Q1 2022 Hexo Corp Earnings Call
Speaker 1: also aware of the challenges we're...
But I'm also aware of the challenges we're facing and.
Speaker 2: And that's why today I'm announcing our new strategic plan, the path forward to solidify ourselves as Canada's leading cannabis company and position us to capitalize on international opportunities.
And that's why today I'm announcing our new strategic plan the path forward to solidify ourselves as Canada's leading cannabis company and position us to capitalize on international opportunities.
Speaker 2: Over the past six weeks, I've had the opportunity to visit every core HEXO facility. I've met with many of our employees, I've met with customers, I've met with analysts, and I have to say I've never been more confident in this team and on our operations to secure a strong and profitable future for HEXO.
Over the past six weeks I've had the opportunity to visit every core hexcel facility I've met with many of our employees I've met with customers.
I met with analysts and I have to say I've never been more confident in this team and on our operations to secure a strong and profitable future for hexcel.
Speaker 2: The path forward is a transformational plan that utilizes HEXO's current assets, including our low-cost cultivation capabilities, strong brands, range of products across the full spectrum of cannabis.
The path forward is a transformational plan that utilizes hexose.
Current assets, including our low cost cultivation capabilities strong brands range of products across the full spectrum of cannabis.
Speaker 2: These come from our recent acquisitions and we will use them to drive accelerated organic growth, build market share, become operationally cash flow positive over the next four quarters.
These come from our recent acquisitions, and we will use them to drive accelerated organic growth build market share become operationally cash flow positive over the next four quarters.
The path forward is made up of five priorities.
Speaker 2: One, continue to reduce manufacturing and production costs and maintain our advantage as low cost.
One continue to reduce manufacturing and production costs and maintain our advantage as low cost producer.
Speaker 2: Two, streamline and simplify the organizational structure.
To streamline and simplify the organizational structure.
Three realized cost synergies from acquisition and recent plant closures.
Speaker 2: Three, realize cost energy from acquisition and recent plant closures.
Speaker 2: Four, focus on revenue management, including more disciplined pricing. And five, accelerate growth through organic market share gains.
Four focus on revenue management, including more disciplined pricing.
And five accelerate growth through organic market share gains capture mis revenue opportunities, including improving our ability to align cultivation planning with market demand.
Speaker 2: capture misrevenue opportunities, including improving our ability to align with conservation planning with market demand.
Speaker 2: reintroduce a focus on medical, and strengthen our commercial capabilities and innovation pipeline.
Reintroduce a focus on medical and strengthen our commercial capabilities and innovation pipeline.
The plan is underpinned by specific actions to fortify our balance sheet strengthened leadership team and enhance our corporate governance.
Speaker 2: The plan is underpinned by specific actions to fortify our balance sheet, strengthen the leadership team, and enhance our corporate governance.
Speaker 2: As part of our plan to ensure HEXO has adequate capital to meet our requirements, we're taking immediate action to reduce the dilutive effect of the convertible note. We are working with Lazard and Bank of Montreal as well as our current debt holder to reduce the overhang impact of this debt.
As part of our plan to ensure.
Hexcel has adequate capital to meet our requirements were taking immediate action to reduce the dilutive effect of the convertible note. We are working with Lazard and bank of Montreal as well as our current debtholders to reduce the overhang.
Impact of this debt.
We're actively evaluating opportunities in a matter in a manner, which maximizes shareholder value.
Speaker 2: We're actively evaluating opportunities in a manner which maximizes shareholder value.
Speaker 2: I'm focused on selecting the best option available for HEXO moving forward. I can tell you we have a number of options available and are moving with pace.
I am focused on selecting the best option available for Hexcel moving forward I can tell you we have a number of options available and are moving with pace.
As of December 14th 2021 U S dollars, a $118 million of the principal and the convertible note has been redeemed and converted leaving US $241 6 million of principal outstanding.
Speaker 2: As of December 14, 2021, US dollars, $118 million of the principal and the convertible note has been redeemed and converted, leaving US dollars $241.6 million of principal outstanding. Our second underpinning initiative is to strengthen our leadership and enhance our corporate governance.
Our second underpinning initiative is to strengthen our leadership and enhance our corporate governance.
Speaker 2: To that end, we're announcing a series of executive changes to strengthen our focus on growth, products, operations and profitability.
That end, we're announcing a series of executive changes to strengthen our focus on growth products operations and profitability. These.
Speaker 2: These decisions reflect our vision for building a best in class consumer packaged goods company that is on the path towards a stable long-term growth.
These decisions reflect reflect our vision for building a best in class consumer packaged goods company that is on the path towards a stable long term growth.
There are three changes I'd like to highlight and outlined today.
Speaker 2: First, I'm pleased to announce that to bolster our focus on products, we're appointing Jackie Fletcher as our Vice President of Science and Technology. Appointing Jackie allows us to leverage the deep expertise and bench strength we acquired as part of the Red Can acquisition, and in particular, Jackie's practical application of R&D efforts. Jackie,
I am pleased to announce that to bolster our focus on products. We are appointing Jackie Fletcher as our vice President Science and technology appointing Jackie allows us to leverage the deep expertise and bench strength, we acquired as part of the <unk> acquisition and in particular Jackie's practical application of R&D efforts.
Jackie will report directly to me.
Second Trent Mcdonald will step down from his role as Chief Financial Officer effective March <unk> 2022.
Speaker 2: Second, Trent McDonald will step down from his role as chief financial officer effective March 8, 2022.
I would personally like to thank <unk> for his significant contributions and dedication to the company and for Green to stay on over the next few months as we complete a search for a new CFO.
Speaker 2: I would personally like to thank Fence for his significant contributions and dedication to the company and for agreeing to stay on over the next few months as we complete a research for a new CFO .
And third to enhance governance, we are announcing the appointment of John Bell as our new chair of the board John has a 40 year career business success. He is chairman of Stat capital Pure Jamaican limited and a board member of cure pharmaceutical.
Speaker 2: And third, to enhance governance, we are announcing the appointment of John Bell as our new chair of the board. John has a 40-year career of business success. He's chairman of Scat Capital, Pure Jamaican Limited, and a board member of CURE Pharmaceutical. From 2014 to 2020, he was a member of the board and chair of Canopy Growth. His tremendous experience will continue to drive HECS-O as the market leader in Canada.
From 2014 to 2020, he was a member of the board and chair of canopy growth has tremendous experience will continue to drive <unk> as the market leader in Canada.
As a result, Dr. <unk> Zhao will be stepping down from the board of directors.
Speaker 2: As a result, Dr. Munzer will be stepping down from the board of directors and his role as chair. And I'd like to personally thank Dr. Munzer for both his dedication to HEXO and his personal support of me through my appointment as CSO, the CEO .
And his role as chair and I'd like to personally thank Dr. <unk> for both his dedication to hexcel and his personal support of me through my appointment as CFO.
Oh.
I would now like to walk you through our transformation plan and the path forward.
Speaker 2: I would now like to walk you through our transformation plan, the path forward.
Speaker 2: This plan includes a series of value creation initiatives that are expected to generate incremental cash flow of 37.5 million in fiscal 2022 and an additional 135 million in 2023 for a total of 175 million over the next two years.
This plan includes a series of value creation initiatives that are expected to generate incremental cash flow of $37 5 million in fiscal 2022, and an additional $135 million in 2023 for a total of $175 million over the next two years.
Speaker 2: split almost evenly between cost reductions within our control and growth opportunities with revenue.
Almost evenly between cost reductions within our control and growth opportunities with revenue.
This plan, which has been validated by <unk> will position <unk> to unlock opportunities enhance our value to shareholders and make us more attractive to institutional investors.
Speaker 2: This plan, which has been validated by EY, will position HEXO to unlock opportunities, enhance our value to shareholders, and make us more attractive to institutional investors.
We have a unique portfolio of assets and a leading portfolio product portfolio and the fastest growing market segments. Once we began executing on this plan, we will grow organically without the need for any additional acquisitions.
Speaker 2: We have a unique portfolio of assets and a leading product portfolio in the fastest growing market segments. Once we begin executing on this plan, we will grow organically without the need for any additional acquisitions. Let me walk you through the...
Let me walk you through the five priorities in more detail.
First we will continue reducing manufacturing and production cost by leveraging existing capabilities across the facilities that have come together across the companies.
Speaker 2: First, we will continue reducing manufacturing and production costs by leveraging existing capabilities across the facilities that have come together across.
Speaker 2: We're actively applying best practices and learning from our highest margin categories and top facilities across the entire operation to improve and optimize productivity.
We are actively applying best practices and learning from our highest margin categories and top facilities across the entire operation to improve and optimize productivity.
For example in my.
The opportunity to tour the facilities at muscle.
Speaker 2: We reduced, over the past year, we reduced our cost per gram of THC by 50%, 5-0, by improving output, reducing costs, improving the bud to trim ratio, and just general overall improvements at that facility.
We reduced over the past year, we've reduced our cost per gram of THC by 50% five zero.
By improving output reducing costs, improving the bud to trim ratio.
In general overall improvements at that facility.
That type of capability and learning, we'll take across other facilities.
Speaker 2: That type of capability and learning will take across other facilities.
Speaker 2: When it comes to something like vapes, we currently outsource the HEXO brand production. However, given Retican's expertise in vapes and their capability, we'll now be bringing that production in-house, resulting in an annualized and immediate $5 million margin improvement for HEXO's portfolio.
When it comes to something like <unk>, we currently outsource the hetzel production the hexcel brand production.
Given <unk> expertise and <unk> and their capability will now be bringing that production in house, resulting in an annualized an immediate $5 million margin improvement for <unk> portfolio of vape products.
Yes.
Sure.
Two we will streamline and simplify the organizational structure and bring operating costs in line with our size and growth.
Starting from an industry leading position. These efforts will continue to position us as best in class operational efficiency, we will aggressively tackle costs across the organization and we will aggressively build capability.
We will continue to focus on capital and be much better stewards of capital.
Three we also continued to deliver on synergies as a result of our recent acquisition last quarter. We reported we would exceed our initial target synergies of $35 million I am pleased to announce this quarter that we expect to exceed $50 million in synergies based on our latest projections.
Okay.
Four we will focus on revenue management, including more disciplined pricing across our entire range. The days of unprofitable cannabis companies are numbered we think that the value add we provide with our high quality products means more more to consumers than a race to the bottom in price.
Successful companies in the future will be those that can successfully run their businesses.
And not just by unprofitable market share.
Five.
To increase revenue, we plan to accelerate growth through organic market share gains and capture missed revenue opportunities through better demand planning.
For example, today, we are only delivering 65% to 70% of demand to our customers.
Going forward, we will connect our demand forecast and what we plant and expect to see the results of these actions in Q3, and we will actively manage that through Q2.
<unk> went through a similar evolution and we are able to learn.
From their experience and apply them across the entire organization.
We will also put a focus back on medical.
Consolidating this product line under <unk> leadership, given their strength in this category.
We're also focused on redoubling, our efforts to consumers at the heart of every decision working closely with retailers and wholesalers to improve the commercialization of our products and prioritizing operations to respond nimbly to constantly changing market conditions and consumer demand.
For example flour.
Flower as the largest category currently with 45% of the market and we currently are number two in this category.
With the combination of the entities coming together, we now cultivate across the entire range of price categories and are well positioned to add significant capacity with very little capital required.
As we expand our indoor growing capability, resulting from the <unk> acquisition and greenhouse and outdoor facilities from Red can we now have the full suite of production capabilities to allow us to compete in flower across a range of good better and best.
Okay.
Pre rolls pre rolls is the fastest growing market in cannabis and hexcel continues to maintain the market leading position in this category with best in class margins in large part due to our recent acquisition of Red again.
We're putting good high quality flower and pre rolls and currently can't keep up with demand and are undertaking steps to increase our capacity by two to three times.
Edibles XO is now in the edibles market through the acquisition of <unk> and we're pleased to announce we're launching our own.
<unk> mainstream edibles.
To compete with market leaders, we're just getting started in this category and anticipate significant room to grow.
And innovate to capture lean manufacturing capability as I mentioned, we're moving <unk> production in house leveraging <unk> capabilities.
And we are also responding to evolving and increasingly sophisticated consumers with innovation. We currently have the number two market share position in this category.
I also want to highlight <unk>, leading market position in beverages capsules concentrates and oils.
Okay.
So in conclusion before I turn it over to trend.
I'd like to close by saying that <unk> is well positioned to maintain and grow as the domestic leader and be amongst the first.
Operating cash flow positive and profitable Lps in Canada.
We will achieve this by executing our new strategic plan and the path forward and by putting the customer and consumer at the center of everything we do.
This business has significantly higher value and upside as we get through our transformation to unlock organic growth.
<unk> is on the right path for long term prosperity and is well positioned to deliver positive shareholder returns in the short and medium term and with that I would like to turn the call over to Trent. Thank.
Thank you Scott and good morning, everyone before I delve into our results. This quarter are I want to point out the key developments.
During the quarter, we completed the acquisitions of 48, North Android can we continue to focus on completing these integrations and incorporating best practices from each across the organization, including consolidation of our productive capabilities in cultivation capacity. This ties into our recent public release relating to the closure of three separate facilities.
Now I'd like to actually jump into the financial results and highlight some key <unk>.
Some key highlights within our within our results first thing I'd like to say and Scott just alluded to it.
The recent headset data not only have we maintained our number one market share position, we have grown the gap between ourselves and number two.
In Q1 total revenue.
Total gross revenue grew to $69 5 million, while total net revenue grew 29% from last quarter to $52 million, both the highest in our in our history.
That said non beverage adult use net revenue grew 40% from Q4 to $46 million.
During the quarter, we did I did a full review of our existing portfolio of Skus and are currently undertaking an exercise to radically rationalize our skus and ensure that our innovation pipeline is consistently offering customers new products based on their demands under our original stash brand. We have now launched OS genetics, which are selected from distinct.
Genetics family and grown under specific specific conditions to bring out the highest quality, our first products, our OS genetics cushion or S. Genetics Hayes and we will be launching more new strains under these product lines over the next year.
During the quarter net beverage sales decreased 39% from Q4 the quarter over quarter decrease in beverage sales is as a result of seasonality attributable to increased sales during the warmer summer months truss beverages. However did continue to lead in the key markets of Ontario, and Quebec, capturing 36% and 70% market share.
<unk>, respectively, while also maintaining the number one market share nationally.
International sales decreased by 11% quarter over quarter as the company effectively recognize two periods of revenue in Q4, 'twenty one due to the logistical issues. We spoke up in Q3 dollars 21, which was resolved in Q4, we are continuing to focus on international sales as we move forward.
Medical net sales increased 237% from Q4 with the acquisition of <unk>. We are now we are continuing to assess the medical market and leverage the strength of our combined entity to gain further ground.
As a result of the purchase price accounting related to the acquisitions of <unk>, which.
Which we spoke about last quarter, the crystallized fair value adjustments, which otherwise would have been realized upon the sale of inventory are included in the cost of sale in order to better communicate the margins from our business activities, we have removed the impact of crystallization and our adjusted cost of sales to calculate gross profit before adjustments overall gross.
<unk> before fair value adjustment, excluding beverages increased to 28% in Q1 from 25% in Q4.
Gross margin on adult use net sales, excluding beverages increased 22% from 14% due to the contribution of <unk> sales at higher than average gross margins and the improvement in <unk> gross margins after realizing some of the planned integration synergies.
Medical gross margins increased to 59% with the addition of <unk> medical sales at higher than average gross margin.
The gross margins on international sales remained relatively consistent at 64% while wholesale margins remained consistent at 24% a minor increase was relatively was related to the previously mentioned <unk> sales.
Which I spoke about a few moments ago. Looking ahead <unk> is focused on improving our gross margins as Scott mentioned, we are focusing on driving cost savings and cultivation and manufacturing improving utilization and realizing additional synergies across the organization. We are actively reviewing the skus, where we have strong margins and are applying best practices from each.
Products to make improvements elsewhere.
In relation to operating expenses, we look at core SG&A as SG&A marketing and promotion and R&D. These when added together represented 59, 1% of net revenue down from 61 point.
3% in Q4 as part of our cost cutting we are continuing to aggressively focus on decreasing core SG&A as a percentage of revenue and longer term expect us to fall under 20%.
In relation to GH G&A, specifically it increased $3 3 million over Q4, the increase was primarily related to the acquisitions of <unk> and 48, north during the quarter marketing promotion increased $2 6 million over Q4 as a result of an enhanced marketing promotion campaign at Red can and our carbon offset initiatives.
Share based compensation increased $3 million over Q4, as a result of the timing of best besting our previous grants as there were no new options granted during Q1.
Amortization of intangibles increased $7 2 million over Q4 due to the additional amortization of <unk> intangible assets, namely cultivation licenses and brands, which were acquired through the acquisition of dentists ready can and 48, north restructuring cost increased to $2 4 million as a result of changes in certain senior personnel across the.
Organization due to the ongoing restructuring initiatives impairment of PP&E increased $3 $5 million, primarily a result of the indefinite suspension of our kit extraction project.
Permit and invest in investment and associate of $26 9 million on October 31.
There are existing indicators of impairment on the Companys investment in truss beverages, and as such and as such management performed discounted cash flow valuation at October 31, 2021, which resulted in impairment towards recoverable amount the historical carrying value of the truss LP investments included $42 3 million related to the fair value of.
Warrants issued to Molson, Canada as part of the initial investment in 2018. These warrants expired unexercised in October of 2021.
Acquisition and transaction costs increased to $9 5 million. These are again related to the acquisitions of 48, North <unk> and the integration of <unk>.
Finance expenses decreased from Q4 down to $4 5 million in Q1, and this relates mostly to the broker and advisory and legal fees for the for the August financing.
Loss from operations increased from 60 million to $155 million. This is significantly driven by the acquisition related costs fair value adjustments, the impairments of PPD talked about around kits and others and in investments and the write down of the truss beverages as I noted earlier.
Adjusted EBITDA was down another 800, K from Q4 and it sits at negative $11 6 million EBIT loss remains somewhat elevated as we continue to work through operational synergies through the acquisitions as Scott spoke to earlier, we have plans to realize cost synergies reduced manufacturing production costs and <unk>.
Lyne and simplified the organizational structure.
We now successfully closed all three transactions, we switched from integration planning to integration execution as we move forward through the robust plan. We created we originally thought we would be able to achieve approximately $35 million in synergies and now believe we will exceed this target and obtain centers synergies of over $50 million.
We have now realized $25 million of those synergies on an annualized basis, which will come into our results over the coming quarters.
From here on out our focus is now on the path forward with our five key priorities as outlined by Scott earlier.
I will not repeat them because Scott did such a good job articulating them earlier, but that will be our ongoing focus on a final note I would like to thank everyone at <unk> for their commitment and effort over this past year, it's been a pleasure working with such a dedicated and resilient team I believe personally and wholeheartedly that hexcel has a great found.
<unk> on which to build for the future and fits in great hands. This now concludes my prepared remarks, operator, we would be happy to take any questions sorry, just before we turn it over to questions.
Thank you Trent just a couple of closing remarks, I want to thank everyone. Once again for joining us this morning.
I'd like to thank once again trend for his service with XO on behalf of the board and management team wish you all the best in your future endeavors.
And then the.
The transformation of XO over the past 12 months has provided a strong foundation for the company as I've outlined today I believe there are significant opportunities across the network to accelerate growth aggressively attack costs expand margins and be more effective stewards of capital all leading us to be the first.
Major cannabis company to Canada consistently be operationally cash flow positive within the next four quarters.
I have full confidence in our path forward I believe there is significant value in this organization and we're on the right path for long term prosperity as we continue to work through the debt issues.
Look forward to speaking with you soon and we'll now open it up for questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Your first question comes from Aaron Grey from Alliance Global Partners. Please go ahead.
Hi, good morning, and thank you for the questions and all the color there.
So I guess first question for me would just be around I. Appreciate how you guys are now doing the kind of path forward, but just in terms of market share trends going forward payroll is doing well, but on the flower side under some pressure.
It sounds like Scott you guys don't want to compete as much on the pricing side anymore. So specifically on the flower category currently the biggest in the Canadian market and how are you guys looking to improve the market share there going forward.
Particularly as you mentioned on the indoor cultivation side. Thank you.
Yes, thanks for the question.
One thing I would say is where if we look at the flower category and Bob do you want to expand them as we look at the category in good better best.
And we are we'll continue to compete with good we have a strong as we've said best in class cost structure, both in cultivation and manufacturing were particularly.
Excited about though as we look at the future.
The opportunity with Alphaville from the <unk> acquisition with the indoor grow facility.
Bringing higher quality flower to our product line.
<unk> got a full range of growing capacity across the <unk> and <unk>.
<unk> and <unk> systems.
We've got new genetics as a result.
The acquisitions, which we are currently testing in a number of facilities to bring to market shortly.
What I am excited about flower again is we have a strong position and with the new acquisitions, we have a lot of opportunity to move into additional segments and categories.
Okay. Thanks for that I appreciate that color and then second question for me just on the synergies so expecting to realize $50 million now versus the original 35 I believe you mentioned, how many synergies realized to date could you. Please just repeat that and then offer some color in terms of the timing of to get to the full 50, and then if you could provide a split.
Between Cogs and SG&A were able to realize $50 million. Thank you.
Sure Aaron Trent here so.
So far we've.
<unk>.
<unk> to get about $25 million of the synergies you don't see all of that in our Q1. Obviously this is an annualized amount, which we expect to come through the P&L over the next three four quarters.
We have realized some of those in Q1, you will note that we've talked about the margins incentives coming back to approximately 32%, which is as a result of some of the synergies coming from the closure of Langley BC among other things.
As we go forward, we're expecting to get to over $50 million.
That would be over the next three four quarters.
<unk> as you know we did announce the closure of several several of our facilities, which will take place at the end of January and the end of February after which those will start to annualize. There is other initiatives in relation to productive capabilities in the app available Thats all im ready can all of which will take some time, but we're doing this with some haste and we do want.
This to start Annualizing over the next three four quarters do you see the full benefit of these acquisitions.
Alright, great. Thanks, so much for the color on all Glenn jump back into the queue.
Thanks.
Your next question comes from from.
Please go ahead.
Good morning, Thanks for taking my question. So I just wanted to touch on maybe more of the <unk> base business. So if I take out the M&A. It appears the base business declined year over year. So maybe just some more color in terms of what's happening with XO, excluding the recent M&A.
Hi, <unk> I'll take the question.
I really can't comment too much on what's happened in the past that I can't tell you what we're doing for them in terms of growing our overall market share. We are in fact number one.
In many categories within the candidates based on our way to doing that in here.
As we move forward and fueled this engine.
To ensure that we're driving organic and market share growth. It really is being fueled by a very deep understanding of the evolving.
Candidates consumer and their needs.
And then Heath detailed overall and so our focus as Scott alluded to.
And that is really focused on understanding these consumers growing the right products.
And delivering them in a timely way to ensure that we continue to grow organically and expand our market share position with textile and all the other brands that are within our handling.
Add to that because we've talked about closing the gap versus customer demand. So one of them as we've talked about growth one of the opportunities is because we cultivate to that customer demand and demand that will certainly be part of closing that gap and accelerating growth.
And we're also looking at the portfolio of brands in totality and we're looking at how can we best meet consumer needs consumers are increasing pre rolls are fast fast growing.
Category and as we look at the set of brands across the full range that we're managing as the portfolio again to meet consumer needs to optimize margins.
Putting the focus and investment behind the highest margin segments.
Yes, I would anticipate as you kind of look at the business moving forward, we're managing it not necessarily brand by brand, but in aggregate to optimize the full opportunity for COVID-19.
Okay, Great. That's helpful color and then just just on the positive cash flow commentary. When you guys have that target out there are you referring to a positive free cash flows our operating cash flows within four quarters.
Operating cash flows operating okay great.
Maybe just one final question just on <unk>, obviously that was one of the more significant acquisitions that you guys have recently done just any major surprises so far positive or negative as you talked about M&A.
Very.
Excited to have read again in the portfolio.
They bring.
Strong capability and capacity around particularly the pre rolls.
But I think where I'm most excited about the red again.
And to the to the Hexcel organization is there is there the capability.
And appointing Jackie Fletcher to the head of science, and where that's really compelling across the organization as Jackie as strong strong technical capabilities and with Red Oak and she had a really practical approach to applying those and so what you saw with Red again is the ability to get into new segments, new formats really quickly.
As much as <unk> brings capability like infrastructure. They also bring that talent.
And we will be increasingly tapping into that across the enterprise.
Okay, great. Thank you.
Okay.
Okay.
Your next question comes from Kenny Chen from BMO capital markets. Please go ahead.
Hi, Good morning, Thanks for the question first from me.
On the cash flow target that you provided first I just wanted to make sure I understand could you talk about incremental so if I look in this fiscal Q1 quarter.
Operating cash flow burn was about $56 million. So are you, saying that for the rest of this fiscal year, there will be an incremental positive 77 million swing on the operating cash flow and then in fiscal 2023, there'll be an additional $135 million.
The positive swing on top of fiscal 2022, so am I understanding that correctly and how did you get to that target, but can you share a bit more of the assumption do you have underlying that.
Sure Tony So right.
Right now Q1 was very noisy extraordinarily noisy in terms of cash flow. There was the closing of two major acquisitions.
The integration continued integration of <unk> as we close on these two acquisitions. So Q1 is not indicative of the combined organization and the strength of these organizations bring to one another as we go forward as one consolidated unit.
Where we see the where we see the dramatic improvements in cash flow are going to come first and foremost as.
Both.
And Scott have talked about is the consolidation of Skus the rationalization of some of our operating facilities. The integration synergies that we continue to talk about that we believe we are going to be able to obtain over the next several quarters and you look at the cash flow impact of each of those things and it's very robust and so are we.
Believe right now.
Although not asked and not we haven't said that lab, but we believe that we will get to EBITDA positive in the in this quarter Q2. So that's what our goal is and we will see how that works out but that's what our goal is to be EBIT positive in this current quarter.
And so that provides us with immediate immediate cash flow better than what we had in Q1 and like I said our goal is to get to positive cash flow in the next several quarters on an operational basis and then from there you continue to build.
So that's really where it comes out as well as some of the cost saving initiatives that Scott talked about on an SG&A productive capabilities the combination of certain.
The lowering in the rationalization of some of our <unk>.
Overhead and costs that go into.
The overhead allocations when the cost.
Cost of goods and so as you bring those down.
It has a positive impact on cash not just not just earnings.
Okay.
Yes.
Got it Okay and my second question is.
Your focus to better match your growth your cultivation planning to demand is something that we've seen other large LP also struggled with and are trying to improve that it's taking some time.
Some of them seem to be unable to keep up with the smaller more nimble company with til.
Could you elaborate more on what you intend to do to better keep up with the demand and especially the consumer expectation for essentially constant pneumo. Thank you.
Yes, I'll take this one file here.
At the onset again, I'm, just going to reinforce the deep understanding of the consumer and planning for the future. So we have an understanding of what to cultivate an event. The second key component of that is working cross functionally together to ensure that there are plans that in fact ticking count demand our cultivation and ultimately our overall supply.
Integration work continues in terms of putting in place the right systems to be able to manage.
And our final enhancement system and integrate all kinds of deep deep collaboration across the organization that is taking place immediately to ensure that we have further looking opportunity can cultivate against the demand we see coming from the consumers, which is really operated in fact and consumer needs and.
The evolving appetite for Canadians in Canada.
Yes, if I could build on that just a couple of specifics Jamie So theres a number of reasons that I believe I mean, one is.
Is simply connecting the right people in the organization.
And obviously thats underway.
But as that talks about consumer needs. We've just completed.
A 3000 person consumer study.
Which.
It really gives us a much deeper understanding of usage and attitude occasions.
And we're using that knowledge and again that'll be at the heart of everything we do to better understand where Canadians are consumers are going.
And be out in front of that.
Bill mentioned quickly, we've just implemented something called our farm management system, which automates, our cultivation and gives us.
Highly highly high visibility to what's growing how it's growing so we have early line of sight too.
How the product how to <unk>.
<unk> going to turn out.
And then with our new integrated system with Alphaville in particular coming online and we have a number of indoor rooms, and as I mentioned, we have a significantly increased genetic bank and that allows us on a smaller scale to grow higher quality flower.
Continue to.
Explore and innovate with flower so that we have a constant set of news and if and if we find that particular strain really resonates with consumers and then we've got the capacity with our other facilities to scale. It in and growing quickly. So we're really going to use that the full capability across the network to allow us to.
Compete effectively in that space.
Thank you.
Thanks for the question.
Your next question comes from Douglas Smith from RBC capital markets. Please go ahead.
Yes. Thank you.
As I think the both the 135 million.
Incremental operating cash flow for 2023.
I believe you mentioned that 50% of that is going to come from incremental revenue opportunities. So, let's say around $70 million and even if we were to give you.
At 50% margin.
Those incremental revenues it means a boat.
140 $150 million in extra revenue next year.
Can you tell me about.
Where that screening come from and how much market share you actually have to take in the market to ensure that that can occur or where I'd gone wrong here.
Yes.
Yeah. So the.
The mix of looking at the opportunities.
In the marketplace.
So if I kind of break it down by format.
There is as I've talked about Theres significant upside in flower with the portfolio coming together, we cannot meet the demands on pre rolls today, we've just at our facility in ready can install the machine that more than doubles, our capacity and capability.
Machine out of Italy can produce one 6 million.
Pre rolls per day.
We are just getting started in edibles, we're just getting.
Started with XO around <unk>.
With the number of brands that come together from good better best we have an opportunity now to compete across the full range of the value.
Proposition.
We have an opportunity to expand <unk> geographically.
We have an opportunity to expand our wholesale.
Sales, we're continuing to look to expand our international sales.
There's a huge range of opportunities and we continue to aggressively pursue those.
It's not all just specifically within the Canadian marketplace.
Okay I understand thank you.
Question, just has to do with the ATM you mentioned.
Is that going to be available at any price and would you be willing to issue stock at let's say below one dollar U S too.
Meet the hurdle for your payments that are due.
Right now we're looking at all options.
All around the holistic solution to the debt itself. So we're not thinking about anything in silo.
Right now, we're obviously going to be working with the board and our advisers on what we think is best for our for our investors and we don't want to do anything thats going to be damaging.
Keeping in mind that we want to remain extraordinarily liquid and keep all options on our table.
But we're always going to be in control of our own destiny.
So no specifics on what we're willing to do today or tomorrow on the ATM, but it is but the ATM is in fact available is and will continue to be available to us I would say the one thing that we're making all of our decisions as we evaluate the options through maximizing shareholder value that is.
Front of our mind and it's driving every decision we make.
And as <unk> said were looking at all options exploring with a number of different.
The number of different options, but always with the lens of how do we optimize shareholder value okay.
Okay. Thank you.
Okay.
And your next question comes from John <unk> from CIBC. Please go ahead.
Yeah.
Thanks, Good morning, I wanted to ask about the balance sheets.
Setting aside the convertible notes issue for now there is just $55 million or so of unrestricted cash in the quarter I know you raised some through the ATM, but.
But it's not even sufficient to get through one more quarter at the current burn rate and.
Credit to the comment you made earlier Q1 is maybe not representative.
Trying to get a sense of what is the Companys plan to address this.
You mentioned a number of options at your disposal in the press release can you give a sense of.
How are you thinking about that and what it is you are leaning towards or what investors should expect on capital raising in the coming months.
Okay.
Yes, John the again you are right I mean look it is very very noisy in Q1. So again I really don't think that that's an indicative of an indicator of future quarters.
With regards to cash yes, it was $55 million at the quarter, we've since we've.
We view the ATM somewhat.
To prepare ourselves in the event, we wanted to do certain things around the around the debenture.
But look we continue to try to maximize shareholder value and keep all of our options in front of US. We do believe based on the initiatives, we talked about both through integration and those synergies and when the timing of those synergies are going to come into play some of the initiatives as Scott alluded too and not just alluded to talk to you in detail on on cost of goods initially.
<unk> SG&A initiatives.
In the current quarter as you know there were.
We closed on two major on two acquisitions in the quarter, which obviously have a massive cash.
Cash operational cash flow impact that doesn't repeat itself in future quarters. So a lot of that just goes away on its own.
But with our combination with all of the other initiatives.
We do believe we're quite liquid right now and we believe that we have a path forward to.
To get to cash flow positive within the next.
Several quarters.
Okay.
Okay, and my follow up's on on the Capex side.
I'm trying to reconcile I guess, the necessity of some of the spending on Capex, particularly given the state of the balance sheet.
Just over $20 million in the quarter.
Can you elaborate on what the company is spending on discretionary spending or is it necessary.
Are you committed to significant amount of capital spending over the next couple of quarters, given what you're talking about with expanding capacity on pre rolls and bringing <unk> in house and a few of the other projects you Robert Thanks.
Yes, let me address that one.
We are absolutely laser focused on disciplined return on investment on any dollar of capital we spend.
One of the first things I did was significantly curtail the capital plan.
When I joined the business.
Six weeks ago.
We cut our capital adapt.
At that point in time by 75% and we.
Continue to look forward to.
Opportunities too.
Cut that further.
The capital opportunities that we are proceeding with are related to the acquisition integration.
Synergies it may all have strong return on investment.
And we will continue as we move forward to be very focused.
And disciplined.
Our use of capital in the business I will expand on that just slightly to that look we know which categories that we not we didn't need to invest in and quite frankly, the cash flow for much of that has already been spent so theres not a lot of large amount of future capex that.
This enables we're already enabled so we believe we can we can move forward and compete really well in key categories with the productive capabilities that have already been spent.
I think that's a key component here that we don't have a lot of future initiatives that we have to put a large amount of capex into.
Okay understood. Thank you very much.
Okay.
Your next question comes from Adam Bachmann from Scotia Bank. Please go ahead.
Okay.
Okay.
Adam Your line is open.
Hey, sorry.
Thanks for taking my question guys.
Trent or do you sort of camera you on this point, but I wanted to kind of dig in a little more sort of normalized free cash flow could you talk about all the moving parts that happened. This quarter are you able to give us a little more clarity on what normalized cash flows would have been for the quarter. So we know what the base was deferred where you stop minus the 30 plus million do you expect to get out.
Right.
More information there just to understand where youre sitting at currently.
Yes look I mean, the big thing is you have to recall is that it's not just the acquisition costs that go with the they come into Q1, and then all the transaction costs that go with that.
Haven't actually rationalized your functional areas your operational teams.
As you as you incorporate these into your organization you still have several facilities that are fully and completely operational throughout the quarter all of that as sort of goes away. So.
As you know Stellarton Kirkland Lake Langley BC.
Branford for for both <unk> and Branford site for.
48, North I mean, these are a lot of site.
All of which had some amount of cash impact in Q1, and so that goes away. In addition to again you have all your functional areas, whether it's finance people and culture and other areas of our organization, where youre, taking all of these teams and Youre getting through Q1, you haven't put the systems in place yet to really.
<unk>.
Get all of those synergistic values out of it until all of that is a cash impact in Q1.
Okay and it is heavy.
Now going forward. In addition to that <unk> had a lot of consulting fees a lot of a lot of advisory and in addition to some audit related issues. So there's a lot of fees in there all of that rationalize itself over the next several quarters and while you are rationalizing all of those spends are also putting into into effect a lot of cost savings.
Initiatives at Cogs and improving margins.
Just on the cost side, but on the pricing side, which valves expressed earlier and Scott talked about in depth in that we're no longer going to be that coming into market on every category trying to undercut market by 15%, 20% and every single product. We launched that's not it's not a it's not.
Conducive to great business and so you put all of these things together and it doesn't take long to be able to put on paper, how you get to cash flow positive because we do have a tremendous base on which to build and we are in fact that what we believe to be one of them one of if not the lowest cost producer in the market.
Okay, Alright, that's it for me thanks.
And there are no further questions at this time I will turn the call back over to the presenters for closing remarks.
Okay.
Yes.
Thank you very much.
Just once again take the opportunity to highlight and reinforce.
The opportunity that hexcel presents.
We brought together.
Set of companies that bring different capability different assets I really believe that <unk> is uniquely positioned in the Canadian market.
And internationally to capitalize on bringing the capabilities of the indoor grow facility all of the brands the leading position we have.
And many of the segments and in the fastest growing segments like pre rolls.
We have the opportunity to aggressively grow our CAC cost expand our margins and as I said previously the more effective stewards of capital.
We are very focused on the consumer and customer at the heart of everything we do we're very focused on getting to be.
That path of operational cash flow positive and confident in the plan that we've laid out.
And as I said I believe there is significant value in this organization and we're on the right term right path for long term prosperity as we continue to work through the debt issues.
With no other questions. Thank you, everyone and look forward to speaking soon.
This concludes today's conference call you may now disconnect.
Okay.
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Yes.
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Sure.