Q2 2021 Hexo Corp Earnings Call
Yes.
And so.
[music].
Good morning, My name and Chris and I will be your conference operator today at this time I would like to welcome everyone to the Hexcel Q2 2021 earnings call.
Before we begin and I would like to remind you that certain matters discussed in todays call or answers that maybe given to questions asked could constitute forward looking statements. These statements are based on the company's current internal views estimates and expectations and assumptions. These statements should not be read as assurances of future performance for our results.
They involve known and unknown risks uncertainties and other factors that could cause actual results performance for achievements to differ materially from current expectations and those implied by such statements. We.
And we would also note that we utilized certain non <unk> measures and our financial reports, which may be discussed on today's call and reconciliations between any such non <unk> measures for their closest reported IR.
<unk> measures are included in our MD and data.
And the discussion is qualified and its entirety by the cautionary notes regarding forward looking statements and the risk factors that are included at the and does this mornings earnings news release and in our MD&A filed with our second quarter of fiscal 2021 financial statements on SEDAR and Edgar This morning.
Please view 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.
<unk> disclaims any intention or obligation except to the extent required by law to update or revise any forward looking statements as a result of new information or future events or for any reason.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will for your 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 you would like to withdraw your question press the pound key.
I'll now turn the call over to Sebastian and St. Louis CEO of XO.
Good morning, everyone and happy to get on this call to celebrate our big Q2, and some reasons for optimism.
Turning to see vaccine rollouts to hopefully and that this COVID-19 pandemic once and for all by later in the year, our safety and the employees that hexcel remains Paramount for us and we're doing a phenomenal job continuing to.
Debt avoid COVID-19 and also reduce workplace accidents.
A huge thank you to all our employees the whole team phenomenal work and getting us to EBITDA positive this year.
This quarter, which has been a huge achievement.
And also for being so successful we haven't required any government handouts in during Covid and so when.
Really winning on our own so I think that's a testament to the hard work we've put in.
Unfortunately, it does look like we're kicking off the roaring 'twenty as a year or two late given the situation, but we will be kicking it off so we're looking forward to putting this behind us and having a consumption patterns return to normal people celebrating and getting back into a social occasions once theyre all vaccinated.
It's been another record quarter of $45 $7 million gross and $32 $8 million net.
Were adjusted EBITDA positive for the first time and hexose history after seven straight quarters of adjusted EBITDA improvements.
Our net revenue was up 12% sequentially from the first quarter and 93% versus the same quarter last year.
We've made moves into the U S and hired a phenomenal GM of U S operations Charlie Bowman.
We've launched CBD beverages and into Colorado legally with our partner Molson Coors under the trust USA joint venture and.
And we've started to deploy capital to support those operations and the operations of future CPG partners that will join our powered by hexcel and production capabilities.
We've had some trademark successes powered by <unk> is now registered in the debt.
<unk>.
And our sales momentum continues to increase across Canada.
And the cost of generating more sales outside of the province of Quebec than we do in Quebec, and that's while maintaining the number one position in Quebec.
Our distribution remains.
Of upside still so we're sitting in a position where a lot of stores and still do not carry hetzel products and despite that.
And we're top three in Alberta.
And quarter over quarter, we went from the top five position and Ontario by market share to now flipping between the top for and top three position depending on the week based on headset data.
We've relaunched our premium brand up and is going very well.
We have $3 2 million of gross sales and the up brand and Q2.
And our other premium products like OS Reserve are winning awards. So OS Reserve won the top Flower award and December for Spirit leaf.
We remain the number one in beverages, and Canada and not only do we remain number one, but we're increasing market share.
So depending again on the month and the most recent numbers are showing the combined market share based on our internal proprietary data and 43% for hexcel brands with Trust, Canada, a huge success from that team and a big congratulations to our partner and Molson Coors who's been instrumental and getting us to.
The leading beverage brands in Canada. We currently have six of the top eight skus by revenue in the country.
We look forward to replicating that success and the United States as we finish our test market and Colorado and start planning expansion and other states legally.
[noise] beverage grew about 11% and the quarter.
January slowed down a bit after the December buy ins and we're also informed by our partner that January and February is often a low seasonality event for beverage So January and February a little bit slower overall, but still amid some growth.
We're very excited to announce the acquisition of <unk>.
We're set to close sometime in early Q4.
It's a phenomenal company and have great momentum great brands leadership, there has been doing a phenomenal job and repositioning their products to resonate with consumers together, we're going to be a very solid top three can tender and Canadian recreational sales and we're closing in on the top two position we are.
Less than a million dollars and revenue away from that top two position at the time for this call.
Really the reason we're going to get we're so excited about it is because we have the assets to make M&A a true success, our manufacturing facility and Belleville, which is a 900000 square foot advanced footprint for CPG manufacturing really allows us to go and get maximum synergies out of an acquisition like <unk>.
And we're quite excited over the next couple of quarters to show those synergies on the financials.
During all of our phenomenal growth in Canada, and our launch and Colorado CPG partnerships have never stopped being our priority. So we continue to have lots of ongoing discussions and negotiations with world class CPG companies and we're looking forward to talk more about that and the following months.
Health, Canada has actually approved additional licensing and our Belleville Center of excellence and that's to expand the site perimeter and to leverage the food technology complex and so we're now in a position where we're even stronger to accept future CPG partners and the animal space.
I will turn it over to Trent to talk about finances.
Thanks, a lot and.
Well look it's been another sequential quarter of no inventory write downs or provisions, which keeps our P&L quite clean from that perspective, another sequential quarter with no impairments of long lived assets, such as goodwill intangible and PP&E.
So again that goes back to our clean up the balance sheet at the year and.
Our operational cash flow usage remained quite low only using $2 9 million and the quarter and $8 1 million combined for three quarters.
Past three quarters, and that's not including non cash working capital items.
Over $250 million of working capital on our balance sheet at the end of the quarter with over $130 million of cash to cover our near and midterm.
And so lots of pathway from and operational perspective.
Our gross margins, including adult use beverage were 40% without having higher margins.
Due to our more on Cogs that we continue to we continue to wage within our organization and.
And we continue to compete on price against the black market and other Lps, who are trying to capture the same thing customer segment.
So within that realm still able to propel ourselves into very healthy margins.
Ongoing restructuring to lower SG&A and still taking place we want to get our SG&A down as a percentage of sales and so youll see $860000 and restructuring charges in the quarter.
In relation to that strategy, our DNA marketing selling and promotion.
And our DNA marketing selling and promotion and our R&D when adding together now at now represent 47% of our net sales down from 51% and Q1 and well ahead of industry norms. We believe there are still more improvements to make and the near and mid term.
And we did have several non recurring type of expenditures on the P&L this quarter, such as the $10 million revaluation of our U S currency warrants and a $2 million foreign exchange loss on the strength of the U S dollar.
So there are a few things there underlying fundamentals of the operations are getting stronger all the time.
And as can be evidenced by the adjusted EBITDA being positive for the first time and our history. So while we've had some one time expenditures that don't typically repeat debt that came through our P&L. The fundamentals are there and are improving with each sequential quarter.
And I would like to bring attention to the fact that look we sell and very clear path for Etfs and we still have the SG&A targets that makes sense for us and we believe we're going to be very credit towards shareholders.
Bringing you pegged off with the oldest net though of our class action lawsuit, which we press released not that long ago, and New York and I think that was a great.
Great team effort on behalf of our internal general counsel and and the team involved both internally and externally and very pleased to have been able to report that.
At that and let them pass it back over to that yeah.
Thanks strength.
And I'd like to wish everybody safety and health as the global pandemic continues and as we get to the tail end of it and I'm very proud of the hexcel team for their dedication and NAV.
Navigated through this ever evolving and unpredictable environment to positive EBITDA.
Despite the many dire economic and social consequences of the pandemic has caused the cannabis industry continues to growth with strength.
Testament to consumer demand for safe legal high quality products that are offered by some of the license producers.
The industry has a $2 $9 billion run rate, we continue to grow XO within a top three market position and a market that's the size of California.
We're closing in on being top two which we believe will cement XO I was one of the leading cannabis brands in Canada, and giving US a platform for the world and to enter into the U S for years to come.
Look forward to discussing more during Q&A, so I will turn it over to questions.
Thank you at this time I would like to remind everyone in order to ask a question for star and the number one on your telephone keypad your.
Our first question comes from Aaron Grey of Alliance Global partners.
Your line is open.
Hi, good morning, and nice job on inflicting to profitability there.
So first question for me.
Sebastian you mentioned the <unk>.
For you guys have right now and with most of the quarters for potential additional partnerships within CPG. So can you just give us an update kind of on that hub and spoke model is kind of progressing you've previously spoken about kind of moving away from the JV model and maybe some other models in terms of these partnerships. So why don't you can't go into detail in terms of specific partners could you kind of go.
And you.
And give us some color in terms of how those could potentially be structured if shifting back to the JV are still looking to do some other types of models as those evolve. Thanks.
Happy to earn the JV with Molson and there's been really a fantastic learning experience not just from a beverage perspective, but just from an overall structure and business perspective, and so the the agreements we're currently.
And pretty final stages with.
And are being negotiated around royalty type arrangements. So how the what we've done is we've removed a lot of the weight of the JV structure, we leaned it out a lot which is tied into our strategic objective of bringing positive EPS soon and so what would the agreement will most likely result in it.
And as hexcel, producing edibles out our Belleville facility and the other food technology complex on behalf of these major cpg's with their technology and engineering assistance at that point Hexcel will distribute and run it like our own business, we're going to brand those products under major recognizable brands because we're not limited.
Like we are and the alcohol space. So for example, with the with Molson and originally the plan was to launch a.
And then fused Coors type and beverage we were planning on leveraging the existing Molson brands.
But we were not able to do that because of the change in regulations along the way. We also have certain restrictions around products like our little victory product, which is hugely successful people love. The taste that product is made with real day Alkalize volume and unfortunately, because of regulations were off and not allowed to say that is made with the alkalize wine and.
And that hurts the value proposition, we don't have those restrictions on edibles and so by taking a leaner structure by being able to lever existing brands, making that here and simply paying back a quarterly royalty.
We expect to be able to do in cash and more often than not and stock. So it won't affect negative cash flow.
And that'll be a leaner proposition to get us quickly to market, perhaps the most exciting part of the structure as we flipped it for U S and rest of world, So and the U S and the rest of world real advantage of the powered by <unk> model is we can lever not just distribution, but also the manufacturing capabilities of our CPG partners, we're bringing.
World class facilities to bear World class knowledge and distribution that's already in place. So very capital light approach, we're exporting hexcel IP remind everybody on the call Hexcel remains top two from an IP portfolio of patents perspective in Canada. So we have phenomenal IP and it keeps growing every quarter. So.
And we're going to move that IP into those states legally we are going to start and CBD from hemp, so not touching to achieve for the moment, but setting up all the infrastructure to do so when the legislation changes in the U S, which we're closely monitoring and that gives us access to give it about five states today, and which we could operate.
Already Testbed, Colorado with Molson by launching in January and so and.
So we think that that structure will allow us to rapidly proliferate product in the United States by using mass channel distribution. So another interesting thing is that with Molson. We're currently in Colorado in grocery stores and not just and traditional THC channel, Although we're certainly.
Not going to neglect the traditional THC channel I think the multistate operators are doing a phenomenal job as retail operators and when the time comes hexcel will certainly approach them to carry our powered by <unk>.
Thanks for color Thats Super helpful.
My second question on the pending and based acquisition.
And you'll be acquiring some indoor cultivation and low cost production, adding to your own capabilities can.
Can you talk about how you're kind of looking to use that indoor cultivation in terms of your own brands do you look for leverage that more for your premium brands because it might be a little more controllable with the indoor cultivation and how you're planning to leverage standard versus legacy brands are.
Bringing the man with <unk> or just for.
From the plans you are looking to do once that acquisition closed and you bring on the additional cultivation and thanks.
Yes first of all we're going to continue some of the phenomenal success that <unk> had with their brands Namath day has great traction and the market and were still evaluating and working with us and this team to make sure that we take a holistic approach and take the best from all brands to make sure that we can really round out the consumer occasions.
The second part the Alphaville facility is a world class facility.
And certainly one of the best indoor growth that exists in Canada today.
I know over the last eight years I've visited most of them and.
And.
That's certainly going to bolster our ability to take up to new heights, So our up product and original stash reserve product are certainly going to benefit from that additional ultra high quality indoor control and capacity.
Alright, great, Thanks, and I'll jump back in the queue.
Your next question comes from Tami Chen of BMO capital markets. Your line is open.
Thanks, Good morning.
And I wanted to go back to debt.
The comments you made with respect to.
I think on and kind of hub and spoke model you mentioned from interesting point, there and I was wondering.
And the extent that you can Scott.
Net debt.
The current discussions that youre, having other element for Chad.
<unk> per hectare and are they more focused on the global and market or youre, having kind of discussions for.
Geography, such as black and.
And that the world and when you're talking about sort of the.
Markets outside of Canada.
And that also similarly, a royalty structure or discussion.
Especially for a bit more than that okay and good luck.
And that's where we need a bit more color there to the extent and we cannot be helpful.
Thank you Tammy yeah. So we'll start with a direct investment and hexcel has plenty of access to capital and in fact, we haven't diluted and the.
A couple of quarters now, we're very well set up I mean operationally over 18 months of cash we have our Capex plan is fully funded and we don't see that as a priority that can create leverage to miss the point of these partnerships. So to your question on exclusivity the exclusivity and <unk>.
Especially the IP and the control of the IP that will emerge out of these partnerships is critical as part of long term value built if you develop the best IP and the World and then end up having to compete with one of the largest companies and the world with the same IP I believe you will loose that's why hexcel was making.
Sure that and these partnerships both partners when both partners are heavily invested in the IP and where the direct investment goes is and pushing the business line. So for example, what we've done with Molson Coors was bolt invest and now have about $115 million into standing of beverages in both Canada and the United States.
These partnerships, we're working on and the future Similarly, they're meaningless, if theyre, Canada only Canada is important.
Has all the distribution and Canada, hexcel delivers more value than Canada, and the CPG and bring in however, where it really shines is and the value that we're able to lever together outside of Canada and as such we're really focused on making sure that these are multi country agreements sometimes global <unk>.
<unk>, obviously, with some nuances, depending on which market and which which product lines, specifically, but yes. We're looking at exclusivity, yes, we're looking at global.
Got it that's helpful. Okay and.
Yes, you mentioned that on my follow up question is.
And then for you with respect for the Capex for things, so far and we're about halfway to your per year I think it's been about $7 million on Capex and I recall your previous commentary why for this.
Fiscal year $45 million. So I'm, just wondering if that's still kind of the outlook and solution for that.
Capex, what kind of really back up and the back yeah.
Yes, I mean look it's definitely going to be back half heavy Tammy.
But we were.
Doing.
A few things and getting our operational team's lean.
This war on Cogs that we've been waiting and so.
Some of the projects that we had planned to start our now Jeff beginning a couple of the big ones that we think are going to be extremely accretive to.
To us and.
That's what we're we're hoping to see anyway, and the future and so.
Those had gotten a bit delayed but not substantially so some of the things that we thought would happen in third and fourth quarter might be for and then for second quarter of next year before fully stood up.
And it was the right thing to do on a couple of our major major major projects to make sure that we have the fundamentals right. So that we can add on top of something strong versus adding something else in to a very complex unorganized environment. So we're very we're very solid right now and it started the process going with all of them into the divisions.
Great. Thank you.
Your next question comes from Disney and Israel of Cowen Your line is open.
Hi, Thanks, and good morning.
Good morning Vivien.
So I wanted to follow up on your commentary on the amount of volume.
And the CBD beverage talk from Colorado, You noted that you were evaluating five other bolt and.
Just so I understand what the muscle and site and you're going to need from consumer and what.
Cool Kpis, you're monitoring before you make the determination for <unk>.
Thank you.
Thanks, Vivian the first thing is just to monitor the brand traction and consumer tastes and the this is a market by market business.
When we look at our Colorado is certainly very different than Quebec, very different than Ontario, and we anticipate will be very different than California, and New York et cetera.
We're looking at a total of five states, where the regulations right now allow us and and purposefully being cagey around the names of those states.
And we believe that's a competitive advantage at the moment to participate in CBD.
The first the first step was really to establish that we could build these mass channel grocery store penetrations and.
And which has been done so.
Now anecdotally, we're on most end caps and the groceries and which we participate the product has displaced other CBD beverages that were available to consumers are responding much and the same way that they've responded and Canada by making truss beverages, 43% and the market share because the taste is simply more preferable for those consumers they are responding and Colorado.
And we're taking on those end caps and so what we're going to wait to see is just to see the traction over the next few months for actual sales numbers Reorders, we're gaining experience with your case quantity and a concept that we don't have and Canada because of regulatory.
We are working on on the E comm support for those businesses and basically setting up the whole infrastructure. During this time, we're also working on reducing Cogs by shifting from the third party manufacturing to bolster and manufacturing specifically.
And so we're working that out as well so that we can get a good sense of capex expansion rollout and what scale. We can really bring this so we're expecting we're expecting to have meaningful data say by the end of may by which we would we would start to activate.
The next state by state strategy.
That sounds great. Thank you for that color a quick follow up for me on Canadian and beverages from a regulatory standpoint, any progress and expanding.
Net limitations for consumer purchases.
So we've had some progress on X M. G. So SMG, which is a smaller format can but that did not necessitate a regulatory change so within the same regulatory framework, our SMG products or a mango pineapple and and our and our fruit punch and now the two top selling Skus and Canada.
For from a beverage perspective and.
And those those are available and APAC. So as you can essentially buy eight cans of SMG versus five bottled beverages, because the millimeters. We have not had success on a regulatory basis and actually affecting change we have had quite a bit of success as an industry to get health, Canada, and the regulator to listen, but understandably they have their hands very full with the band.
<unk> right now and so and our cannabis reform has not been a priority. So it's more a matter of we're pretty convinced it will come they accept all the regulation they understand that from a consumer health perspective.
It really makes no sense to limit the beverage purchase that the other point of purchase how many you're going to buy but to make the actual regulatory change, we'll probably see that as part of a larger regulatory package update that will include a number of changes over the next 12 months.
Very helpful. Thank you for that.
Your next question comes from David <unk> of <unk> capital markets.
And so.
Hi, Good morning, Thanks for taking my question and congrats on the quarter Sebastian insurance and to you a couple of questions I want to start off with.
How would you describe your overall strategy now moving forward Sebastian I know, what the Xenopus acquisition.
Creates a potential top three contenders year, how do we view <unk>. So moving forward looking at your liquidity by our calculations today you'd have a boe per $120 million.
How should we think about your growth is it organic or inorganic or maybe a combination of both at this point. Thanks.
And so it's been growing now quarter over quarter for for many quarters and so I think organic growth is name of the game are displacing market share from other competitors is name of the game seeing really eliminating weaker competitors that don't have don't have the wherewithal to offer consumers the right price point and to displays.
Market that that will drive organic growth inorganic growth remains one of the strength that we have so I've talked a little bit about the advantage of having a very large world class manufacturing center, and our Belleville site and so when you start to look at.
Say mid size or smaller licensed producers. They often don't have the manufacturing wherewithal and so you really get phenomenal with synergies and when you start to pair that in two and manufacturing capacity like Hexcel, Belleville, which has an abundance of capacity that can be filled with extra cultivation and.
So from that sense I don't think M&A is over by any stretch with that said we have to be very cautious on M&A.
And there are not a lot of high quality targets in Canada, and so we we are entertaining discussions hexcel was and it's a little no secret and the industry, but just about every CEO of rings me every once in a while and say hey, what are you thinking on M&A and do you want to can we can we joined forces with XO.
Because they see the fundamentals and theres a disconnect between fundamentals and our value of the stock at the moment and so very attractive for other companies do when they're looking at joining up with a larger partner to pick XO as that partner and so we will certainly see more M&A in the space and we're in ongoing discussions.
Okay. That's very helpful. Thanks, and Sebastien for that.
Moving on here and my second question and it has to do more with your sales in Colorado.
And I was just wondering when you describe Sebastian your success and the U S and Colorado, specifically is this kind of test pilots for beverages, what are your metrics for success.
Besides simply sales.
For one.
And also can you maybe give us a bit of a guide or goalpost for over the next year what percentage of sales do you expect the U S to represent of overall sales.
While I won't guide anything David but I can talk about a little bit about our goals truss is a trust Canada.
Has achieved its goal which was to be the number one beverage brand and its market Trust USA has the same goal cross USA wants to be the number one and beverage brand in the markets in which it operates.
As beverages, obviously and.
So and so I think that that's the largest milestone which is really a sales milestone.
The second one, though which is quite exciting is in the lean operations. So we're trusts you would say differs I've mentioned, we can lever existing infrastructure, we don't have to build everything from scratch and if you look at what it costs to build from scratch and I mean.
And I mentioned about $115 million invested by both Molson him Hexcel, well about 100, 105 hundred $10 million of that was to stand up world class manufacturing facilities in Canada in the U S. We're addressing a population now of 5 million people and Colorado.
So and we're doing so on single digit millions by being very lean and leveraging the IP that we have so we have a number of capital spend our kpis and our profitability Kpis on which we're leaning on of course, the phenomenal experience at Molson Coors to help US guide us through that two to deliver.
To deliver positive cash flow from those operations. So that's another big yard stick we're using.
Thanks for taking my questions and congrats on the quarter.
Your next question comes from Jon Zaffino from CIBC.
Your line is open.
Yes.
Hi, Thanks, good morning.
I wanted to ask about the.
Industry and general Sebastian the general view from some producers at least into the first few months of the year and.
A bit softer for a variety of reasons and seasonality I think you'd mentioned, but also some SKU rationalization and reductions in inventory held by some other provinces and in store locked down at this time around don't seem to have that that boost from customer stockpiling and we saw a year ago.
General and would you agree with that for calendar Q1 for the industry and any color you can provide on what you are seeing either from consumers or provincial distributors would be helpful.
All nuanced set a little bit for you John I think that the industry is entering its most competitive phase that it's based since its inception.
It is no longer okay for a licensed producer just simply create a product throw it on the shelf and move it you now have to contend directly with very competitive pricing and every category very competitive listings with every customer and our relentless pursuit of a better.
Our product and the face of consumers.
And the reality is that most licensed producers are not up to the task and you will hear more and more refrain of difficulty you'll hear more and more of the industry is having trouble.
<unk> is it is growing growing growing our industry is up almost 100% year over year and theres not many companies like <unk> that have also grown with the industry. So it will be not enough just to grow with the speed of industry, but youll have to actually be able to displace and that's what we're seeing through this refrain and I've talked a lot about how I think the and the game.
And here will be three companies that control, 70% market share the number one spot will be a 40% controlling stake nobody has proven they can take that number one spot yet and thats why <unk> shooting for top two but in this competitive set right. We're now right on the cusp of that top two position with a shot at that number one and it is.
And to do that you have to have world class manufacturing for Lori. Your Cogs you have to have world class greenhouse production like we haven't met someone Gatineau and you have to have a world class indoor production like we're acquiring very soon.
And with dentists and Alphaville.
Okay. That's great. Thank you for that.
I appreciate the margin disclosure and the MD&A I wanted to follow up on margins for the beverage side.
You took a meaningful step forward and revenue, but gross margin still negative on lease. So can you talk about the nature of the contribution margin for these products and maybe talk about what percentage of costs are fixed.
And really just try and get a sense of what what sales need to be for.
That gross margin number to look a little more like your other categories or any color on the margin profile for beverages would be helpful.
Yes sure.
Look the.
And with craft beverage and the and the.
We can since he's beverage category.
There is still a fairly low volume, it's a little more capital intensive as you can imagine then 28 Gram bag flower.
And so youre going to have more overhead applied each unit of production and so there is a lot of fixed overheads. There you have to get up to a certain volume before you start seeing positive margin.
And so we're I can't tell you the exact number but.
You can see that were pretty much breakeven at 335 million. So.
And it's not it's not a huge number and since that point there was.
And beverage multi cores is educating us all the time and it's very predictable that theres, a slowdown coming out of.
The holiday season, and in beverage and then January February and you think about it and.
And most people's lives not a huge event driven.
Type of season, though.
The volume isn't going to be there. So you are still looking at that three three and $5 million that we came up from Q1 with its grown 10% 12 per cent back which is great, but look I think over time and you're going to see that volume increase and then our hope is that it is going to increase dramatically and that if we're breakeven at this level I think it's fair game.
And to say that our margins are going to improve as we apply those overhead to more and more and more brands. So it's being spread out across that entire category.
Understood. Thank you very much.
Your next question comes from Andrew Carter from Stifel. Your line is open.
Hey, Thanks, Good morning, I wanted to kind of.
And on the beverages and that kind of year, one biggest takeaways and food and beverages and postpaid are women.
No doubt and coming over the next two months, but I wanted to ask going into the summer season.
Our discussions with retailers and each of the category and heavily and then you've got the cooler and can you give me give us any update on cooler penetration just kind of starting and that maybe some more sophisticated category management and hope you guys and just moving spot or is it kind of and this is more of a thing that will be kind of looking for growth I'll start with the first question.
Thanks, Andrew and I think.
More of the same is precisely what we haven't done at XO and with trust and so crosses first and foremost a beverage company.
[noise] of themselves as they as a cannabis company and I think when they built the brands.
Scott Cooper and his team really took a look to say what are the beverage occasions here.
And that weekend, we can go after specifically and so that brings into your question. What are the limited time offerings. What are the coolers what are the what are the promos, we could do with certain retailers.
And obviously sticking to regulations and the summer season, and there's a very exciting season.
Thank the a big part of the success of Trust has been that we have focused on those beverage occasions for us and not just putting a strain and the bottle. We've we've really focused on crafting a really unique beverage experience. So when we walk into summer it will be a really exciting time for that I think theres plenty of opportunity to further refine that category management.
Second question I wanted to ask about Quebec, and the sales and volume kind of flattish you made up for it with the momentum.
Outside of Quebec, but just kind of wanted to ask about that.
Will that line kind of thing.
A more healthy contribution.
But for limitations and cobalt.
Sure.
And just kind of what we should see or do you expect that to Reaccelerate and then.
Are you talking specifically about beverage or overall, just sorry, Sebastian just Quebec, Quebec adult and sales.
Put them.
And.
Yes, so the headwind that Quebec, and we're still we're still very much number one and we remain preferred supplier and we continue to do to have phenomenal traction and and a lot of our products and Quebec, but the main headwind has been the introduction of a number of the craft, Quebec growers. So is there is a number of small small.
Type growers that have introduced higher THC potency offerings and that craft grow has taken a taken and a portion of share overall the issue is a larger company I mean craft simply has not been our focus.
And to be talked to we need to be over 20% share long term of the market and to do so you can't do that with Kraft. You also have just the the attention and scale right. It's very hard to do crafts and large scale would that be you said this is where our strategic investment.
The acquisition and <unk>.
And on lining of Alphaville and the higher potency products that we can come out of there paired with our mass offering will allow us to move more into that premium Masstige category. This is where the traction around our brands like up which we still haven't fully deployed and Quebec will be very important and.
So.
Typically on certain Skus. There is also regulatory differences. So in harsh for example, there's a restriction on T. C. Potency that is not out there and other in other.
And markets and so that that can cause a slowdown and there is also certain restrictions on individual units.
On that note on individual units when you look at beverages. We just recently made a deal with Quebec to launch a five milligram version of our <unk> product beverage, which is usually a 10 milligram product and the rest of the country. So that will start to create meaningful traction. So we maintain a very healthy dialog and Quebec is doing a phenomenal job of being I think the certainly the.
And most profitable.
Provincial distributor in the country and.
And.
And we'll keep refining the product offering too.
To continue to have share.
And let me just jump in there let me just Andrew just let me jump in there and thanks for taking that and thanks for jumping on the call here.
And go back actually.
And then the very heavy competitor and in Quebec, there they've been gaining traction in the province.
And with their premium brands.
Non.
And have been doing a great job a lot of uptake by consumers and that province, and so the combination of the two of us is going to be a pretty pretty.
Pretty heavy heavy competitor for others to try to come in against.
Thanks, and I'll pass along.
And again it feels like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from Matt Bottomley with Canaccord Genuity. Your line is open.
Good morning, everyone and thanks for taking the question I just wanted to turn back against those benefits and maybe get a.
A little more color on a couple of things there one any sort of granularity.
On potential synergies that would come out of this deal and maybe the classification for them and I imagined back office and things like that and then other the other side of it just on the infrastructure side of what you're acquiring I mean, when you consolidate it clearly there'll be a PPA, there and everything will be at fair value.
Sure.
And when you look at some of the takeaways from your transaction with new strike and the overall infrastructure in the sector that seems to be saturated is there any rent and you think of eating all that infrastructure.
Terrific.
And their specific core competencies that you don't think that that's a concern.
Dr <unk> brought on debt.
Sure Great question, Great question, So look.
We alluded to it earlier, we have available right and they have Apple, though which is again just a great indoor growth facilities here in Canada.
We're going to have plenty of synergies.
And as we start pushing their cultivation through to our Belleville.
Facility with the overhead costs are relatively fixed you are going to be applying less overhead per gram and production and it's going to lower the cogs.
We also believe theres going to be a great.
Matter of synergy on supply and inputs, we have some good solid supply agreements on a lot of our cultivation techniques and a lot of the goodwill and other packaging labeling and so on and so for and I think there is we looked at it and debt between that and then of course as DNA.
Youre always going to have synergies on combinations and we're getting very aggressive right now and our integration planning.
Both our team and so and then of the team and combined.
But we're looking anywhere between 15 and $20 million.
And with with upside from there and so.
It's going to be good news story from my perspective, now around infrastructure look.
We're still going through the planning stages and integration, we know Apple flagship for us is going to need to be for them and for us.
They have their language facility they have stellarton here in Nova Scotia, and how you just happen to be sitting in Nova Scotia, right now and so.
We're going to be looking at adult and then and trying to understand what what's going to be the best use of.
Assets and and word of it from the long term.
We've mentioned this before and look we have had.
The capacity issue looming coming up and we knew that and so that solves a big problem for us and it does and a way that.
That's even more accretive than going out and getting more and more greenhouse. So I think in general there is theres room to be optimistic debt.
Net run rate path in terms of infrastructure.
Okay appreciate that thanks, guys.
Your next question comes from John Truth, and seizures and definitely your.
Your line is open.
Hi, Good morning. So my first question is just on the war on cost of goods sold and just overall opex savings.
Last quarter, you mentioned that you might try to pass on some of those savings just to help drive sales and I'm, just curious whether or not that was the case for the second quarter and if that's still the plan for going forward.
Yes, Thanks John.
Overall in Q2, I would say not really would be the answer to your question. So in terms of Q2 go forward absolutely. So we will continue to pass on those savings were targeting mid <unk> margins and we think I'd say, we are targeting you have to bring back to the overall strategy.
Believe that price is dictated by black market and I want to take a moment to maybe congratulate the whole industry I had an anecdote. The other day I went to one of the black market one of the large black market sites that feeds that feeds the whole country and not black market side, a year ago had over 50 flower skus.
And I will credit our move at XO of resetting the industry pricing on the Outback with original stash, but today that black market site had one single flower SKU and it was north of $400 an ounce. So I think that as an industry. When you look at the $2 9 billion.
At retail that is consuming a majority of the black market and Thats really pushed it out.
And so specifically has a strategy to price to and to beat black market and to do so we have to keep flowing through our Cogs. The advantage is that given that we have so much automation and technology going into Belleville, We're nowhere near the bottom of what we can do in terms of in terms of that war on cards and we keep for.
Finding new significant synergies and Thats without of course talking about Trent mentioned that the M&A synergies, which are going to be significant on their own but on a unit basis, we keep improving and so that will flow through to the consumer and that's what eventually brings us to that market that will have three competitors.
Okay, Great and then just following up on one of the earlier question.
And when it comes from and carrier, we've heard that they've been delaying their restocking efforts and obviously, there's been the CEO and the departure of the CEO of Ocs, probably doesn't help but can you maybe just give us and some insights in terms of whether or not and you've been seeing any restocking reordering by Ontario, and we also heard that eliminate around taking.
Skewed and whether or not the AVR skus were eliminated and.
If you actually saw a net increase and schemes.
Brian and whatnot, so and yes.
And there would be helpful. Thanks.
Yes, So, Ontario has undertaken a rationalization strategy. So we will wait to connect with.
And with David <unk> and his team to see if that remains the case as they're waiting for their potential new new CEO to come in.
And so there has been and overall major rationalization.
<unk> has had that as an opportunity more than a headwind.
And so again, it's a question of rationalizing skus that consumers want and that ties into first being able to achieve that black market pricing.
But there is a lot of uncertainty right now of course with the with the leadership. So we are looking forward to clearing that up and but we're in tight communications and intend to continue to build our preferred partnership with Ontario.
Yes.
Time, and there have been I mean, if you recall, but we were the 17th LTE and of the market in Ontario.
At the and that we've been making steady progress in terms of our penetration into the Ontario market and we're fifth in terms of Canada rack sales and <unk>.
You won and now we are going back and forth between third and fourth and in terms of the headset data, we've been seeing and the last four to six weeks, so lots of lots of momentum and.
And through deals yet.
Yeah.
Okay, great. Thank you.
There are no further questions at this time I will now return the call for Mr. Sweeney for closing remarks.
Yeah.
Thanks, everybody for your questions great to continue to share the hexcel journey with all of you. Thanks to the whole team for making it happen given to EBITDA positive and big Thanks of course for consumers.
And I like our pot and Dale.
And they like our stock let's go thanks, very much Fox suite.
Yeah.
Ladies and gentlemen, this concludes our conference call. Thank you for your participation you may now disconnect.
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