Q4 2021 Hexo Corp Earnings Call
We are well known and unknown risks uncertainties and other factors that could cause actual results performance or achievements to differ materially from current expectations or those implied by such statements.
This mornings discussion is qualified in its entirety by the cautionary note regarding forward looking statements and the risk factors that are included in the annual information form management discussion analysis and annual report. Please review these materials for more information about the forward looking statements and the risk factors that could cause actual results performance developments or events to differ materially.
Clearly from our current expectations and those implied by such statements XO disclaims any intention or obligation except to the extent required by law to update or revise any forward looking statements as a result of new information or future events or any reason I will now turn the call over to Dr. Michael months, our chairman of the <unk> Board of directors.
Good morning.
Like to welcome everyone to this call.
My name is Dr. Michael Munza chair of Hexcel, and Ive been acting CEO in the interim.
St. Louis depart the organization, a little more than a week ago.
This morning, I'm very excited to introduce you to our incoming president and CEO Scott Cooper.
The entire team at XO has been working tirelessly to onboard Scott and bring them up to speed.
On our organization and many thanks school all to all the members of Hexcel for being so incredibly cooperative and hard working to allow this to happen I believe Scott is going to be an exceptional leader for hexcel as we take the next step in our strategic evolution with that I will turn the call over to Scott for some brief remarks.
<unk>.
Thank you Dr. Munza good morning, and thank you for joining our year end financial results call.
Im Scott Cooper incoming president and CEO of Hexcel I'm joined today by trend Mcdonald, Texas, Chief Financial Officer, and Valerie Malone <unk> Chief commercial officer.
Before transfer presents a quarterly and year end results I wanted to provide an overview of my immediate priorities.
First.
Quickly getting my arms around the business.
Over the coming weeks I'll be having as many conversations with customers employees Board partners analysts and investors as I can cram into each day.
These will help inform me as I said, the strategic direction for the business and refine our strategic choices. They'll also help me understand where hexcel can capitalize on strengths and where we may need to augment capabilities to compete for and earn our customers and consumers business.
While doing that I will also focus on supporting the team to effectively complete the integration of our recent acquisitions.
Break down barriers within the organization to ensure the team has the resources they need to successfully achieve our targets.
And address the risk presented by our debt structure.
While I'm, new to XO and my role as President and while I'm new to XO in my role as President and CEO truss beverages I did have an opportunity to close closely work with many of the exco team.
Based on that experience and reinforced by many discussions I've had over the past 90 days I know that Hexcel has a strong foundation strong set of brands and the right fundamentals to build the best cannabis company in the world.
I look forward to updating you on our path to growth over the coming months.
I will now turn the call over to Trent to provide an overview of the financials.
Thank you Scott and good morning, everyone.
Before we delve into our results. This quarter has also had some key developments that I would like to highlight.
On June on June one we completed the acquisition of <unk> more recently, we also closed on the acquisitions of 48, North and ready can we are currently focused on completing these app integrations, including taking best practices from each organization as well as bringing our cultures together.
We're also carefully assessing each site and brand in order to maximize the pro forma value of the combined entities.
Subsequent to year end, we closed on an underwritten public offering for total gross proceeds of $144 million U S. We.
We used the net proceeds from the offering to satisfy a portion of the cash component of the ready can purchase price and for other working capital transaction integration and Capex requirements.
We have made several strategic changes to our global leadership team, we appointed Valerie Malone as Chief commercial officer. She brings more than 20 years of experience managing businesses across different verticals, including CPG technology and consulting.
We appointed <unk> as Chief people and culture Cultural officer. He also brings more than 20 years of experience as a senior international executive leading human resources sustainability public affairs and communications functions.
And we are of course also pleased to have Scott Cooper join us as president and CEO Scott's experience with truss Molson Coors and several other publicly traded consumer packaged goods companies make him exceptionally well positioned to lead us through the next phase of our strategic evolution.
We'd also like to take this opportunity to thank sebastien St. Louis for his tremendous efforts and establishing growth and delivering a solid position from which we can move forward.
Now, let's jump into our results.
In fiscal 'twenty, one we <unk> generated net revenue of $123 5 million an increase of 54% from last year, we saw a strong organic growth of 41% with core hexcel non beverage sales over the prior year with contributions from new brands such as big sale.
And new products like original stash pre rolls Pasche and click.
In September of last year truss beverages were launched in this short time truss beverages is already the market leader with 46% market share across Canada.
We also saw our sales outside of Quebec grow 96% year over year as we continued to focus on national expansion and distribution.
International and wholesale revenue also saw growth, which was offset by a decrease in domestic net medical sales.
Let's move on to our fourth quarter results.
In the fourth quarter, we generated net revenue of $38 7 million the highest in our history and an increase of 71% from the prior quarter net.
Net adult use revenue excluding beverages increased 28% from Q3, then of this brands such as non mistake and re up contributed $4 million through two of those three consolidated months.
As we continue to diversify our provincial sales mix, we saw growth in Alberta of 76% and in Ontario of 31% quarter over quarter and are continuing to maintain a top position in Quebec. We also saw our net beverage sales decreased 70 increased 70% from Q3 to $5 2 million.
Again, maintaining number one market share in beverages, and Canada at 46%.
If you recall the Israeli government recently revised its protocols, resulting in <unk> inability to export in Q3, we are happy to report that <unk> was able to quickly gain compliance and have recognized $6 $8 million in international sales to Israel. In Q4. This will remain an important focus for <unk> as we move forward.
Overall gross margins decreased from 22% in Q3 to 28% in Q4.
Margin on adult use excluding beverages decreased to 12% as a result of a decrease in average selling price due to increased competition and a change in sales mix. Additionally, the accounting rules related to business acquisitions resulted in the crystallization of fair value adjustments to the carrying cost of <unk> inventory.
This then flowed through the P&L as an increase to the cost of sales, which further reduced gross margin.
Gross margins on beverages increased to 33% as we continue to scale up to optimal production levels International sales generated a gross margin of 65% bolstered by the fact that they are not subject to excise tax.
Wholesale generated a negative gross margin of 65% as a result of the previously mentioned crystallization of that fair value adjustments on certain of its inventory normalized for this.
Normalized for this impact gross margins would have been 21% on wholesale.
We are seeing price compression across.
The industry in fact much of this compression specifically dry flower has been led by hexcel and its brands.
Looking ahead hexcel is laser focused on improving our gross margins in the short term the company expects to see much of these improvements as the synergies from the Companys recent acquisitions begin to appear within the Companys financial results. We are actively reviewing margins for all products and categories, which through acquisitions has recently expanded.
And are applying best practices from our top performing categories to make improvements elsewhere.
Further the company is confident that its best in class manufacturing and operational capabilities will continue to drive margin performance across the business. This is particularly true with the acquisition of <unk> and its industry, leading lean production fees facilities.
When looking at gross margin it would be beneficial to evaluate the company's performance on a category by category basis. For example, the company made the informed decision to reduce margin are products like bulk low THC flower to hedge against impairments and capture market share. In addition, the company continues to invest in innovation and scale and high <unk>.
Products, such as Vapes, where we currently command less market share.
Our adjusted EBITDA was negative $13 9 million, representing a decrease of $2 2 million from Q3.
As a result of again the crystallization of the fair value adjustments on the inventory from <unk> and the direct operating expenses up denim as we are continuing to work through the integration and expect to obtain additional synergies.
SG&A as we define it is SG&A marketing promotion and research and development. When added together. This increased $9 4 million over Q3 much of this was due to the impact of the <unk> acquisition and the initial impacts of increased insurance and audit type fees, while our SG&A increase in dollars such expenses represent.
61, 3% of net revenue down from 63, 4% in Q3.
While certain expenses have increased with the size and complexity of the organization and we'll continue to in the future as we endeavor to grow our market share. We are focused on achieving synergies through integration and streamlining of operations and expenses wherever possible as such we will continue to aggressively strive to decrease SG&A as a percentage of our net revenue.
Marketing and promotion, specifically increased $1 2 million over Q3 as a result of a relaunch of op brand expansion, the bake sale and outreach into retail.
Acquisition and transaction costs increased to $14 9 million. This is related to the acquisitions of 48, North and <unk>, which were finalized after the period as well as the as the transaction and acquisition costs presented us.
Yes.
We did impair PP&E $19 4 million. This was primarily due to the impairment of noncore assets acquired from <unk>.
Our financing expenses increased to $23 2 million $18 8 million relates to broker advisory and legal fees related to the senior secured convertible note at $3 million related to the acquired debt of incentives.
We had a loss from operations that increased from 27% to $69 5 million, which was significantly driven by the acquisition related costs financing expenses and transaction costs I just spoke of.
I'd like to give you an update on the progress on our integrations. We have now successfully closed all three transactions, we've switched from integration planning to integration execution as we move forward through the robust plan we created.
We originally thought we'd be able to achieve approximately $35 million in synergies and now believe we will exceed that target.
Due to the timing of acquisitions Q4 of F. 'twenty one in Q1 of F. 'twenty two will only be partial period consolidations with Q2 expected to have full consolidation of <unk> <unk> 48, north for the entire quarter, we look forward to sharing these results.
The team continues to focus on ensuring good margin management management as well as controlling SG&A expenditures and decreasing SG&A as a percentage of revenue as a result of these acquisitions. We have also had success in expanding the geographical reach of the brands in our portfolio, including the introduction of <unk> into Manitoba.
I'd like to speak about ESG, we recently entered into a partnership with offset or a Vancouver based organization that supports renewable energy and carbon projects across the world and became carbon neutral in September 2021, as well as offsetting 100% of the company's operational emissions. In addition to the personal emissions of our <unk>.
<unk> hundred employees something we're very proud of in addition to carbon emissions. We also we're also counteracting the use of plastics in our packaging.
Yes.
The convertible debenture.
The company acknowledges the ongoing concern with the senior secured convertible notes issued on May 27, 2021. The company has maintained a positive relationship with the holder with the holder, having negotiated and agreed to two amendment favorable to the company.
While there exists a risk that significant cash outflows may be required over the next 12 months under the terms of the senior secured convertible note. The company has been working with the holder to renegotiate the terms of that note.
As an outlook going forward, our focus remains on growing market share consumer led innovation and completing the integration of our transformative acquisitions.
On a final note I would like to thank everyone at <unk> for their commitment and effort over this past year.
This now concludes my prepared comments and operator, I would be happy to take questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile our Q&A roster.
Your first question comes from the line of Aaron Grey with reliance Global partners. Your line is open.
Okay.
Hi, good morning, and thank you for the questions.
So first question for me is around gross margin, specifically adult use X beverages seems even if you strip out the crystallization.
So 12%, 14% so still you were down sequentially.
You mentioned some of the bulk low THC flower being sold and how you guys are kind of leading some of the pricing pressure I guess my main question is towards kind of on a go forward basis the product. They now have left.
Do you feel like that'll be more high margin flower sales and then working on some of the more derivative products like fate do.
Do you feel like that mix will start to come up or do you feel like this prolonged price pressure will continue to impact the gross margin line on that adult use X beverage segment. Thank you.
Sure sure Erin Thank you for the question.
Let me address the obvious we are we are seeing price compression across the industry. In fact in lots of the compression like we said, especially on the price of dry flower has been led by <unk> and its brands.
Looking ahead look.
We continue to be laser focused on improving our gross margins.
In the short term the company expect to see much of the improvements as the.
The synergies the companies of the company's recent acquisitions to begin to appear in our financial results.
Looking ahead. The company is actively reviewing categories across hexcel and all of our newly acquired organizations, where we see strong margins.
And we're going to apply best practices from these these categories to make improvement elsewhere. Further the company is confident that it is best in class manufacturing and operational capabilities will continue to drive margin performance across the business.
This particular true with the acquisitions of <unk> and its industry, leading lean production.
If I could point out one other one other remark on margin.
When we look at gross margin, we evaluate the company's performance on a category by category basis. For example, the company made.
Informed decisions to reduce margin our product like bulk low THC flower to hedge against impairments and capture the market share. In addition, the company continues to invest in innovation and scale and high margin products such as Vape as an example, where we currently don't have as much market share.
Okay, great. Thanks for that color. That's helpful. And then second question I was kind of keep it on the gross margin line you mentioned some of the other acquisitions have now closed that weren't included in the quarter maybe.
Maybe could you provide some color maybe what pro forma sales or gross margins would've been including 48, north and <unk> acquisitions or maybe how you think gross margin should trend once you kind of bring those into the fold. Thanks that'd be really helpful to help people going forward. Thank you.
Yes. Good good good question, Eric we're not going to be giving any guidance on what we expect for margins going forward at this point again I'll reiterate that we are looking at all of the organizations that we've that we've just acquired and looking at all the products and categories within within those acquisitions and are looking at best practices.
Very much.
Monitoring what we're going to be doing around margins going forward.
Alright, great. Thanks, I'll jump back in queue.
Your next question comes from the line of Chairman Tami Chen with BMO capital markets. Your line is open.
Hi, good morning, Thanks for the question.
I wanted to go back on comments about integration so.
Can you speak a bit more about this part specifically I recall when you made the acquisition.
And that's one of the things you wanted to do was they had the indoor facility and also avail of that you wanted to.
Well more premium strained game.
That would.
Would be if you were successful a way to increase your margin because as I see it now it means that.
Correct me, if I'm wrong, but it seems like your penetration in the more premium category of the flower segment is still not meaningful enough.
Pushed more into high value brand like Batesville. So can you talk a bit more about that aspect.
And Furthermore, like Mcdonough Best I think contributed just under $7 million of sales that you said G&A includes $9 million quarter over quarter, just seems like there's a decent amount of work that needs to be done there to integrate this acquisition successfully so can you speak a bit to that.
Sure Tammy look we're still.
We're still.
Early in the integration process as you know <unk> I want to say is an extremely good.
Property for US it is definitely part of our ongoing ongoing initiative.
TC improvement and things that you just spoke about.
Again, we originally thought were going to get $35 million of synergies and I believe we're going to be well beyond that target.
And as you know we've taken in a world class set of consultants to help with the integration process and we feel confident on where we are in that process at this time.
We will be continuing to to execute on the original integration plans that we developed and look forward to giving you even more updates as we go forward.
Okay and my follow up question is more specifically on Quebec, I think we've all seen that lost a bit of share here can you just revisit what has happened here. Besides the increase of more players. There are there any new dynamic to call out in that province.
How youre thinking is to gain back some share. Thank you.
Yes, we have a we have a lot of learnings from Quebec.
We still have.
Great relationship with the FTC and.
We play a significant role in the in the province of Quebec, now and we expect to have that in the future at the same time.
We're continuing to grow and achieve.
The top two market share there.
So there'll be more announcements to come but we are looking at we are looking at a plan and.
We will have more information as time goes on.
Okay.
Okay. Thank you.
Okay.
Your next question comes from Pablo <unk> with Cantor Fitzgerald. Your line is open.
Thank you. Good morning, just a question for Scott and then I know this maybe simplistic question.
Bigger picture, but.
Someone that would be new to the industry and looking at the many Canadian there'll be so there Scott what would you say to them or to shake some strings compare to the other peers and related to that if you can expand on your comments about job refining strategic choices going forward. Thank you.
Yeah.
Sure.
Well. Thank you. Thank you for the question.
Just getting <unk>.
Started learning a lot what I would say in my first 90 days.
<unk> had a chance to talk to people across the organization and I'm really humbled by the commitment.
And quality of people that I've met at XO.
So that's one thing I would say.
Second we have a strong solid foundation strong operations.
Quality products number of great brands and significant consumer traction.
Like any organization there are some areas, where there is room for improvement and we're going to continue assessing the organization and we'll report on my findings and observations next quarter.
Okay.
So again just to thank you and a quick follow up for trend.
John can you maybe talk a little bit, though with cash burn I mean capex plans.
And also just just related to that in terms of a senior convertible note the way I calculate it if you got to issue stock right now to pay us back.
It would be about 40 million shares, but maybe help me out with a modest there. Thank you.
Sure.
The company acknowledges the the ongoing concern with the senior convertible note.
Again, we've maintained that positive relationship with the note holder.
And we look we understand the risks this poses and we're taking it very seriously. So we're actively working to address that issue.
Since we have a material update on that we will absolutely notify our shareholders.
Okay. Thank you.
Yeah.
Your next question is from the line of Johns in parallel with CIBC. Your line is open.
Yeah.
Good morning can you talk about how <unk> performs in the quarter and if youre not willing to get into.
Numbers on the wholesale side, maybe you could just talk retail because generally speaking it seems like the retail sales of all three of your acquisitions have seen some declines in times, sometimes meaningfully since those acquisitions. So can you address that and what might be causing that.
Okay.
Well first of all I'd like to address the ready can there are no actual results in the quarter. As you know we closed on ready can on September one which was a subsequent event. So there are no really can.
Our results within our P&L.
As it relates to market share.
Hexcel is still still very focused on building on the unique skills of all of these organizations.
And we have.
We're meaningfully entering into plenty of new categories.
As part of the integration process.
We're also bringing experience and expertise from each of the integrated companies to the whole.
So <unk> confident that we were able to complete an increasingly crowded marketplace.
The company's industry, leading operational capacity utilization and excellence should propel us into a better position.
Okay.
And just just to clarify on <unk> I'm not referring to the statements you posted of course calendar Q2 or calendar Q3 performance is it materially different from what you have publicly said about their calendar Q1 performance.
Yes, again, we cant disclose nonpublic information.
But look refer back to the June sorted the July 15th pro forma and that gives you an idea of what <unk> is and how it performed to that point and we look we really hope to.
To provide more insight once we come out with consolidate results in Q1, and Q2, where youll see <unk> within the P&L.
Okay understood. Thanks, and then my other question is on the balance sheet.
You've talked a lot about the converts what level of confidence do you have on being able to refinance these through some form of traditional debt, even if it's expensive.
Rather than having to tap the equity markets again.
Yeah.
Well again look we're actively working to address the issue okay and so we are working with with partners and we will get back to you as soon as we have a material update there is nothing really to report at this time, but we are working with the debt holder themselves and.
Okay. Thank you.
Okay.
Okay.
Your next question comes from the line of Andrew Carter with Stifel. Your line is open.
Thank you good morning, first off I guess darker months are still on the speed. Good question Graham I'm, just very confused by the change here I mean, the fundamental here aren't really any worse than peers and theres a lot of hope with market share leadership trust that this could be some good fundamentally but everything that happened here has been driven the stock price has been related to the financing.
Net will themselves approved by the board of directors. So im not sure. Its board wasn't aware of the features the detailed financing, but thats, where it is today. So and then second kind of a follow on and I'll just keep this to one returning to the convert as I read it the holders redemption feature given they have to approve the equity price change it almost.
Seems like they have the ability to kind of put Q2 for <unk> in force now of course, something pretty serious given that I believe it senior secured on all assets, maybe you could help me understand those questions. Thanks.
No no problem I'm going to jump in for Dr. <unk> or Andrew if you don't mind.
Look.
Again, we continue to acknowledge that the senior secured debenture is an issue for us.
And I'll reiterate that we are.
In conversations with the debt holders themselves. They have been cooperative like I said before they've negotiated and agreed to couple of amendments that were beneficial for hexcel.
And we're looking at resolving the issue as fast as we can and we hope to give an update.
And as possible to our shareholders on what that.
What that might look like.
<unk>.
So I guess, that's as much as I can say about it for right now.
Okay Fair enough I'll pass along.
Your next question comes from the line of Doug <unk> with RBC capital markets. Your line is open.
Okay.
Okay.
Doug <unk> with RBC capital markets. Your line is open.
Okay.
Your next question comes from Frederico <unk> with Keybanc capital markets. Your line is open.
Yes. Thank you good morning, guys. Thanks for taking my questions. So maybe the first one I think this is for Scott obviously truss has been performing very well in terms of sales growth and dominated Margaret in Canada.
Just curious what kind of key learnings from that market from the beverage market can you can you bring to other segments in <unk>, so to try to mirror that performance.
Yes, I think the one thing that we did.
<unk> done really well is laser focus on.
Meeting consumer needs.
And working with customers to create great programs.
And Thats a completely transferable to XO.
There are already doing it.
Certain my experience will only augments with what's occurring in the company today.
Okay.
Okay. Thanks, and then a while ago you guys mentioned.
An agreement with a fortune 500 company part of Edibles market.
Do you have any update there and are you still looking for our other partners.
To explore or other segments of the market Similarly to the truss JV. Thank you.
Okay.
Yes, I'll answer that one that's a great question right now to be honest, we're not giving any forward looking guidance in terms of our financials, our strategies or what we expect to do with the.
Certain CBD partners.
But we do expect to give.
More more fulsome.
Disclosures as we go forward as those things start to occur.
Okay. Thank you I'll hop back in the queue.
Okay.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad. Your next question comes from <unk> Parikh with Oppenheimer. Your line is open.
Thanks for taking my question I wanted to go back to your commentary just price compression I was just curious on what your outlook is for price compression.
Near to intermediate term.
Okay.
Okay.
Yes, great question again.
We know we have led some of that price compression as we had.
Some of that coming from our more value brands, which were meant to solve a problem on inventory.
And two.
Avoid any impairments in inventory so that's driving some of it but we are again, we have just acquired several organizations and we're looking at all products all categories and some of them performed very well with margin and we're going to take those those learnings and apply to other categories. As we continue to move forward.
Great and then maybe just one follow up question and I'm not sure how much additional detail you can provide so as we look at some of these recent acquisitions like is there any way to just provide some pro forma metrics.
Adjusted EBITDA just to help us model in the near term.
It's very difficult I think from our position just to model the business.
Given some of the disclosures out there. So maybe is there any I don't know if theres anything that you can help us with at this point.
Yeah, again, we're not going to get too much forward guidance here, but I can't say this again, we felt we're going to get about $35 million of synergy synergies coming through Cogs and SG&A. We now believe we're going to exceed that and where youre going to see that in our P&L going forward is through margin management.
And SG&A as a percentage of net revenue.
Okay. Thank you I'll pass it along.
Okay.
There are no further questions at this time I will turn the call back over to the presenters.
Okay.
Okay.
Okay.
Yeah.
Okay.
Okay.
Okay, well that's everything.
I would like to thank everybody for coming into the call and listening to what we have to say and we're really looking forward to leadership under under Scott Cooper and.
And all of our employees quite frankly for their work and effort over this past year.
I can't say enough about the talent and the and the commitment that our employees have shown and continue to shown to show and we expect good things in the future.
You very much.
Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
[music].
Okay.