“Five to 10 years out, you’re going to see three to five billion-dollar companies controlling 80 per cent of the market. Our intention is to be one of them. We’re developing relationships that will piggyback our technology and brands onto existing global distribution networks. We recently announced our plans to capture the European cannabis market and signed an agreement to create a Eurozone processing, production and distribution centre in Greece. This centre will allow us to bring our infrastructure, know-how, and brands powered by HEXO to Europe. We will be announcing our plans for Latin America shortly and are looking forward to continuing taking the powered by HEXO experience international.”
St-Louis has a big vision for the future of cannabis. Indeed, any investors eavesdropping on the call may wonder if this CEO has
too much of a focus on the future. The rebuttal to such thinking is simple: HEXO Corp has executed the single-largest cannabis supply deal in the history of the Canadian cannabis industry. More on that later.
This isn’t the first look for the Stockhouse audience at this rising force within the cannabis industry. We originally introduced HEXO Corp in a full-length feature article from
November 20, 2017. At that time, HEXO was still known by its previous name, The Hydropothecary Corporation. This reflected the Company’s roots in the medicinal side of the cannabis industry. (Hydropothecary still exists as the company’s medical brand, with the HEXO brand as its adult-use product.)
That piece presented readers with the following snapshot:
Management strongly believes that Hydropothecary has been flying under the radar of cannabis investors to date, in comparison to some of its peers…[This is]
a value-packed market cap of (as of this writing) $220 million.
The title of the previous article was
Quebec cannabis company joining industry leaders. This referenced the internal conviction of management that Hydropothecary already merited consideration as a Canadian cannabis industry leader. Now, there is no longer any doubt.
A “value-packed” market cap of $220 million has become a much more robust $1.6 billion. Those investors who recognized that previous value opportunity have done very well for themselves. CEO St-Louis is obviously pleased with this stock performance, but he maintains the strong belief that the market has only begun to reprice this Company versus its peers.
HEXO Corp is one of a small minority of Canadian cannabis companies to have earned a full TSX and a NYSE – American listing. St-Louis attributes this to primarily two factors: strong financial compliance and a rigorous internal control system with respect to operations. This supports the company’s global growth play by increasing the breadth and depth of American and international shareholders. To date, only a handful of their peers have been successful in a cross-border listing on the US exchanges.
In November 2017 (when Stockhouse first covered the Company), HEXO had already announced the expansion of its cultivation capacity at its Gatineau, Quebec facility from its initial 50,000 square feet to a much greater level of 300,000 square feet, a six-fold expansion. It increased in cultivation capacity up to 25,000 kilograms per year.
In November 2017, CEO St-Louis committed to expanding to a Canada-wide distribution business model as HEXO moves beyond its Quebec power base. Today, HEXO has opened up supply channels to the important Ontario market. Expanding its footprint in Western Canada has been greatly facilitated by its $10 million strategic investment in Fire & Flower Inc. on
July 26, 2018. On October 31, 2018, HEXO increased its R&D capacity with the acquisition of its interest in a large facility in Belleville, Ontario to establish a Centre of Excellence for cannabis-based products.
Then there is cannabis distribution in Quebec. As a Quebec-based company (and with relatively few Quebec-based competitors), management was telling anyone who was listening at the time that the Company expected to dominate cannabis distribution in Quebec.
On
April 11, 2018, the Company announced a 5-year supply agreement with Société québécoise du cannabis (SQDC). This is Quebec’s provincial distribution branch for recreational cannabis.
The agreement is nothing less than
he single largest supply agreement in the history of the Canadian cannabis industry. It represents total revenues in excess of $1
billion over the term of the agreement. In the first year of this deal, HEXO is guaranteed a 30 per cent market share, in Canada’s second largest cannabis market. Apart from the sheer scale of this deal, the margins the Company stands to reap are certainly putting a smile on the faces of shareholders.
Outside of its deal with the SQDC, the Company is averaging a very robust $9.12 per gram for medical and $5.45 for adult-use. Meanwhile, HEXO Corp has increased its cultivation space from 310,000 square feet to 1.3 million square feet, for a total expected production capacity of 108,000 kilograms per year at full production.
HEXO’s cannabis operations go well beyond cultivation. Product innovation and introducing value-added products to boost margins are also important operational priorities.
If anything the Company has done to date could eclipse the importance of its deal with the SQDC, it
might be HEXO’s announcement on
August 1, 2018. On that day, HEXO Corp and Molson Coors Canada (Canadian business unit of Molson Coors Brewing Company) announced a definitive agreement for the creation of a joint venture that specifically targets the cannabis-infused beverage market.
This new initiative was a major impetus in the decision to change the corporate name from The Hydropothecary Corporation (with its medicinal cannabis focus) to HEXO Corp, within which is the flagship adult-use brand, HEXO. Future branding will now have a stronger focus on the recreational side of the cannabis industry.
CEO St-Louis frames this
new chapter in the HEXO success story for investors.
“Our partnership with Molson Coors Canada is HEXO’s first major move to support our hub and spoke business model which sees us partner with Fortune 500 companies in several advanced product categories to create cannabis-based beverages, cosmetics, food, and vapes. The strategy allows HEXO to pioneer a vertically-integrated global distribution platform. As one of the first-movers in this burgeoning international industry, we have a huge opportunity to capture a market which will eventually consist of 70 percent of advanced cannabis products, 30 per cent of which will consist of cannabis infused products alone. Our partnership with Molson Coors puts us in the perfect position to capture that market segment.”
If St-Louis is correct here – and many industry executives and media analysts share his outlook – then this positions HEXO Corp as an industry leader in what could become the single largest segment of the entire cannabis market. It is in a very elite group of companies that already have a multinational beverage company as a partner. In HEXO’s case, it is a Fortune 500 partner.
The precise terms of the JV make Molson Coors Canada the majority partner (57.5%) with HEXO retaining a 42.5% share in a non-dilutive deal. For some cannabis companies, being a minority partner in such a venture would be problematic. HEXO Corp welcomes this arrangement.
In what is rapidly becoming a global cannabis marketplace (where HEXO is projecting exponential growth), the Company sees a need to forge many such partnerships – with global leaders in several different sectors. As a simple matter of capital logistics, it wouldn’t be possible for HEXO to finance participation in all these ventures as majority partner.
Beyond this, CEO St-Louis has a passionate belief in the value of creating partnerships to
leverage the expertise of world-class partners such as Molson Coors Canada. HEXO wants its shareholders to derive the full benefits of this partnership.
By no means, however, is HEXO Corp a financial lightweight. As of the most recent financial quarter reported October 31, 2018, the Company held more than $171 million in cash and short-term investments, and a future total expected cash outlay greater than $230 million for warrants and stock options.
Furthermore, the company recently filed a draft shelf prospectus supplement to make a public offering of $50 million as well. In addition to this, a credit facility of $65 million of secured debt financing was put in place to fund expansion plans and perform leasehold improvements as well as provide working capital.
Then there is international expansion. HEXO’s corporate philosophy is to be methodical in its strategy and decisive in execution. The Company is targeting Europe in 2019 and Latin America in the future. And (pending regulatory approval) U.S. expansion is expected in the near future.
HEXO Corp won’t be moving into these markets as some junior cannabis company with limited resources. It now has the necessary mass to penetrate these markets with the same success and efficiency that it has demonstrated in the Canadian cannabis market. Their ability to execute time and again on their commitments and their strategies is what sets them apart from their peers.
A world-class cannabis company demands a world-class team. As it has been expanding operations, the Company has been continuously adding Board and management depth in all facets of its business (see Appendix below).
With its power base in Quebec and strong track record for corporate execution, HEXO Corp has already built itself into a cannabis industry leader. But for this forward-thinking company, this is only the first chapter. As HEXO pursues its domestic target of becoming a Top-2 licensed producer in Canada, it is simultaneously planning its
global cannabis strategy – in Chapter II.