Q3 2021 Hexo Corp Earnings Call
And really put XO and an incredible position.
Forecasted so off the back of the close of those transactions Hexcel should have the number 1 market share and recreational cannabis in Canada.
We'd set ourselves out to achieve the top 2 position of few years ago.
And it's really a momentous and historical occasion for XO and we're celebrating a quite a lot and being able to see that we are now number 1 and recreational share with a 17% share. According to third party results that puts us on a whole point and a half ahead of the next largest L. P on a consolidated.
Dated basis.
We've also announced our intent to purchase of 50000 square foot facility in Colorado, and we're very excited about our U S entry underpowered by Hexcel.
With this facility will be able to put our powered by <unk> technology to work on the larger scale to support all of our partners, including Molson Coors and of course at which is <unk>.
Selling CBD beverages in Colorado from him at the moment.
Our third quarter had really 2 stories and it was.
So 1 of a phenomenal story around the acquisitions and around the consolidated number 1 position, but also a challenging quarter and that the those 2 stories really reflected themselves in all of Canada, and then in Quebec, specifically, so I'll start by speaking a little bit about what happened in Canada, and then I'll talk.
Our challenges and Quebec, and specifically the 2 decisions that we spoke of that we took.
That impacted Quebec negatively.
So let's start outside of Quebec with the good news we're on.
Up 169%, excluding beverage versus the same quarter last year. This is some of the best growth outside of Quebec, and the entire industry.
We're also up 14% and Ontario from Q2, we continued to build a wonderful relationship with the Ocs and with other boards across Canada, and we're being recognized more and more for being the leader in the industry.
Inside of Quebec. Unfortunately, we were down about $5.2 million from Q2 and that is essentially the result of 2 decisions.
So the first decision was 1 we undertook 12 months ago and that was 1 where and we started to see the shift and consumer preferences.
The flowers specifically.
We identified that shift in time, and we started we began a refresh of our flower portfolio. We had initial tests on some new genetics that came out of our Bradford genetics lab that we're incredibly promising and that basically showed us that no problem. We can hit these quality levels, so here's where the mistake came in and hindsight.
We offline some strains that were performing well and Quebec, we had sufficient inventory of 4 to get through the 9 months grow period. So we all find about 3 genetics that we're responsible for quite a bit of quite of bit of sales and Quebec thinking we would replace them with the strains that we had tested and are genetics lab that had performed better than those current strain.
Yeah.
What happened 9 months later, when we actually the when we actually cultivated outside of our greenhouse is we did not hit the same quality that had been done and our indoor facility of Branford and so that was very disappointing and we could not replace our strength that we're now out of inventory with better or like quality and that the vendor.
<unk> in a loss of flower share.
We're still number 1 and Quebec, and we will rectify this very quickly we're working with as few D. C and since then of course, our genetics work has not stopped we've launched 100 strained plan and that is well underway. We have since increased quality at both of our indoor production sites and it myself in fact, the now of the muscle of greenhouse being some of the.
Most productive that's ever been not just from a yield perspective, but also from a THC perspective.
The second decision that hurt us in Quebec was 1 of the overconfidence.
We were the market leaders and still are in the harsh category, but we were had and absolutely dominant position with north of the 70% share nationally.
And we couldn't fulfill all of the demand the demand was just too high on our products were flying off the shelf. So we made the decision to shift our product at a lower than the maximum potential into the market. We put some hash into the market at 22% THC because there were simply no competition.
What we did and what we underestimated was essentially with the speed at which the cannabis industry moves and that of the mistake, we will never make again.
Our competition. So we loaded in this 22% of hash and we produce quite a bit of it.
And our competition came in and especially from the craft growth. So it was a few weeks. After we did our load and they started coming in with harsh of 26, and 27% that crushed the velocity on our 22% hash and we had to retool of that product. So we are this is not of productive capability issue and fact, though we have now started.
Again, we respect all of our hash and now we're outputting between 28 and 30% for the Quebec market and of course outside of Quebec, we're going higher than that of our harsh of hitting as high as 45% to each day.
We are continue to work with S. P D C and the rest of the boards to correct those 2 decisions.
They were unfortunate, but there are things that were set in motion of about 12 months ago and we've since rectified the issues.
Go forward I think thats really underlines the strategic importance of some of the acquisitions we've made.
When you look at the <unk> acquisition and the Apple the asset which is of 450000 square foot indoor growth that really allows us to lean in to all of us genetics work and to scale up our premium genetics.
When you look at our portfolio and the demand and market are up brand, which is hexose ultra premium line is a highly productive assets and all markets.
We have an opportunity to expand the assortment and the distribution and the position a better overall offering and market.
The brand has actually increased nationally about 20% quarter over quarter.
Of course, our harsh quality is now from a productive capability increased we continue to invest on more capex behind that for the what we call harsh 3 point out. So we're very excited to be able to talk to that over the next 6 to 12 months.
And we're very happy to say the quality on our other brands is increasing as well, namely in pre roll when we ran them through double blind consumer based tests.
All of the story is actually Backstopped by continuing great performance from a gross margin perspective. So we we have dipped a little bit below the 30% watermark. So currently running on 28% of adult use margin, which is still 1 of the strongest gross margins and the industry and that is really a result of some.
Some of the inventory right sizing during the quarter to prevent the write downs, we want to maintain a pristine balance sheet and so we're making we're making choices on pricing and real time in order not to accumulate bad inventory of.
That should be rectified against over the next few quarters.
We did not have international sales, which was another impact on the quarter was a temporary impact we actually missed the shipping window by a few weeks, we do have a $2 million sale to Israel that was recently completed post quarter.
We had and adjusted EBITDA loss of $10.8 million due to that lower margin percentage and dollars on lower sales as well as a $3.6 million federal cannabis tax levy recorded in the quarter.
Our trust portfolio has performed incredibly well in may of its strength and the share leadership of the beverage category and Canada growing to 46% market share and nationally so huge congrats to the trust team and of course of our consumers that keep making trust the best beverage brand and cannabis in Canada.
We're going to continue on the success and celebrate the summer with some new products coming out of trust to look forward for house of <unk>, Valentin and sparkling tonic <unk>, citrus and Becks Mg watermelon as well as very well honey Green ice tea Little victory Lemonade and bowl of 5 line look for those on.
Shelves across the country for the summer.
And I'll pass it over the trends to talk more about our financial results.
Thank you Sebastian.
And I just wanted to touch base, a few things on the balance sheet the P&L.
This is another quarter of burden of relevant we've had no significant inventory write downs of provision, but we continue to do the right things around inventory.
Strategically and otherwise.
It's the number of core quarter without any impairment of long lived assets. So our assets remained strong our balance sheet remains clean and.
We raised the $45 million of off the back of our aftermarket offering we only ran it for about 90 day between the filing of the prospect of supplements and the.
As the lead up to the possible announcement of the definitive agreement to purchase ready for them.
At the raised an additional $395 million of net.
And through the issuance of the secured convertible debenture in relation to the ready can acquisition.
Currently sitting with about $194 million and cash and our operating accounts and have another $275 million sitting and waiting on the ready for the transaction the Clos.
Our DNA it's still.
And.
And the continuum or continuing to want to try to push it down and the best percentage of net revenue in the market on <unk>.
The sales motion and down another $1 million sequentially from Q2, which represents an 8% decrease in real dollars.
Loss from operations was $16.1 million per Q3, and bringing the total loss from off lease and the $25.6 million per quarter I. Just wanted to note that this is the by far and I need by far the lowest of any offer and loss from operations and any of the crop LTE and it's not even close.
So we've been doing very well in terms of our commitment to ensuring we are spending investor investor funds wisely.
We still believe we have a clear path yes.
And struck for the correctly and.
And on leverage what we have kind.
Part of a bright future.
We also know that with our M&A activity.
Once closed we have a very good path and not only.
The adjusted EBITDA positivity, but EPS path.
We know of force with that M&A, we will be turning our focus of the integration planning and execution and we have hired external consultant.
We've already closed on on.
And sorry call Protiviti and we've already closed on sentiment.
As of just a couple of weeks ago.
So now that we're on a path to closing on ready for or 40, North we will be doing on a lot of integration and planning on a very structured way and we feel very good at both of the risk that we're mitigating in that regard.
We redid the great job I believe in the benefits and we're looking forward to working with the pool of that ready for and are 40 north of.
Very constructive in the green from cleaning process and then with the per.
Those close integration.
At that I'm going to turn it back over to the bathroom.
Thanks, very much strength.
Despite the many dire economic and social consequences the Panther.
<unk> is caused the cannabis industry continues to grow and that's a testament to the consumer demand for safe high quality legal product that are offered by the licensed producers.
<unk> was extremely proud of its journey over 8 years, we went from the number 17 ranked the L. P by market share to now post consolidation of our acquisition of Red again and.
And 48, North we should be the number 1 and recreational market share of licensed producer.
We think we've done that on some of the best deployment of capital amongst the leading Lp's and are thrilled to announce our new strategic priorities.
3 years ago, I had set us out the become top 2 in Canada.
<unk> operational scalability and high gross margins and of course continue to invest on product innovation.
Today on the verge of becoming number 1 and Canada, we're focused on integration and making sure that we continue to push our margins higher.
Focused on delivering not just the positive EBITDA, but and the future of moving us to a positive EPS.
And we're of course updating our top 2 Canadian target because we've achieved number 1.
2 now becoming top 3 from of cannabis products perspective across the world.
Look forward to updating you on all of this on our next call and happy to answer some questions operator.
And this time I would like to remind everyone in order to ask a question press Star and then the number 1 on your telephone keypad, we'll pause for just a moment to that part of the Q&A roster.
First question comes from Aaron Grey with Alliance Global partners.
Good morning, and thanks for the questions.
So first question from me just talking about Youre.
Your home market of Quebec.
And just having a little bit deeper on some of the softness there in terms of genetics and it looks like you are trying to right that ship.
We'd like to get some more color in terms of.
The timing of kind of the shrink cultivation decisions and how you look to remedy that and do you feel like that's the might be another quarter or 2 until you kind of right that ship and then also as you also talked about the heightened competition and that market. How do you feel it might be more difficult to kind of maybe regain some of that market share as more competitors.
Moving to the Quebec marketplace, So and then kind of color there in terms of of the timing of when you look to return to more positive sequential.
Further on Quebec will be helpful. Thanks.
Thanks, Sharon, we expect to fully recover our market share and Quebec within 2 to 3 quarters.
Most of those decisions that brought us here were decisions that we started as I mentioned, almost 12 months ago, but we didn't stop so 12 months ago. We made the decision to pull some strains that were highly productive out of Quebec, and so and those that inventory of about since run out on those specific strength. So that gave up some share, but it's not like we stopped.
Building, our genetics library of 12 months ago. So 12 months ago, We said Hey, we've got 2 new genetics that look awesome. So let's pull a few of the Quebec and we'll keep we'll keep investing a few months. So the 9 months ago. Then we had more genetics coming in 6 months ago, even more so to the point now that we've got 56 genetics that are actually well underway for development.
From a complete refresh as part of what we call our 100th strained plan. So no things are going very well and now of since then so since the first 2 genetics failed and greenhouse we've actually had tremendous success. So some of our stalwarts specifically northern Berry, which is 1 of the best selling flowers and Canada is produced out of muscle.
And there's actually hitting north of 23%. This round from greenhouse. So we expect that we'll be able to do a lot better with the Apple Bill indoor site and venomous and of course all of this is just reflective of the hexcel genetics library proper not the XO is that of its 48 north threat of can library, which of course is incredibly robust.
Just.
Okay. Thanks for that color.
And the second question from me are you also called out some impacts on revenue.
All of that reserve and your ability to get high THC products. It looks like harvest during the Q remained near record high so the other give some commentary in terms of.
And the level of THC for the.
The harvest of the most of the it's a quarter and then also if you could provide some color in terms of Zen based with that acquisition closing.
Looks like there was some softness and their most recent quarter..2 so just in terms of what youre seeing from from their own sales and then on towers that they've been having because I know you know high THC has been a high priority for you guys. Thank you.
As far as presented those numbers, we look forward to reporting consolidated and Youll see youll.
And you'll see that that should be.
That should be positive when we get to those numbers. So I won't share of the numbers today in terms of productive capability and what we're able to do from a quality perspective.
And keep making improvements all the time and so I just mentioned specifically that we now have our northern Berry product, which is coming up above 23 per cent and thats out of greenhouse grow some remaining upside the to go kind of go hit some theoretical maximums there as we move to 2 indoor the entire port.
Folio is now half of the entire portfolio is now hitting and consistently over 20% and that of course fills the app promise, which is the guaranteed 20 per cent or more across the board. We've also made some strides in Turkey and production. So it's not just a question of increasing THC, but overall quality.
And so we've actually had the tremendous success in Quebec, with Lemon haze, which is actually a bit of of lower THC strength sitting at 16% to 17%, but the Turkey and profile is just resounding with consumers.
On top of that in the double blind tests with consumers <unk> was performing extremely well, we keep improving our curing of processes are drawing processes. We've continued to improve the moisture content of our products, we're improving the bud sorting of our product, which is able to guarantee larger bud size. So if you will pick up and original stash of original stash reserved you'll note.
This go try that against the competitor competing product you'll notice of the Bud structures, a lot nicer way more and more product and I'm not I'm not picking cherry picking just against the majors you can put up XO original stash product against craft, Quebec candidates and the actual product and double blind is better on almost every.
Every single of qualitative aspect. So we're quite happy with that so I think as the consumer continues to learn and look for all factory of response rate and just sensory response and that the story of matures beyond the <unk>. She will have a lot of occasions to really show how great Hexcel product is of course, we continue to hit higher and higher THC and that will remain.
And of our story.
Alright, great. Thanks for the color and I'll jump back into the queue.
Next question comes from kidney Chan with BMO capital markets.
Thanks, Good morning.
First question.
On the genetics and the production flow.
And I was wondering.
And from other competitors.
They are on product revitalization on on what we see what line.
Quite a while and not to go.
The pathway to eventual GAAP some of the who.
The rental model growing and multiple thermal cool commercial scale and little more on that puts.
Quite a while and quite a bumpy so thoughts on could.
And you can just elaborate more on line the confidence you have that.
The model.
And quite a bit of 1 that you are trying to scale up well be able to have them in line.
Cover the market share over the last quarter was the special.
And well be growing and it sounds like some of the strong on the.
1 of the point of view, which I think does come what are learning from them.
And the client.
And now.
From day, 1 yourself.
Thank you Tammy yeah. So this is the advantage of having started the genetics program 12 months ago. So we have been in full swing and genetics revitalization.
For a year now so it's not something we've talked about and we've been quietly doing it and the background and the first 2 strains and didn't work when we moved to mass of 2.2 of our greenhouse and muscle, but we currently have 4 new ones that are and muscle that are productive that are working that are growing and actually about to be harvested we expect that the <unk>.
The September we'll have many new strains and market. So we're quite excited about that and of course, we keep just improving the base strains that we have so of course things like on northern Barry and continue to be highly productive under the upfront. So this is not it is a long turnaround, but it's something we started a year ago and I think when you look at full.
Hold for that too to really be complete it's probably an 18 month process the largely engage that so September.
The September we start and we should have the full portfolio refresh the refresh completed by Q2 by our fiscal Q2 and January which should coincide with the consolidation of <unk> as well of.
Of all of our acquisitions.
Just a couple of up on that day, and I know you mentioned, the Apple Bill as well, although it has been a productive.
Okay.
Or.
Towards the end of this for some time now so it is the state of the art facility and is producing at high grade. We don't we don't believe that it's going to be to your point like starting from scratch, we didn't build the greenfield. It is it is.
Right now in full production. So we believe we're going to be able to get the genetics out of there at a high high level within the very short timeframe.
Okay. Thank you that's helpful and my follow up question is long and beverage category I noticed from language from across from me mentioning and more.
Competitors coming from Montana, while you're still number 1 and you did call that out so I just wanted to ask.
The concern what's the strategy of aside from the.
Some of the new products that you will be launching and the category, how you're thinking about maintaining the number 1 share of home pricing as the lever maybe required just overall the commentary on how you feel about the category and now that it seems like from our competitors.
And to that category.
Thanks, Sami well, it's a dominant number 1 right now at 46 share and we're not.
We're not worried and in terms of the short answer and in fact, I welcome competition and the beverage space I think it's necessary our biggest opportunity and beverage is actually growth of category, so not growth of share, but the growth of the overall category.
And we've seen that in certain markets that we can get upwards of 6% of the category. So we've hit that of time and time again from a unit sales perspective.
What's what's key our beverages have and 85% rebuy rate, meaning that what somebody tries it they are almost certain to try it again.
And so really we need to induce trial, we need to bring people into the category because once they try it and beverage becomes the go to and anyone who has tried the trust portfolio of they're usually blown away and it becomes part of their part of their weekly of consumption habits, and so having more people come into the category, we hope will bring more attention to beverage insight consumers too.
Try trust products and then of course off the back of that we should have a lot of repeat sales I still think the beverages and overall category could eventually hit 15% of total kind of sales, it's simply a wonderful format.
Okay. Thank you.
Next question comes from <unk> Parikh with Oppenheimer.
And thanks for taking my question.
And so I guess I guess first starting out Q4 is there anything you can share from a revenue expectation perspective it clearly.
On the challenges out there with Covid and then you guys have some company specific things that Youre also getting through and so just curious if the could you share on any perspectives on Q4.
We.
Listen Q4 is better and we're coming out of Covid, Rebecca So and we didn't want to blame Covid for Q3, either really I think I think that's a key differentiator for hexcel. The Q3 was our fault. We there were those 2 key decisions that we took a year ago.
And so 1 on the strain selection and the other on hash and we know what those are we've rectified them and it won't happen again.
There is not of Covid problem consumers were still buying the actual product and how do we have the the right.
Mix and category and channel.
I think Q3 would have been a very different story. So Q4, certainly already looking better, but we're not providing guidance on numbers and more specifics.
Okay, Great and then maybe just a follow up question is on EBITDA profitability in the last quarter you guys did get the positive EBITDA just any updated thinking in terms of the timeline to get back to that positive EBITDA I'm not sure.
Yes look we have the EBITDA was hit.
And by 2 things, Okay, we had of $3.6 million.
The tax levy that came in and on an annual basis.
The hit Q3.
We also had of course the margin loss.
And in relation to the lower volume of sales, specifically and a pullback but the.
On the margin percent was about 20% still a pretty good margin percent.
All of the equal, especially around the Lps the time on this.
But I think I.
I think without giving specific guidance.
As you have the you have the M&A activity as well that's coming in we believe that there's going to be a ton of synergies we're already starting to see though then the benefit.
And we believe that we have this path forward that we continue to talk about not just from adjusted EBITDA, but the bid ask.
The EPS.
Look our Q2 is where you'll see really the Q2 next year Youll see all 3 hopefully and we get to the close of already gain of 48, North and we have is that of that.
We would have had because of the statement I think youre going to see a great Q2, but what that looks like but I don't know, but we're not worried too much with EBIT of our skinnier, it's coming on the floor, we're getting better all the time as the leverage their sales back up I don't see I don't see any reason to think that we're not going to be able to get back to where we were.
Okay, Great and then maybe just just on the health, Canada recovery fees is that something that the crude every quarter and then paid out in April and I just wanted to get a sense because I think the P&L impact on this quarter. So just on it there.
It did Doug and I'll hit this quarter it will.
I'll be honest the bit of the bait between us and our auditors as the how we should treat that.
And other.
On the the opinion that it should be accrued quarterly so it doesn't it and any specific quarter I've been losing that debate quite frankly, but I will continue the habit.
And this is the same way of other LP of been treating and as well apparently so.
The state.
And but if we have to start budgeting and for Q3 of the year we will.
Okay, great. Thank you I'll pass it on.
And.
Next question comes from David <unk> with 88, Keybanc capital markets.
Hi, good morning, Thanks for taking my questions both of them are going to evolve a little bit of around your M&A activity as of late so.
My first question Sebastian and we've had this conversation and several times around cultivation, specifically, we've seen you didnt have the write down any inventory this quarter, but now with your other acquisitions, namely ready CAD and to some extent and 48 and or perhaps out of it what are your thoughts around now going back to having the problem.
And not in this quarter, but and in subsequent quarters of how the excess supply, especially with all of these potentially new cultivation facilities coming on line.
Thanks, David.
Properly answer that I think I'd have to take you back almost 2 years so.
2 years ago, when we did rightsize our balance sheet <unk> did that was the first licensed producer to do that but we learned a ton of lessons and those are lessons that we've built on and those 2 years. So a ton of experience there and learning how to manage supply chain how to manage cultivation moving from specific SKU all the way to the.
<unk> and then into consumers' hands. So those lessons is a big part of our integrated business planning, it's a big part of what we bring as a combined story and as heck. So too are our M&A partners. So going in were immediately implementing things that will ensure that inventory does not become.
The problem in the future and you saw some of those things and Q3 of course, but those are those are largely temporary.
And the anything larger that we need to do on a consolidated basis, we're not afraid of doing so no I don't I don't expect that inventory accumulation is going to be a problem, especially in the face of continued really strong demand for for some of the product portfolio from that consolidated business. So specifically when I look at the readiness product the <unk> portfolio.
The right account portfolio as a whole and oil et cetera, I mean kind of on a consolidated basis coming out of this <unk> is going to be the number 1 not just overall by Rick share, but we're actually the number what we should be the number 1 in flower and the number 1 in pre roll the number 1 and beverage and the number 1 and has the number 1 and oil the.
And number 1 of the gel caps, it's a lot of number 1 so you need a lot of capacity to fill that demand.
Okay. That's helpful. Thanks for that encouragement as Walt Sebastian on.
And my second question is around the actual integration of the 2 I know the deal or at least with ready can hasnt closed yet which is the most significant line here, but I mean, what processes and procedures are in place to ensure a seamless acquisition I mean, even with quality control and Youre talking about products that has been arguably number 1 and the market remember.
1 to 3 with ready cash. So is this going to be <unk>, adopting already count approach or vice versa or kind of combination of of the do anyhow.
Really trying to understand how and which measures you have of XO has in place to ensure a seamless integration of the 2 or 3 companies. Thanks.
Yes, no problem.
We've hired a company I keep saying we partnered with the company called Protiviti, but they are a world class organization that has a huge transaction services component.
We went through the benefits acquisition plat integration planning process. It was extraordinarily robust we had a tremendous communication plan cross functional plan.
Operational performance plan, all leading into the closed and now we're starting to execute on those plans.
We also have.
Those things those same consultant that we carried on through the engagement to help with the ready can and $40, which we've already launched and so we're already starting on those integration plans.
See all 3 being very different okay. So as benefits of the very very much more complex type of.
Multi multi sites.
The <unk> ready can.
Or as successful as they are a little less complex to be honest.
And they have been a tremendous operator, we do not see ourselves going in there and fully integrating ready can nor are we going to take what they have done and implemented and hexcel and it'll be of what we're going to take the best of each and and apply to 1 another we don't we expect the things like quality control health and safety that will lend.
Our expertise to ready can where necessary, but we will allow them to be quite autonomous.
Of that almost as a wholly owned sub.
With a lot of support from the exit of teams, where where that makes sense, especially on the cross functional basis with SG&A.
But operationally and these guys are very very very good of what they do and we don't anticipate changing a lot and the 48, it will be a bit of it.
What about the sort of in between the 2 buildings out of this and and Medicare.
Okay. Thanks, very much a trend on Sebastian I'll hop back in the queue and congrats on the quarter. Thanks.
Next question comes from Doug <unk> with RBC capital markets.
Yeah good morning.
The first question has to do with how you see the broader market transitioning all of a lot of success with taking share from the illicit market, but is that incremental market share getting more difficult to achieve and then secondly.
Are you being squeezed then.
By the crop growers is wrong or is there a definite place where youre going to be able to take on.
On the market share over time as my first question.
Thanks, Doug Yeah, I think your first point of the we're still out of an industry, we're still capturing black market, but it has slowed down dramatically I think that's because we've largely captured the flower market from the black market largely whats left now is concentrates and you've seen an explosion of Blackrock of concentrates so.
We're keeping an eye on those specific categories, So think rosin and chatter.
<unk> live extract et cetera.
Just 2.
And to see where we want to play and those specific categories. We do of R&D aggressively working on that.
And so has been the number 1 concentrates operator, when you look at our hash product.
And so we were quite good and making really high quality concentrates. The question is how big does that market ought to be before we want to go full fledged to put into the sort of capital, where we can compete and black market prices. So basically taking the strategy of matching black market price, but doing so with the right capital investment that allows you to do that at high margin. So that is the next.
The path for for growing from the Black market. The second point of of your question around craft craft is absolutely surprised us I talked to I talked about their ability to come in with ash that we were not expecting some of which was a large negative impact on the quarter for from that the.
On that decision, but it was mostly of 1 time things. So they showed us what they could do from their load and it was very much a.
THC concentration piece, which.
And we can do so to be clear, we have no trouble putting out high THC hash, that's better quality and and what the craft guys are putting we just werent expecting them to do it so fast and so we thought there was an opportunity to put more product and market out of 22 per cent and so that's been largely rectified on the flower piece, what's been really interesting is craft loaded.
And some of their best product and they.
And they've made quite quite of bit of the inroads starting of late in our Q2 and really full fledge and Q3, but what we've seen on the tail end of Q3, and even starting Q4. The craft growers that were originally successful with their first load and now are running out of product quality has taken a nosedive. So we do we do of product review.
Weekly at XO, and we go and we review of our own product. We review our of the majors and we also pick out a couple of craft and black market offerings, and we all run it through our quality process to see what people are doing and.
The the craft product thats coming off the shelf right now is just terrible compared to what they were doing so theres huge consistency and growth issues. The craft needs to solve at this point I think that hexcel continues to improve its quality and and the double blind basis. I also think that we can put hexcel product up against just about any flower and market. So I.
I think it was.
I think of was a temporary setback I think that we know the reasons why it happened and I think that the structural advantage is clearly and hexcel favor of long term.
Okay.
And good morning, and second question just has to do with the U S clients and knowing you have a lot on on your plate right now but.
This is going to be kind of obviously very important probably over the next 12 to 18 months of is there anything else you can tell us about.
And what Youre planning and the U S.
Yeah. So the U S is really a of.
3 pronged strategy. So now we have a productive assets going up in Colorado. So that's going to feed our partners. So we've got expansion going on the hemp side with Molson Coors and beverages. So we expect to to expand trusts USA to multi state very soon so thats 1 of growth path. The second of growth path of course.
We continue to be in advanced discussions with large cpg's and and.
Especially on the functional food, but also of pet care and the and cosmetics. So of course, you can see the strategic value of the 48 north tuck in for the for those cosmetics conversations. So we continue to talk to them, which is also going to be the part of the powered by hexcel. So when I say 3 pronged of the first part is AD partners the.
The second part is grow geographically and then the third prong is about the bring everything that we do really well in Canada and kind of is to point out to the U S. So once legalized and once the recreational is available and the U S. We believe that we can take the product portfolio. We have here. So hexcel hash readies pre rolls, we can bring though.
And as to the U S and essentially compete on of quality and price basis.
And directly with any other pre roll or hash manufacturer thats in the U S. Today, so by doing so we plan on leveraging the current distribution network. So the multistate operators, but anywhere else cannabis is eventually sold and becoming a powered by hexcel producer for those retailers and we think by doing that we'll be able to improve.
Those retailers as margins and also capture and a meaningful share of shelf and we believe that that's what's going to lead us to eventually becoming a top 3 kind of as products company and the U S.
Perfect.
Next question comes from Andrew Carter with Stifel.
Hey, Thanks, Good morning, and go back to the cash and I appreciate the breakdowns line.
And it straight and $469 million and total cash between what's available and once and escrow you can take out 400 solution already can how many of you.
And could you just kind of go through kind of on what kind of capital expenditures remain on the base business not sure. If you want to invest more incentivized on 48 north and.
Cost to achieve synergies.
Cost for the.
The new facility in Colorado, and then what other of these future partnerships, where they have kind of on the same capital commitments that go on.
Trust Jamie Thanks.
Yeah happy to happy to talk about the sort of of our capital plans and where we where we're ahead of the cash look we you're right we have the boat the.
And you start doing the math and and remove out the $400 million of we're going to require 2 to close on ready and there will be more cash requirements. As we continue to rollout our capital plan book and the US here in Canada.
Have more plans to stand up and productive facility.
And certain categories within Bell the Bell.
<unk> such as the.
Pre roll and we wanted to continue to invest and pre roll and the other thing.
And the U S. We will be standing up of our power Backflow technology, which we believe is going to be in the anywhere.
Anywhere between 25% to 40 million of over the next 12 to 18 months if.
And if not more.
And we're standing up our power of the heck with technology and that will build is going to require.
Difficult past 2000.25 million of Lee.
Over the next 12 to 18 months.
And so.
Between the between all of those things and more we will be booking.
And what our cash requirements are going to be to be able to take advantage of of these opportunities that we find in front of us ourselves, though you can stay tuned.
Many of you on that.
And just wanted to other kind of zoom back in on some questions I know youre, not giving guidance day and mature and the personnel.
Reporting kind of post kind of of reopening starting in Canada are you seeing any accelerated corners.
And I guess the question is will we see a step change and orders from the provinces.
Or did that kind of.
Inventory level and kind of get my factoring hope and thanks.
Thanks, Andrew does sales are definitely open and we're seeing the opening up again, so the orders have increased.
Yeah.
Okay.
Yes.
And Andrew if you look at US I mean look at I know people.
May of blocked over to that but we had 14% sequential growth and sequential through Covid and I know that thats been the struggle for a lot of LTE. The as they came to market and we kind of quarterly releases.
We're not sitting here, saying that we were up 14% and.
And the.
Arguably 1 of the thought the most important market in Canada. So.
But that's not that and we're seeing momentum coming into Q4 and forward from here. So I mean, if that was or is that was our worst quarter then.
Yeah.
Does that and I'll pass on.
Next question comes from John some of the Sam barrel of CIBC.
Good morning.
I wanted to start on Quebec, the the press release referenced additional competition in the province, I'd like to get a sense of where you think Quebec is in terms of maturity of brands versus some of the other provinces and then can you remind us what are the primary benefits of the preferred supplier.
Flyer agreement of 1 of the terms of that the preferred supplier agreement with the province.
And in terms of the competition John the.
So of Quebec has gone from 11 listing licensed producers to 'twenty 6 there recently implemented a grown and Quebec platform, and which hexcel participates and.
In terms of maturity of the brands I think Quebec was later in accepting more of licensed producers of originally if I take you back from the start of legalization, Quebec had 6 licensed producers and now of course, they've they've opened that up a few times and we're now up to 26 and.
And you've seen that the STD. She continues they just released the quarter. The continue to do a great job on 1 of the most profitable.
So 1 of the most profitable.
Distributors provincial distributors and the country and also getting the continuing to see huge growth and sales, but I think what we're going to see again from the maturity.
<unk> had been slower to ramp on licensed producers I do think that the craft Brewers have a lot to prove out from and ability to operate sustainably. So I mean remaining on shelf maintaining quality having consistency.
So that they maintain not just their listings, but just the consumer demand okay.
It's no secret Eschew D. C is there for the consumer it's there too.
To migrate the black market to 2 of the legal market and of those things are done.
Those things are as long as those things are done.
The the they operate on a market basis. So when you talk about maturity of market I do think that we will continue to see a few craft brewers come in but it is a very difficult market to operate and long term for those craft of course.
The second part of your question from a preferred supplier and Quebec.
The preferred supplier relationship of course, you'll continue to see effects of the number 1 and Quebec since day, 1 of legalization, we don't expect that to change as <unk> said, we expect to fully recover on market share and the next 2 to 3 quarters and 2 and we are very well aware and we are working with the SKU D. C. Hexcel is very well aware of that we did this to ourselves.
And we pulled skus that were highly productive and Quebec, anticipating we could replace them. We did not replace them and time, we will replace them over the next 2 to 3 quarters and Quebec is fully aligned with that strategy. So it's not a it's not a it's not an issue from that perspective, and all of our planning and innovation continues to work very well with the province of Quebec.
Yeah.
Okay.
Helpful. Thank you and then my second question is more broad in terms of the industry. We've got this 3 year mandatory review coming up from Health, Canada, you get a sense. If there is any impetus from health, Canada the change any of the regulations.
Negatively impact the the industry, whether it's on beverage unit sales of edibles concentration or marketing or consumption lounge, and really anything do you get a sense of the things on their radar per being potentially change in the next 12 to 18 months.
There's a lot on their radar and and the.
And the administrators of the program are certainly aligned with industry on a lot of the points. So that's very pleasing to say in terms of timing. Unfortunately, I mean, we've gone through this pandemic thing so rightfully. So the health, Canada is that of other priorities and.
And handling the pandemic, but I do think by the time they do come up for air I think of lot of the decisions are are pretty much de facto made at this point of the recommendations to go to.
And to go to the Minister.
And I do expect we will see some positive outcomes. So specifically I think case quantity per beverages is 1 where we will we will get some progress I think we'll get progress on ways of the consumption personal possession limits.
Do think we will maintain limits on single dose edibles. So I don't expect that to change, but overall a lot of progress for the industry and also I don't think the singles dose edible limits are necessary for us to meaningfully impact black market. When you look at the technology we've put in.
2 our beverages for example, if and if you've had the chance to try 1 of our trust <unk> beverages, which of the 10 milligram nano emulsified formulation I mean, the uptake of that product is phenomenal and very quick it works and about 15 minutes and the.
The because of the technology, we put behind it the.
And the efficacy of it or the high of the quality of high is very very good. So it's not just about more THC, it's actually about the technology behind that THC and this is a lot of what powered by hexcel was named yourself.
Understood. Thank you very much.
Next question comes from Matt Bottomley with Canaccord Genuity.
Good morning, Thanks for taking all of these questions is the faster you just wondering if we can get.
A little more granularity on maybe the dynamics between what we're seeing with some of these L. P earnings and what's happening at the retail level.
We mentioned, Alberta has seen some from some drawdowns of inventory, they're holding I noted and historically that's happened in Ontario, as well, but when you look at all of the announced M&A in terms of the most recent quarters and we can see they are pretty much all sequentially down we don't know what <unk>, obviously has done as of late but im just curious given that we are seeing.
The retail number of incrementally increase I know Jan and February was a little bit down I'm, just curious how much of that is potential market share loss versus all.
All of the LP universe kind of dealing with various issues even aside from some of the ones that were more specific to X of this quarter.
Yeah.
Yes, I think I think this we're definitely in the worst period of the year in terms of the impacts that we've felt from supply chain logistics proliferation of small growers. So again, if you look at it on the national basis, you've got 90% of the share that was split amongst the top 10, Mlps now of what what's happened.
And you've had and on lining of about really 500, or so growers. So theres not a 566 and those growers of all loaded into the provinces and of course of the governments have a mandate to to allow some distribution for the smaller growers, so they've given the chance, which they should but.
What's happening is that all of that load and has I think globally taken share from the majors and I think I do think that's temporary and I don't think that's sustainable because I haven't seen anything out of most craft growers and with some exceptions. There are some some some of that really have a good high quality product, but I havent seen high quality.
And the consistency supply chain acumen I mean, the reality is that standing up of cannabis business is extremely complex and requires CPG expertise that is very expensive and capital and it's very expensive and so it's just the 2 to compete at scale is not something of our skill set from the craft Brewers have so I think that's what we're really feeling this.
Quarter and of course actual being offset from the rest of the industry of February March was actually very painful from a total demand perspective and.
That's right and our quarter right. So we took on 2 of those bad months from an industry perspective.
Right in the in our Q3, so I think that largely recovers and that we will see most of the successful majors continue to retake share hexcel of of course, which arent great path for full Quebec recovery, but also as <unk> said, you've seen us grow and be 1 of the fastest growing outside of Quebec. So we have great traction and those markets.
Despite all of those small producers being there.
And that's very helpful and just lastly on for EMI and just in Quebec, specifically I know you talked a little bit about this and the prepared remarks and 1 of the other questions, but just your risk assessment on on being able to rebound there given that I would assume other than maybe new store opening.
In order to fully rebound and youre going to have to take that share back from someone else. So you had mentioned something that you had talked to the FTC and youre on the right track. There. So I'm just wondering if that's completely risk mitigated and your view or if there is still going to be the.
And the supply demand dynamics of what other Lps are doing and Quebec, and what's strange theyre, providing as youre trying to recover there as well.
Yes, it's completely risk mitigated on on a consolidated basis when I look at the when I look at the strength of I mean that we're bringing in not such as we've developed internally, but also the library that's available from red of cans and the best and 48 north of the actual portfolio has never been stronger and you overlay of that to a productive capability or technology.
And strain post processing, so, including both drawing and touring have never been stronger and pair that with the fact that the quality, we're seeing out of the crop growers and that's taken a nosedive. After the initial load and they are not prepared to compete so no I'm not worried at all and.
I think of.
Of course, nothing is absolutely risk free I think the risk sits only and timing and Thats why were saying 2 to 3 quarters. So the visibility on exactly when it's fully rectified is or is not 100% clear at the moment, but from a capability perspective.
And I have zero concerns.
Okay. Thanks again appreciate it.
Once again to ask a question. Please press star 1 on your telephone Keypad next question comes from John Chu with age I'd and capital.
Hi, Good morning, My first question and just on the original stash. Your bulk format product sales are down quite a bit in Alberta, and Quebec and I don't know if that's the new strains of you were talking about or is that competition and are of pricing pressure can you comment on that.
And.
Sorry, and which markets could you just repeat your question. Please yes, I think and the MD&A. It was saying that the original stash and your bulk format and we saw sales pressure and the Alberta and Quebec market.
And maybe that's not because I don't want part of it.
So sort of come back of explained was part of that stream choice. So some of the Australia, we're president of original stash.
And for for Alberta, specifically, we had a slight decline there as well and that was that was also mostly related to the high THC and loaded but overall, Alberta of purchase orders are going quite well now at this point and especially when we look at it and on a consolidated basis.
Okay, and then just with the strategy of the refreshing lift the new strange of 5700, new genetics.
So are we going to see.
Good day, a complete overhaul of the product portfolio at some point over the next 12.18 months and then.
Youre going to keep the existing brands I guess, what youre going to upgrade and with some of these newest range is that how I interpret that.
The other 100 strained plan is really a response to consumer demand for newness and it's a response to consumer demand for variety and but we will keep the stalwarts and our popular strains and market, we're absolutely not going to pull them I mean, they work very well again, I mean, northern Berry under our brand as 1 of the best selling flowers and Canada and we.
Continue to have robust success I mean, yes, there's a pullback but were still number 1 and Quebec, So hexcel flower.
We have had a pullback, but keep in mind that Quebec consumers are consuming more hexcel flower than any of the than anything else and so we do not want to pull what's working and market. This is really about competing against craft across the board competing against additional variety and taking the next step and evolution to respond to consumer demands.
Okay. Thank you.
Once again and ask a question. Please press star 1 and we have a question from Adam <unk> with Scotiabank.
Hey, good morning, Thanks for taking my question.
So.
I just have 1 and it's more from a long term perspective.
And I think Canada. After you consolidate the 3 companies that you've gone out and.
Reached definitive agreements with recently and.
And you can realize the synergies with those and I'm. Just wondering if you think youre going to get to a place where you won't meet the market the fund Canadian operations or how are you.
You think about that.
Thanks, and well I'll, let Trent that a couple of times, but overall.
And we will be the Canadian Rec share leader. So you can do your own math to start to see what kind of top line that throws out.
And you know that currently axle from and adult use perspective portfolio, even in an incredibly challenging quarter still has 1 of the highest gross margins in the entire industry and our last quarter, we have the highest gross margin and the entire industry. So the technology behind <unk> and our partners is there the acquisitions, we've made have a great operation.
So they some of them have balance sheet issues, but certainly not operationally operating issues and red again is the by far and away and 1 of the top operators in the in the entire space. So I certainly think the path of the EPS is strong.
And.
I think we will continue to need the market for U S and global expansion, because obviously now we're turning our attention to be not just number 1 in Canada, the top III and the world Trent anything of that.
Yes, yes, no I I'll, just reiterate that the once you have the 3 M&A completely.
Amalgamated and into the integrated into the excellent 1 consolidated the entity, we do believe that we will have.
And I have that path EPS and 2 a ton of cost of the cash flow positivity, that's where we see things going I think we're looking out to Q2 next year to be able to start really seeing what that looks like.
So we don't anticipate there being any requirement for market support within Canada.
We will.
And the market support as we go into the U S. But we don't believe even within the U S and at the long on or really capital heavy.
I'd like to just reiterate and remind people of that.
If you take what capital has been deployed to date by Akzo.
In the.
The amount of cash the amount of net assets that we purchased plus the the accumulated deficit that we finance add those 2 things together.
And take and divide that into our current market share for every 10 basis points of market share we've deployed.
At this point Aculab $16 million of.
On the Investor capital and.
And nobody none.
L P. As below 26, 27, and besides that and you've got a couple who are Apple of <unk> 5 million per 10 basis points. So we've been we've been deploying capital and a very efficient way and a net loss from operations as I just said.
The year to date of after 3 quarters is is less than half.
The next best L P and some Lps are over $1 billion.
The loss from operations, though, but we like our position and we like what we've been doing and I think we have a really strong strong path to improve from here and we're already 1 of the best.
Great Thanks for that.
Once again and ask a question. Please press star 1 on your telephone keypad.
And we do not have any questions at this time and I'll turn the call over to Mr Assembly.
Thank you very much and.
And so I wanted to take a moment to thank of course, all our shareholders for continuing to analyze XO and looking for the right entry point for yourself and understanding of the financials, but I want to underline that in this day and age I think it's very important that we look not just on the financials, but also to the environmental social and governance principles of behind the company on him.
Extremely proud that hexcel has announced the plan to be completely carbon and plastic neutral by September.
And that's not just at the corporate level, we're actually offsetting of the carbon of every single employee and hexcel. So I implore, all our stakeholders of our consumers our shareholders. When you are making purchase decisions investment decisions. Please do consider which licensed producers, which companies are taking the planet at heart or doing something about it.
And are making sure that our products don't negatively impact the planet.
And its people over the long term.
Extremely proud to have a team that's now completely carbon neutral not contributing to the problem and of course, all backstopped by the fact that come our Q2.2022, when we expect to be fully consolidated hexcel is a completely different story, where number where we plan to be number 1 and Canadian rec on a <unk>.
The larger revenue base with good gross margin accretive synergies and a solid growth story and the USA, all while making sure that our planet is here for generations of children to come.
Thank you very much for listening and it's been a pleasure well see you next quarter.
This concludes today's conference call and you may now disconnect.
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