Q3 2023 HEXO Corp Earnings Call
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Welcome to Hexcel Corp's third quarter 2023 earnings conference call.
Joining us today as Charlie Bowman, President and Chief Executive Officer of XO Corp, and Julien <unk>, Chief Financial Officer of XO. Please.
Please note that all financial information is provided in Canadian dollars, unless otherwise stated and that a copy of the Q3 results can be accessed on SEDAR and Edgar.
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After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
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Please note this event is being recorded.
I would now like to turn the conference over to Charlie Bowman, President and CEO of XO. Please go ahead Sir.
Thank you good morning, everyone and thanks for joining our call as you know this is our last earnings call as a public company yesterday shareholders voted an overwhelming majority to approve the arrangement agreement with Kilroy brands with over 90% voting in favor.
That in mind before we dive into our results for the quarter I wanted to start with a quick look back over the last 12 months. We will then detail a few of the developments from the quarter and as well walk throughs Hexose financial results.
Firstly obra little year ago, Joyce and I assumed the CFO and CEO roles at Axa at that time, Hexone face significant challenges, including a debt leverage liquidity constraints.
Savanna inventory excessive overhead cost acquisitions were not integrated into the parent organization in short the company with grappling with a host of financial and operational issues and I think it's fair to say we were on the verge of insolvency.
Over the last 12 months. The organization has made remarkable progress as we've executed our strategic priorities to strengthen the balance sheet resize, the business and position the company for long term growth and profitability.
It's also.
Positioning <unk> to deliver the preferred cannabis experience to all of our cannabis consumers.
Outside of the financial progress.
So made advancements on the product side to optimize its portfolio.
We refocused our portfolio to leverage our strength in premium cultivation, and we divested businesses that did not offer XO, our real competitive advantage, specifically, we launched a number of new products, including our new proprietary strains we called it the T N T series, which provided it with what's allowed us to.
EBITDA from generic strains that were more like a commodity to more of these specialty ingredients. We can we capitalize on our high growth potential and the pre roll segment, and we expanded our capacity and our popular straight edge Cree roles, including accelerating the red can readies product to include some of the T. N T series.
And expanding our original stash brands. This expansion resulted in a four fold increase in the ready can pre rolled capacity and enables us now to meet the growing consumer demand across Canada.
Taken together these efforts not only resulted in a higher quality cannabis experience for our customers. It also drove our margins higher our margins are now about 10% higher than they were a year ago Jewish will share a bit of the financial progress we've made over this period.
Thank you Charlie starting with our balance sheet over the past 12 months, we have paid off $40 million and legacy debt and refinanced over $235 million and high cost debt, which combined have reduced our annual interest expense by 60.
Yeah.
We also drove significantly impactful improvement and our cost structure by pursuing an aggressive cost cutting strategy, which has reduced our SG&A footprint by almost 70 million on an annualized basis.
Next we delivered improvements in our working capital management as we have reduced our working capital by $135 million.
A year ago inventory alone was down over 100 million as our ethanol processes were redefined gentlemen.
I see every cannabis plant is not a good plan in short we do not grow just to grow the outcome of the process and cultural changes have resulted in our cash conversion cycle improved by over 100 days, which is truly remarkable and reflective of the efforts of the entire finance and operations teams given the successes absolutely have to.
Positive cash flow from operations for two consecutive quarters, Charlie back to you.
Now turning to our.
Developments in the third quarter first and foremost when it entered into a definitive agreement with Kilroy brands, whereby <unk> will acquire all outstanding shares.
This builds on the strategic partnership we established last year.
Flex the significant progress we've been able to make both financial and operational since that time.
Due to the transaction, we incurred 74 E. G. You impairment charge to reflect till raised purchase price.
<unk> was an acquisition fee of $20 million, resulting in a net income loss of $115 million for the period. In addition to the Tilbury announcement. We also had a number of notable operational and product development, even as we continue to face a challenging competitive landscape and an ever increasing uncertainty in the macro environment.
As we shared last quarter, our emphasis on bulk sales has continued to pay off with bulk sales more than doubling from second quarter, we were effectively leverage the red It can match the growers program as a point of differentiation, perhaps though as you may recall. This has been part of our strategy to expand our b to B sales.
We saw strong momentum in our in house developed TNT strange, which now represent over 37, 5% of all flowers sales.
This is an incredible growth since the introduction of these T N T strange to the market just about four months ago at the end of Q1 and more importantly, we are seeing that momentum continue into Q4 as our TNT strains are now being launched across Canada.
Next we'll be launching a new hemp paper rolled readies product. This will be launched later this fall and it will be an amazing product altogether. This validates our focus on growing the best strains to deliver the best consumer experience, we want for our customers now I'll turn it back to Julie who will go through the financial risk.
<unk> for the quarter.
Thanks, Charlie looking at our Q3 financial results expense controls continue to be a top priority and I'm pleased to share that SG&A expense improved by $2 5 million or 20% compared to the second quarter. After adjusting for the usual health Canada.
Great success of our inside our four walls.
In terms of revenue net sales decreased 11% quarter over quarter to 21 six.
This decline is attributable to lower LNG sales in Alberta reduced emphasis in Saskatchewan, and Manitoba supply chain I'm, sorry, short term supply issues and diversity products into that relative to Q3 'twenty. Two are our sales are down 53% due to increased competition.
SKU rationalization of lower margin products soft performance in key markets, Ontario, Alberta, Quebec, and the removal of product portfolios for divesting this business along with trust beverage, our gross margin increased 10% versus the prior quarter.
243% confirming that our strategy to focus on our most profitable brands is delivering results moving on to adjusted EBITDA, excluding the $2 5 million in animal Health, Canada fees, we recognized an adjusted EBITDA loss of $1 4 million. This represents an improvement of $13 2 million versus a year ago quarter.
Finally, looking at cash generation cash is always Paramount and as I mentioned earlier, we were successful in achieving positive cash flow from operations for the second consecutive quarter, and we delivered a $78 million.
And operating cash flows for Q3 23.
Q3 2002.
Being an aggressive cost cutting strategy as well as balance sheet improvements, we have achieved over the past year before I pass it back to Charlie for his closing remarks, I would like to extend my deepest thanks to the hexcel team and the board of directors for their ongoing commitment and efforts to make the Texas example, I'm probably accomplished over the past year and the industry.
<unk> that is going through significant change.
Great. Thanks, Thanks Lou.
Looking ahead, we're very excited about closing the transaction until they brands, which is on track to be completed by the end of the mall.
PRA has been an excellent partner over the last year and as a combined company, we would be better positioned to drive profitable growth and capitalize on this the complementary portfolios of an industry leading with these high growth plans. We are confident that we are leaving the company in good hands with Irwin Simon XO becomes apart a team until right before.
We opened the Florida questions I'd like to thank all of our employees our partners our customers for their continued commitment to our business and to allow <unk> to be the preferred cannabis supplier. It's been an honor to work with you over the past year I look forward to seeing everything the future holds as a stronger company combined hotel right with that.
Operator, we're ready for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Please limit yourself to one question at this time, we will pause momentarily to assemble our roster.
Our first question is from Matt Bottomley with Canaccord Genuity. Please go ahead.
Morning, everyone. Thanks for taking the questions and congrats on the vote yesterday.
Just wanted to get a little more color I know in your prepared remarks, you had mentioned some of the initiatives you've been doing with various products in various markets, but just given that there's been you know double digit.
Sequential declines for the last couple of quarters and your adult use or are we at sort of a trough here and your interest in what you are anticipating going into the closing and also just on the wholesale side you sort of increase that by two X. Just wondering if that was opportunistic.
Opportunistic or if there was an anticipated you know higher level of wholesale contribution going into the closing with with all right.
Yeah.
Well. Thanks for the question that is really good on the beta beside.
That's an area or the wholesale if you want to call that was an area that Julius had identified when we first came together because of some of the benefits that you could have from the standpoint of little faster to cash when those sales combined with when we when we grow a strain one of the areas. You do is you might ended up growing 1.2 times, but you wanted.
Only in the San Juan maybe 900, you have that extra just in case, there's any issues during the growing process and so theres orphaned and stranded strains they became excellent opportunities for us to put out in the market now let me, let me be real clear none of the TNT strange which are proprietary none of those streams, we've sold into the bnb market.
These are held within the Hexone brands showed me, but what youre seeing with that as those b to B brands. It was a strategic area to leverage this ready can master growers program, which gives us some of the lowest cost if not the lowest cost.
Per gram in the market. It also allows us to have some of the highest level of THC and turbines into the market, which is really what the consumers are looking for it in the Bud tenders are looking at is a point to differentiate in the retail brands now going back on the retail sales one of the areas Youre seeing is when we start putting the promotional value when a consumer comes in.
And they buy the new Tnt's dreams, what we're seeing is some of our older Stranger are now starting to kind of fade out our age out instead of repeat sales on the older brands are starting to slow down while the new strains are starting to come on board. The new strains are only been available in Ontario, and BC through the end of this quarter.
That changes this quarter in Q4 and actually starts to go National and then when you add this amazing marketing and branding strength, that's gonna come onboard kill rate youre going to see a whole new level of engagement and an extension into the market.
So I I see these screens really starting to grow I also see an amazing area. When you take a look at the bulk is combined with this with these incredible grows Jewish anything you would like to add yes for the TNT series and if you've kind of you know listen to us in the past.
Started out a little bit in Q1 going into Q2 and are now building momentum into Q3 and as the growth comes on you just see that kind of pushing out the door and so we started off with you know animal right now we've got Violet fog atomic tower Hayes and goes to a lot of that are all gaining significant traction. So we're.
Really really pleased with how that has been accepted by the marketplace.
Measured as a really good question. Thank you Okay got it thanks guys.
Again, if you have a question. Please press Star then one.
Standby as we poll for questions.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Charlie Bowman for any closing remarks.
Thank you again, everyone I want to thank you. It was a it was a tough year, but at the same time. It was a very rewarding year and I want to thank everybody again at the XO organization all of our customers I want to thank the <unk> Irwin has been great from the standpoint of working together and putting this busy.
And really the synergies that you're going to come through.
Really believe this is going to be an incredible company as it goes forward and I can't wait to see the progress that's going to be made so thanks, everyone have an outstanding day and have a great Thursday bye bye everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.