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spk01: 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 Q3 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, opinions, forecasts, beliefs, assumptions and other statements that are not statements of fact regarding the future of our business, future plans and strategies, operational results and other future conditions. 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, and reconciliations between any non-IFRS measures to their closest reported IFRS measures are included in our MD&A. 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 in our MD&A for our third quarter of fiscal 2021 financial statements. in our annual information form and reports and other continuous disclosure and offering documents filed on our profile on CDAR and 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. Test so 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 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 would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I'll now turn the call over to Sebastian St. Louis, CEO of HEXO.
spk05: Thank you, operator, and good morning, everybody. There's reasons for optimism both in the cannabis industry and also in our societal rollout against COVID-19. Rapid vaccinations are ongoing. We're quite happy to continue to keep the safety of our employees as of paramount importance. We continue to take all precautions and we're happy to say there have been zero transmissions of COVID on site. Some of our employees over the last year have been exposed to COVID but was all outside of HEXO and no disruption, no significant disruption to operations so far. A huge thanks to all our employees who continue to put themselves at risk every day and that continue to bring utmost morale and effort. EXO has been going through a significant period of aggressive growth and transformation. We recently closed on our acquisition of Xenobis, bringing significant indoor production capability to the table, as well as increased market share across most of our markets. We've also announced definitive agreements to purchase both 48 North and Redican. Those two transactions on top of Xenobis really put HEXO in an incredible position. Forecasted, so off the back of the close of those transactions, HEXO should have the number one market share in recreational cannabis in Canada. We had set ourselves out to achieve a top two position a few years ago. And it's really a momentous and historical occasion for HEXO, and we're celebrating quite a lot in being able to see that we are now number one in recreational share with a 17% share, according to third-party results. That puts us a whole point and a half ahead of the next largest LP on a consolidated basis. We've also announced our intent to purchase a 50,000 square foot facility in Colorado, and we're very excited about our U.S. entry underpowered by HEXO. With this facility, we'll be able to put our powered by HEXO technology to work on a larger scale to support all our partners, including Molson Coors, of course, which is selling CBD beverages in Colorado from hemp at the moment. Our third quarter had really two stories. It was one that was a phenomenal story around the acquisitions and around the consolidated number one position, but also a challenging quarter. And those two stories really reflected themselves in all of Canada and then in Quebec specifically. So I'll start by speaking a little bit about what happened in Canada. Then I'll talk about our challenges in Quebec and specifically the two decisions that we spoke of, that we took, that impacted Quebec negatively. So let's start outside of Quebec with the good news. We're up 169% excluding beverage versus the same quarter last year. This is some of the best growth outside of Quebec in the entire industry. We're also up 14% in Ontario from Q2. We continue to build a wonderful relationship with the OCS and with other boards across Canada, and we're being recognized more and more for being the leader in the industry. Inside of Quebec, unfortunately, we were down about $5.2 million from Q2, and that is essentially a result of two decisions. So the first decision was one we undertook 12 months ago, and that was one when we started to see the shift in consumer preferences in flour specifically. We identified that shift in time and we began a refresh of our flower portfolio. We had initial tests on some new genetics that came out of our Brantford genetics lab that were incredibly promising and that basically showed us that no problem, we can hit these quality levels. So here's where the mistake came in, in hindsight. We offlined some strains that were performing well in Quebec. We had sufficient inventory to get through the nine-month grow period. So we offlined about three genetics that were responsible for quite a bit of sales in Quebec, thinking we would replace them with the strains that we had tested at our genetics lab that had performed better than those current strains. What happened nine months later when we actually cultivated outside of our greenhouse is we did not hit the same quality that had been done in our indoor facility at Brantford. And so that was very disappointing, and we could not replace our strains that were now out of inventory with better or like quality. And that then resulted in a loss of flower share. We're still number one in Quebec, and we will rectify this very quickly. We're working with SQDC. And since then, of course, our genetics work has not stopped. We've launched a 100-strain plan. That is well underway. We've since increased quality at both our indoor production sites and at Masson. In fact, now the Masson greenhouse being some of the most productive it's ever been, not just from a yield perspective, but also from a THC perspective. The second decision that hurt us in Quebec was one of overconfidence. We were the market leaders and still are in the hash category, but we had an absolutely dominant position with north of a 70% share nationally. And we couldn't fulfill all of demand. The demand was just too high. Our products were flying off the shelf. So we made the decision to ship a product at a lower than maximum potential into a market. We put some hash into market at 22% THC because there was simply no competition. What we underestimated was essentially the speed at which the cannabis industry moves, and that is a mistake we will never make again. Our competition, so we loaded in this 22% hash, and we produced quite a bit of it, and our competition came in, especially from the craft grows. So it was a few weeks after we did our load-in, they started coming in with hash at 26% and 27%. that crushed the velocity on our 22% hash and we had to retool that product. So this is not a productive capability issue. In fact, we have now started up again, we've respect all our hash and now we're outputting between 28 and 30% for the Quebec market. And of course, outside of Quebec, we're going higher than that, our hash hitting as high as 45% THC. We continue to work with SQDC and the rest of the boards to correct those two decisions. They were unfortunate, but there are things that were set in motion about 12 months ago, and we've since rectified the issues. Go forward, I think this really underlines the strategic importance of some of the acquisitions we've made. When you look at the Xenobis acquisition and the Atholville asset, which is a 450,000 square foot indoor grow, that really allows us to lean into all this genetics work and to scale up our premium genetics. When you look at our portfolio and the demand in market, our Up brand, which is HEXO's ultra-premium line, is a highly productive asset in all markets. We have an opportunity to expand the assortment and the distribution and to position a better overall offering in market. The Up brand has actually increased nationally about 20% quarter over quarter. Of course, our hash quality is now from a productive capability increased. We continue to invest on more CapEx behind that for what we call hash 3.0. So we're very excited to be able to talk to that over the next 6 to 12 months. And we're very happy to say the quality on our other brands is increasing as well, namely in pre-roll when we've ran them through double-blind consumer-based tests. All this story is actually backstopped by continuing great performance from a gross margin perspective. So we have dipped a little bit below the 30% watermark, so currently running on 28% adult use margin, which is still one of the strongest gross margins in the industry. And that is really a result of some inventory right-sizing during the quarter to prevent write-downs. We want to maintain our pristine balance sheet, and so we're making choices on pricing in real time in order not to accumulate bad inventory. That should be rectified again over the next few quarters. We did not have international sales, which was another impact on the quarter. It was a temporary impact. We actually missed the shipping window by a few weeks. We do have a $2 million sale to Israel that was recently completed post-quarter. We had an adjusted EBITDA loss of $10.8 million due to that lower margin percentage and dollars on lower sales, as well as a $3.6 million federal cannabis tax levy recorded in the quarter. Our trust portfolio has performed incredibly well. In May, it strengthened its share leadership of the beverage category in Canada, growing to 46% market share nationally. So huge congrats to the Trust team and, of course, to our consumers that keep making Trust the best beverage brand in cannabis in Canada. We're going to continue on the success and celebrate summer with some new products coming out of Trust. So look forward for House of Terpenes, Valentine and Sparkling Tonic, XMG Citrus and XMG Watermelon, as well as Verivel Honey Green Ice Tea. Little Victory Lemonade, and Molo 5 Lime. Look for those on shelves across the country for this summer. I'll pass it over to Trent to talk more about our financial results.
spk07: Thank you, Sebastian. I just want to touch base on a few things on the balance sheet for the P&L. This is another quarter, third in a row, that we've had no significant inventory write-downs or provisions as we continue to do the right things around inventory, strategically and otherwise. It's another quarter without any impairments of long-lived assets. So our asset base remains strong, our balance sheet remains clean. We raised $45 million off the back of our at-the-market offering. We only ran it for about nine days between the filing of the prospective supplements and as we led up to the possible announcement of a definitive agreement to purchase ReadyCAN. We also raised an additional $395 million of net proceeds through the issuance of a secured convertible debenture in relation to the ReadyCAN acquisition. We're currently sitting with about $194 million in cash in our operating account and have another $275 million sitting in ESPRO waiting on the ReadyCAN transaction close. Our GNA is still in... in a continuum where we continue to want to try to push it down into the best percentage of net revenue in the market. Our marketing sales promotion, we came down another $1.2 million sequentially from Q2, which represents an 8% decrease in real dollars. Loss from operations was $16.1 million for Q3, bringing the total loss from operations to $25.6 million through three quarters. I just want to note that this is by far, and I mean by far, the lowest of any loss from operations in any of the top LPs, and it's not even close. So we've been doing very well in terms of our commitment to ensuring we are spending investor funds wisely. We still believe we have a clear path to EPS as we continue to structure our SBA correctly and leverage what we have to be able to have a bright future. We also know that with our M&A activity that once closed, we have a very good path to not only abundance adjusted EBITDA positivity, but a path to EPS. uh we now of course with that m a we will be turning our focus to integration planning and execution we have hired external consultants uh we've already closed on um on pro uh sorry called productivity and we've already closed on genesis uh as of uh just a couple of weeks ago uh so now that we are on our path to closing on ready can at 48 north we will be doing a lot of integration planning in a very structured way, and we feel very good about the risks that we are mitigating in that regard. We did a great job, I believe, in Zenebis, and we're looking forward to working with the teams at ReadyCAN and 48 North to have a very constructive integration planning process and then to get to post-close integration. At that, I'm going to turn it back over to Sebastian.
spk05: Thanks very much, Trent. despite the many dire economic and social consequences the pandemic has caused the cannabis industry continues to grow that's a testament to the consumer demand for safe high quality legal product that are offered by licensed producers exo is extremely proud of its journey over eight years we've went from the number 17 ranked lp by market share to now post consolidation of our acquisition of Redican and 48 North, we should be the number one recreational market share license producer. We think we've done that on some of the best deployment of capital amongst the leading LPs and are thrilled to announce our new strategic priorities. Three years ago, I had set us out to become top two in Canada, have operational scalability and high gross margins, And of course, continue to invest on product innovation. Today, on the verge of becoming number one in Canada, we're focused on integration and making sure that we continue to push our margins higher. We're focused on delivering not just positive EBITDA, but in the future, moving us to positive EPS. And we're, of course, updating our top two Canadian target because we've achieved number one to now becoming top three from a cannabis products perspective across the world. We look forward to updating you on all of this on our next call and happy to answer some questions. Operator?
spk01: At this time, I would like to remind everyone in order to ask a question, press start on the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. First question comes from Aaron Gray with Alliance Global Partners.
spk07: Good morning, and thanks for the question. So first question for me is talking about your home market of Quebec. So just diving a little bit deeper on some of the softness there in terms of genetics. So it looks like you're trying to right that ship. So we'd like to get some more color in terms of, you know, the timing of kind of the strain cultivation decisions and how you look to remedy that, and do you feel like That still might be another quarter or two until you kind of right that ship. And then also, as you also talked about, you know, heightened competition, you know, in that market, you know, how do you feel it might be more difficult to kind of maybe regain some of that market share, you know, as more competitors, you know, have come into the Quebec marketplace. So you may kind of come there in terms of the timing of when you look to return to, you know, more positive sequential, you know, sales there in Quebec will be helpful. Thanks.
spk05: Thanks, Aaron. We expect to fully recover our market share in Quebec within two to three quarters. Most of those decisions that brought us here were decisions that we started, as I mentioned, almost 12 months ago, but we didn't stop. So 12 months ago, we made the decisions to pull some strains that were highly productive out of Quebec. And that inventory has since run out on those specific strains. So that gave up some share. But it's not like we stopped building our genetics library 12 months ago. So 12 months ago, we said, hey, we've got two new genetics that look awesome. So let's pull a few out of Quebec and we'll keep investing. So then nine months ago, then we had more genetics coming in. Six months ago, even more so, to the point now that we've got 56 genetics that are actually well underway for development for a complete refresh as part of what we call our 100-strain plan. So, no, things are going very well. And now, since then, so since those first two genetics failed in greenhouse, we've actually had tremendous success. So some of our stalwarts, specifically northern berry, which is one of the best-selling flowers in Canada, is produced out of Masson and is actually hitting north of 23% this round from greenhouse. So we expect that we'll be able to do a lot better with the Athelville indoor site in Zenebis. And, of course, all of this is just reflective of the Hexo Genetics Library proper, not the Hexo Xenobis 48 North Retican Library, which, of course, is incredibly robust.
spk07: Okay, thanks for that caller. And the second question for me, you also called out, you know, some impacts on revenues due to OS reserving your ability to get, you know, high TAT products. It looks like harvest during the Q remained, you know, near record high. So we'd love to get some commentary in terms of you know, the level THC, you know, for the harvest in the most recent quarter. And then also, if you could provide some color in terms of Xenobis with that acquisition now closing, it looks like there was some softness in their most recent quarter, too. So just in terms of what you're seeing from their own, you know, sales and their own harvest that they've been having, because I know, you know, high THC has been a high priority for you guys. Thank you.
spk05: As far as the Zenibus numbers, we look forward to reporting consolidated, and you'll see that that should be positive when we get to those numbers. So I won't share the numbers today. In terms of productive capability and what we're able to do from a quality perspective, we keep making improvements all the time. And so I just mentioned specifically that we now have our Northern Berry product, which is coming up above 23%. And that's out of greenhouse grow. So some remaining upside to to go kind of go hit some theoretical maximums there as we move to to indoor. The entire portfolio is now half of the entire portfolio is now hitting consistently over 20 percent. And that, of course, fills the up promise, which is a guaranteed 20 percent or more across the board. We've also made some strides in terpene production. So it's not just a question of increasing THC, but overall quality. And so we've actually had a tremendous success in Quebec with lemon haze, which is actually a bit of a lower THC strain, sitting at 16% to 17%. But the terpene profile is just resounding with consumers. On top of that, in double-blind tests with consumers, HEXO was performing extremely well. We keep improving our curing processes, our drying processes. We've continued to improve the moisture content of our product. We're improving the bud sorting of our product, which is able to guarantee larger bud size. So if you go pick up an original stash or original stash reserve, you'll notice. Go try that against a competing product. You'll notice the bud structure is a lot nicer. Way more moist product. And I'm not cherry picking just against the majors. You can put up Hexo original stash product against craft Quebec cannabis. And the Hexo product and double blind is better on almost every single product. a qualitative aspect. So we're quite happy with that. So I think as the consumer continues to learn and look for olfactory response, right, and sensory response, and that the story matures beyond THC, we'll have a lot of occasions to really show how great HEXO product is. Of course, we continue to hit higher and higher THC, and that will remain part of our story.
spk07: All right, great. Thanks for the call. And I'll jump back into the queue.
spk01: Next question comes from Tammy Chen with BMO Capital Markets.
spk00: Thanks. Good morning. First question is on the genetics and the production. So I was wondering, you know, we've seen some other competitors doing their own product revitalization. And what we've seen is that, one, it takes quite a while, and that, two, the pathway to eventually get some of these newer genetics growing in their facility to commercial scale and hitting more on spec takes quite a while and it's quite a bumpy road so fashion could you just elaborate a bit more on uh the confidence you have that you'll have these new genetics and there seems to be quite a bit of them that you're trying to scale up that you'll be able to have them in market and recover your market share over the next two to three quarters especially if you'll be growing, it sounds like, some of those strains in Zenebus' facility, which I think does come with a learning curve since it is a facility that you've acquired rather than developed from day one yourself.
spk05: Thank you, Tammy. Yeah, so this is the advantage of having started our genetics program 12 months ago. So we've been in full swing in genetics revitalization for a year now. So it's not something we've talked about. We've been quietly doing it in the background. And the first two strains didn't work when we moved to our greenhouse in Nassau. But we currently have four strains. new ones that are in Masson that are productive, that are working, that are growing and actually about to be harvested. We expect that by September, we'll have many new strains in market. So we're quite excited about that. And of course, we keep just improving the base strains that we have. So of course, things like Northern Berry continue to be highly productive under the Up brand. So this is not, it is a long turnaround. But it's something we started a year ago. And I think when you look at full cycle for that to really be complete, it's probably an 18-month process to largely engage that. So September we start and we should have a full portfolio refresh completed by Q2, by our fiscal Q2 in January, which should coincide with the consolidation as well of all our acquisitions.
spk07: Just to follow up on that, Tammy, I know you mentioned Appleville as well. Appleville has been a productive place for... for some time now. So it is a state-of-the-art facility. It is producing at high grade. We don't believe that it's going to be, to your point, like starting from scratch. We didn't build a green field. It is a site now that's in full production. So we believe we're going to be able to get the genetics out of there at a very high level within a very short time frame.
spk00: Okay, thank you. That's helpful. And my follow-up question is more on the beverage category. I noticed some language in the press release mentioning some more competitors with SKUs coming to market. While you're still number one, you did call that out. So I just wanted to ask... Is that of a concern? What's the strategy aside from some of the new products that you will be launching in the category? How are you thinking about maintaining your number one share? Do you think pricing as a lever may be required? Just overall commentary on how you feel about the category now that it seems like some more competitors and schemes are coming into that category. Thank you.
spk05: Thanks, Sammy. Well, it's a dominant number one right now at 46 share. And we're not worried in terms of a short answer. In fact, I welcome competition in the beverage space. I think it's necessary. Our biggest opportunity in beverage is actually growth of category. So not growth of share, but the growth of the overall category. And we've seen that in certain markets that we can get upwards of 6% of the category. So we've hit that time and time again from a unit sales perspective. What's key, our beverages have an 85% rebuy rate. meaning that when somebody tries it, they're almost certain to try it again. And so really, we need to induce trial. We need to bring people into the category because once they try it, beverage becomes a go-to. And anyone who's tried the Trust portfolio, they're usually blown away, and it becomes part of their weekly consumption habits. And so having more people come into the category, we hope, will bring more attention to beverage, incite consumers to try Trust products, and then, of course, off the back of that, we should have a lot of repeat sales. I still think that beverage as an overall category could eventually hit 15% of total cannabis sales. It's simply a wonderful format.
spk01: Great. Thank you. Next question comes from Rupesh Parikh with Oppenheimer.
spk05: Thanks for taking my question. So I guess first starting out with Q4, is there anything you can share from a revenue expectation perspective? It clearly, you know, there's still some challenges out there with COVID. And then you guys have some company-specific things that you're also getting through. So just curious if you could just share any perspectives on Q4. Listen, Q4 is better. We're coming out of COVID, Rupesh. And We didn't want to blame COVID for Q3 either. Really, I think that's a key differentiator for HEXO. Q3 was our fault. There were those two key decisions that we took a year ago, so one on the strain selection and the other on hash. We know what those are. We've rectified them, and it won't happen again. It was not a COVID problem. Consumers were still buying a HEXO product, and had we had the right – mix in category and channel uh it uh you know i think q3 would have been a very different story so uh q4 certainly already looking better but we're not providing guidance or numbers uh in more specifics okay great and maybe just a follow-up question so an ebitda profitability so last quarter you guys did get the positive ebitda um just any update thinking in terms of the timeline to get back to that positive ebitda metric
spk07: Yeah, look, the EBITDA was hit by two things. We had a $3.6 million tax levy that came in on an annual basis. That hit Q3. We also had, of course, the margin loss in relation to the lower volume of sales, specifically in Quebec, but then the margin percent was about 20%, still a pretty good margin percent, all else being equal, especially around the LPs this time, but I think I think for us, without giving specific guidance, you have the M&A activity as well that's coming in. We believe that there's going to be a ton of synergies. We're already starting to see those in Zenebis. And we believe that we have this path forward that we continue to talk about, not just from adjusted EBITDA, but actual ETFs. So, look, our Q2 is where you'll see really Q2 of next year. You'll see all three, hopefully. You know, we get to the close of Ready Canada 48 North, and we have Xenobis, which we would have had for at least eight months. I think you're going to see a great Q2. But what that looks like, I don't know. But we're not worried too much with EBITDA. Our SP&A is coming under control. We're getting better all the time as we leverage our sales back up. I don't see any reason to think that we're not going to be able to get back to where we were.
spk05: Okay, great. And then maybe just on that health Canada recovery fees, is that something that's accrued every quarter and then paid out in April? I just want to get a sense because I think the P&L impact all hit this quarter. So just on the recovery there.
spk07: It did all hit this quarter. I'll be honest, it's a bit of a debate between us and our auditors as to how we should treat that. I'm of the opinion that it should be approved quarterly so it doesn't hit in any specific quarter. I've been losing that debate, quite frankly, but I'll continue to have it. This is the same way as other LPs have been treating it as well, apparently. So, look, stay tuned. But if we have to start budgeting in for Q3 every year, we will. Okay, great. Thank you. I'll pass it along.
spk01: Next question comes from David Knieckel with ATB Capital Markets.
spk08: Good morning. Thanks for taking my questions. Both of them are going to revolve a little bit around your M&A activity as of late. So my first question, Sebastian, and we've had this conversation several times around cultivation specifically. We've seen, you know, you didn't have to write down any inventory this quarter, but now with your other acquisitions, namely ReadyCat and to some extent 48 North, perhaps Zenebis, what are your thoughts though around now going back to having a problem and not in this quarter, but in subsequent quarters of having excess supply, especially with all these potentially new cultivation facilities coming online? Thanks.
spk05: Thanks, David. Well, to properly answer that, I think I have to take you back almost two years. So two years ago, when we did right-size our balance sheet, HEXO did that, was the first licensed producer to do that. Well, we learned a ton of lessons, and those were lessons that we've built on in those two years. So a ton of experience there in learning how to manage supply chain, how to manage cultivation, moving from specific SKU all the way to the shelf and then to consumers' hands. So those lessons is a big part of our integrated business planning. It's a big part of what we bring as a combined story and as HEXO to our M&A partners. So going in, we're immediately implementing things that will ensure that inventory does not become a problem in the future. And you saw some of those things in Q3, of course, but those are largely temporary. And anything larger that we need to do on a consolidated basis, we're not afraid of doing. So no, I don't expect that inventory accumulation is going to be a problem, especially in the face of continued really strong demand for some of the product portfolio from that consolidated business. So specifically when I look at the Redis product, the Redis portfolio, uh the retican portfolio as a whole in oil etc uh i mean on a consolidated basis coming out of this hexo is going to be the number one not just overall by rec share but we're actually the number one we should be the number one in flour the number one in pre-roll the number one in beverage the number one in hash the number one in oil the number one in gel caps it's a lot of number one so you need a lot of capacity to fill that demand
spk08: Okay, that's helpful. Thanks for that encouragement as well, Sebastian. My second question is around the actual integration of the two. I know the deal, or at least with ReadyCAN, hasn't closed yet, which is the most significant one here. But I mean, what processes and procedures are in place to ensure a seamless acquisition? I mean, even with quality control, you're talking about products that have been arguably number one in the market, or number one to three with ReadyCAN. So is this going to be HEXO adopting a ready count approach or vice versa or kind of combination of the two? Any help? I'm just really trying to understand how and which measures you have at HEXO has in place to ensure a seamless integration of the two or three companies. Thanks.
spk07: Yeah, no problem. Well, we've hired a company. I keep saying we've hired a company called Portivity, but they are a world-class organization that has a huge transaction services component. We went through the Xenobis acquisition integration planning process. It was extraordinarily robust. We had a tremendous communication plan, cross-functional plan, operational performance plan, all leading into the close, and now we are starting to execute on those plans. We also have those same consultants that we've carried on through the engagement to help with the ReadyCAN and 48 North, which we've already launched. And so we're already starting on those integration plans. We see all three being very different. So Zenebis is very much a more complex type of multi-site LP. ReadyCAN, for as successful as they are, are a little less complex, to be honest. And they have been a tremendous operator. We do not see ourselves going in there and fully integrating ReadyCAN, nor are we going to take what they have done and implement it in HEXO. We're going to take the best of each and apply it to one another. We expect with things like quality control, health and safety, that we'll lend our expertise to ReadyCan where necessary, but we will allow them to be quite autonomous. Think of it almost as a wholly owned sub, but with a lot of support from the HECSO teams where that makes sense. especially on a cross-functional basis, you know, with SG&A. But operationally, these guys are very, very, very good at what they do, and we don't anticipate changing a lot. And then 48 will be a bit of a different approach sort of in between the two, being Xenobis and ReadyCam.
spk08: Okay. Thanks very much, Trent and Sebastian. I'll hold back in the queue. Congrats on the quarter. Thanks.
spk01: Next question comes from Doug Meehan with RBC Capital Markets.
spk06: Yeah, good morning. First question has to do with how you see the broader market transitioning. You've had a lot of success with taking share from the illicit market, but is that incremental market share getting more difficult to achieve? And then secondly, are you being squeezed in by the craft growers as well, or is there a definite place where you're going to be able to take – and market share over time is my first question.
spk05: Thanks, Doug. Yeah, I think your first point, we're still, as an industry, we're still capturing black market, but it has slowed down dramatically. I think that's because we've largely captured the flower market from black market, largely. What's left now is concentrates, and you've seen an explosion of black market concentrates. So we're keeping an eye on those specific categories. So think rosin, shatter, live extract, et cetera, just to – to see where we want to play in those specific categories. We do have R&D aggressively working on that. HEXO has been the number one concentrates operator when you look at our hash product. And so we're quite good at making really high quality concentrates. The question is, how big does that market have to be before we want to go full-fledged to put in the sort of capital where we can compete at black market prices? So basically taking the strategy of matching black market price, but doing so with the right capital investment that allows you to do that at high margin. So that is the next path for growing from the black market. The second point of your question around Kraft, Kraft has absolutely surprised us. I talked about their ability to come in with hash that we were not expecting, which was a large negative impact in the quarter from that decision. But it was mostly a one-time thing. So they showed us what they could do from their load-in. It was very much a THC concentration piece, which we can do. So to be clear, we have no trouble putting out high THC hash that's better quality than what the craft guys are putting. We just weren't expecting them to do it so fast. And so we thought there was an opportunity to put more product in market at a 22%. And so that's been largely rectified. On the flower piece, what's been really interesting is Kraft loaded in some of their best product, and they made quite a bit of inroads starting late in our Q2 and really full-fledged in Q3. But what we've seen on the tail end of Q3 and even starting Q4, the Kraft growers that were originally successful with their first load-in now are running out of product. their quality has taken a nosedive so we do a we do a product review weekly at hexo and we go and we review our own product we review our the majors and we also pick out a couple craft and black market offerings and and we all run it through our quality process to see what people are doing And the craft product that's coming off the shelf right now is just terrible compared to what they were doing. So there's huge consistency in growth issues that craft needs to solve at this point. I think that HEXO continues to improve its quality. And in a double-blind basis, I also think that we can put HEXO product up against just about any flower in market. So I think it was... I think it was a temporary setback. I think that we know the reasons why it happened. And I think that the structural advantage is clearly in HEXO's favor long-term.
spk06: Okay. Very good. And then second question just has to do with the U.S. clients. I know you have a lot on your plate right now, but this is going to become obviously very important probably over the next 12 to 18 months. Is there anything else you can tell us about what you're planning in the U.S.?
spk05: Yeah, so the U.S. is really a three-pronged strategy. So now we have a productive asset going up in Colorado. So that's going to feed our partners. So we've got expansion going on the hemp side with Molson Coors and beverages. So we expect to expand TrustUSA to multi-state very soon. So that's one growth path. The second growth path, of course, is we continue to be in advanced discussions with large CPGs And especially in the functional food, but also pet care and cosmetics. So, of course, you can see the strategic value of the 48 North tuck in for those cosmetics conversations. So we continue to talk to them, which is also going to be the part of the Powered by HEXO. So when I say three-pronged, the first part is add partners. The second part is grow geographically. And then the third prong is about to bring everything that we do really well in Canada, in Cannabis 2.0, to the U.S. So once legalized and once recreational is available in the U.S., we believe that we can take the product portfolio we have here, so HexoHash, Reddy's, PreRolls, we can bring those to the U.S., and essentially compete on a quality and price basis directly with any other pre-roll or hash manufacturer that's in the U.S. today. So by doing so, we plan on leveraging the current distribution network, so the multi-state operators, but anywhere else cannabis is eventually sold, and becoming a powered by HEXO producer for those retailers. And we think by doing that, we'll be able to improve those retailers' margins and also capture a meaningful share of shelf. And we believe that that's what's going to lead us to eventually becoming a top three cannabis products company in the U.S. Perfect. Thank you.
spk01: Next question comes from Andrew Carter with Stiefel.
spk02: Hey, thanks. Good morning. I wanted to go back to the cash. I appreciate the breakdown, but if I had it straight, you had $469 million in total cash between what's available and what's in escrow. You take out $400, so it leaves you for Redican. That leaves you with 69. Could you just kind of go through kind of what kind of capital expenditures remain on the base business? Not sure if you want to invest more in Zenimus or 48 North. Any cost to achieve synergies, costs for the new facility in Colorado, and then what other, these future partnerships, will they have kind of the same capital commitments that the Trust JV had? Thanks.
spk07: Yeah, happy to talk about sort of our capital plans and where we're headed with cash. Look, you're right, we have about, if you start doing the math and remove about the $400 million that we're going to require to close on ReadyCAN, there will be more cash requirements as we continue to roll out our capital plans, both in the U.S. and here in Canada. You know, we have more plans to stand up productive facilities, In certain categories within Bellville, such as pre-roll, we want to continue to invest in pre-roll and other things. In the U.S., we will be standing up our Power by Hexo technology, which we believe is going to be anywhere between $25 million and $40 million over the next 12 to 18 months, if not more. We are standing up our Power by Hexo technology in Bellville, which is going to require significant cash, $20 million, $25 million at least. over the next 12 to 18 months. So between all of those things and more, we will be looking at what our cash requirements are going to be to be able to take advantage of these opportunities that we find in front of ourselves. So you can stay tuned for the timing on that.
spk02: I just wanted to kind of zoom back in on some questions. I know you're not giving guidance today, but you're the first LP reporting kind of post kind of reopening starting in Canada. Are you seeing any accelerated orders? You know, I guess the question is, will we see a step change in orders from the provinces, or did the kind of inventory level kind of get right-sized during COVID? Thanks.
spk05: Thanks, Andrew. Sales are definitely opening. We're seeing the opening up again. So the orders have increased. Yeah. And I'll pass it on.
spk07: And, Andrew, if you look at us, I mean, look, I know people may have glossed over it a bit, but we had 14% sequential growth in OCS, sequential, you know, through COVID. And I know that that's been the struggle for a lot of LPs as they came to market in recent quarterly releases. We're not sitting here saying that. You know, we were up 14% in, you know, arguably one of the most important markets in Canada. So... That's not bad. And we're seeing momentum coming into Q4 and forward from here. So, I mean, if that was our worst quarter, then we'll take it.
spk01: Sounds good. I'll pass it on. Next question comes from John Zambaro with CIBC. Thank you.
spk07: Good morning. Good morning. I wanted to start on Quebec, the press release referenced additional competition in the province. I'd like to get a sense of where you think Quebec is in terms of maturity of brands versus some of the other provinces. And then can you remind us what are the primary benefits of the preferred supplier agreement or what are the terms of that preferred supplier agreement with the provinces?
spk05: In terms of competition, John, so Quebec has gone from 11 listing licensed producers to 26. They recently implemented a grown in Quebec platform in which Hexo participates. And in terms of maturity of brands, I think Quebec was later in accepting more licensed producers. So originally, if I take you back to the start of legalization, Quebec had six licensed producers. And now, of course, they've opened that up a few times, and we're now up to 26. And you've seen that SGDC continues. They just released their quarter. They continue to do a great job, one of the most profitable distributors, provincial distributors in the country, and also continuing to see huge growth in sales. But I think what we're going to see, again, from a maturity, I think that Quebec has been slow to ramp on licensed producers. I do think that the craft growers have a lot to prove out from an ability to operate sustainably. So, I mean, remaining on shelf, maintaining quality, having consistency so that they maintain not just their listings, but just their consumer demand. It's no secret. SQDC is there for the consumer. It's there to migrate the black market to the legal market. And those things are done. As long as those things are done, they operate on a market basis. So when you talk about maturity of market, I do think that we'll continue to see a few craft growers come in, but it's a very difficult market to operate in long term for those craft growers. For the second part of your question, from a preferred supplier in Quebec, the preferred supplier relationship, of course, you continue to see HEXO has been number one in Quebec since day one of legalization. We don't expect that to change. As Trent said, we expect to fully recover our market share in the next two to three quarters. And we are very well aware, and we are working with SQDC, HEXO is very well aware that we did this to ourselves. We pulled SKUs that were highly productive in Quebec, anticipating we could replace them. We did not replace them in time. We will replace them over the next two to three quarters. And Quebec's fully aligned with that strategy. So it's not an issue from that perspective. And all our planning and innovation continues to work very well with the province of Quebec.
spk07: Okay, that's helpful. Thank you. And then my second question is more broad in terms of the industry. We've got this three-year mandatory review coming up from Health Canada today. Do you get a sense that there's any impetus from Health Canada to change any of the regulations that somewhat negatively impact the industry, whether it's on beverage unit sales or edibles concentration or marketing or consumption lounges? Really anything, do you get a sense anything is on their radar for being potentially changed in the next 12, 15 months?
spk05: Yeah there's a lot on their radar and and the the administrators of the program are certainly aligned with industry on a lot of the points so that's very pleasing to say in terms of timing unfortunately I mean we've gone through this pandemic thing so rightly so Health Canada has had other priorities and in handling the pandemic but I do think by the time they do come up for air I think a lot of the decisions are pretty much de facto made at this point and the recommendations to go to the minister and I do expect we'll see some positive outcomes so specifically I think case quantity for beverages is one where we will we'll get some progress I think we'll get progress on ways of consumption personal possession limits I do think we will maintain limits on single dose edibles. So I don't expect that to change. But overall, a lot of progress for the industry. And also, I don't think that single dose edible limits are necessary for us to meaningfully impact black market. When you look at the technology we've put in to our beverages, for example, if you've had the chance to try one of our Truss XMG beverages, which has a 10 milligram nano emulsified formulation. I mean, the uptake of that product is phenomenal, very quick. It works in about 15 minutes. And because of the technology we put behind it, the efficacy of it or the high, the quality of high is very, very good. So it's not just about more THC. It's actually about the technology behind that THC. And this is a lot of what Powered by Hexel was aiming to solve. Understood. Thank you very much.
spk01: Next question comes from Matt Bottomley with Canaccord Genuity.
spk04: Good morning. Thanks for taking all these questions. Sebastian, just wondering if we can get a little more granularity on maybe the dynamics between what we're seeing with some of these LP earnings and what's happening at the retail level. You know, we mentioned Alberta has seen some drawdowns in inventory they're holding. I know historically that's happened in Ontario as well. But when you look at all the announced M&A, you know, in terms of the most recent quarters we can see, you know, they're pretty much all sequentially down. We don't know what Redican obviously has got as of late. But I'm just curious, given that we are seeing retail numbers incrementally increase, I know Jan and Feb was a little bit down. I'm just curious how much of that is potential market share loss versus, you know, all the LP universe kind of dealing with various issues, even aside from some of the ones that were more specific to HEXA this quarter.
spk05: Yeah, I think we're definitely in the worst period of the year in terms of the impacts that we've felt from supply chain, logistics, proliferation of small growers. So again, if you look at it on a national basis, you've got 90% of the share that was split amongst the top 10 LPs. Now, what's happened, you've had an onlining of about really 500 or so growers. So there's now 566. And those growers have all loaded into provinces. And of course, the governments have a mandate to allow some distribution for these smaller growers. So they've given them a chance, which they should. But what's happening is that all that load in has, I think, globally taken share from the majors. And I do think that's temporary. I don't think that's sustainable because I haven't seen anything out of most craft growers. And with some exceptions, there are some that really have good, high-quality product. But I haven't seen high-quality, consistency, supply chain acumen. I mean, the reality is that standing up a cannabis business is extremely complex and requires CPG expertise that is very expensive and capital that's very expensive. And so it's just to compete at scale is not something or a skill set that the craft growers have. So I think that's what we're really feeling this quarter. And of course, HEXO being offset from the rest of the industry, February, March was actually very painful from a total demand perspective. And that's right in our quarter, right? So we took on two of those bad months from an industry perspective right in our Q3. So I think that largely recovers and that we will see most of these successful majors continue to retake share. HEXO, of course, which is on a great path for full Quebec recovery, but also, as Trent said, you've seen us grow, be one of the fastest growing outside of Quebec. So we have great traction in those markets despite all those small producers being there.
spk04: That's very helpful. And just lastly, on my end, just in Quebec specifically, I know you talked a little bit about this in the prepared remarks and one of the other questions, but just your risk assessment on being able to rebound there, given that I would assume other than maybe new store openings, you know, in order to fully rebound, you're going to have to take that share back from someone else. So you had mentioned something that you had talked to the SQDC and, you know, you're on the right track there. So I'm just wondering if that's completely risk mitigated in your view or if there is still going to be you know the supply demand dynamics of what other LPs are doing in Quebec and what strains they're providing as you're trying to recover there as well?
spk05: Oh it's yeah it's completely risk mitigated on a consolidated basis when I look at the when I look at the strains I mean that we're bringing in not that just we've developed internally but also the library that's available from Retican, Xenobis and 48North The HEXO portfolio has never been stronger, and you overlay that to our productive capability, our technology and strain post-processing, so including both drying and curing, have never been stronger. And pair that with the fact that the quality we're seeing out of the craft growers has taken a nosedive after their initial load-in. They are not prepared to compete. So, no, I'm not worried at all. And I think, I mean, of course, nothing is absolutely risk-free. I think the risk sits only in timing. And that's why we're saying two to three quarters. So the visibility on exactly when it's fully rectified is not 100% clear at the moment. But from a capability perspective, I have zero concerns.
spk04: Okay. Thanks again. Appreciate it.
spk01: Once again, to ask a question, please press star 1 on your telephone keypad. Next question comes from John Chu with Desjardins Capital.
spk03: Hi, good morning. My first question is just on the original stash, your bulk format products. Sales are down quite a bit in Alberta and Quebec, and I don't know if that's just the new strain you were talking about or that competition and or pricing pressure. Can you comment on that?
spk05: Sorry, in which markets? Could you just repeat your question, please?
spk03: Yeah, I think in the MD&A, it was saying that the original stash in your bulk format, you saw sales pressure in the Alberta and Quebec markets.
spk05: So Quebec, I've explained, was part of that strain choice. So some of those strains were present in the original stash. um and uh for uh for alberta specifically we had a slight decline there as well uh and that was that was also mostly related to uh to high thc and loden uh but overall alberta purchase orders are going quite well now at this point and especially when we look at it on a consolidated basis okay and then just with this strategy of refreshing with the new strain of 50 100 new genetics
spk03: So are we going to see basically a complete overhaul of the product portfolio at some point over the next 12, 18 months? I mean, you're going to keep the existing brands, I guess, but you're going to upgrade them with some of these newer streams. Is that how I interpret that?
spk05: No, the 100 strain plan is really a response to consumer demand for newness. It's a response to consumer demand for variety. But we will keep the stalwarts and our popular strains in market. We're absolutely not going to pull them. I mean, they work very well. Again, I mean, northern berry under our up brand is one of the best selling flowers in Canada. And we continue to have robust success. I mean, yes, there's a pullback. but we're still number one in Quebec. So hexoflower, I mean, we have had a pullback, but keep in mind that Quebec consumers are consuming more hexoflower than anything else. And so we do not want to pull what's working in market. This is really about competing against craft across the board, competing against additional variety, and taking the next step in evolution to respond to consumer demands.
spk01: Okay, thank you. Once again, to ask a question, please press star one. And we have a question from Adam Buckham with Scotiabank.
spk07: Hey, good morning. Thanks for taking my question. So I just have one, and it's more from a long-term perspective. Within Canada, after you consolidate the three companies that you've gone out and reached definitive agreements with recently, and you've realized the synergies with those, I'm just wondering if you think you're going to get to a place where you won't need the market to fund Canadian operations or...
spk05: know how you think about that thanks adam well i'll let trent add a couple of cents but overall uh will be the canadian rec share leader so you can do your own math to start to see what kind of top line that throws out and you know that currently hexo from an adult use perspective portfolio even in an incredibly challenging quarter still has one of the highest gross margins in the entire industry At our last quarter, we had the highest gross margin in the entire industry. So the technology behind Hexo and our partners is there. The acquisitions we've made have a great operation. So some of them have balance sheet issues, but certainly not operating issues. And Redican is by far and away one of the top operators in the entire space. So I certainly think the path to EPS is strong, and I think we will continue to need the market for U.S. and global expansion, because obviously now we're turning our attention to be not just number one in Canada, but top three in the world. Trent, anything to add?
spk07: Yeah, yeah, no, I'd reiterate that. You know, once you have the three M&As, completely amalgamated and integrated into HEXO as one consolidated entity, we do believe that we will have that path to EPS and to a ton of cash flow positivity. That's where we see things going. I think we're looking out to Q2 of next year to be able to start really seeing what that looks like. So we don't anticipate there being any requirement for market support within Canada. Clearly, we will continue to need market support as we go into the U.S., but we don't believe even within the U.S. that it's a long time or really capital heavy. I'd like to just reiterate and remind people that if you take what capital has been deployed to date by EXO, being the amount of net assets that we purchased, Plus the accumulated deficit that we finance, add those two things together and divide that into our current market share. For every 10 basis points of market share, we've deployed, at this point, actually around $16 million. of investor capital. And nobody, no LP is below 26, 27 besides us. And you got a couple who are up over 85 million per 10 basis points. So we've been deploying capital in a very efficient way. And our net loss from operations, as I just said, year to date after three quarters is less than half. of the next best lp and some lps are over one billion uh uh loss from operations so but we we like our position and we like what we've been doing and i think we have a really strong strong path to improve from here and we're already one of the best great thanks for that once again to ask a question please press star 1 on your telephone keypad and we do not have any questions at this time i'll turn the call over to mr st louis
spk05: Thank you very much. And so I want to take a moment to thank, of course, all our shareholders for continuing to analyze HEXO and looking for the right entry point for yourself and understanding the financials. But I want to underline that in this day and age, I think it's very important that we look not just to the financials, but also to the environmental, social and governance principles behind the company. I'm extremely proud that HEXO has announced a plan to be completely carbon and plastic neutral by September. And that's not just at the corporate level. We're actually offsetting the carbon of every single employee at HEXA. So I implore all our stakeholders, our consumers, our shareholders, when you are making purchase decisions, investment decisions, please do consider which licensed producers, which companies are taking the planet at heart, are doing something about it, and are making sure that our products don't negatively impact the planet or its people over the long term. I'm extremely proud to have a team that's now completely carbon neutral, not contributing to the problem. And, of course, all backstopped by the fact that come our Q2 2022, when we expect to be fully consolidated, HEXO is a completely different story. We plan to be number one in Canadian REC on a much larger revenue base with good gross margin. creative synergies, and a solid growth story in the USA, all while making sure that our planet is here for generations of children to come. Thank you very much for listening. It's been a pleasure. We'll see you next quarter.
spk01: This concludes today's conference call. You may now disconnect.
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