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Disappointed with its latest quarterly results? The cannabis producer's CEO identified plenty of good news that should be on the way.
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HEXO (HEXO +0.00%) announced its fiscal 2019 third-quarter results Wednesday evening. Investors didn't like what they saw, with the Canadian cannabis producer's shares dropping more than 8% on Thursday. Although revenue skyrocketed versus the prior-year period, sales slipped somewhat from the previous quarter due to capacity constraints.
But while the financial results didn't excite investors, several statements made by CEO Sebastien St.-Louis in the Q3 conference call should. Here are 10 things you can expect for HEXO over the next couple of years, according to St.-Louis.
Image source: Getty Images.
HEXO currently dominates in the province of Quebec thanks to the company's tremendous supply agreement signed last year. But Quebec recently approved six additional producers to sell adult-use recreational marijuana in the province. St.-Louis knows that competition will intensify, but he thinks the company is in a good position to defend its 30% market share.
St.-Louis confidently stated, "We're delivering a double this quarter." He was referring to doubling net revenue in the fiscal fourth quarter, which ends on July 31, compared with the total reported in Q3. He said that the key to achieving this increase was expanded packaging infrastructure that's now in place.
The company announced on Thursday that its affiliate, HEXO MED, received a medical cannabis installation license in Greece. St.-Louis said in the conference call that this license will enable HEXO to step up its presence in the European medical cannabis market. He singled out the U.K. and France as key targets.
St.-Louis said the company plans to launch cannabis-infused beverages, gummies, and vapes later this year when the market for these products opens for business. He thinks that beverages and vapes could be especially significant opportunities, and is especially enthusiastic about the cannabis-infused beverages that its joint venture with Molson Coors Brewing (TAP +0.00%), Truss, has developed.
Speaking of Molson Coors, HEXO generated plenty of excitement last year when the big brewer selected it as its cannabis partner. But that agreement was only for the Canadian market. St.-Louis hinted that the two "will be doing a joint release at some point in the future" to spell out how their relationship will expand outside of Canada.
The company isn't planning to limit its partnerships with just one major company from outside the cannabis industry. St.-Louis stated that it is talking with over 60 Fortune 500 companies and hopes to add its second "spoke partner" from these large organizations next year, with a third coming perhaps in late 2020.
He mentioned that a total capital deployment of $6 billion Canadian ($4.51 billion) is required for HEXO to become a top three global player. But he said that the company won't have to raise capital for the full amount because he thinks "there's significant [mergers and acquisitions] opportunity in the U.S." In other words, it looks like it is fully expecting a significant equity investment from one of its Fortune 500 partners in the not-too-distant future. And he hinted that this equity investment could be at least CA$2.4 billion.
HEXO hasn't provided official guidance for when it will become profitable. But St.-Louis let the cat out of the bag during the company's conference call, saying, "I am happy to share with you that 2020, we're going to make some money." Later, he said that he thinks the company will "absolutely" be able to be profitable next year, "but the number will be modulated given our investments back into R&D."
Although it hasn't entered the U.S. hemp cannabidiol (CBD) market yet, St.-Louis committed to the company doing so in 2020. He said that it intends to partner with large U.S. companies, in a way that's fully legal.
St.-Louis made one dire prediction for the Canadian cannabis industry: There will be a shake-up over the next 18 to 24 months, with smaller producers being forced to lower their prices for cannabis flower to compete in provinces. He expects that 80% of the smaller players will ultimately go bankrupt.
This scenario will result in HEXO also having to lower its pricing on cannabis flower over the short term. However, because the company is focused on "advanced products" -- derivatives including beverages, edibles, and vapes -- St. Louis believes that it will survive the purge and emerge with less competition.
This is in line with the prediction that former Aphria CEO Vic Neufeld made last year: a future where "the strong will survive, but the weak will not." If Sebastien St.-Louis is right about the previous nine items on this list, HEXO will be one of those players that survive and thrive over the long run.