HEXO Corp. (NASDAQ:HEXO) Q2 2023 Earnings Convention Name March 17, 2023 10:00 AM ET
Firm Contributors
Charlie Bowman – President and Chief Govt Officer
Julius Ivancsits – Chief Monetary Officer
Convention Name Contributors
Matt Bottomley – Canaccord Genuity
Frederico Gomes – ATB Capital Markets
Aaron Gray – Alliance International Companions
Operator
Good morning. I wish to welcome everybody to HEXO Corp’s Second Quarter 2023 Convention Name. Becoming a member of us at the moment is Charlie Bowman, President and Chief Govt Officer of HEXO Corp; and Julius Ivancsits, Chief Monetary Officer of HEXO. As a reminder, this convention is being recorded. Please observe that every one monetary info is offered in Canadian {dollars}, until in any other case said {that a} copy of the Q2 outcomes will be accessed on SEDAR and EDGAR. To open the decision Charlie and Julius will present their commentary on the quarter, adopted by a question-and-answer session to make sure that we get to as many questions as attainable. We ask members to restrict themselves to 1 query.
With that, I will now move the decision over to Charlie Bowman, President and CEO of HEXO Corp.
Charlie Bowman
Thanks and good morning everybody. I am happy to overview our outcomes from the quarter ending in January 31, 2023. We’ll start by detailing a few of our monetary accomplishments, spotlight a number of of our key merchandise and operational achievements that occurred this quarter, our objective is to take you alongside the journey to a leaner operation centered on the standard and near-term profitability. Afterwards, Julius will stroll us by way of HEXO’s monetary outcomes. First, earlier than I simply begin, about 9 months in the past, I had a possibility to sit down down with a lot of the unique shareholders, none of who’ve offered a single share of inventory. Their recommendation to me was as soon as we reset the steadiness sheet is to take off my company tie and to give attention to the important thing shopper parts of why individuals buy campus excessive THC, worth and terpenes, develop the very best strains to ship this shopper expertise on the lowest worth we will. And that is what we have been doing.
So let’s tackle this legacy steadiness sheet, which was my first precedence. Over the previous six months, our aggressive value slicing technique has lowered HEXO’s total debt while bettering our steadiness sheet. We repaid a complete excellent precept of 40,700,000, which was matured on December 05, 2022 with an all accrued and unpaid curiosity. This was the primary main step of strengthening our steadiness sheet. Subsequent, we centered on strengthening our margins with the next worth product combine, leveraging a sequence of intense value reductions and pricing disciplines. We centered on high quality. We measure it by pharmacopoeia take a look at methodology procedures. We centered on the vital objects and improved our first-pass success charge. All in our staff decreased our operation bills and considerably lowered our commerce receivables.
Now turning to our product and operational improvement, we have streamlined our leisure hashish portfolio, specializing in delivering the very best shopper expertise. We expanded our well being and wellness portfolio by addressing unmet shopper wants that solely hashish can tackle, featured on our Redecan Medical Platform. We signed a long-term settlement with Entourage Well being, securing a a number of channel distribution community into the medical hashish market over the following three years. This partnership is essential to increasing our well being and wellness portfolio and accelerates our means to develop the enterprise and ship premium hashish merchandise to extra Canadians, however to particularly our veterans.
Within the leisure market, we’re centered on creating a novel, sensory expertise by highlighting some superb terpenes and excessive THC strains from our in-house developed TnT strains. We launched three new Redecan branded merchandise and two new Unique Stash merchandise all utilizing the brand new TnT strains. These strains have been launched after about 20 months of analysis and improvement, which reinforces our perception that correctly balanced terpenes dramatically enhanced the hashish expertise.
In truth, customers validated our dedication to this distinctive hashish expertise. Our first TnT launch, Animal Rntz, offered out inside 24 hours of its launch, replenishment offered out in two days and the third order offered out in lower than every week. The fourth order is within the technique of packaging this week. It was if not the quickest promoting pressure in Ontario hashish board historical past. The excellent news Violet Fog is subsequent.
As we transfer in direction of a leaner portfolio, our long-standing dedication to innovation stays robust. First, subsequent technology of merchandise from our inside genetics program highlights whole cannabinoids, excessive THC proportion with a variety of terpenes. It’s this continued pursuit to ship the very best high quality hashish that enables our premium strains to put on the crown on the Redecan cam model. We produce among the business’s highest THC proportion, and for sure, the full cannabinoid content material. And with an unbelievable breadth of terpenes and flavonoids, it is an impressive shopper expertise. Moreover, these new cultivars give us a excessive manufacturing yield with larger margins and the business’s main terpenes, THC proportion, and whole cannabinoids. In truth, that is TnT.
So lastly, our staff is dedicated to the continued value effectivity by decreasing the general footprint. We have deployed sources into our worthwhile segments and eradicated unprofitable enterprise manufacturers. For instance, we noticed the excessive development potential within the pre-roll phase, particularly within the infused pre-roll space, we expanded our capability in our In style Straight Edge Pre-Rolls facility in Fenwick, Ontario on the finish of this quarter. This enhance of fourfold of Rede’s Straight Edge. Capability, and expands our product providing and capabilities it permits HEXO to ship the popular hashish expertise to all of our Redecan and Unique Stash clients.
And with that, I will flip the dialog over to Julius to debate our monetary outcomes.
Julius Ivancsits
Thanks, Charlie, and good morning everybody. I might wish to remind you that every one numbers I share at the moment are Canadian {dollars}, until in any other case said. Earlier than diving into the monetary outcomes, I might wish to touch upon considered one of our greatest monetary challenges, cleansing up the steadiness sheet.
Our strategic redeployment over the past two quarters has included a radical overview of our underperforming property and taking a robust motion to restore the steadiness sheet. The early monetary outcomes of our bodily yr display a prudent path in direction of long-term profitability. As Charlie famous, the debt compensation has helped delever our steadiness sheet, positioning HEXO for long-term monetary success.
I’d additionally like to notice that regardless of tough advertising situations and intensifying competitors, which has to place vital strain on pricing, we’ve made the choice to take care of our honest pricing as a part of taking a sustainable strategy and our dedication to high quality.
Now, I’ll focus on Q2 outcomes. This quarter, the corporate has hit two necessary milestones. First, optimistic web earnings and the second optimistic money move from operations. That is attributable to an 11% discount in SG&A spending from the prior quarter, together with a 20% discount in commerce accounts receivable. Income did nonetheless sluggish within the quarter with a 26% decline to $24.2 million when in comparison with Q1 2023 of $35.8 million.
The decline will be attributed to a lot of various factors, worth reductions by our rivals in our greatest markets, Ontario, Alberta, Quebec, and British Columbia resulting in HEXO market share declines. Additionally, the income was impacted by returns of seasonal merchandise resulting from low velocity, unavailable provide for sure demanded merchandise and particular merchandise being positioned on maintain resulting from pricing reductions in key Ontario markets.
Lastly, we ceased recognition of hashish infused income as the results of the belief operationally – operationalizing their hashish promoting license. On the identical time, our web gross sales declined 54% relative to Q2 2022, resulting from elevated competitors and diminished efficiency of HEXO model in key markets of Ontario, Alberta, and Quebec, together with the elimination of product portfolios from the divested 48North enterprise and Zenabis manufacturers.
Taking a look at our adjusted EBITDA within the quarter, we noticed a lack of $2.4 million, which is a rise of $1.8 million from the prior quarter Q1 2023. On the optimistic observe, the Redecan branded gross sales did enhance 9% from Q2 2022 because of the elevated emphasis on the Alberta market.
Moreover, our growing gross margins confirmed that we’re on monitor to profitability. On a remaining observe, I wish to thank anybody – everybody at HEXO for his or her ongoing dedication and optimistic outlook. We sit up for leveraging this staff’s expertise to turning into the usual of the excellence within the business. Thanks for continued help.
Now, I flip the dialog again to Charlie.
Charlie Bowman
Thanks, Julius. Earlier than we open the ground to questions, I’d wish to echo that the successes we achieved within the second quarter resulted from our strategic alignment, which together with tackling the legacy steadiness sheet, stripping all non-productive processes, capitalizing on our strengths, these changes will proceed to create a extra worthwhile entity for the steadiness of the yr.
Lastly, I’d wish to thank all of my fellow Fenwick, Cayuga, Masson, develop websites, and all of our workers and companions for his or her continued dedication to our enterprise and clients. This transition has not been easy or simple, however I can’t thank my staff way more for his or her commitments and efforts in making HEXO successful.
With that, we’ll proceed our remarks and open the ground to questions.
Query-and-Reply Session
Operator
Thanks. [Operator Instructions] The primary query is from Matt Bottomley with Canaccord Genuity. Your line is open.
Matt Bottomley
Sure. Good morning, everybody. Thanks for the query. I simply needed to get a little bit bit extra colour on what you imagine the sustainability is within the – let’s name it medium-term for the technique of possibly for giving some revenues to guard profitability. Once you type of go searching among the dispensaries and simply the restrictive nature of the laws it simply appears more and more tough for any LP to type of get differentiation on math with respect to branded merchandise or issues which are extra the traits of the merchandise themselves versus pricing. So I’m simply curious not attempting to tease steering out or something like that, however simply the place you type of suppose the highest line erosion may go proportionately from the place you might be at the moment given the dynamics within the sector.
Charlie Bowman
Thanks, Matt. That’s an impressive query. We took a tough look when the worth battle started final quarter, a little bit earlier than the final quarter, and measured out what could be the affect to us if we truly participated, maintained that quantity, income quantity – quantity and income, and what that will affect into our web earnings as it will come down and this – it was vital.
We – you’re speaking wherever from $5 million to $8 million loss, and it simply wasn’t one thing that we needed to entertain. On the identical time, we have been within the technique of on the point of launch our TnT sequence. And with that, to your level, proper now, hashish is hashish. And so the important thing level of differentiation is that shopper expertise. The buyer expertise comes from THC, it turns into from whole cannabinoids and it turns into from terpenes.
And so our factors of differentiation was to launch these excessive THC, excessive terpene strains and place them in throughout the totally different components of Canada. So in some components, we’ve Animal Rntz and Violet Fog and different components of the market, we’ve Ghost Gelato, Intercourse Panther. Throughout the Board, we’ve the CBD Kush,which is extra of a medical model and health and wellbeing.
And so the objective right here was to get the strains out and permit these strains to begin to differentiate. Along with our straight edge, we acknowledged the expansion of the infused pre-roll, and we had launched our atomic bitter haze into this space, and we’ve bought a sequence of different merchandise approaching. So for us, it was to reset the steadiness sheet, to reset the operation, in order that we couldn’t present me too merchandise into the market, however to have really differentiated hashish merchandise withstanding expertise from the buyer facet. And that’s what we centered in. That’s an excellent query.
Matt Bottomley
Respect that. After which only one extra fast one for me, simply on the money move technology profile. So a few of you guys inflected into optimistic territory from operations. It appears to be like like although once you take a look at the dynamics, there’s fairly huge swings nonetheless in working capital which are inflicting for among the volatility. So I’m simply questioning the way you see that smoothening – smoothing out over the following few minutes. And if you happen to suppose the inflection into optimistic territory is sustainable throughout the subsequent couple of quarters.
Julius Ivancsits
Sure, I can take that one. A big chunk of it’s if you happen to simply take a look at commerce AR from quarter-to-quarter, you see a major drop, whereas it was flat from This autumn to Q1. And so we very aggressively improved our money assortment efforts after which modified our invoicing procedures a bit to principally transfer up these fee cycles. That coupled together with, if you happen to take a look at our SG&A footprint, and simply total footprint, these bills are down fairly considerably. So, we’re completely happy on how that’s trending within the enterprise. Hopefully, that solutions your query.
Matt Bottomley
Obtained it. Thanks quite a bit guys.
Operator
[Operator Instructions] The subsequent query is from Frederico Gomes with ATB Capital Markets. Your line is open.
Frederico Gomes
Hello good morning, Charlie and Julius, thanks for taking my query. By way of your steadiness sheet and your capital wants, you talked about your ATM. Is there any particular purpose why you’ve determined to not begin utilizing that but, simply given that you simply appear fairly near reaching our covenant there? And the second half right here is simply if you happen to determine to make use of that ATM going ahead or do some type of different fairness elevate, how would that affect the conversion worth of the senior notes held by Tilray? Thanks.
Charlie Bowman
Sure. That is Charlie. Thanks, Frederico. For the ATM, one of many causes that we have taken a glance proper now of not tapping into the ATM was throughout this worth battle that was happening for lack of higher phrases, we wanted to determine what the brand new baseline was going to be as we glance by way of to what our money consumption could be and likewise how low we may take our money burn from a standpoint of our value takeout and our financial savings.
As well as, with the speed of the brand new strains approaching, it actually does reset what the steadiness and the enterprise was trying like. We’ve been actually lucky with each our major debt holder, which is Tilray, however then all of our companions that we work with about supporting us as we undergo from a standpoint of what we would want from money, what we would want from a standpoint of working collectively to make sure that we’ve sufficient money to run the operations.
After which I feel most significantly is once you take a look at like Tilray, they’re not solely an investor in us, they’re additionally a major buyer for us too. And so there’s plenty of ways in which we will work collectively to deal with this capital wants. The ATM is clearly considered one of them. We’ve had a lot of banks that we’ve had discussions about for funding. So the excellent news is we’ve a lot of choices. The objective right here was is to stay inside our means proper now. And as I stated a lot of quarters in the past, the objective for our operations has at all times been to be self-sustained. And in order that’s type of nonetheless the mindset that we’ve proper now. Julius, any colour you wish to add?
Julius Ivancsits
No. We’re repeatedly working with our Board and inside administration to judge all strategic financing alternatives. So whether or not that’s the ATM, whether or not that’s ELOC or different signifies that’s at all times on the desk and underneath analysis.
Frederico Gomes
Thanks. I’ll hop again within the queue.
Operator
The subsequent query is from Aaron Gray with Alliance International Companions. Your line is open.
Aaron Gray
Hello. Good morning and thanks for the questions. So first one from me, I simply needed to get some content material of what you suppose, the affect is likely to be of among the modifications that OCS is making. And whether or not or not that affect is likely to be extra so for the retailers or a few of it’d move by way of to you as they give the impression of being to cut back the margin that they’re taking? After which, whether or not or not any of that give again would possibly simply move proper right down to continued pricing strain or if you happen to suppose that may find yourself flowing resulting from your guys’ profitability as nicely? Thanks.
Charlie Bowman
That is an excellent query, Aaron. From a standpoint of all of the Boards have been actually lively about reaching out to us, I do not suppose anyone was – I do not suppose anyone was shocked with the worth battle and the magnitude that went on within the final 5 months. I feel the injury that might happen to the business is critical as a result of nobody wins in a worth battle. And so I feel one of many areas with the OCS taking a decrease margin and resetting is clearly to assist fairly a little bit of the retailers. Whereas quite a lot of that, particularly smaller unbiased retailers are bleeding from a standpoint of simply the plethora of shops which are available on the market proper now and undercutting each other.
I feel from a standpoint of the – how this takes on, what we take a look at it’s, I can not say on the business and the others, however we take a look at the self-discipline of the enterprise because the enterprise needs to be worthwhile. The enterprise ought to have some extent of differentiation in each product line that it brings to the market, and it’s best to cost a good worth. That does not imply I cost the premium the very best. It additionally means I am not the bottom within the business, but it surely needs to be honest. Our merchandise are all priced in a great spot the place we’re in a good space, a good worth level. So far as our margins go we have executed an unbelievable job throughout the operations of getting value out to the place I really feel very snug with the assertion that if we’re not the, we’re one of many lowest value operators within the business.
As such, it means that you can take that volatility of when individuals do silliness, like get right into a worth battle and they need to be extra disciplined than that. The bottom of that’s, if there’s extra margin that comes out by the Board – by the federal government, what it ought to enable is to remove from the illicit market, as a result of the illicit market had a unbelievable development this previous yr. And in consequence, they’ve plowed it in all through the nation and it has taken away some – fairly a little bit of the expansion. In order that’s one of many key issues that we work with, and hopefully, the federal government continues to tackle is to curve this illicit market. That’s a very good query. Thanks.
Aaron Gray
Okay, nice. Thanks very a lot. That’s useful. I’ll leap again within the queue.
Operator
[Operator Instructions] It appears to be like like we’ve no additional questions presently. I’ll flip it again over to Charlie Bowman for any closing remarks.
Charlie Bowman
Simply needed to say thanks to all people within the time. It was a dynamic 9 months that we’ve gone by way of. And from a standpoint of strolling us the chance to undergo what our quarter two outcomes are, I simply needed to say thanks. And I do know every now and then, we’ve analyst calls which are scheduled up. Any extra questions they’ve can be greater than keen to tackle. Thanks very a lot, and I hope all people has a unbelievable Friday.
Operator
Women and gents, this concludes at the moment’s convention name. Thanks for collaborating. You might now disconnect.
