quinlash wrote: I have been giving some thought to the news today that the HEXO Corp / Molson JV (TrussCBDusa) will be ended (or paused) as of Dec 31st vs the news out that the Tyson 2.0 Products are finally being sold within Canada. I have also been considering the value of the Entourage Supply Agreement now in place with HEXO picking up the production of their products.
Considering the mix of news I am seeing recent developments as a NET POSITIVE for HEXO Corp and here is why…
In Terms of TrussCBDusa Shutting Down
The current status of US Legalization is an unknown however the cost to operate TrussUSAcba is a known and that known is not a positive cash return at this time. To keep the operation going would be an on-going cost and one which has no definitive end in sight. I certainly look forward to a follow up news release indicating that the JV is coming back online at some point in 2023 (I hope) however for now I am ok with it being placed back on the shelf while we await progress on Cannabis Legalization state-side. The cost-savings are more important currently vs having products online and ready to go nation-wide for a date that is unknown.
In Terms of Tyson 2.0 Products + Entourage Supply Agreement
Both deals can be said to be part of the “Powered by HEXO” business model where HEXO Corp produces products for other companies for a service fee and for some portion of the profits. We can safely say that HEXO Corp would not entertain any deal of this sort without it being a win (profitable) for HEXO Corp so both can be expected to be net positive for the business. HEXO Corp has been reporting margins in the range of 30 to 50% depending on the product being noted however I am willing to speculate that the “Powered by HEXO” deals are either coming in at the higher end of the range or even higher.
Why Can Margins of 50% or Higher Be Seen?
As I noted a few times now, whenever looking at what is possible it is best to look at the situation form the point of view of “How would I do this if I were in charge?”. With this in mind I would be pushing for over a 50% margin on these deals. How would I get better than 50%... allow me to explain…
Here is how I envision HEXO Corp discussing the service offering and how they would justify a higher rate of return than 50%. The sales pitch HEXO Corp should be presenting to potential Clients would look something like this:
Sales Pitch / Slide Deck / Assorted Marketing Materials
HEXO Corp can offer you the following benefits through our “Powered by HEXO” Service offering
- Cost-Savings: Your company will no longer need to own, maintain or operate growing facilities. Savings to your business come from avoiding high levels of initial capital expenditures (plus cost to carry), annual property tax, cost to operate (heat / water / regular maintenance) as well as direct and indirect staffing requirements and cost (salary / benefits and support staff). The monitoring and compliance with changing government policy is also taken over by HEXO Corp.
- Quality of Product: Quality of the product will be at the best level of quality possible through proven product development seasoned over 10 years of Research and Development. Access to HEXO Patents provide unique and proven approaches to incorporating Cannabis components (CBD + THC) into both beverage and edible products. Access to this technology is only available to those who have partnered with HEXO Corp.
- Award Winning Staff: Access to award-winning staff members with years of experience in growing consistent and high-quality cannabis. No need to source out, or train up, your own personnel
- Time to Market: Companies transitioning to HEXO Corp for their growing and production needs will see little to no impact to their product availability due to seamless transition plans between production facilities. New clients, with new to market products, will avoid virtually 100% of the time required to initiate, develop, and deliver new products to market as they will be leveraging HEXO’s existing infrastructure.
- Access to Market: By partnering with HEXO Corp your company will have immediate access to existing sales channels across Canada. No delay in accessing the market or delay in establishing your own agreements. Once the US Progresses on Cannabis Legalization we will be able to offer Stateside Production options through our Fort Collins facility which is also zoned for THC products.
Cost Modeling
The above sales pitch shows the value to the Client and notes the cost avoidance opportunities they would have by partnering with HEXO Corp through the “Powered by HEXO” service offering. This would certainly be of interest to any company currently working within the sector or one considering a venture into it. The savings however have value, this value has a price tag and should not (would not) be overlooked by HEXO Corp.
By off-loading the overhead cost of the 3rd party company (currently both Tyson and Entourage) the 3rd party company would be realizing much higher profits with much less risk exposure than if they were to go forward without HEXO Corp. Without getting into the details of how these deals could be priced out I see the margin on the service offering being capable of generating more than 50% as the cost savings portion (plus cost and risk avoidance benefits) should be shared at no less than 50/50 between the two entities while HEXO Corp retaining a portion of the sales margin on each unit sold.
In Summary
Recent news from HEXO Corp reports 2 opportunities we can say will produce cash positive benefits to the company while it was also reported that 1 existing (non-cash positive JV) will be paused. The 2 cash positive deals have the possibility of producing higher numbers / margins than we have seen from HEXO Corp in any previous QTR report while at the same time the expense side will be further managed to the positive through cost-avoidance.
Therefore -> NET Positive News
jmho/glta
Q
- Long on HEXO Corp.