Hexo ‘confident’ about survival in pot sector despite $56M net loss
Inventory writedown of $17M attributed to operations’ significant scale, expenses
Shares of Hexo Corp. tumbled Tuesday after the licensed cannabis producer reported a net loss of $56 million, including an inventory writedown of $17 million for the fiscal quarter ended July 31.
The fourth-quarter results, announced late Monday, came just days after Hexo laid off close to 20 per cent of its workforce, as part of cost-cutting measures to bring the company closer to profitability.
Hexo attributed its inventory loss to “price compression” and overall net loss to the “significant” scale of its operations and increased research and development expenses.
The company posted net revenue of $15.4 million from the sale of 4,009 kilograms of cannabis for the quarter but its average selling price on the recreational market was just $3.51 per gram.
Hexo had sold 2,759 kilograms of cannabis at $4.30 per gram in its previous quarter.
“The challenge right now is not if cannabis will be a huge industry, we know that (it will). What is less clear is which companies will survive …. I’m more confident than ever as we see the number of licensed producers dwindle drastically, we are almost certain to be one of those survivors,” said Hexo’s chief executive officer Sebastian St-louis on a Tuesday morning conference call with analysts and investors.
While Hexo’s revenue increased by 19 per cent from the previous quarter, expenses soared by more than 90 per cent and gross margins declined to 33 per cent, significantly below most analysts’ expectations.
The Gatineau, Que.-based company had signed a five-year supply agreement last year with the SQDC — Quebec’s provincial cannabis retailer — to provide it 20,000 kilograms of cannabis for the first year of legalization.
But St-louis confirmed that due largely to the slow retail rollout in Quebec, Hexo had only sold the province half of that amount.
“We don’t think it would be responsible to demand (that Quebec buy) 20 tonnes,” St-louis said, in response to an analyst question on the licensed producer’s low sell-through rate. St-louis added that despite retail headwinds, his company has managed to maintain a 33-per-cent market share in Quebec throughout the year, down from 60 per cent when recreational cannabis first became legal a year ago.
“You have to remember that we have not even penetrated the Ontario market fully yet.
It was just a few weeks ago that our flower skews were fully listed in every Ontario store,” St-louis said.
Last week, the company laid off 200 employees and suspended cultivation at its Niagara facility (acquired from Newstrike Brands) and 200,000 square feet of its Gatineau facility. In a statement, the company said that the suspensions were temporary, but additional cultivation space would not be required until more retail stores emerge in Quebec and Ontario.
Hexo had slashed its revenue guidance by more than 40 per cent earlier this month and withdrew its fiscal 2020 guidance of $400 million in annual cannabis sales, as it struggled to compete in the cannabis market outside its home province of Quebec.
Bank of Montreal cannabis analyst Tamy Chen called the inventory writedown an “unsettling development” considering the amount of unfinished inventory held by licensed producers across the country. Health Canada data puts that number at roughly 340,000 kilograms.
Royal Bank of Canada analyst Douglas Miehm also appeared unimpressed with Hexo’s results, specifically expressing concern over the pricing and product return dynamics with the company’s wholesaler.
“We look to understand whether pricing and resultant margins could trend lower. We also expect investors to focus on internal controls and governance given the abrupt departures of three executives in less than a month,” Miehm wrote in a Tuesday morning note.
Hexo’s chief financial officer Michael Monahan abruptly resigned in early October.
The company’s recent layoffs also included the departures of Arno Groll its chief manufacturing officer and chief marketing officer Nick Davies.
Hexo shares fell more than six per cent early in the day; they closed at $2.94, down three per cent.
The challenge right now is not if cannabis will be a huge industry, we know that (it will). What is less clear is which companies will survive. I’m more confident than ever ... we are almost certain to be one of those survivors.