HEXO Corp.
Q1 2020 Earnings Call Transcript

Published: 16 Dec 2019

[Operator:]

Good morning and welcome to HEXO Corp.'s First Quarter Fiscal 2020 Earnings Conference Call. After the presentation, we will conduct a question-and-answer session. All lines have been placed on mute to prevent any background noise. . Thank you. Please note that this call is being recorded today, December 16, 2019 at 8

[Jennifer Smith:]

Thank you. Good morning. I am Jennifer Smith, the Director of Investor Relations for HEXO Corp. Thank you all for joining us this morning for our 2020 Q1 earnings call. We will start with a presentation by our CEO, Sebastien St-Louis, followed by a recap of our first quarter results by our CFO, Steven Burwash, before opening the floor to questions from financial analysts. Before we begin, I would like to remind you that today's presentation contains forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. The forward-looking statements are based upon and include the company's current internal estimates, plans, expectations, opinions, forecast, projections, targets, guidance or other statements that are not statements of fact. Any statements contained herein or discussed during today's sessions that are not statements of historical fact may be deemed to be forward-looking statements. Such statements can often, but not always, be identified by the use of forward-looking terminology and other similar words and expressions that are predictions or indicate future events and future trends, including negative and grammatical variations thereof or statements that contain certain events or conditions may or will happen or by discussions of strategy. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. Those risks and uncertainties include but are not limited to those relating to the company's ability to execute its business plan; renew required permits and licenses and related regulatory compliance matters; implement its growth strategies; obtain and maintain financing on acceptable terms; maintain and renew required licenses; maintain good business relationships with its customers, distributors and other strategic partners; keep \pace with changing consumer preferences; protect intellectual property; manage and integrate acquisitions; retain key personnel; and relating to the company's competitive advantages, the development of new products and product formats for the company's product, changes in laws, rules, regulations and the absence of materially adverse changes in the industry or global economy. A more complete discussion of the risks and uncertainties facing the company appears in the company's annual information form and the company's management discussion and analysis for the three-month period ended October 31, 2019, which are now available under the company's profile on SEDAR.

[Sebastien St-Louis:]

Thank you, Jennifer. Good morning, everybody. During our Q4 call a few weeks ago, we signaled several changes in market conditions and assumptions, created significant challenges for the legal market in Canada. We listed seven short-term strategic priorities that HEXA was initiated to ensure that we're addressing these challenges, while preparing for the 2.0 market and targeting profitability in calendar 2020. In Q1, we're very pleased to highlight that our increased focus on controlling our expenditures and cash burn have resulted in decreased operating expenses of 25%. That's excluding restructuring costs. Revenue growth in the Canadian market continues to be hindered by slower-than-expected store openings. The Government of Ontario announced this week that they'll scrap the lottery system and start issuing licenses in the new year. The AGLC will issue up to 20 retail authorizations per months as stores become ready. There could be approximately 250 stores opened by the end of calendar 2020. Additional store openings in Quebec will start to alleviate market access constraints on the licensed producers. However, we don't believe that the retail channel will be substantially built until the end of 2021 or part way through 2022. The illicit market channel will continue to thrive until retail access is brought to the majority of Canadians. Pricing levels have continued to decrease since legalization. HEXO has taken an aggressive stance on our pricing to increase our market share. We've launched Original Stash, our value brand, now available in both Ontario and Québec, that's designed to combat the illegal market and increase our overall share of the market.

[Steve Burwash:]

Thank you, Sebastian. Good morning, everyone. We'll start at the top of the income statement with revenue. The total gross revenue was CAD 19.3 million for the quarter. That's a decrease of 6% over Q4. Gross revenue is net of CAD 1.2 million in price concessions as we continue to assess our pricing to drive sales volume and sell-through and a return provision of CAD 700,000 to provide for possible unsold inventory in the supply chain. Net revenue was CAD 14.5 million. Adult use sales increased 5% to 4,196 kilograms from 4,009 kilograms in Q4. We're expecting to see overall volumes continue to increase with the introduction of Original Stash at the end of Q1. Distribution of Original Stash has expanded past Québec, with listings in Ontario. And at the end of November, BC and Alberta will also have Original Stash. We achieved adult use revenues per gram of CAD 4.35 per gram, a decrease of CAD 0.39 over the last quarter. This figure includes a provision for price concessions, which resulted in a reduction of CAD 0.30 per gram, and a provision for sales returns, which resulted in a CAD 0.17 per gram reduction. Cost of sales decreased 3% to CAD 9.9 million compared to CAD 10.3 million in Q4 2019. The fair value adjustment on the sale of inventory was CAD 6.7 million, a decrease from CAD 7.3 million in Q4 2019 due to a slight decrease in total grams sold. The unrealized gain on changes in fair value of biological assets was CAD 7.1 million compared to CAD 5.3 million in Q4 2019 as a result of an increase in estimated yields and production rates at Gatineau. This was offset by higher costs to produce in Q1, a typically lower yielding period due to humid conditions in the summer months. In Q1 2020, the company recorded an impairment loss on inventory of CAD 25.5 million in the quarter. CAD 15.4 million of this impairment related to excess supply of trim and mill products on hand when compared with our short-term demand needs, CAD 4.4 million related to bulk purchased products, CAD 3.4 million related to a surplus of oil products and CAD 1.2 million related to finished goods samples which are required to be archived by Health Canada. We are closely monitoring inventory levels as well as assessing applications for inventory in our 2.0 products and will continue to keep you updated on a quarter-by-quarter basis regarding any further impairments that may be required.

[Jennifer Smith:]

Thank you, Steve. We will now take questions from our analysts. Due to the large number of analysts joining us today, I would ask you to limit your questions to two at a time and you're welcome to rejoin the queue after we do that. Thank you. And I'll turn it over now to our first question.

[Operator:]

Thank you. The first question is from Adam Buckham from Scotiabank. Please go ahead, Adam.

[Adam Buckham:]

Good morning. Thanks for taking my question. So, I just wanted to start off on CapEx. Is there any changes to the CAD 100 million to CAD 110 million CapEx program for 2020? And could you provide some color on the magnitude of the expected step-down in 2021? I understand it's far out, but any color you can provide would be helpful.

[Sebastien St-Louis:]

Yes, we have a couple of changes to the 2020 CapEx budgets. They are items that we believe we need to do strategically. And they are in the budget, but not approved to spend until we have the market conditions in the right conditions. 2021, we don't really have a lot of visibility as to what the CapEx would be in 2021, but it is not at the same level of building at Belleville and Gatineau.

[Adam Buckham:]

Okay, perfect. So, just to clarify there, you're saying that there is additional CapEx required to the CAD 100 million or you're deferring some of it?

[Sebastien St-Louis:]

So, we have identified a couple of projects that would add to the CAD 100 million, but it will depend on market conditions in 2020.

[Adam Buckham:]

Okay, perfect. And then, just following up on SG&A and marketing. So, you're going to continue to control costs here going forward. But with 2.0 coming online, how should we be thinking about any additional costs that would be associated with that throughout 2020?

[Steve Burwash:]

I think with 2.0 specifically, you have to look at most of our costs related to that is – you already see in our SG&A and R&D lines. So, we are investing in the 2.0. The formulations are mostly developed. In terms of CapEx, there's a limited amount, but that's within that CAD 100 million budget you mentioned. And we're confident we'll deliver our 2.0 strategy in a capital-light manner.

[Adam Buckham:]

Okay, great. Thanks.

[Operator:]

Thank you. The next question is from John Zamparo from CIBC. Please go ahead, John.

[John Zamparo:]

Thank you. Good morning. Sebastien, in the past, you made comments about partnering with other Fortune 500 partners beyond just Molson Coors Canada. Can we get an update on those plans please? I'm just wondering. Are those conversations still happening? And if so, what's the major roadblock for other industries getting involved?

[Sebastien St-Louis:]

Yeah. thanks, John. Conversations still definitely happening. In fact, more and more players than ever that are interested in HEXO's strategy. The structure behind the strategy, we're certainly reevaluating. So, in terms of our partnership with Molson Coors, it was a joint venture, which we're very proud of, and that's executed some really nice beverage portfolio that I'm looking forward to speaking about. But what we've learned is that the joint venture structure was quite heavy from a partnering perspective. So, there's a lot of work that went into the structure itself. So, we're starting to open it up in our discussions with Fortune 500s we're speaking with as to other possible structures, and that seems to be resonating. So, going down that path for the moment.

[John Zamparo:]

Okay, understood. And then, one housekeeping question. In terms of working capital in the trust JV, what do you expect your capital contributions to be towards those over the next 12 months, let's say?

[Sebastien St-Louis:]

Yeah. So, for us, it's been funded with an aggregate of about CAD 80 million to-date, HEXO providing 43% of that capital, and we have a little bit of funding left to go. I think an aggregate funding of about CAD 26 million left to go in that total, so which would leave HEXO with 43% of that, call it, CAD 12 million. And that covers both CapEx and OpEx. Also, the CapEx has been deployed. The trust facilities are gorgeous, 180,000 square feet of state-of-the-art beverage manufacturing in our Belleville facility.

[John Zamparo:]

Great, thanks. And, sorry, if I can squeeze one more. So, the working capital you expect over the next 12 months outside of…?

[Sebastien St-Louis:]

The working capital is including in that CAD 80 million, but we're not breaking it down, John.

[John Zamparo:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Graeme Kreindler from Eight Capital. Please go ahead.

[Graeme Kreindler:]

Yeah. Hi. Good morning. Thanks for taking my questions here. I just wanted to dig a little bit deeper within the 2020 outlook expectation there. And I know there's a number of underlying assumptions. And I was curious as to whether that considers the current derivative market environment in Québec, specifically with what looks like a delay in the rollout of vapes and tighter limits on the restrictions around edible products. Thank you.

[Sebastien St-Louis:]

Yeah, it does. That's a good point. So, we're adjusting to that reality which obviously puts a bit of downward pressure in the short-term. As we're still planning on rolling out our vape products, although that will obviously be outside of Québec at first, and we do expect that once we can share the results of our clinical trials with the Government of Québec, that will prompt good discussion.

[Graeme Kreindler:]

Okay, thank you. And then, my second question here is, with respect to Original Stash, trying to look at the margin profile on that product and that becoming margin accretive on a consolidated basis, can you help me understand sort of where the margin profile in that product is now? And based on all the work being done and the further efficiencies you're looking to drive at your existing facilities, how that's expected to trend over time? Because doing a simple math right now in terms of where a cost per gram sold doesn't imply that there is a very accretive margin on what the expected selling price would be on that product. So, any color would be helpful. Thank you.

[Sebastien St-Louis:]

Yeah. We still think our total portfolio margin will be low 40s over the long term. There's some headwinds in the short-term as we continue to get out to market, as we continue to lower costs. We've been able to strip CAD 25 million in costs out of the business in the one quarter. I'm extremely proud of that. And we're just getting started there. There's tons of efficiencies to go get. And that's a big part of the Original Stash story, something that will grow in margin over time as we remove costs, while continuing to deliver something that beats out black market pricing.

[Graeme Kreindler:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Matt Bottomley from Canaccord. Please go ahead, Matt.

[Matt Bottomley:]

Good morning. Thanks for taking the questions. Sebastien, I just wanted to touch base on some of your commentary from last quarter and then, obviously, topping up for this on the derivative rollouts and the leveraging of your Belleville facility. So, my understanding is that's probably going to be a mid-calendar year 2020 implementation at scale. So, what's the best way or what are the – maybe the leverage we should look at that could potentially move the current run rate that you're at on your top line? I think your net top line of about CAD 15 million. Is it Ontario, store rollouts, are there other factors that analysts should look at to try and handicap where exactly your topline might go prior to inflecting product out of your Belleville facility?

[Sebastien St-Louis:]

Yeah. I think you're hitting the two factors right there, Matt. So, one is external, is the store growth that has to hit the assumption, right? We're thinking 1,000 stores nationally still by the end of the year here. But the other one is internal, which is getting our Belleville facility fully ramped. And I think your assumption of mid-summer is a good one here until we really see that starting to kick in. The good news is that, from the original prototyping we're seeing, the step change in cost structure is phenomenal. We're really seeing, like our packaging throughput which used to take to do a unit – I'll stay away from specific numbers. You'll see them in coming quarters. But where we used to do x units with y people, you're doing now kind of 4x units with a tenth of the people. So, Belleville facility is going to be – we're very excited about. But it is taking a little bit of time to get everything up and running here.

[Matt Bottomley:]

Okay, thank you. And just a follow-up, more housekeeping. Just your cash balance. I am not sure if you put out there what the number is today. I know you did last quarter. So, is it appropriate to look maybe back of the envelope to CAD 70-odd-million you had as of period-end, the CAD 70 million you closed? And then, if you look at sort of what your historical CapEx and OpEx burn was the last couple of quarters, would that kind of put where your balance is today? I sort of have it between CAD 90 million and CAD 100 million. I'm just wondering if that's appropriate, if you can comment on that.

[Steve Burwash:]

Yeah, your range is good. We're just over CAD 90 million.

[Matt Bottomley:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Chris Carey from Bank of America. Please go ahead, Chris.

[Chris Carey:]

Hi. Good morning. So, I guess it's clear to me what the current strategy is for the predominantly flower portfolio. And you're three quarters in Québec, right? But, I guess, I'm trying to figure out what the differentiation or the pitch is to the other provinces, right, for 2.0? Because you're not really going to be able to leverage the core Québec presence, right, when you're going out with vapes and beverages. And so, I guess, for the back half of calendar 2020, you're going to be going up against a lot of other companies also rolling out vapes predominantly. I guess I see the differentiation with beverages, but what's kind of the pitch, right, and how do you see your portfolio differentiated relative to some others, given that I think predominantly people are kind of focused on the same thing?

[Sebastien St-Louis:]

Yeah. So, I think it's a two-part answer there, Chris. The first part is the strategy overall when we're approaching the provinces is to take a portfolio long-term approach. So, the idea that in dealing with HEXO, we can provide them better service, a better full range portfolio to address the various segments. So, that's when you'll start to see in our branding with our UP products all the way down to the value brand, Original Stash, and our HEXO in the mid-market. We really touch on the whole portfolio. Same strategy is going to come in with beverage, but also with a 2.0 product. So, having a full range, so you can shop in one place, lowest cost for the provinces, lower shipping cost makes it more efficient and we can get products in front of consumers at a better price. That's the first part. Then there's individual strategies on individual product lines. So, specifically, beverage has really been a quality and segmentation strategy. And when we roll that out with Truss, you'll understand. Definitely, one of the best beverage portfolios in the world right now when that gets rolled out. On the vape strategy, it's been one of safety. So, we start with vapes with our clinical trials. To my knowledge, we're still one of only two companies that are doing safety trials for adverse reaction on our vapes. We're one of a handful of companies that is delivering a vape liquid that is pure cannabis. So, no oils, no vitamin acetate, et cetera. So, we're making a good bet on that. All that in the context of cost control. So, as we've seen in flower, 2.0 will be extremely cost competitive. Your point is not lost on us. In vape, there's currently well over 600 SKUs being presented to provinces. So, we're coming right out of the gate as a hyper-competitive launch. And this is symptomatic of having to compete against a developed illicit market and having many companies in the running. I think that stars to alleviate over the next year as we see more and more of the smaller producers really have to pick and choose where they focus. So, for that part, I think we're in good shape.

[Chris Carey:]

Okay, thanks for that. And then, I guess, secondly, and this has been asked in several different ways, but maybe I'll try another approach. I'm just thinking about the revenue cadence into kind of – until you get to the back half of calendar 2020. And I think there's a reasonable case to be made that volume should continue to sequentially grow, especially with new stores coming in Ontario around Q1 2020. We'll see when exactly they come out. But, I guess, your pricing is also going to sequentially go down just for no other reason than mix, right? If Original Stash is better, your average pricing should continue to trend down. And so, I'm just trying to think about – is this the situation where revenues could be flattish to slightly up for the next couple of quarters? Or if there's a case to be made that volumes should really accelerate with some of these new stores coming online?

[Sebastien St-Louis:]

I think, Chris, we've talked about the two main factors back when Matt posed his question. And so, definitely, we need more stores. That's guaranteed. And now, you're seeing Ontario delaying store openings until April. So, that's definitely a factor that could potentially affect – well, not potentially. It will affect our ability to earn revenue in the near-term. In the medium-term, we need to look at onlining our facilities. We've got CAD 130 million sitting in Belleville of deployed CapEx that is not operational right now. That's a ton of operational efficiencies that we're not living, which includes an ability to serve at volume across the country. And that also not showing up in the near-term. That's showing up in the medium-term, which puts us about six months out. I think that the third inflection is really one of competition. As I've said the previous quarters, I think we are going to see more consolidation in the industry. I think we're going to see a majority of licensed producers in the industry being troubled, and that will, in the longer-term, lead to a bit of a release valve on the competitiveness, which will give us more room. So, very confident now having popped up the cash balances to make sure we're one of the ones that make it all the way because I still see a future where there's four or five large license producers, HEXO being one of them, capturing a 20% plus share of CAD 7 billion market. It's a rocky path to get there.

[Chris Carey:]

Okay. Thanks, guys. Appreciate it.

[Operator:]

Thank you. The next question is from Scott fortune of ROTH Capital. Please go ahead.

[Scott Fortune:]

Good morning. Real quick, any updates on CBD or MCBD offering in the U.S. and strategy there as you guys move out going forward here, 2020?

[Sebastien St-Louis:]

Yeah, strategy is progressing really well, Scott. Thanks for asking. And Steve was talking earlier about some specific CapEx initiatives that we're starting to reserve money from. So, that is specifically U.S. focused. Formulations, again, all the R&D work we're doing is going to apply in our platform technologies that we can sell to Fortune 500 companies. So, that's progressing very well. And that's going to be a stay tuned in the medium-term for the next steps on our U.S. strategy. But we remain focused, now that we've delivered 10 provinces in Canada, on starting to focus on opening up the U.S. market.

[Scott Fortune:]

Okay. And then, real quick follow-up, can we expect revenues some time second half of next year from this offering in the U.S.?

[Sebastien St-Louis:]

I think let us demonstrate the revenue. I don't want to get into pseudo guidance. We're definitely focused on getting the supply chain robust and then we will start hitting the quarters from a results basis.

[Scott Fortune:]

Okay. That's it from me. Thanks.

[Operator:]

Thank you. The next question is from David Kideckel from Alta Corp Capital. Please go ahead, David.

[David Kideckel:]

Hi. Good morning. Thanks for taking my question. Just a couple of quick ones here. I'm wondering if you could provide any guidance with respect to your product mix. Specifically, going through some of your MD&A this morning with your key products, from UP, HEXO and the Original Stash, is there any trends you're seeing in the current marketplace that suggests what the relative percentages of customers' purchasing patterns are?

[Sebastien St-Louis:]

Yeah. David, I think you really have to look at what consumers want. That, we've got a pretty good idea. But that has to be measured against both store openings availability and also regulatory ability to go in front of consumers. So, with 2.0, I think most of the governments are still relatively cautious in their approach and more loosening of the regulations in the correct spots will allow us to get closer to what consumers are actually demanding and to close out black market. And to put numbers around it, I don't think it's changed overall. I think we should expect 50% of the market to be flower. I think the balance of your 2.0 products will be heavy vape, heavy beverage and then a mix of edibles and innovatives. So, roughly split, a third, a third, a third between vapes, beverage and then a variety of other things that include pills, patches, et cetera.

[David Kideckel:]

Okay, that's helpful. Thank you. And I had a question also as well, just based on the Ontario government's announcement that came out last week, Thursday night, I'm just wondering HEXO's position here. We see now, with the government opening up dispensaries throughout the province, but what are your thoughts regarding when it comes to the privatization or the wholesale model we see in Saskatchewan, for example, where the LPs, whether it's HEXO or any other, have direct conversations with, say, the dispensaries. What is HEXO's position on the Ontario government still having the so-called bottleneck in place, even though we saw a good news coming with the number of dispensers increasing, but still the government as the middle person in the middle, so to speak? So, if you can just give any color with respect to what your position on that is.

[Sebastien St-Louis:]

Yeah. I think the government is in an incredibly difficult position. Much like licensed producers today, we're in a transition piece after this first year of legalization where we've enacted a lot of changes. You've seen in HEXO, right? We've stripped out a ton of costs. We're putting our CapEx online that will bring more operational efficiency. We're lowering price. But you don't see it in the numbers for the next so many months. And I think, for the government, it's the same idea. They're making a good strategic shift to go into privatization, but there's still some meaningful improvements they need to do in the distribution channel. And I think that will take a number of months to surface.

[David Kideckel:]

Very helpful. Thanks for taking my questions.

[Operator:]

Thank you. The next question is from Brett Hundley from Seaport Global. Please go ahead, Brett.

[Brett Hundley:]

Hey. Good morning, guys. Steve, I just have two questions for you. My first is on profit timing in 2020. My expectation is that you guys would reach that profitability during the back half of the calendar year. well, I guess late summer. And my question is, do you think that we will see that profitability in one of your later quarters during the fiscal year? Or do you just anticipate reaching that profitable level at some point during the year?

[Steve Burwash:]

Yeah. It's what we've guided, is that we're going to reach positive EBITDA in calendar 2020. We haven't pinned it down any further than that.

[Brett Hundley:]

Okay. And then, separately, did you guys run an impairment test for Niagara during the quarter or will that be pushed to the end of the fiscal year?

[Steve Burwash:]

We ran an impairment test in Q1.

[Brett Hundley:]

Okay, great. Thanks so much.

[Operator:]

The next question is from John Chu of Desjardin. Please go ahead, John.

[John Chu:]

Hi. Good morning. So, Sebastien, you mentioned that you took out a lot of OpEx costs in the quarter, but you also said that there's tons of other efficiencies that you can get as well. Maybe some more details on that and how quickly do you see additional efficiencies being drawn under the system?

[Sebastien St-Louis:]

Yeah. So, the early focus, John, was trying to cut at the senior level, make the pyramid a little wider and less pointy at the top from an SG&A perspective. So, still you've seen a lot of severance, et cetera, built into those cuts. We haven't start to live that. The future cost savings I'm talking are really above the lines, so on our gross margin. So, as we start to online – I talked about Belleville, for example, you've got CAD 130 million of capital there that's really just going to drive efficiency. So, once that starts to hit, I think it hits really above the margin. There's some nuances still to do, some massaging to do below the line, so into our SG&A still. So, we're keeping an eye on that, but the majority of the costs below the line have been taken care of.

[John Chu:]

Okay. And then, just on the price adjustments and the sales return provisions that you've been taking, are we starting to see that settle down a bit or is there still more to go in the upcoming quarters?

[Sebastien St-Louis:]

I think the pricing we've taken have really good direction on it. I think we're working better than ever with the provinces in figuring out how to price things, so that it moves. We've moved away from channel-stuffing very well. So, now when we're loading the stores, it's what consumers want and they can start to purchase. There's still some work to do, especially outside of Québec, in actually getting those pricing adjustments in front of consumers. So, there's a nuance where pricing adjustments in stores – for example, in certain stores in Ontario and Alberta, even though we can cut or adjust our pricing, that pricing hasn't been presented to consumers because the stores don't have a way to live that pricing adjustment. So, that will take a bit of time to work itself through channel, but then we should be in pretty good shape. In terms of kind of future proofing against future price adjustments, I don't think it's safe to assume that they're all done. But with that in mind, we're closer than ever to good price. And good indicator is that we're below black market pricing. So, once that happens, you lose one of the key reasons to keep driving that below. So, I think you'll see pricing stabilize around where we are now.

[John Chu:]

Okay, thank you.

[Operator:]

. And the next question is a follow-up from Chris Carey of Bank of America. Please go ahead, Chris.

[Chris Carey:]

Hi. Thanks so much for taking my follow-up question. I just had a question on the partner strategy. I guess a couple of years ago, when legalization of cannabis in other markets wasn't so obvious, the strategy is kind of clear to me – develop competitive advantages, developed IP, et cetera. But as we get closer to, say, maybe U.S. legalizes federally in the next one to two years, other countries globally to-be-determined, but how has that conversation evolved? I guess, in a similar vein of a question I asked earlier, what's the pitch to a Fortune 500 company today for them to invest into HEXO versus, say, waiting another year or so until the legal landscape is a bit clear? Thank you.

[Sebastien St-Louis:]

Yeah. So, quality, supply chain and technology is really the pitch that we're making to these – to our future partners. So, from a quality perspective, one of the biggest mistakes we've seen in the U.S. markets have been emerging brands starting to source from multiple different producers and losing track of their quality. We've seen some of the top brands just vaporize because of that. HEXO can solve that for Fortune 500 companies. So, we're going in and we can provide steady supply. We can guarantee pesticide-free. And we can guarantee the same quality across various states. The next piece, on the supply chain, is chain of custody. In a world where there's gray market, black market white market and everything in between, HEXO is able to validate the supply chain for our Fortune 500 partners. And in an extremely complex regulatory environment, guarantee that our partners are operating legally. The third is one of technology. So, we're well ahead of the curve with our emulsion technologies and a few more platform-based technologies that we can include as part of the supply, so that we can make innovative products that taste better, work better and get in front of consumers. All these things lead to an advantage that's way beyond one year. I think that Fortune 500 companies, or any company, that choose to go without a cannabis partner will face extreme headwinds. And I think that will become clearer and clearer as our portfolio is with those partners, like Molson hit the market.

[Chris Carey:]

That's helpful. Thanks, Sebastien.

[Operator:]

Thank you. There are no further questions. You may proceed.

[Jennifer Smith:]

Great. Thank you very much for joining us today, everyone. We look forward to speaking to you. And should you have any other questions, please don't hesitate to reach out.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.