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Monday, Jul 4, 2022
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.

Industry update

Hexo touts Q2 earnings, eyes M&A

Once its deal to buy Zenabis closes, Hexo says it will be close to top-2 in Canadian recreational weed sales

For most companies in the highly competitive Canadian cannabis industry, achieving any metric of profitability — even a modest sum — is seen as a major feat.

On Thursday, Hexo Corp. (TSX: HEXO) (NYSE: HEXO) said it delivered on a long-stated goal of turning a profit in the second quarter ended Jan. 31. The firm reported a slim $202,000 in adjusted earnings before interest, taxes, depreciation, and amortization.

“I am so proud of the entire Hexo team for the role they played in helping us achieve positive adjusted EBITDA this quarter, along with our seventh consecutive quarter of adjusted EBITDA improvement,” CEO Sebastien St-Louis said in a statement.

However, the Ottawa-based producer posted a net loss of $20.8 million in the fourth quarter, up 395 per cent from $4.2 million in the prior three-month period.

With Health Canada issuing 623 production and processing licences since 2018, hundreds of companies have struggled to generate enough revenues to cover costs amid slow growth in the country’s recreational weed market.

It’s been the opposite in the much larger and faster evolving U.S. cannabis sector, where operators have been reporting ballooning sales and profits since late 2019.

For Hexo, it’s about pushing to the front of the pack in Canada.

The firm reported net revenue of $32.8 million, up 12 per cent from $29.4 in the previous quarter.

Hexo says its joint venture Truss has a 43% market share lead in the Canadian cannabis beverage category. Press photo

Hexo eyes top-2 spot in Canadian recreational weed sales

But last month, Hexo bought rival producer Zenabis Global Inc. (TSX: ZENA), in a $235 million all-stock deal the company says will boost its domestic business.

CEO St-Louis says the two companies combined will create a solid top-three contender in Canadian recreational sales and that they’re already closing in on the top-two position.

Aphria Inc. (TSX: APHA) (Nasdaq: APHA) led all Canadian firms with adult-use cannabis net revenue of $67.9 million in its latest quarter — while Canopy Growth Corp. (TSX: WEED) (Nasdaq: CGC) filed $63.3 million.

On a conference call with analysts, St-Louis touted Zenabis’ brands and cultivation facility in Atholville, New Brunswick that now has European Union Good Manufacturing Practice certification.

Hexo will use the site to support its own brands such as Up and Original Stash Reserve, according to the CEO.

The company is also looking to expand its Truss cannabis drink brand, which it says leads the Canadian adult-use sector with 43-per-cent market share.

Zenabis will also give Hexo a foothold into the European cannabis market, according to the firm.

However, analysts have questioned that claim, citing how Zenabis’s European partners have yet to sell a gram.

Read more: Is Hexo blowing smoke on Euro entry via Zenabis deal?

In the U.S., Hexo said it’s looking at five state-legal cannabis markets to expand its CBD drinks into. In January, the firm and its beverage partner Molson Coors entered the U.S. CBD market for the first time by launching infused drinks in Colorado.

St-Louis hinted that Hexo might not be finished with looking for more merger and acquisition deals.

“It’s a little-known secret in the industry, but just about every CEO rings me every once in a while to say, ‘Hey, what are you thinking on M&A? Can we join forces with HEXO?’ Because they see the fundamentals, and there’s a disconnect between the fundamentals and our value of the stock at the moment,” he told analysts on the call.

Looking to the balance sheet, the firm’s cash position declined to $129.4 million in the fourth quarter, from $149.8 million.

Hexo shares fell 6.3 per cent Thursday to $9.05 on the Toronto Stock Exchange.

Top image via Hexo


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