Hexo CEO: Canada’s cannabis sector entering ‘most competitive phase’

Cannabis producer Hexo Corp. reported a net loss of 21 million Canadian dollars ($17 million) for its second quarter ended Jan. 31 as its chief executive said the Canadian industry was entering its “most competitive phase” yet.

Ottawa, Ontario-based Hexo saw improved sales of adult-use cannabis and beverages compared to the quarter ended Oct. 31, 2020.

Adult-use revenue, excluding beverages, was CA$39.4 million in the second quarter, up 10% quarter-over-quarter.

Beverage sales grew to CA$3.6 million in the three-month period, up from CA$3.3 million in the first quarter.

Revenue from outside Canada almost doubled to CA$2 million.

Hexo reported its first positive adjusted EBITDA, a measure of profitability, of CA$202,000.

In a conference call with analysts to discuss the quarter, CEO Sebastien St. Louis said the company aims to be counted among the top two producers in the country in terms of market share.

He warned the industry is increasingly more competitive.

“The industry is entering the most competitive phase that it’s faced since its inception. It is no longer OK for a licensed producer to create a product, throw it on the shelf, and move it,” St. Louis said.

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

The CEO said the emergence of craft cannabis cultivators is starting to put pressure larger producers.

“The main headwind (in Quebec) has been the introduction of a number of craft growers,” he told analysts.

“A number of small growers have introduced high-THC offerings. That craft grow has taken a portion of share overall.”

St. Louis said Hexo’s ambition to be among the top producers in Canada has impacted its ability to compete with craft cultivators.

“This is where the acquisition of Zenabis (factors in),” he said, because it will allow Hexo to move into the premium category. Hexo entered a definitive agreement in February to buy Zenabis Global for CA$235 million.

St. Louis does not expect regulatory change in the near term to help the cannabis beverage category.

“We have not had success on a regulatory basis of affecting change (to regulations),” he said.

“We have had quite a bit of success as an industry to get Health Canada to listen, but understandably they have their hands full with the pandemic right now, so cannabis reform has not been a priority.”

The CEO expects Health Canada will roll out “a larger regulatory package update that will include a number of changes over the next 12 months.”

In a note to clients, Owen Bennett, analyst for New York-based Jefferies, highlighted Hexo’s goal to expand CBD beverages into another five states.

“Given recent political developments in the U.S., it is arguably this market that will be the main driver of sentiment and multiples in the next couple of years,” he wrote. “If a Canadian LP can’t establish a strong foothold, its valuation will likely see pressure.

“To this, should the U.S. market open up near term, we worry about Hexo’s ability to compete due to its cash situation.”

Hexo had CA$129 million in cash at the end of the quarter.

The company’s shares trade as HEXO on the New York Stock Exchange and Toronto Stock Exchange.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at matt.lamers@mjbizdaily.com.