Canadian pot producers ‘underestimated’ supply chain demands, CEO says

Canadian cannabis producers struggled with supply chain issues with the rollout of legal recreational marijuana in Canada, the CEO of HEXO Corp (NYSE:HEXO) said after the company reported a surge in quarterly revenue.

“I think as a general rule, all the licensed producers including HEXO generally underestimated the amount of packaging, infrastructure and logistics, and the employees and space that it would take to actually do fulfillment,” CEO Sebastien St. Louis said during a call with analysts on March 14.

HEXO reported C$13.3 million (a Canadian dollar currently is valued at US$0.75)  in gross revenue, a 10-fold increase, for the second quarter of 2019, the first since Canada legalized the recreational market in 2018. The company had a net loss of C$4.3 million.

St. Louis was addressing a report from the Canadian government this week, which showed that sales of dried cannabis and cannabis oil had declined slightly in January from the previous month, while finished inventories of both grew.

The overall spread between finished inventories and sales remained wide. About 15,600 pounds of dried cannabis was sold in January, versus finished inventories of about 43,000 pounds. The spread was larger with cannabis oil, with about 7,800 liters sold versus finished inventories of about 53,000 liters.

“Where you’re seeing the disconnect is basically inventory piling up from cultivation and LPs (licensed producers) not being able to process it,” St. Louis said, responding to a question from BMO analyst Tamy Chen.

HEXO produced about 10,800 pounds of dried cannabis and sold about 5,900 pounds. It operates on a significantly smaller scale than market leaders Canopy Growth and Aurora, which respectively sold about 22,000 pounds and 14,000 pounds of marijuana during their most recent quarters.

HEXO is expanding its Belleville, Ontario, production facility and is projecting that it will help the company be able to generate up to C$400 million in sales next year.

The company is also expanding production through the pending C$263 million acquisition of Ontario-based Newstrike Brands.