Q2 2021 Hexo Corp Earnings Call
Moving.
[music].
My name of Chris and I will be your conference operator today at the.
This time I would like to welcome everyone to the Hex of Q2 2021 earnings call.
Before we begin we would like to remind you that certain items 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 expectations and assumptions. These statements should not be read as assurances of future performance for the results.
They involve known and unknown risks uncertainties and other factors that could cause actual results performance or achievements to differ materially from current expectations on those implied by such statements.
We would also note that we utilized certain non <unk> measures and our financials of course, which may be discussed on today's call and reconciliations between any such non <unk> measures to their closest reported IR I got for.
<unk> measures are included in our MD&A.
The discussion is qualified in its entirety by the cautionary notes regarding forward looking statements and the risk factors that are included at the end of this morning's 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 of 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 be the 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've looked like the withdraw your question press the pound key.
I will now turn the call over to Sebastien, St Louise CEO of XO.
Good morning, everyone I'm happy to get on this call to celebrate our big Q2, and some reasons for optimism.
Turning to see vaccine rollouts to hopefully end of this COVID-19 pandemic once and for all by later in the year or safety of the employees that hexcel remains Paramount for us and we're doing a phenomenal job the continuing to.
Debt avoid COVID-19 and also reduce workplace accidents.
A huge thank you to all our employees the whole team phenomenal work in getting us to EBIT 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 the during Covid and so when the.
Really winning on our own so I think that's a testament to the hard work we put in.
Unfortunately, it does look like we're kicking off the roaring <unk> 'twenty as of 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 the 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 in <unk> 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, the into Colorado legally with our partner Molson Coors under the trust USA joint venture.
And we've started to deploy capital to support those operations and the operations of future of CPG partners that will join our powered by hexcel production capabilities.
We've had some trademark successes powered by <unk> is now registered in the debt.
The U.
And our sales momentum continues to increase across Canada. We're on the cusp of generating more sales outside of the province of Quebec the.
We do in Quebec, and Thats, while maintaining the number one position in Quebec.
Our distribution remains a house.
On the of upside still.
So we're sitting in a position where a lot of stores that still do not carry hexcel products and despite that.
Our top three in Alberta.
End of quarter over quarter, we went from the top five position in Ontario by market share to now flipping between the top for in 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 in the up brand in Q2.
And our other premium products like OS Reserve are winning awards. So OS Reserve won the top Flower award in December for Spirit leaf.
We remain the number one in beverages in Canada, and not only do we remain number one, but we're increasing market share.
Depending on again on the the month and most recent numbers are showing the combined market share based on our internal proprietary data at 43% for Hexcel brands with Trust, Canada of huge success from that team and a big congratulations to our partner Molson Coors, who has been instrumental in getting us to be.
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 in the United States as we finish our test market in Colorado and start planning expansion in other states legally.
Beverage grew about 11% in 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 of little bit slower overall, but still amid some growth.
We're very excited to announce the acquisition of Xenopus.
We're set to close sometime in early Q4.
It's a phenomenal company they have great momentum great brands leadership, there has been doing a phenomenal job in repositioning their products to resonate with consumers.
Together, we're going to be a very solid top three contender and Canadian recreational sales and we're closing in on the top two position we are.
Actually less of a million dollars on revenue away from that top two position at the time of this call.
Really the reason we're going to we're so excited about it is because we have the assets to make M&A of true success, our manufacturing facility in Belleville, which is the 900000 square foot advanced footprint for CPG manufacturing really allows us to go and get maximum synergies out of an acquisition.
None of us 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 in 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 in the following months.
Health, Canada has actually approved additional licensing out of our Belleville Center of excellence and that's to expand the site perimeter and to leverage the food technology complex. So we're.
Now in a position, where we're even stronger to accept future CPG partners in the animal space.
I'll turn it over the trend to talk about finances.
Thanks, a lot.
Well look it's been another sequential quarter of no inventory write downs of 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 cleanup of the balance sheet at the.
The year end of.
Our operational cash flow usage remained quite low only using $2 9 million in the quarter and $8 1 million combined for the three quarters.
The 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.
So lots of pathway from an 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 we continue to compete on price against the black market and the other Lps, who are trying to capture the same customer segment.
So within that realm still able to propel ourselves into very healthy margins.
Ongoing restructuring to lower SG&A is still taking place we want to get our SG&A down as a percentage of sales so youll the $860000 of restructuring charges in the quarter.
In relation to that strategy, our G&A marketing selling and promotion.
Our DNA marketing down the promotion and our R&D when adding together now at now represent 47% of our net sales down from 51% in Q1, and well ahead of industry norm. We believe there are still more improvements to make in the near and mid term.
Uh huh.
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 of $2 million foreign exchange loss on the strength of the U S dollar.
On.
So there are a few things there underlying fundamentals of the operations are getting stronger all the time. However, as you can as can be evidenced by the adjusted EBITDA being positive for the first time in our history. So while we've had some the onetime expenditures that are typically the repeat that came through our P&L the fundamentals of our there.
The improving with each sequential quarter.
And I'd like to bring attention to the fact that look we sell them very clear path for Etfs and we still have the SG&A target that makes sense for us and we believe we're going to be very credit towards shareholders.
I'd like to bring the depends on flow through the oldest net though of our class action lawsuit, which we press released not that long ago in New York and I think that was the rates.
A great team effort on behalf of our internal general counsel and the team involved both internally and externally.
We're pleased to have been able to report that so at that a lot of pass it back over to the bat yeah.
Thanks strength.
I'd like to wish everybody safety and health as the global pandemic continues and as we get to the tail end of it I am very proud of the <unk> team for their dedication they've navigated through this ever evolving in unpredictable environment to positive EBITDA.
Despite the many dire economic and social consequences of the pandemic has caused the cannabis industry continues to grow with strength.
Testament to the consumer demand for safe legal high quality products that are offered by some of the licensed producers.
The industry as of $2 9 billion dollar run rate, we continue to grow XO within the top three market position in the markets. That's the size of California.
For closing in on being top two which we believe will cement XO I was one of the leading cannabis brands in Canada on giving US a platform for the world and to enter into the U S for years to come.
Look forward to discussing more during the Q&A, So we'll turn it over to questions.
Thank you at this time I would like to remind everyone in order to ask a question for <unk> of them. The number one on your telephone keypad.
Your 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 most of the course of 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 models, maybe some other models in terms of these partnerships. So why don't you can't go into the detail in terms of specific partners could you kind of go.
Thank you.
Give us some kind of in terms of how those could potentially be structured.
Shifting back to the JV are still looking to do some other types of models out of those evolve. Thanks.
Happy to earn the the JV with Molson has been really of 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 in.
Pretty final stages with.
Are being negotiated around the royalty type of arrangement. 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 is hexcel, producing edibles out our Belleville facility and the tip of the food technology complex on behalf of these major CPG with their technology and engineering assistance at that point Hexcel will distribute and run it like our own business, we're going to brand the those products.
Under a major recognizable brands because we're not limited like like we are in the alcohol space. So for example, with the with Molson originally the plan was the launch.
And then fused of course type of 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 of that product is made with real the alkalize the volume and unfortunately because of regulations were often not allowed to say that is made with the alkalize line and I.
Think of that hurts the value proposition, we don't have those restrictions on edibles and so by taking a leaner structure by being as both the lever existing brands, making that here and simply paying back of quarterly royalty.
Which we expect to be able to do in cash and more often than not in stock. So it won't affect negative cash flow, we think 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. On the rest of world. So in the U S. On the rest of world real advantage of the powered by <unk> model.
We can lever not just the 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.
Exporting hexcel IP remind everybody on the call Hexcel remains of top two from an IP portfolio of patents perspective in Canada. So we are phenomenal IP and it keeps growing every quarter. So we're going to move that IP into those states legally we're going to start on CBD from hemp, so not touching T of cheap for the moment, but setting up.
All of the infrastructure to do so when the legislation changes in the U S, which we're closely monitoring that gives us access to give it about five states to date, which we could operate we've already testbed, Colorado with Molson by launching in January and.
So.
So we think the bat structure will allow us to rapidly proliferate product in the United States by using mass channel of distribution. So another interesting thing is that with Molson. We're currently in Colorado in grocery stores not just in traditional THC channel all.
But 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> line.
Thanks for the color Thats Super.
For my second question on the pending the acquisition.
So you'll be acquiring some indoor cultivation of low cost production, adding to your own capabilities.
Can you talk about how you're kind of looking to use the indoor cultivation in terms of your own brands do you look for leverage that more for your premium brands on the op.
Because of might be of a little more controllable with the indoor cultivation, how you're planning to leverage standard versus legacy brands are.
Bringing the man with <unk> or just for.
On the plans Youre looking to do once that acquisition closing you bring on the additional cultivation.
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 in the market and were still evaluating and working with the zone of his 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 of the Alphaville facility as the World class facility.
Certainly one of the best indoor grows that exist in Canada today.
No for the last eight years I've visited most of them.
And the.
That's certainly going to bolster our ability to take up to new heights. So are up product in original SaaS reserve product are certainly going to benefit from that additional ultra high quality indoor controlled capacity.
Alright, great. Thanks, I'll jump back on the game.
Your next question comes from Tami Chen of BMO capital markets. Your line is open.
Thanks, Good morning.
Thank you I wanted to go back to bed.
The comments you made with respect to.
I think on the kind of hub and spoke model you mentioned from interest.
And I was wondering.
The sky or expand a bit on the.
On the current discussions that youre, having other element for Chad.
For hexcel.
Are they more focused on the can.
The <unk> market or having some kind of discussions on.
For geographies such as the.
The World then when you're talking about sort of the.
Markets outside of Canada that that also from a royalty structure or.
The discussions with more than that okay.
And that's why we need a bit more color there to the extent of the camera would be helpful.
Thank you Tammy yeah. So we'll start with the direct investment Hexcel has plenty of access to capital and in fact, we haven't diluted in the.
A couple of quarters now.
We're very well set up I mean operationally over 18 months of cash we have of our Capex plan is fully funded 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 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 in the World and then end up having to compete with one of the largest kind of companies in the world with the <unk>.
Same IP I believe you will lose that's why hexcel was making sure that in these partnerships both partners. When both partners are heavily invested in the IP and where the direct investment goes isn't pushing the business line. So for example, what we've done with Molson Coors was bolt invest in now of about $115 million.
Interest standing of beverages in both Canada, and the United States. These partnerships, we're working on in the future. Similarly, they're meaningless if theyre, Canada only Canada is important.
So has all of the distribution in Canada, Hexcel delivers more value in Canada on the CPG 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.
Completely obviously with some nuances, depending on which market and which which product line specifically, but yes. We're looking at exclusivity, yes, we're looking at global.
Yeah.
Got it that's helpful. Okay on.
Jeff You mentioned that on my follow up question.
But the window for you with respect to the Capex for being so far on we're about halfway through your fiscal year I think it's been about $7 million on Capex and I recall your previous commentary why for the fiscal year $40 million to $55 million. So I'm just wondering if that's still kind of the outlook and solutia from that.
Capex will kind of really backed up on the back.
Yes, I mean look it's definitely going to be back half heavy Tammy.
But we were.
Doing.
I've got a few things and getting our operational team's lean.
This is more on calls 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 us and.
That's what we're we're hoping to see anyway in the future and so.
Those have 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 the fully stood out.
But 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 two of very complex on organized 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 the living in Israel of Cowen Your line is open.
Hi, Thank you good morning.
Good morning Vivien.
So I wanted to follow up on your commentary on the amount of bolt on.
The CBD beverage talk from Colorado, you noted that you were evaluating five other states.
And just so I understand what the muscle insight here going on.
Some consumer on what Kpis, you're monitoring before you make the determination.
On beyond Colorado. Thank you.
Thanks for the in the first thing is just to monitor the the brand traction and consumer tastes and the.
This is the market by market business.
When we look at our Colorado is certainly very different than the Quebec very different in 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 in on purposefully being cagey around the names of the states.
And we believe that's a competitive advantage at the moment to participate in CBD the firm.
The first step was really to establish that we could build these the mass channel grocery store of penetrations.
<unk>, which has been done so.
Now anecdotally, we're on most end caps and the groceries on which we participate the product has displaced other kind of CBD beverages that were available to consumers are responding much in the same way that they've responded in Canada by making truss beverages, 43% of the market share because of the taste of it simply more preferable for those consumers they are responding in Colorado.
Now and we're taking on the was on caps. 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 the case quantity a concept that we don't have in Canada because of the regulatory.
We are working on the on the E comm support for those businesses basically setting up the whole infrastructure. During the time, we're also working on reducing Cogs by shifting from the third party manufacturing to Molson manufacturing specifically.
So we're working that out as well so that we can get a good sense of capex expansion rollout and of what scale. We can really bring this so we're expecting we're expecting to have meaningful data say by the end of May buy wish 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 beverages from a regulatory standpoint any progress in expanding the.
The net limitations for the consumer purchases.
So we've had some progress on ex Mg So ex Mg, which is the smaller format can but that did not necessitate a regulatory change. So within the same regulatory framework are ex AMG products or a mango pineapple and are in our fruit punch on now the two top selling skus in Canada.
For from a beverage perspective, and those are those are available in the APAC. So as you can essentially buy eight cans of ex Mg versus five bottled beverages because of the millimeters. We have not had success on the regulatory basis in actually affecting change we have had a quite a bit of success as an industry to get health, Canada on the regulator to listen but.
Candidly they have their hands very full with the pandemic right now and so the cannabis reform has not been of priority. So it's more of a matter of the we're pretty convinced it will come they accept all of the regulations they understand that from a consumer health perspective.
It really makes no sense to limit the the beverage purchase at the at the point of purchase how many of youre going to buy but to make the actual the regulatory change, we'll probably see that as part of the larger regulatory package update that will include a number of changes over the next 12 months.
Very helpful. Thank you so much.
Your next question comes from David <unk> of <unk> capital markets.
One of them.
Hi, Good morning, Thanks for taking my question and congrats on the quarter of Sebastian trend continue on a couple of questions I want to start off with.
How would you describe your overall strategy now moving forward the Sebastian I know what the none of this acquisition.
<unk> creates the 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 vote of $120 million.
How should we think about your growth is it organic.
Or inorganically or maybe a combination of both at this point thanks.
Actually it's been growing now quarter over quarter for for many quarters and so I think organic growth is name of the game of displacing market share from other competitors is name of the game seeing really eliminating weaker competitors that don't have the don't have the wherewithal to offer consumers the right price point and the dish.
The place black market.
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 in Belleville site and so when you start to look at say mid size or smaller license producers. They often don't have.
Of the manufacturing wherewithal, and so you really get phenomenal of synergies when you start the pair that in two of manufacturing capacity like Hexcel, Belleville, which has an abundance of capacity that can be filled with extra cultivation.
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 the there are not a lot of high quality targets in Canada, and so we we are entertaining discussions the XO is in the it's a little no secret in the industry, but the judge.
About every CEO of Rings me every once in a while to say hey, what are you thinking on M&A and do you want to can we can we joined forces with XO because the see the fundamentals and Theres a disconnect between the fundamentals on our value of the stock at the moment.
So very attractive for other companies do when they are looking at joining up with the 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, best of the Boston for that.
Moving on to hear my second question to ask the do more with your sales in Colorado.
I'm just wondering when you describe Sebastian your success in the U S. In Colorado, specifically is this kind of test pilot for beverages.
Are your metrics for success.
Besides simply sales on number 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.
The U S to represent <unk> of overall sales.
While I won't guide anything David, but I can talk about a little bit about our goals trusses of Trust Canada.
Has achieved its goal which was to be the number one beverage brand in its market Trust USA has the same goal cross USA wants to be the number one beverage brand in the markets in which it operates cannabis beverages obviously.
So.
And so I think that that's the largest of milestone which is really of sales milestone the.
The second one, though which is quite exciting is in the lean operation. So where trust you will 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.
I mentioned about $115 million invested by both most of them hexcel, well about 100, <unk> hundred five of $110 million of that was to stand up world class manufacturing facilities in Canada, and the U S. We're addressing of population now of 5 million people in.
So and we're doing so on single digit millions by being very lean and leveraging the IP that we have so we're we have a number of capital spend the kpis and the profitability Kpis on which we're leaning on of course, the phenomenal experience of Molson Coors to help us guide us through that to deliver.
To deliver positive cash flow from those operations. So that's another big yard stick with us.
Thanks for taking my questions and congrats on the quarter.
Your next question comes from John's on par of CIBC.
Your line is open.
Yes.
Hi, Thanks, good morning.
I wanted to ask about the the industry in general Sebastian the general view from some producers at least at the firm.
First few months of the year of bin.
The softer for a variety of reasons the seasonality I think you had mentioned, but also some SKU rationalization and reductions in inventory held by some of the provinces in store Lockdown for this time around don't seem to have that that boost from customer stockpiling of the saw a year ago.
Generally would you agree with that for calendar Q1 for the industry and any color you can provide on what youre seeing out of it from consumers or provincial distributors would be helpful.
All of nuance it a little bit for you John I think that the industry is entering its most competitive phase that it's faced since its inception. It is no longer okay for a licensed producer to simply create a product through it on the shelf and move it you now have to contend directly with very.
<unk> of pricing in every category very competitive listings with every customer and our relentless pursuit of a better product in 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 deferred.
<unk>, you'll hear more and more of the industry is having trouble, but the fact 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 you'll have to actually be able to displace and that's what we're seeing.
<unk> through this refrain ive talked a lot about how I think the end game here will be three companies that control, 70% market share. The number one spot will be of 40% controlling stake nobody has proven they can take that number one spot yet and thats why <unk> shooting for top two but in the competitive set right. We're now right on the cash.
ASP of the top two position with the shot at that number one and at the end to do that you have to have world class manufacturing to lower 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.
None of it is in Alphaville.
Okay. That's great. Thank you for that.
I appreciate the margin disclosure in the MD&A I wanted to all of us on margins for the beverage side.
You took a meaningful step forward in revenue the gross margin still negative on lease. So can you talk about the nature of the contribution margins on these products and maybe talk about what percentage of costs are fixed.
I'm really just trying to get a sense of what what sales need to be for that gross margin number to look a little more like your other categories of any color on the margin profile for beverages would be helpful.
Yes sure.
Look the.
With craft beverage on the and the.
The Kansas infused beverage category.
Theres still at fairly low volume at the little more capital intensive as you can imagine then of 28 Gram bag of flour.
So youre going to have more overhead by 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.
So we're I can't tell you the exact number of that but.
You can see that were pretty much breakeven at three $3 5 million. So.
It's not it's not on huge number and debt to seven point there was.
Beverage multi quarters as the educating up all the time and it's very predictable that theres, a slowdown coming out of the.
The holiday season and in beverage and the.
January February do you think about it.
Most people's lives.
<unk>.
<unk> driven.
Type of season, though.
The volume isn't going to be there. So you are still looking at that 335 million that we came out of Q1 with its grown 10%, which of 12% back which is great. But look I think over time, you're going to see that volume increase and then our hope is that it's going to increase dramatically in that if we're breakeven at this level I think the fair game.
To say that the margins are going to improve as we apply those overhead to more and more and more brands. So it's being spread out of across that entire category.
Alright understood. Thank you very much.
Your next question comes from Andrew Carter of Stifel. Your line is open.
Hey, Thanks, Good morning, I wanted to kind of volume.
Hollywood on the beverages, I guess kind of year, one biggest takeaways in the bedroom.
Actually the pace of winning more of that.
No doubt coming over the next two months, but I wanted to ask going into the summer season or the.
The discussion with retailers each of the category of heavily.
Can you just give us the any update on cooler penetration just kind of starting up maybe some more sophisticated category management with the hope you guys with the lending spot or is it kind of the.
It's more of the sale of everybody kind of looking for growth I'll start with the first question.
Thanks, Andrew.
Think of more of the same is precisely what we haven't done at XO and with trusts. So trust is the first and foremost of beverage company.
Think of themselves as they as the cannabis company and I think when they built the brands Scott.
Scott Cooper and his team really took a look to say what are the beverage occasions here.
And that we can 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.
Obviously sticking to regulations.
The summer season is a very exciting season.
Think the a big part of the success of truss has been that we have focused on those beverage occasions first and not just putting a strain in the bottle. We've we've really focused on crafting a really unique beverage experience. So when we walk into the summer it'll be a really exciting time for that I think theres plenty of opportunity on to further refine that category management.
Second question on where to ask about Quebec on a sort of simple and kind of flattish you made up for it with the momentum.
The outside of Quebec, but just kind of wanted to ask about that.
Will that line kind of thing.
On a more healthy contribution.
But there are limitations on cobalt.
Sure.
Just kind of what we should see or do you expect that to reaccelerate in the corner.
Are you talking specifically about beverage or overall just to go back sorry for.
Back to just go back with the Quebec of adult use sales.
Put them in front of the board.
Sure.
Yes, so the headwind the Quebec, and we're still we're still very much number one we remain preferred supplier and we continue to have phenomenal traction in.
A lot of our products in Quebec, but the main headwind has been the introduction of a number of the craft, Quebec grows. So does the theres a number of small small type growers that of introduced higher THC potency offerings and the craft grow has taken the kicking in.
A portion of share overall the issue is the larger company I mean craft simply has not been our focused of we.
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 on large scale would that be you said this is where a strategic investment of the <unk>.
Acquisition of <unk> the.
On lining of Alphaville in 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 in Quebec will be very important and so specifically on certain skus. There is also ready.
Tori differences so in harsh for example, there's a restriction on T. C. Potency that is not out there in other in other 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 ex Mg 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 in Quebec is doing a phenomenal job of being I think the certainly the.
Most profitable.
The provincial distributor in the country.
And we'll keep the refining the product offering too.
To continue to have share.
And let me jump in there let me just Andrew just let me jump in there and thanks for taking the and thanks for jumping on the call here the.
I think go back actually.
None of it the.
The very heavy competitor in Quebec, there they've been gaining traction in the province.
With their premium brands the system.
On a day and have been doing a great job a lot of uptake by consumers in that province, and so the cash.
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, I'll pass it on.
Again, it feels like to ask the question Press Star then the number one on your telephone keypad.
Your next question comes from Matt Bottomley of Canaccord Genuity. Your line is open.
Good morning, everyone and thanks for taking the question I just wanted to turn back against the benefit and maybe get a.
A little more color on on a couple of things the one any sort of granularity.
On the potential synergies that would come out of the deal and maybe the classifications of the I imagine back office and things like that and then other the other side of it just on the infrastructure side of what Youre acquiring I mean, when you consolidated clearly there'll be a PPA, there and everything will be of fair value of apologies on here.
But when you look at some of the takeaways from your transaction with new strike and the overall infrastructure in the sector of that seems to be saturated is there any rent you think of of meeting all of that infrastructure or do you think the specific.
We think there are specific core competencies that you don't think that that's the third with the infrastructure brought on by the bank.
Sure Great question, Great question, So look.
We alluded to it earlier, we have Belleville right and they have app avail, which is again just a great indoor grow facility here in Canada.
We're going to have plenty of synergies.
As soon as you start pushing their cultivation through to our bellville, but simple.
Facility with the overhead costs are relatively fixed you are going to be applying less overhead per gram to end production and it's been the lowered the Cogs. We also believe theres going to be of great.
A matter of synergy on supply in imports we have some good solid supply agreements on a lot of our cultivation techniques in a lot of the goodwill of the packaging labeling and.
So on the top floor and I think there is we looked at it and said you know between bat and then of course, SG&A, where youre always going to have synergies on combinations and we're getting very aggressive right now on our on our integration planning.
Both of our team of <unk>, So and then of the team and the combined.
We're looking anywhere between 15 and $20 million.
And with with upside from there and so that the.
It's going to be good news story from my perspective, now around the infrastructure look.
We're still going through the planning stages of integration, we know Apple flagship for us is going to need to be for them and for us.
They have their language of facility they have stellarton here in Nova Scotia items happen to be sitting in Nova Scotia right now.
So there we're gonna be balking at the Dol, and then and trying to understand what what's going to be the best use of of.
The assets in and where it all of it from the long term.
We've mentioned this before we have had.
The capacity issue looming coming up and we knew that and so that solves the big problem for us than it does in a way of it.
That's even more accretive than going out on getting more more greenhouse. So I think in general there is theres room to be optimistic that the.
But the run rate path in terms of infrastructure.
Okay appreciate that thanks, guys.
Your next question comes from Jon True seizure. Thanks, Geoff on your line is the.
Hi, Good morning. So my first question the shift on the war on cost of goods sold on just overall opex saving.
Last quarter, you mentioned that you might try to pass on some of those savings just to help drive sales. So I'm, just curious whether or not that was the case for the second quarter and if thats still of the plans for going forward.
Yeah. Thanks, John.
So 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're targeting you have to bring back to the overall strategy.
We believe that price is dictated by black market and I want to take a moment of maybe congratulate the whole industry I have an anecdote. The other day I went to one of the black market one of the large black market sites that feeds the feeds of the whole country.
And that black market side, a year ago had over 50 flower skus.
And our credit or move it of XO of resetting the industry pricing on the Outback with original stash, but today of 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 number at retail that is consuming.
The majority of the black market and Thats really pushed it out <unk>, specifically has a strategy to price too and the 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 the in terms of that war on Cogs, and we keep finding new significant synergies and thats without of course talking about having Trent mentioned, the 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 the to the consumer and that's what eventually brings us to that mark.
They will have three competitors.
Okay, Great and then just following up on one of the earlier question.
When it comes to the interior, we've heard that they've been delaying the restocking efforts on obviously, the new CEO and the departure of the CEO of <unk>.
Ocs, probably doesn't help but can you maybe just give us some insight in terms of whether or not you've been seeing any restocking of reordering by Ontario, and we also heard the had eliminated around taking other.
Skus and whether or not that any of the skus were eliminated <unk>.
If you actually saw a net increase in schedule for the upper end and whatnot.
Yes.
It would be helpful. Thanks.
Yes, So, Ontario has undertaken of rationalization strategy. So we will wait to connect with the wood.
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 but so there has been an overall major rationalization XO has had that as an opportunity more than the headwind.
And so again, it's a question of rationalizing skus that consumers want and that ties into first being able to achieve the 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 of but we're in type of communications in the intent to continue to build the preferred partnership with Ontario.
Yes.
The time in their debt I mean, if you can recall that we were 17 belt the end of the market in Ontario.
At the end of 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 at the end.
You won and now we are going back and forth the third and fourth in terms of the headset data we've been seeing in the last four to six weeks, so lots of lots of momentum.
Three of the OS yet.
Yeah.
Okay, great. Thank you.
There are no further questions at this time I will now return the call to Mr. Sweeney for closing remarks.
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 the big banks of course for consumers.
They like our part there.
Our stock let's go thanks, very much Fox of.
Yeah.
Ladies and gentlemen, this concludes our conference call. Thank you for your participation you may now disconnect.
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