HEXO Q1 2021 Earnings Call
Operator: Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEXO Q1 Twenty Twenty One Earnings Call. Before we begin, we would like to remind you that certain matters discussed in today’s call or answers that may be given to questions asked could constitute forward-looking statements. These statements are based on the company’s current internal views, estimates, expectations and assumptions. These statements should not be read as assurances of future performance or results. They involve known and unknown risks and uncertainties and other factors that could cause actual results, performance or achievements to differ materially from current expectation and those implied by such statements. We will also note that we utilize certain non-IFRS measures in our financial reports, which may be discussed on today’s call. And reconciliations between any such non-IFRS measures to their closest reported IFRS measures are included in our MD&A. This discussion is qualified in its entirety by cautionary notes regarding forward-looking statements and the risks factors that are included at the end of this morning’s earnings news release and in our MD&A and AIF filed with our fourth quarter 2020 financial statements on SEDAR this morning and which will also be filed on EDGAR. Please review these materials for more information about forward-looking statements and the risks factors that could cause actual results to differ materially from our current expectations and those implied by such statements. HEXO 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 for any reason. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Sebastien St-Louis, CEO of HEXO.
Sebastien St-Louis: Thank you, operator. Good morning, everybody. Before we get going, I’d just like to wish everybody good luck. Of course, during these unprecedented times, HEXO has certainly kept the safety of its employees as a paramount priority and we’ve taken many precautions to ensure that everything goes smoothly and that we continue our essential service of supplying Canadians with high-quality cannabis during this pandemic. Big thank you to everybody at HEXO for your role in supplying our consumers and customers. Before we discuss Q1, I’d like to take two minutes and share with you a look inside our Belleville Center of Excellence. I’m very excited to share with you what we’ve got going on inside. Belleville is a game changer for us and we’re now up and running, operator, would you please start the video?
Operator: [Commercials]
A - Sebastien St-Louis: Of course, it was thrilling to be able to share a virtual introduction to that site with you a few days ago. And again, today, I promise you, the feeling when you walk in is even more exciting. This facility is highly automated and we believe that it delivers a competitive advantage and it really leverages the capital moat that HEXO has erected in Canada. With this facility, we have the ability to go to market quicker than most competitors. We have the ability to ramp-up new product lines and we have the ability to continue to lever economies of scale to push better pricing to our consumers. We’ve been hard at work over the last few quarters and especially in Q1, matching timely supply and demand, And that’s down to the SKU level. We’re really moving beyond talking about tons and kilos at HEXO and really starting to talk about discrete SKUs, velocities, sell-through at retail and this is an area that’s remaining top of mind. We understand some of the frustrations that our consumers and our customers feel when we introduce great new products into the markets and then it rapidly sells out and they have to wait until we replenish. With our Belleville facility now, we are getting control over that SKU-by-SKU velocity and getting that additional supply in market is really unleashing the potential that HEXO has. In the first quarter, we deliberately took our time to really understand the forecasted demand and to build a planning organization that can make sure that popular products and rarer products are available to consumers throughout Canada at all times. We’re starting to see the early benefits of this. You saw in our video a secondary packaging has increased five-fold. So that capital moat and that ability to go quickly to market means that we’re putting fresher product into market. The manufacturing capability of taking a freshly harvested flower and bringing it quickly, say, under 60 days into a retail store, gives us an ability to simply have a higher-quality product. Consumers started measuring quality by price, and obviously, Belleville contributes there and HEXO has been a price leader now for over a year. They have also continued to measure quality by potency. And we’ve recently launched our Up Cannabis brand, which is the first brand to promise a potency guarantee to our consumers of over 20%. The next fashion, where we need to be able to win, is freshness. And competitors of ours that do not have access to the facility of the scale and complexity of Belleville will simply not be able to compete on that freshness, because you need a very, very nimble and complex supply chain to be able to take that fresh flower and bring it to market quickly. Our goal is to keep the most popular and successful products in market, so our consumers gain access to the whole HEXO portfolio and that our customers at the boards can continue to rely on HEXO as a partner of choice. We’ve had a phenomenal Q1 and start to the year. Record revenue, forty one point three million dollars, which is the highest in the company’s history. We’re up 14% sequentially from the fourth quarter and more than doubled year-over-year. Our net revenue was twenty nine point four million dollars and is also up substantially from prior periods. More or maybe even more impressive than that and what really gets me excited is that we’re proving HEXO’s ability to win important categories. We have won the hash category. We are the clear number one national supplier of hash. And resoundingly, we’ve just taken the number one position in beverage. Now, this will be a highly fought for category. I think it’ll be a much more important to the industry than anyone realizes so far. In fact, I’ll talk about this a bit more in the call. But we are now, as an industry, rolling the beverage business at about one point nine percent of total market. So some of you on the call might say, well, okay, one point nine percent, that’s not an interesting number. And this is where I beg to differ. And I think it’s a very significant milestone. For years now, we’ve been talking about beverage as a piece of cannabis being between the one and one and a half percent. In fact, in the USA, beverage occupies about a one point four percent piece of the market. The fact that we have now demonstrated that by creating a best-in-class product with better taste, with a recyclable glass bottle, and with a wide variety of portfolio and effects, that we can overtake the total category space that exists in beverage in the U.S., proves how important this category is. I’ll talk a bit more about that during the call. Our sales momentum has increased across Canada, and we’re still holding the number one position in Quebec. So take that in for a moment, HEXO has been concentrated on being the number one supplier to come back and we are continue to achieve that. We’re still sitting on a 29 percent market share Quebec and we have continued to that. We are still sitting on a 29% markets share in our home province and we will continue to serve Quebec as the preferred supplier to the Quebec marketplace for years to come. However, what’s very significant this quarter is you’re seeing a meaningful uptick in outside of Quebec. So as our supply chain has become more robust, we’ve been able to put attention outside of Quebec. And you’ve seen us become top three now in Alberta. We’re moving up in Ontario. We’re in sixth position in that market. And we expect that trend to continue so that in future quarters, we actually expect that we will have more revenue coming from outside of Quebec than in Quebec while keeping our number one status there. We’re launching products that resonate with consumers. We started the year with Original Stash, taking over price point and really redefining the market. When we launched Original Stash, it was a 28-gram format at a very competitive price point. That product was met with a lot of market skepticism. And today, those types of 28-gram good value offerings are over 50 percent of the market throughout the chain. Our hash product, as I’ve mentioned, is number one, and we continue to be able to out innovate. Our vapes are getting phenomenal reviews. And across the Board, HEXO is seen as a leader by our consumers. We really took time to match supply and demand, and that meant some difficult decisions. So our up product, for example, our up-line relaunched in Q2. So you don’t actually see the benefit of the up relaunch in Q1. That’s additional upside and it’s going very well. This is our sixth consecutive quarter of EBITDA improvement, our first quarter, where we’ve improved 87 percent from a negative of three point twenty five million in Q4. To a negative – from negative of almost well, to a negative of about 400,000 dollars. So getting very tight on our EBITDA control now, losing under $1 million dollars. Our gross margins, excluding adult use beverage, were 39 percent and continue to be very robust go forward and prove out the sustainability of a CPG marijuana company. And beverage itself has gone from a whopping minus 125 percent gross margin to one percent positive in just one short quarter. Our CPG partnerships, I think, the most significant part about our deal with Molson and beverages is that it really proves out the model that HEXO embarked on three years ago with our powered by HEXO model. So HEXO believes that we will never be the best company at making coffee, beer or chocolate bar. We believe there are world-class companies that make those products, and we believe that HEXO was a world-class company at understanding consumer experiences built from the molecules that come from marijuana. And I think that this foray now into beverage with Molson Coors through Truss s has allowed us to demonstrate that that strategy is a winning strategy. For less capital that some of our competitors, we’ve taken the number one spot in Canada. We’ve just recently launched in the United States, so we now have CBD beverages derived from hemp on the shelf in Colorado and we’re very excited to see how that develops. Although today I won’t talk to specific numbers in that market, because it’s a – this is very fresh news. But we’ve been hard at work on these partnerships now for – and we’ve never really stopped over the last three years. They are extremely complex partnerships to negotiate and that’s what we’ve been doing. So we believe that, as we are able to land successive partners to Molson Coors, that will really continue to prove additional upside for HEXO and our shareholders. I’ll now turn it over to our CFO – to Trent McDonald to go through a little bit more about the numbers.
Trent MacDonald: That’s very much appreciated, and good morning, everyone. The one thing – the first thing I wanted to point out really was, oddly enough, not the results itself, but the cleanliness of our P&L. I think that goes back to Q4. We made some tough decisions at the end of the year around cleaning up our balance sheet. So we took a lot of write-downs, a lot of big impairments, because we no longer wanted to do what the industry tended to be doing and that is piecemealing this clean up over time. We wanted to come into this year with an extraordinarily clean set of financials, so that when we came to market, as we did just now in Q1, people could see and digest the results the way they should be able to do. And so you – what you see here is a very clean, understandable P&L, and that is where we are going to continue in the future each quarter successively from here on out to show beautifully clean P&L that people can digest, that is very simple to understand. If you look at our results getting into them, our operational cash flow was only minus six point one million. Add that to the Q4 and you’re talking about half of the year, we’ve only gone through $10 million of operational cash flow. A lot of that came from inventory this particular quarter. We did build up inventory, but I want to talk about that. Inventory has been an area of risk for LPs, not for us. We’ve cleaned it up. We had a great harvest near the end of the quarter and that was a higher yield harvest than we had anticipated, which was a great thing, because since that point in time, we’ve been able to turn all of that into value-added stamped finished goods at our Belleville facility, which are now out into market. We are not creating any risk. For the first time in our history, we are actually using more trim on a weekly basis than we can actually produce. And I don’t know of any other LPs can say that. We are in a great place in inventory, and that is [Audio Gap] the use of our cash in Q1, which we don’t expect going forward, it was just a timing issue, but we’re in a great place. So if you look at our total cash flow, I mean, our total cash flow would have been only a use of 11 million dollars for the quarter had it not been for one thing. And that’s a 23 million dollar move from cash to restricted cash, which was to fund a captive insurance policy for ourselves and our D&O, which saves up between $10 million and $15 million a year in premium. So a great move to do that at very high return. So right now, we’re sitting with one hundred fifty million dollars cash on our balance sheet. That’s – just think about that and the $10 million we’ve gone through from an operations perspective in a half a year and we had $150 million on our balance sheet. We are not doing anything dilutive right now. We have chosen – cognitively chose not to do anything dilutive and to be opportunistic. As many of the LPs have been over the course of the last several weeks when the industry has taken off as a result of much of which was due to what was happening in the United States. And there are lots of LPs who have absolutely no exposure to the United States yet their stock are driving forward, not like us. We have exposure to the United States. And even still, we are sitting in a place where we don’t have to be opportunistic, which is great. And therefore, we can – we have the cash to support what we need to do on an ongoing basis. The – one of the things we want to talk about is the improvement in that EBITDA and that path the EPS. So that starts with our war on COGS, to keep those margins being very healthy while we know that the market is severely price competitive and we are a leader there. We want to offer great products at a competitive price. And so that means we have to be extremely good on the COGS side that we can continue to deliver healthy margin, which we are doing. The other thing is SG&A. With SG&A, we have been doing a lot of things to control those costs. In this quarter, our – if you look at G&A, marketing, selling and promotion and R&D, those are your three core SG&A that you see on the face of the P&L, very similar to other LPs. For us, that figure was $50 million in total or 51% of net sales. That’s down from $50 and a half million in Q4, which at that point was fifty seven percent of net sales. We need to be better there and we know that. So we’ve already made significant improvements in Q2. We’ve done some restructuring and are going to continue to do some restructuring over the next two quarters beyond this to get to a place where we know we are going to be best-in-class in SG&A. We have some very high targets for ourselves in terms of getting that percentage down to a reasonable level of net sales. Within a year-and-a-half to – within a year-and-a-half, we’re hoping to get that down under 25 percent and even better of net sales. That is a great target and a good place that allows us to have that clear path to earnings per share. Earnings per share is where it’s at. And when you look at market valuations today, there is what you call an implied level of earnings inside of market cap. And if you look at an industry like ours where it’s growing, even if you said, okay, market caps are – represent 40 times and imply earnings stream on behalf of the company that you’re talking about. Well, if you look at that 40 and you just – and I encourage people to go and look at this, okay? I encourage you to go to all the LPs and us and look at our market cap divided by 40, say, what does that mean for implied earnings? Then compare that to the reality. So the reality is if you take margin, you minus out that SG&A I talked about earlier, which is the G&A marketing, selling, and promotion, R&D, just minus that from margin. And you say, okay, what is the – what does that look like as a number? And what is the depreciable capital base that everyone’s using to get that number? That’s another thing. We’re under three hundred million. We have been very diligent in our way of managing the P&L or managing the balance sheet. Others, you can look at that for yourself, billion, multibillions of capital, depreciable capital to get their earnings, not us. So you take that and – you take that net margin minus of the SG&A, minus of the depreciation, and where are you? What does that earnings look like today? What is the reality? And multiply that out by four, because it’s a quarter, let’s say, what does that look like for annual earnings? And how does that compare to what was in the market cap? You’re going to get a disparity. You’re going to get big disparities across the Board between what the reality is and what’s in the market valuations. Some of the LPs out there are as high as seven hundred and fifty million dollars of annual earnings as a disparity, not us. We are under 45 million right now. That is by far, bar none, the best of all of the top five or six LPs and it’s not even close. We have the lowest disparity between our valuation on the market and the reality of what we are delivering today. We have a path. We are headlong into this path of eliminating that disparity and then moving well beyond with regards to earnings per share. And that is what is extremely important to us and where we’re going to continue to go. And we’re going to do it off the back of a low capital base while not being dilutive unless there’s some type of strategic initiative, something that we can bring to market to say this is why we need to dilute, because there’s something that’s going to provide a very reasonable return for our investors. With that,. I do want to turn it back to Sebastien and thank you, everybody, for listening in. And I think we’re going to open up to questionsnow.
Sebastien St-Louis: Before we get to questions, I’d like to again wish everybody safety and health as the global pandemic continues. I’m so proud of what the HEXO team has achieved for the their – and also for their dedication as we navigate through an ever-evolving environment. Despite the many challenges that this economic and social construct has posed here, the cannabis industry continues to grow and that’s a testament to consumer demand for safe and legal high-quality products that are offered by licensed producers and HEXO. The industry is running at about a two point nine billion dollar run rate, that’s just in Canada and it continues to accelerate. We’re in the top four market share position at HEXO. We are closing in on the top three spot, which I continue to believe will be necessary to be in those top threes to ensure a long-term sustainable business with high-value brands that can be leveraged internationally. We’ve proven now that the HEXO model of partnership is one that leads, that can lead to being number one in important categories. We’ve shown that the U.S. story isn’t the be all and all. When you look at beverage as a part of the market in the U.S. it’s not just one percent, it’s not one and a half percent. In fact, after two months in market in Canada, it is one point nine percent of Canadian sales. That means that categories when you hit the product right, when you truly create a proposition that delivers to consumers what they want, you are able to redefine the market and create a larger opportunity. We’re currently number one in Canada, it’s possible for HEXO to be number one in the USA. We can take what our Canadian run rate is and multiply it dramatically in Canada, but our strategy following U.S. legalization provides a ton of blue sky. And take in mind that our – just the Canadian opportunities currently running at a 12 million dollar run rate annualized for HEXO, that – and that’s just us. That’s not the whole industry. Remember that beverages have a high capital moat around them and that the technology and the manufacturing behind them cannot be easily replicated. And the expertise that HEXO is developing and that our partners are contributing is hard to match. We’ve now proven our ability to win categories. We’ve proven the model and we continue to do negotiate. We’ve never really stopped with other CPG partners to multiply that success. We look forward to updating everybody at our next call. It should be an exciting next quarter, a very exciting next year, and I’m very happy to be able to take some questions.
Operator: [Operator Instructions] The first question comes from Tamy Chen with BMO Capital Markets.
Tamy Chen: Hi, good morning. Thanks for the question. I wanted to ask about the U.S., I guess, first is, if you could provide a bit more commentary on Truss U.S. And you mentioned you’ve launched in Colorado. Can you just talk a bit about how you’re thinking about additional states, just kind of expansion on that front? And then also curious how you think about HEXO’s strategy for the THC side in the U.S.?
Sebastien St-Louis: Thank you, Tamy. The U.S. expansion is really going to follow the regulatory path, and that regulatory path is not fully defined. We’ve obviously seen the first vote on the MORE Act that probably getting shutdown in the Senate. So that is probably not the immediate path. So before going to multistate, HEXO is going to make sure that we are in full cooperation with all federal and state laws in the USA. So their current operations in Colorado are fully legal at all levels of government. They’re within state lines from hemp-derived CBD. There are other states that have a current legal environment from our interpretation. What – really the advantage of our strategy is, we wanted to prove out the product in Canada. That was number one. Now we are proving out the nuances to the product for the U.S. consumer base, which is slightly different when you start to talk about branding, concentration, taste profiles, and that’s really we’re leaning on the expertise of Molson Coors there. But certainly, we’re keeping a close eye on expansion opportunities. So those will come soon.
Tamy Chen: Okay, got it. And my follow-up question is just wanted to revisit the up relaunch versus the Original Stash product line. So looks like there was good growth on the Original Stash side. So just wondering in the market, are you – are we seeing n reacceleration in that value segment again? And with respect to the relaunch, can you talk a bit more about how that’s going as you try to endeavor now to up pricing your consumers and other value consumers, kind of up that pricing here? How do you do that and how is it going? Thanks.
Sebastien St-Louis: Thank you. Before we start to talk about raising prices for consumers, it’s critical that we develop better – we deliver a better feature set and better value for them. And this is really why we’re very excited about, because our cultivation has gone so much stronger now. We’re able to deliver at a predicted – predictable guaranteed 20 percent plus THC with a very strong terpene profile. We’ve redesigned our genetics lab in Brantford. So we have an entire indoor facility now at HEXO that is 100 percent dedicated to the development of World-class genetics. And so we’re leveraging the existing massive genetics bank that HEXO has and we’re further developing on top of that. So we’re in R&D. And as we introduce new feature sets, we expect to be able to offer competitive pricing for what that feature set is. The up launch has gone very well. So since we’ve hit market, we’re getting a great consumer response. And I think that’s because we’re meeting the expectations of the consumer. We promised a certain concentration. We promised a higher-quality product, and we’re still competing at a very reasonable price. So if you compare high end up product to see some of the higher end black market products, we’re still in the right pocket from a consumer demand perspective. Original Stash and lower priced value offerings still continue to be a large part of the demand profile. And we’ve seen a ton of competition in market. But as I mentioned earlier, most of our competitors don’t have the robust infrastructure that HEXO has. And so they’ve been able to kind of come in and out, but Original Stash remains a mainstay for consumers and continues to gain traction.
Tamy Chen: Got it. Thank you.
Operator: Next question comes from Aaron Grey with Alliance Global Partners.
Aaron Grey: Good morning. Congrats on the quarter and thanks for the questions. First one for me, guys, is on the beverages. Some of you guys remain bullish on that now, one point nine percent of Canadian sales. So I just want to know if you guys have done kind of any initial kind of studies or conversations with consumers in terms of how much of that – has been kind of trial versus repeat purchases? And maybe some of that initial feedback that you’ve been hearing that gives you kind of further confidence in the overall trends? I’ll kind of help that category continue to grow as you and competitors continue to launch new products and build that out. Thanks.
Sebastien St-Louis: Thanks, Aaron. The trial is certain – the trial rate is certainly high. What’s exciting is Health Canada is now taking a look at the regulations. And there’s early regulatory interpretation that’s – that should allow us to go from a five-drink limit point of purchase to six-drink limit. So that’s already a meaningful improvement, because that’s been some of the feedback our consumers are saying. They’re saying, “Can I please buy more of this stuff, especially at once? Can we reduce friction? And when you look at the concentration, for example, the current equivalency factor, so what – which is what drives in regulations, how many drinks you’re able to buy is based on the milliliters or the volume of the beverage. So it really is not aligned with consumer and public safety. And I think Health Canada is well aware of that. They’ve gone to consultation right now. I think we will see that change. And as that changes in the next while, that will really allow not just a six pack at point of purchase, but a case quantity consumption. And as you start to hit that, that really conflates with our production ability to. So you saw in our video this morning, our Belleville facility with Truss, we can produce 400 units a minute. And if you do the math and you start to annualize that, that’s a tremendous amount of beverages. But we’ve really built that facility for what we believe the market will be in the future. And I’ve said a few times, I believe beverages could be as high as 15 percent of the total category, a massive part of the market. And so I think as regulatory changes shift, we’re hearing loud and clear from our consumers. We want to buy cases. Health Canada certainly listening as well. And I think as those things fall, beverages will continue its climb as a meaningful part of the category.
Aaron Grey: All right, great. Thanks for that color. That’s helpful. And then the second question for me will go on with pricing as well with more on the vape side, so say you guys had increased sequentially on the vape sales, it looks like looking at MD&A. So I just want to get some commentary that you might have in terms of what you’re seeing within the vape category? Where you’ve kind of started to launch some of those products, especially as we’ve seen kind of overall. A lot of other competitors launching their own products and some competition on price there. So just any commentary in terms of what you’re seeing on the vape category and how you kind of see that evolve and where you see yourself kind of having a competitive edge would be helpful there? Thanks.
Sebastien St-Louis: Thank you. Yes. So vape is where flower was 18 months ago as a general category. And what I mean by that distillate pricing in Canada is still egregious and that translates to high unit costs in vapes and then essentially a high-price for the consumer. So when the consumer is still looking at vape overall and this isn’t just for HEXO, but vape overall, they’re priced out of the market compared to black market. Black market is our number one competitor. Let’s make no mistake, we have to get the pricing right and we have to beat black market pricing without qualification. So before we can get the, say, 90, 95 percent of the total market, a consumer has to know and trust that what’s available in legal channel is better priced than what they can get from their dealer on the street. After that, once they know they’re getting the best price, then we can talk about the future set. Then we can talk about concentration. Then we could talk about safety, legal channel, consumer protection, protection of children, all that kind of stuff starts to matter, right? Environmental footprint, all those all those other features. And so vape is still at the front end of that, because licensed producers as a whole have not fixed the supply chain. Now this is where HEXO’s advantage comes in. We’ve been hard at work developing great formulations. So initial responses to the actual distillate that we have in our vapes is phenomenal, but to scale up is not actually full-fledged. So we haven’t actually turned on us vape machine the way we’ve turned on the beverage machine. And I talk – as a machine, it’s not one discrete piece of equipment. I’m talking about the whole system and process to produce our vapes. That is something that will be coming up for HEXO and it’s a category we’re certainly playing in. And when we do that, we expect to be able to do to the market what we did in flower, what we did in hash, and what we’re doing in beverage, which is to deliver pricing. That’s a black market competitive and which, in turn, will simply box out50 percent to 80 percent of our competition that is unable to operate at the same scale.
Aaron Grey: All right, great. Thanks for the color now. I’ll jump back into the queue.
Operator: Next question comes from Rupesh Parikh with Oppenheimer.
Rupesh Parikh: Good morning. Thanks for taking my question and also congrats on a nice quarter. So just going back to the progress that you guys are seeing in the beverage category, I’m just curious what SKUs you have today in the marketplace? And going forward, what’s the opportunity to add more SKUs and to gain more distribution in more provinces?
Sebastien St-Louis: So distribution as a whole, Rupesh, thank you for pointing that out, is getting a lot more sophisticated and a lot more competitive. So the – our provincial partners, in fact, are demanding that we have a high throughput rate. So, I mean, you’re looking at, in Ontario, for example, the filter order has to be above 98 and a half percent. HEXO’s goal is to get well above 99 percent in that market and to deliver the same kind of preferred partnership service that has made us number one in Quebec. In beverage, that means that the provinces are more and more relying on portfolio providers that can stay on shelf, that have a good understanding of the consumer, that can provide that whole portfolio offering. And so Truss has really become the beverage company of choice throughout Canada. And that’s not even in being in every store. So that’s with Truss sitting at about 60 percent distribution right now. So there’s a lot of low-hanging fruit to get more listings simply as we get in more retail stores. So when I say 60% distribution, there were about six out of 10 retail stores throughout the country. And that will rapidly increase, we hope, to that that 90 percent plus number. In terms of listing them out, like when you look at our SKUs, that’s the beauty of the Truss portfolio. Our little victory wine spritzers made from real dealcalized wine with a 2.5 milligram THC and 2.5 milligram CBD composition. We just launched a new SKU with a dry white wine base in our dry grapefruit line, so that, that comes and joins Blood Orange and Dark Cherry. Our XMG line is proliferating and having really good success. That’s at the higher-end of the spectrum, Ten milligrams of THC offering in a tropical punch. And now the new flavor, mango, pineapple, which is really dynamite. huge improvement in flavor profile on that one. We have a list – a line of CBD sparkling waters, right? So they’re under the Verywell brand. And so there’s quite a few SKUs actually. I think we’re up to 14 or 15 now SKUs in market, but we’re also rapidly adapting to consumer preference. So we saw, for example, that our House of Terpene brand has had tremendous success with Limonene, but consumers are having a bit of a slower uptake in understanding the properties of the value prop under Mersin. And Mersin is a very flavour forward product. It was designed to go after the scotch drinker market. And so the first time you taste it, you’re not sure what to expect, because you never actually tasted that flavor. And that’s the really cool thing that we were able to develop with Molson Coors and Truss was to come and take the unique characteristics of cannabis and not only deliver an experience that’s unique, but actually to deliver a flavor. And so the uptake has been a bit slower on that product, but as consumers are starting to try and starting to build a niche, but we’re adjusting then supply in response. So still a lot of opportunity for proliferation, a ton of opportunity for improvement. And we’re dialing in, for example, in the USA specific flavoring that’s for the U.S. market. And so I’ll be really excited to see what that does. It’s too early to see the sales numbers, but that’ll be a good thing to monitor.
Rupesh Parikh: Okay, great. And then maybe just one follow-up question. So the gross margin performance was pretty strong this quarter. So as we look forward, is it fair to think that we build on the improvement that we’ve seen this quarter going forward?
Sebastien St-Louis: Yes. I think I mean, are you talking beverage side specifically or portfolios…
Rupesh Parikh: Just in general, just portfolio, just portfolio gross margin?
Sebastien St-Louis: Yes. So in general, yes, super proud of what the team has done. We’re hard at work on continuing to remove COGS. But the flip side is that, we want to flow through those savings to the consumer. I mean, HEXO is not out to try to achieve 80 percent gross margins. We’ve been striving for a 40 percent-type portfolio margin. But if we have to be at 35% for a while in order to make sure we are relevant to the consumer and that we beat black market pricing and that we continue to grow market share and total share of market, that’s certainly something we’re going to do. I think what we’re proving out is, we have an ability to be the most competitive among the most competitive companies in this whole sector. And as long as we keep doing that and delivering great value for price, I’m confident that we’ll get the volume to keep sustaining a better COG profile.
Rupesh Parikh: Okay, great. Thank you, and happy holidays.
Sebastien St-Louis: Thank you.
Operator: Next question comes from John Zamparo with CIBC.
John Zamparo: Thanks. Good morning. I want to ask about pricing. It was a fairly significant decline in the quarter, but that was clearly a shift towards large format value. But just would like to get a sense of how you see that category playing out in pricing for the next few quarters?
Sebastien St-Louis: Yes. Well, I think from pricing, John, thanks for that. One, you didn’t – you did not see the impact of our up portfolio. So the up relaunch, as we said, we had taken a specific action to delay that to make sure that when we did launch, we would be in market all the time. So that should provide some positive momentum. But overall, if you look at kind of the stabilized pricing over five quarters, you’ll be trending up, down. You tend to stick around – the pricing that we have now, I think, is reflective of an ability to keep pricing go forward. But overall, I guess investors, I wouldn’t caution investors on seeing any kind of massive price drops, but the but to that, on a per gram basis, I think that’s not where we want to look at pricing. I think on a per gram basis, there’s still some room to move a little bit lower just to really dial in the competitive nature against black market. And then simply, if we get a little bit tighter and this depends on certain products, right? Like if you take Original Stash 28-gram, you don’t need to drop the pricing on that product. It’s more competitive than what black market can offer. When you take $120 ounce, right, what’s available for $100 to $120 on the black market, simply it’s not even near the quality that you get in Original Stash. So – but there’s still a lot of room to refine pricing on categories like vapes, for example. There’s still some room to refine pricing on categories like hash the exciting things that HEXO has the infrastructure to do that. And as we’ve proven with Original Stash, as we drive pricing, most of our competition can follow and then that leaves a larger basket for us.
John Zamparo: Okay, that’s helpful. Thanks. And then my second question on the beverage side, as you have conversations with retailers and distributors, is there a sense that there’s kind of a cap on how big that category can get just because of the lower revenue per square foot of that item versus, say, dry flower or other categories? Is that something they mentioned to you? Is that something you’re thinking about when you mentioned the 15 percent of sales of the category. Just trying to get a sense of how that plays out in your conversations with partners?
Sebastien St-Louis: Yes. I mean, we talk about that all the time. We’re talking to our preferred retailers, right? We talk to retailers literally every day. And so one of the things we’ve done is we’ve actually we have a capital fridge program. So Truss provides fridges that provide for a very nice set up in retail stores and nice experience, refrigerated beverage ready to drink. So that’s one of the things we’ve done. But the other thing we’ve done, and this is where the capital moat around Belleville comes up. In Quebec, for example, we’re shipping twice a week. So we’re reloading those stores often and that’s something that we’ve started to take. I mean, I commend the OCS on the Ontario government for the progress they’ve done. They’ve got the brand-new distribution center coming up very soon in the Wells. And that facility allows for a just in time sort of approach. And as they look at an overall SKU rationalization for the industry and really focus on a core SKU program, Truss is part of those core SKUs. And what that means is that, we’re in market. We’re replenishing often. And then that paired with the longer-term regulatory development at the federal level that will allow pace quantity. Absolutely. I think that if we are able to blow past that barrier, you’re seeing a bunch of new retail store operators open and we’re working closely with those new retailers to make sure that beverage is more than a one percent of in their mind that they really start to think of beverages 10 percent to 15 percent of the category, because it is a differentiator. And so I – that certainly is a challenge we need to overcome, but it will be overcome over the medium to long-term.
John Zamparo: Okay, that’s helpful. Thank you very much.
Operator: Next question comes from David Kideckel with ATB Capital Markets.
David Kideckel: Hi, good morning. Thanks for taking my question and congrats on the quarter. First question is, Sebastien, you mentioned and this has been a recurring theme over, I guess, quite some quarters, just increasing your market share in other provinces besides Quebec. So I’m wondering, just on that point alone, are you able to disclose what your market share is within the other big provinces? And also, what specific steps is HEXO going to take to increase market share? And will that be HEXO-driven? Or do you see that more as macro-related factors, for example, the opening of new brick-and-mortar stores? Thanks.
Sebastien St-Louis: Thank you, David. Yes, definitely HEXO-driven. I mean, our war on the floor strategy, our brand strategy. So with the up launch now, HEXO has a full portfolio offering across the value chain, right? We’ve got our HEXO core offering. We’ve got Original Stash towards the value. We’ve got up – the up relaunch at the premium portfolio. So we can really offer retailers and then that’s just from a pricing perspective. But we can offer retailers across categories now to a full slew of products, right? When you look at vape, hash, pre-rolls, like flower across all categories, beverages, there’s not a lot of competitors that can do that. And so we’re having a lot of success and being part of that at both the retail level and also with the provinces and having those conversations as a preferred supplier. So that will drive volume. The second piece that drives volume is our ability to compete directly with the illicit market on price for like quantity – like quality and better. And so that is also driving volume. And you also have a flushing out of competition, which is driving volume. So you’re seeing a lot of our competitors. I mean, there’s still over 400 licensed producers in Canada, but 10 of the licensed producers control 90 percent of the market share. HEXO is part of that 90 percent. And you’re seeing that success. And now that we’ve unlocked the supply chain and that we’re really focused outside of Quebec while maintaining number one position in Quebec. But while we’re focused there, you’ve seen in this quarter, it’s almost 30 percent of our revenue now that’s coming from outside of our core home province. So a meaningful upgrade from where we were before.
Trent MacDonald: Let me follow-up – Trent here. Let me follow-up there quickly. If I didn’t have the figures right in front of them, but you’ve asked about market share. And, look, we’re number three in Alberta. We have seven percent market share. We’re number six in Ontario. Don’t forget, not too long ago, we’re 17 in Ontario. Now we’re number six. And we still – we’re very close to five percent market share now there. And more of our basket, it’s more than 30 percent. We’re 18 percent of our total sales in Q – right now. As of today, in fact, right now, today, today is 18 percent, 18 percent of our sales are in Alberta, 15 percent are in Ontario. And then we are not just in those two provinces [that’s our] [ph] Quebec, we’re in other provinces as well like DC. So like I said earlier, our goal is – our goal and we’re progressing there extraordinarily quickly is to have more than 50 percent of our basket outside of Quebec while again maintaining that market share in Quebec and we’re on our way. But that’s not a year from now. We’re getting there very quickly.
David Kideckel: Okay, thanks, guys. Very helpful. My follow-up question goes back to your Original Stash brand. And our channel checks and due diligence have suggested that consumers are not really loyal to any value-priced brand per say, and they’re willing to go with whatever’s the cheapest price in store. So my question is, number one, do your channel checks verify that as well? Or actually is Original Stash perhaps working outside the box here? And secondly, on that one as well, to what extent you envisage Original Stash contributing to your top line revenue number, just as a value brand? Thanks.
Sebastien St-Louis: Well, David, I think that you’re touching on a core point there, and I’ve been saying now for years that brands don’t exist yet in cannabis, although we are starting to see them build and Original Stash certainly is a name to watch. So I fundamentally believe that the build brands and for the brand to cycle back into value – to really build value from the brand itself, that brand needs to first have an unbelievable distribution. And second, have a very good feature set the price. It needs to be priced right for the features that it offers. I think we’ve done those first two things with Original Stash and we started to see search for product, especially in web sales, people are searching by brand name. So it’s starting. But you’re right that overall this is a highly competitive market and that we can’t rest on any laurels. No brand is strong enough to command just from a brand name perspective to command shelf space. We have to keep driving value through price and feature set. And HEXO is very good at doing that. We’re very good at remaining relevant and responding to the market. And so I see the fact that brands don’t exist yet in cannabis as an opportunity for HEXO as an opportunity to build our portfolio of brands. From a top line perspective, I think, Trent can share a little bit where we’re going.
Trent MacDonald: Yes. I mean, look, from our top line, we continue to grow and expand and where our goal is to be – well, we can’t say what we’re – what’s going to happen. We’re not giving guidance, okay? But let’s make it clear, our goal is to continue coming here quarter after quarter with very clean P&Ls, very digestible, that allows us to continue that that ongoing dialog another quarter of growth, another quarter of growth, another quarter of growth, top and bottom line. And so when we talk, there has been a lot of questions on pricing here. I mean, over the course of the sales, tough questions, and that’s fair enough. But that’s why we have such great practices in our cultivation in that prong, which we’re not talking about a lot, but really great quality operations going on there as a result of – led by our Chief Operating Officer, Don, who’s a wealth knowledge. He has brought in some great people in that. They’re doing a wonderful job. And then you move that over to Belleville and what’s happening. Our price can come down and we can continue to be very good on margin. This is not a margin game. It’s a volume game. The more we sell, the better we can do on our dollars of margin, even at lower margin rates. And that’s the bottom line. We control our SG&A. We get that war on COGS going. If we’re at 35 percent, we’re going to be profitable all day long. And that’s a good place to be. And that’s – and we’re one of the very, very few who can say that. So we like where we’re at.
David Kideckel: Okay, thanks for that. Very helpful. I’ll hop back in the queue.
Operator: Next question comes from John Chu with Desjardins Capital Markets.
John Chu: Hi, good morning. Maybe just following up on the beverages in the retail stores, one of the earlier questions about convincing the retailers from a value per square footage. But the other question, I guess, I have is just more from a capacity perspective, a lot of the retail stores are pretty small footprints. And in terms of how do you convince them to take on a Truss-related refrigerator to have some of the drink. I’m just trying to understand what small footprints that some of these stores have? How do you get to that target of 15 percent if the space within the store is pretty limited?
Trent MacDonald: Yes. I’ll – let me take this one. Just for – and Trent can clearly jump in if I miss anything. But my background is in retail, okay, that’s my better part of my executive career in retail. And I can tell you that’s a great question. How do you get listings? How do you convince retailers to take on new listings and provide space inside of a fixed quantity of square foot? Trent talked about it earlier, there are different programs. There’s the refrigeration. You’re taking capital expenses that they would have otherwise had out of their pocket. You’re doing it on their behalf. And the return is – in return you say you have to take certain listing. But there’s also the fact that we have Molson Coors. We can’t understate the fact that we have a global partner, global. And this isn’t not to take shots here, but it’s not a craft beer location in one state. This is a global partner. And when they want listing, they get listing. And that’s the beauty of it. In retail environments, they’re going to give what they see. They’re going to get space to whatever moves. And so we can get a listing. But somebody asked earlier, are we getting more people coming after the fact? We are. That’s the truth of it. We started off first quarter with one point nine. Now we’re at three point one. And let’s be honest, we have not tapped out here. This is a growing segment for us and you’re going to see that. And so, we’re continuing to grow what we’re seeing that this is – the retailers are wanting more and more of this product. Trent says earlier, once you introduce like people can say, oh, it’s not that big of a category, because products are, let’s be honest, not good. They’re just not good. They don’t have a good taste profile. People are trying it like somebody pointed out. They’re trying it, but they’re not coming back for it. That has changed. That has changed dramatically. Little victory was just named the – was named Top Beverage in Canada in the Cannabis Awards by Time. And that’s because it has a great profile. People are going to come back and they are coming back over and over. And when you get volume going to retail, the decent margins exist, retailers will get a shelf space and that’s outworks.
John Chu: Okay, great. And then the second question is just maybe a bit more of an update on Belleville. Sebastien, you mentioned that it’s up and running now, so maybe just give us a sense on the transition to Belleville, where that’s at, and when do you think you’ll be mostly transitioned over there, excluding the Truss part of that?
Sebastien St-Louis: Yes, John, it’s done. We’re fully transitioned. We have no more – there’s no significant manufacturing operations happening in Massawa [ph] or outside of Belleville. So we’ve really – we’ve consolidated. That’s why we took that virtual introductory tour. Now, what’s great now is that, we’re done moving everything to Belleville, the improvements and the proliferation within that facility that we’re just getting started. So super exciting over the next few years to see best-in-class, pre-roll manufacturing, keep vape being integrated for manufacturing. And as we start to put those elements there and hopefully a few more partners next to Truss, right, which we’ve got about 400,000 square feet sitting in Belleville, waiting to accommodate those partners. And that’s the license square footage that can accommodate the next Fortune 500 CPG partners. As we do that, that center really comes alive. But right now, it’s active. I mean, the parking lot is full. You’ve got 350 HEXO employees working at that center. So it’s quite operational.
John Chu: Okay, great. Thank you.
Operator: Next question comes from Doug Miehm with RBC Capital Markets.
Douglas Miehm: Good morning. Two questions. Sebastien, I just wanted to delve a little bit more and I know this has been beat to depth, but I do want to understand your thinking, because you’re a leader on the Original Stash side. So I want to get your thinking on where you think pricing needs to go in the vape market relative to where it is right now, let’s say, for half a gram or a gram-type product and if you’re going to be leading that charge?
Sebastien St-Louis: Thank you, Doug. Yes. So I won’t disclose on this call where I’m taking the pricing just yet, if – so I apologize for dodging that question a little bit. But overall, for HEXO plan is to have a pyramid-type brand strategy, right, so think up Original Stash. And that all feature sets do have price points that compete directly with the black market, and that will be largely driven by our ability to lower unit cost to and to flow that through to the consumer and to win through volume.
Douglas Miehm: Okay. And where is the black market right now?
Sebastien St-Louis: Oh, black market base, so it depends on the quality and feature set. But I mean, you’ll get a black market vapes could range anywhere from twenty dollars. I mean, you could get as low as $10 to $15 on certain disposables in the sale environment to – you’re typically towards the $30, $40 range on something a bit “higher end.” Now obviously those are brand promises and the black market that are unvalidated and there’s nothing to back it up. So they tend to say what they want about their products, but that’s kind of your pricing.
Douglas Miehm: Okay. And then my second question has to do with the capital fridge program, because I think it will be helpful. But can you sort of walk through the details of that if you do provide a fridge to a retail store, are there any obligations on their part in terms of ordering a certain amount of product? Or can you just walk us through this fridge program in a bit more detail?
Sebastien St-Louis: Yes. We don’t create any obligations for our retail partners and we do it as part of our overall like, for example, in Quebec, the capital for its program that we do in Quebec, we do as part of being the preferred supplier. It’s the same sort of arrangement we do. I mean, we take care of the distribution for all web sales in Quebec, right? That’s not an exchange, a quid pro quo. That’s part of what we see is our relationship as preferred supplier. It’s the kind of service that we deliver to our customers. And so that that’s part of that overall program. We believe that this – the kind of when you look at it in aggregate and everything that HEXO offers to our customers, that is the reason they come back and that they choose us willingly has a preferred supplier. And that’s the reason that we keep – that we can keep our shelf space and then create sell-through with the consumer.
Douglas Miehm: And what’s – yes.
Trent MacDonald: Just following up the – you think what the fridge program, it’s very similar to a lot of retail environments and LPs, even within the Canada’s retail environment coming in and doing merchandizing and the retailers allowing them to put up displays, not dissimilar to that. There is no obligation. There’s no incentive beyond just the fact that you have a fridge there. But, yes, so I didn’t want to leave it at there…
Douglas Miehm: And just to finish off, what’s the expected cost of that program over the next two years?
Sebastien St-Louis: It’s with Truss – yes, it’s within Truss, Doug. So we don’t – that all rolls in eventually. And as a reminder, Truss will be obtaining a full license within the next six to 12 months. When that happens, the Truss earnings cost everything will move over to Molson Coors consolidation from HEXO. And as Truss becomes profitable, we expect to simply see contribution to net income below the line there. So it’s not nothing material.
Douglas Miehm: Okay. Thank you.
Operator: [Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to Mr. St-Louis.
Sebastien St-Louis: Thank you, everybody, for joining the call. It’s been exciting to share our progress as we continue to remain and top four lists in Canada, and looking forward to sharing continued progress and continue to roll out new products to more consumers. We’ll see you next quarter.
Operator: This concludes today’s conference call. You may now disconnect.