HEXO Corp.

Good morning. Thank you all for joining us for HECSL's fourth quarter 2020 earnings call. Before we begin, we would like to remind you that certain matters discussed in today's call are answers that may be given to questions asked who 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, uncertainties, and other factors that could cause actual results, performance, or achievements to differ materially from current expectations and those implied by such statements. We would also note that we utilize certain non-IFRS measures in our financial reports, which may be discussed on today's call. The reconciliations between any such non-IFRS measures to the closest reported IFRS measures are included in our M, D, and E. This discussion is qualified in its entirety by the cautionary notes regarding forward-looking statements and the risk factors that are included at the end of this morning's earnings news release and in our MD&A and AIS field with our fourth quarter 2020 financial statement on CIDA this morning and which will also be filed on EDGAR. Please review these materials for more information about forward-looking statements and the risk factors that could cause actual results to differ materially from our current expectations and those implied by such statements. HIGSO 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. I will now turn the call over to the CEO of HIGSO, Sebastian San Luis. Thank you. Please go ahead, sir.

Thank you, operator. Good morning, everybody. I'd like to start by wishing everyone safety and health as this global pandemic continues. I'm very proud of HEXO and the team for the dedication as we navigate through the ever-evolving and unpredictable environment. The safety of our team is always our first priority and we're operating within the confines and processes we put in place at the start of the pandemic. We established a COVID-19 response team, which manages the company's information flow of COVID-19 updates, reviews, public health and safety protocols, and we've developed action plans to mitigate risks. We transferred all functions which we can do to work from home and operate purely from that stay-at-home mode, web-based and teleconferencing platforms, and our functions which require on-site activity. We increased focus on social distancing, and we added personal sanitation station and provided additional PPE. We also implemented travel restrictions and quarantines while traveling, and importantly, we initiated a hero pay program to support our cultivation and manufacturing employees who continue to work during the pandemic. Despite the many dire economic and social consequences the pandemic has caused, the cannabis industry continues to grow, and that's a testament to the consumer demand for safe and legal product that we offer. The industry has a $2.9 billion run rate and continues to grow, We remain in a top four market share position, closing in on the third spot and increasing the gap between ourselves and the number five and number six LPs. We've been deliberate and selective in our launch of 2.0 products. We've launched vape pens, our hash products, and they've been overwhelming successes. Great quality reviews, and we are number one in the hash category. We continued to lead the way with original stash, including our 28-gram package format, which is a high-quality consistent product priced to compete directly with the illicit market. This was an industry first, and HEXL reset the Canadian market for dried flour as a result. Many of our competitors scrambled to duplicate our efforts. Our hash product is a market leader. delivering a phenomenal head high, super clean, very little body buds, reminiscent of the best Montreal hash of the decade. We're the first company to roll out nationally, and we have the largest market share. Again, we're competing with the black market, but are delivering a high quality product at CPG scale. We have a plan for further hash line extensions to come. We've also launched a COVID-friendly share pack of pre-rolls, setting the bar for competitors and lighting the way for consumers to enjoy high-quality pre-rolls in an affordable 12-pack. Our up products are a great example of our focus on COGS while we deliver more value to the consumer and begin to move up market while introducing higher consumer promises. We increased the average revenue per gram this quarter from $2.22 net to $2.95. We continue to focus on driving that as high as possible. Beverage is a category that I'm extremely excited about, especially this last quarter. Trusts, our joint venture partner with Molson Coors, is going very well, and we're learning a lot about this exciting new product category. We believe beverage represents a huge opportunity in cannabis, especially over the next several years, which is why it was so important to have a world-class partner such as Molson Coors. In early August, Trust began rolling out its range of THC and CBD infused beverages across Canada. The portfolio of brands is suitable for a wide range of beverage occasions, and it's designed to appeal to both current cannabis consumers and those who are just beginning to explore the category. Whether it's helping people unwind, whether it helps to add energy to social occasions, or it's part of your wellness routine, expect to find Trust products there. While the cannabis beverage market continues to develop and distribution continues to build, consumer feedback on the taste and performance of Trust's beverages has been overwhelmingly positive. As of October 2nd, with only 7 of 13 SKUs available, Truss has shipped approximately half a million units of ready-to-drink beverages. In the three short months that HEXO and Truss have been in market with beverages, we have now become the market share leader at till sales. Outside of Canada, we intend to penetrate the Colorado market, and our current launch is teaching us a lot about becoming number one. As Powered by HEXO pushes into the USA with TrustUSA, we're proving our template for the low capex, capital, light partnership strategy. Internationally, we also began selling flour into Israel, which contributed to $1.3 million of net sales in Q4. Beyond the top line, this year we launched our truly world-class center of excellence in Belleville, which also houses our trust operations. It has highly automated manufacturing capabilities, which are aimed at ensuring HEXO products are not just meeting the sizable market demand, but that products will get to the consumer as fresh as possible. Our customer demands HEXO's quality and value, and that includes a freshness component that competitors just don't have the supply chains to deliver. Matching timely supply and demand down to the SKU level is critical. This is an area of deep focus for us, and we believe we still need to get better. We understand the frustrations of our customers when we introduce a great product into the market and then it sells out and they can't get access to additional supply. As such, over the past several months, we've purposefully taken the time to better understand forecasted demand and to carefully optimize our production and supply chain. Our goal is to keep our most popular and successful products in market so our customers can gain access to these HEXO products over and over. We've been spending a lot of time ensuring that we're the best positioned player to dominate the market in the future. That means we've had to take some aggressive and proactive steps, particularly with our balance sheet at the end of the year. We've corrected our inventory levels to match supply to the market and have taken impairments on property, plant, and equipment. These will be discussed in more detail by our CFO momentarily, but I'm very pleased with our current financial strength and liquidity. While we strive for consistent, positive EBITDA, we're also focused on learning from the past. It's not our intention to overpay for assets or overbuild our capacity. With today's announcement, we feel we've put ourselves on a path towards positive earnings per share. Our capital life global strategy to partner with Fortune 500 companies continues. While we aren't announcing any new partnerships today, It's a top priority here at HEXO, and we're in a few meaningful conversations with several potential CPG partners. We have a lot of work to do, but the good news is that our revenues are growing, our yields and volumes sold have improved, our normalized gross margin is healthy, and our costs continue to come down. Our adjusted EBITDA loss improved materially in the fourth quarter, and we hope to be EBITDA positive very soon. Lastly, we've made investments in our team and recently welcomed our new CFO, Trent McDonald, and Emilio Imbroglio to our board. We have a fantastic team in place to capitalize on the opportunity in front of us. Let me pass the call over and welcome Trent now to run us through some financials.

Thank you, Sebastian. Good morning, all. I recently joined the company and delighted to be part of the management team. The innovation, creativity, and operational expertise I see here at HEXO is truly staggering. I believe HEXO has an opportunity to become one of the largest cannabis-based companies in the entire world. Our view is that companies in a new and growing industry have to first gain a top market position with high-quality winning products, but they have to do so while controlling SG&A, at least if they hope to. This has been problematic for the cannabis industry. At the outset, most of the larger LPs scrambled to build out robust teams, systems, and infrastructure, as if they were all going to be multi-billion dollar companies. At Hexo, we have gotten ahead of the curve in right-sizing our SG&A, but we are not done. We cannot rest on our laurels. We continue to focus on this area, ensuring that we have the right processes, tools, and people to scale our top line without adding costs into the organization. While our company and the entire industry is focused on positive EBITDA, we also know this is only a first step. We need to move past EBITDA and develop a clear path to positive earnings per share. That is why it is so important to focus on our balance sheet. to ensure our EBITDA isn't attained off the back of a grossly high depreciable capital base. Throughout history, there have been plenty of examples of companies with positive EBITDA who have failed due to the consistent and pervasive erosion of book value through interest and depreciation. This has been and will continue to be a problem for many larger cannabis LPs as time goes on. At HEXO, we feel we are extremely well positioned in this regard. With today's PP&E impairments, we believe we are or are near best in class in terms of depreciable asset base, especially when compared to our potential future EBITDA, which again is clearing a path for positive EPS. Unlike many LPs, we want to stop piecemealing our inventory write-downs, PP&E impairments, and goodwill and intangible impairments. We truly wanted to go into the next fiscal year with a strong balance sheet, putting the past behind us so we can focus on the future. I believe we've done just that. And so my top goals are to ensure we optimize the business, not just to get to adjusted EBITDA positive, but to achieve meaningful profitability on a per share basis. And I see plenty of opportunities to do this. Starting at the top, this was a record quarter and year for sales. Consumers, especially the everyday high volume user, have turned to HEXO for quality products at retail. Our products have strong repeat purchase rates and consumers are loving our 2.0 products. As Sebastian mentioned, we've sold out in many categories and as we enter 2021, we are taking the opportunity to evaluate how to most effectively meet consumer demand at retail. That means ensuring our production planning and demand forecasting is spot on. We learned a lot about this in the fourth quarter, and we are taking some of those lessons with us into Q1. We have and are deliberately taking the time to get this right. And our margins follow suit. While we are already a lean operator, we see opportunities across manufacturing, particularly packaging and in many areas like yield and concentration. We have launched an internal war on COGS with the goal to become best in class on a cost per gram basis. We want to be able to maintain high margins as we continue to grow market share in a price competitive environment and not just on our core products, but across all products. While the top line grows, we are also focused on the foundational aspects of our business, like IT systems and infrastructure, so we can reduce SG&A to become truly scalable. From a liquidity perspective, we are in a great position. We have $223 million of working capital, including $184 million of cash, while our operational cash burn was only $3.8 million in Q4. In addition, we aren't burdened with high debt levels and the related debt servicing that goes along with it, which, as we all know, can diminish a company's ability to focus on strategic investments. So I believe we are the best possible position to drive long-term shareholder value and can become the leading player in both Canada and beyond. Lastly, I do want to speak to the reverse split we announced this morning. In relation to our continued listing requirements on the New York Stock Exchange, we decided on a one-for-eight reverse split and we intend to have that completed shortly after our upcoming board meeting in December, where we anticipate it will be approved. We'll put out updates as necessary. Thank you, and we will now open up the line to questions. Operator?