Q1 2021 Hexo Corp Earnings Call
Welcome everyone to the Heck. So Q1 2021 earnings call before we begin we would like to remind you that certain matters discussed on today's call or answers that maybe given to questions could constitute forward looking statements. These statements are based on the company's current internal views estimates expectations and assumptions.
These statements should not be read as assurances of future performance or 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 I FRS measures to their closest reported I FRS measures are included in our Mdna.
This discussion is qualified in its entirety by cautionary notes regarding forward looking statements on the risk factors that are included in the at the end of this morning for earnings news release, and other M&A 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 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 to 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 a question. During this time simply press star followed by the number one on your telephone keypad, if youd like to withdraw your question press about key on.
I'd like to turn the call over to Sebastian same moving to yield hexcel.
Thank you operator, and good morning, everybody.
Before we get going on just like to.
Wish everybody. Good luck on of course during these unprecedented times axle has certainly kept the safety of its employees as 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 cannabis during this pandemic big.
Big Thank you everybody and hexcel for your role in 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 for a game changer for us and we are now up and running.
Operator would you please start the video.
Yes.
Thanks.
So for for corporate.
Thanks.
Thanks.
For for.
Okay.
From a from.
[noise].
Thanks.
[noise] I.
Thanks.
Thanks.
Okay.
Thanks.
Thank you.
[music].
Thank you.
Thank you.
Good day.
Thanks.
Thanks.
Thanks.
Thanks.
Thank you.
Molson Coors.
It was thrilling to be able to share virtual introduction to dot 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 a competitive advantage and it really leverages the capital bolt that Hec So has erected in Canada.
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.
Cash and 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 this 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 sells 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 supply and.
Market is really unleashing the potential of that EXL has.
In the first quarter, we deliberately took our time to really understand the forecasted demand.
And to build a 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.
So on our video secondary packaging has increased five fold.
So that capital bold and that ability to go quickly to 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 obviously bellville contributes there and hexcel has been a 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.
With his freshness and competitors of ours that do not have access to that facility of the scale and complexity of bellville.
We will simply not be able to compete on that freshness, because you need a very.
Very nimble and complex supply chain to be able to take that fresh flower on bringing 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 have 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 on 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 than not on what really gets me excited is that we're proving hexcel his ability to win important categories. We have one at the high cash 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 will talk about this a bit more on the call, but we are in now as an industry rolling the beverage business at about 1.9 per cent of total market. So some of you on the call my simple 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 in 1.5% 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 and effects that we can overtake.
The total category space that exists and debt in beverage in the U.S. proves how important this category is I'll talk a bit more about that during the call.
Our sales momentum has increased across Canada, and we're 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 continuing to achieve that we're still sitting on a 29% market share in our home province and.
We will continue to circle back on as the preferred supplier to the cutback marketplace for years to come.
However, whats very significant this quarter is you're seeing a meaningful uptick in outside of Qubec. 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 in that market and we expect that trend to continue.
Menu 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 original stash taking over price.
Price point, it really redefining the market when we launched original stash. It was a 28 gram format at a very competitive price point that product was met with a lot of markets skepticism and today those types of 28 Gram.
Good value offerings are over 50% of the market throughout the chain.
Our hash product as I mentioned is number one and we continue to be able to out innovate our vape start getting from not phenomenal reviews and across the board Hexcel is seen as a leader by our consumers.
We really took time to match supply and demand and that meant some difficult decisions. So our product for example.
Our up line re launched in Q2, so you don't actually see the benefit of the UPT relaunch in Q1.
It's additional upside and it's going very well.
This is our sixth consecutive quarter of EBITDA improvement.
Our first quarter, where we've improved 87% from a negative 3.25 million in Q4 2000.
To a negative from a negative of almost well to a negative about $400000. So getting very tight on our EBITDA control now losing under a million dollars.
Our gross margins, excluding adult beverage were 39% and continue to be very robust go forward and prove out the sustainability of a CPG marijuana company.
And beverage itself has gone from a whopping minus 125% gross margin for 1% positive in just one short quarter.
Our CPG partnerships I think the most significant part about our deal with Molson and beverages.
Is that it really proves up a model that hexcel embarked on three years ago with our powered by Hexcel model. So hexcel believes that we will never be the best company, making coffee beer a 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 strategies on 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.
Right and we're very excited to see how that develops although today I will talk to specific numbers in that market because it's 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 successive partners for Molson Coors that will really continue to price.
Additional upside for ex on 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.
Thanks.
Very much appreciate it.
And good morning, everyone.
The one thats the first thing I want to point out really was.
Oddly enough other resolved itself, but the cleanliness of our PML I think that goes back to Q4, we made some tough decisions.
The end of the year around cleaning up our balance sheet. So we took a lot of write downs a lot of big impairment because we no longer on one do what the industry tend to be dealing in that piecemealing. This 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 could 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 each.
Each quarter successively from here on a day to show beautifully clean PML that people can digest that as very simple to understand.
If you look at our results getting into them 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 year, we've only gone through 10 million of operational cash flow.
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 it up we had a great harvest near the end of the quarter and that was the higher yield or higher.
Higher yield harvest than we had anticipated which was a 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 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.
On the use of our cash in Q1, which we don't expect going forward. It was just a timing issue.
We're on a great place. So if you look at our total cash flow I mean, our total cash flow.
Have been only a use of $11 million for the quarter had it not been for one thing and that a 23 million dollar move from cash to restricted cash which was to fund a captive insurance policy for ourselves and our Dino, which day into being $10 million to $15 million per year in premium so a great moving to be that a very high.
Return.
So right now, we're sitting with $150 million cash on their balance sheet.
Just think about that in the 10 million we've gone through from an operations perspective in a half a year and we had $150 million on on our balance sheet.
We are not doing anything dilutive right now we have chosen causes we chose not to do anything dilutive 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 a result of much of which was due to what was happening in the United States.
And there are lots of Lps, who have absolutely no exposure to the United State yet their stock are driving forward.
Not like US we have exposure to the United States.
And even still.
We are sitting in a 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 other things we want to talk about it.
The improvement in that.
EBITDA in that path to EPS, So, let's start with our war on cog.
Keep those margins.
Being very healthy while we know that the market is 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 side that we can continue to deliver healthy margin.
Which we are doing the other thing is SDMA.
With the EPS DNA, we have been doing a lot of things to control those costs.
In this quarter are if you look at DNA.
Marketing selling and promotion and R&D. Those are your three core EPS DNA that you see on the pace 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 15 on a 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 this 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.
Yes.
Within a year and a half to two people within a year and a half we're hoping to get that down under 25% and even better.
Net sales that is a great target and a good place that allows us to have that clear path to earnings per share earnings per share is where it's at.
And when you look at market valuations today.
There is what you would call an implied level of earnings inside of market cap and if you look at an industry like ours, where it's growing even if you said okay market caps are represent 40 times, an implied earnings stream on behalf of the company.
Are you talking about well if you look at that 40, and you just and I encourage people to go and look at debt. Okay. I encourage you to go to all the LP and.
And looking for market cap divided by 40 say, what does that mean for implied from.
Then compare that to the reality for the reality is you take margin yeah.
On that note that asked DNA I talked about earlier, which is the DNA marketing selling and promotion on R&D, just minus that for margin and you say, okay. What is the what does that look like at that number and what has been 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.
On our way of managing the piano or managing the balance sheet others.
You can look at that for yourself billion multi billion of capital to preach for capital to get their earnings not on.
So you take that and you might you take that.
Net margin mine as of yesterday modest relative depreciation and where are you. What does that earnings look like today, what is the reality and multiply that by for the quarter is that 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 a disparity for getting it big disparities across the board between what the reality is and what the market valuation some of the LP, though there are $750 million of annual earnings at the disparity.
Not for us we.
We are under $45 million that is by far borrowed on the best all for top five or six LP and its non core we.
We have the lowest disparity between our valuation on the market and the reality of what we are delivered today, we have a path we are.
Headlong into this path.
Eliminating that disparity and then moving well be on with regards to earnings per share and that is what is extremely important to us and where we're going to continue to go and we're going to do with off the back of a low capital base, while not being dilutive unless there is some type of strategic initiative something that we can bring to mark to say this is why we need to dilute.
Because there is something that's going to provide a very reasonable returns for our investors.
That.
I do want to turn it back to Sebastian and thank you everybody for listening in and I think we're going to open up for questions.
Before we get to 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 that and also for their dedication as we navigate through an ever evolving environment.
Despite the many challenges that this economic and social construct has posed here.
The cannabis industry continues to grow.
Thats, a testament to consumer demand for safe and 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 helps so we are closing in on the top three spot, which I continue to believe we will be necessary to be in those top threes to ensure a long term sustainable business with high value brands that can deleveraged.
Really.
We've proven that now that the hexcel model of partnership is one that leads that can lead to being number one in important categories.
We've shown that the U.S. story isn't the be all end all when you look at beverage as a part of the market in the US it's not just one per cent, it's not 1.5% in fact after two months and market in Canada. It is 1.9% of Canadian sales that means that categories. When you hit a product.
Right.
When you truly create a proposition that delivers to 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.
Our strategy following us legalization provides a ton of blue Sky.
And take in mind that are just the Canadian opportunities currently running at a 12 million dollar run rate annualized for hexcel that and Thats just us that's not the whole industry.
Remember that beverages have a 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 is 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 stops 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, a very exciting next year and I'm very happy to be able to take some questions.
If I could ask.
I would like to ask a question at this time. Please press star one on your telephone keypad. It seems like for the Joe Your question press the pound for.
First question comes from Kenya chain with BMO capital markets.
Hi, good morning, Thanks for the question on.
I wanted to ask about the UK I guess first on.
If you could provide a bit more commentary on trust. You. Lastly, 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 on also.
Also curious how you think about exos strategy for that CHP side, and we will.
Thank you Jamie.
On the the U.S. expansion is really going to follow.
As a follow the regulatory path from not regulatory path is not fully defined we've obviously seen the first vote on the more active probably getting shut down in the Senate. So bad that is probably not the immediate task so before going to multistate tax always going to make sure that we are in full cooperation with all federal and state laws in.
In the USA.
So the current operations in Colorado or fully legal at all levels of government day, there within the state line from M. derived CBD. There are other states that have a current for legal environment from our interpretation.
What that 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 the nuances to the product for the us consumer base, which is slightly different when you'd start to talk about branding and concentration and taste profiles and thats really we are leaning on the expertise of Molson Coors there.
But certainly we're keeping a close eye on expansion opportunities for both those will come soon.
Okay got it and my follow up question.
Just wanted to revisit the free launch versus full.
Moving on stash product line so it.
It looks like there was good growth on the original cash side. So just wondering on the market.
Being a re acceleration in that value segment again with respect to the relaunch on can you talk a bit more about how that's going on as you're trying to endeavor now to us pricing youre consumers on other value to consumers kind of that pricing here. How do you how do you do that and how is it 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 this is really why we're very excited about up because our cultivation has gone so much stronger now we're able to deliver.
Hi.
Predicted a predictable guaranteed.
20% plus THC with a very strong terpening profile. We've we've re designed our genetics lab in Branford. So we have an entire indoor facility now it ex so that is 100% dedicated to the development of World class genetics, and so we're leveraging the existing massive genetic.
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 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 are still competing at a very reasonable price. So if you compare high end up product.
Some of the higher end black market products, we were still in the right pocket from a consumer demand perspective original.
Original fashioned low lower price to value offerings. So continue to be a large part of the demand profile and weve 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.
Do you use to gain traction.
Got it thank you.
Next question comes from Aaron Grey with other lines Global partners.
Hi, good morning, congrats on the quarter and thanks for the questions.
Well first one from me guys is on the beverages for you 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 burst repeat purchase Dave and maybe some of that May show feedback that you've been hearing that gives you kind of for.
Other confidence in the overall trends on kind of how that category continue to grow as you and competitors continue to launch new products in both net out thanks.
Thanks Aaron.
Trial assert the trial rate certainly high what's exciting is health, Canada is now taking a look at the regulations and there is a there is early.
Regulatory interpretation that says that should allow us to go from a five drink limit at point of purchase to six drink limit so thats already a meaningful improvement.
Because that's been some of the feedback or consumers are saying the strength can I believe by more of the stuff, especially at wants can we reduce friction and when you look at the concentration for example.
Yes, the current equivalency factor, so what which is what drives and regulations. How many drinks are able to buy is based on the milliliters or 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 a six pack at point of purchase but a 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. 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 thats, 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% on 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 color Thats helpful. And then the second question from me, Okay, along with pricing as well, but more on the vape side. So you guys had.
Increased sequentially on the Veight 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 vapor category in on re you've kind of started to launch on those products, especially as we've seen kind of overall a.
A lot of on other.
Competitors launching their own products and some competition on price there. So it's in commentary in terms of what you're seeing on the vapor category on how you kind of see that evolve and ready for yourself.
Kind of having a competitive edge would be helpful. Thanks.
Thank you, yes, so vape is where flower was 18 months ago as a general category, what I mean by that.
Distillate pricing in Canada is still agregious and that translates to high unit cost in vapor and then.
Essentially a high price for the consumer so when it when the consumer still looking at safe overall and this isn't just for hexcel vapor overall price out on the market compared to 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 no interest that whats available in legal channel is better price than what they can get from their dealer on the street on.
For that once they know they're getting the best price then we can talk about feature set then we can talk about concentration then we can talk about safety legal channel consumer protection protection of children, all that kind of stuff starts to 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 on developing great formulation. So initial responses to the actual distillate that we have in our vapor is phenomenal.
The scale up is.
Not in the is not actually full fledged. So we haven't actually turned on our Veight machine the way Weve turned on the beverage machine and I talk to as a machine that's 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're doing in beverage, which is to deliver pricing, that's black market competitive and which in turn will simply box out.
50% to 80% of our competition that is unable to operate at the same scale.
Hi, great. Thanks for calling on 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 progress that you guys are seeing in the beverage category Im just curious whats can you how today in the marketplace and going for what's the opportunity to add more skews in into into day more distribution and more provinces.
So distribution as a whole rupesh. Thank you for pointing that out is getting a lot more sophisticated and lot more competitive so the.
Our potential partners in fact are demanding that we have a high throughput rate. So I mean, you're looking at in.
Ontario for example, the filter order.
Cost of the above 98, and a half per cent hexcel. His goal is to get well above 99% in that market and to deliver the same kind of preferred partnership service that has made us number one in Quebec in beverage that means that the provinces are more and more are relying on on portfolio providers that can stay on shelf.
That have a good understanding the consumer that can 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 in every store. So that's I would trust a sitting at about 60% distribution right. Now. So there is a lot of low hanging fruit to get more for listings simply as we get in more retail stores. So when I say, 60% distribution that 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 CBD composition, we just launched a new skew with a dry white wine.
Base.
On our dry grapefruit line, so that that comes in joins blood Orange and dark Chery, our ex some g. line is proliferating and having really good success. That's on the higher end of the spectrum 10 milligrams, a Phd offering and a tropical punch a note on new flavor mango pineapple, which is really dynamite huge huge huge improvement in flavor profile and not one.
We have a list a line of CBD sparkling waters price so under the various L band and so theres quite a few skews actually I think we're up to 14 or 15 now skew.
Houston market, but we're also rapidly adapting to consumer preference. So we saw for example that our house of term beans brand has had tremendous success with limiting but consumers are having a bit of a slower uptake in understanding the profits of the value prop under mercy and we're seeing is a is a very flavor for drop.
Correct. It was designed to go after the Scotch drinker market and so the first time, you tasted you're not sure what to expect because we've never actually tasted 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 cannabis and not only deliver an experience that is unique but.
Actually to deliver a flavor and so on.
The uptake has been a bit slower on that product, but as consumers are starting to try is trying to build a niche, but we're adjusting then supply in response, so still a lot of opportunity for street proliferation, a ton of opportunity for improvement and we are dialing in for example in the USA specific flavoring thats for the us market.
So ill.
Be really excited to see what that does its too early to see the sales numbers, but that will be a good thing to monitor.
Okay, Great and then maybe just one follow up question. So the gross margin performance.
Was 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 on going forward.
Yes, I think I mean are you talking beverage side, specifically on portfolios in general just portfolio.
Gross 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 those savings for the consumer I mean heck. So is not out to try to achieve 80% gross margins.
We have 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 black market pricing and that we continue to grow on 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 and delivering great value for price on.
Confident that we'll get the volume to keep sustaining better cost profile.
Okay, great. Thank you and happy holidays.
Thank you next.
Next question comes from John then borrow when the ITC.
Thanks, Good morning, I wanted to ask about pricing fairly.
Moving on to decline in the corner, but we clearly to shift towards large format value.
But just for I'd like to get a sense of how you see that category playing out on pricing for 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 up relaunch as we said we had net and 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 stabilized pricing over five quarters.
We'll be trending up down you tend to stick around the pricing that we have now I think is reflective of the of an ability to keep pricing go for it.
But overall I guess investors I wouldn't caution investors on seeing any kind of net.
Massive price drops, but the but for that on a per gram basis, I think thats, not where we want to look at pricing I think on a per gram basis, Theres still some room to move a little bit lower just to really dial in the competitive nature against black market.
Then simply if we get a little bit tighter and this depends on certain products right. Like if you take original stashed on your Graham you don't need to drop the pricing on that product, it's more competitive on 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 to it's not even near the quality that you get an original stash.
So, but but theres still a lot of room to add to refine pricing on categories like apps 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 original stash as we drive pricing most of our competition can't follow and then 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 that theres kind of a cap on how big that category can get just because of the.
Lower revenue per per square foot about items versus say 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%.
Percentage sales the category just trying to get a sense of how that plays out in 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 for retailers, but literally every day.
And so one other things we've done is we've actually we have a capital a fridge program. So trust provides for just that provide for a very nice setup in retail stores and nice experience refrigerated beverage ready to drink. So thats one of the things we've done but the other thing we have done and this is where that capital both around bellville comes up.
Tobacco 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 gross he has on the Ontario government for the progress they've done they've got the brand New distribution center coming up very soon in the in wealth and.
That that that facility allows for a just in time sort of approach and as they look at an overall SKU rationalization for the industry and really focused on a core skew program Trust.
Trust is part of those core skews on 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 will allow case quantity absolutely I think that.
If we are able to blow past that barrier.
You are seeing a bunch of new retail store operators open and we are working closely with those new retailers to make sure that beverages.
It is more than one per cent 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.
Next question comes from David Canaccord with Eightv capital markets.
Hi, Good morning, Thanks for taking my question and congrats on the quarter. First question is on Sebastian you mentioned that on this has been on a recurring theme over I guess quite some quarters, just increasing your market share in other provinces. Besides Quebec. So I'm wondering just on that point of loans 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 be hexcel, driven or do you see that more is macro related factors. For example, the opening of new brick and mortar stores. Thanks.
Thank you David Yes, definitely Ekso, driven I mean, our our war on the floor strategy our brand strategy. So with with the up launch now actually has a full portfolio offering across the value chain right. We've got our hexcel core operating we've got original stash towards the value we've got up the up relaunch at day.
Premium portfolio. So we can really off for retailers and then that let's just from a pricing perspective, but we can offer retailers across categories now to a for.
Full slew of products right when you look at fate.
Cash pre rolls.
Flower across all categories beverages that theres not a lot of competitors that can do that and so we were having a lot of success on 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.
With the illicit market on price for like quantity 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 are still over 400 license producers in Canada, but 10 of the license producers control now.
90% on the market share hexcel as part of that 90% and you're seeing that success and now that weve unlocked the supply chain and that we're really focused.
Outside of Qubec, while maintaining number one position in Quebec, 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 a meaningful.
Meaningful upgrade from from where we were before.
Moving to call.
Sure Trent here, let me follow up there quickly.
That didn't have the figures rating from them, but you that both market share and.
We're number three in Alberta, we have 7% market share.
For number six in Ontario.
On the logo were 17 in Ontario, Levered on our six and we were very close to 5% market share now there.
And more of our basket, it's more than 30% were 18% of our total sales in Q.
Right now.
As of today in fact, right now today today.
Teen percent, 18% of our sales are in Alberta, 15% are in Ontario.
And then we are not just on those two problems that sorry for back were in other problems as well if DC.
So.
Thank you.
So on 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 Qubec, while again, maintaining net market share in Quebec, and we're on our way, but that's not a year from now we're getting there very very quickly.
Okay. Thanks, guys very helpful. On my follow up question goes back to your original stash brands.
And our channel checks and due diligence suggested that consumers are not really loyal to any value price brand per se in there. They are willing to go with whatever is the cheapest price in store on.
So my question was number one do your channel checks verify that as well or actually is original slashed perhaps.
Looking at slide the box year on and.
And secondly on that one as well on.
To what extent you into siege.
Original stash contributing to your top line revenue number just as a value brand. Thanks.
Well, David I think that Youre touching on a core point, there and I've been saying now for years that brands don't exist yet in cannabis, although we are starting to see them build.
Original Sasha only as a name to watch so I fundamentally believe that the build brands and for the brand to cycle back into value to really build value from the brand itself.
That brand needs to first have an unbelievable distribution and second 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 original stash and we started to see search for product, especially in what.
Salespeople searching by brand name so its starting but you are right that overall this is a highly competitive market and that we can't rest on any of the worlds No brand is strong enough to command just from a brand name perspective to come on shelf space, we have to keep dry.
Driving value through price and feature set and ex was very good at doing that we're very good at remaining relevant of responding to the market and so I see the fact that brands don't exist yet in cannabis as an opportunity for ex so as an opportunity to build our portfolio of brands and from a top line perspective, I think trend.
Can can share a little bit where we're going.
Yes, I mean look from our top line work and we continue to grow and expand and our goal is to be.
Yes.
But we can't say what were what's going to happen, we're not giving guidance okay bye.
I get clear our goal is to continue coming here quarter after quarter with very clean Keno Hills very digestible.
That allows us to continue that.
Net that ongoing dialogue.
Another quarter of gross another quarter gross and another quarter of gross.
Top and bottom line and so when we talk from its been a lot of questions on pricing here on mean over the course of these analyst.
Questions and that's fair enough, but thats why we have such great practices in our cultivation.
In that zone, which we're not talking about a lot, but really great quality.
Operations going on there as a result of.
Led by our Chief operating Officer Don.
Who's a wealth of knowledge, the east gardens, and great people on that on there they're doing a wonderful job and then you move that over to Bell Bill on what's happening on price can come down and we can continue to be to be very good on margin. This is not a margin gain it's a volume game.
The more we sell.
The better we can do on or.
On our dollars of margin, even at lower lower margin rate and that the bottom line, we control or EPS DNA, we get that were on Cogs going if were 35%.
We're going to be profitable all day long.
And that's a good place to be and that's and we're one of every day.
You will convey that.
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 Hewitt Day died and capital market.
Hi, Good morning, maybe just following up on the fabricated at retail.
Stores, whether your other question other though come from.
From the retailers from.
On the value per square footage, but the other question I guess I have 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 for me to branded refrigerator, how some of the strength I'm just trying to understand what small foot.
Footprints on some of these stories have how do you.
Debt to that target of 15% space within will force pretty limited.
Yes, I'll, let me take this one just for instance.
Clearly jump in if I Miss anything, but you know my background is in is in retail okay.
On the better part of my executive from retail and I can tell you Thats a great question, how do you get lifting how do you convince retailers to take on new Liftings and provide space inside of a fixed.
Quantity of square foot.
Then talk a little bit earlier, there's different programs theres, the refrigeration, you're taking capital expenses that they would've otherwise that out of their pocket you're doing it on their behalf and the return is in return you say you have to take certain listening, but there is also the fact that we have multi course, we can't understate. The fact that we have eight loans.
We will partner global channel.
This isn't an uptick shop here, but.
Not a craft beer location in one state.
As a global partner.
And when they want lifting they get listen and Thats the beauty of it in retail environments.
They're going to give what they say, they're going to get space for that removed and so we can get a lifting but somebody asked earlier are we getting more people coming after that that we.
We are you know that's the truth of it we started off from 1.9 now we're at the 0.1 day, let's be honest.
We have not debt here.
As a growing segment for us and we're going to see that and so we're continuing to grow on what we're seeing that this is that retailers are wanting more and more of this product set those earlier once you introduced that people can say on it's not that big.
Not that big of a category because.
Products are let's be on not good there, they're just not good they don't have a good taste profile people are trying it like the ex any pointed as they're trying it but they're not coming back for.
That has changed that has changed dramatically little victory was just named the non.
On the top beverage in Canada.
Canada's words that time.
Is that because it has that rate profile people are going to come back and they are cutting back over and over and when you get volume goal to retail.
Decent margins.
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 and maybe just give us a sense on.
The transition to Bell, Delaware that sat on when do you think you will.
On the multi transitioned over there excluding that the trust part of that.
Yes, John on a done were.
We're fully transitioned we have no more for the there.
Theres Theres no significant manufacturing operations happening in Messamore outside of the outside of 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 we're done moving everything to bellville the improvements on the proliferation within that facility in that.
We're just getting started so super exciting on.
Over the next few years to see.
Best in class pre roll manufacturing seats being integrated for best on it for for manufacturing and as we start to put those elements there and hopefully.
A few more partners next to trust, right, which which we've got we've got about 400000 square feet sitting in bellville waiting to accommodate those partners on that set ups license 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 parking lots for you guys.
350, Hexcel employees working on that center. So it's it's quite operational.
Okay, great. Thank you.
Our 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 on and none of this has been the debt, but I do want to understand your thinking because you were a leader on your original stash side. So on one to get your thinking on where you think pricing needs to go in that vein market.
Relative to where it is right now, let's say for half a gram or a gram 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.
For her.
Axles plan is to have a.
Pyramid type brand strategy right. So think op ex on original stash and not all feature sets do have price points for that 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 win through volume.
Okay, and where is the black market rate now.
A black market base. So it depends on the quality and feature set but I mean, you'll you'll get.
Black market Vapours could range anywhere from.
$20.
You could get as low as 10 to $15 on certain disposables in the sales environment.
You are typically towards the for the 30 $40 range on something a bit.
Quote on quote higher end now obviously those are brand promises and the black market that are on validated and there is nothing to back it up so they tend to say what they want about their products.
On the that's 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 a for industrial or retail store.
Are there any obligations on your part two in terms of ordering a certain amount on a product or can you just walk us through this fringe program in a 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 capital for each program that we do into equity do as part of being the preferred supplier. It's the same sort of arrangement. We do I mean, we take care of the distribution for all web sales on come back right Thats not thats not in exchange.
Quid Pro quo Thats part of what we see is our relationship as preferred supplier. It's the kind of service that we do we delivered on our customers and.
So that that's part of that overall program. We believe that this kind of when you look at it in aggregate and everything that hexcel offers for our customers zone.
That is the reason they come back and that they choose us willingly has a 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 whats going on a lot for it.
Just on the I think what the bridge program, it's very very similar to a lot of.
Retail environments and Lps, even within the candidates retail environment coming into in merchandising and retailers, allowing for that.
Please.
Not dissimilar to that.
There is no obligation there is no incentive beyond the fact that you have that bridge there.
But yes, so it didnt didn't want to leave leave us.
And just to finish off what's going on the expected cost for that program over the next two years.
We don't it's worth entrusted us with interest and so we don't that'll roles and eventually enter as a reminder, trust will be obtaining its on a license within the next six to 12 months when that happens the trust.
Earnings cost everything will move over to Molson Coors consolidation from ex so.
And as trust becomes profitable, we expect that simply see.
Contribution to net income below the line there so.
So.
It's not nothing material okay.
Okay. Thank you.
Once again, if you back out for your question. Please press star one on your telephone keypad.
And we do not have any telephone questions. At this line I will turn the call over to Mr. Stanley.
Thank you for everybody for joining the call have been exciting to share our progress as as we continue to.
To to remain on that top for list in Canada, and looking forward to share and continued progress on continue to rollout new products to more consumers will see you next quarter.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
Okay.
No.
Hello.
On.
Okay.