Canadian cannabis producer HEXO (HEXO.TO)(HEXO) surprised analysts on Thursday by reporting its first profitable quarter. The milestone comes as the Ottawa-based company’s CEO predicts the start of the “most competitive phase” the industry has seen since Canada legalized pot.
Sebastien St-Louis told analysts on a post-earnings conference call that HEXO is "closing in on" a number two rank by revenue in Canada’s recreational cannabis market.
HEXO said it's currently the top four company in Canada’s non-medical market by net sales, and continues to dominate pot infused beverages through its joint venture with Molson Coors Canada (TPX-B.TO) called Truss. The company expects its acquisition of Vancouver-based producer Zenabis (ZENA.TO) will bump it up to number three, after the deal’s expected closing in its fourth quarter.
St-Louis predicts many of HEXO’s rivals will struggle as competition heats up.
“The reality is that most licenced producers are not up to the task. And you will hear more and more refrain of difficulty,” he said on the call.
In the three months ended Jan. 30, 2020, HEXO saw its revenue climb to $32.8 million, up 12 per cent from $29.4 in the prior period. The company reported a net loss of $20.8 million in the three months ended Jan. 30, 2020. That compares with a loss of $298.2 million in the same period last year, when the company took large one-time charges related to its goodwill and intangible assets.
HEXO delivered on its long-stated goal of turning a profit, reporting a slim $202,000 in adjusted earnings before interest, taxes, depreciation, and amortization. Analysts polled by Bloomberg expected $31.8 million in sales and $132.8 in negative adjusted EBITDA.
HEXO IS IN TALKS FOR MORE M&A DEALS
Last month, Hexo announced plans to buy Zenabis in a $235 million all-stock deal. St-Louis said he continues to participate in M&A discussions with other cannabis companies.
"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 said on the call.
St-Louis is prioritizing opportunities that expand HEXO’s reach, calling Canada-only partnerships “meaningless.” HEXO’s Truss beverage arm is active in the United States, selling CBD-infused drinks in Colorado grocery stores. The plan is to introduce THC-based beverages if the U.S. reforms its federal cannabis laws.
“We continue to have lots of ongoing discussions and negotiations with world class CPG companies, and we're looking forward to talking more about that in the following months,” St-Louis said.
HEXO aims to produce edible cannabis products at its large facility in Bellville, Ont. under established non-cannabis consumer brands.
"With Molson, originally the plan was to launch an infused Coors type of beverage. We were planning on leveraging the existing Molson brands, but we were not able to do that because of a change in regulations along the way," St-Louis said. "We don't have those restrictions on edibles."
HEXO claims pot drink dominance
HEXO said it remains the leading cannabis beverage brand in Canada, and plans to introduce its American CBD drinks beyond Colorado in five additional states.
The company said its drinks revenue increased 11 percent in the second quarter, versus the previous period. HEXO said sales were slower in January and February, following a stronger holiday season.
Ottawa’s limits on how many drinks consumers can buy in a single purchase has been a persistent complaint among licenced producers.
St. Louis said he does not expect regulatory change to help the cannabis beverage category in the near term. He said Health Canada is most likely to introduce “a larger regulatory package update that will include a number of changes over the next 12 months.”
HEXO’s Toronto-listed shares climbed 0.83 per cent to $9.74 at 1:49 p.m. ET on Thursday.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.