Q3 2021 Hexo Corp Earnings Call
CBD beverages in Colorado from him at the moment.
Our third quarter had really 2 stories.
So 1 of what 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 about our challenges of Quebec, and specifically the 2 decisions that we spoke of debt, we took that impacted Quebec negatively.
Let's start outside of Quebec with the good news.
We're up 169% excluding beverage versus the same quarter last year. This is some of the best growth outside of Quebec in the entire industry.
Were also up 14% in Ontario from Q2, we continue 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 we started to see the shift in consumer preferences.
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.
The mistake came in hindsight, we offline the some strains that were performing well in Quebec, we had sufficient inventory of 4 to get through the 9 months growth period. So we all find about 3 genetics that we're responsible for quite a bit of the quite a bit of sales on Tibet thinking we would replace them with the strains that we had tested it at our genetics lab.
That had performed better than those current strength.
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 in our indoor facility at Bradford 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.
Resulted in a loss of flower share.
We're still number 1 in 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 that is well underway. We have since increased quality at both of our indoor production sites ended 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 an 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 our products were flying off the shelf. So we made the decision to ship a product at a lower than maximum potential into a market. We put some hash into market at 22% THC because there was simply no competition.
What we didn't what we underestimated was essentially with the speed at which the cannabis industry moves and that of the mistake, we will never make again.
The our competition so we loaded in the 22% of hash and we produce quite a bit of it.
Our competition came in especially from the craft growth. So it was a few weeks. After we did our load and they started coming in with Ash of 26 from 27% that crushed the velocity on our 22% hash and we had to retool that product. So we are this is not of productive capability issue. In fact that we have now started.
Again, we respect all 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 are hitting as high as 45% to each day.
We are continue to work with the S. P. D C on the rest of the boards to correct those 2 decisions.
They were unfortunate, but there are things that were set in motion about 12 months ago and we've since rectified the issues.
Go forward I think that's 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 those 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 asset in all markets.
We have an opportunity to expand the assortment and the distribution and the position a better overall offering in 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 O. 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 are we have dipped a little bit below the 30% of watermark. So currently running on 28% adult use margin, which is still 1 of the strongest gross margins in the industry and that is really the result of some.
Some of the <unk>.
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 in real time in order not to accumulate bad inventory of that.
<unk> 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 an 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 at strengthening of the share leadership of the beverage category in Canada growing to 46% market share nationally. So huge congrats to the trust team and of course, our consumers that keep making trust the best beverage brand in cannabis in Canada.
We're going to continue on the success and celebrate the summer with some new products coming out of trust. So look forward for house of <unk>, Valentin and sparkling atonic ex M. G Citrus index Mg watermelon as well as the very well honey Green Iced tea.
Little victory eliminated and bowl of 5 line look for those on the shelves across the country for the summer.
I'll pass it over the trends to talk more about our financial results.
Thank you Sebastian.
I just wanted to touch base, a few things on the balance sheets of the P&L.
This is another quarter of third in the ROE that we've had no significant inventory write downs of provision does the continued to do the right things around inventory.
Quickly on otherwise.
Number of core quarter without any impairment of long lived assets. So our asset base remains strong our balance sheet remains clean.
We raised $45 million of off the back of our aftermarket offering we only ran it for about 90 day between the filing of the perspective supplement and the.
As we led up to the possible announcement of the definitive agreement to purchase ready for them.
We also raised an additional $395 million of net proceeds through the issuance of the secured convertible debenture in relation to be ready can acquisition. We're currently sitting with about $194 million in cash on our operating accounts and have another 275 million.
Sitting in Casper of waiting on the Freddie Fannie transaction flow.
Our DNA it's Phil.
The.
And the continuum or we continue to want to try to push it down into the debt percentage of net revenue in the market.
Our marketing sales growth, we've come down another 1.
Sequentially from Q2, which represents an 8% decrease in real dollars.
Loss from operations was $16.1 million per Q3, bringing the total loss from operations, the $25.6 million per quarter.
I just wanted to note that this is the by far and I mean by far the lowest of any loss from operations on any of the crop LTE and is not even close so we've been doing very well in terms of our commitment.
Commitment to ensuring we are spending investor investor funds wisely.
We still believe we have a clear path yes.
The group structure of it correctly.
On the leverage what we have kind.
Have a bright future.
We also know that with our M&A activity.
Debt once closed we have a very good path, but not only.
Abundance of adjusted EBITDA positivity, but equally of path.
We know of force with that M&A, we will be turning our focus of the integration planning and execution, we have hired external consultant.
We've already closed on on.
On 3 call Protiviti and we've already closed on the out of it.
As of the <unk>.
Couple of weeks ago.
But we know that we're on a path to closing on ready fan or for the work we will be doing on a lot of integration planning on a very structured way, where we feel very good at both of the risk that we're mitigating any of that with Baird.
We redid the great job I believe in front of it.
We're looking forward, we're working with the teams that ready 440 <unk> north.
The very constructive in the green from client protest with the <unk>.
Post close integration.
At that I'm going to turn it back over to the bathroom.
Thanks, very much trend.
Despite the many dire economic and social consequences the pan.
<unk> is caused the cannabis industry continues to grow that's a testament to the consumer demand for safe high quality legal products that are offered by the licensed producers.
Ex those 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 of can ends.
48, North we should be the number 1 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 in Canada were focused on integration and making sure that we continue to push our margins higher.
We're focused on delivering not just the positive EBITDA, but in the future of moving us to 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 a 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.
At this time I would like to remind everyone in order to ask a question press sorry, it's on the number 1 on your telephone keypad well 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 your.
Your home market of Quebec.
Just having a little bit deeper on some of the softness there in terms of genetic so it looks like you are trying to right that ship.
So we'd like to get some more color in terms of.
The timing of kind of of the strength 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 heightened competition and that marketing of how do you feel it might be more difficult to kind of maybe regain some of that market share as more competitors have come.
Moving to the Quebec marketplace, So and then kind of come on 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 in 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 now since run out on those specific constraints. 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 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 hundred strained plan so no things.
Things are going very well and now of since then so since the first 2 genetics failed in greenhouse we've actually had tremendous success. So some of our stalwarts specifically northern Berry, which is 1 of the best selling flowers in Canada is produced out of muscle and is 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 will endorse items out of this and of course all of this is just reflective of the hexcel genetic library proper not the hexcel is none of US 48 more threat of can library, which of course is incredibly robust.
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 the ability to get high THC products. It looks like harvest during the Q remained near record high So would love to get some commentary in terms of.
The level of THC for it.
The harvest of the most recent quarter and then also if you could provide some color in terms of Zen based on that acquisition of all closing.
It looks like there was some softness in their most recent quarter..2 so just in terms of what youre seeing from from their own sales ended on <unk> is that they've been having because I know.
<unk> has been a high priority for you guys. Thank you.
As far as the Zen of those numbers, we look forward to reporting consolidated and Youll see youll.
Youll 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, we 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% and thats out of greenhouse grow.
Some of remaining upside of 2 to go kind of go hit some theoretical maximums there as we move to 2 indoor the entire portfolio is now half of the entire portfolio is now of hidden 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 the Turkey production. So it's not just the 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 turpin profile is just raised.
And 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 know.
Go try that against the compare of competing product you'll notice of the Bud structures, a lot nicer way more moist 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 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 a response rate and just sensory response and that the story of matures beyond <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.
Part of our story.
Alright, great. Thanks for the color on I'll jump back into the queue.
Next question comes from kidney Chan with BMO capital markets.
Thanks, Good morning first question on.
On the genetics from a production so.
Wondering.
Some of our competitors doing their own product the finalization of our what we saw what 1 quite a while and not to go.
Well to eventual what some of the rental model growing of multiple thermal cool commercial scale.
That puts quite a while on quite a bumpy about so it sounds from could you just elaborate a bit more on the confidence you have.
Hi, Joe.
And then quite of bit of 1 that law.
We're trying to scale up probably won't be able to have them on lifestyle.
The market share over the last 2 quarters the special.
The growing it sounds like some of the strong on.
Some of the pro forma book, which I think that would come back on a learning curve.
Some of them.
Okay.
Okay.
On yourself.
Thank you Tammy yeah. So the this is the advantage of having started the genetics program 12 months ago. So we've been in full swing and genetics revitalization.
For a year now so it's not something we've talked about we've been quietly doing it in the background and the first 2 strains 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 in muscle of that are productive that are working that are growing and actually about to be harvested we expect that by.
September will have many new strains in market. So we're quite excited about that and of course, we keep just improving the base trains that we have some of course things like on northern Barry 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 of when you look at full cycle.
For that to really be complete it's probably an 18 month process the largely engaged that so.
The September we start and we should have the full portfolio of refresh refresh completed by Q2 by our fiscal Q2 in 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.
Toward the end of this for some time now so it is the state of the art facility 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 of the there at a high high level within the very short time frame.
Okay. Thank you that's helpful and my follow up question is long established category I noticed from language in the press from me mentioning of more.
Competitors coming to market, while you're still number 1 you did call that out so I just wanted to ask is that on.
The concern what's the strategy of aside from the.
Some of the new products that you will be launching in the category, how you're thinking about maintaining your number 1 share of global pricing as a lever maybe required just overall the commentary on how you feel about the category now that it seems like from our competitors.
So that category. Thank you.
Thanks, Sami well, it's a dominant number 1 right now at 46 share and we're not we're not worried in the in terms of the short answer in fact I welcome competition in the beverage space I think it's necessary our biggest opportunity in beverage is actually growth of category, so not growth of share, but the growth of of the overall cat.
Laurie.
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 on 85% rebuy rate, meaning of 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 beverage becomes of go to and anyone who has tried the trust portfolio of they're usually blown away and it becomes part of their part of the 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 on overall category could eventually hit 15% of total cannabis sales, it's simply a wonderful format.
Okay. Thank you.
Next question comes from the Ritesh <unk> Parikh with Oppenheimer.
Thanks for taking my question. So on so I guess I guess first starting out with the Q4 is there anything you can share from a revenue expectation perspective, we clearly saw some challenges out there with Covid and then you guys have some company specific things that Youre also of getting through so just curious if he could you share on any perspectives on the Q4.
We.
Listen Q4 is better.
Coming out of Covid are robust so and we didn't want to blame COVID-19 for Q3, either really I think I think that's a key differentiator for <unk>. The Q3 was our fault. We there were those 2 key decisions that we took a year ago.
So 1 on the strange election, and the other on hash we know what those are we've rectified them and it won't happen again.
Not of Covid problem consumers were still buying the actual product and how do we have the the right.
Mixing category and channel.
I think Q3 would of been a very different story. So Q4, certainly already looking better, but we're not providing guidance on numbers in more of 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.
By 2 things, Okay, we had of $3.6 million.
The tax levy that came in on an annual basis.
The hit Q3.
We also had of course of the margin loss.
In relation to the lower volume of sales specifically on a pullback but.
But then the margin percent was about 20% still a pretty good margin percent.
All of the equal, especially around the LP at the time of this time, but I think.
Think breath 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 that of it.
And we believe that we have this path forward.
Talk about not just from adjusted EBITDA, but the.
But the actual EPS.
So look on our Q2 is where you'll see really the Q2 of next year, you'll see all 3 hopefully when we get to the close of ready can of 48, North and we have is that we would've had because of the statement I think youre going to see a great Q2, but what that looks like I don't know, but we're not worried too much but EBIT of RSP there it's coming on to the.
The role, 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 that 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 I just thought of it did.
Doug I'll hit this quarter.
Honestly, it's a bit of the debate between us and our auditors as the how we should treat that.
I'm on the opinion of it should the quarterly so it doesn't hit in any specific quarter I've been losing that debate quite frankly, but I'll continue the habit.
The thing that as other people have been treating it as well apparently so look the.
Stay tuned, but if we have to start budgeting in for Q3 of the year we will.
Okay, great. Thank you I'll pass it on.
Next question comes from David <unk> with 80, <unk> capital markets.
Hi, good morning, Thanks for taking my questions both of them are going to evolve a little bit around your M&A activity as of late so.
My first question Sebastian and we've had this conversation several times around cultivation, specifically, we've seen you didnt have the write down any inventory this quarter, but now with your other acquisition, mainly ready CAD and to some extent 48, north perhaps out of this what are your thoughts around now going back to having the problem.
And not in this quarter, but in subsequent quarters of how the excess supply.
Especially with all of these potentially new cultivation facilities coming on line.
Thanks, David.
To 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 were the lessons that we've built on in those 2 years. So a ton of experience there and learning how to manage supply chain.
To manage cultivation moving from specific SKU, all the way to the shelf and then at the 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 hexcel to our our M&A partners. So going in were immediate.
Implementing things that will ensure that inventory does not become a problem in the future and you saw some of those things in 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 gonna be of.
The 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 readies portfolio.
Of the right account portfolio as a whole in the oil et cetera.
On a consolidated basis coming out of this <unk> is going to be the number 1 not just overall by rec share, but we're actually the number what we should be the number 1 in flower the number 1 in pre roll the number 1 in beverage the number 1 and has the number 1 in oil the 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 well as Sebastian.
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 1 here, but I mean, what processes and procedures are in place to ensure a seamless acquisition I mean, even with quality control of Youre talking about products that has been arguably number 1 of the market remember.
1 to 3 with ready can so is this going to be heck, so adopting already kind of approach or vice versa or kind of a combination of the 2 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 the same consultant that we've carried on through the engagement to help with the ready can and 40, dark which we've already launched and so we're already starting on those integration plans.
All 3 being very different okay. So as benefits of the very very much more complex type of.
Multi multi sites.
L P 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 it'll be of what we're going to take the best of each 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 it almost as a wholly owned sub.
But with a lot of support from the expert teams, where where that makes sense, especially on the cross functional basis with SG&A.
But operationally. The 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 a different.
The boats.
Sort of in between the 2 because none of us in the Medicare.
Okay. Thanks, very much trends 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.
First of all she has to do with how you see the broader market transitioning from a lot of success with taking share from the illicit market, but is that incremental market share of 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.
The market share over time as my first question.
Thanks, Doug.
Your first point of the we're still a 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 black-market concentrates so.
We are keeping an eye on those specific categories. So think rosin shatter.
The live extract et cetera.
Just 2.
To see where we want to play in those specific categories. We do of R&D aggressively working on that.
So has been the number 1 concentrates operator, when you look at our hash product.
And so we were quite good and make it really high quality concentrates. The question is how big does that market I have to be before we want to go full fledged to put in the sort of capital where we can compete at 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 talk 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 from.
On that decision, but it was mostly of 1 time thing so they've showed us what they could do from their loading it was very much a.
T. She concentration piece, which we can do so to be clear, we have no trouble putting out high THC hash, that's better quality than the 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 in 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 in some of their best product and they they've made quite a quite of bit of inroads starting of late in our Q2 and really full fledged in Q3, but what we've seen on the tail end of Q3, and even starting Q4. The craft Brewers that were originally successful with their first loading now are run.
Out of product the 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 are the majors and we also pick out a couple of craft on black market offerings, and we all run it through our quality process to see what people are doing and the the craft product that's 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 in the double blind basis. I also think that we can put hexcel product up against just about any flower and market. So I think it was I think.
It was a temporary setback I think that we know the reasons why it happened and I think that the structural advantage is clearly in <unk> favor of long term.
Okay.
And then second question just has to do with the U S clients I know you kind of a lot on your plate right now but.
This is going to be kind of obviously very important probably over the next 12 to 18 months is there anything else you can tell us about.
Youre planning of the U S.
Yeah. So the U S is really of the.
3 pronged strategy. So now we have of productive asset 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 trust USA to multistate very soon so thats 1 of growth path the second of growth path of courses.
Continue to be in advanced discussions with large cpg's and especially.
Especially on the functional food, but also of pet care and cosmetics.
Of course, you can see the strategic value of the 48 north tuck in for the 4 of 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 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 in the months of recreational is built on the U S. We believe that we can take the product portfolio. We have here. So hexcel hash readies pre rolls, we can bring those to the U S and essentially compete on quality and price basis.
Directly with any other pre roll or hash manufacturer that's 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 a meaningful share of shelf and we believe that that's what's going to lead us to eventually becoming a top 3 cannabis products company in the U S.
Thank you.
Next question comes from Andrew Carter with Stifel.
Hey, Thanks, Good morning, I wanted to go back to the cash and I appreciate the breakdowns line.
The strength you had $469 million in total cash between what's available on once in escrow you can take out 400 from me. She already can tell me the CPI and so 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 into an investor on 48 north.
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.
Jamie Thanks.
Yeah happy to happy to talk about the sort of of our capital plans and where we where we're ahead of our cash look we you're right we have the vote.
If you start doing the math and remove out the $400 million of we're going to require 2 to close on ready can there will be more cash requirements. As we continue to rollout our capital plans book in the U S. Here in Canada.
Have more plans to stand up the facility.
In certain categories within bell of the Bell.
<unk> such as the.
Pre roll we wanted to continue to invest in pre roll and the other thing.
In the U S. We will be standing up our power Backflow technology, which we believe is going to be in the U S.
Anywhere between 25% of $40 million over the next 12 to 18 months.
If not more.
Standing up our power of the heck of the technology available, which is going to require significant cash of 20.25 million of Lee over the next 12 to.
The 18 months.
So between the between all of the both things and more.
We'll be booking.
At what our cash requirements are going to be to be able to take advantage of of these opportunities that we find some of the.
Ourselves so you can stay tuned.
The timing on that.
I just wanted to kind of zoom back in on some questions I know youre, not giving guidance day maturing of the personnel.
Reporting kind of post kind of of reopening starting in Canada are you seeing any accelerated orders.
I guess the question is will we see a step change in orders from the provinces or did that kind of inventory.
Inventory level kind of get my time during COVID-19. Thanks.
Thanks, Andrew the sales are definitely open up we're seeing the opening up again, so the the orders have increased.
Yeah.
Okay.
Got it.
And Andrew if you look at US I mean look at it.
People may of blocked over to that but we had 14% sequential growth and on.
Sequential through Covid, and I know that thats been the struggle for a lot of LTE of as they came to market in recent quarterly releases.
We're not sitting here, saying that we were up 14% 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 help on.
Next question comes from Johnson <unk> with CIBC.
Good morning.
I wanted to start on Quebec, the the press release referenced additional competition in the province, So 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 profile of.
The preferred supplier agreement on 1 of the terms of that as the preferred supplier agreement with the province.
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 in Quebec of platform in which hexcel participates and in terms of maturity of the brands I think Quebec was later in accepting more licensed producers of originally if I take you back to the start of legalization, Quebec.
Kind of fixed license producers.
Now of course, they've they've opened that up a few times and we're now up to 26 and you've seen that ex Judy. She continues they just released the quarter. The continued to do a great job of 1 of the most profitable.
So 1 of the most profitable.
Distributors provincial distributors in the country and also getting of continuing to see huge growth in sales, but I think what we're going to see you again from the maturity.
The bank has been slower to ramp on licensed producers I do think that the craft growers of a lot to prove out from an 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.
It's no secret Eschew D. C is there for the consumer it's there too to migrate the black market to 2.
The legal market and those things are done.
<unk>.
Those things are as long as those things are done.
The they operate on the 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's a very difficult market to operate in long term 4 of those craft growth for the second part of your question from a preferred supplier in Quebec.
The preferred supplier relationship of course, you continue to see ex of the number 1 in Quebec since day, 1 of legalization, we don't expect that to change as <unk> said, we expect to fully recover on market share on the next 2 to 3 quarters.
And we are very well aware and we are working with the SKU D. C. Ex was very well aware of that we did this to ourselves we pulled skus that were highly productive in Quebec, anticipating we could replace them. We did not replace them in time, we will replace them over the next 2 to 3 quarters and Quebec is fully aligned with that strategy. So it is not.
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.
Okay. That's that's 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's any impetus from health, Canada. The change any of the regulations that somewhat negatively impact the.
The industry, whether it's on beverage unit sales of our edibles concentration or marketing or consumption lounges really anything do you get a sense of the things on their radar per being potentially changed the next 12 to 18 months.
There's a lot on their radar and the.
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 has had other priorities.
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.
To go to the Minister.
And I do expect we'll see some positive outcomes. So specifically I think case quantity per beverages is 1 where 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 single 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 you've had the chance to try 1 of our truss SMG beverages, which is the 10 milligram nano emulsified formulation I mean, the uptake of that product is phenomenal of very quick it works on about 15 minutes and.
The the because of the technology, we put behind it the 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 anything 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 in the 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. We can see they are pretty much all of sequentially down we don't know what <unk>. Obviously has got as of late but im just curious given that we are seeing.
The retail numbers of incrementally increase I know Jan February was a little bit down I'm, just curious how much of that is potential market share loss versus the.
All of the LP universe of kind of dealing with various issues, even aside from some of them ones that were more specific to ex 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 felt from supply chain logistics, a proliferation of small growers. So again, if you look at it on the national basis, you've got 90 per cent of the share that was split amongst the top 10, Mlps now what's happening.
You've had on on lining of about really 500, or so growers. So theres not 566, and those growers of all of 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 them the chance, which they should but.
Whats 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 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 haven't seen a high quality.
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 capital that's very expensive and so it is just the 2 to compete at scale is not something or a skill set from the craft Brewers have so I think thats what were 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 in 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 course, its on a great path for full Quebec recovery, but also as <unk> said, you've seen us grow the 1 of the fastest growing outside of Quebec. So we have great traction in those markets.
Despite all of those small producers being there.
That's very helpful and just lastly on my interest in Quebec, specifically I know you talked a little bit about this in the prepared remarks on 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 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 in your view or if there is still going to be the.
The supply demand dynamics of what other Lps are doing in Quebec, and what strength they are providing as youre trying to recover there as well.
It's yeah, it's completely risk mitigated on on a consolidated basis when I look at the when I look at the strength that we're bringing in non such as we've developed internally, but also the library that's available from <unk> 48, north of the actual portfolio has never been stronger and you overlay that to our productive capability or technology.
And strain post processing, so, including both drawing and curing have never been stronger and pair that with the fact that the quality, we're seeing out of the crop growers. That's taken a nosedive after the initial load and they are not prepared to compete so no I'm not worried at all in the.
Thank you.
I mean of course, nothing is absolutely risk free I think the risk sits only in timing and that's why we're saying 2 to 3 quarters. So the visibility on exactly when it's fully rectified is is not the 100% clear at the moment, but from a capability perspective.
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 HRD and capital.
Hi, Good morning. My first question is just on the original stash. Your bulk format product sales were down quite a bit in Alberta, and Quebec and I don't know if thats. The new strains of you were talking about or is that competition Andrew of pricing pressure can you comment on that.
Sorry on which market. So could you just repeat your question. Please yes, I think in the MD&A. It was saying that the original stash on your bulk format you saw sales pressure in the <unk>.
Alberta, and Quebec market.
So maybe just kind of where they don't want.
So come back I've explained was part of that strain choice. So some of those strength.
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 2 of 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 on a consolidated basis.
Okay, and then just with the strategy of refreshing with the new Strange I think you said of 100 new genetics.
So are we going to see of basically a complete overhaul of the product portfolio at some point over the next 12.18 months.
To keep the existing brands of I guess, what youre going to upgrade them with some of these newest range is that how I interpret that.
No. The 100 screen plan is really a response to consumer demand for newness. It's of response do consumer demand for variety and but we will keep the stalwarts on our popular strains of 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 on Canada and.
We continue to have robust success I mean, yes, there is a pullback but were still number 1 in 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 in market. This is really about competing against craft across the board competing against additional variety and taking the next step in evolution to respond to consumer demands.
Okay. Thank you.
Once again to ask the question. Please press star 1 and we have a question from Adam <unk> with Scotiabank.
Hey, good morning, Thanks for taking my question so.
So.
I just have 1 and it's more from a long term perspective with the.
In Canada. After you consolidate the 3 companies that you've gone out and.
Reached definitive agreements with recently.
And you realize the synergies with those 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 you think about that.
Thanks on well I'll, let Trent out a couple of times, but overall 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 an adult use perspective portfolio, even in an incredibly challenging quarter still has 1 of the <unk>.
<unk> gross margins in the entire industry at our last quarter, we have the highest gross margin of the entire industry. So the technology behind <unk> on 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 of 1 of the top operators.
And 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. On global expansion, because obviously now we're turning our attention to be not just number 1 in Canada, but the top 3 in the world trends anything to add.
Yes, yes no.
Iterate that the once you have the 3 M&A.
The.
Amalgamated and into the integrated into the excellent 1 consolidated the entity, we do believe that we will.
Have that path to 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 though within the last bit of the long of time or really capital heavy.
I'd like to just reiterate and remind people of that.
Take what capital has been deployed to date buyback so.
Being 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 in 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 Nobody know LP is below 26, 27, besides that and you've got a couple of who are Apple of <unk> 5 million per 10 basis points. So we've been we've been deploying capital on a very efficient way and our net loss from operations as I just debt.
Year to date of after 3 quarters is is less than half the.
The next best L P and come out of these are over $1 billion.
The loss from operations, though, but we like our position and we like what we've been doing in the 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 to ask a question. Please press star 1 on your telephone keypad.
And we do not have any questions at this time I will turn the call over to Mr Assembly.
Thank you very much.
So I wanted to take a moment to thank of course, all our shareholders for continuing to analyze the 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.
I am extremely proud that <unk> 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 at hexcel.
I implore, all our stakeholders 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 or its people over the long.
Term.
Extremely proud to have a team that is 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 the.
Number 1 we plan to be number 1 in Canadian rec on a much larger revenue base with good gross margin accretive synergies and a solid growth story in the USA, all while making sure that our planet is here for generations of children to come thank.
Thank you very much for listening and it's been a pleasure well see you next quarter.
This concludes today's conference call you may now disconnect.
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