HEXO Corp.

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.

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.

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.