HEXO - Earnings call transcript Q2 2021

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Operator

Good morning, my name is Chris and I will be your conference Operator today. At this time, I would like to welcome everyone to the Hexo’s Q2 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 current internal views, estimates, expectations and assumptions. These statements should not be read as assurances of future performance or results. those and actual uncertainties to results, from expectations known that other differ involve statements. current cause such could performance and may unknown and risks, factors materially They by implied or achievements We would certain in reconciliations on financial measures our closest between discussed included we any which our be measures call, are non-IFRS reported to may their measures reports today’s note also that utilize and MD&A. such in non-IFRS IFRS notes its the second in our statements entirety morning’s qualified regarding is statements cautionary that at forward-looking with quarter the the included new discussion financial morning. XXXX end on factors risk our The fiscal MD&A filed in and and by SEDAR this this of release are and of EDGAR more and current our such materials forward-looking cause about could that these by the factors and results view to materially statements actual statements. those implied Please for differ risk expectations from information intention update or required or except any new information any to future disclaims any obligation a of extent as reason. revise statements or for the or result Hexo to events, law by forward-looking placed have any All background been lines to mute noise. on prevent After answer session. question the will and remarks, speakers’ a there be

by during your If to like ask star a one telephone number time, you simply press question followed keypad. would the on this

If I Hexo. of press question, will like over you key. Sebastien would St-Louis, CEO to the now call pound withdraw your to turn the

Sebastien St-Louis

QX and for Happy everyone. to reasons get our on some morning to big call Good this optimism. celebrate

remains that’s us year, our whole haven’t COVID being COVID thank and we’re once later quarter, successful, work A government the of this also off, $XX.X achievement, handouts required any during you forward behind return - all this for Unfortunately to they’re job will COVID. It’s consumption which and to us kicking in Really and to We’re phenomenal to at our safety to the looking another hard situation, huge winning so starting $XX.X phenomenal once late accidents. on rollouts we EBITDA by been it think be workplace it year we’ve off avoid huge and paramount has all like occasions employees, to and positive the in. the million kicking a to getting been and we’re year. having all in this for people getting a end our into us of for vaccine so work does also net. putting the look gross team but record reduce given we a normal, hopefully and social patterns million we’re quarter so back celebrating Hexo pandemic see doing continuing a testament vaccinated. I to XXs The roaring too this employees own, put

history EBITDA in first straight adjusted of positive Hexo’s after quarters adjusted time for improvements. We’re the EBITDA seven

sales in deploy Powered our trademark capital momentum Canada. will that partner, We’ve Powered Molson had net revenue a launched moves Charlie same up the sequentially across by with operations quarter increase the Coors registered hired last GM operations, Hexo we’ve capabilities. CPG is future and to EU made and Colorado and some to CBD from our Hexo the versus venture, of and joint We’ve the legally Bowman. partners continues into the USA those by Our U.S. XX% to operations the join now XX% is U.S. into beverages We’ve started first year. Truss of production and under support phenomenal quarter successes. our

in the number generating one Quebec. of outside cusp of while the than Quebec of the on Quebec, more and that’s sales province we in position We’re do maintaining

and top week, that very so four still, the it’s quarter-over-quarter data. we’re top do we depending on products, lot and by a position three We’ve not on in Headset top from carry Ontario well. where to five stores position, still of tons of the and brand, sitting share based going despite Up, between Hexo market Alberta position remains--has flipping in upside went distribution and Our re-launched now in our we’re top premium the a X

We by states and a a overall quarter. legally. to the partner for in growth. us currently top data January partner, getting have for like replicating Hexo huge beverages based in still SKUs in we success beverage, Canada. leading Molson Flower beverage have gross market one, to United in buy-ins, the Reserve, proprietary and slower big won congratulations depending Leaf. January increasing is in Colorado one again revenue February not Up little in by recent has remain our Truss awards. after of start Spirit as remain our on Coors, be only do team Beverage forward $X.X winning February from look country. we’re the seasonality market are some that number million other QX numbers we our December informed the planning grew our premium sales Top to XX% market other and but bit and January brand Reserve products, month share, in number we’re instrumental expansion and We Award about are a in in low the that bit OS Canada test OS the most been are on our We eight with brands so so amid for often and slowed that and States who brands XX% six and down combined the also in share but as of success in internal the the in the a showing Canada, a event December We finish

Zenabis. to acquisition very of excited announce We’re the

contender we’re They on three in been top position. sometime doing to brands. top with to in very going close to QX. It’s set their We’re sales recreational products has the great two momentum, in Canadian resonate in and consumers. phenomenal a Together, a phenomenal company. early Leadership a there job have repositioning be we’re solid great closing

less reason about excited away than to in true dollars revenue it time we M&A call. two is top a because position so assets actually the million at we’re make from that have Really, success. a the of this We’re the

manufacturing synergies is get for foot over the and the couple Our financials. quarters XXX,XXX of in Zenabis, us allows t of out maximum show footprint a synergies to quite advanced manufacturing, go square hose CPG an excited facility Belleville, which we’re really acquisition on and like next to

discussions launch talk months. about never more During the actually in Canada CPG our Canada we forward priority, CPG phenomenal partnerships to companies ongoing have and Health and negotiations with in growth to continue stopped all following our world-class our that of looking Colorado, have and we’re lots has being approved so technology the space. additional Excellence, in and licensing so to that’s it and turn the the where to at partners food over to about our position a in talk expand finances. we’ve perimeter now CPG stronger edible we’re to leverage complex, Trent even to I’ll Belleville future Center of accept site in

Trent MacDonald

been of a another which from sequential provisions, slate quarter Thanks or inventory keeps clean P&L It’s write-downs lot, that our no Sebastien. perspective.

the our so as year impairments that Another to the sequential no such quarter back PP&E, goes long-lived goodwill again of end. sheet at balance intangibles and with clean-up of assets,

the using three $XXX million only items. our $X.X cash for capital cash quite non-cash with million quarter operational and low, past of on the end working that’s Our of combined quarters, usage the our cover lots to million and so Over an million midterm including quarter at sheet working $X.X of the $XXX pathway remains operational flow over of near from perspective. balance in not and capital needs,

we were LPs continue segment, XX% our use taking so relation within our able place. adult still beverage gross our quarter Ongoing SG&A of continue that trying margins in to capture SG&A the to compete with same ourselves that so including and on wage Our of restructuring other to price in against to our margins are within the to due having see healthy get COGS higher to is to and who on down propel organization, strategy. sales, market We as that we customer Up into the black percentage to war want restructuring lower charges $XXX,XXX realm, a very you’ll margins. still

Our dollar, of and in few XX% of by so getting first U.S. as there of million on U.S. in being as a currency of down the strength the represent believe our several time, and this however, improvements foreign loss marketing, industry non-recurring We time more exchange warrants the norms. are promotion, the now million are the added sales, Underlying $XX the our positive XX% did together midterm. and all the type operations EBITDA of stronger the evidenced QX fundamentals of history. net adjusted expenditures $X the still from there. when things for near revaluation to make P&L a and and ahead G&A, are our selling well have there in on R&D such our We quarter,

team we a the team I us, we’ve our both released repeat to our a York, internally which also it we SG&A attention targets and had look, have externally. think we came and effort like of to P&L, improving ETS sense in bring and I’d clear going shareholders. still I’d long press very sequential report that to that, expenditures been pass through quarter. to your to and lawsuit, the Sebastien. and path attention fundamentals going like While to each our are internal the very Sebastien? some make have are I’m fact to to there that behalf are was ago the not to of for saw that action with involved, to on very believe we general be pleased and accretive bring dismissal great full over class typically don’t one-time With that, that that. counsel I’m New our able back that

Sebastien St-Louis

it. unpredictable caused, proud the many continues products the They industry Thanks social high the some grow wish safe, the the we Despite has tail are has strength. the have a industry The this offered producers. through of the to and licensed that That’s for team their consumer very by navigated rate. economic dedication. everybody and as consequences quality with Hexo cannabis pandemic environment a global health to demand get to end billion as to and I’m for continues dire run and safety of ever-evolving legal, Trent. pandemic I’d to $X.X testament EBITDA. like positive of

top a the that’s position to three grow. of in We is in Hexo size market a California. market continue

of to it leading come. which questions. We’re closing giving and us to during to cannabis cement forward Canada Look to the in as believe for world the in so platform will and we’ll turn two, a Q&A, U.S. brands over top Hexo into more begin years we discussing on for one the enter

Operator

Global Aaron Alliance Your instructions] Grey [Operator Partners. first comes of question from

is open. line Your

Aaron Grey

and on Hi, good there. job morning, nice to profitability inflecting

Sebastien St-Louis

Thank you.

Aaron Grey

terms of or still of detail you Molson terms with now on could those looking and to these me, you partnerships, and spoke partners, about do partnerships for shifting Sebastien, some those give can spoken specific Coors can’t of hub how other models color just moving JV from away us model go that models progressing? so you previously into--give partnership you in be update You’ve of types back of question some guys right Thanks. you the so an the evolve? model in us to in First CPG, potential I into structured, could some is know maybe other while mentioned JV terms potentially as to kind go additional have the within how

Sebastien St-Louis

business. but just we’ve Aaron. currently a weight result arrangement, a strategic what Hexo has bringing producing final are is point, distribute being it from the on JV structure, of in with and that not in from Hexo the edibles our our lot food and technology leaned At tied we’ve likely and will experience done in with The run these engineering objective like an removed of most The JV pretty soon, we’ve a the which just Belleville a been what overall our agreements assistance. royalty-type so into complex perspective. fantastic their behalf facility perspective it positive EPS at major we’re and of Molson to, CPGs Happy a structure stages is technology agreement will around own beverage is really lot, business negotiated so with learning out

we because because plan originally with brands that Coors-type planning to the We’re beverage. like on going able we are recognizable the a infused to We existing for were space, so along Molson in not to major in regulations example limited leveraging but brand those the products launch was way. the Molson, not under change of an were alcohol brands, we’re do

with of have love that taking value wine, product, simply on lever We the of Powered capabilities which able also regulations, being around and that but is not successful, we by had it’s often our real able because We that and cash back the making affect is royalty, will by so proposition. structure flipped the That to CPG negative hurts In of U.S. with we’re than leaner advantage like and the made made model to and I leaner more people be can to is say we not the product do his don’t market. for here hugely t we certain just it cash de-alcoholized by part the also the U.S. rest allowed in won’t restrictions Little of and wine, Hexo rest think edibles, often our de-alcoholized restrictions manufacturing to Perhaps the unfortunately is structure, it products in be a brands, think world. us the proposition Victory taste. which to of get quarterly partners. that so of quickly to we a stock, flow, most exciting distribution paying world, and those expect a and existing not real lever

knowledge facilities so place, that’s bringing in and already bear, a very approach. world-class to We’re capital-light world-class distribution

everybody We’re we quarter. Canada, and I’d Hexo keeps on portfolio IP call so exporting have every it IP from remind growing IP an phenomenal remains perspective patent Hexo top in two - the

that going IP states We’re those to move legally. into

the access start we legislation structure moment, up the by operate. so the distribution. channel will that do mass hemp, by five We’re U.S., monitoring. us to in rapidly going in Colorado states We’ve States us gives when so could think proliferate closely with the launching about United bed That THC for in allow we which today in setting so to test to already infrastructure we’re product from changes January, not the touching but which all that to Molson in using and CBD

Molson, in not that with channels. Another we are traditional Colorado just interesting currently in THC thing is in grocery stores,

operators line. not certainly phenomenal by we’re certainly channel, operators, are when doing Although I going to the Powered neglect THC Hexo comes, Hexo multi-state approach our the time carry traditional will the them to a as retail think and job

Aaron Grey

controllable question about indoor that the terms capabilities. to for on you low to in brands on for Zenabis indoor Thanks that’s super more own the you’re color, some planning production, might look your that do because your to Thanks. indoor of bring once some with looking so own second your Up, Can you’re premium the them pending it or helpful. and acquisition Hexo’s, looking leverage you plans Do cultivation, the brand, just how Zenabis’ to that to you the acquiring be cost My legacy of be talk how a or closes you’ll additional little bring in acquisition, brands? use adding cultivation leverage more cultivation? cultivation, you’re with

Sebastien St-Louis

with we great working traction their Yes, and the has had we’re market first and evaluating we success Zenabis that make and phenomenal to from take of Namaste the approach consumer to some team brands. really in the to round a make Zenabis take of with that still can continue best out sure occasions. we’re holistic all, brands, the all the going has that sure

over - part, I in indoor the second world-class to That’s heights. one bolster exists Up of new them. years, I’ve ability Canada today. take facility. It’s of eight going that the know facility a best most The grows to our visited is the to certainly certainly Alphaville last

going Reserve Up to high capacity. control product indoor and benefit ultra additional Original are that Stash product Our our from certainly quality and

Aaron Grey

in Thanks. I’ll the queue. jump All back right, great.

Operator

from question next Capital Markets. comes of BMO Tamy Chen Your

Your line is open.

Tamy Chen

the and back with on go current made the to to update to comments you wanted model. I Sebastien, hub respect spoke morning. good your Thanks,

bit also as focused points royalty such outside you? mentioned having and can would geographies discussions or the they current a or you more for just there having, investment you a there, in and these is elements as than that markets You concurrent direct you’re this, some extent for you’re interesting bit exclusivity market are there the Canadian can and helpful. such to extent that a are you’re Hexo, discuss I’m wondering, similarly to these the more discussions that expand bit are more color or that on such as of U.S. structure talking of Just Canada, a be When the rest that, world? a about discussions on

Sebastien St-Louis

to in we you couple fact Thank we’ll haven’t start capital, so direct Tamy. and Yes, plenty of quarters Hexo access diluted now. has the a of in with investment.

months We’re very operationally set well cash. I mean, up XX over - of

to these priority. and emerge funded. of these can exclusivity, especially is plan IP term don’t on the leverage the miss your the partnerships a the see That that of of of question To capex and that as out the fully value critical Our control create We part is will point exclusivity partnerships. as IP long build.

sure up in the is the partners the IP heavily win, I Hexo develop invested where same lose. IP, world and making business IP, both you partnerships, these the in line. are believe best world companies the then why pushing goes If in you the and partners is That’s having with compete with both of the in the largest direct that in one to end investment will

both bring value about Coors if it in the is into meaningless similarly to working done only. able Canada Hexo value lever outside Canada the in the shines distribution delivers than has together in is of CPGs we’re where in; all that really with important. Canada. the more partnerships both on we’ve Canada Hexo Canada. however, States. standing now These and and Molson was Canada they’re invest future, what beverages $XXX example, For United they’re the million we’re in up

completely, But market line multi-country which depending some focused As that product specifically. sure on exclusivity, at on looking we’re we’re looking yes, nuances global. these and such, obviously agreements, with really global at are making yes, sometimes we’re which

Tamy Chen

it, Got helpful. that’s

Okay. so halfway capex, we’re for follow-up think it’s through about and with the [Indiscernible] my your Trent, far you, year. question to specifically is, I respect fiscal

on about wondering so $XX really ramp back capex Thanks. half I million year and million think so still capex, year. the fiscal million, I’m outlook to in I just should was will of that it’s recall up the if this previous $X the we think for and commentary your $XX that’s the

Trent MacDonald

bit to versus of first-second thing top had a of we the the things it But up. on substantially, so planned teams but - adding our and just a major it’s but might something going had fundamentals heavy, the future. things be next Yes, we back waging, this we projects sure start complex, be would the of thought third very accretive us - environment. half lean, see, Tamy, war are make think some some unorganized doing Those now in so what then hoping we quarter to do ones look that on strong quarter a operational to fourth that and we’ve on in of to the stood that that add something extremely were delayed was we a definitely our couple been into projects of that fully few and right so to we’re to they’re before getting year beginning, we couple anyway, could be and are the that of not big a fourth major, to had gotten going in that’s COGS else happen right

all We’re started additions. right these the now going with very solid process and have

Tamy Chen

you. thank Great,

Operator

from of comes Cowen. question Azer next Vivien Your

Your line open. is

Vivien Azer

Hi, thank you. Good morning.

Sebastien St-Louis

Vivien. morning Good

Vivien Azer

please, I test United follow CBD the your and to the on commentary, States beverage in wanted Colorado. up on

determination you’re other were Colorado. you. KPIs what states. make gleaning you’re you insights that from Thank Interested and noted five evaluating before to initial expand to You monitoring you beyond the consumers key what understand

Sebastien St-Louis

Vivien. Thanks

California is just market consumer will traction this When etc. anticipate thing by at is than first Quebec, a York, monitor very certainly and Ontario, The be the tastes, brand and and market very New business. it’s very different than we look different different we to than and Colorado,

believe us, of to a that’s now those a - at competitive allow at purposefully names participate in we total regulations I’m and the looking states the around cagey CBD. states moment, We’re advantage five the where being right of

that Canada really numbers, The responding mass going that by in end our because over so market available, has much channel was step they’ve of actual and to share, store more caps groceries been these build months now CBD those to to in way which first in Truss see other are The now we we’re caps, just reorders. the the responded sales in those end what in we’re anecdotally which on to product making on participate. were see penetrations, establish most responding beverages is is Beverages simply has grocery the the Colorado done, could displaced to so we’re that traction taking wait preferable same we consumers the are for XX% few taste They next so consumers.

gaining have with quantity experience the that because case regulatory. concept in Canada don’t We’re of we

working are those support for the ecomm on up the We businesses setting infrastructure. whole basically and

working working reducing During we COGS this expansion can and so well from we’re Molson so scale also capex can to rollout we sense and manufacturing this. shifting specifically, by good get as on bring that of a party the really out time, what on that we’re manufacturing third

strategy. to expecting have We’re May, end the say state-by-state would by start the we by next meaningful of activate which to data,

Vivien Azer

for Thank in the quick standpoint. regulatory follow-up limitations great. you expanding on consumer A sounds for a for color. that beverages me unit Any purchases? That from progress Canadian

Sebastien St-Louis

which the We’ve our beverages, bottled of our effecting same a beverage change. Mango had and - XMG. available Punch have regulatory those perspective, Canada in had not regulatory eight-packs, necessitate within regulatory smaller a milliliters not basis are essential because Pineapple two products a buy in so in on can now success the you We top XMG did so versus and cans SKUs can on format are is eight XMG change, some of selling progress XMG, that but framework, Fruit the from five actually our

a regulation. have regulator understandably and a success full the to consumer see right they purchase, with of probably to to hands of perspective buy, to reform no so will purchase pandemic pretty to the as They make number we’ll Health Canada a actual listen, limit convinced an understand has not it accept have a now come. cannabis their and more had quite been the bit industry priority. all very We matter It’s a of--we’re but get They it the months. next but regulatory include regulatory really how change, that part package from you’re update will as changes beverage many a point that at sense of health over of makes the larger going the the XX that

Vivien Azer

Very so much. helpful, you thank

Operator

Your Markets. next comes Kideckel David question from ATB of Capital

Your open. line is

David Kideckel

Sebastien, describe your combination potential morning. my Thanks. contender good inorganic, a maybe taking million. would A moving you now for quarter organic I Thanks Is and acquisition, do Looking your view we off question. or of couple Hexo forward, think Congrats it overall today creates I Hi, both Zenabis growth? want know moving the with have strategy here. the with your calculations it on How liquidity, point? by about to how Sebastien? or you three Trent team. at this questions. How a top of we our forward? about $XXX at should start

Sebastien St-Louis

growing partner. lot have Canada, entertaining that From that industry, to we with Hexo, every don’t they a M&A to talked get and in often of like little the any and the capacity sense, are quarter manufacturing stock start every a between M&A fundamentals not now of capacity the and is strengths secret value share a competitors of the thinking we Hexo’s extra is to, larger licensed so what as consumers the said, be the organic when about producers, look CEO the our cautious will in so and we just really targets rings With of market, the to growth. have, and they wherewithal, you I been abundance that is into very a--it’s that remains a Displacing of to about start the competitors so over point say, and so of so that market very see that an a are which say, I because the site, me one think or manufacturing cultivation. but hey, at see displace can looking we joining Bellville by that synergies I’ve you center to price on little Seeing, discussions. in are once other M&A, partner, bit on many wherewithal filled advantage and smaller a really large to offer Belleville, with Inorganic in quality has in join you and the have don’t space, from attractive a forces to having the companies there’s don’t up M&A have and weaker in known at, high right Hexo drive Hexo when growth game. ongoing the world-class moment, disconnect for they’re pick fundamentals phenomenal manufacturing we’re be black over eliminating there you organic is when certainly discussions. game. the quarter that pair with We’ll Hexo’s more stretch. the can midsized quarters, while the name name so very in at growth for other of think

David Kideckel

that’s helpful, Sebastien for Okay, very that. thanks

over next guide success a give for sales expect what or a for specifically of has Moving maybe and on your U.S. Thanks. this success here, as you Also, simply Sebastien, do you to goalpost one? the sales my of number year, second represent are the sales? to what just us for the U.S. I’m pilot more you describe, test percentage besides question with Colorado can beverages, in in metrics when wondering, your bit sales, overall your Colorado. of

Sebastien St-Louis

be same one sales number which largest Truss wants which really the a anything, think USA so that’s and Truss beverage brand the markets Truss the Canada - which guide bit its beverage has David, to its the was won’t the in about has little brand can one to is I in goals. Well USA operates milestone, in goal. it but I a market. be I achieved beverages, milestone. our obviously, cannabis number goal, talk

The in can from Truss second mentioned exciting, We is lever so USA to which don’t operations, though, one, where scratch. we lean differs, existing I’ve build everything infrastructure. is the quite have

leveraging what you to from on people I a to Canada. capital Hexo millions the the by about and In another that IP we If million world-class at through build $XXX - positive addressing now was number U.S., on, and we’re of using. which phenomenal cash those that KPIs scratch, yardstick we’re have deliver guide doing $XXX up course, on to about it well, and flow so look help digit spend big stand a of of invested Coors lean million, That’s we’re being KPIs mentioned and operations. by we’re manufacturing X from facilities single very $XXX us million costs we the in to experience at Colorado, that in leaning population profitability both million Molson of Molson so have,

David Kideckel

Thanks taking questions, on for my the quarter. congrats and

Operator

John comes of question Your next Zamparo from CIBC.

Your line is open.

John Zamparo

lockdowns to but morning. from or - rationalization boost SKU bit industry, Hi, and softer reductions the would for agree QX producers seeing view first you’re some industry for be seems The helpful. have a the inventory this at by saw store that what that few seem you Good thanks. I that year been can reasons on a with don’t customer would general of and some provinces, either variety seasonality general, for the of of least year consumers that color we ask also I some provincial you any be have around Sebastien. ago. mentioned, the you wanted Generally, in and held the distributors to time calendar provide stockpiling to in in think from months a about

Sebastien St-Louis

little for bit you, I’ll John. nuance a it

I it’s okay longer since no a product, think that industry entering on inception. to faced a it its most competitive the producer it. is is It phase its move the that simply for and licensed throw shelf create

face now contend up better with are pricing consumers. a The task. not competitive a pursuit to with most category, very the of relentless and every have is producers every very customer, licensed reality You the listings that product directly of competitive in to in

is industry difficulty, the trouble, is having and of it’s will more growing, hear the growing. you’ll more hear but and You more refrain fact more growing,

Hexo to we’re XXX% there will enough industry is why controlling they shooting The will but spot that on be set, that have a you’ll like the what through at speed and it lot industry this that many world-class the how--I two. to for to talked also the of about the with refrain. be I’ve Our grown can number you and a have that almost cusp position think end game companies we’re manufacturing stake not right here competitive of nobody and this to do up that that’s now spot at have top have proven grow market that’s so two companies lower displace, is take not one industry, just yet, will in that XX% be is one, actually COGS. able - year-over-year, XX% a control one to and with number But Hexo shot three top has number your share. seeing be to

greenhouse world-class Alphaville. with acquiring production in have we and world-class have like and we’re very Zenabis have production Masson soon in you Gatineau, indoor to to have You like

John Zamparo

side. Thank great. the I wanted for Appreciate up the on beverage that. in that’s the for you disclosure Okay, margin margins to follow MD&A.

step a meaningful beverages other the what talk of profile look You little gross more gross trying to of took just these, categories, talk still sales these on can but Thanks. get in be contribution of like for are on is margin about sense margins the really so helpful. any I’m to would a to maybe your of for be a color negative margin forward that need so products, what number or margin revenue, nature fixed? costs percent about you the

Trent MacDonald

little Beverage Look, still and overhead you’re there. beverage applied have unit to a Truss It’s volume. lot low with the cannabis-infused sure. fairly you is going fixed with capital so there’s imagine, a category, overhead production, of of bag so as than more more XX-gram each Yes, intensive, flower, can there of

But much if and positive of February, you event-driven not slowdown out before start to at seeing can’t which exact we and that volume so back, the not to there Coors over of and we’re overheads it’s is margins was we be increase there’s beverage. us of type at I XX% X, it’s which you category. but a those that that huge time that You very that certain look, that it’s the going great. educating our there, grams, this is volume apply level, QX I January a--in have at X, so time up spread out you Seb’s to X.X it’s to margin. a see point, with, is million, fair get X.X can about breakeven coming XX%, number. tell came game if and season volume Molson we’re see hope it’s it, that think and so entire a season, To it’s I to off that you’re you’re are improve increase, more beverage, huge going at that pretty number predictable holiday so still in more across to people’s dramatically isn’t the a most lives, breakeven all being to looking as to the grown million think going going think say you in our

John Zamparo

you thank Understood, very much.

Operator

next question Carter comes Your of Stifel. Andrew from

open. is line Your

Andrew Carter

to to the biggest wanted of I’ll of management you’ve looking morning. some beverages. the category doubt kind sophisticated are you the year know over of start coolers takeaway just summer Hey, spot, I it question. No can more but Good for thanks. the I the - are or that got a guess more kind of winning. season, good give tastes leading could us cooler update on growth? I is into maybe first with with is starting with seems in this going is discussions at beverage be Just guys same, hone penetration? feature months, everybody help heavily? I category my just two you the retailers next is kind slowdown any one, ask coming to there the wanted it to on there

Sebastien St-Louis

of is the company. built your what took say, beverage the obviously I No, are beverage offerings, really brands, Truss. what are think limited question, certain occasions as can what a specifically, exciting are same coolers, sticking summer think a very of after with here cannabis Andrew. his go they and that is retailers, the the Truss company, haven’t to what what to we the do season a They season. look the we and that time Scott precisely more regulations, brings think first promos are Thanks don’t into done the so a with and Cooper and at themselves we can team when foremost I is and Hexo

strain so really just big crafting I of summer, think that first we not the for it time on a focused a those Truss walk into have unique on success part occasions experience we in We’ve of a and focused will the bottle. really exciting really putting beverage that. has been when be beverage a

I refine to think opportunity category there’s management. plenty further of that

Andrew Carter

Got it.

question, sales about ask have flattish. of Second kind to Quebec. I I wanted know been

the up outside made momentum You for it with Quebec.

this Quebec, there ask Just what do limitations you in be when are more re-accelerate that wanted that we contribution? or about [indiscernible]? is to healthy will that expect but to see a line should that get I -

Sebastien St-Louis

specifically beverage talking you Are or about overall?

Andrew Carter

adult the Quebec just side, aside just use the putting beverages. Sebastien, Quebec, Sorry

Sebastien St-Louis

a to focus. so, and growers, potency overall. the continue the with Quebec, of of we our term The long can’t lot grow we do one, number craft growers number to of THC at not craft and as top of have small a to so larger headwind the taken but the need headwind a our very over main products that we’re of offerings have craft. higher - still you type that issue a has traction do craft a be be much number company simply remain so introduction been XX% we Quebec, portion in of share Quebec supplier in preferred I a two, has Yes, there’s To and phenomenal been introduced mean, share market, and has

category. is products the just said, of investment which can we premium hard very come that allow that offering mass it’s where right - masstige at Zenabis. The to very the there of and out have potency acquisition fully also our around and of important. be that You Quebec, do will With haven’t in Up, attention our into Alphaville we this large the scale, that like us with the scale. is paired on-lining more strategic move deployed being higher still and This craft to where traction will brands

product our most distributor share. refining and and certainly maintain product the start deal at cause of in product Quebec launch XMG will restrictions recently dialogue not so beverage, THC also of is On so units. slowdown, country, restriction with version a XX traction. rest in the look so a which we note can milligram continue in healthy a at there to We other in regulatory just think, Specifically when individual meaningful on the for and a also phenomenal out to is a usually the to we’ll certain there’s being, a the to on markets, differences, on there’s country, units, I that profitable certain example, hash, you individual have made SKUs, milligram a is offering there’s Quebec create that doing keep that on provincial potency beverages, five that job and very

Trent MacDonald

and call been thanks of to by is Quebec in us specifically In job. have try jump been province, others for - is against. doing to of the two for competitor a consumers the a just come heavy in Zenabis lot premium with A They’ve and brands, great traction in here. competitor the uptake province me a there that on be going to so combination of pretty in very Namaste, in heavy their Quebec. Andrew, gaining let jumping the actually,

Andrew Carter

on. Thanks, it I’ll pass

Operator

the a ask number if one question, you’d then telephone press keypad. to your on like Again star

question Canaccord Genuity. Matt next comes from of Your Bottomley

line is open. Your

Matt Bottomley

from maybe be color and that. of when overall needing this transaction that seems do of classifications that other just value a office [indiscernible] the and competencies would there the infrastructure Newstrike think, don’t of specific your that do the Good risk, the on here. you things. on infrastructure at there everything Zenabis things synergies the Then consolidate imagine like or and them? you at side on when deal what back I side a you’re of some of acquiring, the apologies that be you and with clearly - will of and there’s again morning PCA infrastructure wanted Thanks. it, think out the is there One, [indiscernible] all to turn a everyone, by back fair maybe to or specific any brought potential that you that’s be will come on look thanks for takeaways granularity infrastructure I saturated, to sector sort But the more with taking any just core think reasons [indiscernible]? in couple questions. little of get

Trent MacDonald

Sure, Belleville, great indoor alluded which is, to have - we Canada. have great again, question. in right, earlier and we they Alphaville facility a it great Look, question, grow just here

of synergies. to going have We’re plenty

lower start As the applying costs COGS. the production, you and our their you’re through with overhead facility as cultivation going to end Bellville be relatively per soon to to pushing it’s to going less fixed, gram overhead

amount on great and also We to believe inputs. supply a going there’s be synergy of

team that always on combinations, going and have SG&A, and both so of at we’re good, and and looked Zenabis to you planning, it you’re techniques think right packaging our have solid course we’ve lot then and and of at on the We and and Hexo so agreements supply I combined. where between our getting some very our synergies on said, a team labeling, forth, the on cultivation aggressive lot a and of know, now integration

$XX and good be so with We’re looking story million a there, $XX it’s perspective. to our anywhere between million news upside from from going

it that’s the to and understand facility, getting even and Langley be be and now, is we Now - assets so still stages mentioned continue before Scotia accretive a a planning for Nova to be it’s looming We for right solves for to big looking through at for had going around just trying - greenhouse. They of and to infrastructure, a more in and issue look where the what’s Alphaville term. Scotia We’ve and them fits our way - integration. it than us. know to a have we’re us going flagship up, sitting use going be this in in happen of going more us, in and that, to this coming Stellarton they we all so problem we’re out knew long Nova all I does going capacity the here best have it have their

I think room on in path in there’s right the be to that infrastructure. we’re general, terms of optimistic

Matt Bottomley

Okay, appreciate that. Thanks guys.

Operator

Your of Capital. next question comes from Chu Desjardins the John

open. line Your is

John Chu

first whether pass goods and that My for forward. I’m on more or quarter question you cost you just drive second of the morning. just just good not that was is to on Last mentioned case plan just to sales. Hi, might of that’s sold savings. try quarter, the opex and going still curious those overall help if for some savings the

Sebastien St-Louis

we Go Yes, your pass continue of thanks John. Overall so savings. so to those in I the absolutely, answer in be QX, question, terms on not forward, to would say QX. really, would will

strategy. black think--I with at single Original was of large north that SKU, sites black $XXX and I price the today one country, we whole and a day, site feeds went the Hexo and black on to - market other of it to say to market had margins credit we’re take resetting I targeting, I had and black market--one mid-XXs anecdote flower you of move market, but back the the targeting ounce. on that by whole that is industry site one maybe dictated We congratulate had want ago an We’re overall the to bag the our to black over pricing the XX believe that moment SKUs. bring an have year I’ll market industry a flower ounce the Stash,

beat what and that’s we’re automation Trent The on is to into that of black M&A do I retail, a that improving, going mean, and the we going bottom a that war that is have talking and that as think look a to so will the new consuming of to own, that near unit COGS, out. finding brings and through industry, market when their mentioned the consumer. synergies, we $X.X which we price on about--I significant of terms we of COGS. so keep course at that we can basis eventually that an to competitors. keep are pushed do Belleville, in given flowing synergies, much has number have significant Hexo you us keep but be to what on our through and has to have That’s three flow really advantage nowhere the to that majority market the at to specifically will without billion it black technology market, strategy so and

John Chu

SKUs terms it following probably that you of seeing would and any comes their just in just not and/or there restocking some of also been Then up on of the Thanks. by delaying of with been restocking in when one net X,XXX insights and great. and we’ve maybe be reordering whether whether or obviously efforts, Ontario? the if We help, but SKUs, your you’ve around the not so SKUs us can of OCS they’ve earlier departure Ontario, doesn’t eliminated give Okay, the brand Up CEO or had to saw were they heard or insights had eliminated helpful. questions, whatnot, a increase actually any any you

Sebastien St-Louis

want, their Lobo had Ontario. of lot achieve leadership, SKUs to a Ontario pricing. question preferred strategy, waiting his so than There’s we a with is a clearing rationalization. that with more overall but opportunity new undertaken and able to communication come the David again an up, partnership see to for consumers to rationalizing potential course, and if first so Hexo intend there has into and to CEO that in that of tight forward build uncertainty team in. with we’re a an so they’re black that case to to major Yes, being a connect right But the it’s to we’ll has market remains looking so been headwind, wait that continue rationalization as and of ties as are now, that

Trent MacDonald

bit. chime in there Yes, a I’ll even

QX, Canada and market the we at data rec fourth the We’ve fifth back in penetration sales end Headset terms through the seeing progress and market of If in LP the of terms were into the the we and steady of between in are now momentum in you our of Ontario. six going we’ve last Ontario making recall, third four of lots XXth OCS. terms we’re the into forth so been to weeks, and been in

John Chu

Thank Okay, you. great.

Operator

There I Mr. will to are remarks. no time. St-Louis the further questions call now closing at return for this

Sebastien St-Louis

continue getting stock, for so all our to Hexo much. the thanks soon. you. EBITDA share everybody positive, very happen, our go. questions. to with to like to let’s Thanks it your making Great to Thanks like and team for of pot Thanks our the and they consumers. journey course Talk whole big of They

Operator

this our conference you Thank for call. and your participation. Ladies concludes gentlemen,

may You now disconnect.

HEXO (HEXO) 18 Mar 212021 Q2 Earnings call transcript