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spk00: 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 2021 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 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, 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 risk factors that are included at the end of this morning's earnings and news release. And NRMDMA and AIF filed with our fourth quarter 2020 financial statements on CDAR 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. HECSO 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 speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to turn the call over to Sebastian St. Louis, CEO of HECSO.
spk09: 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, HAXO 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. A 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's a game changer for us, and we're now up and running. Operator, would you please start the video? Oh, my God. You just got a look into our truly world-class center of excellence in Belleville, which also houses our trust operations, our JV with Molson Coors. 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, secondary packaging has increased fivefold. 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 bastion where we need to be able to win is freshness. And competitors of ours that do not have access to a 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, $41.3 million, 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 $29.4 million and is also up substantially from prior periods. More, 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 have 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 category. to the industry than anyone realizes so far. In fact, I'll talk about this a bit more on the call, but we are now as an industry rolling the beverage business at about 1.9% of total market. So some of you on the call might say, well, okay, 1.9%, 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 1 and 1.5%. In fact, in the USA, beverage occupies about a 1.4% 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 US 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 Quebec and we are continue to achieve that. We're still sitting on a 29% market 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 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% 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 upline 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% from a negative of 3.25 million in Q420. to a negative of about $400,000. So getting very tight on our EBITDA control now, losing under a million dollars. Our gross margins excluding adult use beverage were 39% and continue to be very robust to go forward and prove out the sustainability of a CPG marijuana company. And beverage itself has gone from a whopping minus 125% gross margin to 1% 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 a coffee, a beer, a chocolate bar. We believe there are world-class companies that make those products. And we believe that HEXO is 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 trust has allowed us to demonstrate that that strategy is a winning strategy. For less capital than some of our competitors, we've taken the number one spot in Canada. We've just recently launched at 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 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 MacDonald, to go through a little bit more about the numbers.
spk08: That's very much appreciated. And good morning, everyone. The first thing I wanted to point out really was... Oddly enough, not the result 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 want to do what the industry tended to be doing, and that is piecemealing this cleanup over time. We wanted to come into this year clean. with an extraordinarily clean set of financials so that when we came to market, as we did just now on Q1, people could see and digest the results the way they should be able to do. And so 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. You know, if you look at our results getting into them, our operational cash flow was only minus 6.1 million. Add that to the Q4 and you're talking about in a 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 LP can say that. We are in a great place in inventory. And that was predominantly 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 for the quarter had it not been for one thing, and that's a $23 million 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 and 15 million a year in premium. So a great move to do that, a very high return. So right now we're sitting with $150 million of cash on our balance sheet. That's, you know, you just think about that and the 10 million we've gone through from the operations perspective in a half a year, and we have 150 million on our balance sheet. We are not doing anything dilutive right now. We have chosen, cognizantly 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, you know, we are sitting in a place where we don't have to be opportunistic, which is great. and therefore we have the cash to support what we need to do on an ongoing basis. One of the things we want to talk about is the improvement in that EBITDA and that path to 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 cog side so 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, 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 $15 million in total, or 51% of net sales. That's down from $15.5 million in Q4, which at that point was 57% 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, we're hoping to get that down under 25% 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 would 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 represent 40 times an implied earnings stream on behalf of the company that you're talking about. Well, if you look at that 40, and I encourage people to go out and look at this, okay? I encourage you to go to all the LPs and us and look at our market cap, divide it by 40, say, what does that mean for implied earnings? Then compare that to the reality. So the reality is you take margin, you minus out that SG&A I talked about earlier, which is the G&A, marketing, selling, promotion, and R&D, just minus that for margin. And you say, okay, 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 300 million. We have been very diligent in our way of managing the P&L or managing the balance sheet. Others, you know, you can look it up for yourself. Billions, multi-billions of capital, depreciable capital to get their earnings, not us. So you take that and you take that net margin, minus out the SG&A, minus out the depreciation, and where are you? What does that earnings look like today? What is the reality? And multiply that out by four, you know, because it's a quarter. 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 valuation. Some of the LPs out there are as high as $750 million 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 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 it with regards to earnings per share. And that is what's 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. At that, I do want to turn it back to Sebastian. And thank you, everybody, for listening in. And I think we're going to open up to questions soon.
spk09: 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 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. 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 $2.9 billion run rate. That's just in Canada and it continues to accelerate. We're in a 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 US story isn't the be all end all. When you look at beverage as a part of the market in the US, It's not just 1%, it's not 1.5%. In fact, after two months in market in Canada, it is 1.9% 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 US legalization provides a ton of blue sky. And take in mind that just the Canadian opportunity is currently running at a $12 million run rate annualized for HEXO. And that's just us. That's not the whole industry. Remember that beverages have a high capital moat around them, 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 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 now.
spk00: If you'd like to ask a question at this time, please press star one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Your first question comes from Tammy Chang with BMO Capital Markets.
spk01: 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 Trust U.S. So 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 I'm also curious how you think about HEXO's strategy for the THC side in the U.S.
spk09: Thank you, Tammy. 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 probably getting shut down in the Senate, so that is probably not the immediate path. So before going to multi-states, HEXO is going to make sure that we are in full cooperation with all federal and state laws in the U.S.A. So the current operations in Colorado are fully legal at all levels of government. They're within state lines. They're from hemp-derived CBD. There are other states that have a current legal environment from our interpretation. 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 where 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.
spk01: Okay, got it. And my follow-up question is, I just wanted to revisit the up relaunch versus the original Stash product line. looks like there was good growth on the original stash side. So just wondering, in the market, are we seeing a reacceleration in that value segment again? And with respect to the up relaunch, can you talk a bit more about how that's going as you're trying to endeavor now to up pricing your consumers and other value consumers, you know, kind of up that pricing tier? How do you do that and how is it going? Thanks.
spk09: Thank you. Before we start to talk about raising prices for our consumers, it's critical that we deliver a better feature set and better value for them. And this is really why we're very excited about UP because our cultivation has gone so much stronger than that. We're able to deliver at a predictable guarantee 20% 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% 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 a high-end UP product to, say, 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 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.
spk01: Got it. Thank you.
spk00: Next question comes from Aaron Gray with Alliance Global Partners.
spk04: Good morning. Congrats, Nikora, and thanks for the questions. First one for me, guys, is on the beverages. Some of you guys remain very bullish on that now, 1.9% of Canadian sales. So I just want to know if you guys have done any initial studies or conversations with consumers in terms of how much of that has been 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 that'll kind of help that category continue to grow as you and competitors continue to launch new products and build that out. Thanks.
spk09: Thanks, Aaron. The trial rate's certainly high. What's exciting is Health Canada is now taking a look at the regulations, and there's early regulatory interpretation that should allow us to go from a five drink limit at 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, which is what drives and regulations how many drinks you're able to buy, is based on the millilitres of 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 case quantity consumption. And as you start to hit that, that really conflates with our production ability too. So you saw in our video this morning, Our Belleville facility with Trust, 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% 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 is certainly listening as well, and I think as those things fall, beverages will continue its climb as a meaningful part of the category.
spk04: All right, great. Thanks for that, Kyle. That's helpful. And then the second question for me will go along with pricing as well, but more on the vape side. So you guys had an increase sequentially on the vape sales, it looks like, looking at the MD&A. Okay. Just wanted to get some commentary that you might have in terms of what you're seeing within the vape category where you 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 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.
spk09: Thank you. Yeah, so vape is where Flower was. 18 months ago as a general category. What I mean by that, distillate pricing in Canada is still egregious. And that translates to high unit cost in vapes. And then it's 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% 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 feature set. Then we can talk about concentration. Then we can talk about safety, legal channel, consumer protection, protection of children. All that kind of stuff starts to matter, right? Environmental footprint, 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 the scale-up is not actually full-fledged, so we haven't actually turned on our vape machine the way we've turned on the beverage machine. And I say machine, it's not one discrete machine. a 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 flour, what we did in hash and what we're doing in beverage, which is to deliver pricing that's black market competitive and which in turn will simply box out 50% to 80% of our competition that is unable to operate at the same scale.
spk04: All right, great. Thanks for that, Colin. I'll jump back into the queue.
spk00: Next question comes from Rupesh Parikh with Oppenheimer.
spk07: Morning. Thanks for taking my question, and also congrats on a nice quarter. So just going back to the progress that you guys have seen in the beverage category, I was just curious, what SKUs do 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?
spk09: So distribution as a whole, Rupesh, and thank you for pointing that out, is getting a lot more sophisticated and a lot more competitive. So 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 98.5%. HEXO's goal is to get well above 99% 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 Trust sitting at about 60% 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, we're in about 6 out of 10 retail stores throughout the country. And that will rapidly increase, we hope, to that 90% plus number. In terms of listing amount, when you look at our SKUs, that's the beauty of the Trust portfolio. Our little victory wine spritzers made from real de-alkalized 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 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. 10 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 under the Verivel brand. And so there's quite a few SKUs actually. I think we're up to 14 or 15 now. skews in market, but we're also rapidly adapting to consumer preference. So we saw, for example, that our House of Terpenes brand has had tremendous success with limonene, but consumers are having a bit of a slower uptake in understanding the value prop under mercine. And mercine is a very flavor-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've never actually tasted that flavor. And that's the really cool thing that we were able to develop with Molson Coors and Trust 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's been a bit slower on that product, but as consumers are starting to try it, it's starting to build a niche, but we're adjusting then supply and response. So still a lot of opportunity for skew proliferation, a ton of opportunity for improvement. And we're dialing in, for example, in the USA, specific flavoring that's for the US 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.
spk07: Okay, great. And 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?
spk09: Yeah, I think, I mean, are you talking the beverage side specifically or portfolio?
spk07: Just in general, just portfolio.
spk09: Yeah, so in general, yeah, super proud of what the team's done. We're hard at work on continuing to remove COGS. But the flip side is we want to flow through those savings to the consumer. I mean, HEXO is not out to try to achieve 80% gross margins. We've been striving for a 40% 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 amongst the most competitive companies in the 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.
spk07: Okay, great. Thank you and happy holidays. Thank you.
spk00: Next question comes from John Zampero with CIBC.
spk07: Thanks. Good morning. I want to ask about pricing. It was a fairly significant decline in the quarter, but that was clearly to 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.
spk09: Yeah, well, I think from pricing, John, thanks for that. One, 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 know, you'll be trending up, down. You tend to Stick around the pricing that we have now, I think, is reflective of the 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 program basis, I think that's not where we want to look at pricing. I think on a program 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, $120 on Black Market, simply it's not even near the quality that you get in original Stash. 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 thing is 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't follow. And then that leaves a larger basket for us.
spk07: 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 flour or other categories. Is that something they mentioned to you? Is that something you're thinking about when you mention the 15% of sales in the category? Just trying to get a sense of how that plays out in your conversations with partners.
spk09: Yeah, 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 Trust provides fridges that provide for a very nice setup 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 that capital moat around Belleville comes up. You know, in Quebec, for example, we're shipping twice a week. So we're reloading those stores often. something that we've started to take. I mean, I commend the OCS and the Ontario government for the progress they've done. They've got their brand new distribution center coming up very soon in Guelph. 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, trust 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 case quantity, absolutely I think that 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 1% in their mind, that they really start to think of beverage as 10% to 15% of the category because it is a differentiator. And so that certainly is a challenge we need to overcome, but it will be overcome over the medium to long term.
spk07: Okay, that's helpful. Thank you very much.
spk00: Next question comes from David Kitticle with ATB Capital Markets.
spk05: Hi, good morning. Thanks for taking my question and congrats on the quarter. First question is, Sebastian, 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.
spk09: Thank you, David. Yeah, definitely Hexo driven.
spk06: I mean, our war on the floor strategy, our brand strategy.
spk09: 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 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, flour across all categories, beverages, there's not a lot of competitors that can do that. And so we're having a lot of success in being part of that at both the retail level and also with the provinces at 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 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% of the market share. Hexo is part of that 90%. 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% of our revenue now that's coming from outside of our core home province. So a meaningful upgrade from where we were before.
spk08: Let me follow up with Trent here. Let me follow up there quickly. Seb didn't have the figures right in front of him, but you'd asked about market share. And, you know, look, we're number three in Alberta. We have 7% market share. We're number six in Ontario. Don't forget, not too long ago, we were 17 in Ontario. Now we're number six. And we have very close to 5% market share now there. And more of our basket, it's more than 30%. We're 18% of our total sales in Q, you know, right now. As of today, in fact, right now, today, this today is 18%. 18% of our sales are in Alberta, 15% are in Ontario. You know, and then we are not just in those two problems that South Quebec, we're in other problems as well, like BC. So like Seb said earlier, our goal is, our goal, and we're progressing there extraordinarily quickly, is to have more than 50% of our basket outside of Quebec while, again, maintaining that market share in Quebec. And we're on our way. That's not a year from now. We're getting there very quickly.
spk05: 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 price brand per se, 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 do you and Besiege original staff contributing to your top line revenue number just as a value brand? Thanks.
spk09: 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 Sash certainly is a name to watch. So I fundamentally believe that to 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 to price. It needs to be priced right for the features that it offers. I think we've done those first two things with Original Sash. And we've started to see a 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. And from a top line perspective, I think Trent can share a little bit where we're going.
spk08: Yeah, I mean, look, from our top line, we continue to, you know, grow and expand and where our goal is to be, you know, Look, we can't say 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, you know, that ongoing dialogue of another quarter of growth, another quarter of growth, another quarter of growth. um, top and bottom line. And so when we talk, I mean, there's been a lot of questions on pricing here. I mean, over the course of these analyst calls, uh, questions and, and that's fair enough, but that's why we have such great practices in our cultivation, uh, in Masson, which we're not talking about a lot, but really great, uh, quality, um, uh, operations going on there as a result of, uh, you know, uh, led by our chief operating officer, uh, Don. uh who who's a wealth of knowledge and he he's brought in some great people in mass on they're they're doing a wonderful job and then you move that over to bellville and what's happening our price can come down and we can continue to be to be very good on margin this is not a a margin game it's a volume game you know the more we sell the better we can do uh on our um 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%, we're going to be profitable all day long. And that's a good place to be. And we're one of very, very few who can say that. So we like where we're at. Okay.
spk05: Thanks for that. Very helpful. We'll hop back in the queue.
spk00: Next question comes from John Chu with Desjardins Capital Market.
spk02: Hi, good morning. Maybe just following up on the beverages in the retail stores. One of the earlier questions is 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 trust-related branded refrigerator to house some of the drinks. I'm just trying to understand what small footprints that some of these stores have. How do you get to that target of 15% if the space within the store is pretty limited?
spk08: Yeah, let me take this one just for, and Seb can clearly jump in if I miss anything, but My background is in retail. I spent a 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 footage? Seth talked about it earlier. There's 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 listings. But there's also the fact that we have molten cores. You know, we can't understate the fact that we have a global partner, global. You know, and this isn't, not to take shots here, but it's not a craft beer location in one state. You know, this is a global partner. And when they want listings, they get listings. And, you know, that's the beauty of it. In retail environments, you know, they're going to give 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. You know, that's the truth of it. We started off first quarter with 1.9. Now we're at 3.1. And let's be honest, we have not capped out here. You know, this is a growing segment for us, and you're going to see that. And so, you know, we're continuing to grow. What we're seeing that this is the retailers are wanting more and more of this product. Seb says earlier, once you introduce, like people can say, oh, it's not that big of a category because the 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 number, was named top beverage in Canada in the Canada's awards by kind. And, you know, that's because it has that great profile. People are going to come back and they are coming back over and over. And when you get volume going to retail with a decent margin, which it is, retailers will give it shelf space. And that's how it works.
spk02: Okay, great. And then the second question is just maybe a bit more of an update on Belleville and Sebastian, 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 trust part of that?
spk09: Yeah, John, it's done. We're fully transitioned. We have no more – there's no significant manufacturing operations happening in Masson or outside of – outside of Belleville now. 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, you know, best-in-class pre-roll manufacturing, see vape being integrated for manufacturing. And as we start to put those elements there, and hopefully a few more partners next to Trust, right? Which we've got about 400,000 square feet sitting in Belleville waiting to accommodate those partners. And that's licensed 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's full. You got 350 HEXO employees working at that center. So it's quite operational.
spk02: Okay, great.
spk09: Thank you.
spk00: Next question comes from Doug Meem with RBC Capital Markets.
spk03: Good morning. Two questions. Sebastian, I just wanted to delve a little bit more, and I know this has been beat to death, 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.
spk09: Thank you, Doug. Yeah, so I won't disclose on this call where I'm taking the pricing just yet, so I apologize for dodging that question a little bit. But overall... for Hexo's plan is to have a pyramid type brand strategy, right? So think up Hexo original stash and at all feature sets to have price points that compete directly with the black market. And that will be largely driven by our ability to lower unit cost and to flow that through to the consumer and to win through volume.
spk03: Okay. And where is the black market right now?
spk09: Oh, black market vapes. So it depends on the quality and feature set. But I mean, you'll get a black market vapes could range anywhere from $20. I mean, you could get as low as $10 to $15 on certain disposables in the sale environment to, you know, you're typically towards the $30, $40 range on something a bit quote unquote 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.
spk03: 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?
spk09: Yeah, we don't create any obligations for our retail partners. Uh, and we, we, we do it as part of our overall, like for example, in Quebec, uh, the, the capital fridge program that we do in Quebec, we do as part of being the preferred supplier. Uh, 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 in-exchange quid pro quo. That's part of what we see as our relationship as preferred supplier. It's the kind of service that we deliver to our customers. And so that's part of that overall program. We believe that 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 as a preferred supplier. And that's the reason that we can keep our shelf space and create sell-through with the consumer.
spk08: Just to follow up, you're thinking about the bridge program. It's very similar to a lot of retail environments and LPs, even within the cannabis retail environment, coming in and doing merchandising and retailers allowing them to put up displays. You know, it's not dissimilar to that. You know, there is no obligation. There's no incentive beyond just the fact that you have a fridge there. But, yeah, so I didn't want to leave it there.
spk03: And just to finish off, what's the expected cost of that program over the next two years?
spk09: It's within trust. Yeah, it's within trust, Doug. So that all rolls in. Eventually, as a reminder, Trust will be obtaining its own license within the next six to 12 months. When that happens, the Trust's earnings, cost, everything will move over to Molson Coors Consolidation from HEXO. And as Trust becomes profitable, we expect to simply see contribution to net income below the line there. So it's nothing material. Okay, thank you.
spk00: Once again, if you'd like to ask a question, please press star 1 on your telephone keypad. And we do not have any telephone questions at this time. I will turn the call over to Mr. St. Louis.
spk09: Thank you, everybody, for joining the call. It's been exciting to share our progress as we continue to remain in that top four list 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.
spk00: This concludes today's conference call. You may now disconnect.
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