HEXO Corp.
Q3 2021 Earnings Call Transcript

Published: 14 Jun 2021

[Operator:]

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 or facts 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.

[Sebastien St-Louis:]

Thank you, operator, and good morning, everybody. There are reasons for optimism, both in the cannabis industry and also in our societal role out 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 it was all outside of HEXO and no significant disruption to operations so far. A huge thanks to all our employees who continue to put themselves at risk every day, and they continue to bring utmost morale and efforts. HEXO has been going through a significant period of aggressive growth and transformation. We recently closed on our acquisition of Zenabis, 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 48North and Redecan. Those two transactions, on top of Zenabis, really put HEXO in an incredible position. Forecasted 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.

[Trent MacDonald:]

Thank you, Sebastien. I just want to update a few things on the balancing and 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 inventories 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.

[Sebastien St-Louis:]

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 products that are offered by licensed producers. HEXO is extremely proud of its journey. Over eight years, we went from the number 17 ranked LP by market share to now post consolidation of our acquisition of Redecan and 48North, we should be the number one recreational market share licensed 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 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 through positive EPS. And we’re, of course, updating our top two Canadian targets, because we’ve achieved number one to now becoming top three from a cannabis products perspective across the world.

[Operator:]

First question comes from Aaron Grey with Alliance Global Partners.

[Aaron Grey:]

Good morning. And thanks for the questions. So, first question for me, just talking about your home market of Quebec. So, just diving a little bit deeper on from 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 the timing of kind of the strain cultivation divisions and how you look to remedy that, and do you feel like that there might be another quarter or two until you kind of right that ship? And then also, as you also talk about heightened competition in that market, how do you feel? It might be more difficult to kind of maybe regain some that market share as more competitors have come to the Quebec marketplace. So, you may kind of cover there in terms of the timing of when you look to return to more positive sequential sales in Quebec, will be helpful. Thanks.

[Sebastien St-Louis:]

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 so, in those -- that inventory -- since e are now 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 will keep investing. A few months -- so then nine months ago, then we had more genetics coming in; six months ago, even more 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 it 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 Atholville indoor site in Zenabis. And of course, all of this is just reflective of the HEXO genetic library proper, not the HEXO Zenabis, 48North, Redecan library, which of course is incredibly robust.

[Aaron Grey:]

Okay. Thanks for that color. And then, second question from me, you also called out some impacts on revenue due to OS Reserve and your ability to get high THC products. It looks like harvest during the Q remained near record high. So, would love to hear some commentary in terms of the level of THC for the harvest in most recent quarter. And then, also if you could provide some color in terms of Zenabis with the 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 sales and their own harvest as they’re going to expand -- high THC has been a high priority for you guys. Thank you.

[Sebastien St-Louis:]

As far as the Zenabis numbers, we’ll 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 growth, so some remaining upside to go hit some theoretical maximums there as we move to indoor. The entire portfolio is now -- half of the entire portfolio is now hitting consistently over 20%. And that, of course, fills the Up promise, which is a guaranteed 20% 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 resoundingly with consumers. On top of that, in double-blind task with consumers, HEXO was performing extremely well. We keep improving our curing processes, our drawing 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 reserved, you’ll notice -- go try that against a competitor competing product and 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 qualitative aspect. So, we’re quite happy with that. So, I think as the consumer continues to learn and look for olfactory response and just 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.

[Operator:]

Next question comes from Tamy Chen with BMO Capital Markets.

[Tamy Chen:]

Thanks. Good morning. First question is on the genetics and the production. So, I was wondering, 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 now, two, the pathway to eventually get some of these newer genetics growing in their facility to commercial scale and hitting more on such takes quite a while and it’s quite a bumpy road. So, Sebastien, could you just elaborate a bit more on 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, but 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 Zenabis’ 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.

[Sebastien St-Louis:]

Thank you, Tamy. Yes. 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 -- to our greenhouse in Masson, but we currently have four 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 go inside with the consolidation of -- as well of all acquisitions.

[Trent MacDonald:]

Just to follow up on that, Tamy. I know you mentioned Atholville as well. Atholville has been a productive site for Zenabis 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 this greenfield. 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 very a high level within a very short timeframe.

[Tamy Chen:]

Okay. Thank you. That’s helpful. And my follow-up question is on the beverage category. I noticed some language in the press release and showing 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, any commentary on how you feel about the category now that it seems like some more competitors and SKUs are coming into that category? Thank you.

[Sebastien St-Louis:]

Thanks, Tamy. 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 Truss 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 Truss 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.

[Operator:]

Next question comes from Rupesh Parikh with Oppenheimer.

[Rupesh Parikh:]

So, I guess, first starting out with Q4, is there anything you share from a revenue expectation perspective? Clearly, there are 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 share any perspectives on Q4?

[Sebastien St-Louis:]

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 the actual product. And had we had the right mix in category and channel, I think Q3 would have been a very different story. So Q4, certainly already looking better, but we’re not providing guidance or numbers in more specifics.

[Rupesh Parikh:]

Okay, great. And maybe just follow-up question, so on EBITDA profitability. So, last quarter, you guys could get to a positive EBITDA. Just any update thinking in terms of the timeline to get back to that positive EBITDA metric?

[Trent MacDonald:]

Yes. Look, the EBITDA was hit for quite few things. We had $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 out of Quebec, but that’s been the margin percent, but 28% still a pretty good margin present all else being equal, especially around the LPs at this time. But, I think for us, without giving specific guidance, there’s -- you have the M&A activity as well coming in. We believe that there’s going to be a ton of synergies. We’re already starting to see those in Zenabis. And we believe that we have this path forward that we just talked about, not just from adjusted EBITDA, but actual EPS. So, look, our Q2 is where you’ll see really -- Q2 of next year, you’ll see all three hopefully, when we get to the close of Redecan and 48North, and we have Zenabis, 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 for the EBITDA. Our SG&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.

[Rupesh Parikh:]

And then maybe just on 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 that I think the P&L impact hit this quarter? So, just kind of…

[Trent MacDonald:]

It did, I’ll hit this quarter. I’ll be honest -- that’s a bit of the data -- that’s in our auditors as to how we treat that. I have the feeling that it should be quarterly -- so it doesn’t fit 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 stay tuned. But, if you have to start budgeting in for Q3 of every year, we will.

[Operator:]

Next question comes from David Kideckel with ATB Capital Markets.

[David Kideckel:]

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, Sebastien, 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 Redecan and to some extent 48North, perhaps Zenabis, what are your thoughts 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 on line? Thanks.

[Sebastien St-Louis:]

Thanks, David. 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, were the first licensed producer to do that. But 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 and learning how to manage supply chain, how to manage cultivation, moving from specific queue, all the way to the shelf, and then into 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 the -- anything larger that we need to do on a consolidated basis, we’re not afraid to do. 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 Rede’s product, the Rede’s portfolio, the Redecan portfolio as a whole in oil, et cetera, 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 flower, 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 ones. So, you need a lot of capacity to fill that demand.

[David Kideckel:]

Okay. That’s helpful. Thanks for that encouragement as well, Sebastien. My second question is around the actual integration of the two. I know the deals -- or at least with Redecan 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, remember one to three with Redecan. So, is this going to be HEXO adopting a Redecan approach or vice versa, or kind of combination of it? Do 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.

[Sebastien St-Louis:]

Yes. No problem. We’ve hired a company -- I keep saying we’ve hired this company called Protiviti. They are a world class organization that that has a huge transaction services component. We went through the Zenabis acquisition plus 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 carried on through the engagement to help with the Redecan and 48North, which we’ve already launched. And so, we’re already starting on those integration plans. We see all three being very different. Okay? So, Zenabis was a very, very much more complex type of multi-sites LP. Redecan, for as successful as they 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 Redecan, nor are we going to take what they have done and implement it in HEXO. It’ll be -- we’re going to take the best of each and apply to one another. We don’t -- we expect the things like quality control, health and safety that will lend our expertise to Redecan 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 HEXO teams, where that makes sense, especially on cross-functional basis, 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, it will be a bit of a different approach, sort of in between the two being Zenabis and Redecan.

[David Kideckel:]

Okay. Thanks very much, Trent and Sebastian. I’ll hop back in the queue, and congrats on the quarter. Thanks.

[Operator:]

Next question comes from Doug Miehm with RBC Capital Markets.

[Doug Miehm:]

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 market share over time, is my first question.

[Sebastien St-Louis:]

Thanks, Doug. Yes, 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, I think rosin, shatter, live extract, et cetera, just 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 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 margins. So, that is the next path for growing from the black market. The second point of your question around craft. Craft has absolutely surprised us. I talked about their ability to come in with hash that we were not expecting. So, which was a large negative impact on 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 22%. And so, that’s been largely rectified. On the flower piece, what’s been really interesting is craft loaded in some of their best product. And they make 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 in Q3 and even starting Q4 the craft growers that were originally successful with their first load-in, and now are running out of product. Their quality has taken a nosedive. So, 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 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 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.

[Doug Miehm:]

Okay, and very good. And then second question just has to do with U.S. clients. I know you have a lot on your plate right now, but this is going to be 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.?

[Sebastien St-Louis:]

Yes. 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 Truss USA 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 48North 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 ad 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 where you have here. So, HEXO hash, readies, pre-rolls. 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.

[Doug Miehm:]

Perfect. Thank you.

[Operator:]

Next question comes from Andrew Carter with Stifel.

[Andrew Carter:]

Hi. Good morning. I want to go back to the path, I appreciate the breakdown, but I had straight in $469 million in total cash between what’s available and what’s in escrow. You take out 400, so use it for Redecan . So, could you just kind of go through kind of what kind of capital expenditures remain on base business? I’m not sure if you want to invest more in Zenabis or 48North, a cost to achieve synergies, cost for the new facility in Colorado, and then what other of these future partnerships, will they have had on the same capital commitments that Truss JV has? Thanks.

[Trent MacDonald:]

Yes. 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 those $400 million that we’re going to require to close on Redecan, there will be more cash requirements as we continue to roll out our capital plans, both in U.S. and here in Canada. We have more plans to stand up not the facility, in certain categories within Bellville, such as pre-rolls. We want to continue to invest in pre-roll and other things. In the U.S. we will be expanding up our Powered by HEXO technology, which we believe is going to be in the -- anywhere between $25 million and $40 million over the next 12 to 18 months, if not more. We are standing up our Powered 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.

[Andrew Carter:]

All right. And 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 kind of reporting kind of post kind of reopening starting in Canada. Are you seeing any accelerated orders? I guess, the question is, will we see a step change in orders from the provinces or get the inventory level kind of get right-sized during COVID? Thanks.

[Sebastien St-Louis:]

Thanks, Andrew. The sales are definitely open -- we’re seeing the opening up again. So, the orders have increased.

[Trent MacDonald:]

And Andrew if you look at us, I mean look, it’s -- I know people -- may have glossed over to this. But we have 14% sequential growth in OCS, sequential 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 seeing that. We were up 14% and arguably, one of, if not the most important market in Canada. So, that’s not that. And we’re seeing momentum coming into Q4 and forward from here. So if that was our -- if that was our worst quarter, then we’ll take it.

[Operator:]

Next question comes from John Zamparo with CIBC.

[John Zamparo:]

I wanted to start in Quebec. The press release referenced additional competition in the province. So, 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 of what are the primary benefits of the preferred supplier agreement, or what are the terms of that preferred supplier agreement with the province?

[Sebastien St-Louis:]

In terms of the 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 originally. If I take you back to the 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 SQDC continues. They just released their quarter, they continue to do a great job, one of the most profitable -- one of the most profitable distributors -- provincial distributors in the country and also getting -- 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 slower 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 markets, 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 will 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, we 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 is 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.

[John Zamparo:]

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. 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 that any thing’s on their radar for being potentially changed in the next 12 to 18 months?

[Sebastien St-Louis:]

Yes. There’s a lot on their radar and 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’s had other priorities 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’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 and very quick. It works in about 15 minutes. And the -- 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 work Powered by HEXO itself.

[Operator:]

Next question comes from Matt Bottomley with Canaccord Genuity.

[Matt Bottomley:]

Sebastien, 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. We’ve mentioned Alberta has seen some draw downs in inventory they’re holding. I noted historically that’s happened in Ontario as well. But when you look at all the announced M&A, in terms of the most recent quarters, we can see, they’re pretty much all sequentially down. We don’t know what Redecan obviously has got to as of late. But I’m just curious, given that we are seeing retail numbers incrementally increase, I know Jan-Feb was a little bit down. I’m just curious how much of that is potential market share loss versus all the LP universe kind of dealing with various issues, even aside from some of the ones that were more specific to HEXO this quarter?

[Sebastien St-Louis:]

Yes. I think this, we’re definitely in the worst period of the year in terms of the impacts that we felt from supply chain, logistics, proliferation of small growers. So again, if you’re looking 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 government’s had a mandate to allow some distribution for the 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 think -- 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 products. 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. 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 the successful majors continue to retake share. HEXO of courses 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.

[Matt Bottomley:]

That’s very helpful. And just lastly for me, 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, 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’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 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?

[Sebastien St-Louis:]

Yes. It’s completely risk mitigated. On a consolidated basis, when I look at the strains, I mean, that we’re bringing in, not such as we’ve developed internally, but also the library that’s available from Redecan, Zenabis 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 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 where we’re seeing 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.

[Operator:]

Next question comes from John Chu with Desjardins Capital.

[John Chu:]

My first question is just on the Original Stash your bulk format product. Sales were down quite a bit in Alberta and Quebec. And I don’t know if that’s just the new strains you were talking about, or is that competition and/or pricing pressure. Can you comment on that?

[Sebastien St-Louis:]

Sorry. Which markets, could you just repeat your question, please?

[John Chu:]

Yes. 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.

[Sebastien St-Louis:]

So, Quebec, I’ve explained was part of that strain choice. So, some of those strains were present in Original Stash. And for Alberta specifically, we had a slight decline there as well. And that was also mostly related to high THC and load-in. But overall Alberta purchase orders are going quite well now, at this point, and especially when we look at it on a consolidated basis.

[John Chu:]

Okay. And then, just this strategy of refreshing with the new strain with 100 new genetics. So, are we going to see basically complete overhaul of the product portfolio at some point over the next 12 to 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 strains, is that, how I interpret that?

[Sebastien St-Louis:]

No, the 100-strain plan is really 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 and our Up brand is one of the best selling flowers in Canada. And, we continue to have robust success. I mean, yes, there is a pullback, but we’re still number one in Quebec. So, HEXO flower, I mean, we have had a pullback. But keep in mind that Quebec consumers are consuming more HEXO flower than any than anything else. And so, we do not want to pull what’s working in markets. 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.

[John Chu:]

Okay. Thank you.

[Operator:]

And we have a question from Adam Buckham with Scotiabank.

[Adam Buckham:]

Hey. Good morning. Thanks for taking my questions. 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 realize 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 functioning operations or how you think about that.

[Sebastien St-Louis:]

Thanks, Adam. Well, I’ll let Trent add a couple of comments. But overall, we’ll 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 higher 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 Redecan 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?

[Trent MacDonald:]

Yes. No, I’d reiterate that. Once you have the three M&A 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 the cash flow positivity. That’s where we see things going. I think we’re looking out to Q2 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 in the U.S. that it’s a long time or really capital heavy. And I’d like to just reiterate and remind people that if you take what capital has been deployed to date by HEXO 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 further 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 were up over 85 million or 10 basis points. So, we’ve been deploying capital in a very efficient way. And for net loss from operations, as I just said is year to date after three quarters is less than half of the next best LP, and some LPs were over $1 billion of loss from operations. But 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.

[Adam Buckham:]

Great. Thanks for that.

[Operator:]

And we do not have any questions at this time. I’ll turn the call over to Mr. St-Louis.

[Sebastien St-Louis:]

Thank you very much. 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 HEXO. 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 backstop 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, accretive 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.

[Operator:]

This concludes today’s conference call. You may now disconnect.