Righting a Canadian cannabis company: Q&A with Hexo CEO Charlie Bowman

Canadian cannabis producer Hexo Corp. spent more than 1.2 billion Canadian dollars ($935 million) to acquire three other producers in 2021: Redecan (CA$925 million), Zenabis (CA$235 million) and 48North (CA$50 million).

After those acquisitions, Hexo found itself deeply in debt, with a ravaged share price that endangered its Nasdaq listing (HEXO) , its auditor warning that the company might not be able to stay afloat and an activist investor demanding change in the wake of years of quarterly losses.

Founding CEO Sébastien St. Louis left Hexo in 2021, and his successor, Scott Cooper, stepped down in April.

Hexo’s latest CEO, Charlie Bowman, has previous experience in the specialty chemical industry.

Bowman started with Hexo in February 2021 as general manager of U.S. operations before becoming chief operating officer in January 2022. He was appointed CEO in late April.

He leads a much smaller Hexo: The Quebec-based company listed 1,277 employees as of July 2021, and Bowman said it now has 570 employees in Canada and the U.S.

Earlier this year, the company signed an alliance with competitor Tilray, with Tilray acquiring Hexo’s debt in exchange for the option to take a significant stake in Hexo and cooperation between the two.

Bowman doesn’t rule out an eventual acquisition by Tilray.

MJBizDaily spoke with Bowman about his plans to get Hexo back on solid ground.

Hexo lost nearly a billion Canadian dollars in the first nine months of its fiscal year (through April 30), and has withdrawn financial guidance for investors. Your strategic plan includes cost-cutting, streamlining and maintaining disciplined pricing. Can you elaborate on that plan?

There was a debt structure that was unsustainable; that’s now been addressed with the Tilray debt purchase that went through.

There was also an excessive amount of SG&A (selling, general and administrative expenses) and third-party consultants that were on board. We’ve done a tremendous job of getting those under control.

There wasn’t a real clear pathway to get to EBITDA (earnings before interest, taxes, depreciation and amortization) positive and then, from there, to actually start driving into earnings.

So the first thing that I had to do was actually to establish some form of a bedrock, look at what the foundation of the company could really grow from and where it had distinct competitive advantages.

For us, it was around cultivation and some very unique products that were in the market, like the Redee straight-edge (pre-roll from Redecan).

Some of our brands, (like value brand) Original Stash, had some incredible brand loyalty.

But we had to rightsize that organization. Instead of trying to put out 14 or 15 brands, we had to lock it down to four. And then you just shred the rest, and you move fast.

At one point, Hexo had in excess of 405 net tons of capacity on cannabis, which was much more than what we needed.

The plants weren’t operating efficiently.

As a result of that, we had to bring those facilities down so that you could still maintain your market share and your leading position.

But what you also had to do is to get to where you had your cost of goods and manufacturing down, to where you could actually start turning cash out of the operations as opposed to burning cash.

The second element is around … (ensuring) that we had the debt structure to where it was much more favorable.

In addition to that, it also freed up cash to actually operate the business.

Before you were CEO, Hexo bought 48North, Zenabis, and Redecan. Since then, Hexo has been struggling financially and Zenabis has filed for creditor protection. In hindsight, were those three acquisitions a mistake?

Well, you never walked in somebody else’s shoes and then judge it – you have to take a look at where we are now.

And you can look in the rearview mirror and say, “Maybe this should have been done, maybe that should have been done.”

I think you can do that (for) just about anything.

What Zenabis brought to the table, and its uniqueness, we had that inside of Redecan.

So it made sense to put (Zenabis) into bankruptcy protection. And it’s going to have a really good home when it comes out.

The uniqueness of the Redecan brand, some of the areas around topicals for skin care that 48North had … there’s real synergy with those.

(Redecan’s Redee pre-rolls are) the leading product in every province, in every market. Whether it’s male or female, it’s the preferred pre-roll to be purchased.

So that was an outstanding purchase, as well as the cultivation techniques that we were able to pick up – not just in Hexo but in 48North and in Redecan.

You never know what the mindset was when people went into the acquisitions and the buying.

But I can say, for the integration and the value we’re bringing out, we’ve carved out those bits that are unique and give us competitive advantage, and that’s what we’re focusing on.

Hexo currently owns a number of nonoperational facilities in Canada. We’ve seen a trend where the largest Canadian cannabis companies have had to sell off unnecessary facilities for less than they spent. Should we expect more discount cannabis facility sales from Hexo in the future?

We’ve taken the impairments … we’ve realigned the balance sheet. So the balance sheet’s clean now.

We do have facilities that are for sale, but we’ll get our fair market value out of those facilities and be able to move on, just as we also have been able to rightsize our facilities to where our cost of goods have gone down.

The amended debt purchase deal with Tilray puts Tilray in a position to take a 48% stake in Hexo, which looks a lot like it could acquire Hexo down the line. How are you preparing for that possibility?

We’re not operating as one company. There’s rules of engagement to ensure that things aren’t shared, and there’s firewalls up in several different areas. They are an investor into our business.

Tilray is a great company. They’re a brand company.

We’re not a brand company. We’re a cannabis company, we are a cultivation company. We have some really strong brands, but we’re not a brand company.

We focus in on what we do best, and that’s in the areas of cultivation, that’s in getting our operations to where it’s rightsized, so it’s throwing off cash.

From the standpoint of taking a look at the new products that (are) coming out, they’re all based on areas of unique experience for cannabis.

If Tilray one day decides to acquire us, they’re going to acquire the best cannabis company in the world.

If they don’t, then they’ve made a great strategic investment to get a return on their business as our stock goes up.

In the meantime, the debt purchase deal with Tilray helps keep Hexo going. How has that deal changed how you’re doing business?

Oh, no question. The way (Hexo’s debt) was structured to afford to acquire those companies was not sustainable, so it had to be reworked.

What it allows us to do is, they have some very strong areas which we can tap into for shared services. And in return for that, I can remove (those costs) within our organization.

We run our own show, we run our own operations … it allows us to get some synergy, without them acquiring us.

The debt structure, yeah, it was tough.

It was burning up so much cash, and the way in which that debt structure was being paid, that we would pay in shares, and then those shares would be basically placed into the marketplace … it drove our stock down.

So we had to get rid of that debt structure and the way those payments were going.

The good news (is) that’s now been resolved.

We come back to those specialty chemical (industry) principles, which enable us to take what is the unique structure function – in this case, it’s around cannabis – and how you deliver that to your customers, to where you become part of their solution and part of their uniqueness to the marketplace.

And so far, the market has responded extremely well. We had a good Q4.

You’re making yourself available to the media now, even at a time when Hexo is perhaps not getting the most positive media attention. As CEO, what’s your thinking behind that media strategy?

Hexo went under a blanket for a period of time, which was not conducive.

A lot of changes were going on. If you don’t frame the narrative, somebody frames it for you.

We have to start sharing the message, and let the spears and the arrows be chucked toward you – that goes with the job.

But the other side of it is, this is a really sound company now.

This interview has been edited for length and clarity.

Source: https://mjbizdaily.com/how-ceo-charlie-bowman-plans-to-get-hexo-corp-cannabis-on-solid-footing/