HEXO Corp. Price & Performance (HEXO)

Thank you. Good morning, everyone, and thanks for joining our call. As you know, this is our last earnings call as a public company. Yesterday, shareholders voted an overwhelming majority to approve the arrangement agreement with Tilray Brands with over 90% voting in favor. With that in mind, before we dive into our results for the quarter, I wanted to start to give a quick look back over the last 12 months. We will then detail a few of the developments from the quarter and as well walk through HEXO's financial results. First, HEXO. Over a little year ago, Julius and I assumed the CFO and CEO roles at HEXO. At that time, HEXO faced significant challenges, including debt leverage, liquidity constraints, excessive inventory, excessive overhead costs, acquisitions were not integrated into the parent organization. In short, the company was grappling with a host of financials and operational issues, And I think it's fair to say we're on the verge of insolvency. However, over the last 12 months, the organization has made remarkable progress as we have executed our strategic priorities to strengthen the balance sheet, resize the business and position the company for long term growth and profitability, whilst also positioning HEXO to deliver the preferred cannabis experience to all of our cannabis consumers.

Outside of the financial progress, HEXO has also made advancements on the product side to optimize its portfolio. We refocused our portfolio to leverage our strength in premium cultivation, and we divested businesses that did not offer HEXO a real competitive advantage. Specifically, we launched a number of new products, including our new proprietary strains. We called it the TNT series, which provided it which allowed us to pivot from generic strains that were more like a commodity to more of these specialty ingredients. We capitalized on high growth potential in the pre roll segment, and we expanded our capacity in our popular straightedge pre rolls, including accelerating the Redi Can Readys product to include some of the TNT series expanding our original Stash brands. This expansion resulted in a fourfold increase in the reticam pre roll capacity it enables us now to meet the growing consumer demand across Canada. Taken together, these efforts not only resulted in a higher quality cannabis experience for our customers. It also drove our margins higher. Our margins are now about 10% higher than they were a year ago. Juresh will share a bit of the financial progress we've made over this period. Thank you, Charlie.

Starting with our balance sheet, over the past 12 months, we have paid off more than $40,000,000 in legacy debt and have refinanced over $235,000,000 in high cost debt, which combined has reduced our annual earnings expense by $16,000,000 we also drove significant impactful improvement in our cost structure by pursuing an aggressive cost cutting strategy, which has reduced our SG and A footprint by almost $70,000,000 on an annualized basis. Next, we delivered improvements in our working capital management as we have reduced our working capital by $135,000,000 versus a year ago. Inventory alone was down over 100,000,000 our SMOP processes will redefine an installment of its philosophy, every cannabis plant is not a good plant. In short, we do not grow, just to grow. The outcome of the process and cultural changes have resulted in our cash conversion cycle improving by over 100 days, which is truly remarkable and reflective of the efforts of the entire finance and operation teams. Given these successes, Axle has delivered positive cash flow from operations for 2 consecutive quarters. Charlie, back to you. Thanks, Julius. Now turning our developments into the Q3. 1st and foremost, we entered into a definitive agreement with the Tilray Brands, whereby Tilray will acquire all outstanding shares of HEXO.

This builds on the strategic partnership we established last year and reflects the significant progress we've been able to make both financially and operational since that time. Due to transaction, we incurred a $74,000,000 CGG impairment charge to reflect Tilray's purchase price, combined with an acquisition fee of $20,000,000 resulting in a net income loss of $115,000,000 for the period. In addition to the Tilray announcement, we also had a number of notable operational and product developments even as we continue to face a challenging competitive landscape an ever increasing uncertainty in the macro environment. As we shared last quarter, our emphasis on bulk sales has continued to pay off. With bulk sales more than doubling from 2nd quarter, we will effectively leverage the Redican master growers program as a point of differentiation for HEXO. As you may recall, this has been part of our strategy to expand our B2B sales. Next, we saw strong momentum in our in house developed TNT strains, which now represent over 37.5% of all flower sales. This is an incredible growth since the introduction of the TNT strains to the market just about 4 months ago at the end of Q1. And more importantly, we are seeing this momentum continue into Q4 as our TNT strains are now being launched across Canada.

Next we'll be launching a new hemp paper rolled ready product. This will be launched later this fall and it will be an amazing product. All together, this validates our focus on growing the best strains to deliver the best consumer experience we want for our customers. Now I'll turn it back to Julius, who will go through the financial results for the quarter. Thanks, Charlie. Looking at our Q3 financial results. Expense controls continue to remain a top priority, and I am pleased to share that our Sheena spending improved by $2,500,000 4% compared to the 2nd quarter after adjusting for the annual health candidate fee. This marks our 4th consecutive quarter of sequential improvement an SG and A segment. This demonstrates the success of our Inside Our 4 Walls program. In terms of revenue, net sales decreased 11% quarter over quarter to $21,600,000 This decline is attributable to lower development sales in Alberta, reduced amphisip in Saskatchewan and Manitoba, supply chain I'm sorry, short term supply issues and illicit products in Quebec. Relative Q3 'twenty two, our sales are down 53% due to increased competition, Steve rationalization of lower margin products, soft performance in key markets, Ontario, Alberta, Quebec and the removal of product portfolios for divested benefits business, along with TrustBeverage.

Our gross margin increased 10% versus the prior quarter to 43%, confirming that our strategy to focus on our most profitable brands is delivering results. Moving on to adjusted EBITDA. Excluding the $2,500,000 in annual Health Canada fees, we recognized an adjusted EBITDA loss of $1,400,000 this represents an improvement of $13,200,000 versus a year ago quarter. Finally, looking at cash generation. Cash flow is always paramount. And as I mentioned earlier, we were successful in achieving positive cash flow from operations for the 2nd consecutive quarter, we delivered a $78,000,000 improvement in operating cash flows versus Q3 'twenty three. In Q3 'twenty six, reflecting an aggressive cost cutting strategy as well as balance sheet improvements we have achieved over the past year. Before I pass it back to Charlie for his closing remarks, I would like to extend my deepest thanks to the HEXO team and the Board of Directors for their ongoing commitment and efforts to make HEXO successful. Great. Thanks, Bill. Looking ahead, we're very excited about closing the transaction with Tilray Brands, which is on track to be completed by the end of the month. PRA has been an excellent partner over the last year. And as a combined company, we will be better positioned to drive profitable growth, capitalize on this complementary portfolios of an industry leading with these high growth brands.

We are confident that we are leaving the company in good hands with Irwin Simon as HEXO becomes a part of King Tilray. Before we open the floor to questions, I'd like to thank all of our employees, our partners, our customers for their continued commitment to our business and to allow HEXO to be the preferred cannabis the supplier. It's been an honor to work with you over the past year. I look forward to seeing everything the future holds as a stronger company combined with Tilray. With that, Operator, we'll take your questions.

We will now begin the question and answer session. To withdraw your question. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Our first question is from Matt Bottomley with Canaccord Genuity. Please go ahead.

Good morning, everyone. Thanks for taking the questions and congrats on the vote yesterday. Just wanted to get a little more color. I know in your remarks you had mentioned some of the initiatives you've been doing with various products and in various markets. But just given that there's been double digit sequential declines for the last couple of quarters in your adult use. Are we at sort of a trough here in what you're anticipating going into the closing and also just on the wholesale side, you sort of increased that by 2x. Just wondering if that was, opportunistic or if there's an a higher level of wholesale contribution going into the closing with Tilray.

Thanks for the question. It was really good. On the B2B side, That's an area of the wholesale, if you want to call. That was an area that Julius had identified when we first came together because of some of the benefits that you could have from the standpoint of a little faster to cash on those sales combined with when we grow a strain, one of the areas you do is you might end up growing 1.2 tons, but you only end up selling maybe 900. You have that extra just in case there's any issues during the growing process. And so those orphaned and stranded strains, they became excellent opportunities for us to put out in the market. Now let me be really clear. None of the TNT strains, which are proprietary, none of those strains we've sold into the BNB market. Those are held within the HEXO brand Solvay. But what you're seeing with those B2B brands, it was a strategic area to leverage this reticcan master growers program, which gives us some of the lowest cost, if not the lowest cost, per gram in the market. It also allows us to have some of the highest level of THCs and terpenes into the market, which is really what the consumers are looking for and the bud tenders are looking at the point to differentiate in the retail brands.

Now going back on the retail sales, one of the areas we're seeing is when we start putting the promotional value and the consumer comes in and they buy the new TNT strains. What we're seeing is some of our older strains are now starting to kind of fade out or age out. And so the repeat sales on the older brands are starting to slow down, while the new strains are starting to come on board. The new strains are only both in Ontario and BC through the end of this quarter. That changes this quarter in Q4 and actually starts to go national. And then when you add this amazing marketing and branding strength that's going to come on board with Tilray, you're going to see a whole new level of engagement and extension into the market. So I see these brands really starting to grow. I also see an amazing area when you take a look at the bulk and combined with this incredible growth. George, anything you would like to add? Yes. The P and T series. And if you've kind of listened to us in the past, we started out a little bit of Q1 growth in Q2 and then now building momentum Q3.

And as the grow comes on, you just see that kind of pushing out the door. And so we started off with animal runs. Now we got Violet Fog, Atomic Sour Haze and Go Gelato that are all gaining significant traction. So we're really pleased with how that is being accepted by the marketplace.

Showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Charlie Bowman for any closing remarks.

Thank you. Again, everyone, I want to thank you. It was a tough year, but at the same time, it was a very rewarding year. And I want to thank everybody again at the HEXO organization, all of our customers. I want to thank the Tilray team. Erwin has been great from the standpoint of working together and putting this the businesses and really the synergies that's going to come through. I really believe this is going to be an incredible company as it goes forward, and I can't wait to see the progress that's going to be made. So thanks, everyone. Have an outstanding day and have a great Thursday. Bye bye, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.