and we continue to negotiate we've never really stopped with other CPG partners to multiply that success.
We look forward to updating everybody at our next call. It should be an exciting next quarter of very exciting next year and I'm very happy to be able to take some questions.
If I could ask the.
I would like to ask the question at this time. Please press star one on your telephone keypad, if youd like for the job of your question press the pound the for.
Next question comes from taking the chain with BMO capital markets.
Hi, good morning, Thanks for the question.
I wanted to ask about the US I guess first is.
I think the provide a bit more commentary on track last the you mentioned you launched in Colorado can you just talk a bit about how you're thinking about additional states just kind of expansion on that and then also.
Also curious how you think about XOMA strategy for the Phd side, and we will.
Thank you Jamie as the.
The the the U.S. expansion is really going to follow the.
The follow the regulatory path of not regulatory path is not fully defined we've obviously seen the first vote on the more act the probably getting shut down in the Senate. So that that is probably not the immediate pass so before going to multi state tax always going to make sure that we are in full cooperation with all federal and state laws in.
In the USA.
The current operations in Colorado or fully legal at all levels of government day, there within the state lines are from helped drive the CBD of there are other states that have a currency the legal environment from our interpretation.
What really the advantage of our strategy is we wanted to prove out the product in Canada that was number one now we are proving out of the nuances of the product for the us consumer base, which is slightly different when you'd start to talk about branding and concentration taste profiles and thats really where leaning on the expertise of Molson Coors there.
But certainly we're keeping a close eye on expansion opportunities for both of those will come true.
Okay got it and my follow up question.
Just wanted to revisit the free launch versus the the other.
Moving on stash product lines to flow it looks like there was good growth on the original stash side. So just wondering in the market are we seeing a reacceleration in that value segment again with respect to the relaunch can you talk a bit more about how that's going on as you're trying to from Denver now to price.
Thank you our consumers of other value of consumers kind of that price.
Pricing here, how do you how do you do that and how is the going thanks.
Thank you before we before we start to talk about raising prices for consumers. It's critical that we develop better if we deliver a better feature set and better value for them and the this is really why we're very excited about up because our cultivation has gotten so much stronger now we're able to deliver.
The predicted the predictable guaranteed 20% plus THC with a very strong curbing profile. We've we've re designed our genetics lab and brand for it. So we have an entire indoor facility now ex so that is 100% dedicated to the development of.
Of World Class genetics, and so we're leveraging the existing massive of genetics bank that hexcel highs and were further developing on top of that so we're we're in R&D and as we introduce new feature sets, we expect to be able to offer competitive pricing for what that feature set its.
The other launch has gone very well since we've hit market, we're getting a great consumer response, and I think thats because we're meeting the expectations of the consumer we promised a certain concentration we promised a higher quality product and we're still competing at a very reasonable price. So if you compare high end up product.
Some of the higher end black market products, we are still in the right the pocket from a consumer demand perspective original.
The original fashioned low.
Lower price the value offerings still continue to be a large part of the demand profile, we've seen a ton of competition in market, but as mentioned earlier most of our competitors don't have the robust infrastructure that EXFO has and so they've been able to kind of come in and out but original stash remains a mainstay for consumers and continues to gain traction.
Got it thank you.
Next question comes from Aaron Grey with aligns corporate partners.
Hi, good morning, congrats for the quarter and thanks for the question.
Well first one for me guys is on the beverages Sunday guys remain very bullish on that now 1.9% of Canadian sales. So I just wanted to know if you guys have done kind of in the initial kind of studies or conversations with consumers in terms of how much of that has been kind of trial of burst repeat purchase Dave and maybe some of that May show feedback that you've been hearing that gives you kind of for.
Of the confidence in the overall trends out kind of how of that category continue to grow as you and competitors continue to launch new products in both net out thanks.
Thanks, Aaron the the trial of certain of the trial rate certainly high what's exciting is health Canada is now taking the look at the regulations and there is the theres early.
Regulatory interpretation that said that should allow us to go from a five drink limit at point of purchase to six drink limit. So that's already a meaningful improvement.
Because that's been some of the feedback or consumers are saying the same can I believe by more of the stuff, especially at wants can we reduce friction.
When you look at the concentration for example.
The the current equivalency factor, so what which is what drives and regulations. How many drinks are able to buy is based on the milliliters of the volume of the beverage. So it really is not aligned with consumer and public safety and I think health, Canada is well aware of that Theyve gone to consultation right now I think we will see that change and as that changes.
As in the next while that will really allow not just the six pack at point of purchase but case quantity consumption and as you start to hit that that are really conflates with our production ability to so you saw in our in our video of this morning, our Bellville facility with trust, we can produce 400 units a minute.
And if you do the if you do the math and you start to annualize that that's a tremendous amount of beverages, but we've really built that facility for what we believe the market will be in the future and I've I've said, a few times I believe beverages could be as high as 15% of the total cash category a massive part of the market and so I think as regulatory.
Changes shift, we're hearing loud and clear from our consumers, we want to buy cases health, Canada, certainly listening as well and I think as those things fall beverages will continue its climb as a meaningful part of the category.
All right great. Thanks for that kind of that's helpful. And then the second question from me over the long with pricing as well, but more on the base. So you guys had incur.
Increased sequentially on the vet sales it looks like looking at M&A. So just wanted to get some commentary that you might have in terms of what you're seeing within the Veight category really kind of started to launch of those products, especially as the same kind of overall.
A lot of volume.
Other competitors launching their own products and some competition on price there. So any commentary in terms of what you're seeing on the vs category and how you kind of see that evolve and where you for yourself.
Kind of having of competitive edge would be helpful. There. Thanks.
Thank you yeah. So vape is where flower was 18 months ago as the general category, what I mean by that.
Distillate pricing in Canada is still egregious and that translates to high unit cost in vapor.
And then.
Essentially a high price for the consumer so when the when the consumer is still looking.
I'd say overall and this isn't just for hexcel vapor overall, the price out of the market compared the black market.
Black market is our number one competitor, let's make no mistake, we have to get the pricing right and we have to be black market pricing without qualification. So before we can get the say 90, 95% of the total market.
A consumer has to know and trust that whats available in legal channel is better price than what they can get from their dealer on the street ask for that once they know they are getting the best price. Then we can talk about feature set then we can talk about concentration then we could talk about safety legal channel consumer protection.
Protection of children, all that kind of stuff starts the matter right environmental footprint all of those all those other features and so they are still at the front end of that because license producers as a whole have not fixed the supply chain. Now this is where actuals advantage comes in we've been hard at work developing great formulation. So initial responses to the.
Actual distillate that we have in our vapor is phenomenal clip.
But the scale up is.
It's not in the is not actually full fledged. So we havent actually turned on are Vic machine. The way Weve turned on the beverage machine and I talk to as the machine is not one discrete piece of equipment I'm talking about the whole system and process to produce our volume that is something that will be coming up for hexcel.
And it's a it's a category we are certainly playing in and when we do that we expect to be able to do to the market. What we did in flower what weighted and cash and what we are doing in beverages, which is to deliver pricing, that's the black market competitive and which in turn will simply box out.
50% of up to 80% of our competition that is unable to operate at the same scale.
All right great. Thanks for that Collin I'll jump back into the queue.
Next question comes from requests per week with Oppenheimer.
For me Thanks for taking my question and also congrats on the nice quarter. So just just going back to the the progress that you guys are seeing in the beverage category. I was just curious what's can you have today in the marketplace and going for what's the opportunity to add more skews and to end the day more distribution and more provinces.
So distribution as a whole rupesh and thank you for pointing that out is getting a lot more sophisticated and a lot more competitive so the the our potential partners. In fact are demanding that we have a high throughput rate. So I mean, you're looking at.
Stereo for example, the fills the order.
Cash to be above 98.5 per cent hexcel. His goal of is to get well above 99% in that market.
To deliver the same kind of preferred partnership service that has made us number one and cut back in beverage that means that the provinces are more and more of relying on the portfolio providers that can stay on shelf that have a good understanding of the consumer the could provide that whole portfolio offering.
And so trust has really become the beverage company of choice throughout Canada.
And that's that's not even in being an average store. So that's I would trust sitting at about 60% distribution right. Now. So there is a lot of low hanging fruit to get more more listings simply as we get in more retail stores. So when I say, 60% distribution. The we're in about six out of 10 retail stores throughout the country and that will rapidly increase we hope to.
That that 90% plus number in terms of lifting amount like when you look at our skews that the beauty of the trust portfolio, our little victory wine spirits or is made from real the alkalies wine with a 2.5 milligram THC and 2.5 milligram of CBD composition, we just launched a new skew the dry white wine.
Base.
In our dry grapefruit line, so that the that comes and joins the blood Orange and dark Chery, our ex Im GE line is proliferating and having really good success thats at the higher end of the spectrum 10 milligrams of THC offering in the tropical punch of note the new flavor mango pineapple, which is really dynamite huge huge huge improvement in the in flavor profile of that one.
We have a list a line of the CBD sparkling waters right. So of that under the very of L. brand and so as the Theres quite a few skews actually I think we're up to 14 or 15 now so.
Houston market, but we're also rapidly adapting to consumer preference. So we saw for example that our house of Turpin brand has had tremendous success with limiting but consumers are having a bit of a slower uptake and understanding the profits of the value prop under mercy and we're seeing is the is a very flavor for drop.
Correct. It was designed to go after the Scotch drinker market and so the first time you taste of you're not sure what to expect because we've never actually taste of that flavor and that that's the really cool thing that we were able to develop with Molson Coors and trust, what's to come and take the unique characteristics of kind of us and not only deliver an experience that's unique but.
Actually to deliver a flavor and so other the uptake has been a bit slower on that product, but consumers are starting to try and starting to build the niche, but we're adjusting then supply in response, so still a lot of opportunity for street proliferation of ton of opportunity for improvement and we're dialing in for example in the USA specific flavoring thats for the us market.
And so I'll be really excited to see what that does the it's too early to see the sales numbers, but that will be a good thing the monitor.
Okay, Great and then maybe just one follow up question. So the gross margin performance.
Pretty strong this quarter. So as we look forward is it fair to think that we build on the improvement that we saw on we've seen this quarter going forward.
Yes, I think I mean are you talking beverage side, specifically or portfolio just in general just portfolio growth. So in general Yeah Super proud of what the team's done we're hard at work on continuing to remove Cogs, but the flip side as I, we want the flow through the the savings for the consumer I mean, ekso is not out to try to achieve 80% gross margins.
Weve been striving for for a 40% type portfolio margin, but if we have to be at 35 for a while in order to make sure. We are relevant for the consumer and that we beat the black market pricing and that we continue to grow our market share and total share of market.
That's certainly something we're going to do I think what we're proving out as we have an ability to be the most competitive.
Amongst the most competitive companies in the whole sector.
And as long as we keep doing that of delivering great value for price.
Confident that we will get the volume to keep sustaining better cost profile.
Great. Thank you and happy holidays.
Thank you.
Next question comes from John then borrow with the ITC.
Thanks, Good morning, I wanted to ask of of pricing the fairly.
Moving it declined in the quarter, but that was clearly the shift towards large format value.
But just would like to get a sense of how you see that category of playing out can pricing for of the next few quarters.
Yes, well I think from pricing John Thanks for that one.
One you Didnt you did not see the impact of our up portfolio. So the the upper launch as we said we had the we have taken a specific action to delay that to make sure that when we did launch we would be we would be in market. All the time. So it so that should provide some positive momentum.
But overall, if you look at kind of the the stabilized pricing over five quarters.
You will be trending up down you tend to stick around the the pricing that we have now I think is reflective of the of.
Inability to keep pricing go for it.
But overall I guess investors I wouldn't caution investors on the seeing any kind of.
Mass of price drops, but the bulk of that on a per gram basis, I think thats, not where we want to look at pricing I think on a per gram basis, there's still some room to move a little bit lower.
Just to really dial in the competitive nature against black market.
And then simply if we get a little bit tighter and this depends on certain products right. Like if you take original fashion Moneygram, you don't need to drop the pricing on that product, it's more competitive than what black market can offer when you take you take a $120 per ounce right. What's available for 100 $120 on black market simply did not even near the quality that you get an original stash.
So, but but theres still a lot of room to at the refined pricing on categories like maps for example, theres still some room to refine pricing on categories like cash the exciting thing about hexcel has the infrastructure to do that and as we've proven with the original stash as we drive pricing most of our competition kind of follow in the that at least of a larger basket for us.
Okay. That's helpful. Thanks, and then my second question on the beverage side.
As you have conversations with retailers and distributors is is there a sense of theres kind of the cap on how big of that category can get just because of the.
Lower revenue per per square foot of that item versus say the dry flower or other categories is that something they mentioned to you is that something you're thinking about when you when you mentioned the 15%.
Per cent of sales of the category just trying to get a sense of how that plays out of your conversations with other partners.
Yes, I mean, we talk about that all the time, we're talking to our preferred retailers right, we talked to retailers the literally every day.
And so one of the things we've done is we've actually we have a capital of Fridge program. So trust. The provides for just that provide for a very nice set up in retail stores and nice experience refrigerated beverage ready to drink. So that's one of the things we've done but the other thing we have done and this is where the capital both around Bellville comes up.
Capex for example, we're shipping twice a week. So we're reloading those stores often and that's something that we've started to take I mean I commend. The all she has some of the Ontario government for the progress of they've done they've got the brand New distribution center coming up very soon in the in wealth and.
The that that facility allows for a just in time sort of approach and as they look at an overall skew rationalization for the industry and really focused on a core skew program.
Trust is part of those core skews and what that means is that we're in market. We're replenishing often.
And then that paired with the longer term regulatory development at the federal level that allow case quantity, absolutely I think that.
We are able to blow past that barrier you.
You are seeing a bunch of new retail store operators open and were working closely with those new retailers to make sure that beverages.
As more than a 1% of.
In their mind, they really start to think of beverages, 10% to 15% of the category.
Because it is a differentiator and so I'd I'd say.
Certainly is a challenge we need to overcome but it will be overcome over the medium to long term.
Okay Thats helpful. Thank you very much.
The next question comes from David kind of cool with Eightd capital markets.
Hi, Good morning, Thanks for taking my question and congrats on the quarter. First question is Sebastian you mentioned the them. This has been a recurring theme over I guess quite some quarters, just increasing your market share in other provinces. Besides qubec. So im wondering just on the corn alone are you able to disclose what your market share is.
Within the other big provinces and also what specific steps, it's actually going to take to increase market share.
And will that the heck, so driven or do you see that more is map will really the factors for example, the opening of new brick and mortar sort of thanks.
Thank you David Yes, definitely ex so driven I mean, our of our war on the floor strategy our brand strategy. So with with the up launch now EXL has a full portfolio offering across the value chain right. We've got our hexcel core offering we've got original stash towards the value we've got up the upper relaunch at the the.
Premium portfolio. So we can really offer retailers and then the let's just from a pricing perspective, but we can offer retailers across categories now too.
Full slew of products right when you look at Feight assets.
Cash pre roles the.
Flower across all categories beverages, the theres not a lot of competitors that can do that and so we are having a lot of success and being part of that at both the retail level and also with the provinces at having those conversations as a preferred supplier. So that will drive volume. The second piece that drives volume is our ability to compete directly.
The with the illicit market on price for like quantity of like quality and better and so that that is also driving volume and you also have a flushing out of competition, which is driving volume. So you're seeing a lot of our competitors I mean, there's still over 400 licensed producers in Canada, but 10 of the license producers controlled.
90 per cent for the market share of hexcel as part of that 90% and you're seeing that success now the we've unlocked the supply chain and the we're really focused.
Outside of Qubec, while maintaining number one position in qubec, but while we're focused there you've seen in this quarter, it's almost 30% of our revenue now that's coming from outside of our core hold province. So.
Meaningful.
Meaningful upgrade from from where we were before.
Let me the call the.
Trent here is in the follow up there quickly.
Instead of Didnt have the figure of rating from them, but you that both market share and the.
Yes, we're number three in Alberta, we of 7% market share.
For a number six in Ontario.
For the logo were 17 in Ontario, and that one of our six and we were very close to 5% market share now there.
And more of our basket, it's more of the 30% word per se.
One of our our total sales in Q right now.
As of today in fact right now today the today is the.
And then we are not just the most the problems that sort of come back were and other problems as well the of DC.
So.
The.
The sense said earlier, our goal our goal and we're progressing there for ordinarily quickly is to have more than 50% of our basket outside of Quebec, while again, maintaining net market share in Quebec, and we're on our way that that's not a year from now we're getting there very quickly.
Okay. Thanks, guys very helpful. My follow up question goes back to your original stash brands.
And our channel checks and due diligence with the suggested that consumers are not really loyal and the value price brand per se in the they're willing to go with whatever is the cheapest price in store.
So my question was number one the your channel checks of verify that as well or actually is the original stash of perhaps.
Looking at slide the box year end.
And secondly on that one as well.
To what extent you and the seeds.
Original stash contributing to your top line revenue number of just as a value growth. Thanks.
Well, David I think that you're touching on the core point, there and I've been saying now for years that brands don't exist yet in kind of us, although we are starting to see them build.
In the original sash certainly as the name to watch so I fundamentally believe that the build brands of for the brand the cycle back into value to really build value from the brand itself.
That brand needs. The first have an unbelievable distribution and second the have a very good feature set the price it needs to be it needs to be price right for the features that it offers I think weve done those first two things with the original stash and we started to see search for product, especially in the.
Salespeople searching by brand name so what's starting but you are right that overall this is the highly competitive market and that we can't rest on any of the worlds Knoll brand is strong enough to command just from a brand name perspective to commence shelf space, we have to keep dry.
Driving value through price and feature set and ex was very good of doing that were very good of remaining relevant of responding to the market and so I see the fact that brands don't exist, yet and kind of this as an opportunity for ex so as an opportunity to build our portfolio of brands and from a topline perspective I think the trend.
Can can share a little bit where we're going.
Yes, I mean look from our topline work and we continue to grow the expanded and where our goal is to the.
Yeah.
Look we can't say what were what's going to happen, we're not giving guidance okay bye.
Let's make it clear our goal is to continue coming here quarter after quarter with very clean PNM sales there you digestible.
That allow that to continue that.
Net that the ongoing dialogue.
Another quarter of growth another quarter of growth and another quarter of growth.
Top and bottom line and so when we talk from its been a lot of questions on pricing here I mean over the course of the analyst.
Questions and and that's fair enough, but that's why we have such great practices in our cultivation in math on which we're not talking of a lot, but really great quality.
Operations going on there as a result of it.
Led by our Chief operating Officer Don.
Who's a wealth of knowledge of the problems in great equal in the us on there. They are doing the wonderful job and then you move that over the bellville happening our price can come down and we can continue to be to be very good on margin. This is not a margin gain if the volume gains.
The more we sell.
The better we can do honor.
On our dollars of margin EBITDA, lower lower margin rate and that the bottom line, we control our EPS DNA, we get that were on pause going if were 35%.
We're going to be profitable all day long.
And that the good place the beat and that's and we're one of the great view.
View the convey that so.
So we we like where we're at.
Okay. Thanks for that very helpful. I'll hop back in the queue.
Next question comes from John Chu with data of and capital market.
Hi, Good morning, maybe just following up on the fabricated the retail.
Stores, one of the earlier question of little though come from.
For the retailers from.
The value per square footage of the other question I guess the has is just more from a capacity perspective, a lot of the retail stores are pretty small footprint.
And in terms of how do you convince them.
Taking a.
I Trust related credit refrigerator to how some of the strength I'm just trying to understand the small for.
Footprints of some of the stories have how do you.
Debt to that target of 15% space within the store is pretty limited.
Yes, I'll, let me take this one just for instance that.
Clearly jump in if I Miss anything, but you know my background is in is in retail okay. That's the.
I think the better part of my executive from retail and I can tell you that the great question. How do you get lifting how do you convince retailers to take on new listings of provide space inside of a fixed.
One of the of square foot.
It's impossible to the earlier you know there's the different programs theres. The refrigeration, you're taking capital expense is that they would have otherwise that out of their pocket the doing it on their behalf and the and the return is in return you say you have to take for listening, but there is also the fact that we have multiple of course, we can't understate. The fact that we have a low.
Total partner global.
This isn't the not to take shots here, but it's not a it's not a craft beer location in one state.
As a global partner and when they want lifting the get listen and and Thats. The best the beauty of the in retail environments.
They are going to give what base the they're going to get space two of that removed and so we can get the lifting but somebody asked earlier are we getting more people coming after the fact, we.
The where we held that the truth of it we started off per quarter 1.9, now we're at the 0.1 day, let's be honest.
We have not tapped out here.
As a growing segment for us and you're going to the that and so we're continuing to grow and what we're seeing that this is the retailers are wanting more and more of this product set those earlier once you introduced that people can pay us not that big of not that big of a category because the.
Product, where we are not good there they're just not the they don't have a good taste profile people are trying it like the except the pointed as they're trying it but the not coming back for.
That has changed that has changed dramatically little victory was just named the none of the.
From the beverage in Canada in the.
The candidates words, the Cline and.
Okay, because it has that rate profile people are going to come back and they are pulling back over and over and when you get volume both for retail.
The margin.
Retailers will get adjusted and that and Thats outwards.
Okay, Great and then the second question is just maybe a bit more of an update on bellville.
Sebastian you mentioned that it's up and running now maybe just give us a sense on.
The transition to Bell Bell, where that's at the end when do you think you will.
The mostly transitioned over there excluding the the trust part of that.
Yes, John the done were.
We're fully transitioned we have no more of the.
There's there's no significant manufacturing operations happening and messamore outside of the <unk>.
The Bellville now so we've really we've consolidated that's why we took that virtual introductory tour now what's great. Now is that were done in moving everything the bellville the improvements from the proliferation within that facility of that that we're just getting started so super exciting over the next few years to see.
Best in class pre roll of manufacturing seats being integrated for best assets for for manufacturing and as we start to put those elements of there and hopefully a few more partners next to trust right, which which we've got the we've got about 400000 square feet sitting in bellville waiting to accommodate the was partners and Thats the low.
Some square footage that can accommodate the next fortune 500, CPG partners as we do that that center really comes alive, but right now it's it's active I mean, the parking lots for you've got 350 hexcel employees working at that center. So its.
It's quite operational.
Okay, great. Thank you.
The next question comes from Doug Miehm with RBC capital markets.
Hi, Good morning, two questions Sebastian I, just wanted to delve a little bit more in the none of this has been beat the debt for the do want to understand your thinking because you were a leader on your original stash side. So I want to get your thinking on where you see the pricing needs to go into the market.
Relative to where it is right now, let's say for half of Gram or of Graham type product.
And if you're going to be leading that charge.
Thank you, Doug So I won't disclose on this call where I'm, taking the pricing just yet.
So I apologize for it for dodging the question a little bit but overall for.
Axles plan is to have a.
A pyramid type of brand strategy right. So think of ex original stash and not all feature sets do have price points. The compete directly with the black market and that will be largely driven by our ability to lower unit cost.
And to flow that through to the consumer and to wind true volume.
Okay, and where is the black market rate now.
Oh, the black market basis, so it depends on the quality of features that but I mean, you'll you'll get the.
Black market base could range.
Anywhere from the.
$20.
And you could get as low as tens of $15 on certain disposables in the sales environment.
To your typically low towards the for the 30 $40 range on the something a bit.
Quote unquote higher end now obviously those are brand promises and the black market that are on the validated and there is nothing to back it up so they tend to say what they want about their products, but the thats kind of your pricing okay.
Okay and then my second question has to do with the capital for engine programs, because I think it will be helpful. But can you.
The sort of walk through the details of that if you do provide the fringe true a retail store.
Are there any obligations on your part two in terms of ordering of certain amount of product or can you just walk us through this fringe program and the bit more detail.
Yes, we don't create any obligations for our retail partners and we do it as part of our overall like for example in Quebec. The the capital for each program that we do in Quebec, we do as part of being the the preferred supplier. It's the same sort of arrangement. We do I mean, we take care of the distribution for all web sales and come back right. That's not that's not the in exchange for.
Quid Pro quo, that's part of what we see is our relationship as preferred supplier as the kind of service that we did we deliver to our customers and.
So that the.
That's part of that overall program, we believe that the cash the.
Kind of when you look at it in aggregate and everything the hexcel offers for customers that is the reason they come back and that they choose us willingly has the preferred supplier and thats. The reason that we keep that we can keep our shelf space and then create sell through for the consumer.
And from what's coming off of the luck for you.
This part of the you think with the bridge program, it's very very similar to a lot of.
Retail environments and Lps, even within the Canada's retail environment coming in doing merchandising and the retailers, allowing the displays.
Not dissimilar to that.
There is no obligation there is no incentive beyond the fact that you have the for is there.
But yes, so it didnt didn't want to leave the leave of.
And just to finish off.
Good day, the expected cost of that program over the next two years.
It's within for us jobs with interested so we that we don't that that'll roles and eventually in other as a reminder, trust will the obtaining the kind of license within the next six to 12 months when that happens the the trust.
Earnings cost everything will move over to Molson Coors consolidation from ex so.
And as trust becomes profitable we expect the simply see.
Contribution to net income below the line there so.
So.
It's not nothing material okay.
Okay. Thank you.
Once again, if youd like to ask a question. Please press star one on your telephone keypad.
And we do not have any telephone questions. At this time I will turn the call over to Mr. Stanley.
Thank you for everybody for joining the call of been exciting to share our progress as the as we continue to.
The two two to remain in that top for list in Canada, and looking forward to share and continued progress on continuing to roll out new products to more consumers will see you next quarter.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
No.
Hello.
Alright.
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