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Cannabis Cannabis supply lagged as licensed producers ‘underestimated’ logistics needed, HEXO chief says

Employees collect cuttings from cannabis plants at Hexo Corp's facilities in Gatineau, Que., on Sept. 26, 2018.

CHRIS WATTIE/Reuters

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The chief executive of HEXO Corp. says cannabis products have been slow to reach retailers because licensed producers “underestimated” the infrastructure needed to fulfill orders.

Sébastien St-Louis’s comments came one day after Health Canada released legal cannabis sales and inventory figures for January that indicated sales of dried flower fell while licensed producers’ finished inventory stockpiles continued to build up.

“All the LPs, including HEXO, generally underestimated the amount of packaging infrastructure and logistics and employees and space that it would take to actually do fulfillment,” he said during a conference call to discuss its latest quarterly earnings.

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“It’s one thing to grow this product, it’s one thing to bag it in giant bags. But by the time you think about putting it in individual multiline products, that’s quite complex.”

Since Canada legalized cannabis for recreational use last October, many provincial, territorial and private retailers have faced product shortages. The lack of product has prompted the provincial retailer in Quebec to shut its stores on Mondays and Tuesdays and was cited by the Ontario government in its decision to limit the province’s initial batch of physical stores to 25.

The statistics released by Health Canada late Wednesday signalled that there continues to be a lag for finished inventory between licensed producers and sales channels.

In January, total sales of both medical and non-medical dried cannabis in Canada amounted to 7,115 kilograms, down 3.7 per cent from 7,385 kilograms in December, Health Canada said.

However, the amount of finished dried cannabis inventory at licensed producers rose by 16.4 per cent during that period to 10,174 kilograms, the health agency said. At the same time, the amount of finished dried flower inventory held by provincial, territorial distributors and retailers slipped by 5.7 per cent during the period to 9,346 kilograms.

Oil sales and inventory fared better in January, however.

Total sales of cannabis oil increased by 4.3 per cent to 7,856 litres during January. Meanwhile, the finished oil inventory held by licensed producers rose by 24 per cent to 33,822 litres and by distributors and retailers by 29.8 per cent to 19,099 litres.

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St-Louis said on Thursday he expected HEXO’s sales to be relatively flat during its third quarter which ends April 30, but a new facility the Quebec-based licensed producer is building in Belleville, Ont. will be “transformational.”

“A two-million square-foot facility will give us enough space to fulfill that $400-million net sales [target] next year, and beyond,” he told analysts.

HEXO on Wednesday announced another move which would boost its scale – a friendly deal to acquire Newstrike Brands Ltd. in an all-stock deal valued at $263-million.

Shareholders of the Ontario-based cannabis company – backed by members of the Tragically Hip band – are being offered 0.06332 of a HEXO common share in exchange for each common share held. Based on the value of HEXO shares at the close on Tuesday, the offer would be worth nearly 47 cents per share.

The companies say the deal, which requires approval by Newstrike shareholders, would give HEXO the capacity to produce about 150,000 kilograms of cannabis annually and to realize $10-million of annual synergies.

HEXO reported a loss of $4.3-million in its latest quarter as revenue grew to $16.2-million in its first full quarter following the legalization of recreational cannabis in Canada.

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The company says the loss amounted to two cents a share for the quarter ended Jan. 31.

The result compared with a loss of nearly $9-million or 10 cents a share in the same quarter a year earlier when the company reported $1.2-million in revenue.

The company’s loss from operations in what was its second quarter increased to $6.9-million compared with a loss of $4.7-million a year earlier due to higher expenses as it prepared for the legalization of the adult-use market and stock-based compensation expenses.

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