HEXO Corp. (NYSE: HEXO) Q1 2021 earnings call dated Dec. 14, 2020.
Corporate Participants:
Sebastien St-Louis — Co-founder & Chief Executive Officer
Trent MacDonald — Chief Financial Officer
Analysts:
Tamy Chen — BMO Capital Markets — Analyst
Aaron Grey — Alliance Global Partners — Analyst
Rupesh Parikh — Oppenheimer — Analyst
John Zamparo — CIBC — Analyst
David Kideckel — ATB Capital Markets — Analyst
John Chu — Desjardins Capital Market — Analyst
Douglas Miehm — RBC Capital Markets — Analyst
Presentation:
Operator
Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the HEXO Q1 2021 Earnings Call.
Before we begin, we would like to remind you that certain matters discussed in today’s call or answers that may be given to questions asked could constitute forward-looking statements. These statements are based on the Company’s current internal views, estimates, expectations and assumptions. These statements should not be read as assurances of future performance or results. They involve known and unknown risks and uncertainties and other factors that could cause actual results, performance or achievements to differ materially from current expectations and those implied by such statements.
We also note that we utilize certain non-IFRS measures in our financial reports, which may be discussed on today’s call, and reconciliations between any such non-IFRS measures to their closest reported IFRS measures are included in our MD&A.
This discussion is qualified in its entirety by cautionary notes regarding forward-looking statements and the risk factors that are included at the end of this morning’s earnings news release and in our MD&A and AIF filed with our fourth quarter 2020 financial statements on SEDAR this morning and which will also be filed on EDGAR. Please review these materials from our information about forward-looking statements and the risk factors that could cause actual results to differ materially from our current expectations and those implied by such statements. HEXO disclaims any intention or obligation except to the extent required by law to update or revise any forward-looking statements as a result of new information or future events or for any reason.
[Operator Instructions]
I would now like to turn the call over to Sebastien St-Louis, CEO of HEXO.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you, operator, and good morning, everybody.
Before we get going. I’d just like to wish everybody good luck. Of course, during these unprecedented times, HEXO has certainly kept the safety of its employees as a paramount priority, and we’ve taken many precautions to ensure that everything goes smoothly and that we continue our essential service of supplying Canadians with high-quality cannabis during this pandemic. A big thank you to everybody at HEXO for your role in supplying our consumers and customers.
Before we discuss Q1, I’d like to take two minutes and share with you a look inside our Belleville Center of Excellence. I’m very excited to share with you what we’ve got going on inside. Belleville is a game-changer for us, and we’re now up and running. Operator, would you please start the video?
[Video Playback]
[Technical Issues] Molson Coors. It was thrilling to be able to share a virtual introduction to that site with you a few days ago and again today. I promise you the feeling when you walk in is even more exciting. This facility is highly automated, and we believe that it delivers a competitive advantage and it really leverages the capital moat that HEXO has erected in Canada. With this facility, we have the ability to go to market quicker than most competitors, we have the ability to ramp up new product lines and we have the ability to continue to lever economies of scale to push better pricing to our consumers. We’ve been hard at work over the last few quarters and especially in Q1, matching timely supply and demand, and that’s down to the SKU level. We’re really moving beyond talking about tons and kilos at HEXO and really starting to talk about discrete SKUs, velocities, sell-through at retail, and this is an area that’s remaining top of mind.
We understand some of the frustrations that our consumers and our customers feel when we introduce great new products into the markets and then it rapidly sells out and they have to wait until we replenish. With our Belleville facility, now we are getting control over that SKU by SKU velocity, and getting that additional supply in market is really unleashing the potential that HEXO has.
In the first quarter, we deliberately took our time to really understand the forecasted demand and to build a planning organization that can make sure that popular products and rarer products are available to consumers throughout Canada at all times. We’re starting to see the early benefits of this. You saw in our video: secondary packaging has increased five-fold. So that capital moat and that ability to go quickly to market means that we’re putting fresher product into market. The manufacturing capability of taking a freshly harvested flower and bringing it quickly, say under 60 days, into a retail store gives us an ability to simply have a higher quality product. Consumers have started measuring quality by price, and obviously Belleville contributes there, and HEXO has been a price leader now for over a year. They have also continued to measure quality by potency, and we’ve recently launched our Up cannabis brand, which is the first brand to promise a potency guaranteed to our consumers of over 20%.
The next bastion where we need to be able to — to win is freshness, and competitors of ours that do not have access to a facility of the scale and complexity of Belleville will simply not be able to compete on that freshness. Because you need a very, very nimble and complex supply chain to be able to take that fresh flower and bring it to market quickly. Our goal is to keep the most popular and successful products in market so our consumers gain access to the whole HEXO portfolio and that our customers can continue to rely on HEXO as a partner of choice.
We’ve had a phenomenal Q1 and start to the year. Record revenue, CAD41.3 million, which is the highest in the Company’s history. We’re up 14% sequentially from the fourth quarter and — or more than doubled year-over-year. Our net revenue was CAD29.4 million and is also up substantially from prior periods. More — maybe even more impressive than that and what really gets me excited is that we’re proving HEXO’s ability to win important categories. We have won the hash category. We are the clear number one national supplier of hash. And resoundingly, we’ve just taken the number one position in beverage.
Now, this will be a highly fought for category. I think it will be much more important to the industry than anyone realizes so far. In fact I’ll talk about this a bit more on the call, but we are now, as an industry, rolling the beverage business at about 1.9% of total market. So some of you on the call might say, well, okay, 1.9%; that’s not an interesting number. And this is where I’d like to differ, and I think it’s a very significant milestone. For years now, we’ve been talking about beverage as a piece of cannabis being between the 1% and 1.5%. In fact, in the USA, beverage occupies about a 1.4% piece of the market. The fact that we have now demonstrated that by creating a best-in-class product with better taste, with a recyclable glass bottle and with a wide variety of portfolio and effects, that we can overtake the total category space that exists in beverage in the US proves how important this category is. I’ll talk a bit more about that during the call.
Our sales momentum has increased across Canada, and we’re still holding the number one position in Quebec. So take that — take that in for a moment. HEXO has been concentrated on being the number one supplier to Quebec, and we have continued to achieve that. We’re still sitting on a 29% market share in our home province, and we will continue to serve Quebec as the preferred supplier to the Quebec marketplace for years to come.
However, what’s very significant this quarter is you’re seeing a meaningful uptick in — outside of Quebec. So as our supply chain has become more robust, we’ve been able to put attention outside of Quebec, and you’ve seen us become top three now in Alberta. We’re moving up in Ontario; we’re in sixth position in that market, and we expect that trend to continue so that in future quarters, we actually expect that we will have more revenue coming from outside of Quebec than in Quebec while keeping our number one status there. We’re launching products that resonate with consumers. We started the year with Original Stash taking over a price point and really redefining the market. When we launched Original Stash, it was a 28-gram format at a very competitive price point. That product was met with a lot of market skepticism. And today those types of 28-gram good value offerings are over 50% of the market throughout the chain.
Our hash product, as I had mentioned, is number one, and we continue to be able to out-innovate. Our vapes are getting phenomenal reviews, and across the board, HEXO is seen as a leader by our consumers. We really took time to match supply and demand, and that meant some difficult decisions. So our Up product, for example — our Up line — re-launched in Q2, so you don’t actually see the benefit of the Up relaunch in Q1. That’s additional upside and it’s going very well.
This is our sixth consecutive quarter of EBITDA improvement, our first quarter where we’ve improved 87% from a negative of CAD3.25 million in Q4 ’20 to a negative — from a negative of almost — well, to a negative of about CAD400,000, so getting very tight on our EBITDA control now, losing under CAD1 million.
Our gross margins, excluding adult use beverage, were 39% and continue to be very robust go forward and prove out the sustainability of a CPG marijuana company. And beverage itself has gone from a whopping minus 125% gross margin to 1% positive in just one short quarter.
Our CPG partnerships — I think the most significant part about our deal with Molson in beverages is that it really proves up a model that HEXO embarked on three years ago with our Powered by HEXO model. So HEXO believes that we will never be the best company at making coffee, beer or chocolate bar. We believe there are world-class companies that make those products. And we believe that HEXO is a world-class company at understanding consumer experiences built from the molecules that come from marijuana. And I think that this foray now into beverage with Molson Coors through Truss has allowed us to demonstrate that that strategy is a winning strategy.
For less capital than some of our competitors, we’ve taken the number one spot in Canada; we’ve just recently launched in the United States. So we now have CBD beverages derived from hemp on the shelf in Colorado, and we’re very excited to see how that develops, although today I won’t talk to specific numbers in that market because it’s — this is very fresh news. But we’ve been hard at work on these partnerships now for — and we’ve never really stopped over the last three years. They are extremely complex partnerships to negotiate, and that’s what we’ve been doing. So we believe that as we are able to land successive partners to Molson Coors, that will really continue to prove additional upside for HEXO and our shareholders.
I’ll now turn it over to our CFO, to Trent MacDonald, to go through a little bit more about the numbers.
Trent MacDonald — Chief Financial Officer
That’s very much appreciated. And good morning, everyone.
The one — the first thing I wanted to point out really was, oddly enough, not the results itself but the cleanliness of our P&L. I think that goes back to Q4. We made some tough decisions at the end of the year around cleaning up our balance sheet. So we took a lot of write-downs, a lot of big impairments because we no longer wanted to do what the industry tended to be doing, and is piecemealing this cleanup over time. We wanted to come into this year with an extraordinarily clean set of financials so that when we came to market as we did just now in Q1 people could see and digest the results the way they should be able to do. And so what you see here is a very clean understandable P&L, and that is where we are going to continue in the future, each quarter successively from here on out to show beautifully clean P&L that people can digest, that is very simple to understand.
If you look at our results, getting into them, our operational cash flow was only minus CAD6.1 million. Add that to the Q4, and you’re talking about, in a half of the year, we’ve only gone through CAD10 million of operational cash flow. A lot of that came from — from inventory this particular quarter. We did build up inventory, but I want to talk about that. Inventory has been an area risk for LPs. Not for us. We’ve cleaned it up. We had a great harvest near the end of the quarter, and that was a higher yield — higher yield harvest than we had anticipated. Which was a great thing, because since that point in time, we’ve been able to turn all of that into value-added finished goods at our Belleville facility, which are now out into market.
We are not creating any risk. For the first time in our history, we are actually using more trim on a weekly basis than we can actually produce, and I don’t know if any other LPs can say that. We are in a great place in inventory, and that is [Technical Issues] the use of our cash in Q1, which we don’t expect going forward. It was just a timing issue. But we are in a great place. So, if you look at our total cash flow, I mean, our total cash flow would have been only a use of CAD11 million for the quarter had it not been for one thing, and that’s a CAD23 million move from cash to restricted cash, which was to fund a captive insurance policy for ourselves and our D&O which saves up between CAD10 and CAD15 million a year in premium, so a great move to [Indecipherable] very high return.
So right now, we’re sitting with CAD150 million of cash on our balance sheet. That’s — just think about that, and the CAD10 million we’ve gone through from an operations perspective in a half a year, and we have CAD150 million on our balance sheet. We are not doing anything dilutive now. We have chosen — cognitively chose not to do anything dilutive and to be opportunistic as many of the LPs have been over the course of the last several weeks when the industry had taken off as a result of, much which was due to what was happening in the United States. And there are lots of LPs who have absolutely no exposure to the United States, yet their stock are driving forward. Not like us. We have exposure to the United States. And even still, we are sitting in a place where we don’t have to be opportunistic, which is great. And therefore, we can — we have the cash to support what we need to do on an ongoing basis.
The — one of the things we want to talk about is the improvement in that EBITDA and that path the EPS. So that starts with our war on COGS, to keep those margins being very healthy, while we know that the market is severely price competitive and we are a leader there. We want to offer great products at a competitive price. And so that means we have to be extremely good on the COGS side that we can continue to deliver healthy margin, which we are doing.
The other thing is SG&A. With the SG&A, we have been doing a lot of things to control those COGS. In this quarter, if you look at G&A, marketing, selling and promotion and R&D, those are your three core SG&A that you see on face of the of the P&L, very similar to other LPs. For us, that figure was CAD50 million in total or 51% of net sales. That’s down from CAD50.5 million in Q4, which at that point was 57% of net sales. We need to be better there, and we know that.
So we’ve already made significant improvements in Q2. We’ve done some restructuring and going to continue to do some restructuring over the next two quarters beyond this to get to a place where we know we are going to be best in class in SG&A. We have some very high targets for ourselves in terms of getting that percentage down to a reasonable level of net sales. Within a year and a half — within a year and a half, we’re hoping to get that down under 25%, and even better, of net sales. That is a great target and a good place that allows us to have that clear path to earnings per share.
Earnings per share is where it’s at, and when you look at market valuations today, there is what you call an implied level of earnings inside of market cap. And if you look at an industry like ours, where it’s growing, even if you said, okay, market caps are — represent 40 times and imply earnings stream on behalf of the company that you’re talking about. Well, if you look at that 40 and you just — and I encourage people to go and look at this, okay? I encourage you to go to all the LPs and us and look at our market cap, divide it by 40, say, what does that mean for implied risk. Then compare, that’s the reality.
So the reality is, you take margin, you minus out that SG&A I talked about earlier, which is the G&A, marketing, selling and promotion and R&D, just minus that from margin, and you say, okay, what is the — what does that look like as a number and what is the depreciable capital base that everyone’s using to get that number. That’s another thing. We’re under CAD300 million. We have been very diligent in our way of managing the P&L — or managing the balance sheet. Others, you can look at that for yourself: billions, multi-billions of capital, depreciable capital to get their earnings, not us. So you take that and you take that net margin minus of the SG&A, minus of the depreciation and where are you? What does that earnings look like today? What is the reality? And multiply that out by 4 because it’s a quarter, and say like what does that look like for annual earnings and how does that compare to what was in the market cap. You’re going to get a disparity. You’re going to get big disparity across the board between what the reality is and what’s in the market valuation.
Some of the LPs out there are as high as CAD750 million of annual earnings at a disparity. Not us. We are under CAD45 million right now. That is by far, bar none, the best of all the top five or six LPs, and it’s [Indecipherable]. We have the lowest disparity between our valuation on the market and the reality of what we are delivering today. We have a path. We are headlong into this path of eliminating that disparity and then moving well beyond it with regards to earnings per share, and that is what extremely important to us and where we’re going to continue to go and we’re going to do it off the back off a low capital base while not being dilutive unless there is some type of strategic initiatives, something that we can bring to market as a, this is why we need to dilute because there’s something that’s going to provide a very reasonable return for our investors.
At that, I do want to turn it back to Sebastien. And thank you, everybody, for listening in. And I think we’re going to open up to questions now.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Before we get to questions, I’d like to again wish everybody safety and health as the global pandemic continues. I’m so proud of what the HEXO team has achieved for the — and also for their dedication as we navigate through an ever-evolving environment.
Despite the many challenges that this economic and social construct has posed here, the cannabis industry continues to grow. That’s a testament to consumer demand for safe and legal high-quality products that are offered by licensed producers and HEXO. The industry is running at about a CAD2.9 billion run rate — that’s just in Canada — and it continues to accelerate. We’re in a top four market share position at HEXO. We are closing in on the top three spot, which I continue to believe will be necessary to be in those top threes to ensure a long-term sustainable business with high value brands that can be leveraged internationally.
We’ve proven now that the HEXO model of partnership is one that leads — that can lead to being number one in important categories. We’ve shown that the US story isn’t the be-all, end-all. When you look at beverage as a part of the market in the US, it’s not just 1%. It’s not 1.5%. In fact, after two months in market in Canada, it is 1.9% of Canadian sales. That means that categories when you hit the product right, when you truly create a proposition that delivers to consumers what they want, you are able to redefine the market and create a larger opportunity. We’re currently number one in Canada. It’s possible for HEXO to be number one in the USA.
We can take what our Canadian run rate is and multiply it dramatically in Canada, but our strategy following US legalization provides a ton of blue sky. And take in mind that our — just the Canadian opportunity is currently running at a CAD12 million run rate annualized for HEXO. That — and that’s just us. That’s not the whole industry. Remember that beverages have a high capital moat around them. That’s the technology and the manufacturing behind them cannot be easily replicated. And the expertise that HEXO is developing and that our partners are contributing is hard to match. We’ve now proven our ability to win categories. We’ve proven the model, and we continue to negotiate. We’ve never really stopped with other CPG partners to multiply that success.
We look forward to updating everybody at our next call. It should be an exciting next quarter, a very exciting next year. And I’m very happy to be able to take some questions now. Operator?
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Tamy Chen with BMO Capital Markets.
Tamy Chen — BMO Capital Markets — Analyst
Hi, good morning. Thanks for the question. I wanted to ask about the US. I guess first is, if you could provide a bit more commentary on Truss US. You mentioned you you’ve launched in Colorado. Can you just talk a bit about how you’re thinking about additional states, just kind of expansion on that front? And then, also curious how you think about HEXO’s strategy for the THC side in the US.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you, Tamy. The — the US expansion is really going to follow the — follow the regulatory path, and that regulatory path is not fully defined. We’ve obviously seen the first vote on the MORE Act probably getting shut down in the Senate. So that is probably not the immediate path. So before going to multi-state, HEXO is going to make sure that we are in full cooperation with all federal and state laws in the USA. So the current operations in Colorado are fully legal at all levels of government. They’re within the state lines from hemp derived CBD. There are other states that have a current legal environment from our interpretation. What the — really, the advantage of our strategy is, we wanted to prove out the product in Canada. That was number one.
Now we are proving out the nuances to the product for the US consumer base, which is slightly different when you start to talk about branding, concentration, taste profiles, and that’s really we’re leaning on the expertise of Molson Coors there. But certainly, we’re keeping a close eye on expansion opportunities. So those will come soon.
Tamy Chen — BMO Capital Markets — Analyst
Okay. Got it. And my follow-up question is, I just wanted to revisit the Up relaunch versus the — the Original Stash product line. So it looks like there was good growth on the Original Stash side. So just wondering, in the market, are we seeing a reacceleration in that value segment, again. And with respect to the Up relaunch, can you talk a bit more about how that’s going as you’re trying to endeavor now to up-pricing your consumers and other value consumers kind of up that pricing tier, how do you — how do you do that and how is it going? Thanks.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you. Before we — before we start to talk about raising prices for our consumers, it’s critical that we develop better — we deliver a better feature set and better value for them. And this is really why we’re very excited about Up because our cultivation has gone so much stronger now. We’re able to deliver Up at a predicted — a predictable guarantee 20% plus THC with a very strong terpene profile. We’ve redesigned our genetics lab in Brantford. So we have an entire indoor facility now at HEXO that is 100% dedicated to the development of world-class genetics. And so we’re leveraging the existing massive genetics bank that HEXO has, and we’re further developing on top of that.
So we’re in R&D, and as we introduce new feature sets, we expect to be able to offer competitive pricing for what that feature set is. The Up launch has gone very well. So since we’ve hit market, we’re getting a great consumer response. And I think that’s because we’re meeting the expectations of the consumer. We’ve promised a certain concentration, we’ve promised a higher-quality product and we’re still competing at a very reasonable price. So if you compare high-end Up product to say some of the higher-end black market products, we’re still in the right pocket from a consumer demand perspective.
Original Stash and lower-priced value offerings still continue to be a large part of the demand profile, and we’ve seen a ton of competition in market. But as mentioned earlier, most of our competitors don’t have the robust infrastructure that HEXO has, and so they’ve been able to kind of come in and out, but Original Stash remains a mainstay for consumers and continues to gain traction.
Tamy Chen — BMO Capital Markets — Analyst
Got it. Thank you.
Operator
Next question comes from Aaron Grey with Alliance Global Partners.
Aaron Grey — Alliance Global Partners — Analyst
Hi, good morning. Congrats on the quarter and thanks for the questions. First one for me, guys, is on the beverages. So — and you guys remain very bullish on that now, 1.9% of Canadian sales. So I just want to know if you guys have done kind of any initial kind of studies or conversations with consumers in terms of how much of that has been kind of trial versus repeat purchases and maybe some of that initial feedback that you’ve been hearing that gives you kind of further confidence in the overall trends that kind of help that category continue to grow as you and the competitors continue to launch new products and build that out. Thanks.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thanks, Aaron. The trial is — the trial rate is certainly high. What’s exciting is, Health Canada is now taking a look at the regulations, and there is a — there is early regulatory interpretation that — that should allow us to go from a five-drink limit at point of purchase to six drink limit. So, that’s already a meaningful improvement because that’s been some of the feedback our consumers were saying. They’re saying, can I please buy more of this stuff, especially at once, can we reduce friction.
And when you look at the concentration, for example, the current equivalency factor, so what — which is what drives regulations, how many drinks you’re able to buy is based on the milliliters or the volume of the beverage. So it really is not aligned with consumer and public safety. And I think Health Canada is well aware of that. They’ve gone to consultation right now. I think we will see that change. And as that changes in the next while, that will really allow, not just the six pack at point of purchase, but case quantity consumption. And as you start to hit that, that really conflates with our production ability too.
So you saw in our video this morning, our Belleville facility with Truss. We can produce 400 units a minute. And if you do the — if you do the math and you start to annualize that, that’s a tremendous amount of beverages. But we’ve really built that facility for what we believe the market will be in the future. And I’ve said a few times, I believe beverages could be as high as 15% of the total category, a massive part of the market. And so I think as regulatory changes shift, we’re hearing loud and clear from our consumers that we want to buy cases. Health Canada is certainly listening as well, and I think as those things fall, beverages will continue its climb as a meaningful part of the category.
Aaron Grey — Alliance Global Partners — Analyst
All right. Great. Thanks for that color. That’s helpful. And then the second question for me go along with pricing as well, but more on the vape side. So you guys had increased sequentially on the vape sales, it looks like, looking at MD&A. So I just wanted to get some commentary that you might have in terms of what you’re seeing within the vape category, where you’ve kind of started to launch some of those products, especially as we’ve seen kind of overall — a lot of competitors launching their own products and some competition on price there. So any commentary in terms of what you’re seeing on the vape category and how you kind of see that evolve and what do you see yourself kind of having a competitive edge would be helpful there. Thanks.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you. Yeah, so vape is where flower was 18 months ago as a general category. And what I mean by that, distillate pricing in Canada is still egregious, and that translates to high unit cost in vapes and then essentially a high price for the consumers. So when the consumer is still looking at vape overall, and this isn’t just for HEXO but vape overall, they’re priced out of the market compared to black market. Black market is our number one competitor, let’s make no mistake. We have to get the pricing right, and we have to beat black market pricing without qualification. So before we can get the, say 90%, 95% of the total market, our consumer has to know and trust that what’s available in legal channel is better price than what they can get from their dealer on the street.
After that, once they know they’re getting the best price, then we can talk about feature set, then we can talk about concentration, then we can talk about safety, legal channel, consumer protection, protection of children, all that kind of stuff starts to matter, right — environmental footprint, all those — all those other features. And so, vape is still at the front end of that because licensed producers as a whole have not fixed their supply chain. Now, this is where HEXO’s advantage comes in. We’ve been hard at work developing great formulations, so initial responses to the actual distillate that we have in our vapes is phenomenal.
But the scale-up is — is not — is not actually full-fledged. So we haven’t actually turned on our vape machine the way we’ve turned on the beverage machine, and I talk — I say machine, it’s not one discrete piece of equipment, I’m talking about the whole system and process to produce our vapes. That is something that will be coming up for HEXO, and it’s a category we’re certainly playing in. And when we do that, we expect to be able to do to the market what we did in flower, what we did in hash and what we’re doing in beverage, which is to deliver pricing that’s a black market competitive and which in turn will simply box out 50% to 80% of our competition that is unable to operate at the same scale.
Aaron Grey — Alliance Global Partners — Analyst
Okay. Great. Thanks for that color, and I’ll jump back into the queue.
Operator
Next question comes from Rupesh Parikh with Oppenheimer.
Rupesh Parikh — Oppenheimer — Analyst
Good morning. Thanks for taking my question. And also congrats on the nice quarter. So just going back to the progress that you guys are seeing in the beverage category. I’m just curious, what SKUs you have today in the marketplace, and going forward, what’s the opportunity to add more SKUs and to gain more distribution in more provinces?
Sebastien St-Louis — Co-founder & Chief Executive Officer
So distribution as a whole, Rupesh, and thank you for pointing that out, is getting a lot more sophisticated and lot more competitive. So the — our provincial partners in fact are demanding that we have a high throughput rate. So, I mean, you’re looking at — in Ontario, for example, the fill to order has to be above 98.5%, and HEXO’s goal is to get well above 99% in that market and to deliver the same kind of preferred partnership service that has made us number one in Quebec.
In beverage, that means that the provinces are more and more relying on portfolio providers that can stay on shelf that have a good understanding of the consumer that can provide the whole portfolio offering. And so Truss has really become the beverage company of choice throughout Canada. And that’s — that’s not even in being in every store. So that’s with Truss sitting at about 60% distribution right now. So there’s a lot of low-hanging fruit could get more — more listings simply as we get in more retail stores. So when I say 60% distribution, we’re in about six out of 10 retail stores throughout the country, and that will rapidly increase. We hope to do that 90% plus number.
In terms of listing them out like, when you look at our SKUs, that’s the beauty of the Truss portfolio. Our Little Victory wine spitzers made from real de-alkalized wine with a 2.5 milligram THC and 2.5 milligram CBD composition, we just launched a new SKU with a dry white wine base in our dry grapefruit line. So that comes and joins blood orange and dark cherry. Our XMG line is proliferating and having really good success. That’s at the higher end of the spectrum, 10 milligrams of THC offering in a tropical punch and now the new flavor, mango pineapple, which is really dynamite, huge — huge improvement in flavor profile on that one.
We have a list — a line of CBD sparkling waters, right, so under the Veryvell brand. And so there is quite a few SKUs, actually I think we’re up to 14 or 15 now, SKUs in market. But we’re also rapidly adapting to consumer preference. So we saw, for example, that our House of Terpenes brand has had tremendous success with limiting but consumers are having a bit of a slower uptake and understanding the — the value prop under myrcene. And myrcene is a very flavor-forward product. It was designed to go after the scotch drinker market. And so, the first time you take it, you’re not sure what to expect as you’ve never actually tasted that flavor. And that’s the really cool thing that we were able to develop with Molson Coors and Truss was to come and take the unique characteristics of cannabis to not only deliver an experience that’s unique, but actually to deliver a flavor.
And so the uptake has been a bit slower on that product. But as consumers are starting to try and starting to build a niche, but we’re adjusting the supply in response. So, still a lot of opportunity for proliferation, a ton of opportunity for improvement and we’re dialing in for example in the USA specific flavoring that’s for the US market. And so I’ll be really excited to see what that does, it’s too early to see the sales numbers but that’ll be a good thing to monitor.
Rupesh Parikh — Oppenheimer — Analyst
Okay. Great. And then maybe just one follow-up question. So the gross margin performance was pretty strong this quarter. So as we look forward, is it fair to think that we build on the improvement that we saw — we’ve seen this quarter going forward?
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah. I think — I mean, are you talking beverage side specifically or portfolio?
Rupesh Parikh — Oppenheimer — Analyst
Just in general, just portfolio [Speech Overlap].
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah. So in general — yeah, super proud of what the team has done. We’re hard at work on continuing to remove COGS. But the flip side is that, we want to flow through the savings to the consumer. I mean, HEXO is not out to try to achieve 80% gross margins. We’ve been striving for — for a 40% type portfolio margin, but if we have to be at 35% for a while in order to make sure we are relevant to the consumer and that we beat black market pricing and that we continue to grow market share and total share of market, that’s certainly something we’re going to do. I think what we’re proving out is, we have an ability to be the most competitive — amongst the most competitive companies in the whole sector, and as long as we keep doing that and delivering great value for price, I’m confident that we’ll get the volume to keep sustaining a better COG profile.
Rupesh Parikh — Oppenheimer — Analyst
Okay. Great. Thank you. Happy holidays.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you.
Operator
Next question comes from John Zamparo with CIBC.
John Zamparo — CIBC — Analyst
Thanks. Good morning. I wanted to ask pricing. It was a fairly significant decline in the quarter but that was clearly the shift towards large format value. But just would like to get a sense of how you see that category playing out the pricing for the next few quarters.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah. Well, I think from pricing — John, thanks for that. One, you did not see the impact of our Up portfolio, so the Up relaunch, as we said, we had taken a specific action to delay that to make sure that when we did launch, we would be — we would be in market all the time. So that should provide some positive momentum. But overall, if you look at kind of the stabilized pricing over five quarters, you’ll be trending up, down, you tend to stick around — the pricing that we have now I think is reflective of the — of an ability to keep pricing going forward.
But overall, I guess investors — I wouldn’t caution investors on seeing any kind of massive price drops. But the buck [Phonetic] of that, on a per gram basis, I think that’s not where we want to look at pricing. I think on a per gram basis, there is still some room to move a little bit lower. Just to really dial in the competitive nature against black market, and then simply — if we get a little bit tighter — and this depends on certain products, right. Like, if you take Original Stash 28 gram, you don’t need to drop the pricing on that product. It’s more competitive than what black market can offer. When you take — you take CAD120 ounce, right, what’s available for CAD100 to CAD120 on black market simply, it’s not even near the quality that you get in Original Stash.
So — but there’s still a lot of room to refine pricing on categories like vapes, for example. There’s still some room to refine pricing on categories like hash. The exciting thing is that HEXO has the infrastructure to do that. And as we’ve proven with Original Stash, as we drive pricing, most of our competition can’t follow, and that leaves a larger basket for us.
John Zamparo — CIBC — Analyst
Okay. That’s helpful. Thanks. And then my second question, on the beverage side, as you have conversations with retailers and distributors, is — is there a sense that there is kind of a cap on how big that category can get just because of the lower revenue per square foot of that item versus say, dry flower or other categories? Is that something they mentioned to you? Is that something you’re thinking about when you mentioned the 50% of sales in the category? Just trying to get a sense of how that plays out in your conversations with the partners. Thank you.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah. I mean, we talk about that all the time. We’re talking to our preferred retailers, right? We talk to retailers literally every day. And so one of the things we’ve done is we’ve actually — we have a capital — a fridge program. So Truss provides fridges that provide for a very nice setup in retail stores and nice experience, refrigerated beverage ready to drink. So that’s one of the things we’ve done.
But the other thing we’ve done — and this is where that capital around Belleville comes up. In Quebec, for example, we’re shipping twice a week. So we’re re-loading those stores often, and that’s something that we’ve started to take. I mean, I commend the OCS and the Ontario government for the progress they’ve done. They’ve got their brand new distribution center coming up very soon in Guelph, and that facility allows for a just-in-time sort of approach. And as they look at an overall SKU rationalization for the industry and really focus on a core SKU program, Truss is part of those core SKUs.
And what that means is that, we’re in market, we’re replenishing often, and then that, paired with the longer-term regulatory development at the federal level that will allow case quantity. Absolutely, I think that we are able to blow past that barrier. You’re seeing a bunch of new retail store operators open, and we’re working closely with those new retailers to make sure that beverages — was more than 1% of in their mind, that they really start to think of beverage as 10% to 15% of the category because it is a differentiator. And so I — that certainly is a challenge we need to overcome, but it will be overcome over the medium to long term.
John Zamparo — CIBC — Analyst
Okay. That’s helpful. Thank you very much.
Operator
Next question comes from David Kideckel with ATB Capital Markets.
David Kideckel — ATB Capital Markets — Analyst
Hi, good morning. Thanks for taking my question. And congrats on the quarter. First question is, Sebastien, you mentioned — and this has been a recurring theme over I guess quite some quarters — just increasing your market share in other provinces besides Quebec. So I’m wondering just on that point alone, are you able to disclose what your market share is within the other big provinces? And also, what specific steps are HEXO going to take to increase market share and will that be HEXO driven or do you see that more as macro related factors, for example, the opening of new brick and mortar stores? Thanks.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you, David. Yeah, definitely HEXO driven. I mean, our war on the floor strategy, our brand strategy — so with the Up launch now, HEXO has a full portfolio offering across the value chain, right. We’ve got our HEXO core offering; we’ve got Original Stash towards the value; we’ve got Up, the Up relaunch at the premium portfolio. So we can really offer retailers. And then — that’s just from a pricing perspective, but we can offer retailers across categories now to a full slew of products, right. When you look at vape, hash, pre-rolls, flower across all categories, beverages. There is not a lot of competitors that can do that. And so, we’re having a lot of success in being part of that at both the retail level and also with the provinces at having those conversations as a preferred supplier. So that will drive volume.
The second piece that drives volume is our ability to compete directly with the illicit market on price for like quantity, like quality and better. And so, that is also driving volume. And you also have a flushing out of competition, which is driving volume. So you’re seeing a lot of our competitors — I mean, there is still over 400 licensed producers in Canada, but 10 of the licensed producers can fill 90% of the market share, and HEXO is part of that 90%. And you’re seeing that success. Now that we’ve unlocked the supply chain and that we’re really focused outside of Quebec, while maintaining number one position in Quebec, but while we’re focused there, you’ve seen in this quarter, it’s almost 30% of our revenue now that’s coming from outside of our core whole province, so a meaningful — a meaningful upgrade from — from where we were before.
Trent MacDonald — Chief Financial Officer
Let me follow up that trend here — so let me follow up there quickly. You said you didn’t have the figure [Indecipherable] but you’ve asked about market share. And, look, we’re number three in Alberta. We have 7% market share. We’re number six in Ontario. Don’t forget, not too long ago, we were 17 in Ontario. Now we’re number six, and we have very close to 5% market share now there. And more about — it’s more than 30% — 18% of our total sales in Q — right now, as of today, in fact, right now today. Today is 18%. 18% of our sales in Alberta; 15% of it in Ontario.
And then we are not just [Indecipherable] two problems inside Quebec. We have another problems as well like DC. So like — like said earlier, our goal — our goal, and we’re progressing there extraordinarily quickly, is to have more than 50% of our basket outside of Quebec while, again, maintaining that market share in Quebec. And we’re on our way. That’s not a year from now. We’re getting there very quickly.
David Kideckel — ATB Capital Markets — Analyst
Okay. Thanks, guys. Very helpful. And my follow-up question goes back to your original Stash brand. And our channel checks and due diligence have suggested that consumers are not really loyal to any value priced brand per se and they’re willing to go with whatever is the cheapest price in store. So my question is, number one, do your channel checks verify that as well or actually it’s Original Stash perhaps looking inside the box here? And secondly, on that one as well, to what extent do you envisage Original Stash contributing to your top line revenue number just as a value brand? Thanks.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Well, David, I think that you’re touching on a core point there, and I’ve been saying now for years that brands don’t exist yet in cannabis, although we are starting to see them build. And Original Stash certainly is a name to watch. So I fundamentally believe that to build brand and for the brand to cycle back into value — to really build value from the brand itself, that brand needs to first have an unbelievable distribution and second, have a very good a feature set to price. It needs to be — it needs to be priced right for the features that it offers.
I think we’ve done those first two things with Original Stash, and we started to see search for product, especially in web sales, people searching by brand name. So it’s starting. But you’re right that overall, this is a highly competitive market and that we can’t rest on any laurels. No brand is strong enough to command, just from a brand name perspective, to command shelf space. We have to keep driving value through price and feature set. And HEXO is very good at doing that. We’re very good at remaining relevant and responding to the market. And so I see the fact that brands don’t exist yet in cannabis. There is an opportunity for HEXO, there is an opportunity to build our portfolio of brands. And from a top line perspective, I think the trend can share a little bit where we’re going.
Trent MacDonald — Chief Financial Officer
Yeah. I mean, look, from our top line, we continue to grow and expand, and our goal is to be — well, we can’t say what we’re — what’s going to happen. We’re not giving guidance, okay? But let’s make it clear. Our goal is to continue coming here quarter after quarter with very clean P&Ls, very digestible, that allows us to continue that — that ongoing dialog another quarter of growth, another quarter of growth, another quarter of growth, top and bottom line. And so when we talk — and it’s been a lot of questions on pricing here, I mean, over the course of the [Indecipherable] questions, and that’s fair enough.
But that’s why we have such great practices in our cultivation in Masson, which we’re not talking about a lot. But really great quality operations going on there as a result of — led by our Chief Operating Officer, Don, who is a welcome [Indecipherable] and great people in Masson. They are doing a wonderful job. And then you move that over to Belleville [Indecipherable] our price can come down, and we can continue to be — to be very good on margin. This is not a margin game; it’s a volume game. The more we sell, the better we can do on our — on our dollars of margin even at lower — lower margin rates, and that’s the bottom line. We control our SG&A, we get that war on COGS going. If we’re at 35%, we’re going to be profitable all day long. And that’s a good place to be. And that’s — and we’re one of the very, very few who can say that. So we like where we’re at.
David Kideckel — ATB Capital Markets — Analyst
Okay. Thanks for that. Very helpful. I’ll hop back in the queue.
Operator
Next question comes from John Chu with Desjardins Capital Market.
John Chu — Desjardins Capital Market — Analyst
Hi, good morning. Maybe just following up on the beverages and the retail stores. One of the earlier questions was about convincing the retailers on the value per square footage. But the other question I guess I have is just more from a capacity perspective, a lot of the retail stores are pretty small footprints, and in terms of how do you convince them to take on a Truss related branded refrigerator to have some of the direct — I’m just trying to understand with small footprint that some of these stores have, how do you get to that targeted 15% if the space within the store is pretty limited?
Trent MacDonald — Chief Financial Officer
Yeah, let me take this one just for — and Sebastien can clearly jump in if I miss anything, but my background is in retail, okay. I’ve spent my — better part of my executive career in retail, and I can tell you, that’s a great question: how do you get listing, how do you convince retailers to take on new listings and provide space inside of a fixed quantity of square foot. Seb talked about it earlier. There are different programs. There is the refrigeration. You’re taking capital expenses that they would have otherwise bought out of their pocket, you’re doing it on their behalf, and the return is — in return, you say you have to take certain listing.
But there’s also the fact that we have Molson Coors. We can’t understate the fact that we have a global partner, global. And this isn’t not to take shots here, but it’s not — it’s not a craft beer location in one state. This is a global partner. And when they want listing, they get listed. And that’s the beauty of it. In retail environments, they’re going to give what they — they’re going to get space to whatever moves. And so we can get a listing, but somebody asked earlier, are we getting more people coming after the fact. We are. That’s the truth of it. We started off first quarter with 1.9, now we’re at 3.1, and let’s be honest. We have not [Indecipherable]. This is a growing segment for us, and you’re going to see that.
And so, we’re continuing to grow, and what we’re seeing is that this is — that retailers are wanting more and more of this product. Seb said earlier, once you introduced like people say they are, it’s not that big, not that big of a category because the products are let’s be honest, not good. They’re just not good. They don’t have good taste profile. People are trying it, like Seb, you pointed out, they’re trying it, but they’re not coming back for it. That has changed — that has changed dramatically. Little Victory was just named the — was named the Top Beverage in Canada [Indecipherable] and that’s because it has that great profile. People are going to come back, and they are coming back over and over, and when you get volume going to retail [Indecipherable] retailers will get adjusted, and that’s how it works.
John Chu — Desjardins Capital Market — Analyst
Okay. Great. And then the second question is just maybe a bit more of an update on Belleville. Sebastien, you mentioned that it’s up and running now. So maybe just give us a sense on the transition to Belleville, where that sat and when do you think you’ll be mostly transitioned over there, excluding the Truss part of that.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah, John, it’s done. We’re fully transitioned. We have no more — there is — there is no significant manufacturing operations happening in Masson or outside of the — outside of Belleville now. So we’ve really — we’ve consolidated. That’s why we took that virtual introductory tour. Now, what’s great now is that we’re done moving everything to Belleville. The improvements and the proliferation within that facility, that we’re just getting started. So super-exciting over the next few years to see best in class pre-roll manufacturing seats — vapes being integrated for best — for manufacturing. And as we start to put those elements there and hopefully a few more partners next to Truss, right, which we’ve got — we’ve got about 400,000 square feet sitting in Belleville waiting to accommodate those partners, and that’s licensed square footage that can accommodate the next Fortune 500 CPG partners. As we do that, that center really comes alive. But right now it’s active. I mean, the have parking lot is full. You got 350 HEXO employees working at that center. So it’s quite operational.
John Chu — Desjardins Capital Market — Analyst
Okay. Great. Thank you.
Operator
Next question comes from Doug Miehm with RBC Capital Markets.
Douglas Miehm — RBC Capital Markets — Analyst
Good morning. Two questions. Sebastien, I just wanted to delve a little bit more. This has been beat the dead, but I do want to understand your thinking because you’re a leader on the Original Stash side. So I want to get your thinking on where you think pricing needs to go in the vape market relative to where it is right now let’s say for 0.5g or 1 gram type product, and if you’re going to be leading that charge.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you, Doug. Yeah, so I won’t disclose on this call where I’m taking the pricing just yet. So I apologize for dodging that question a little bit. But overall for HEXO’s plan is to have a pyramid type brand strategy, right. So think Up HEXO Original Stash, and that all feature sets do have price points that compete directly with the black market, and that will be largely driven by our ability to lower unit cost and to flow that through to the consumer and to win through volume.
Douglas Miehm — RBC Capital Markets — Analyst
Okay. And where is the black market right now?
Sebastien St-Louis — Co-founder & Chief Executive Officer
Black market — it depends on the quality and feature set. But I mean, you’ll get a — black market vapes could range anywhere from CAD20 — I mean, you can get as low as CAD10 to CAD15 on certain disposables in the sale environment to — you’re typically towards the CAD30, CAD40 range on something a bit quote, unquote higher end. Now, obviously, those are brand promises and the black market that are unvalidated, and there is nothing to back it up. So they tend to say what they want about their products, but that’s kind of your pricing.
Douglas Miehm — RBC Capital Markets — Analyst
Okay. And then my second question has to do with the capital fridge program because I think it will be helpful. But can you sort of walk through the details of that? If you do provide a fridge to a retail store, are there any obligations on their part in terms of ordering a certain amount of product or — can you just walk us through this fridge program in a bit more detail?
Sebastien St-Louis — Co-founder & Chief Executive Officer
Yeah. We don’t create any obligations for our retail partners, and we do it as part of our overall like — for example, in Quebec, the capital fridge program that we do in Quebec we do as part of being the preferred supplier. It’s the same sort of arrangement we do. I mean, we take care of the distribution for all web sales in Quebec, right. That’s not — that’s not an in-exchange quid pro quo. That’s part of what we see as our relationship as preferred supplier. It’s the kind of service that we deliver to our customers and so that — that’s part of that overall program. We believe that this — the kind of when you look at it in aggregate, everything that HEXO offers to our customers, that is the reason they come back and that they choose us willingly has a preferred supplier, and that’s the reason that we keep — that we can keep our shelf space and then create sell-through with the consumer.
Trent MacDonald — Chief Financial Officer
[Speech Overlap] Yeah. [Indecipherable] you think about the fridge program. It’s very — it’s very similar to a lot of retail environments and LPs even within the Canada’s retail environment, coming in, doing merchandising and retailers allowing them to put up displays. Not dissimilar to that. There is no obligation, there is no incentive beyond just the fact that you have a fridge there. But yeah, so it didn’t — didn’t want to leave it at that.
Douglas Miehm — RBC Capital Markets — Analyst
And just to finish off, what’s going to be the expected cost of that program over the next two years?
Trent MacDonald — Chief Financial Officer
[Speech Overlap]
Sebastien St-Louis — Co-founder & Chief Executive Officer
It’s within Truss. Yeah, it’s within Truss, Doug. So we don’t — that all rolls in eventually. As a reminder, Truss will be obtaining its own license within the next six to 12 months. When that happens, the Truss earnings, cost, everything will move over to Molson Coors consolidation from HEXO. And as Truss becomes profitable, we expect to simply see contribution to net income below the line there. So it’s not — nothing material.
Douglas Miehm — RBC Capital Markets — Analyst
Okay. Thank you.
Operator
[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to Mr. St-Louis.
Sebastien St-Louis — Co-founder & Chief Executive Officer
Thank you, everybody, for joining the call. It’s been exciting to share our progress as we continue to — to remain in that top four list in Canada and looking forward to sharing continued progress and continue to roll out new products to more consumers. I’ll see you next quarter.
Operator
[Operator Closing Remarks]